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 market’s 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 people’s 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
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
