This document discusses factors that affect foreign exchange rates, including relative inflation rates between countries, interest rates, international trade balances, foreign currency supply, and net international reserves of a country. Floating and managed exchange rate regimes are also covered. The author predicts that the Egyptian pound will face challenges maintaining its value against the US dollar in 2009 due to declining factors like international reserves and an increasing trade deficit, and may depreciate to reach 6 Egyptian pounds per US dollar by the end of the year.

1. Factors affecting foreign
exchange rates
Prepared by: Walid Saafan

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. 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
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Factors affecting foreign exchange rates - prepared by: Walid
Saafan

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. Relative Inflation Rates, cont.
 Inflation rate is declining but still on a
high levels that has a –ve impact on
$/LE
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Factors affecting foreign exchange rates - prepared by: Walid
Saafan

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. 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. 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. 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. 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. 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. 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. 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. 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
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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. THANK YOU
3rd Feb., 2009 15
Factors affecting foreign exchange rates - prepared by: Walid
Saafan