Beating Popular FX Trading Strategies With Bond Flows
- By Sam van de Schootbrugge
- 7 min read
Summary
- A new BIS working paper explores the extent to which international bond flows predict exchange rate returns on EM currencies.
- It finds a long-short portfolio, which goes long in currencies with the largest weekly inflows and short in those with the largest outflows, delivers large excess returns.
- The strategy outperforms more traditional FX strategies, such as carry, momentum and valuation, and can be explained by a ‘flow risk premium’.
- This premium is a compensation for the risk that countries with large inflows today face a higher probability of significant financial tightening tomorrow.
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