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Foreign Exchange

Morgan Stanley launches FX tool to outwit headline risk

Morgan Stanley launched a new FX tool this month that it said can help traders identify currency pairs that are more likely to respond to macroeconomic fundamentals over broad headline risk events.

Morgan Stanley’s FX Macro Opportunity Monitor is an electronic filter that charts currency pairs based on their relative sensitivity to global risk factors and macro-related factors over particular time frames, the bank said after the launch of the tool was announced in its weekly FX Pulse newsletter. The FX Macro Opportunity Monitor can be used by traders to identify trends in the sensitivity of a particular currency pairing to relative macro or risk factors that – in conjunction with separate analysis – can assist in the discovery and evaluation of trading opportunities.

“The best fundamental [FX] trade ideas, even in Asian or Latin American currencies, often stop out as European policymaker [statements] shock asset markets across the world,” says Morgan Stanley FX strategist Evan Brown. “The FX Macro Opportunity Monitor will help uncover currency pairs that are relatively less sensitive to global risk events and comparatively more sensitive to country-specific fundamentals.”


 FX Macro Opportunity Monitor - 12 month regressions

 
 Source: Morgan Stanley, Bloomberg

For example, the tool can be used to run regressions of daily currency percent changes against two variables that illustrate the volatility of one currency in relation to the volatility of another currency acting as a benchmark, which are called betas. If proved statistically significant over time, these currency-pair beta comparisons – expressed in one hypothetical example in the Morgan Stanley report as a beta to rate differential versus a beta to global risk sentiment – will appear on the FX Macro Opportunity Monitor chart.

The tool “is designed to be a high-frequency model allowing us to track pairs and recognize new opportunities or identify a breakdown in existing ones,” Brown said in the bank’s report.

The launch of the Morgan Stanley FX tool is timely as macro hedge funds active in the FX market showed negative annual returns through the first half of 2012 after a year in the red in 2011, according to Hedge Fund Research data.

 Macro hedge fund returns

 
Source: Hedge Fund Research Inc 

Moore Global Investments founder Louis Bacon recently returned $2 billion – a quarter of the fund’s assets under management – to investors because of a lack of investment opportunities and poor returns.

That environment has largely been driven by the risk-on/ risk-off phenomenon which has dominated trading conditions since the financial crisis.

For that to end, global economic conditions will have to improve markedly. Until then, tools such as the FX Macro Opportunity Monitor could serve to enhance yield.

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