Blog

CFO's beware, FX drivers are never fixed.&nbsp;Their weights and sometimes even their signs change continuously.&nbsp; Currency exposure is a full time job.In G10 markets, currencies are usually explained as the result of something else:Interest-rate differentials. Growth expectations. Fiscal policy. Commodity prices. Risk sentiment.Over the long term, that is broadly right. But it risks treating currencies as passive scoreboards when they can also change the game.A weaker currency raises import prices, changes corporate margins and may alter a central bank’s reaction function. A stronger currency tightens financial conditions and can weaken exports and inflation.Japan provides a particularly interesting example.For years, the yen was largely an output of Japan’s economic policy. Ultra-low interest rates weakened the currency, supported exporters, raised import prices and helped Japan escape deflation.But the relationship can shiftPersistent yen weakness is now increasing import costs, reducing household purchasing power and contributing to inflation. It is creating political pressure, encouraging currency intervention and influencing the Bank of Japan’s interest-rate decisions.The causality begins to reverse:Previously: Monetary policy → weaker yen → higher inflation.Increasingly: Weaker yen → higher inflation → tighter monetary policy.Because the yen also funds global carry trades, this change can affect international capital flows, bond markets and equities well beyond Japan.Currencies are therefore not completely independent variables but neither are they merely the end product of economic fundamentals.They are part of a feedback loop:Fundamentals move currencies, and currencies then reshape the fundamentals. Japan may be the clearest current example of that transition:The yen is switching from an output of the policy regime to an input that is beginning to determine it.

CFO's beware, FX drivers are never fixed. Post

PPP for professionals&nbsp;Purchasing Power Parity (PPP) is one of the oldest and most widely discussed concepts in foreign exchange. Yet it is also one of the most misunderstood.A common belief is that if a currency is 20% or 30% undervalued according to PPP, it should eventually appreciate by a similar amount. While intuitive, this is not how professional investors typically use the model.The real question is not whether PPP works. It is whether it is being used correctly.PPP is a valuation model, not a timing modelPPP estimates the long-run fair value of a currency by comparing inflation-adjusted purchasing power between economies.It tells us whether a currency appears expensive or cheap relative to its fundamentals.What it does not tell us is when the market will move towards that fair value.As one systematic FX manager put it:"PPP tells you where a currency should settle in the long run, but it does not tell you when or how it will get there."That distinction between valuation and timing is fundamental.PPP has little short-term forecasting powerProfessional evidence suggests that over investment horizons of one month to one year, PPP provides almost no useful forecasting information.The information coefficient over these horizons is close to zero, meaning that knowing whether a currency is undervalued today tells you very little about where it will trade over the coming months.This explains why currencies can remain apparently cheap or expensive for years without moving back towards fair value.Its strength emerges over longer horizonsWhile PPP struggles over shorter periods, its predictive power improves considerably over multi-year horizons.Between two and five years, valuation becomes increasingly relevant, and over horizons exceeding five years PPP can explain a meaningful proportion of long-term real currency returns.In other words, PPP is not a trading signal—it is a long-term anchor.Cross-sectional analysis is more powerful than time-series analysisOne of the more interesting insights from systematic investing is that PPP works best as a cross-sectional measure.Instead of asking whether a single currency is cheap relative to its own history, investors compare currencies against one another at a point in time and identify the most expensive and cheapest currencies across the entire universe.This approach avoids many of the structural biases that weaken traditional time-series valuation models.Small valuation gaps are mostly noiseNot every deviation from fair value is meaningful.Professional systematic strategies generally require currencies to be around 15–20% away from estimated fair value before valuation begins to offer a useful signal.Minor mispricings simply do not contain enough information to justify investment decisions.Capital flows dominate exchange ratesIf PPP determines value, what determines price?The answer is capital flows.Short- and medium-term exchange rate movements are driven primarily by interest-rate differentials, portfolio allocation, economic surprises, central bank policy, investor positioning and shifts in global risk sentiment.Financial markets are simply much larger than international trade flows.As a result, exchange rates are often determined by where investors choose to allocate capital rather than by the movement of goods and services across borders.PPP is only one part of the investment processProfessional systematic investors rarely trade PPP in isolation.Instead, valuation is treated as one independent source of information within a diversified multi-factor framework.Standalone valuation strategies are susceptible to "value traps", where currencies remain mispriced for far longer than expected.By combining independent factors at the portfolio level, investors can benefit from valuation without relying on it as a timing tool.Some currencies can remain permanently expensive or cheapPPP should not be viewed as a fixed destination.Structural changes in productivity, terms of trade, demographic trends and international capital flows can shift equilibrium exchange rates over time.Reserve currencies such as the US dollar, safe-haven currencies like the Swiss franc, and heavily managed currencies such as the Japanese yen have all spent extended periods appearing significantly misaligned with traditional PPP measures.These are not failures of PPP so much as reminders that fair value itself evolves.The real misconceptionPerhaps the biggest misunderstanding surrounding PPP is the assumption that valuation automatically leads to price appreciation.It does not.A currency can be objectively cheap and continue falling.An expensive currency can remain expensive for years.Valuation and forecasting are not the same thing.ConclusionPurchasing Power Parity remains one of the most useful tools available for estimating long-term currency value.However, its strength lies in identifying relative value over long horizons—not in predicting next month's exchange rate.Professional investors recognise this distinction. They use PPP as one component of a broader investment framework, combining long-term valuation with other independent sources of return.Understanding what PPP can—and cannot—tell us is ultimately more valuable than simply knowing whether a currency appears cheap or expensive.

FX Professionals Guide..... Big Mac Index turns 40 years old Post

How much do you currently spend each year buying certainty?Take more risk..... a statement that will make many finance professionals uncomfortable.Good.When Interest rate differentials are low or positive, buying certainty is logical.The decision is easy....Hedge....Protect the budget.Move on.So what if your company is not in that luxurious position.Imagine you're the CFO of a European business with $50 million of annual US revenue.If interest rate differentials mean a straightforward 12-month hedge costs around 1.5%, you've already committed around $750,000 before dealing spreads, hedge accounting, audit requirements, treasury administration and management time.You've paid a lot for certainty before the exchange rate has moved by a single cent.Here's my question.If another supplier increased your costs by almost $1 million a year, would you simply accept the invoice?Or would you challenge it?That's exactly how CFOs should think about FX hedging.When certainty is cheap, keep your strategy simple and spend your time elsewhere.When certainty becomes expensive, spend more time on treasury—not less.&nbsp;If you dont have the time, find an expert you trust to help.That doesn't mean speculating on currencies.It means asking whether the business really needs to pay for 100% certainty, or whether accepting a measured amount of FX risk could materially reduce the total cost of managing that exposure.The role of a CFO isn't to eliminate risk.It's to make the best economic decision.Sometimes...taking a little more FX risk is the right financial decision. &nbsp;

CFOs & CEO's Should Take More FX Risk… Sometimes.

Without allowing North Sea Oil or Returning to EU, how can the GBP rise?The danger of Burnham shuffling deck chairs on the Titanic.The UK has spent decades under-investing in resilience.That is the uncomfortable point at the heart of the current debate about Britain’s economic model. It is tempting to frame the issue as public versus private ownership, or as a simple reversal of the 1980s. But that misses the deeper problem.The UK did not just spend the peace dividend. It spent the depreciation dividend.Infrastructure was allowed to age. Public services were squeezed. Energy security was treated as someone else’s problem. The City was treated as a golden goose. And the country became comfortable with an economic model that worked only while capital was cheap, globalisation was benign, and external shocks were rare.That world has gone!A currency rises when investors believe a country can generate better real growth, attract capital, control inflation risk, and maintain fiscal credibility.So what would make GBP structurally more attractive?The obvious answers are uncomfortable.First, energy. Britain’s reliance on imported or globally priced energy has left it vulnerable to shocks. More domestic oil and gas would not be a complete strategy, but it would fit the resilience argument. If the UK can reduce external energy vulnerability, it reduces one source of pressure on inflation, household incomes, the current account and industrial competitiveness. How do we bring the debt down?Second, Europe. Brexit damaged the UK’s market access, weakened the stock market ecosystem, and reduced the attractiveness of the UK as a base for capital. A closer relationship with the EU, or eventually rejoining, would be one of the clearest ways to restore scale, credibility and investment appeal.Without those two levers, the path for GBP is harder.That leaves a Burnham government, or any UK government, needing to do three things at once:Be fiscally credible Do not scare the gilt market. If investors think fiscal rules are being loosened without a credible plan, sterling will struggle.Protect investment Fiscal tightening may be necessary, but cutting public investment again would repeat the mistake of the past 40 years. The UK cannot rebuild resilience by cancelling the spending that creates it.Build a new productive model The old City-led model is not enough. The UK stock market is shrinking, listings are leaving, and financial services alone cannot carry the economy. Britain needs a path back to the EU to survive.&nbsp;That is the narrow road for GBP.The market is clearly positioned for what i am talking about as we observed when a credible chancellor was announced, the GBP rallied. The enthusiasm will soon wear off however if Burnham choses not to acknowledge the simple reality that the UK has very few options and this is not the time to shuffle deck chairs on the Titanic. Activate to view larger image,&nbsp; See content credentials Activate to view larger image, &nbsp;

Without allowing North Sea Oil or Returning to EU, how can the GBP rise?

“If AI can improve every forecast in your business, why is FX forecasting still largely judgemental?”Every CFO I speak to is investing in AI.a&gt; Sales forecasting. b&gt; Demand planning. c&gt; Inventory optimisation. d&gt; Working capital. e&gt; Cash forecasting.Yet one area is still surprisingly reliant on instinct, opinion and whatever the bank happened to say last week.Foreign exchange!The irony is that FX isn’t usually a forecasting problem.It’s a decision problem.Nobody consistently knows where EUR/USD or GBP/USD will trade six months from now. If they did, they wouldn’t be running a treasury department.But that’s often how companies behave.- Someone has a view. &nbsp;-The board becomes optimistic or pessimistic. &nbsp;- The market moves. &nbsp;- A hedge is delayed, accelerated or abandoned.The result isn’t better forecasting.It’s simply emotion dressed up as strategy.I think AI can genuinely transform corporate treasury. Not because it will magically predict exchange rates. It can dramatically improve the quality and consistency of the decisions surrounding them.Imagine an AI system that continuously asks questions such as:• How exposed are we today compared with last month? &nbsp;• What would a 10% currency move do to EBITDA? &nbsp;• Are we operating within our board-approved policy? &nbsp;• Have our budget assumptions materially changed? &nbsp;• Are we over- or under-hedged relative to our risk appetite? &nbsp;• Which decisions are genuinely new, and which are simply emotional reactions to market moves?Notice what’s missing.“Where will EUR/USD be in December?”That’s often the least useful question.The companies that manage currency risk best aren’t necessarily better forecasters.They’re better decision-makers. They have clearer frameworks. More consistent processes. Better governance. Less emotion.I suspect AI’s biggest contribution to treasury won’t be replacing judgement. It will be removing the noise that too often masquerades as judgement. Perhaps the future of FX isn’t an AI that predicts the market. It’s an AI that helps finance teams make better decisions regardless of what the market does. That’s a much more achievable and valuable goal.What do you think?Will AI eventually become a decision-support tool for treasury, or do you believe currency management will always remain primarily a human judgement?

If AI can improve every forecast in your business, why is FX forecasting still largely judgemental?

Make money in FX from low volatility....Low volatility is not just a market condition. It is a trade setup.When realised volatility falls, investors are encouraged to take more risk. Carry trades get larger. Option sellers become more comfortable. Vol-targeting and risk-budgeted portfolios can increase exposure.That can make low volatility self-reinforcing:Low vol -&gt; more carry -&gt; tighter ranges -&gt; lower vol -&gt; more carry.But the better opportunity is not simply to sell volatility.It is to ask:Which volatility is overpriced because the market is trapped, and which volatility is underpriced because the market is asleep?In FX, that question is especially useful. Some pairs are genuinely range-bound because policy, carry and flows are aligned. Others look quiet even though the catalyst set is improving.The trade is to sell the vol that should not realise, and use it to buy the vol that should.One expression of that idea is: Buy GBP/JPY movement, funded by selling GBP/USD movement. Using the 1-month option prices shown: GBP/JPY Buy the 50-delta put Buy the 50-delta call Sell the 10-delta put Sell the 10-delta callThat is a long GBP/JPY straddle, partly funded by selling the 10-delta wings.Then fund it with GBP/USD: Sell the 50-delta put Sell the 50-delta call Sell the 10-delta put Sell the 10-delta callConverted at the implied USD/JPY cross of roughly 161.4, that is worth about:The idea is simple:Own movement in GBP/JPY. Sell movement in GBP/USD.This is not just a directional GBP trade.&nbsp;It is a relative volatility trade.You want GBP/JPY to move more than GBP/USD. You are effectively saying that JPY is the currency where the real optionality sits because this is not equilibrium for the Japanese Yen, while GBP/USD is more likely to remain contained.The structure works if GBP/JPY breaks meaningfully while GBP/USD stays relatively range-bound.It struggles if GBP/USD starts moving hard in either direction, because the funding leg is short a lot of GBP/USD volatility.And because the 10-delta wings are sold, this is not a pure long-vol trade. It is long the middle of the GBP/JPY distribution and short the tails in both pairs, especially GBP/USD. Experience has shown me that even big moves need you to take profits in FX so selling the wings is sensible.That is the broader low-volatility lesson. In quiet markets, the best trade is often not simply “buy vol” or “sell vol.”It is: Sell the volatility that should not realise, and use it to buy the volatility that should.Or more bluntly: Sell gamma where the market is trapped. Buy gamma where the market is asleep.#FX #Volatility #GBPJPY #GBPUSD #Options #Macro #CarryTrade #RiskManagement

Make money in FX from low volatility....

Dragten Capital Solutions

Core Positioning Statement
Dragten Capital Solutions helps internationally exposed businesses manage foreign exchange risk with institutional-level FX expertise — without the institutional cost.
One-Line Value Proposition
We help businesses reduce the hidden cost of currency volatility.
Strategic Positioning
Most companies have FX exposure. Very few manage it strategically.
Large institutions have treasury teams, macro specialists and sophisticated risk frameworks. Most mid-sized businesses do not — despite currency movements having a direct impact on profitability, margins and cash flow.
Dragten Capital Solutions bridges that gap by bringing institutional-grade macro and FX expertise into a practical commercial setting.

Dragten Capital Solutions

Blog

CFO's beware, FX drivers are never fixed. Post

FX Professionals Guide..... Big Mac Index turns 40 years ...

CFOs & CEO's Should Take More FX Risk… Sometimes.

Without allowing North Sea Oil or Returning to EU, how ca...

If AI can improve every forecast in your business, why is...

Make money in FX from low volatility....