Discussing the article: "Gain An Edge Over Any Market (Part V): FRED EURUSD Alternative Data"
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Check out the new article: Gain An Edge Over Any Market (Part V): FRED EURUSD Alternative Data.
In today’s discussion, we used alternative Daily data from the St. Louis Federal Reserve on the Broad US-Dollar Index and a collection of other macroeconomic indicators to predict the EURUSD future exchange rate. Unfortunately, while the data appears to have almost perfect correlation, we failed to realize any material gains in our model accuracy, possibly suggesting to us that investors may be better off using ordinary market quotes instead.
If we were to ensure that both time-series data are on the same scale, an obvious pattern emerges. We shall change our y-axis so that it records the percent change in time-series data over 1 year. When we perform this step, we can clearly observe that the index displays almost perfect negative correlation to the EURUSD Foreign Exchange rate.
Fig 2: The Dollars to Euro Spot Exchange Rate & the Broad Dollar Index on a percentage scale
We shall explore the viability of algorithmically learning a trading strategy that employs these datasets to predict the future exchange rate of the EURUSD. Given the perfect negative correlation, there could potentially be some information that our model could learn about the exchange rate, given macroeconomic indicators from the Federal Reserve Economic Database (FRED).
Author: Gamuchirai Zororo Ndawana