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Currency Forecasting

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Shaon Biswas

The document discusses various methods for forecasting currency exchange rates, including fundamental and technical analysis. Fundamental analysis examines economic relationships and data using models like purchasing power parity and international fisher effect to estimate future exchange rates. Technical analysis relies on historical price patterns and indicators like simple and exponential moving averages, as well as chart patterns, to predict exchange rate movements. Factors like inflation differentials, interest rates, supply and demand can influence exchange rates under these analytical frameworks. The document concludes different forecasting systems provide varying value and using more economic information generally leads to more reliable projections.

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Currency Forecasting RMB to GBP
CURRENCY FORECASTING IN IB Hedging decision Short-term financing decision Short-term investment decision Capital budgeting decision Earnings assessment Long-term financing decision Source: Madura
METHODS OF CURRENCY FORECASTING Fundamental Analysis Technical Analysis Relies on historical price patterns to arrive at a forecast. Simple Moving Average (SMA), Exponential Moving Average (EMA), Chartism Examines economic relationships and financial data to arrive at a forecast. Ex: Parity Models, Econometric Models etc.
PARITY MODELS Through these models one attempts to calculate an equilibrium exchange rate in the future. Analysis built on long standing economic theories of exchange rate determination. Purchasing Power Parity Model International Fisher Effect
PURCHASING POWER PARITY MODEL Follow the Law of One Price. Assumes that exchange rates will change to offset relative prices levels between countries. Countries with relatively high rates of inflation will show currency depreciation Countries with relatively low rates of inflation will experience currency appreciation In equilibrium, the amount of depreciation (or appreciation) will be equal to the inflation differential. Provide results based on inflation rate, spot rate and time
PPP FORECASTING Future Spot rate (et) = Spot Rate (e0) x (1+ich)t (1+iuk)t The Spot rate of GBP/RMB at 20 December 2013 was 9.91412 According to World Bank data the inflation of rate of both country in 2013 was 2.6% So Based on this concept the spot rate of 19 December 2014 will be 9.91412 Source: The World Bank 2013 & XE 2014
INTERNATIONAL FISHER EFFECT The exchange rates change in direct proportion to relative differences in long term interest rates. The long term interest rates capture the markets expectation for inflation. Countries with relatively high rates of long term interest rates (i.e., high inflation) will show currency depreciation. Countries with relatively low rates of long term interest rates (i.e., low inflation) will show currency appreciation. In equilibrium, the amount of depreciation (or appreciation) will be equal to the long term interest rate differential.
IFE Forecasting The interest rate of the peoples Bank of China and bank of England are 5.60% and 0.50% Spot GBP/RMB = 9.91412 (on 20 December 2013) IFE Spot GBP/RMB Forecast 1 year change in GBP = 9.91412x (5.60%-0.50%)= 0.50562 1 year spot GBP = 9.91412 + 0.50562 = 10.41974 Source: Global Rate 2013, Bank of England 2014
TECHNICAL ANALYSIS Uses charts and price patterns to forecast future moves in spot exchange rates. Looks for price patterns that have historically signed a future move. Assume historical relationship will result in similar moves in the future. Not interested in explaining the source of the expected future move. Not interested in financial information or news.
SIMPLE MOVING AVERAGE Sep 13 Oct 13 Nov13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 9.798 9.860 9.811 9.914 9.945 10.130 10.280 10.453 10.502 10.589 10.603 10.192 10.013 9.851 9.598 10.173 10.191 10.19 10.172 The simple moving average is extremely popular for currency forcasting, but like all technical indicators, it does have its critics. Many individuals argue that the usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. N.B: All the rate taken on 20 or 19 of each month Source: Investopedia 2014, XE.com 2014
EXPONENTIAL MOVING AVERAGE The exponential moving average is a type of moving average that gives more weight to recent prices in an attempt to make it more responsive to new information. Current EMA= ((Price(current) - previous EMA)) X multiplier) + previous EMA Sep 13 Oct 13 Nov13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 9.798 9.860 9.811 9.914 9.945 10.130 10.280 10.453 10.502 10.589 10.603 10.192 10.013 9.851 9.598 10.173 10.191 10.190 10.172 10.173 10.125 10.046 Here Multiplier= (2/12+1) Source: Investopedia 2014
CHARTISM 9 9.2 9.4 9.6 9.8 10 10.2 10.4 10.6 10.8 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 RMB/GBP Actual Rate SMA EMA
Source: XE.com 2014
Increase Demand Decrease Demand
Increase Supply Decrease Supply
Tourism supply lead to appreciation to the exchange rate. Overseas goods compare to domestics goods could lead to increase in a supplier to a RMB exchange rate if the interest rate services seasons at attractive in the demand for currency
CONCLUSION Different System of currency forecasting providing different value. The more information about different economic factors provide more reliable forecasting. Fundamental analysis use more economical factors Technical analysis use more market pricing trend.
REFERENCE Shapiro, A.C. 2010, Multinational financial management, John Wiley, Hoboken, N.J. BANK OF ENGLAND (2014). Bank of England. [online]. Last accessed 09 December 2014 at: http://www.bankofengland.co.uk/Pages/home.aspx [online]. Last accessed 9 December 2014 2014 at: http://www.global-rates.com/interest-rates/central- banks/central-bank-china/pbc-interest-rate.aspx INVESTOPEDIA (2014). Investopedia. [online]. Last accessed 08 December 2014 at: http://www.investopedia.com/articles/trading/10/simple-exponential-moving-averages-compare.asp INVESTOPEDIA (2014). Investopedia. [online]. Last accessed 09 December 2014 at: http://www.investopedia.com/articles/forex/11/4-ways-to-forecast-exchange-rates.asp [online]. Last accessed 8 December 2014 at: http://abeweb.org/proceedings/proceedings06/sandler.pdf THE WORLD BANK (2014). The World Bank. [online]. Last accessed 08 December 2014 at: http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG XE (2014). XE.com. [online]. Last accessed 08 December 2014 at: http://www.xe.com/currencycharts/?from=GBP&to=CNY&view=2Y

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Currency Forecasting

  • 2. CURRENCY FORECASTING IN IB Hedging decision Short-term financing decision Short-term investment decision Capital budgeting decision Earnings assessment Long-term financing decision Source: Madura
  • 3. METHODS OF CURRENCY FORECASTING Fundamental Analysis Technical Analysis Relies on historical price patterns to arrive at a forecast. Simple Moving Average (SMA), Exponential Moving Average (EMA), Chartism Examines economic relationships and financial data to arrive at a forecast. Ex: Parity Models, Econometric Models etc.
  • 4. PARITY MODELS Through these models one attempts to calculate an equilibrium exchange rate in the future. Analysis built on long standing economic theories of exchange rate determination. Purchasing Power Parity Model International Fisher Effect
  • 5. PURCHASING POWER PARITY MODEL Follow the Law of One Price. Assumes that exchange rates will change to offset relative prices levels between countries. Countries with relatively high rates of inflation will show currency depreciation Countries with relatively low rates of inflation will experience currency appreciation In equilibrium, the amount of depreciation (or appreciation) will be equal to the inflation differential. Provide results based on inflation rate, spot rate and time
  • 6. PPP FORECASTING Future Spot rate (et) = Spot Rate (e0) x (1+ich)t (1+iuk)t The Spot rate of GBP/RMB at 20 December 2013 was 9.91412 According to World Bank data the inflation of rate of both country in 2013 was 2.6% So Based on this concept the spot rate of 19 December 2014 will be 9.91412 Source: The World Bank 2013 & XE 2014
  • 7. INTERNATIONAL FISHER EFFECT The exchange rates change in direct proportion to relative differences in long term interest rates. The long term interest rates capture the markets expectation for inflation. Countries with relatively high rates of long term interest rates (i.e., high inflation) will show currency depreciation. Countries with relatively low rates of long term interest rates (i.e., low inflation) will show currency appreciation. In equilibrium, the amount of depreciation (or appreciation) will be equal to the long term interest rate differential.
  • 8. IFE Forecasting The interest rate of the peoples Bank of China and bank of England are 5.60% and 0.50% Spot GBP/RMB = 9.91412 (on 20 December 2013) IFE Spot GBP/RMB Forecast 1 year change in GBP = 9.91412x (5.60%-0.50%)= 0.50562 1 year spot GBP = 9.91412 + 0.50562 = 10.41974 Source: Global Rate 2013, Bank of England 2014
  • 9. TECHNICAL ANALYSIS Uses charts and price patterns to forecast future moves in spot exchange rates. Looks for price patterns that have historically signed a future move. Assume historical relationship will result in similar moves in the future. Not interested in explaining the source of the expected future move. Not interested in financial information or news.
  • 10. SIMPLE MOVING AVERAGE Sep 13 Oct 13 Nov13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 9.798 9.860 9.811 9.914 9.945 10.130 10.280 10.453 10.502 10.589 10.603 10.192 10.013 9.851 9.598 10.173 10.191 10.19 10.172 The simple moving average is extremely popular for currency forcasting, but like all technical indicators, it does have its critics. Many individuals argue that the usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. N.B: All the rate taken on 20 or 19 of each month Source: Investopedia 2014, XE.com 2014
  • 11. EXPONENTIAL MOVING AVERAGE The exponential moving average is a type of moving average that gives more weight to recent prices in an attempt to make it more responsive to new information. Current EMA= ((Price(current) - previous EMA)) X multiplier) + previous EMA Sep 13 Oct 13 Nov13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 9.798 9.860 9.811 9.914 9.945 10.130 10.280 10.453 10.502 10.589 10.603 10.192 10.013 9.851 9.598 10.173 10.191 10.190 10.172 10.173 10.125 10.046 Here Multiplier= (2/12+1) Source: Investopedia 2014
  • 12. CHARTISM 9 9.2 9.4 9.6 9.8 10 10.2 10.4 10.6 10.8 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 RMB/GBP Actual Rate SMA EMA
  • 16. Tourism supply lead to appreciation to the exchange rate. Overseas goods compare to domestics goods could lead to increase in a supplier to a RMB exchange rate if the interest rate services seasons at attractive in the demand for currency
  • 17. CONCLUSION Different System of currency forecasting providing different value. The more information about different economic factors provide more reliable forecasting. Fundamental analysis use more economical factors Technical analysis use more market pricing trend.
  • 18. REFERENCE Shapiro, A.C. 2010, Multinational financial management, John Wiley, Hoboken, N.J. BANK OF ENGLAND (2014). Bank of England. [online]. Last accessed 09 December 2014 at: http://www.bankofengland.co.uk/Pages/home.aspx [online]. Last accessed 9 December 2014 2014 at: http://www.global-rates.com/interest-rates/central- banks/central-bank-china/pbc-interest-rate.aspx INVESTOPEDIA (2014). Investopedia. [online]. Last accessed 08 December 2014 at: http://www.investopedia.com/articles/trading/10/simple-exponential-moving-averages-compare.asp INVESTOPEDIA (2014). Investopedia. [online]. Last accessed 09 December 2014 at: http://www.investopedia.com/articles/forex/11/4-ways-to-forecast-exchange-rates.asp [online]. Last accessed 8 December 2014 at: http://abeweb.org/proceedings/proceedings06/sandler.pdf THE WORLD BANK (2014). The World Bank. [online]. Last accessed 08 December 2014 at: http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG XE (2014). XE.com. [online]. Last accessed 08 December 2014 at: http://www.xe.com/currencycharts/?from=GBP&to=CNY&view=2Y