Nations can have different types of monetary regimes. Regimes can vary between fixed exchange rates when the government sets the price, through to fully floating regimes where the markets alone determine the price. In practice, nations adopt as a matter of policy, an exchange rate regime that reflects national, political and economic ideology and goals.
The starting point in currency analysis is to determine the type of regime as it exists, and to describe the factors which have an impact on the exchange rate. This forms the basis to explaining how and why exchange rates have changed in the past and how they might change in the future, that is, predicting exchange rates.
Predicting the future is inevitably problematic, and never more so than with exchange rates. Future exchange rates will reflect, to an extent, past prices. The price of a foreign currency tomorrow will be related to its price today. Time series and trend analysis is part of a range of highly sophisticated quantitative approaches for estimating the future exchange rate within a range.
Other quantitative methods of analysis take a longer-term view. Exchange rates will tend to move subject to prevailing and expected macroeconomic conditions. Inflation and interest rates will have direct effects on the exchange rate, as will even broader parameters such as GDP growth and the current account. We might expect, for example, that high inflation in a nation would lead to “automatic” adjustment (a fall) in the foreign value of a currency (depreciation).
There is also a need to understand the role of political actors in the economy. This is the qualitative dimension in exchange rate determination. Some governments have an ideological bias for or against intervention in the exchange rate to achieve socio-economic goals. So an exchange rate, for example, might be kept below its natural market rate to promote the export sector - so-called currency manipulation. At the other end of this spectrum is the freely floating exchange rate when the currency moves up and down at the whims of the domestic and international economy, acting then as an automatic stabilizer - a shock absorber - on the economy and external account.
Our best prediction of a future exchange rate would therefore depend on quantitative analysis of long and short terms factors as well estimating potential for government intervention in the exchange rate.
There are four main actors in international foreign exchange markets – traders (such as banks and financial institutions), arbitrageurs, hedgers and speculators. Traders buy and sell currency for a profit based on currency spread. Typically, they manage their risk through volume and interest rates. Arbitrageurs also operate in a “risk free” setting, watching for small deviations in buy sell spreads across markets, and this explains why exchange rates around the world are equal in most currency settings.
Ozeconomics has its focus on solutions for hedgers and speculators. Hedgers and speculators are the yin and yang of currency markets. Hedgers want to avoid uncertainty and risk, while speculators seek to profit from it. In a real sense, hedgers sell risk and speculators are the buyers. The financial risk is that a currency may change in the wrong direction. So, a goods trader, for example, selling goods in a foreign market would fear a foreign currency depreciation because it reduces sales revenues. In that sense, a foreign currency appreciation is good for the exporter but bad for the importer, and a depreciation has the opposite effect.
There are general financial instruments that serve the purpose of hedgers in forex risk management. Common instruments include bank forward rates and futures contracts. Each type of derivative has a price and fits the needs of different type of risk management. Derivatives have a price of course. So there is a need to determine the scale and direction of our risk to decide whether a hedging strategy is required and what it might look like.
Speculators are also helped by high quality predictions and risk analysis when investing in the forex market. Again, the scale and direction of change will guide the size and timeframe of the funds invested.
Ozeconomics can provide a solution to the needs when investing and managing risks in:
Please visit the Contact page for further information.
Principal of Ozeconomics: Dr Dennis Howard
I am an Australian and I have degrees from the University of Queensland, Southern Cross University, and Anaheim University in the fields of political science, risk analysis, management and finance, including a PhD in Economics and an advanced MBA.
I have collected over 35 years experience working as a consultant, advisor, researcher and lecturer for a variety of organisations and institutions, both private and public, including universities and training institutes rights across Asia and the Pacific.
As a university professor I have taught at first year undergraduate through to postgraduate level in economics and international finance.
These days I pursue my passion, namely understanding the way foreign exchange rates move in reponse to their political and economic environments. I enjoy reporting on target country exchange rate analysis and forecasting. And I enjoy training people in the techniques of forex prediction and maangement, either individually or in small groups. So, if you have a need to learn more about predicting foreign exchange movements either in the form of a report or for personal learning, please send me an email.
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