Archive for June 30th, 2009

Classical economics has sought and failed to explain short-term exchange rate moves on a consistent basis. Currency economics is an attempt to fine tune economic theory to the practical relevance of the currency market. Broadly speaking, it seeks to analyse those aspects of the economy that are relevant to the exchange rate value, such as:
Trends within the balance of payments, including the current and capital accounts;
The accounting identity for economic adjustment ( S ? I = X ? M );
The Real Effective Exchange Rate (REER) and the external balance;
Relative productivity measures.
Naturally, all other aspects of the economy should be considered such as growth, inflation and so forth, but the ones mentioned above are the key indicators relevant for our purpose of currency analysis and strategy. Growth per se does not make a currency rise or fall on a consistent basis. Currency market practitioners, while keeping an eye on other parts of the economy as well, should seek to focus primarily on those specific aspects of the economy that affect the exchange rate.