Is it time to buy USD/ISK? | Forex Factory

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Is it time to buy USD/ISK?

  • #1
  • First Post: Sep 10, 2016 3:55pm Sep 10, 2016 3:55pm
Is it time to buy USD/ISK? It is expected that the fed will raise interest rates and Iceland recently lowered their interest rate. USD is also undervalued vs the icelandic krona.
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  • #2
  • Sep 10, 2016 4:58pm Sep 10, 2016 4:58pm
Quoting Gambler180
Is it time to buy USD/ISK? It is expected that the fed will raise interest rates and Iceland recently lowered their interest rate. USD is also undervalued vs the icelandic krona. {image}
Thank you for telling us this pair.
It is an interesting pair.
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  • #3
  • Sep 10, 2016 7:59pm Sep 10, 2016 7:59pm
Quoting Gambler180
Is it time to buy USD/ISK? It is expected that the fed will raise interest rates and Iceland recently lowered their interest rate. USD is also undervalued vs the icelandic krona. {image}
Your point on purchasing power parity is interesting, however you may want to hedge hedge the commodity exposure held by the iceland krona. Ice land is a commodity economy, and thus global commodities have a huge effect on price fluctuations. Perhaps try trading the ISKAUD, this will hedge your commodity exposure in turn reducing volatility.
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  • #4
  • Sep 11, 2016 6:56am Sep 11, 2016 6:56am
Quoting aroxalot
{quote} Your point on purchasing power parity is interesting, however you may want to hedge hedge the commodity exposure held by the iceland krona. Ice land is a commodity economy, and thus global commodities have a huge effect on price fluctuations. Perhaps try trading the ISKAUD, this will hedge your commodity exposure in turn reducing volatility. {image}
I just calculated PPP for that currency pair. It also seems to be undervalued. The data are from the link below. Do you by any chance know what purchasing power parities FOR GDP means? I assume that there is a difference between just PPP and PPP for GDP but I'm not sure.
http://stats.oecd.org/Index.aspx?datasetcode=SNA_TABLE4
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  • #5
  • Sep 11, 2016 2:07pm Sep 11, 2016 2:07pm
Quoting Gambler180
{quote}purchasing power parities FOR GDP means? {image}
Yes, It is the GDP of a country adjusted for the purchasing power parity. For Example, adjusted for purchasing power, China has the largest economy, despite not being the largest in international dollars. China has a PPP GDP of 20.8 trillion vs a GDP of 9.24 trillion. This is due to a lower cost of living in China.
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  • #6
  • Sep 12, 2016 4:55am Sep 12, 2016 4:55am
Quoting aroxalot
{quote} Yes, It is the GDP of a country adjusted for the purchasing power parity. For Example, adjusted for purchasing power, China has the largest economy, despite not being the largest in international dollars. China has a PPP GDP of 20.8 trillion vs a GDP of 9.24 trillion. This is due to a lower cost of living in China.
Don't you mean PPP adjusted for GDP. It's PPP numbers that is shown in the table but I don't know how they adjust for GDP.
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  • #7
  • Sep 12, 2016 10:38am Sep 12, 2016 10:38am
Quoting Gambler180
{quote} Don't you mean PPP adjusted for GDP. It's PPP numbers that is shown in the table but I don't know how they adjust for GDP.
No, if cost of living is 4x greater in india vs US, PPP GDP will be 4x GDP. with relation to the US
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  • #8
  • Sep 12, 2016 11:26am Sep 12, 2016 11:26am
I think that I understand how they do it now after reading this article.
http://www.economist.com/content/big-mac-index

The cost of some goods as a percentage of GDP/citizen in country A VS. the cost of the same goods as a percentage of GDP/citizen in country B is used to calculate the GDP adjusted PPP exchange rate(if I'm not mistaken).

I'm wondering which dataset it would be best to use for forex trading. We can choose between
Purchasing power parities for GDP
Purchasing power parities for private consumption
purchasing power parities for actual individual consumption.
http://stats.oecd.org/Index.aspx?datasetcode=SNA_TABLE4
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  • #9
  • Sep 12, 2016 11:37am Sep 12, 2016 11:37am
Quoting Gambler180
I'm wondering which dataset it would be best to use for forex trading. We can choose between Purchasing power parities for GDP Purchasing power parities for private consumption purchasing power parities for actual individual consumption. http://stats.oecd.org/Index.aspx?datasetcode=SNA_TABLE4
A weighted ratio blending of all three (3). That should do the trick. :nerd: They have all been headed in roughly the same direction from 2008 through 2015.
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  • #10
  • Sep 12, 2016 5:54pm Sep 12, 2016 5:54pm
Quoting Gambler180
I think that I understand how they do it now after reading this article. http://www.economist.com/content/big-mac-index The cost of some goods as a percentage of GDP/citizen in country A VS. the cost of the same goods as a percentage of GDP/citizen in country B is used to calculate the GDP adjusted PPP exchange rate(if I'm not mistaken). I'm wondering which dataset it would be best to use for forex trading. We can choose between Purchasing power parities for GDP Purchasing power parities for private consumption purchasing power parities...
you may want to include some leading indicators, or at least inflation. PPP is a lagging indicator, so you also must take into account inflation differentials between FX pairs. one key trade I have my eyes on is THBUSD, It pays 3% interest, It has a favorable inflation difference, and it is undervalued in the PPP model.
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  • #11
  • Sep 13, 2016 11:21am Sep 13, 2016 11:21am
Quoting aroxalot
{quote} you may want to include some leading indicators, or at least inflation. PPP is a lagging indicator, so you also must take into account inflation differentials between FX pairs. one key trade I have my eyes on is THBUSD, It pays 3% interest, It has a favorable inflation difference, and it is undervalued in the PPP model.
Where did you find PPP data for thailand? It's not included in the OECD table.
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  • #12
  • Sep 13, 2016 1:20pm Sep 13, 2016 1:20pm
Quoting Gambler180
{quote} Where did you find PPP data for thailand? It's not included in the OECD table.
Data on thai ppp implied fx rates for USD/THB are available through quand, a free service for economists and quants: https://www.quandl.com/data/ODA/THA_...te-LCU-per-USD Beware however that Emerging markets don't work well with the PPP model.
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  • #13
  • Sep 13, 2016 3:55pm Sep 13, 2016 3:55pm
Quoting aroxalot
{quote} Data on thai ppp implied fx rates for USD/THB are available through quand, a free service for economists and quants: https://www.quandl.com/data/ODA/THA_...te-LCU-per-USD Beware however that Emerging markets don't work well with the PPP model.
I guess you mean that PPP doesn't matter for emerging markets? Like the mexican peso being undervalued by 50+ % compared to the american dollar. I think that i understand why the mexican peso is undervalued(a lot of shorting to hedge) but for other emerging market currencies I don't understand it. Do you?
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  • #14
  • Sep 13, 2016 8:13pm Sep 13, 2016 8:13pm
Quoting Gambler180
{quote} I guess you mean that PPP doesn't matter for emerging markets? Like the mexican peso being undervalued by 50+ % compared to the american dollar. I think that i understand why the mexican peso is undervalued(a lot of shorting to hedge) but for other emerging market currencies I don't understand it. Do you? {image}

Historically in export driven EM currencies are undervalued, and as the markets "Emerge" the exchange rates tend to converge to their fair value. That's why GBP fell back to the PPP value when the brexit occurred, despite the GBP being historically overvalued. The more developed a nation, the more overvalued the currency becomes as it approaches the safe haven status.
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  • #15
  • Last Post: Edited 2:47am Jan 15, 2017 2:35am | Edited 2:47am
Quoting aroxalot
{quote} Historically in export driven EM currencies are undervalued, and as the markets "Emerge" the exchange rates tend to converge to their fair value. That's why GBP fell back to the PPP value when the brexit occurred, despite the GBP being historically overvalued. The more developed a nation, the more overvalued the currency becomes as it approaches the safe haven status. {image}
That makes sense. But how can USD/CHF be explained? They are both developed nations and safe havens but the CHF is always overvalued. My guess is historical inflation differentials. More inflation in the U.S. --> weaker dollar and falling PPP.
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