One of the main economic indicators for currency valuation is the real interest rate differential between the two countries / currencies.
The large flows of fixed income always go to where there is the highest real yield, interest rate discounted from inflation. The carry trade.
It is possible to see in the USDCAD example on the graph the great correlation between the interest rate differential and the appreciation / depreciation of each currency.
Currently, this indicator does not seem to make much sense due to extremely low inflation and low interest rates in the worldwide. However, the big draw is to know where the economic recovery will be faster, will create more jobs and income, will lead to an increase in inflation and consequently to an increase in interest rates and currency appreciation.
Make your bets!
I would bet on Australia and Europe, maybe that's why the dollar is so weak.
Although curencies don't really have any top or bottom valuation between eachother, carry traders form sort of just that.
Thank you for this view on the fundamentals!
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Market is also pushed against carry traders so that they feel the pain and force them to abandon positions either to keep their jobs and bonuses or to keep economic stability of a country or institution
blacksheepforex
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@Trendbeat, thanks, I agree with you, and hardly a trader is profitable only with carry trade. There are other important variables in the medium and long term.
scheplick
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Really interesting to read and I was actually unaware of this