The main methods of exchange rates forecasting

The main methods of exchange rates forecasting

Any participant in the global Forex market, doesn’t matter if it a large investment fund or a private investor, is vitally interested in a qualitative forecast of the dynamics of the exchange rate chosen for trading. The fact is that the most precisely calculated exchange rate allows to reduce financial risks and increase profits from capital investments. Forex daily analysis and prediction is a very important part of successful trading.

Method of accounting PPP

Appeal to the purchasing power parity due to the theoretical position that the same goods have the same value regardless of the location of the sale, if you do not take into account the cost of transportation and the cost of the exchange transaction. Based on this provision, the exchange rate always tends to such a change that allows you to compensate for the price increase caused by inflation. For example, in the United States, prices for the current year will grow by 2.5%, while in Australia due to a fall in demand by only 0.5%. In this case, the inflation differential will be:
2.5% – 0.5% = 2%

In accordance with the PPP principle, the US dollar in this example depreciates relative to the Australian national currency by an amount close to 2%. If, for example, the exchange rate was equal to 92 US cents per Australian dollar, then according to the theory of purchasing parity, the forecast for the course will be:

(1 + 0.02) x (0.92 US dollars for 1 Australian dollar) = 0.938 US dollars for 1 Australian dollar

The method of economic stability accounting

The study of the economic growth rate of the countries-emitters of freely convertible currencies makes it possible to predict the dynamics of the exchange rate. It is obvious that a healthy economy with a potentially higher growth rate is more likely to attract more foreign investment than an economy that is subject to stagnation. Meanwhile, long-term investments are associated with the need to purchase the national currency, which in turn leads to an increase in demand for it and, as a result, to its appreciation. This principle, in fact, is the basis of this method for predicting the behavior of the exchange rate.

It should be noted that, in contrast to the method that takes into account PPP, the method based on studying the current state of the economy of a country does not allow to predict the exact size of the exchange rate. However, it allows investors working in the global Forex market to form a general idea of ​​possible market trends, that is, the possible direction of price dynamics (strengthening or weakening) of the currency chosen for trading, as well as the strength of such trends. In practice, this method of forecasting is used in combination with other methods. This approach allows you to make the most complete picture of changes in the foreign exchange market. Currency prediction will be much easier if you will try to combine a few methods though.

The method of constructing an econometric model

Econometric refers to such a predictive model that links the change in the exchange rate of a particular traded currency with the entire set of factors affecting it. As a rule, when creating an econometric model, you should use the parameters of standard economic theory. At the same time, any variable that, in the opinion of the currency trader, affects the movement of market quotations to some extent, can be added to the calculations.

Suppose that it is necessary to make a forecast of changes in the exchange rate of the US dollar relative to the Canadian dollar for the coming year. As a result of a thorough study with subsequent analysis, the key factors affecting the rate were selected INT (the difference in interest rates of the US and Canadian Central Banks), IGR (the difference in the rate of increase in household incomes in both countries) and GDP (differential in GDP growth rates in both countries). a country).

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