LIVE MARKETS-Goldman takes a factor approach to FX markets

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GOLDMAN TAKES A FACTOR APPROACH TO FX MARKETS

Equity factors - common characteristics such as cheap valuations, price momentum or earnings growth - are often used by investors for portfolio construction, and Goldman Sachs is applying similar analysis to currency markets.

The U.S. bank has constructed a series of FX factors designed to capture the themes driving currency performance and identify opportunities.

These are carry, equity risk, national debt, net investment international position (NIIP), energy commodities, metals commodities and mean reversion.

Each factor consists of a basket of long and short currency positions weighted according to their exposure to a particular theme. For example, the equity risk factor rates currencies by their sensitivity to moves in global equity markets.

"Across the factors we have developed, carry has led the way so far this year, while energy exporter, procyclical, and momentum themes have also performed well," Goldman Sachs says in a note.

Looking forward, Goldman sees carry, low national debt, and energy exposure as the factors with the strongest potential for outperformance.

"This factor-based approach currently sends a positive signal for COP, BRL, IDR, AUD, NOK, and CHF, and a clear negative signal for JPY and THB."

(Samuel Indyk)

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