My name name is Chris Martin, Product Manager at Omega Point, and I’m excited to take the Factor Spotlight helm from Omer over the next two weeks. All of us at Omega Point hope that you and your families remain healthy and safe as you celebrate this holiday weekend.
Defining Exchange Rate Sensitivity
Exchange Rate Sensitivity is a factor that captures a company's risk associated with its revenue generation in foreign countries given constant fluctuations in exchange rates. Exchange Rate Sensitivity is calculated by regressing local market asset returns against the returns of a currency basket, in this case the International Monetary Fund’s Special Drawing Right (SDR) basket. SDR currencies from the top 5 exporting currencies in the world, which currently consists of the following currencies at the following weights:
Who gets hurt during strong dollar: (negative exposure)
Generally when the US dollar strengthens, US companies that rely on imports benefit as goods cost less in terms of USD to purchase, and US companies that rely on exports can suffer given goods cost more in the local currency reducing demand. Generally when the US dollar weakens, US companies that rely on imports are hurt as goods cost more in terms of USD to purchase, and US companies that rely on exports benefit as goods are less expensive increasing demand. We can therefore think of Exchange Rate Sensitivity as the ‘import/export revenue/cost of goods risk’ factor.
Cumulative Performance (4/9/2019 - 4/9/2020, AXWW4-MH model)
What will the future of this factor be given the Coronavirus pandemic and the financial accommodations now in play? Will companies start to rely less on complex international supply chains and implicitly reduce their FX risk? What currency will win the stimulus arms race by staying strongest relative to the rest of the world? Exchange Rate Sensitivity is an interesting factor to keep your eyes on during this unprecedented time of fiscal expansion and supply chain breakdown. Next week we will continue our analysis at a company and sector level, to help investors identify unwanted risks and alpha opportunities.
US & Global Market Summary
US Market: 4/03/20 - 4/09/20
Factor Update: Axioma US Equity Risk Model (AXUS4-MH)