Hey guys,
I was wondering how researchers and traders calculate the fair value of the dollar and what kind of models they use (examples would be highly appreciated).
Since 2006 the fed does not publish M3 anymore, which includes repurchase agreements, the fed's main tool for open market operations.
Does that mean that its been 5 years people are guessing the value of the dollar or are there more variables in the model ??
Less than CAD... XD
FV for currency is kind of a moot concept. Given that FX is quoted in pairs the only relevant question is what is the RELATIVE attractiveness of one nation's currency versus another. Read Soros' reflexivity. Further, as FX is highly driven by technicals, you should only ask yourself where the spot rate is going to trade in the next week / month vs. year / few years.
Further, and often due to the facts i provided above, FX is not the venue for "long term" theses/arguments that deal in absolutes. Example, there are many long term structural types who trade/manage $ for l/s global macro funds who got absolutely destroyed with long term theses in the past few years by using currencies as an execution platform when they should have been using CDS indices for example.
I totally agree with this
Thank you for your explanation DurbanDiMangus, however it seems that FX transactions are solely based on technical analysis ? That's where i learned most of these skills, analyzing FX markets, but I kept hearing people talking about "fundamental analysis" instead of technical analysis for FX, therefore I got pulled into the currency fair value idea. It seems that everybody is focused on pure technical analysis since FX is more biased towards short term investments.
I keep on bumping on Soros' book "the alchemy of finance", its definitely going to be on my list of next books to buy !!
The fundamental analysis people are talking about is on the macro level. What kind of monetary policy do governments have, debt levels, worlds view of x countrys economy ect ect. FX is done on a min, hour, day, week basis. Fundamental valuation is done on more of a week, month, quarter basis. While fundamental is important to everyone, the technical min by min is much more important to the trader.
Edit: brain wasnt working, I was thinking fundamental and wrote technical. My bad.
things like debt levels, current accounts, and monetary policy/interest rate forecasts are fundamentals not technicals. Technicals would be things like market positioning, flows, and charting. Some people trade FX based on fundamentals, some trade based on technicals, and some trade on a combination of the two. "Fair value" is a pretty nebulous concept...usually each sell-side firm has some fair value model that is based on the above fundamentals (and others) but having some idea of fundamental valuation is really only one small piece of a large puzzle.
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