Weekly vs. Daily
In our previous posts, we used daily returns to setup the analysis. However, analyzing daily series on currencies and commodities is problematic. They trade 24/7 in a global marketplace and “closing” prices for commodities and currencies are hard to pin down at a granular level across markets. One way to ameliorate this issue is to use a weekly or a monthly series instead.
This gives us more confidence in our back-tests. We end our series with the following caveats:
- Trading the spread involves trading both legs (as discussed in Part III.)
- One can only buy a currency by selling another. i.e., buying USDINR implies going long USD and short INR.
- Using the above analysis, if a trade involves buying USDINR in one of the legs, it does not inform anything on relative valuation of USD or INR.
Code and charts on github.