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ClearMacro combined EPFR and other data to successfully predict strength of DXY in recent years

June - 2022

Context:

  • DXY: is calculated by factoring in the exchange rates of G10 currencies, and, as such, is a key measure of liquidity Significant trends in the $ vs other developed market currencies can also impact returns in other asset classes, such as emerging market equities and gold.
  • ClearMacro generates a “DXY Composite signal” which is designed to provide a forward looking view on the DXY over different horizons and is comprised of EPFR data and of a range of signals from ClearMacro’s signal library (150+ signals). It is shown in purple in fig.1. ClearMacro employs a calibration scale of 1-10 and higher scores are indicative of potential strength in the target variable/benchmark (in this case, DXY).

 

Fig.1 Evolution of DXY and ClearMacro DXY Signal over 20 years

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First, does the ClearMacro signal work and what is it saying now?

ClearMacro measures the return of the target variable / benchmark (DXY) in time windows after a signal score has printed in order to determine whether the signal worked for a given trading/allocation horizon. Typically, we adjust the thresholds on the signal buy and sell levels in order to optimise the performance. The area in blue indicates where the signal correctly identified a period of positive performance ahead. As you can see in Fig.2, over the last 5 years ClearMacro’s signal has been successful (>60%) in identifying periods of DXY strength.

 

Fig.2  Did the signal work ?  Tracking of 3 month ex post Return on Dxy - ClearMacro DXY Signal

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What is in the signal and where does EPFR come in?

ClearMacro employs a range of aggregration techniques to form a composite - but generally we screen the relevance / performance of our signal library to a target variable (DXY) and select the most relevant signals for a given period (usually a year). This is premised on the belief that most investibles / assets have different drivers at different points in time.  The DXY composite currently is comprised of 5 signals. As you see in Fig.3 , two of these are EPFR signals – Equity country flows and FX Flows. The latter is still exhibiting a strong positive signal.

 

Fig.3 What were the contributing signals selected for the DXY Composite

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How does that evolve over time

ClearMacro also tracks the evolution of the signal drivers over time. As you see in Fig.4 for example, FX flows have increasingly been a driver in the last 10 years – with the exception of 2013-26 and 2017. One of the challenges investors often have is to determine when an underyling signal is most relevant. ClearMacro helps solve that problem.

 

Fig.4 Evolution of the signals over time

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Zeroing in on the EPFR signal

ClearMacro also allows users to zero in on the underlying signals selected to help surface insights about the underyling dynamics. Chart 5 below shows the EPFR FX flow signal. It is notable that this initially was falling off sharply and would have been predicting weakness in DXY were it not for its recent sharp rebound. Of note though, Incremental value is added when combined with other relevant signals.

Secondly, we note that the equity flows signal did turn decidedly negative over the last few months which was a drag on the DXY view, but in the last few weeks, began rising again, ahead of the recent rally in DXY. Again here, it is evident that accretive value can be derived when combining these signals.

 

Fig.5 Zeroing in on the EPFR signal FX flow

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Fig.6  Zeroing in on the EPFR signal Equity flows Country

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For more information, please email sales.financial@informa.com

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