Forex Blog: Currency Trading News & Analysis.

November 29th 2005

Economics and Currency Trading

In many branches of economics, there is a significant divergence between theory and reality. This is especially true of exchange rate economics, where empirical evidence suggests that theory is of little use in explaining and forecasting exchange rates. Basically, currency traders may fare better flipping a coin than using theories of interest rate parity and purchasing power parity as basis for their trades. In contrast, data on foreign exchange market-makers order flow has proven to be extremely insightful. The books of Citibank, for example, can be used to make reasonably accurate predictions for the future direction of exchange rates, based on the ratio of buyers to sellers. Technical analysts rejoice! The Economist reports:

The information in today’s order flow will still be percolating through the market weeks afterwards…Citibank’s order flow can predict almost 16% of the dollar’s bobbing and weaving four weeks hence.

Read More: Marking the dealer’s cards

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© 2004 - 2018 Forex Blog.org. Currency charts © their sources. While we aim to analyze and try to forceast the forex markets, none of what we publish should be taken as personalized investment advice. Forex exchange rates depend on many factors like monetary policy, currency inflation, and geo-political risks that may not be forseen. Forex trading & investing involves a significant risk of loss.