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Factors affecting exchange rates

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Factors affecting exchange rates

  1. 1. Factors affecting foreign exchange rates Prepared by: Walid Saafan
  2. 2. Checkpoint What is better $/LE  or ? Considerations:  International trade balance.  Net International Reserve valuation.  FDI  Others… 3rd Feb., 2009 2 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  3. 3. Determination of Exchange Rates  Floating rate regimes ◦ allow changes in the exchange rates between two currencies to occur for currencies to reach a new exchange-rate equilibrium ◦ Currencies that float freely respond to supply and demand conditions ◦ No government intervention to influence the price of the currency, free demand and supply theory applied.  Managed fixed-rate regime ◦ government buys and sells its currency in the open market as a means of influencing the currency’s price ◦ Central banks holds foreign-exchange reserves can sell these reserves to affect exchange rates for the currency ◦ Governments use fiscal or monetary policy to influence the demand for their currencies ◦ Countries may revalue or devalue their currencies if economic policies and intervention do not work 3rd Feb., 2009 3 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  4. 4. 1.Relative Inflation Rates  changes in relative inflation between two countries must cause a change in exchange rates  If domestic inflation rate is lower than that in the foreign country, the domestic currency should be stronger than the foreign currency 3rd Feb., 2009 4 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  5. 5. Relative Inflation Rates, cont.  Inflation rate is declining but still on a high levels that has a –ve impact on $/LE 3rd Feb., 2009 5 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  6. 6. 2. Interest rates  Fisher Effect—links inflation and interest rates ◦ nominal interest rate in a country is the real interest rate plus inflation ◦ Real interest rate should be the same in every country, the country with the higher interest rate should have higher inflation iRr 111 3rd Feb., 2009 6 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  7. 7. Impact of interest rates, cont.  International Fisher Effect (IFE)— links interest rates and exchange rates, Interest- rate differential is a predictor of future changes in the spot exchange rate  currency of the country with the lower interest rate will strengthen in the future 9 9 9 9 9 9 10 10 11 11.5 11.5 11.5 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 CBE monthly avg dicount rates 3rd Feb., 2009 7 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  8. 8. 3. International trade balance  The deficit in the international trade balance is increasing with –ve impact on $/LE -29,566 -47,543 -66,428 -82,485 Jul/Aug Jul/Sep Jul/Oct Jul/Nov International trade balances Y08 LE mio 3rd Feb., 2009 8 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  9. 9. 4. Foreign currency supply  Excepted decline in foreign currency supply from: ◦ Suez canal. ◦ Tourism ◦ Money transfer from gulf area.  This decline will put more pressure on LE 3rd Feb., 2009 9 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  10. 10. 3rd Feb., 2009 5. Net International Reserves NIR  NIR is declining that decreases CBE ‘s ability to maintain $/LE at constant rates 34,572 34,683 34,819 35,024 35,031 34,405 34,112 June July August Sept. Oct. Nov. Dec Net International Reserves Y08 US$ mio 10 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  11. 11. 6. Other factors affecting exchange rate movements  Confidence—safe currencies considered attractive  Technical factors ◦ release of national statistics ◦ seasonal demands for a currency ◦ slight strengthening of a currency following a prolonged weakness 3rd Feb., 2009 11 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  12. 12. Weighted avg interbank EX rates  CBE maintained $/LE rates and will have difficulties in the future 5.4329 5.4788 5.4512 5.5095 5.5909 5.5936 5.5774 5.5314 5.5352 5.5345 5.5198 5.5254 5.5271 5.5199 5.5221 5.5137 11.09 18.09 25.09 9.10 16.10 23.10 30.10 6.11 13.11 20.11 27.11 4.12 11.12 18.12 25.12 31.12 WA weekly Interbank EX rates 3rd Feb., 2009 12 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  13. 13. Forecasting Exchange-Rate Movements Fundamental forecasting—uses trends in economic variables to predict future rates ◦ Use econometric model or more subjective bases Technical forecasting—uses past trends in exchange rates to spot future trends in the rates ◦ Assumes that if current exchange rates reflect all facts in the market, then under similar circumstances future rates will follow the same patterns ◦ Good treasurers and bankers develop their own forecasts ◦ Use fundamental and technical forecasts for3rd Feb., 2009 13 Factors affecting foreign exchange rates - prepared by: Walid Saafan
  14. 14. Conclusion LE will face a challenge during 09 to maintain its rate vs $ due to presented factor and is estimated to depreciated during the year to reach 6 $/LE 3rd Feb., 2009 14 Factors affecting foreign exchange rates - prepared by: Walid Saafan Jul/Aug Jul/Sep Jul/Oct Jul/Nov International trade balances Y08 Net International Reserves Y08 WA weekly Interbank EX rates
  15. 15. THANK YOU 3rd Feb., 2009 15 Factors affecting foreign exchange rates - prepared by: Walid Saafan

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