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Trend following

Highest Correlation of Trend-following CTAs with the US Dollar

Photo by Markus Spiske

The correlation of trend-following CTAs with the US dollar is at its highest level in 23 years. A 2x-leveraged long US dollar position has replicated all of the gains of trend CTAs in the last two years.

Although the long-term correlation of trend-following CTAs with the US dollar index is close to zero, it has historically been highly volatile.


The above chart shows the 0-lag, 120-day correlation of the SG CTA Trend Index (Société Générale) with the US dollar index since the inception of the former in January 2000.

This correlation has varied between +0.81 and -0.77, and the long-term average is close to zero.

By the end of last December, the correlation had reached a new high of +0.81, and as of February 16, 2023, it was at +0.74.

As the US dollar index bottomed in May 2021, the correlation started rising to the December 2022 peak.

The high correlation of the SG CTA Trend Index with the US dollar index indicates that the gains of trend-following CTAs are equivalent to those of a leveraged long US dollar position.

Below is a table that shows the yearly returns of the SG CTA Trend index in 2021 and 2022 and a comparison to a long position in the DBMF ETF and a 2x leveraged position in the UUP ETF.

SG CTA Trend Index DBMF ETF 2x UUP
2021 9.1% 11.5% 11.3%
2022 27.4% 21.6% 18.0%
Total Return 39.0% 35.4% 31.3%

A 2x leveraged position in UUP returned more than 88% of DBMF gains over two years and 80% of SG CTA Trend Index gains.

“In the last two years, the trend was a 2x leveraged long US dollar position.”

However, CTA trend-following has not always been equivalent to a leveraged long US dollar position, other than in the 2013–2014 period, with the SG CTA Trend Index up nearly 20% and the 2x US dollar index up about 26%. Extreme correlations do not imply returns are replicated. But in the last two years, this has been the case.

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Specific disclaimer: This report includes charts that may reference price target levels determined by technical and/or quantitative analysis. No charts will be updated if the market condition changes affect the charts’ levels and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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