Market Blow Offs: How to Identify and Profit from Bubbles and Crashes: Bubbles and blow offs produce winners and losers. As you know, every week, Contrarian forex 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, South African rand and the Japanese yen are not far behind, with 26 points each, followed by Chinese renminbi and Norwegian krone with 23 and 22 net points, respectively. British pound also stands out among overvalued currencies with 21 net points.
The most “underrated” or undervalued currencies are the Turkish lira and the Brazilian real with a total net score of -40 each. These two currencies are far behind their counterparts. The next closest currency in terms of undervaluation is Israeli new shekel with only -22 net point. Judging by the results of four econometric studies, the most contrarian trade is to buy Turkish lira or Brazilian real against Czech koruna or the British pound.