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Trade Desk Thoughts: Back To Basics On Currency Valuations

Published 12/31/2000, 07:00 PM
Updated 11/08/2009, 10:24 AM

TheLFB NewsTheLFB-Forex.com A Forex Trader Portal

Market Wire Update:


The valuations of Global currencies have been historically based on two things; the overnight Interest Rate in the region, and the current economic strength of the regions’ Business Cycle. The laws of economics determine how attractive one currency is compared to another, and that is how traders have decided for years on the fair value of each pair.

That overall view of forex trade has become very clouded since the twitter-like world of 10 second sound-bites accompanied the retail investor into the commercially based forex arena. There is now an insatiable appetite for information and a desire to have a reason for each pip of movement, on each pair out there.

These days it seems as though the yen can only move when referenced to the 'Carry Trade' headline , the cad can only move if the 'Oil price' headline is in play, the Aussie is stuck unless the 'Gold and Metal prices are moving' headline is used, and the US$ seems only to move lately because of the 'Credit Crunch' headline.

There is a link to all of these currencies, and to the headlines, no doubt about the fact that forex follows the moves in other markets as the vehicle used to hedge forward commitments. However, there also always seems to have to be an intra-day answer as to why a air moved, and why therefore a headline was created.

Sometimes there is no intra-day answer, sometimes the moves come from the basic Institutional Currency Valuation standard that responds to regional equity open and closes, the fixing of daily Libor, gold, and oil rates. To stay connected to the global market, and to get a complete education and support on trading today's fast moving trading arena, contact TheLFB trade team.

It is these moves that are actionable and reliable, the headlines are always so far after the fact, and tend to be short-term views that create volatility and short-term trading opportunities, that detract from the newer trader's understanding of the longer-term basics of currency valuations; overnight and daily interest rate differentials and regional business cycle strength.

Business cycles are key to most institutions, as they determine in the long run where currency valuations are likely to be once the near-term dust has settled. Traders may be well advised to try to retain a bigger picture view, even when intra-day trading, because ultimately institutions will buy the stronger economic region, eventually.

The long-term outlook creates a trend, it is not just Carry Trades Unwinding, Credit Crunches or Flights to Quality; most of those headlines are daily explanations of volatile price movements that can be profited from. In the long term it is the Trend Trader, on the daily and 4 hour chart, who will tend to stay the forex distance, while they dip down and counter-trend trade for limited exposure trades while waiting for the bigger moves.

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