Currency strength

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Currency strength expresses the value of currency. For economists, it is often calculated as purchasing power, [1] while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundamental data, overall economic performance (stability) or interest rates. [2] [3] It can also be calculated from currency in relation to other currencies, usually using a pre-defined currency basket. A typical example of this method is the U.S. Dollar Index (USDX). [4]

Contents

Currency strength based trading indicators

There are two types of currency strength calculations: fundamental based, and price based.

Generally, price based currency strength is calculated from the USDX, which is used as a reference for other currency indexes. [5] The basic idea behind indicators is "to buy strong currency and to sell weak currency". If X/Y currency pair is up trend, it can be determined whether this happens due to X's strength or Y's weakness. [6] For the calculation of indexes of this kind, major currencies are usually used because they represent up to 90% of the whole forex market volume. [7]

In the minority of cases, fundamental based currency strength (also known as macro currency strength [8] ) is calculated from aggregating various leading economic reports, including but not exclusive to: ISM Reports, Consumer Surveys (UMCSI), [9] Interest Rates, and much more.

With indicators like above, one is able to choose the most valuable pair to trade; see the reactions of each currency on moves in correlated instruments (for example CAD/OIL or AUD/GOLD); [10] look for a strong trend in one currency; and observe most of the forex market in one chart.[ citation needed ] The current trend in currency strength indicators is to combine more currency indexes in order to make forex movements easily visible. [11]

Examples

Typical examples of indicators based on currency strength are relative currency strength and absolute currency strength (percentage). Their combination is called the "Forex Flow indicator", because one can see the whole currency flow across the forex market.

See also

Related Research Articles

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Currency strength index expresses the index value of currency. For economists, it is often calculated as purchasing power, while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundamental data, overall economic performance or interest rates. It can also be calculated from the currency in relation to other currencies, usually using a pre-defined currency basket. A typical example of this method is the U.S. Dollar Index. The current trend in currency strength indicators is to combine more currency indexes in order to make forex movements easily visible. For the calculation of indexes of this kind, major currencies are usually used because they represent up to 90% of the whole forex market volume.

The Euro Currency Index (EUR_I) represents the arithmetic ratio of four major currencies against the Euro: the American dollar, British sterling, the Japanese yen and the Swiss franc. All ratios are expressed in units of currency per Euro. The index was launched in 2004 by the exchange portal Stooq.com. Underlying are 100 points on 4 January 1971. Before the introduction of the European single currency on 1 January 1999 an exchange rate of 1 euro = DM 1.95583 was calculated.

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The Buffett indicator is a valuation multiple used to assess how expensive or cheap the aggregate stock market is at a given point in time. It was proposed as a metric by investor Warren Buffett in 2001, who called it "probably the best single measure of where valuations stand at any given moment", and its modern form compares the capitalization of the US Wilshire 5000 index to US GDP. It is widely followed by the financial media as a valuation measure for the US market in both its absolute, and de-trended forms.

References

  1. ↑ MISES, Ludwig von. The Theory of Money and Credit. page 97. United States of America : Yale University Press, 1953.
  2. ↑ Barrington, Richard. "What Determines The Strength Of A Currency?". Forbes. Retrieved 2021-01-27.
  3. ↑ O'KEEFE, Ryan. Making Money in Forex: Trade Like a Pro Without Giving Up Your Day Job. page 42 .John Wiley and Sons, 2010
  4. ↑ Twomey, Brian (2011-10-04). Inside the Currency Market: Mechanics, Valuation and Strategies. John Wiley & Sons. ISBN   978-1-118-14935-5.
  5. ↑ Umarov, Alexey (10 June 2010), Creating a Multi-Currency Indicator, Using a Number of Intermediate Indicator Buffers
  6. ↑ "Currency Strength Indicator". www.earnforex.com. Retrieved 2021-01-27.
  7. ↑ Laïdi, Ashraf (10 December 2008), Currency Trading and Intermarket Analysis, ISBN   978-0-470-22623-0
  8. ↑ "Macro Currency Strength Meter - Live Chart". logikfx. Retrieved 2021-06-12.
  9. ↑ "Surveys of Consumers - Data". data.sca.isr.umich.edu. Retrieved 2021-06-12.
  10. ↑ Gębarowski, Robert; Oświęcimka, Paweł; Wątorek, Marcin; Drożdż, Stanisław (2019-11-01). "Detecting correlations and triangular arbitrage opportunities in the Forex by means of multifractal detrended cross-correlations analysis". Nonlinear Dynamics. 98 (3): 2349–2364. arXiv: 1906.07491 . doi: 10.1007/s11071-019-05335-5 . ISSN   1573-269X.
  11. ↑ Gill, Tanvir (2020-03-24). "The US dollar will test 105 against a basket of currencies in the short term, analyst says". CNBC. Retrieved 2021-01-27.
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