Currency modeling at one time was very simple. The focus would be on relative inflation rates and by extrapolation monetary expansion. Sell currencies which have higher inflation or higher money expansion relative to other countries. Unfortunately, except at extremes these types of simple models did not do a good job for forecasting. Yes, during hyperinflation, these models did well. Over the longer-run, these provided a good foundation, but using monetary models for shorter-term views of under a year did not work. There was a good reason for this when monetary expansion did not differ greatly across countries. If money growth rate differences were small, the volatility of exchange rates would swamp out any relationship between money and currency prices. But times change.
Currently, monetary models can be seen as more useful. Simply put, if you fade those countries which have been stronger QE expanders, you may be do well. Sell yen. Sell sterling. Careful on euro because while ECB president Draghi said he would provide unlimited OMT, he has not put up the funds. The Fed was a strong QEer, but recent minutes suggest that the resolve is not as stronger. Note the rising dollar.
Follow the money and use a monetary model for tilt. I do not want to be a buyer of strong QE countries especially if growth is below trend and not moving upward.
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