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I was considering making some sort of free index data set that would basically attempt to estimate changes in the value of a currency against all other currencies. So I came to thinking if I took daily volume, and daily changes, summed dollar volume for all currencies except the one for the given index, then divided a given currency's estimated volume in dollars lets say for example is CHF, this gives us percent of daily volume, then we would multiply by the percent of daily volume by the change of the currency for the index, for example lets say we are calculating the USD index, we then multiply the price change for USDCHF by the percent of daily volume. Then continue for every currency against the dollar in order to calculate how much the index should move. Is this a thing or should I make it one?

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  • $\begingroup$ As everyone has already mentioned, data on volume is hard to know, but I wanted to share that CLS is now offering FX databases with trade volume on Quandl See: quandl.com/vendors/cls. Volume is covered in terms of both the number of trades and the total value in USD. CLS operates the world's largest multicurrency cash settlement service. The databases cover 33 currency pairs aggregated hourly, daily and monthly and by trade instrument (swap, spot, outright forward). You can check out the databases at quandl.com/vendors/cls [Full Disclosure: I work for Quandl] $\endgroup$ – user37317 Jul 21 '16 at 15:41
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It is not a thing. The basic problem is that volume of currency traded is unknown. FX traded almost exclusively over the counter without centralised clearing or reporting. There are no daily volume statistics.

The thing that is most commonly done for FX indexes is trade weighting. Changes in a currency's value are measured against the value of a basket of other currencies, where each currency in the basket is weighted according to its share of the import/export trade. Probably the weighting would be adjusted annually, or in line with how often the government accounting office publishes import/export statistics.

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  • $\begingroup$ I understand already the OTC aspect of FX, but what I was meaning is to sample from a single estimate source, probably from year to year, and as new estimate data arrives on volume, weights would be adjusted for all new data. $\endgroup$ – FX_NINJA Jun 30 '16 at 4:47
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re: fx volume

majority of fx volume is "unknown", but so is much else in markets. there are ways of estimating volume to feed your models - just don't get overly reliant on it IMO.

check out CME T&S and a few spot venues. google Lee/Ready and Tick Rule to get ideas on how to create your own estimation models based on available/accessible data for FX.

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An index has to have a purpose. For example, the FTSE100 tracks the performance of the 100 largest capitalised companies on the LSE; it's purpose is to give the expected return of a fund of those largest companies. It is, therefore, replicable; if I wanted to get the same performance as the FTSE100, I just buy the right proportions of shares as the index contains, and keep rebalancing vs the changing portfolio and weightings.

So for a currency index, the question has to be: What is it for? If you want to know how well USD is performing, then performing against what? If I was a US investor in a collection of European companies, where I want my USD initial capital to track the movement of the currencies of those companies, then I would want a basket containing that proportion of currencies. If I was a Swiss investor with a need to maintain a fund of CNY for my imports, then I would want that in the basket.

Ultimately, I think an index which just tracks 'volume' (as measured by whom?) isn't particularly useful. Currency movements are less about how much has moved, and more about the economies and inflationary environments of the countries that issue them.

Consider the recent Brexit move. If I were a US investor into the UK, then obviously GBPUSD is going to be a large component in the risks I'm looking at. But for exporting companies, a drop in GBPUSD is helpful, as it cuts labour, rent and other local costs at a stroke. But that UK capitalisation is also reduced. So then perhaps I care more about the long term interest rates available in the UK, and the market's view on its future. So I might want a basket of Gilts, German bonds and Treasuries, each with their own currency dependencies, to reflect my interest or my risk.

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  • $\begingroup$ well the objective is mostly to gauge the actual change in value of a currency, as the exchange rate change of USDJPY is also dependent on the change of the Yen's value. Ultimately I think trade data as mentioned is possibly a better route for weighting, how volume could also be a factor applied to the index. $\endgroup$ – FX_NINJA Jul 21 '16 at 3:18
  • $\begingroup$ @FreepromTech so what do you mean by the actual change in value of a currency? Compared to what? Nothing is absolute in Finance, so that is the change in value of an amount of JPY in terms of USD? Or as an indicator of the asset value of a country? Ultimately the question is what you are trying to measure. The exchange rate itself is already capturing effects from changes to investment rates to inflation to perceived differences in risk in interbank markets. So, what is the purpose of this actual value you're trying to measure? $\endgroup$ – Phil H Jul 23 '16 at 9:58
  • $\begingroup$ I mostly am making this out of boredom and curiosity, I saw the weights on the dollar index, and the FXCM dollar index, but was interested in a currency index with more pairs as well as a less arbitrary seeming weighting. I did manage to find a trade weighted index which satisfied my curiosity measuring the dollars change in value. It has 25 currencies which is enough for me. $\endgroup$ – FX_NINJA Jul 23 '16 at 11:03

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