MacroVar monitors currencies price dynamics and economic and market factors affecting them. Learn how to use MacroVar currencies models to analyze and invest in currencies. If you are new to currencies trading, check our free step by step guide on Forex Trading created by professional fund managers.
Systematic Risk model
Risk Management model
MacroVar Quantitative Signals
MacroVar models monitor different quantitative values for all currencies. The most important currencies price indicators are: 1. MacroVar Trend Indicator, 2. MacroVar Momentum Indicator, 3. Year on Year momentum, 4. 3m, 5. 1m, 6. 1w
MacroVar currencies trend indicator is compiled from signals compiles from different timeframes. Currencies trend indicator ranges from -100 to +100. A currency technical rollover is identified when MacroVar trend strength indicator moves from positive to negative. MacroVar currencies momentum indicator monitors price action for different timeframes of commodities. Momentum indicator ranges from -100 to +100.
The US Dollar is the world’s reserve currency. It is one of the five most important financial assets used to monitor global economic conditions and markets. The US dollar’s value is measured by the us dollar index.
The US Dollar is affected by the US economy and global market conditions. During global economic expansions, funds flow out of the US into emerging markets (carry trade) searching for higher investment returns causing the US Dollar to depreciate. Conversely, during global economic slowdowns, global market risk is high, credit conditions are tight and funds flow into the US in search for low-risk safe assets causing the US Dollar to appreciate. Economic divergences between the US economy and the rest of the world may also cause US dollar to appreciate. When the US economy outperforms other economies, the Fed may keep or raise short-term rates higher than in other countries causing funds to flow back to the US.
The US Dollar is one of the best currencies to hold during economic conditions where global economic growth slows, and inflation is slowing. Check MacroVar model of modeling global economic growth and inflation.
The relationship between Global economic conditions and the US Dollar is monitored by MacroVar closely and presented below.
During rising global market risk, funds flow into the world’s safe currencies which are the US dollar, Japanese yen, and Swiss franc. These currencies are considered safe due to their stable financial systems, credible governments, trade surpluses.
Emerging Market Currencies
Emerging market currencies are dependent on global economic conditions, US relative economic growth, short-term rates, and central banks’ monetary policies.
Global economic expansions and loose Fed monetary policies lead to a weak US dollar and low US short-term rates, causing capital flows out of low-risk countries like the US into emerging currencies for higher investment returns and vice-versa.
MacroVar uses CEW as the benchmark for monitoring the emerging market currencies basket.
During emerging countries’ financial crisis, the country’s currency is hit hard by capital flight. The currency selloff is combined with stock weakness, bond weakness and yield curve inversion. The country experiences deteriorating economic conditions with weak business confidence and skyrocketing inflation. Read MacroVar analysis on emerging market economies and crisis.
MacroVar monitors the following economic and financial market factors affecting currencies.
Currencies and Global Economic Growth
During global economic expansions, capital flows out of the United States looking for higher investment returns causing US dollar to depreciate and emerging market currencies to appreciate.
Currencies and Global Market Risk
During global economic expansions and low global market risk capital flows out of safe low-risk currencies like the US dollar, the Japanese Yen and Swiss Franc into the high return currencies of emerging market countries. MacroVar also monitors Global currencies breadth versus the US Dollar. Risk on environments coincide with global currencies breadth depreciations versus the US Dollar.
MacroVar monitors AUDJPY as an especially useful risk on / risk off indicator. Australia is a major exporter of metals to China and Japan is considered a low-risk country. During low market risk, the Australian dollar appreciates versus the Japanese Yen indicating rising industrial metals demand.
Conversely, during high market risk, capital flows out of risky assets like the Australian Dollar to safe heaven currencies like the Japanese Yen.
Currencies and the Economy
Currencies are highly correlated to the country’s economy. The country’s economy is compared with the currency’s performance using manufacturing PMI.
Currencies and Financial Markets
A country’s currency is also intricately linked with the country’s global bond markets and stocks. More specifically when funds flow in a specific country they cause the currency to appreciate. These funds are invested in the stock market and the country’s bonds causing the respective markets to rise as well.
Currencies and Monetary Policy
When a country’s economy weakens, the government and central bank use fiscal policy and monetary policy tools to inject or withdraw liquidity from the country’s financial system to support the economy.
Central banks use monetary policy tools to inject liquidity. The tools used are the expansion of their balance sheets, reduction of the required reserve ratio and cutting short-term rates. Expansion monetary tools cause the country’s currency to weaken versus other countries. Read more about fiscal and monetary policy tools using our free step by step guide on forex trading.
Currencies and Fiscal Policy
Countries’ policymakers use fiscal policy tools to strengthen a weakening economy. Fiscal policies may include reduction in taxes and increase in government spending through infrastructure spending. Fiscal and Monetary policy stimuli weaken the country’s currency. Read more about fiscal and monetary policy tools using our free step by step guide on forex trading
Currencies and Commodity producing countries
The currencies of countries which depend on heavily on producing commodities are closely correlated with the price of commodities.
Crude Oil related Currencies
The Russian Rubble, Norwegian Krona, Canadian dollar depend on the price of crude oil because these countries are major crude oil producers.
Metals related Currencies
The Australian Dollar is dependent on industrial metals because Australia is a major metal exporter mainly to China. Chile is a major producer and exporter of copper, hence the Chilean Peso is closely correlated with the spot price of copper.
South Africa is major producer and exporter of Gold and Platinum. Gold and Platinum are respectively 20% and 7.5% of South Africa’s exports. Hence, the South African Rand (ZARUSD) is closely correlated with the spot price of these commodities.
Currencies versus Yield Differential
Currencies are highly correlated with the yield differential between the bonds of the pair’s countries. Asset monitors the yield differential between the 2-year bond rates of countries.
For example, let us examine the USDGBP in an environment where the US economy is stronger than the UK economy. During a strong US economy, the Fed raises short-term rates to keep the economy strong while controlling inflation. This causes the US 2-year bond rates to rise. At the same time, the BOE keeps short-term interest rates low to help a weak UK economy strengthen. This causes UK 2-year bond rates to stay low. Since US 2-year bond rates yield more than UK 2-year bond rates, capital flows out of GBP into the US Dollar causing the USDGBP to appreciate.
Currencies technical analysis
MacroVar models monitor many statistics for all currencies. The most important currencies price indicators are: 1. MacroVar Trend Indicator, 2. MacroVar Momentum Indicator, 3. Year on Year momentum, 4. 3m, 5. 1m, 6. 1w
There are however two other important tools used to monitor currency risk and capital flows for a specific currency.
Trade tensions between countries cause global economic slowdowns which lead to rising market risk and capital flows to low-risk countries and financial assets like the US Dollar. Moreover, sanctions or tariffs imposed by major importing countries like the United States to other countries leads to depreciation of those currencies. For example, in June of 2019 the United States increased tariffs in Mexico causing the Mexican peso to depreciate a lot.
Currency Implied Volatility
MacroVar monitors implied volatility of major currencies. Implied volatility is used as a leading indicator of the currency’s risk. Currency implied volatility indicates how much the market expects a currency pair to fluctuate. Currency implied volatility is considered a measure of market risk.
During elevated global market risk, the implied volatility of emerging currencies tends to rise a lot indicating.
Factors affecting Currencies
MacroVar monitors the following factors affecting each currency:
- Currency versus Countries 10-year Bond
- Currency versus Currency Implied Volatility
- Currency versus Country Credit Default Swap
- Currency versus Global Risk Indicator
- Currency versus Country's Central bank balance sheet YoY
- Currency vs 2-Year yield differential between US and specific country's bond
- Currency vs 10-Year yield differential between US and specific country's bond
The COT report is published weekly (available every Friday) and provides analysis of holdings of different market participants for all major currencies monitored.
The COT report is used to monitor capital flows of currencies and detect trend continuations or reversals. A specific currency tends to reverse when the currency is overbought or oversold. COT report data are especially useful in detecting overbought and oversold market conditions.
COT Report versus US Dollar
The COT report is used by MacroVar to monitor the market’s US Dollar net positioning by calculating the average position of total Open Interest of large speculators for the following assets: EUR, GBP, CHF, JPY, CAD, AUD, NZD, MXN, RUB, BRL. Net long positioning in this indicator is interpreted as net long in the US Dollar.
COT Report and Safe Currencies
MacroVar also monitors net positions in low-risk currencies like the JPY and CHF. During high market risk environments capital flows to these currencies reporting increasing net long positions. Other safe financial assets related to the JPY, CHF are the US 10-year bond, Gold and VIX.
DXY is the main global reserve currency. Most global transactions are settled in DXY. When emerging countries economies grow stronger than the US, their rates rise creating an outflow (FX carry) towards these economies, lowering DXY and boosting EM currencies. When the US economy is stronger than Row (trade surplus, budget surplus are 2 boosting factors), causes hawkish Fed raising rates to control the economy, normalizes balance sheet, causing DXY rise, commodities to fall and emerging markets (due to refinance risk rising, commodities falling) to fall. Everything is relative. In this case, DXY has remained strong because Eurozone (big part of DXY index %) is very weak.
When economy and inflation grows CB raise rates to decelerate economy (create powder for next cycle downturn) and vice-versa.
This sucks capital into the US and slows down the economy from overheating + load on ammo for next round (ECB ESI Man NO YY up missed reload ammo p781). This drags EM and slows down world economy. When the world is strong, FX carry trade moves to emerging countries and USD down and vice-versa. When world is in Quad 1 (global growth up, inflation down), expected value USD down, when in Quad 4 (global growth down, inflation down) expected value USD up (p. 127)
FX driven by 1. Yield differentials, 2. YC differentials, 3. B/S change differentials, 4. Terms of trade, 5. Risk on/off
FX Dependent on commodities: RUB, CAD, NOK vs Crude Oil (Brent), AUD vs Industrial Metals YY, ZAR vs Gold & Platinum, CLP vs Copper
The relationships above depend on commodities demand not supply. Accidents like VALE cause disruptions in supply and their relationship.
FX Risk On / Off: Some currencies are characterized as Risk On/Off. NZD/AUD/CAD are considered risk on currencies (cyclical dependent on commodities).
Domestic Economy & Export Partners: Australia weakness due to Housing bust, China slowdown
For FX relative Business growth, inflation growth, trade balance, fiscal policies and monetary policies should be considered.
Policy makes take opposite action to slow down overheated economy (FX bullish), speed up sluggish economy (FX bearish). This is also true for relative wealth. Deflation (AU falling real estate or china) cause policy makers to combat this by easing (FX short).
- Reserve Currency (deflationary crisis)
- Emerging Currency (inflationary crisis) – e.g. Turkey