JP Morgan last week launched its FX & Commodity Barometer, which tracks drivers of the major currencies and metals, such as economic forces, yield differentials, relative equity market performance, technicals, flows and positions.
“We look at a range of indicators and assign a weight to each,” explains John Normand, global FX and fixed income strategist at JPM in London. “Our FX & Commodity Barometer is diverse in terms of the indicators it uses, and flexible regarding the weights assigned to each of these drivers, which is important because influences can shift over time.”
Normand explains that the signalling model differs from others available in the market in several key areas. First, he notes that it uses a broad range of indicators covering fundamental, asset market and technical influences on currencies. Some existing JPM tools are retained (EASI, Flow of Funds) and others (LCVI) are reorganised into new proprietary measures (carry-to-risk, forward carry, equity return-to-risk).
Additionally, empirical testing is conducted to determine each signal’s standalone value, rather than a qualitative plus/minus checklist of all possible influences, he adds. Moreover, there is flexibility in terms of combining these indicators into a bull/bear index, to vary weights over time as market drivers shift, he says.
Further, extensions to other products such as the DXY index, metals and some emerging markets currencies, exploit correlations with G-3 currency trends, Normand adds.
The model is updated weekly, with results published in the FX Barometer report. It also covers the broad dollar index and highlights how this can be extended to commodities and emerging markets. Weightings are reviewed monthly.
“In our weekly report, we track the performance of different signals against each of the currencies to show which strategy would have been the most profitable in the last year,” says Normand.