Majors FX-REER/NEER Suite [BIG]

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BIG MAJORS FX-REER/NEER SUITE
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OVERVIEW

The BIG Majors FX-REER/NEER Suite is a multi-currency valuation framework designed for institutional FX traders, macro strategists, and systematic currency allocators. This indicator calculates Real Effective Exchange Rates (REER) and Nominal Effective Exchange Rates (NEER) for the seven major currency pairs (G7 FX), integrating macroeconomic fundamentals (CPI inflation differentials) with technical trend analysis to identify structural currency misvaluations and mean-reversion opportunities.

Unlike standard FX indicators that only analyze bilateral price action, this suite constructs trade-weighted basket indices that measure each currency's strength against a portfolio of its major trading partners, adjusted for inflation differentials. This approach mirrors central bank and sovereign wealth fund methodologies for assessing equilibrium exchange rate levels.

The framework combines:
- Fundamental valuation metrics – REER/NEER indices with Z-score normalization
- Technical trend filters – Ichimoku Cloud and Aroon oscillator confluence
- Signal classification system – Long/Short/Watch/Conflict regime identification
- Quantitative confidence scoring – 0-100% signal reliability weighting


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CORE METHODOLOGY
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• NEER Calculation (Nominal Effective Exchange Rate)

The NEER measures a currency's value against a trade-weighted basket of its seven major trading partners, geometrically averaged in log-space to ensure symmetry:

1. All seven G7 FX pairs are normalized to USD-pivot (A/USD format)
2. Each currency's log-normalized rate is compared to the arithmetic mean of the other six
3. Formula: NEER_i = (8/7) × log(CCY_i/USD) - mean(log(CCY_others/USD))

This construction ensures that:
- A rising NEER indicates currency appreciation against the basket
- The methodology is symmetric and avoids base-currency bias
- Changes reflect multilateral competitive dynamics, not just bilateral moves


• REER Calculation (Real Effective Exchange Rate)

The REER adjusts the NEER for inflation differentials using Consumer Price Index (CPI) data:

Formula: REER_i = NEER_i + log(CPI_i) - mean(log(CPI_others))

By incorporating CPI differentials, the REER provides a purchasing-power-parity-adjusted valuation metric that accounts for relative inflation rates. This is the institutional standard for assessing fundamental currency equilibrium levels.

Data Sources:
- FX rates: TradingView composite feed (FX:), OANDA, FXCM, FOREXCOM
- CPI data: ECONOMICS namespace (monthly frequency, official statistical releases)
- Supported currencies: USD, EUR, JPY, GBP, CHF, AUD, CAD, NZD


• Valuation Bias Detection

Each currency pair is classified as overvalued (bias = -1, "Short") or undervalued (bias = +1, "Long") based on two independent criteria:

1. Percentage Band Deviation – Relative Index distance from 100 baseline
• Overvalued: Index > 100 × (1 + deviation%), default +5%
• Undervalued: Index < 100 × (1 - deviation%), default -5%

2. Z-Score Threshold – Statistical extremes in rolling lookback window
• Overvalued: Z-Score > +1.5 (default)
• Undervalued: Z-Score < -1.5 (default)

Either condition triggers a bias classification. This dual-filter approach captures both absolute deviations and relative extremes within recent historical context.


• Trend Confirmation (Ichimoku + Aroon)

To avoid counter-trend entries in strong momentum regimes, the suite integrates two independent trend filters:

Ichimoku Cloud
- Bull: Price > Cloud AND Conversion > Base Line
- Bear: Price < Cloud AND Conversion < Base Line
- Parameters: Conv(9), Base(26), Span B(52), Displacement(26)

Aroon Oscillator
- Bull: Aroon Up > 70 AND Aroon Down < 30
- Bear: Aroon Down > 70 AND Aroon Up < 30
- Default lookback: 25 periods

Trend is confirmed only when both indicators agree (Ichimoku + Aroon ≥ +1 for bull, ≤ -1 for bear).


• Setup Classification Logic

The framework combines Bias (fundamental valuation) with Trend (technical momentum) to generate four distinct setup types:

- Long↗︎ (Setup = 1) – Undervalued + Bullish Trend
Context: Mean reversion opportunity with momentum confirmation. Currency trading at fundamental discount while technical trend supports upside.

- Short↘︎ (Setup = -1) – Overvalued + Bearish Trend
Context: Mean reversion opportunity with momentum confirmation. Currency trading at fundamental premium while technical trend supports downside.

- Watch (Setup = 2) – Valuation bias present, but no clear trend
Context: Fundamental mispricing without directional conviction. Monitor for trend emergence before entering.

- Conflict (Setup = 3) – Bias and trend pointing opposite directions
Context: Overvalued currency in uptrend OR undervalued currency in downtrend. Avoid—either trend continuation or valuation mean reversion, but unclear which dominates.


• Confidence Score (0-100%)

Each setup receives a quantitative confidence weighting based on three factors:

1. Band Distance (40%) – How far the Relative Index deviates from 100 baseline
2. Z-Score Magnitude (40%) – Statistical extremeness within lookback window
3. Trend Confluence (20%) – Agreement between Ichimoku and Aroon signals

Score interpretation:
- 70-100% = High confidence (both valuation and trend extremes aligned)
- 40-69% = Moderate confidence (one factor strong, others weak)
- 0-39% = Low confidence (marginal signals, questionable reliability)


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VISUAL COMPONENTS
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• Dashboard Table (Top-Right)

Displays real-time valuation metrics for all seven major pairs:

Column 1: Pair – Currency pair identifier
Column 2: RelIdx – Relative Index (100 = baseline at first valid bar)
Column 3: Z – Z-Score vs. rolling lookback window
Column 4: Bias – Long/Short/Neutral valuation classification
Column 5: Trend – ↑/↓/– trend direction (Ichimoku + Aroon)
Column 6: Setup – Long↗︎/Short↘︎/Watch/Conflict (color-coded)
Column 7: Conf – Confidence score 0-100% (color-coded)
Column 8: Quelle – REER (inflation-adjusted) or NEER (nominal only)

Color coding:
- Green = Long↗︎ setup
- Red = Short↘︎ setup
- Orange = Watch (no trend)
- Purple = Conflict (bias/trend divergence)


• Optional Chart Plot

Select any of the seven pairs to plot its Relative Index on the chart with:
- Baseline at 100 (horizontal gray line)
- +Band at 100 × (1 + deviation%), dashed red
- -Band at 100 × (1 - deviation%), dashed green
- Aqua line tracking the selected pair's Relative Index evolution


• Signal Labels

When a pair transitions into Long↗︎ or Short↘︎ setup:
- Green label below bar = Long↗︎ entry signal
- Red label above bar = Short↘︎ entry signal
- Positioned using ATR offset for visibility


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KEY FEATURES
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- Institutional valuation methodology – REER/NEER framework used by central banks and sovereign wealth funds
- Macro-fundamental integration – CPI inflation differentials adjust for purchasing power parity
- Multi-timeframe flexibility – Daily (D), Weekly (W), Monthly (M) resolution options
- Seven simultaneous pairs – Monitors all G7 FX majors in single unified dashboard
- No repainting – All signals confirm on bar close
- Automated alerts – TradingView notifications when setups transition (Long/Short triggers)
- Confidence weighting – Quantitative scoring allows position sizing calibration
- Fallback logic – Automatically switches to NEER if CPI data incomplete


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HOW TO USE
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1. Apply to any chart – The indicator pulls multi-security data; chart symbol does not matter (commonly applied to SPY or DXY for reference)

2. Select data feed – Default FX: (TradingView composite) is recommended; alternatives: OANDA, FXCM, FOREXCOM

3. Choose timeframe:
• Daily (D) = Swing trading, medium-term mean reversion (2-8 week horizons)
• Weekly (W) = Position trading, macro regime shifts (1-6 month horizons)
• Monthly (M) = Strategic allocation, long-term equilibrium analysis (6-24 month horizons)

4. Configure parameters:
• Z-Score Lookback: Default 252 (one trading year on Daily); adjust for timeframe (52 for Weekly, 36 for Monthly)
• Deviation Band: Default ±5%; tighten to ±3% for more signals, widen to ±7% for higher conviction
• Z-Threshold: Default ±1.5; increase to ±2.0 for extreme-only signals

5. Monitor dashboard table:
• Focus on pairs showing Long↗︎ or Short↘︎ setups with Conf ≥ 70%
• Watch for Watch setups transitioning to directional signals
• Avoid Conflict setups unless you have strong macro conviction

6. Execute mean-reversion trades:
• Long↗︎ = Buy undervalued currency (e.g., EURUSD Long if EUR undervalued)
• Short↘︎ = Sell overvalued currency (e.g., USDJPY Short if JPY overvalued)
• Target: Mean reversion toward 100 baseline or opposite band

7. Position sizing by confidence:
• High confidence (70-100%) → Standard position size
• Moderate confidence (40-69%) → Reduce size by 50%
• Low confidence (<40%) → Avoid or use minimal pilot size

8. Risk management:
• Stop loss: Place beyond recent swing high/low or 1.5× ATR
• Take profit: Opposite valuation band or 100 baseline
• Time stop: Exit if setup reverses (Long→Neutral→Short or vice versa)


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LIMITATIONS
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- CPI data lag – Consumer Price Index releases are monthly and report with 2-4 week delay. REER calculations may lag real-time inflation dynamics.

- Structural shifts ignored – The baseline (100) is set at first valid bar. Long-term structural appreciation/depreciation (e.g., 20-year USD bull market) is not accounted for. Suitable for cyclical mean reversion, not secular trend analysis.

- Equal-weighting assumption – All seven currencies are equally weighted in basket construction. Actual trade-weighted indices use GDP or trade volume weights, which this framework simplifies.

- No emerging market currencies – Limited to G7 majors (USD, EUR, JPY, GBP, CHF, AUD, CAD, NZD). Does not cover EM FX (e.g., CNY, BRL, MXN).

- Technical filter limitations – Ichimoku and Aroon are lagging indicators. In fast-moving markets (e.g., central bank interventions, geopolitical shocks), trend signals may arrive late.

- Mean reversion assumption – The framework assumes currencies revert to equilibrium. During regime changes (e.g., monetary policy divergence, crisis flows), deviations can persist or expand before eventual reversal.


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TECHNICAL SPECIFICATIONS
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- Pine Script v6
- Non-repainting (signals confirmed on bar close)
- Multi-security data feeds (7 FX pairs + 8 CPI series)
- Automated alert system (transitions to Long↗︎/Short↘︎)
- Real-time dashboard table (8 columns × 8 rows)
- Maximum 500 labels supported (100 per pair direction)
- Fallback logic: NEER used if CPI data unavailable


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NOTES
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This indicator is designed for experienced FX traders, macro strategists, and portfolio managers familiar with:
- Real and nominal effective exchange rate concepts
- Purchasing power parity theory and inflation differentials
- Multi-currency portfolio construction and basket hedging
- Carry trade and convergence strategies
- Central bank policy impacts on FX equilibrium levels

The framework provides objective valuation signals but does not account for:
- Interest rate differentials (carry)
- Capital flow dynamics (risk-on/risk-off)
- Central bank intervention zones
- Geopolitical risk premiums

Always combine REER/NEER valuation analysis with macro event calendars, positioning data (CFTC COT reports), and fundamental policy divergence assessments.


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Developed for institutional FX valuation analysis based on central bank REER/NEER methodologies.