October 30, 2023
We show that sentiment in macroeconomic and forex news can forecast G7 currencies’ performance, for long-short strategies.
Foreign exchange markets remain complex and volatile, driven by a wide range of factors, from macroeconomic news and geopolitical events to investor sentiment. For instance, the Russian invasion of Ukraine caused the Russian ruble to be excluded from global trade. In addition, the recent rise in inflation, after a decade of low levels, has driven interest rates up, opening new carry trade opportunities.
In this white paper we analyzed RavenPack news sentiment data for G7 currencies and identified strong predictive power for trend-following and mean-reverting signals—identifying deviations from the average and anticipating a return to it.
Here are the key take-aways of this research:
Our daily-rebalanced trend-following long-short FX futures strategy achieves an Information Ratio of 0.80 with a 5-day holding period. Similarly, our mean-reverting strategy achieves an Information Ratio of 0.79 with a 4-day holding period.
Both strategies outperform an equally-weighted basket of G7 currencies, demonstrating the value of RavenPack sentiment in currency rotation.
When compared to traditional price momentum and mean-reversion, backtested performance using news sentiment shows low correlation and significant outperformance.
Mean-reverting strategies work well for shorter time horizons, while trend-following strategies are effective for longer time horizons, indicating they complement each other over different periods.
The combined strategy generally outperforms the individual strategies across the holding periods, benefiting from the complementarity of signal decays.
N = 1
N = 2
N = 3
Effective Holding Period
Information Ratio of the long-short futures-based FX strategies across G7 currencies when rebalancing at a daily frequency over 2004-2023.
We disaggregate the portfolio statistics by top and bottom number of currencies (N).
Source: RavenPack, October 2023
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