Category Archive: FX Theory

The Euro is Poised for a Rise, Expect $1.50 in 2 to 4 Years

We present twelve reasons that could sustain a further euro appreciation to $1.40 or even 1.50 in the upcoming two to four years. The main one is that Germans are net global creditors and Americans net debtors. This is reflected in fiscal and monetary policy and in investors’ behaviour. The post was written in December 2013, but the arguments are still valid today and will continue to be valid in the future.

Permanent link to this article: http://snbchf.com/fx-theory/eurusd-1-50/

The Balance of Payments Model

The balance of payments leads to many confusions because definitions vary. Essentially the balance of payments do not reflect payments, i.e. accounting entries. But it is a flow model, similar as cash flow analysis for companies.
For example, the IMF’s definition is different from the usual or historical definition. Secondly, the relationship between the balance of payments and reserve assets is difficult to grasp, especially in the IMF definition. Thirdly the origin of “errors and omissions” is often unclear. Therefore we give an explanation in around 400 words, that clarifies the relationships.

Permanent link to this article: http://snbchf.com/fx-theory/balance-of-payments-model/

CPI-based Real Effective Exchange Rate Since 1965: Yen Still Most Overvalued Currency

If we calculate Real Effective Exchange rates on the base year 1965, the Japanese yen remains the most overvalued currency.
This analysis is based on the real effective exchange rate (REER) provided by the Bank of International Settlement (BIS) and a consumer price-index adjusted exchange rate.
The real value of the yen is around 50% higher than 1965, the same applies to the Swiss franc.

Permanent link to this article: http://snbchf.com/fx-theory/real-effective-exchange-rate/real-effective-exchange-rate-since-1965/

The Ultimate Carry Trade: U.S. Banks Buying Treasuries

Continue reading »

Permanent link to this article: http://snbchf.com/fx-theory/carry-trade-u-s-banks-treasuries/

Contrarian Investment, FX Rates and the Misleading Concept Called GDP

We extended and improved our existing post to contrarian investing. It was published on Seeking Alpha. We are pleased that it was awarded the Editor’s Pick.
Gross Domestic Product(ion) is (or has become) a measurement of activity and consumption, but not of capital accumulation and production.
In many cases, GDP growth is negatively correlated to saving. Higher savings (aka austerity) leads to lower GDP growth today, but to higher GDP in the future. In its worst case, GDP growth could be completely based on credit, eliminating the capital basis of a country (example Greece).
FX rates are less driven by GDP but by savings and investments, in particular on the corporate side, by investors and micro-economic indicators.
In addition to micro-economic indicators like price to cash flow or price to book ratio, the saving rate is the best macro-economic indicator of the investment style called “contrarian investing.”

Permanent link to this article: http://snbchf.com/2014/07/fx-rates-misleading-concept-called-gdp/

FX Rates, Contrarian Investments and the Misleading Concept Called GDP

We extended our existing post to contrarian investing. It was published on Seeking Alpha and awarded the Editor’s Pick.
Gross Domestic Product(ion) is (or has become) a measurement of activity and consumption, but not of capital accumulation and production.
In many cases, GDP growth is negatively correlated to saving. Higher savings (aka austerity) leads to lower GDP growth today, but to higher GDP in the future.
In its worst case, GDP growth could be completely based on credit, eliminating the capital basis of a country (example Greece).
FX rates are less driven by GDP but by savings and investments, in particular on the corporate side, by investors and micro-economic indicators.
In addition to micro-economic indicators like price to cash flow or price to book ratio, the saving rate is the best macro-economic indicator of the investment style called “contrarian investing.”

Permanent link to this article: http://snbchf.com/fx-theory/fx-rates-contrarian-investing-misleading-concept-gdp/

Net International Investment Position United Kingdom

Permanent link to this article: http://snbchf.com/fx-theory/wealth-niip/net-international-investment-position-united-kingdom/

Net International Investment Position Switzerland and Italy

Permanent link to this article: http://snbchf.com/fx-theory/wealth-niip/net-international-investment-position-switzerland-italy/

Net International Investment Position

Permanent link to this article: http://snbchf.com/fx-theory/wealth-niip/net-international-investment-position/

FX Rates, the Balance of Payments Model and Central Bank Interventions

Continue reading »

Permanent link to this article: http://snbchf.com/fx-theory/fx-rates-balance-payments-model-central-bank-interventions/

Germany and the Currencies in Northern Europe

Permanent link to this article: http://snbchf.com/fx-theory/germany-currencies-northern-europe/

OECD Purchasing Power Parity Index

Permanent link to this article: http://snbchf.com/fx-theory/purchasing-power-parity/oecd-purchasing-power-parity-index/

Purchasing Power Parity: Big Mac and Starbucks Tall Latte

Permanent link to this article: http://snbchf.com/fx-theory/purchasing-power-parity/purchasing-power-parity-big-mac-starbucks-tall-latte/

Differences in global CPI baskets

Permanent link to this article: http://snbchf.com/fx-theory/purchasing-power-parity/differences-cpi-baskets/

The Most Complete Real Effective FX Rate Comparison

In August 2013 the Bruegel blog offered one of the best comparison of long-term real effective exchange rates (REER). The data is CPI based and therefore not as good as the producer price index (PPI) that reflects tradable goods better.
However the data is huge with three different sources – BIS, World Bank, Eurostat, OECD and Bruegel. The data indicates how the real value of the currencies of China and many other Emerging Markets (EM) have improved against 1995. In order fulfill basic needs like food, transportation and housing, this expansion required more and more commodities. By consequence the commodity producers Canada, Australia, New Zealand, Russia, Brazil and OPEC countries but also less known oil producers like Angola, Guatemala, Honduras, Sudan went into a boom.

Permanent link to this article: http://snbchf.com/fx-theory/global-cpi-reer/

Currencies: Asian vs. American bloc

Permanent link to this article: http://snbchf.com/fx-theory/fx-price-movements/asian-bloc-american-bloc/

The Holy Grail of Long-Term Currency Movements: Crowther’s Balances and Imbalances of Payments

Permanent link to this article: http://snbchf.com/fx-theory/crowthers-balances-imbalances-payments/

The Main FX Trading Strategies

Permanent link to this article: http://snbchf.com/fx-theory/main-fx-trading-strategies/

FX Theory: The relationship between Current Accounts Surpluses and the Carry Trade

Permanent link to this article: http://snbchf.com/fx-theory/current-account-carry-trade/

FX Theory: Currencies of Countries with High Economic Freedom, Immigration and Savings Must Appreciate

Permanent link to this article: http://snbchf.com/fx-theory/currencies-freedom-immigration-and-savings/

Page 112