All forex pairs

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The contents of all ‘Chat’ messages should not be construed as advice and represent the opinions of the authors, not those of London South East Limited, or its affiliates. London South East does not authorise or approve this content, and reserves the right to remove items at its discretion. This article is now exclusive for PRO subscribers. Turkish Lira is the most undervalued among the emerging group of currencies, while South African rand is the most overvalued one. Japanese yen is now the most overvalued currency among the majors, followed by British pound and the euro. As you know, every week, Splendid Exchange looks at seven major currency pairs in search of the evidence of popular delusions and the madness of crowds. The idea is to find anomalies and bullish or bearish divergences that will break the trend, not prolong it.

It is a painful exercise, but also highly rewarding. In order to find the most overbought and oversold currency, I conduct four econometric studies: over-extension analysis, secular performance analysis, oil correlation and economic divergence. Additionally, I look at traders’ positioning to understand the psychological state of the market. Latest Results Recently, I decided to expand the coverage of currencies.

The main focus is still on the majors, but I will also briefly look at 18 other currencies. I will not go through the results of each of the studies, but instead illustrate the final ranking. If you want to see the individual results of each of the studies, scroll down to the charts section below. I have ranked the currencies on the scale of -11. 5 for each of the studies, where -11. Therefore, the overall minimum score that any currency can have is -46.

However, the Japanese yen is not far behind, with 34 points, followed by Czech koruna and Chinese renminbi with 33 and 23 net points, respectively. Norwegian krone and Singapore dollar also stand out among overvalued currencies with 22 and 19 net points, respectively. Brazilian real and Indian rupee with -32 and -28 net points, respectively. Is it risky to short this pair? But that is why it is called contrarian trade. When looking at the major currencies, we notice that the picture has not changed much since the previous update.

However, all three currencies are relatively “expensive” for different reasons. Japanese yen overvaluation is primarily driven by the results of two econometric studies: secular performance study, which compares a currency’s performance against the price of gold, and oil correlation study, which examines the link between a country‚Äôs exchange rate and the price of oil. Overall, the ranking picture is quite mixed. If you are a contrarian investor, you will want to short the most overvalued currency against the most undervalued currency. However, at this point in time, there are no clear leaders and no obvious laggards. That is why I decided to refine the results by applying two additional indicators: effective exchange rate and monetary sentiment. The most recent weights are based on trade in the 2011-13 period, with 2010 as the indices’ base year.