One of Australia’s finest, and best market analyst, Greg McKenna, and more important, our good friend, posits a new exchange rate determination model: PMI differentials.
FX traders use many models to justify and fundamentally rationalize trades at any period in time, such as:
- GDP growth differentials;
- Interest rate differentials;
- FX reserve levels (mainly in the emerging markets, especially);
- Current account balances;
- Capital flows;
- Purchasing Power Parity (long-term model);
- and, now, Greg’s PMI Differentials
FX traders are married to none of the above, and switch back-and-forth between the various FX models, or, at least, they act as if they do.
The key to success in trading is to understand what is the dominant model driving the market at any given time and determining the trend if one exists.