Our Framework
Divergent Markets produces bilateral FX research using a systematic 10-factor weighted framework. Every pair analysis follows the same structure, uses the same methodology, and applies the same scoring system — so you can compare across pairs with confidence that the process is consistent.
This page explains how the framework works and how to read our reports.
The Bilateral Approach
Most FX research analyses currencies individually — "AUD is bullish" or "JPY is weak." We think that misses the point. You don't trade a currency, you trade a pair. And the pair-level dynamics often differ from what either standalone view would suggest.
Our analysis starts with two independent base currency dossiers (one for each side of the pair), then builds a bilateral assessment that captures what neither dossier can see alone: the differential, the relative trajectory, and the interaction effects.
A currency can be bullish in isolation but bearish in a specific pair if the other side is even more bullish. Our framework captures this.
Two Horizons
Every assessment is made across two time horizons:
Tactical (2-4 weeks) — driven by near-term catalysts, positioning, event risk, and technical levels. This is the "what's happening now" view. Useful for swing traders and anyone managing active positions.
Strategic (1-6 months) — driven by policy divergence, growth differentials, structural flows, and valuation. This is the "where is this going" view. Useful for position traders and portfolio allocation.
The two horizons can disagree. A pair might be strategically bullish but tactically bearish because of crowded positioning or an imminent risk event. When they disagree, we explain why and identify the inflection point where the tactical view is expected to converge with the strategic one.
The 10 Factors
Each pair is assessed across 10 macro factors. Every factor receives a stance (Bullish, Bearish, or Neutral for the pair), a confidence score (0-100%), and a weight that determines its contribution to the overall score.
Factor 1: Policy & Rates Central bank rate differentials, trajectory, and market pricing. The single most important driver for most pairs. Covers current rates, OIS-implied paths, and the gap between market pricing and central bank guidance.
Factor 2: Inflation & Growth Bilateral GDP growth differentials, inflation divergence, employment gaps, and PMI comparisons. Where the two economies sit in the business cycle relative to each other.
Factor 3: Risk Appetite & Sentiment How global risk conditions affect the pair. Some pairs have asymmetric risk sensitivity — one leg reacts more to risk-off than the other. VIX levels, equity performance, and risk beta differentials.
Factor 4: Flows & Positioning CFTC positioning for both legs, crowding assessment, contrarian signals, and structural bilateral flows (FDI, pension fund allocations, trade settlement). Positioning extremes are the most reliable tactical reversal signals.
Factor 5: External Balance & Terms of Trade Current account differentials, commodity exposure netting, and terms-of-trade sensitivity. Particularly important for commodity-vs-commodity pairs where the two export baskets compete for pair direction.
Factor 6: Guidance & Credibility Central bank communication quality, forward guidance divergence, and the gap between what markets price and what central banks signal. Captures the "repricing potential" that hasn't hit the rate channel yet.
Factor 7: Event Risk & Geopolitics Near-term binary catalysts, geopolitical tail risks, and election/referendum calendars. Assessed for asymmetric impact — does the event hit one leg harder than the other?
Factor 8: Fiscal & Sovereign Risk Government debt trajectories, credit ratings, fiscal stance, and sovereign risk premiums. Rarely a primary driver for G10 pairs but can matter at extremes.
Factor 9: Market Structure & Volatility Pair-specific technicals (not standalone currency charts), implied vs realised volatility, options market structure, and expression assessment. Includes support/resistance levels, moving average configuration, and momentum indicators.
Factor 10: USD Liquidity & Funding Cross-currency basis, USD funding conditions, and the dollar smile framework. Matters for all pairs through the vehicle currency channel — most FX trades are executed via USD legs even for non-USD crosses.
Weight Adjustments
Each factor has a default weight that sums to 1.00 across all 10 factors. For most pairs, default weights apply. Occasionally, a pair's unique characteristics justify adjusting weights — for example, a commodity-vs-commodity pair like AUD/CAD might receive elevated weight on External Balance because the competing commodity baskets are the pair's defining feature.
All weight adjustments are documented in the analysis with explicit rationale. Weights always sum to 1.00.
Scoring System
Weighted Score
Each factor's contribution is calculated as:
Stance Score (+1 bullish, -1 bearish, 0 neutral) × Confidence (0-100%) × Weight = Weighted Contribution
The sum of all 10 weighted contributions produces the net weighted score for each horizon. This score typically ranges from -1.0 (maximum bearish) to +1.0 (maximum bullish).
Conviction (1-5)
The weighted score maps to a conviction level:
- 5/5 — Exceptional. Rare. Nearly all factors aligned with high confidence.
- 4/5 — Strong. Clear directional signal with few offsetting factors.
- 3/5 — Moderate. Directional lean supported by fundamentals but with meaningful headwinds.
- 2/5 — Mild. The direction is probably right but entry timing or risk/reward is poor.
- 1/5 — Marginal. Barely directional. Close to neutral.
Composite Score
Combines tactical and strategic weighted scores into a single ranking number used in the executive summary's opportunity matrix. Higher composite = stronger overall signal across both horizons.
Alignment
When tactical and strategic horizons agree on direction, the pair is marked as Aligned (✅). When they disagree, it's marked Not Aligned (❌). Aligned pairs are generally higher-quality opportunities because you're not fighting a conflicting signal on a different timeframe.
How to Read a Pair Analysis
A typical pair analysis runs 8,000-12,000 words. Here's how to navigate it efficiently:
Start with the Executive Summary — this gives you the headline stance, conviction, and the one-paragraph thesis in 30 seconds.
Check the Synthesis section — the weighted score tables show you exactly which factors are driving the call and by how much. The scenarios give you base/upside/downside targets with probabilities.
Drill into factors that matter to you — if you care most about positioning, read Factor 4. If you trade around central bank events, read Factor 1 and Factor 6. You don't need to read all 10 every time.
Use the Conviction Ladder — this tells you what would make us more or less bullish. If you see one of these conditions developing in real-time, you know the view is about to shift before the next report.
Check Invalidators — these are the specific, quantitative conditions that would flip the thesis. If an invalidator triggers, the analysis is stale and you should reduce exposure regardless of the headline conviction.
Forward vs Spot Decomposition — shows you where our view diverges from what the forward curve implies. This is the quantified "edge" — the gap between what the market prices and what we expect.
How to Read the Executive Summary
The executive summary synthesises all 31 pair analyses into a single cross-pair view. Key sections:
Opportunity Matrix — all 31 pairs ranked by composite score. Start here for the overview. Direction, conviction, carry, expected value, and key risk in one table.
Top Trades — the 8-10 best opportunities with full reasoning, targets, and invalidators. These are the pairs where alignment, expected value, and carry all converge.
Currency Strength Ranking — aggregated view across all pairs. Shows which currencies are broadly strong or weak and flags contradictions worth investigating.
Carry Landscape — every pair ranked by carry-to-vol ratio. Highlights which trades pay you to wait and which cost you to hold.
Catalyst Calendar — deduplicated events across all pairs for the next 30 days, with asymmetry flags for events that aren't fully priced.
Risk Dashboard — invalidator heatmap grouped by scenario (risk-off, CB shocks, commodity shocks), positioning extremes, and cross-pair consistency checks.
Key Terms
Carry — the interest rate differential between two currencies. Positive carry means you earn yield holding the position; negative carry means you pay.
Carry-to-Vol Ratio — annualised carry divided by implied volatility. Measures how much you earn relative to how much the pair moves. Higher is better for carry trades.
CFTC Positioning — speculative positioning data from the Commodity Futures Trading Commission. Measured in contracts and expressed as a percentile (0th-100th) against recent history. Extremes signal crowding.
COT Index — the current CFTC net position as a percentile of its 3-year range. 100th percentile = maximum bullish crowding. 0th percentile = maximum bearish crowding.
Invalidator — a specific, quantitative condition that would cause us to reverse or neutralise our view. Each includes a trigger threshold, rationale, monitoring frequency, and probability estimate.
Signpost — a leading indicator we're tracking to confirm or challenge the thesis. Each includes the current level, bullish threshold, bearish threshold, and data source.
PPP Fair Value — Purchasing Power Parity estimate of the "correct" exchange rate based on relative price levels. We use OECD PPP data. Pairs far from PPP face valuation headwinds/tailwinds.
Risk Reversal — the difference in implied volatility between calls and puts. Indicates whether the options market is skewed toward upside or downside protection for a pair.
Terms of Trade — the ratio of export prices to import prices. When a country's export prices rise relative to imports, its currency tends to strengthen. Particularly relevant for commodity-exporting currencies.
Forward Edge — the difference between our expected exchange rate and the rate implied by the forward curve. Positive edge means we expect the pair to outperform what forwards price.
Conviction Ladder — a set of conditions that would increase or decrease our conviction level. Provides a forward-looking roadmap of what to watch for between reports.