BofA looks to capitalise on AI in currency research

Bloomberg

Bank of America (BofA) is jumping on the AI bandwagon. For the first time, the bank’s currency strategists are using machine-learning programs — which enable computers to comb through vast amounts of data to draw inferences and make predictions on their own — to tell clients what to buy and sell. They began producing AI-based research last month, as political turmoil in Italy roiled financial markets and sparked fears of another existential crisis in Europe.
The machine’s advice? Keep calm and carry on. Of course, such seemingly high-level analysis isn’t exactly new. Quant funds have used machine learning for years. But at a time when Wall Street research is increasingly commoditised, it’s not hard to see why Bank of America is trying to capitalise on one of the hottest buzzwords in finance.
“It’s hard to learn from the historical data because of the nature of the FX market, so we try to really push the frontier” with alternative data and machine learning, said Alice Leng, the currency strategist who authored Bank of America’s AI-based research.
Among the three biggest US banks, Bank of America is the first to incorporate insights from machine-learning models into its published currency research. JPMorgan’s FX research team has explored machine-learning applications, but hasn’t put out any reports using them. Wells Fargo says it favours a fundamental economic approach to FX strategy, partly because that’s where it has expertise.

LEARNING CURVE
For the team’s first study, Bank of America’s machine-learning algorithms sifted through fundamental and survey data, such as government spending and consumer confidence, to determine how the euro-dollar currency pair might perform. The team used both supervised learning, when the machine receives training in how to process information, and unsupervised learning, when no classification guidelines are given.
The bank’s models concluded that in the aftermath of the Italian election, in which euro-skeptic parties swept into power, the common currency would likely weaken.
However, fears of a deep and sustained selloff against the dollar, like the one witnessed during the European debt crisis, were overblown.
Despite all the hype surrounding AI, most banks are still scratching the surface. A vast majority of financial institutions in a Digital Banking Report survey last fall said they used some form of machine learning, but less than 20 percent went beyond “fraud, risk and compliance,” said publisher Jim Marous.

SELLING POINT
Just this week, Morgan Stanley said it hired Michael Kearns, a computer-science professor at the University of Pennsylvania who has worked for Steve Cohen’s former hedge fund, to expand its use of AI across the company.
Caio Natividade, Deutsche Bank’s head of cross-asset quantitative research, sees plenty of upside, particularly when it comes to currencies.