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Foreign Exchange

Positive beta: Short and sweet in Switzerland

Deutsche’s bi-monthly <i>Exchange rate perspectives</i> publication contains a report on foreign exchange investment returns. Particularly it analyses three years of live trading (and 30 years of back-tested results) of Deutsche Bank’s systematic currency returns index, the dbCR.

The index is one of many offered by the major banks. It is a relatively simple combination of carry, valuation and momentum strategies.

The average annual excess return of dbCR since 1980 is 3.9%, although understandably, over the last three years, since live trading began, dbCR is only up 3.6% in total. The Sharpe ratio for the index is 0.74, back-tested over 30 years. If anyone needed proof, currency beta exists. And it is remarkably stable.

One line in the report surprised me: “...the dbCR has never been long CHF...” Ever. Not for five minutes over the last 30 years. As the report explains, it does make some sense. The cost of living in Switzerland, “drives up the real value of CHF, causing it to be chronically short in the valuation index.” And with CHF always being a short, or at best neutral, from a carry perspective, the index has been net short of CHF 89% of the time over the last 30 years. And never long: no matter what reading the momentum index gave and regardless of the currency’s lingering status as a safe-haven (see London to Singapore, by tax).

The Swiss National Bank should consider sponsoring market-wide dissemination of Deutsche’s report – particularly page 11 from which my quotes come. It would be cheaper than making daft bids above the market.


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