Notes for Fundamental and Technical Analysis in Currency Forecasting by Michael Rosenberg

Fundamental and Technical Analysis in Currency Forecasting by Michael Rosenberg

  1. Fundamental Factors
    1. Long Term
      1. Internal
        1. Unemployment, productivity
      2. External
        1. Current account balance
        2. PPP
    2. Short Term
      1. Monetary Policy
      2. Fiscal Policy
        1. Mundell-Fleming Model Monetary/Fiscal Policy Mix
          1. Expansionary Fiscal + Restrictive Monetary = Currency Appreciates
          2. Restrictive Fiscal + Expansionary Monetary = Currency Depreciates
          3. All other combination = Ambiguous
      3. Portfolio Balance
        1. Looks at effect of supply and demand for bonds on exchange rates.
      4. Interest Rate Differentials
  2. Technical Analysis
    1. Empirical work suggests that filter rules work well in forex markets.
    2. Trend following trading rules are profitable as long as the correctly predicted swings are sustained and pronounced.
    3. In a study by Levich and Thomas, proved that even though exchange rates seem to fluctuate randomly, technical models can still work. They compared technical models applied on real data vs random data that are both serially uncorrelated.

Conclusion

The complexities of the foreign exchange markets favor, almost dictate, a composite approach to currency forecasting, one that integrates fundamental and technical analysis. Fundamental factors, issues, of external and internal balance,and monetary and fiscal policy-clearly drive exchange rates in the long run, but technical analysis helps discipline a fundamental-based investor when exchange rates overshooting the short run. An investor who relies too heavily on the fundamentals takes undue risk during those inevitable times when market forces are moving against fundamental forces; technical models can help mitigate that risk

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