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.
We cut our teeth as a young economist on Anne Krueger‘s book, Exchange Rate Determination. The book is dated, but we highly recommend it, a good and quick read.
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.
Requires flexible thinking.
Andy’s flexible logic reminds me Steely Dan’s Pretzel Logic.
We all waste years of our lives in university being indoctrinated in these unproven theories, put forth by people who live off taxpayers and have no real world experience.
Then we spend the rest of our lives trying to learn how things actually work in the real world.
The IMF is an institution who’s official reason d’etre ended in 1972. Any business in the real world would have closed the IMF buggy whip division a long long long time ago.
Every single newsstand owner in the world knows more about economics in the real world than all these academics combined. Enough with the cult of academia. Peter Pan didn’t want to grow up either.
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