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Exchange rate forecating

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Vinaykar Thakur

Multinational enterprises need short-term currency forecasts to make bank deposits in various currencies. There are three main types of exchange rate forecasting: judgemental forecasts which consider economic, technical, and psychological factors; technical forecasts which extrapolate past exchange rate trends; and fundamental analysis which uses econometric models incorporating macroeconomic variables. However, obtaining all relevant information and quantifying hard to measure factors make accurate exchange rate forecasting difficult.

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I.E (Carbaugh) P. 418 Exchange Rate Forecasting Multinational enterprises need short term currency forecasts for a variety of reasons. For example: Corporations often have for brief periods large amount of cash, used to make bank deposits in various currencies. Choosing a currency in which to make deposit requires some idea of what the currencys exchange rate will be in future. For Multinational enterprises short term forecasting tends to be more widespread than long term forecasting. Most corporations revise their currency forecast at least every quarter. Three Exchange rate forecast made by Morgan Guaranty Trust Company for Dec 31,1999 based on following factors: a: Real Interest rates b: Current A/C balance as a % of GDP c: Deviation of real foreign exchange rate from its long run average rate. The need of multinational enterprises and investors for forecasted currency values has resulted in the emergence of currency firms including Predex, Goldman Sachs, and Wharton Econometric Forecasting Associates. In addition large banks such as Chase Manhattan Bank and Citibank have provided free currency forecasts to its clients. Most Exchange rate forecasting methods use accepted economic (fundamental) relationships to formulate a model then it is refined through a Statistical analysis of past data. In the current system of market determined Exchange rates, currency values fluctuate almost instantaneously in response to new information regarding changes in interest rates, inflation rates, money supplies trade balances etc. Judgemental Forecasts: They are something known as Subjective or common Sense models. They require the gathering of wide array of political and economic data and interpretation of this data in terms of timings, direction and magnitude of exchange rate changes. Judgemental Forecasts formulate projections based on a thorough examination of individual nations. They consider economic indicators such as inflation rate and trade data; Technical factors such as
potential intervention by a control bank in the foreign exchange market and psychological factors that relates to ones feel for the market. Technical Forecasts It involves use of historical Exchange rate data to estimate future values. This approach is technical in the sense that it extrapolates from past exchange rate trends and ignores economic and political determinants of exchange rate movements. It encompasses a variety of charting techniques including a currencys price, cycle or volatility. A common starting point for technical analysis is a chart that plots a trading periods opening, high, low and closing prices. Time series models are used to analyze moving averages of exchange rates. Fundamental Analysis It involves consideration of macroeconomic variables and policies that are likely to affect a currencys value. It uses computer based econometric models which are statistical estimates of economic theories. TO generate forecasts econometricians develop models for individual nations that attempt to incorporate the fundamental variables that underlie exchange rate movements, trade &investment flows, industrial activity , inflation rates, income levels and so on. Econometric Models are best suited in forecasting long term exchange rate trends. This is because exchange rates in the short term are influenced by many factors that change on a day to day basis resulting in considerable short term volatility. Criticism Obtaining reliable information on interest rates and inflation is difficult. There are always factors affecting exchange rates that cannot easily be quantified (such as intervention by RBI in currency markets.)

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Exchange rate forecating

  • 1. I.E (Carbaugh) P. 418 Exchange Rate Forecasting Multinational enterprises need short term currency forecasts for a variety of reasons. For example: Corporations often have for brief periods large amount of cash, used to make bank deposits in various currencies. Choosing a currency in which to make deposit requires some idea of what the currencys exchange rate will be in future. For Multinational enterprises short term forecasting tends to be more widespread than long term forecasting. Most corporations revise their currency forecast at least every quarter. Three Exchange rate forecast made by Morgan Guaranty Trust Company for Dec 31,1999 based on following factors: a: Real Interest rates b: Current A/C balance as a % of GDP c: Deviation of real foreign exchange rate from its long run average rate. The need of multinational enterprises and investors for forecasted currency values has resulted in the emergence of currency firms including Predex, Goldman Sachs, and Wharton Econometric Forecasting Associates. In addition large banks such as Chase Manhattan Bank and Citibank have provided free currency forecasts to its clients. Most Exchange rate forecasting methods use accepted economic (fundamental) relationships to formulate a model then it is refined through a Statistical analysis of past data. In the current system of market determined Exchange rates, currency values fluctuate almost instantaneously in response to new information regarding changes in interest rates, inflation rates, money supplies trade balances etc. Judgemental Forecasts: They are something known as Subjective or common Sense models. They require the gathering of wide array of political and economic data and interpretation of this data in terms of timings, direction and magnitude of exchange rate changes. Judgemental Forecasts formulate projections based on a thorough examination of individual nations. They consider economic indicators such as inflation rate and trade data; Technical factors such as
  • 2. potential intervention by a control bank in the foreign exchange market and psychological factors that relates to ones feel for the market. Technical Forecasts It involves use of historical Exchange rate data to estimate future values. This approach is technical in the sense that it extrapolates from past exchange rate trends and ignores economic and political determinants of exchange rate movements. It encompasses a variety of charting techniques including a currencys price, cycle or volatility. A common starting point for technical analysis is a chart that plots a trading periods opening, high, low and closing prices. Time series models are used to analyze moving averages of exchange rates. Fundamental Analysis It involves consideration of macroeconomic variables and policies that are likely to affect a currencys value. It uses computer based econometric models which are statistical estimates of economic theories. TO generate forecasts econometricians develop models for individual nations that attempt to incorporate the fundamental variables that underlie exchange rate movements, trade &investment flows, industrial activity , inflation rates, income levels and so on. Econometric Models are best suited in forecasting long term exchange rate trends. This is because exchange rates in the short term are influenced by many factors that change on a day to day basis resulting in considerable short term volatility. Criticism Obtaining reliable information on interest rates and inflation is difficult. There are always factors affecting exchange rates that cannot easily be quantified (such as intervention by RBI in currency markets.)