The Foreign Exchange Matrix: A New Framework for Traders to Understand Currency Movements
The Foreign Exchange Matrix fills an important need in the market today regarding currency valuation and trading. With more than 50 years of foreign exchange market experience between them, Rockefeller and Schmelzer boldly go where few have dared. While they flatly admit to a lack of an elegantly simplistic theory to currency valuation, what they provide is a vigorous and comprehensive examination of the factors that weigh on foreign exchange markets.
Introduction:
The FX market is a mystery to most people, including some of its participants. Pundits on other financial markets and legislators in most countries don’t fully understand it, either. Everyone notes how big the FX market is – bigger than all other global markets combined at $4 trillion per day – but no one ever asks “What is the purpose of all this trading volume?” There are other unanswered questions about FX too.
We also want to know whether FX secretly drives all other markets, or whether it is the passive end-product of all the other markets. Neither assertion is wholly accurate, but knowing that doesn’t help us understand where FX does fit into the grand scheme of things. Further, why do exchange rates always overshoot any reasonable estimate of value, such as comparative purchasing power? Does this mean the FX market is inherently unstable, as financier George Soros has said?
Most of all, FX is money, and money has many different roles. Money is not only how we pay the electric bill (medium of exchange), how we measure economic sustainability (unit of account), and how we measure wealth (store of value), it is also a symbol of a country. Chances are the realities of the FX market are not what you might think. In this book, we point out that:
- FX is driven more by pure speculation and global investment flows than by economic facts and ideas.
- FX players thumb their noses at the efficient market hypothesis and the concept of rational expectations.
- FX has a disconnect puzzle in which factors that should move the market do not, such as the three decades of persistent trade surpluses in Japan and deficits in the US. The exchange rate does not work as an equilibrating factor, as economists insist it should.
- While we cannot forecast exchange rates systematically, we can trade FX systematically.
- FX does not have a benchmark rate of return that traders or investors must try to match and surpass.
- FX traders are vastly more disciplined than traders in other sectors, in part because they use technical analysis.
- We do not have volume statistics in FX, except in the most delayed and roundabout forms.
In summary, the FX market is endlessly fascinating, not least because figuring out some of its puzzles and perversities leads to profound insights into the human heart and mind, albeit sometimes all you get is the same old insight that the profit motive always rules in markets and it doesn’t pay to attribute mystical properties to mere prices.
Contents:
- The Matrix Concept
- Review of Risks
- Global Attitude Toward Risk
- Interest Rates and Interest Rate Differentials
- Forecasting FX
- Positions and Flows
- Intermarket Analysis
- Technical Analysis in Foreign Exchange
- The FX Files of Trading
- Be Careful What You Wish For: Reserve Diversification and the Future of the Dollar
- The Euro and the New Gold Standard
- The Central Bank Tool Kit and How it Affects Foreign Exchange
