Forex RouteMap: Fair Value Line

 Profit from divergences between actual prices and fair value

Sample of our summary chart. The red up + down arrows show the track record of our technical algorithm. The orange projection shows our year on year ecomometric forecasts.

This strategy is intended to show the index level that can be explained by economic factors based on past relationships over very many years. Divergence between actual levels and predicted levels show the extent of over- or under-valuation based on investor euphoria or fear prevalent at any point in time.

The exchange rate index is shown as the thick white line on the right hand axis. The explanatory variable uses the left hand axis. This is the yellow line. Best Guesses for the next couple of years are show in orange.
 
For comparability, exchange rates have been rebased to set year-end 1994 at 100.
 
These Best Guesses suggest what would happen to Fair Value, based on Consensus Forecasts for the economic variables in our models.
 
Owing to the conversion of legacy currencies into Euros, analysis is provided on the common currency, rather than for individual countries. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit.
 
Exchange rates can move a long way away from Fair Value so this strategy is of limited practical use for this RouteMap. However our charting technique has also been a successful momentum strategy.