Against a basket of major currencies, the US Dollar fell by 5% in November.1 More specifically, it fell 3.85% in the two days following November 9th, when October inflation data came in below expectations and rate hikes were expected to ease.1


Cumulative Return for the U.S. Dollar Index in November 2022

Source: Venn by Two Sigma. The chart displays the cumulative return of the U.S. Dollar Index using data from MarketWatch. The October CPI print took place on 11/10/2022.


Venn’s Two Sigma’s Factor Lens is both holistic and orthogonal. As a result, various factors account for currency movements in different ways. This includes capturing the latest downward movements in the USD. More specifically, we think performance of our Foreign Exchange Carry, Trend Following, Foreign Currency, Emerging Markets and Commodities Factors are worth a closer look this month.


Source: Venn by Two Sigma. The median and percentile columns measure the performance of each factor in the Two Sigma Factor Lens relative to the entire history of the factor in USD, using monthly data for the period March 1995 - November 2022


Capturing Currency Factors as a Part of a Holistic Factor Lens

  • Our Foreign Exchange Carry Factor captures exposure to high-yielding G10 currencies funded by those that are lower-yielding. Looking at current yields may lead some investors to consider going long the USD and short the Japanese Yen, for example. 
    • In the month of November, the USD to JPY exchange rate went from 148.71 to 138.07, suggesting that the dollar weakened by 7.15% versus the Yen. This likely acted as a strong headwind for this risk factor. 
    • Looking at historical returns back to March 1995, this is the 3rd worst month in this factor’s history.
  • While Trend Following is not solely a currency-related factor, it does go long or short currencies based on trends of their historical performance.
    • In November, Trend Following lost ground in every one of its sleeves: commodities, equities, fixed income, and currencies. Its currency sleeve was the largest detractor down -2.07%, likely due in part to being net long the USD, which was up over 15% YTD through October.2
    • Despite struggling in November, our Trend Following Factor is still the second best performing factor YTD (behind only Value), performing well by being generally short in a downward trending market.  
  • Our Foreign Currency Factor was up 2.52% by having exposure to moves in foreign currency values versus its local currency.
    • Given that this report is generated using Venn’s USD lens, in this case the Foreign Currency Factor was short the USD while being long the other nine G10 currencies, on a GDP-weighted basis. This is why the falling dollar was a tailwind for this factor in November.

Accounting For Currency Risk in Non-currency Factors

  • Our Emerging Markets and Commodities Factors account for sensitivity to, and the performance of, a global currency basket.3 We believe this results in a purer interpretation of these two factors by attempting to control for overlapping risks.
    • One reason we account for currencies in commodities is because they are typically priced in the USD. This means a weaker dollar can mechanically lead to lower dollar commodity prices while also increasing global demand from non-USD currencies. This can muddy the understanding of risk between holding commodity exposure and currency exposure. 
    • Many commodity-producing countries tend to be in emerging markets. This is one reason why our Emerging Markets Factor not only accounts for exposure to a global currency basket, but also our Commodity Factor when aiming for independence.
    • Despite protests in several major cities, Chinese equities were up almost 30% in November on the expectation of easing Covid restrictions,4 benefiting our Emerging Markets Factor.


A Separate Note on Our Equity Factor

  • Despite an impressive 6.05% return for our Equity Factor last month, it had been down -1.18% through November 9th.
    • Notably, our Equity Factor began rallying only after the YoY October inflation print came in below expectations. It jumped another 2.28% on the last day of the month after Fed Chair Jerome Powell indicated the first slowing of rate hikes since June 2022. 
    • This suggests that markets are still reacting sharply to inflation data and Fed talk, leaving the door open for future spikes in volatility.


 Cumulative Return for Venn’s Equity Factor in November 2022

Source: Venn by Two Sigma. The chart displays the cumulative return of the Equity Factor in the Two Sigma Factor Lens. The October CPI print took place on 11/10/2022 while Powell’s comments were on 11/30/2022.


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Through residualization, these factors also account for our Equity and Interest Rates Factors. Additionally, the Emerging Markets Factor accounts for Credit and Commodities as well.

4  As measured by MSCI China Index


References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.

This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Any statements regarding planned or future development efforts for our existing or new products or services are not intended to be a promise or guarantee of future availability of products, services, or features.  Such statements merely reflect our current plans.  They are not intended to indicate when or how particular features will be offered or at what price.  These planned or future development efforts may change without notice. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.

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