- 23 December 2020
- Posted by: dev
- Category: News
Currencies are a specific macro asset with difficult to determine intrinsic value. Separately, they are often used as an economic “weapon” by the respective central banks.
In order to compile an analysis for prognostic purposes, we will prepare a short three – factor model with the following elements: gold, competitiveness of the economy and the dynamics of the yield of the 10 – year sovereign debt. We will give equal weight to all three indicators.
The idea is to use objective indicators that are beyond the power of national statistics and, if possible, market-based. In other words, we would like currencies to be valued in terms of a stable benchmark (gold), internal and external strength of the economy (competitiveness) and current profitability (sovereign debt).
1.To assess the relative performance of currencies, we will “anchor” them to gold, which in the course of human civilization has proven its role as real money, and this is especially true in the current monetary environment.
The chart below shows the percentage change in five major currencies against gold over the last six months. In this case, a larger upward percentage change means a stronger depreciation of the respective currency.
Their performance over the last six months, according to the relative strength thus determined, is as follows:
1.AUD (purple curve)
2.EUR (orange curve)
3.GBP (pale blue curve)
4.JPY (yellow curve)
5.USD (dark blue curve)
1.The competitiveness of the countries is measured by the composite Global Competitiveness Index of the World Economic Forum. For 2019, the ranking of the surveyed countries is:
4.Europe (as EU average)
2.Dynamics of the yield on sovereign debt over the last six months is presented through 10 – year government securities for these countries. Yield is usually the leading indicator relative to other financial assets. When it rises, it leads to an appreciation of the respective currency, other things being equal. The percentage change for the specified period is shown in the graph below.
From the point of view of the profitability of the sovereign debt, the preconditions for appreciation are strongest in:
1.USD (dark blue curve)
2.EUR (purple curve expressed through the profitability of German bundes)
3.JPY (yellow curve)
4.GBP (light blue curve)
5.AUD (orange curve)
The euro and the US dollar have the best chances of performing well in 2021. This implies a consolidation movement in the EUR / USD pair.
The Australian dollar and the British pound have the worst chances.
This is a baseline scenario that can change dynamically, depending on market conditions throughout the year.
From a practical point of view for potential timing in currency trading, we can use the seasonality of financial instruments. For example, looking at the history of euro futures based on a 20 – year period, we can see the appreciation of the euro around May and November and a relative depreciation around January and September, as shown in the chart below.