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The effects of so-called “currency wars” and other central bank actions are small compared to the long-term impact made by these five catalysts, which include credit cycles, trade balance, differences in economic growth, and more.
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An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power.
In this chapter we connect three related concepts: inflation, central banks and interest rates.
Carry Trades, Central Bank Interventions, Fundamental Data, mean reversion, Momentum Trades, Overshooting, trend following
We are of the strong opinion that an FX rate for certain countries does not matter in the long-term. The reason can be found in comparative cost theory and a so-called "Real Mean Reversion".
Direct or indirect intervention is credible only in countries where domestic asset prices are undervalued and CPI/asset price inflation are no issues. Otherwise they create medium-term risks.
Exports and imports typically fluctuate with a rising or falling currency. When a currency appreciates then exports and imports fall when calculated in the local currency, and with a weaker currency exports and imports increase.
We indicate the main factors that influence FX rates in the longer term. We explain the movements of currencies based on these factors.
The weighted average of country's currency relative to index or basket of other major currencies adjusted for inflation.
This page discusses two closely related concepts: the carry trade and the reverse carry trade.
The balance of payments model states that a currency valued based on balance of payments. The currency with a positive balance of payments must appreciate,
The Asset Market Model implies that a currency will be in higher demand and should appreciate in value, if the flow of funds into financial market of the country such as equity and bonds markets increase.
former "The Economist" Geoffrey Crowther wrote on balance of payments development over time: Young debtor phase, mature debtor, debt repayment phase, young, then mature creditor, asset liquidator phase...
Economic freedom, immigration and high savings are main drivers for strong currencies. Switzerland, Singapore, Norway, Sweden and in the future even Germany are examples. Strangely most are in Europe.
The EUR/USD is going on its longest winning streak for a long time. Since May 27, it has improved from 1.2850 to 1.3396 and is approaching 1.34. What are the reasons?