Citigroup has introduced CitiFX Flow Weighted Indices (FWI), a set of tools created by the bank to assess the value of a currency based on today’s composition of the foreign exchange market.
The indices represent, Citi says, “a significant departure from the composition of the market indicators, such as Trade Weighted Indices (TWI) and Effective Exchange Rate, that policy makers and market practitioners have relied upon for decades”.
While trade weighted indices were constructed to reflect the importance of international trade flows, allowing market participants to monitor and trade the relative performance of a currency against a basket of currencies, the composition of the FX market has changed greatly since their introduction.
“Trade flows no longer dominate foreign exchange activity, as we estimate that capital flows now account for 70% of the total foreign exchange volume. CitiFX Flow Weighted Indices retain the international trade component, but also capture the composition of currency flow generated by real money managers, hedge funds and banks,” says Philip Brass, global head of CitiFlows advisory. “Unlike existing indices, the FWIÂ provides new insight into the modern currency market. Ultimately it is not just goods that drive valuation but also portfolio flows, and our indices are uniquely positioned to capture the combined impact of both sources of value.”
The indices will be updated annually and incorporate all flows from all client types. The currency weights will be calculated from the last three years of flow data, which allows the weights to be statistically robust and dynamic. The 10 currency indices will be calculated in real time and available on Reuters and Bloomberg.
“It is important for any database used today be a realistic representation of market activity,” adds Jeff Feig, Citigroup’s global head of FX. “The breadth of our platform enables us to facilitate significant capital flow from all client segments. Combined with the depth of our global corporate relationships, Citigroup is uniquely qualified to produce this new index.”