Saturday 11 April 2009

My currency basket

For the record, when I post charts showing currency movements, these are all against the same 'basket'. Commenters have asked me how I calculate this, so I shall explain it properly and add this post to my 'Quick links' widget in the top right hand corner.

Step 1. I can't be bothered to ascribe relative weights to each country, so I use two currencies from the North American bloc (USD and CAD); three from the European bloc (GBP, EUR and CHF) and three from Asia-Pacific (JPY, AUD and SGD), so the overall weighting is 'roughly right'. I don't include Chinese Yuan or Hong Kong Dollar as I don't trust them as far as I can throw them.

Step 2. Using GBP as a base currency, I download daily rates from the excellent (starting from 1 January 1990) 'A'.

Step 3. I then adjust the daily value (in GBP terms) of each currency by dividing it by its long-run average value (in GBP terms) 'B'. For example, EUR is currently GBP 0.9021, but its long-run average is GBP 0.7090, so that then goes into the calculations as 1.2724 'C'.

Step 4. For each individual currency, I add up the 'C' values of the other seven currencies (GBP is always 1.00, of course) and divide it by 7 to arrive at 'D', the value of a unit of 'world currency' from the point of view of each individual currency.

Step 5. Each individual currency then gets divided by the value of one unit of 'world currency' to give the final value 'E' that I use in my charts. For good measure, I also add 183-day and 365-day moving averages.

Here's the example of how I calculated the final value 'E' for 10 April 2009 (the actual spreadsheet I use is in rows down, not columns across, of course), click to enlarge:

Just sayin', is all.


Lola said...

That would work well. Currencies, unlike equities and other assets are priced relative to other currencies, and gold.

Had you thought of adding in a line for gold?

Mark Wadsworth said...

L, I have, but then I didn't know where I'd get daily gold prices since 1990, so I never got round to it.

Lola said...

Have you thought about asking the world gold council? They publish monthly price stats since 1971 (I think). They may have the daily prices.

Steven_L said...

London Bullion Association publish the daily fix going back to before I was born.

Steven_L said...

London Bullion Markets Association that should have been.

Derek said...

This site gives daily London closing prices for gold back to 1970.

I used it for my Gold Price prediction expert system. Very useful site. Wish I could say the same for the expert system.