Monitor 'Currency Rotation' using Relative Rotation Graphs
Ever since Relative Rotation Graphs were introduced to the (professional) investment community by the launch of
RRG<GO>
on the Bloomberg professional services terminal one of the most asked questions was: "Can RRG be used for currencies?"
My answer to this question has always been: " YES , they sure can, however ........."
The "however" had to do with the fact that currency pairs are a strange beast among other traded financial instruments as they are a "relative strength line" by themselves. A currency is always expressed IN another currency. EUR/USD is the Euro quoted in US dollars. USD/JPY is US dollars quoted in Japanese Yen.
The fact that an FX pair is essentially a relative strength line and the fact that the market convention in quoting various currencies is not always consistent causes some hurdles when rendering a meaningful Relative Rotation Graph. For years, I adapted my code for the calculations that go behind RRGs and told people that most implementations for RRG, except the one done by Optuma (formerly Market Analyst), were geared towards equities or regularly traded securities and could not handle an RRG holding currencies as they required a benchmark which does not make sense for currencies as they are already quoted against a "benchmark" ...
"Ahaa" moment
A few weeks ago now I received another question related to showing currency pairs on a Relative Rotation Graph. As I was already halfway through my reply explaining the "problems" and why it could not be done (in this case the request was related to the StockCharts.com platform) I got an idea about how to "fix" this.
As it was just a hunch at that moment I had to sit down and go over the code and check whether what I was thinking would work. It took me a day or two to run the numbers and validate the idea but it appeared that my hunch was correct.
It is possible to render a Relative Rotation Graph holding currency pairs, taking into account some requirements with regard to quotations and "tricking" the benchmark.
I described the setup and the solution in a blog post at StockCharts.com ( http://hvst.co/1UyPzMS ) . This workaround can also be used on RRG<GO> on Bloomberg.
Julius
My answer to this question has always been: " YES , they sure can, however ........."
The "however" had to do with the fact that currency pairs are a strange beast among other traded financial instruments as they are a "relative strength line" by themselves. A currency is always expressed IN another currency. EUR/USD is the Euro quoted in US dollars. USD/JPY is US dollars quoted in Japanese Yen.
The fact that an FX pair is essentially a relative strength line and the fact that the market convention in quoting various currencies is not always consistent causes some hurdles when rendering a meaningful Relative Rotation Graph. For years, I adapted my code for the calculations that go behind RRGs and told people that most implementations for RRG, except the one done by Optuma (formerly Market Analyst), were geared towards equities or regularly traded securities and could not handle an RRG holding currencies as they required a benchmark which does not make sense for currencies as they are already quoted against a "benchmark" ...
"Ahaa" moment
A few weeks ago now I received another question related to showing currency pairs on a Relative Rotation Graph. As I was already halfway through my reply explaining the "problems" and why it could not be done (in this case the request was related to the StockCharts.com platform) I got an idea about how to "fix" this.
As it was just a hunch at that moment I had to sit down and go over the code and check whether what I was thinking would work. It took me a day or two to run the numbers and validate the idea but it appeared that my hunch was correct.
It is possible to render a Relative Rotation Graph holding currency pairs, taking into account some requirements with regard to quotations and "tricking" the benchmark.
I described the setup and the solution in a blog post at StockCharts.com ( http://hvst.co/1UyPzMS ) . This workaround can also be used on RRG<GO> on Bloomberg.
Julius
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