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Economic Countdown To The Olympics 3: A Winning FX Strategy

Tyler Durden's picture





 

In part three of our five-part series tying the Olympics to economics (previously here and here), we note that in a rather surprising coincidence, the Olympics' host nation has been a rather simple tool to pick long-term 'winners' in the FX market. As Goldman points out, while we doubt that the Olympics directly affects the FX market, it has provided excellent long-term appreciation potential. We assume this means that the BoE will stop QE or we really don't see cable extending this performance record, though the findings suggest that systematically picking the 'next' host tends to pick winners more than losers.

Goldman Sachs: The Olympics As A Winning FX Strategy

Is it possible that the Olympics affect foreign exchange markets? At first glance, this may seem unlikely as the Olympics are a relatively small event when compared to the size of the Global FX market, which turns over several trillion Dollars every single day. However, from an economic point of view, the question does make some sense. In a standard open economy model, government spending such as constructing the Olympic sites and improving the infrastructure typically leads to real appreciation. Also, a country hosting the Olympics is likely to see an influx of visitors during the actual Games. This would be recorded as a services export in the balance of payments and, all else equal, it would increase the demand for local currency.

To investigate whether the Games do affect FX markets, we constructed a real effective exchange rate for the Olympics, by combining the Goldman Sachs Real Trade Weighted FX Indices (GS RTWI) of the host countries starting after the Moscow Olympics in 1980. For example, the GS RTWI for the Chinese Yuan is used between August 29, 2004 (the closing date of the Athens Olympics) and August 24, 2008 (the closing ceremony of the Beijing Olympics). For host cities in the Euro area, we use the Euro RTWI.

 

The Olympic RTWI has appreciated by around 90% since the end of the Moscow Olympics in 1980, which is vastly more than any other individual currency (apart from a few hyperinflation cases with highly unstable exchange rates).

The table shows that the currency with the second strongest real appreciation was the Japanese Yen: it has appreciated by around 54% since 1980, and remains substantially below the appreciation of our synthetic Olympic index. This suggests that individual currencies do tend to appreciate more than usual in the run-up to hosting the Olympics. By systematically picking the next hosting currency, the Olympic FX Index tends to pick ‘winning’ currencies more often than ‘losers’.

However, there are a few important caveats. First, the four-year periods preceding the Seoul 1988, Sydney 2000 and London 2012 Olympics saw the host currency depreciate. In other words, the Olympic FX Index is not guaranteed an FX Gold Medal. Second, real effective exchange rates can appreciate because of high inflation rather than nominal appreciation. Carry may be higher as well, meaning that investors may still be able to benefit, but Olympic currencies are not guaranteed to appreciate in nominal terms.

To check the performance of the Olympic currency, we calculated the return to date on an initial investment of $100 in the Olympic currency at the end of the Moscow Games, including carry. Following the host country rules laid out above, this would mean that at the end of the Beijing Olympics the investment would have been shifted out of Renminbi and into Sterling. Starting with $100 in 1980, this Olympic investment would currently be held in Sterling and worth about $1,020. In comparison, investing $100 in rolling 1-year USD investments would have returned only about $700.

In summary, the empirical results suggest that a synthetic Olympic currency would outperform over time. Even though Olympic investment spending is a relatively small share of GDP (for example, around 0.8% for the UK 2012 Games), one potential explanation is that there is a positive selection bias in picking the host city. For example, countries with strong growth in the years before a decision would be able to invest more in their Olympics bid, increasing the chances of winning the Games. This is even more so if growth is supported by a structural story that lasts longer than just one business cycle. The Beijing Olympics are an obvious recent example.

Overall, we continue to doubt that the Olympics directly affect the foreign exchange market. However, the Olympics may be a rather simple tool to pick long-term ‘winners’ in the FX market with good long-term appreciation potential.

Thomas Stolper and Constantin Burgi

 


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Fri, 07/20/2012 - 18:32 | Link to Comment reader2010
reader2010's picture

Who cares coporate marketing events, such as the Olympics?

Fri, 07/20/2012 - 19:09 | Link to Comment Silver Bug
Silver Bug's picture

The olympics is shaping up to be a huge mess.

 

http://ericsprott.blogspot.ca/

Fri, 07/20/2012 - 19:29 | Link to Comment 12ToothAssassin
12ToothAssassin's picture

So we do the opposite of what Goldman suggests, right?

Fri, 07/20/2012 - 19:41 | Link to Comment FieldingMellish
FieldingMellish's picture

Always.

Fri, 07/20/2012 - 19:51 | Link to Comment engineertheeconomy
engineertheeconomy's picture

1st place Gold

2nd place Silver

3rd place Palladium

BUY

BUY

BUY

Fri, 07/20/2012 - 22:10 | Link to Comment Skateboarder
Skateboarder's picture

And in an honorable mention fourth place - maybe, just maybe, a hundred thousand NATO troops to evacuate all of London.

Fri, 07/20/2012 - 23:03 | Link to Comment Muppet of the U...
Muppet of the Universe's picture

To Goldman:  When I picture you...

I picture a nigel thornberry type character trotting along in safari camo with an 8 guage elephant gun, stupidly grinning and laughing the line,

'Mmmmm, smashing good time'. 

& in the background, feet obviously not visible, the little Fraggle Rock muppets screaming and running with hands in the air... 

Visual aid:

http://www.youtube.com/watch?v=qSRIUKevPTs#t=0m4s

+

http://www.youtube.com/watch?v=l_zsz_MlVvI#t=0m%2030s

=

http://www.youtube.com/watch?v=7TRaS6maqG8#t=0m18s

 

To the Goldman, I say:  http://www.youtube.com/watch?v=lRvhRhWWE44

 ;)

 

Fri, 07/20/2012 - 18:36 | Link to Comment Desert Irish
Desert Irish's picture

Stolpers going for a gold medal in muppet fuckery......

Fri, 07/20/2012 - 19:11 | Link to Comment Aziz
Aziz's picture

Olympic FX strategy since 1980: 80% gain.

Gold since 1980 (and gold was in a bubble in 1980!): 180% gain.

S&P500 (minus dividends, because I'm lazy and can't find pre-88 total return data) since 1980: 1150% gain.

What a great trading idea...

Sat, 07/21/2012 - 00:24 | Link to Comment Al Huxley
Al Huxley's picture

'muppet fuckery' - good one!  Stolper's got to be a favorite in the event.

Fri, 07/20/2012 - 18:37 | Link to Comment Rainman
Rainman's picture

Squid must need to dump some pounds

Fri, 07/20/2012 - 18:46 | Link to Comment Yen Cross
Yen Cross's picture

 Bashing (gbp) is done. Liquidity my friend.

   I haved this old T/L  and some simple M/A,s.

    I working an IBM chart as we speak.   There seems to be a gap!

Fri, 07/20/2012 - 19:24 | Link to Comment Yen Cross
Yen Cross's picture

 I want to reiterate, my above post!

Fri, 07/20/2012 - 18:52 | Link to Comment magpie
magpie's picture

Much good did the Olympics do for Greece

Oh and the GBP was a good riskometer, if it loses that role for several weeks i'll have to look for a new one.

Fri, 07/20/2012 - 20:09 | Link to Comment Yen Cross
Yen Cross's picture

 You aren't un-noticed.  

Sat, 07/21/2012 - 07:00 | Link to Comment magpie
magpie's picture

My moral quandary is perhaps underappreciated, since i warn one set of plutocrats to be beware of another, which doesn't really deserve it...oh well.

http://www.youtube.com/watch?v=AFa1-kciCb4&feature=related

Fri, 07/20/2012 - 19:14 | Link to Comment FieldingMellish
FieldingMellish's picture

FUGS!

Fri, 07/20/2012 - 19:18 | Link to Comment reefermadness
reefermadness's picture

Did Romney save the Olympics? Sure.

Fri, 07/20/2012 - 19:19 | Link to Comment reefermadness
reefermadness's picture

Does Romney wear magic underwear made in China?

Fri, 07/20/2012 - 19:20 | Link to Comment Yen Cross
Yen Cross's picture

 A winning F/X strategy!?

                                 Never sleep, Never eat! Manually manage stop losses.

 

 

               manage every macro piece of news, like it never happened!

                                                                                                                  I'm just getting started!

Fri, 07/20/2012 - 19:28 | Link to Comment fonzannoon
fonzannoon's picture

Yen you are a total badass and proof that if you really want to make money you better be ten steps ahead.

Fri, 07/20/2012 - 20:14 | Link to Comment Yen Cross
Yen Cross's picture

 I live to trade! So do you!

 Most sucessful traders never discuss profits. It's painful to make $.

   Just trade the Sunday gap, and stay sharp!

  Edit; ALWAYs respect risk /reward! Any sane trader gets it right 33% of the time!

Sat, 07/21/2012 - 04:59 | Link to Comment BeetleBailey
BeetleBailey's picture

Yen: For five years, I knocked it out of the park, trading wise. This year, not so much.

I concur with what you say here.

The FX markets today are totally fucked up IMO.

 

Fri, 07/20/2012 - 19:48 | Link to Comment tom a taxpayer
tom a taxpayer's picture

The Russian ruble or rubble (I'm not sure how to spell this foreign word) could be a winner because Sochi is hosting the 2014 Winter Olympics. But I prefer to bet on a valuable asset that will be hyped more than the currency. Maria Sharapova "who was raised in Sochi, will carry the Olympic flag for her country at the Opening Ceremony of the London 2012 Olympic Games on July 27." 

I'm betting on "Anything Maria" because between now and 2014 Winter O, Maria's stock and anything she touches is going to turn to gold. And guess what Maria touches more than anything. Tennis balls. Oh! So many tennis balls. Oh!!Oh!! She has a gentle yet firm, reassuring grip on the balls. When Maria's tennis game is going good and she is in a playful mood when preparing to serve, she runs her finger lightly across the little fuzz on the balls. Maria says it sends a tingling sensation to the balls, making the balls pliable to her strokes.

When Maria's tennis game is going bad and she is in a desperate mood when preparing to serve, she squeezes the balls. Maria says it sends a pain sensation to the balls, making the balls able to withstand her 130 mph serves.

This investment opportunity gets even better. In honor of Maria, Sochi is building an indoor tennis court for the 2014 Winter O. For $10,000 a pop, Maria will bat balls with high rollers, whales, and BSDs. And each tennis ball Maria tucks in her tennis panties, leaving the unmistakable scent of Maria on the ball, will sell for $1,000.  

I'm nervous and sweaty, like a kid waiting at the door for his first date. I'm waiting in delicious anticipation for the Maria Sharapova IPO.

http://www.insidethegames.biz/olympics/summer-olympics/2012/17670-tennis...

Fri, 07/20/2012 - 23:10 | Link to Comment Greenie
Greenie's picture

An autograghed Oscar Mayer weiner would go well with the scented tennis ball

Fri, 07/20/2012 - 20:07 | Link to Comment Yen Cross
Yen Cross's picture

 i worked the IBM chart, from a technical stand-point.

   The move  to 200 needs to fill the gap @ 180 support.

        I can draw some s/t linès. That stock is a short!

Sat, 07/21/2012 - 00:59 | Link to Comment otto skorzeny
otto skorzeny's picture

you want to go to Yahoo! Finance. besides that little hebe w/ her baby hebe they just hired as CEO needs the traffic to get her $60mil

Sat, 07/21/2012 - 06:29 | Link to Comment Colonial Intent
Colonial Intent's picture

To use a user name that was a nazi war criminal wanted for murdering us prisoners is really sick dude.

 

Fri, 07/20/2012 - 20:10 | Link to Comment Muppet of the U...
Muppet of the Universe's picture

Holy SHIT Tyler, have you seen the riots in Spain?

I think the rabble may be catching on to it...

Fri, 07/20/2012 - 20:16 | Link to Comment Colonel
Colonel's picture

About time!

Sat, 07/21/2012 - 00:56 | Link to Comment otto skorzeny
otto skorzeny's picture

we can badmouth the Eurotrash all we want- but we can learn a few things about rioting from 'em. They make Seattle in '99 and the OWSers look like pussies. BURN THAT SHIT TO THE GROUND!

Sat, 07/21/2012 - 06:29 | Link to Comment Colonial Intent
Colonial Intent's picture

To use a user name that was a nazi war criminal wanted for murdering us prisoners is really sick dude.

Sat, 07/21/2012 - 00:01 | Link to Comment Itch
Itch's picture

The other countries didnt have to borrow the money to host the olympics...

Sat, 07/21/2012 - 00:53 | Link to Comment otto skorzeny
otto skorzeny's picture

how' s that Israeli security company working out for you london? and these yids are gonna take on the Persian Empire without US "help"? give me a break

Sat, 07/21/2012 - 06:30 | Link to Comment Colonial Intent
Colonial Intent's picture

To use a name that was a nazi war criminal wanted for murdering  american prisoners in ww2 is really sick dude.

Sat, 07/21/2012 - 06:41 | Link to Comment magpie
magpie's picture

I thought he only stole chewing gum and uniforms...

Sat, 07/21/2012 - 08:43 | Link to Comment antisatan
antisatan's picture

Ian Crane warns of falseflag at London Olympics

http://anticorruptionsociety.com/2012/07/19/researcher-ian-crane-warns-o...

Sat, 07/21/2012 - 10:46 | Link to Comment Tom Green Swedish
Tom Green Swedish's picture

I think it would have made more sense for Italy Spain Greece and Ireland to peg to the dollar instead of joining the Euro, or even more sense just to use their own currency.  Just because a bunch of countries trade and are connected to each other doesn't mean anything. Germany really cleaned these countries clock with this scam.  In fact it would have been better for the Euro Zone just to adopt the dollar. I am sure those pig headed Germans would disagree with my comment but it would have been a better option.  They are going to really get creamed after all is said and done.  The problem is going to hurt the world. When developed markets start to suffer problems get bad.  The last time Italy was in such poor share somebody named Mussolini came along.   FDR got Social Security from him.  American Fascism was born.  Now we have a socialist president disguised as a democrat who is screwing up things big time catering to SNAP card people and illegal aliens just to get votes.

 

And now to get back to the article. I really don't think this would make an effective trade.  The people working at Goldman Sachs are clearly cheating. Somethings not right.  This is stupid nonsense.

Sat, 07/21/2012 - 13:55 | Link to Comment mrdenis
mrdenis's picture

If your wearing any clothes from a competor of a olympic sponcer ,you will be denied entrance to the event ....http://www.dailyrecord.co.uk/news/uk-world-news/2012/07/21/london-olympi...

Sat, 07/21/2012 - 14:33 | Link to Comment Grand Supercycle
Grand Supercycle's picture

As mentioned before, market intervention has only postponed the inevitable.

Despite short and medium term market vacillation - the following remains a constant :

>> USDX monthly indicators [ie big picture] continue to warn of significant long term USD upside. (thus EURUSD & AUDUSD etc bearish)

>> SPX monthly indicators [ie big picture] continue to warn of significant long term downside for equities which will be worse than 2008.

http://www.zerohedge.com/news/2012-12-24/market-analysis

Do NOT follow this link or you will be banned from the site!