Paratrade Systems Weekly Research News

22 Jul

Comparing The British Pound to the Swiss Franc

Up to now, I haven’t posted any analysis on either of these two currencies. It is safe to assume that each will take its cue primarily from the Euro. The question(s) becomes – which one performs better when the Euro rallies and which one performs better when the Yen rallies?

During this 5-year period, the Pound did fall but there is no great trend in the BP/SF cross over the period In the ’08-’16 there is a clear relationship between this cross and the Euro. The Swiss franc is a far more reliable follower of the Euro. The red line above shows how badly the BP does versus the SF when the Euro declines (and how weakly it rallies, relatively, when the Euro rallies.

Here we can see the impact of Yen rises on the BP vs the SF. It is actually more stark and far more reliable across all time frames. If you think the Yen is going to rise then buy the SF and short the Pound. – on the cross. Now we can combine the two so we use the fuel gauges with a higher weight on the Yen Gauge. We’ll create a new weighted gauge = (YenFG+ .6*EuroFG)/1.6

You can see here that the new index is relatively volatile. We’ve marked the buy and short levels (75 and 25 respectively. We can create a simple system (guided by an optimizer):

  • Buy if the wtd index >75
  • Exit if the index falls below 65
  • Sell Short if the index is < 25
  • Buy to cover if the index rises above 35

How does this do?  … pretty well. We can also try substituting Euro MA filters for the Euro gauge filter. The result is very similar. I would look to add a mean reversion system for the times when this weighted index is between 25 and 75. Regardless, we can be clear about our approach, if we should expect the SF/BP cross to follow the Yen and the Euro but the Yen is more important.

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