ABN Amro pioneers FX model that predicts price behaviour in EUR-USD spot rate
ABN Amro has pioneered an FX model that predicts price behaviour in EUR-USD spot rate.
The groundbreaking foreign exchange model indicates whether the EUR-USD exchange rate is likely to trend higher or lower, or instead be subject to movements within a trading range.
The ABN AMRO FX Regime Prediction Indicator, the first proven model of its kind, assesses market volatility and positioning to assign a probability factor to likely movements in the EURUSD spot rate in the coming week.
"This tool provides currency traders and portfolio managers with an extra level of sophistication and choice in managing their currency exposure," says Aziz McMahon, Senior FX Strategist at ABN AMRO. Typically, currency managers use one of two strategies: 'trend following', which takes positions on long-term trends; and 'volatility capture', which uses option positions to sell volatility between trends.
Adopting a single strategy can cause losses: a market that is range trading undermines maintained long or short positions, while short volatility positions fail to take advantage of trending movements in the spot rate. This risk has been traditionally hedged by currency managers adopting both strategies side-byside. There is a limit to the potential losses of a single strategy, but also potential profits are lower.