The Importance of Identifying Currency Market Regimes

摘要

Change is the only permanent feature of the foreign exchange market. The only certainty about the themes that dominate the market today is that at some point in the future they will diminish in importance. As a consequence, success in analyzing the foreign exchange market relies not only on early identification of these regimes, but also on understanding when and why they change. We illustrate below an approach which has proved to be successful in identifying such regime shifts using cross-border portfolio and hedging flow indicators. This process has been developed by State Street Global Markets research for use in their currency overlay recommendations, which have generated an information ratio of 1.5 since their launch in August 2000.