The fear of Asset Bubbles In FX Markets

Mean reversion is “a concept of normality,” where extreme events can cause an asset to diverge from its long-term averages. For Deutsche Bank Foreign Exchange Macro Strategist Sebastien Galy, the theory of mean reversion works, so long as the underlying economic principles that exert the law of gravity on currency prices don’t change. Looking at currency markets, however, Galy notes that sometimes currency valuations and prices just don’t revert to their mean. This can be particularly when prudent government policies are not maintained.

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Currency valuations follow a formula

Currencies have traditionally...