Current State of Currency Research
Currency movements are some of the toughest investments to predict. Modern finance can not determine the many reasons why currencies increase or decrease in value. This problem leads to the use of technical analysis to predict currency movements, but patterns and assumptions are a backwards way to predict future changes. If a pattern accurately predicts an event, that prediction may change when enough people realize the pattern exists. Predictive patterns will also change if predictions are wrong. There is a better method to technical analysis.
How WikiWealth Improves Currency Research?
WikiWealth uses value investing to determine currency potential. This method is completely unique, because it solves one of the hardest assumptions in currency valuation, which is determining investment potential. Our currency research includes the interest rate parity, inflation rate parity, purchase price parity, and the investment flow analysis. International investment flows are movements of money between countries. They naturally go from where investment potential is low to where investment potential is high. This is the secret weapon to predict which currencies are high and in demand and which are low in demand.
WikiWealth created the investment flow analysis by analyzing each individual company in a particular country. When the aggregate of those countries are undervalued, we assume investments will flow to that country. When a country's main companies are overvalued, we assume investments will flow out of that country and in to other regions of the world. WikiWealth believes that companies with lots of potential will attract the most money internationally, and thus, increase the demand for their local currencies.
What Improves Currency Demand?
From property rights to budget deficits, countries have a significant roll in helping domestic companies succeed. The international flow of money determines the demand for local currencies; therefore, currency changes are a direct representation of a number of different and complimentary attributes of a particular country. When countries run high budget deficits, this increases the chance of future tax increases and benefit cuts. The knock on effect of these fiscal changes will eventually affect the country's investment potential. Likewise, when governments negatively affect property rights, educational spending, research funding, etc. they have a negative affect on country's potential. WikiWealth simply identifies these country-specific characteristics in order to predict future investment potential. See the general factors below:
Qualitative Factors and Explanations: (help)
- Economic Freedom Ranking: Great economic freedom allows faster and more stable economic growth.
- Government Transparency & Stability: Government corruption hurts grows, whereas, transparency lowers risk and aids growth.
- Economic Diversity & Opportunities: Diverse economies adjust better to changing economic conditions, thus, reducing risk.
- SWOT Strengths Greater Than Weaknesses: This creates a protective economic moat that aids growth and reduces risk.
- SWOT Opportunities Greater Than Threats: Creates an environment for the country to increase long term growth and investment.
Parity Valuation Techniques
WikiWealth uses the purchase price parity, interest rate parity, and inflation rate parity currency research methods to help predict currency movements. Why do these parity relationship helps? They predict some of the characteristics that affect currency demand. If interest rates are higher in one country versus the next, the higher rates will attract investments from the country with low interest rates. This is like moving money between savings accounts to find the one with the best rates. Many qualitative factors help predict parity changes. Below are the parity valuation techniques and definitions:
Quantitative Factors and Explanations
- Investment Flow: Countries with high investment potential will have high demand for their currencies.
- Purchase Price Parity: Exchange rates should equalize the price of goods between countries and demand for their currencies.
- Interest Rate Parity: High interest rates increase currency demand.
- Inflation Rate Parity: High inflation rates decrease currency demand.
Conflicts Between Parity and Investments Flows
Qualitative factors affect parity assumptions and investment flows in different ways. For example, Greece had a debt crisis that caused their interest rates to significantly increase. Higher interest rates would cause an increase in demand for their currency under the interest rate parity assumption, but higher rates hurt company potential, because Greece would have to borrow money at higher levels. These types of conflicts confuse traders, because it's hard to predict which technique is strongest. WikiWealth decided to weight each technique so that an aggregate conclusion could help decide the value of any one currency.
Currency Research is Completely Transparent
We believe our currency research has many advantages that investors and traders will enjoy. Additionally, our analysis is completely transparent, so if you have different assumptions, we encourage you to find a set of currency research assumptions that make sense to you.