Managed Futures Loves a Trending USD

What do you get (besides a gold and silver rally) when you do $3 Trillion in stimulus, and the Euro countries find out they can do a coordinated monetary policy? A U.S. Dollar sell off!  After spiking from around 98 up to 104 in the depths of the crisis, the U.S. Dollar has sold off rather heavily, falling down to 92 (as of our writing this, we have a knack for inadvertently calling a bottom as soon as we write up something about a market).

What’s happening? Well, if you’re scared that Trillions in stimulus makes runaway inflation a possibility, lessening the purchasing power of your fiat currency, you sell dollars and buy gold (or Silver, or Bitcoin). If you think the Eurozone has figured out how to all coexist and are stronger together than they are apart, you sell dollars to buy Euros, and so forth. The common denominator, is selling dollars.

 

What is the Dollar Index?

Ice Futures has a nice explanation of their US Dollar Index Futures here:

The U.S. Dollar Index (USDX) is a geometrically-averaged calculation of six currencies
weighted against the U.S. dollar. The U.S. Dollar Index was created by the U.S. Federal
Reserve in 1973. Following the ending of the 1944 Bretton Woods agreement, which had
established a system of fixed exchange rates, the U.S. Federal Reserve Bank began the
calculation of the U.S. Dollar Index to provide an external bilateral trade-weighted average of the U.S. dollar as it freely floated against global currencies.

Which currencies are included in the U.S. Dollar Index?

The U.S. Dollar Index contains six component currencies: the euro, Japanese yen, British
pound, Canadian dollar, Swedish krona and Swiss franc. Before the creation of the euro, the original USDX contained ten currencies—the ones that are currently included (but not the euro), plus the West German mark, the French franc, the Italian lira, the Dutch guilder, and the Belgium franc. The euro replaced the last five of these currencies.

Before the creation of the euro, which now accounts for 57.6% of the USDX, the weightings of the five historical European currencies were: German mark (DEM), 20.8%; French franc (FRF), 13.1%; Italian lira (ITL), 9.0%; Dutch guilder (NLG), 8.3%; and Belgium franc (BEF), 6.4%.

Specifically, the index finds the weighted geometric mean against the six different currencies. However, not each currency holds the same weight. As ICE points out above, the Euro holds a 57.6% weight, while the other weightings are JPY = 13.6%,  GBP = 11.9%, CAD = 9.1%, SEK 4.2%, CHF 3.6%. So, with the Dollar Index having the exchange rate with the Euro Currency for more than half of its composition, it’s only natural we see U.S. Dollar Index Futures falling while Euro Currency Futures are rising. Indeed, our quick back of the napkin math tells us it would be quite hard, mathematically – for the Dollar Index and Euro Currency to move in the same direction.

Why are Managed Futures Excited?
Traditionally, a rally in the Dollar Index has proven to be very beneficial for Managed Futures. That’s because it typically means the other currency markets are also moving with the same sort of depth. The other part of the reason managed futures tends to do well when the U.S. Dollar is trending, is because the U.S. Dollar index impacts almost all commodity futures markets simply because those markets are priced in the U.S. dollar. That means, for example, a falling U.S. Dollar can translate to rising prices in dollar denominated futures markets (all else being equal).

Here’s a look at the historical performance of Managed Futures (as measured by the SocGen CTA Index) has performed in different Dollar Index periods of strong trendiness, which we measured by the 14 day ADX indicator seeing values greater than 40, and then looking at the percentage of days the indicator saw such high readings each year. Here’s what we found. Managed Futures love it some strongly trending USD, with all but one year in which more than 35% of days were in strong trend seeing gains (90% of time), versus just 60% of the time when there weren’t as big of a percentage of strongly trending USD days. What’s more – the upsides were completely different, with the trending USD periods seeing a much higher ceiling for their performance (40% of the time with double digit years) versus 0% of the years seeing double digit gains when strong trends in the USD weren’t as frequent. All in all, in the strong US Dollar trending years, we saw a max of +15.25%, min of -2.87% and average year of 8.22%, versus a max of 6.26%, min of -5.83%, and average of just 0.42% in the other years.

So bring on that U.S. Dollar weakness. CTA’s will welcome it with open arms.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

logo