The Four Books You Must Read If You Really Want to Understand Currency Markets

Perfect summer reading

Because the exchange rate is a relative, not absolute, price, the SNB’s predicament is indicative of far more than domestic issues. In this particular case, the franc's strength also points to a regional misalignment that has vexed Swiss authorities for quite a while: how to retain Switzerland’s traditional standing as a safe harbor and its role as a home for foreign capital while the European Central Bank has adopted experimental monetary policies involving large-scale purchase of securities and significant expansions of its balance sheet. — Mohamed El-Erian, Bloomberg View

We think long USD-CHF and short CHF-JPY spot positions look attractive regardless of whether the Greek political crisis is resolved. We forecast USD-CHF to appreciate to 1.03 in Q3 2015, which the market seems to underprice by assigning only [an] 8 percent probability and move higher to 1.08 in Q1 2016 and 1.11 in Q2 2016. — Barclays

The Swiss and the Swiss franc are in the news. The two-minute drill is the nation is wildly successful while its euro-neighbors are not. Thus money rolls in and destabilizes the economy. There are benefits to the Swiss, yes, but there are also problems. It is all managed by the Swiss National Bank amid a roaring Swiss domestic political debate. The thing to focus on within the complexity is the time function: The longer Europe is surreal, the more profound and intractable the effects on Switzerland. Two treatments of this are above. Dr. El-Erian writes a brilliant essay for Bloomberg View wrapped around his command of Euro-Swiss game theory. The FX team at Barclays pen a market-based note on how to make money and critically how not to lose money in the CHF market [no, CHF doesn't stand for "congestive heart failure;" it's the ISO code that bank computers use for Swiss francs].

Both approaches are complex, advanced, and sophisticated. Here are three good places to start if you really want to understand FX:

This is hands down the currency Bible. Call it the Codex FXus:

Rosenberg Currency

Pay up for the hardcover edition.

Long ago and far away (pre-PDF; think, the age of the quill) smart people on Wall Street clutched and protected under lock-and-key their Michael Rosenberg, 20-page Xerox on foreign exchange. It was the work of Merrill Lynch, Pierce, Fenner & Smith, but everyone on Wall Street wanted it. Rosenberg was brilliant and concise, and he combined fundamental and technical analysis with the macroeconomics of FX. Then he wrote the above book. It was an instant classic and is still stunningly valuable in 2015. Yes, some of the 388 pages are dated, but for the most part it spans the strange space between El-Erian and the Barclays research note. It is worth its weight in gold in linking international monetary dynamics to what actually happens in the currency markets. Rosenberg is about synthesis and linking disparate economics and finance. Currency Forecasting destroys, about every 15 pages, the inept blather heard after hours in Wall Street pubs and by-the-minute on business TV and radio.

This book is the primer:


EUR-CHF: Pop Quiz! Which is the numerator; which the denominator?

Sam Y. Cross wrote this primer more than two decades ago. It is still the best short, concise, matchless, must-read on FX. Yes, it is dated, but the blunt reality is it is the shortest path to understanding the actual trading market. Better yet, plow through Cross, then read Rosenberg.

More recent is this short jewel:

eichengreen fx

Barry Eichengreen writes long and short books. This is a wonderful quick read on your inner dollar-fears. China will win; we're all going to die. Eichengreen has first-order academic chops. He is the follow-on to some of the giants covered in Michael Rosenberg's classic. Here he, as always quietly, explains why the U.S. dollar is different and how the hysteria over the Deutsche mark, then Lebanese pound, then Swiss franc, then Japanese yen, and now Chinese renminbi is overdone.

Finally, I asked Maury Harris, of UBS, if he had a favorite FX book:


Here is Charles Kindleberger of MIT on FX and the human condition.


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