Category Archive: FX Theory

Main Author George Dorgan
George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.

(1.3.) Let’s improve the way we report FX rates

This post is motivated by recent headlines suggesting that the Chinese yuan has depreciated in recent days. Here's an example: China's yuan weakens to 5-1/2 low as c.bank tolerates depreciation. This headline is completely inaccurate - the Chinese yuan has been appreciating in recent days. So that's one problem I'd like to fix.

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(5.6.1) Crowther’s Balances and Imbalances of Payments: METI Paper

The former chief editor of "The Economist" Geoffrey Crowther published a great work on the development of balance of payments and current accounts over the long-term. It divides development into six phases, which are analogous to Shakespeare's seven phases of life. The seven stages are: Young debtor nation, Mature debtor nation, Debt repayment nation, Young creditor nation, Mature creditor nation, Credit disposition /Asset Liquidation nation and...

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(3.4) More Thoughts on Negative Rates



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(3.3) FAQ: The Why and What For of BOJ’s Negative Interest Rates



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(11) 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.

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(10.1.2) Net International Investment Position Switzerland and Italy

We compare aspects of the Net International Investment Positions for Italy and Switzerland

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(1) What Determines FX Rates?

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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(1.1) Currencies: Asian vs. American bloc



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(1.2) Explaining price movements in FX rates

We indicate the main factors that influence FX rates in the longer term. We explain the movements of currencies based on these factors.

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(13) Germany and the Currencies in Northern Europe

German spending is one factor that drives currencies in Northern Europe.

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(2) FX Theory: Purchasing Power Parity

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.

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(2.1) OECD Purchasing Power Parity Index

The OECD purchasing power parity compares consumption prices in different countries.

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(2.2) Purchasing Power Parity: Big Mac and Starbucks Tall Latte

The following table compares the Big Mac and the Starbucks Tall Latte index among different countries. It explains the issues with these measurements.

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(2.3) Differences in global CPI baskets

Typically poorer countries have a basket with a higher weight for food and other consumption goods, but richer states give them a smaller weight. Here the full details over different countries

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(2.4) Purchasing Power Parity: Prefer Export Price Indices against PPI



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(2.5) Real Effective Exchange Rate, Swiss Franc, Yen and Renminbi

The weighted average of country's currency relative to index or basket of other major currencies adjusted for inflation. We explain the Real Effective Exchange Rate for the Franc, the Yen and Renmimbi

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(2.6) 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.

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(2.7) 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...

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(3) Inflation, Central Banks and Interest Rates

In this chapter we connect three related concepts: inflation, central banks and interest rates.

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(3.1) FX Theory: Interest Rate Parity

The interest rate parity gives a mathematical explanation for the purchasing power parity and real effective interest rates

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