When it comes to determining accurate economic indicators specific to exchange rate movements, several factors are involved. Currency forecast is a process in which professional forecasters look at these different factors, which are then assigned scores from zero, which means there is no influence to ten, showing a strong influence. This job is very serious and to be a forecaster, people go through many years of education and training. While not for everyone, the people who are responsible for a country’s currency forecast, the information and insight they provide is priceless.
The challenge with currency forecast is that every currency is influenced by a variety of factors, some shared and some unique to the country. However, in this article we wanted to focus on the six factors involved with currency forecast that are typically deemed the most important. These factors include relative growth, inflation differential, trade and current account balance, short and long-term interest rate differences, and equity flows.
To provide an accurate currency forecast, professional economists rate each of these six factors using a special scoring system. Keep in mind that while each of these factors plays an important role when it comes to determining exchange rate movement, some play a more important role than others do. Below are a few of the many examples of world currencies and the way in which they are scored specific to exchange rate movement and currency forecast.
Exchange Rates per $1 US Dollar Relative Growth Inflation Differentials Trade and Current Account Interest Rate Differences (Short/Long-Term) Equity Flows Score
Euro 6.7 4.3 5.7 8.0 (Short)
6.0 (Long) 4.3
Japanese Yen 6.7 3.7 7.3 7.0 (Short)
5.3 (Long) 4.3
United Kingdom Pound 7.3 4.0 5.7 8.0 (Short)
6.0 (Long) 4.7 City Importance – 7.0
Quantitative Easing – 6.0
Canadian Dollar 6.0 3.0 7.0 6.7 (Short)
5.7 (Long) 2.5 Commodity Prices – 6.0
Australian Dollar 5.7 3.7 6.0 8.0 (Short)
6.7 (Long) 4.3 Commodity Prices – 6.5
New Zealand Dollar 6.3 4.0 6.7 8.7 (Short)
7.3 (Long) 5.5 Commodity Prices – 7.0
Exchange Rates per $1 US Dollar Relative Growth Inflation Differentials Trade and Current Account Interest Rate Differences (Short/Long-Term) Equity Flows Score
South Korean Won 7.7 3.5 7.7 6.0 (Short)
6.0 (Long) 6.7 Relations w/ North Korea – 7.0
Thai Baht 7.3 6.0 7.3 5.0 (Short)
4.5 (Long) 6.7 Corporate Governance – 7.0
Czech Koruna 4.2 2.4 3.5 5.9 (Short)
5.0 (Long) 3.2
Clearly, a variety of factors influence exchange rates but again, the degree and position of importance for these factors would vary from one country to another over a period. Forecasters have the tough job of distinguishing sensitive factors for each country’s currency to determine the way in which influences affect movement of the exchange rate. In addition to forecasters using various factors, it is also important to understand that the influences that affect exchange rates are always moving in different directions, which must also be analyzed.
Interestingly, of the six most important factors used to help with currency forecast, interest rate differences is by far the most critical, especially for currencies from industrialized countries. However, for medium-term roles specific to emerging market currencies, trade and current account positions would be considered the most critical. Then, each country has one or more unique factors that need to be considered for currency forecast. A prime example is the United Kingdom Pound, which has exchange rates affected by the importance of a city within the country.
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