Exchange Rates: Momentum & Value Summary

 Buy when the orange line is above the white line and when the arrows point upwards

Sample of our summary chart. The red up + down arrows show the track record of our technical algorithm. The orange projection shows our year on year ecomometric forecasts.

This chart shows how to maximise returns and minimise risks by combining momentum and value strategies. Price Momentum is based on technical analysis (See Chart Technical Analysis) and fundamental value is derived from the extent of over - or under-valuation of exchange rates compared to Fair Value based on our econometric models.
 
The exchange rate index is shown as the thick white line on the right hand axis. The explanatory variable uses the left hand axis. This is the yellow line. Best Guesses for the next couple of years are show in orange.
 
For comparability, exchange rates have been rebased to set year-end 1994 at 100. For this summary chart, foreign currency indices are shown on a total return basis, including interest on short-term deposits.
 
Please note that the performance pattern of total return foreign currency indices may be radically different from price-only indices. This occurs because the yield on high inflation currencies is often substantially greater than that needed to offset exchange rate depreciation. Thus Buy & Sell signals for total return indices will not be the same as for price-only indices.
 
These Best Guesses suggest what would happen to Fair Value, based on Consensus Forecasts for the economic variables in our models.
 
Owing to the conversion of legacy currencies into Euros, analysis is provided on the common currency, rather than for individual countries. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit.
 
Exchange rates can move a long way away from Fair Value so this strategy is of limited practical use for this RouteMap. However our charting technique has also been a successful momentum strategy.