A three-pillar framework for foreign exchange trading based on interest rates, growth and financialization

The paper develops a transparent, modular framework for trading EUR/USD, USD/JPY, and EUR/JPY that integrates three fundamental drivers—real interest rates, economic growth, and financialization.The framework treats financialization as a multiplicative accelerator of fundamental signals, combined with a contrarian correction that fades extreme speculative positioning to avoid crowded trades.By exploiting the no-arbitrage identity among the three currency pairs, the framework enforces directional consistency, reduces position sizes when signals conflict, and adds a small mean-reverting signal from normalized triangular deviations.A backtest over 2005–2024, with all parameters fixed a priori, reports a Sharpe ratio of 0.72 for the full model versus 0.33 for a simple carry benchmark, alongside a substantially lower maximum drawdown. This paper presents a coherent, theoretically grounded framework for trading the three major currency pairs (EUR/USD, USD/JPY and EUR/JPY) using only fundamental factors. The framework is built on three pillars: the interest-rate–growth nexus, which provides a fair value anchor; a financialization accelerator that amplifies or corrects the fundamental signal; and triangular consistency constraints that prevent arbitrage violations. A regime-dependent weighting scheme adapts the model to carry, growth or leverage environments. All equations are explicitly stated, making the framework reproducible and, once calibrated, falsifiable. The structure is intended as a foundation for rigorous backtesting and refinement. A preliminary backtest over 2005–24, presented as initial evidence rather than validation, suggests the framework’s potential, with the full model showing a significantly higher Sharpe ratio and lower drawdown than a simple carry benchmark. The integration of these three dimensions into a single, modular design offers a transparent alternative to black-box trading models and addresses key shortcomings of single-factor approaches. Copyright Infopro Digital Limited. All rights reserved. You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5. If you would like to purchase additional rights please email info@risk.net