Curreny Forecast

Topics: Inflation, Monetary policy, Macroeconomics Pages: 5 (1242 words) Published: September 28, 2014
EFB312 – International Finance
Currency Forecasting Project
Dora Chou n9248871
Queensland University of Technology
In the ever-changing financial markets, people should diversify their investments to earn the maximum profit. Distributing different portion of money into selected currencies is one of the approaches to make money. For the past many years, scholars have developed a number of methods to predict exchange rates. As a speculator, I am going to use three measures including Asset Market Approach, Relative PPP, and International Fisher Effect for currency forecasting. From the fundamental perspective, Asset Market Approach considers economic growth, unemployment rate, political risk, etc. I would like to use Relative PPP instead of Absolute PPP as Absolute PPP assumes two countries have similar or identical goods from the basket. Absolute PPP is pretty straightforward and easy to compute; however, it’s difficult that all goods are trade between all countries, and the labour cost may be various in each country. (Alan M. Taylor and Mark P. Taylor, 2004). International Fisher Effect is closely related to Relative PPP which adopts nominal interest rates rather than inflation rate, and it’s now widely used for predicting exchange rate. Asset Market Approach

Real GDP Growth
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%

2009

2010

2011

2012

2013

2014

2015

USD

-2.60%

3.00%

1.80%

2.80%

1.90%

2.80%

3.00%

EUR

-4.10%

1.80%

1.40%

-0.60%

-0.50%

1.20%

1.50%

GBP

-4.90%

1.40%

0.80%

0.20%

1.80%

2.90%

2.50%

AUD

1.20%

2.70%

2.10%

3.70%

2.40%

2.60%

2.70%

Source: IMF World Economic Outlook

1

Unemployment Rate
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

2009

2010

2011

2012

2013

2014

2015

USD

9.30%

9.60%

9.00%

8.10%

7.40%

6.40%

6.20%

EUR

9.40%

10.10%

10.20%

11.40%

12.10%

11.90%

11.60%

GBP

7.50%

7.90%

8.00%

8.00%

7.60%

6.90%

6.20%

AUD

5.60%

5.20%

5.10%

5.20%

5.70%

6.20%

6.20%

Source: IMF World Economic Outlook

Asset Market Approach regards inflation rate, interest rate, economic growth, political and economic risk, and government intervention as the factor to determine the equilibrium exchange rate. For US, the economic activity becomes dynamic accompanied by encouraging investments and a steady housing market recovery. “With the continued support of near-zero interest rates and firming external demand, this should reinforce virtuous circles between construction activity, household spending and employment expansion, bringing GDP growth back to around potential by 2015.”(European Economic Forecast, 2014) Unemployment rate continues to decrease in 2014 and 2015 due to demographic reasons. Then, for Euro area, after suffering from the euro crisis, Europe’s economics has gradually recovered, and economic uncertainty has reduced. Furthermore, the European Central Bank announced a monetary stimulus package to help return inflation to a rate consistent with its objective for price stability. (Bank of England Inflation Report, 2014 August). While Euro area’s unemployment rate is highly linked with the economic development, it seems to fall from its peak. Thirdly, for UK, the Real GDP growth is now stronger than has been in recent years, although only domestic demand with private consumption and investment contribute to the economic growth. Net exports grow very slowly and remain weak. Whether net exports are positive or not will depend on the growing exports to Ireland and China. “The labour market has remained resilient since 2010 despite weak economic growth and redundancies in the public sector with 2013 being no exception.” (European Economic Forecast, 2014) The unemployment rate will decline by degrees for the following years. Finally,...
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