Currency Valuation Drivers Lecture

Vocabulary flashcards covering core terms and concepts from the lecture on currency valuation drivers, PPP, analysis methods, economic indicators, and quotation conventions.

Currency Valuation Drivers

Key factors—interest rates, inflation, and trade balances—that influence the strength or weakness of a currency.

Currency Arbitrage

Strategy in which traders buy a currency in one market at a low price and simultaneously sell it in another market at a higher price to profit from price discrepancies.

Purchasing Power Parity (PPP)

Economic theory stating that exchange rates adjust so identical goods and services cost the same across countries when priced in a common currency.

PPP Usage

Primarily applied as a long-term guide to currency values rather than for short-term trading decisions.

Macroeconomic Analysis (FX)

Study of broad economic indicators—GDP, employment, inflation—to forecast currency movements.

Sentiment Analysis (FX)

Assessment of market psychology and behavioral biases to gauge likely currency direction.

Fundamental Analysis Assumptions

Belief that investors aim to maximize return and minimize risk, have equal information access, and act rationally.

Sentiment Analysis Assumption

Acknowledges investor behavioral weaknesses and irrational patterns that can be observed and analyzed.

Consumer Price Index (CPI)

Measure of average price changes in consumer goods and services; a high CPI often prompts central banks to raise interest rates.

Producer Price Index (PPI)

Gauge of wholesale price changes; rising PPI signals higher inflation pressures.

Interest Rate–Currency Relationship

When the Federal Reserve raises rates, the U.S. dollar typically strengthens relative to other currencies.

Yield Differential

The difference in interest rates between two currencies; the currency with the higher yield is generally stronger.

Currency Quotation Convention

In a currency pair, the first currency is quoted in terms of the second (e.g., EUR/USD = 1.10 means €1 costs $1.10).

Surprise Economic Changes

Unexpected shifts in interest rates, inflation, or trade balances that can sharply revalue a currency.