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Trade Insight April 2015

Currency volatility on the rise | EUR-USD heads for parity while equities climb


Executive Summary


Delta Economics’ Trade Corridor Index Assets (TCI-A) analysis for April suggests the following:

  • There will be continued optimism about European recovery in particular as the Purchasing Managers’ Indices rise.
  • The optimism in European growth will not boost the value of the euro. Quantitative Easing (QE) is already putting downward pressure on the euro which, combined with the political and financial consequences of Greece’s debt repayments, is pushing the value of the euro down further versus the US dollar.
  • As a result, the TCI-A is suggesting short positions on EURUSD. We expect the bearish trend to continue through the month and although there could be some resistance around €1.05:$1 in the middle of the month, the model suggests it could go as low as $1.01 by the end of the month with parity likely during May.
  • Meanwhile, we are bullish on the Dax and Eurostox 50, which are attracting capital inflows as a result of QE.
  • In the run-up to the general election in the UK we are expecting the value of sterling to fall against the US dollar. If Industrial Production results in the UK are weak, then we expect this to increase volatility in the value of sterling. This volatility is likely to continue as the general election nears as investors weigh up the business consequences of a Labour government versus the uncertainties of a referendum on European membership with a Conservative government.
  • The long positions we are taking on Asian equities reflect the fact that QE in Europe has increased capital availability and weakened the value of the euro.


Outlook for PMIs April 2015


The Trade Corridor Indices (TCIs) measure the trade flows of any one country and forecasts these forward using its proprietorial forecasting methodology. Each index is specific to the country it relates to in that the trade corridors and flows will differ for each country. The rate of change in the index is correlated with the Purchasing Managers’ Index (PMI) for that country.

The TCIs are based on actual data and although they are highly correlated are in no sense an alternative to the PMIs since the methodologies differ. PMIs, being survey-based, are sentiment indicators while the TCIs give an actual and a forecast indication of how underlying trade conditions, including trade finance, are moving. In other words, the TCIs provide a predictable and quantifiable view of how changes in the global economy are affecting trade at an individual country level. They are constructed as follows:

  • The correlation of a country’s top 500 trade corridors with that country’s Manufacturing PMI to create a trade corridor index associated with the PMIs/sentiment (TCI-S).
  • Correlation of the rate of change in that index (six-month moving average) with the Manufacturing PMI.
  • The monthly change in the six-month moving average (positive change suggests PMIs will improve while negative suggests they will deteriorate).

The full PMIs are expected to move generally in line with the Flash PMIs and consensus in April 2015. Overall, only very small movements in the PMIs are predicted, either by us or by the market. The PMI data has ceased to move markets substantially and the very similar results each month suggest that there will be little market volatility around these indicators this month.


Key points:

  • We are generally optimistic and in line with consensus about Europe’s PMIs. We are substantially more positive about French services than consensus, but the correlation is low so there is a high downside risk on this.
  • We are expecting a mild increase in the US Manufacturing PMI while consensus is predicting a mild downturn. However, the spread is very small between the two and, as this is an estimation of a survey, this could be within an error margin.Trade Corridor Index Asset Price Calls



Figure 1 | PMI Outlook, April 2015
Source | Delta Economics analysis


Trade Corridor Index Asset Price Calls



The Delta Economics TCI-based asset management strategy takes the top 500 trade corridors (trade between two countries by sector) against an asset price. It creates an optimum corridor index of those trade corridors each month and has been tracking its performance over the past 21 months. This is a systematic model and assets are included in the portfolio if one of the following conditions is met:

  • The signal strength (which measures the percentage of trade corridors that are pointing to a long or short call) must be higher than 95%.
  • The signal strength is greater than 85% and the Information Ratio (which measures the performance of that optimum corridor relative to benchmark returns) is greater than 0.5, indicating good or very good back-tested performance.
  • Where there is a signal strength of 100 and only one corridor in the index, the Information Ratio must be above 0.5.

The returns across the portfolio reflect the accuracy of the calls only. They are not optimised in any way, do not include transaction costs and are based on an equally-weighted portfolio across the asset calls that conform to the conditions above. There is no leveraging.

Key point | In March 2015 these paper returns were 1.9% suggesting that over the past 21 months, we have called the assets in a way that potentially produces an above-market performance of 1.4% per month.




Figure 2 | Monthly Returns of TCI-A strategy (%) June 2013 – April 2015
Source | Delta Economics analysis


We are calling metals long this month but our signal strengths and Information Ratios have deteriorated since February. This reflects continuing volatility in commodity prices; the price of oil, for example, is being influenced by uncertainties in the Middle East which, if they continue, could put strong upward pressure on prices.




Figure 3 | Delta Economics TCI-A Based Strategy, Commodity Calls for April 2015
Source | Delta Economics analysis



QE in Europe and Japan alongside continuing uncertainty around any rate rise means that equity markets are likely to continue their bull run. Information Ratios continue to be weak suggesting that there is real volatility in the market, while the signal strengths on global (European and US) equities are much stronger than they are on EM equities. This is a product of capital movements into Europe post QE and continuing concerns about the depth of any Chinese slowdown. Of the Asia-Pacific markets the ASX 200 and BSE look to be the strongest performers in April.




Figure 4 | Delta Economics TCI-A Based Strategy, Equity Calls for April 2015
Source | Delta Economics



We return to a bearish stance on the euro versus USD for April and overall our calls suggest that the strength of the US dollar versus most currencies is likely to continue. The only exception is our bullish stance on the AUD which is based on a reasonable signal strength and strong Information Ratio.




Figure 5 | Delta Economics TCI-A Based Strategy, Currency Calls for April 2015
Source | Delta Economics


Delta Economics Trade Insight April 2015  |  Author  |  Rebecca Harding  |  CEO Delta Economics