4 September How to Forecast Foreign Exchange Rates September 4, 2017By FX Initiative FX Market Overview, General Continuing Professional Education, Currency, Forecasting, Fundamental Analysis, FX, Hypothesis, Management, Technical Analysis, CPE, Foreign Exchange, Guess, Predict, Risk 0 Forecasting foreign exchange rates is a challenging but necessary aspect of currency risk management. There is no single prescribed method for FX forecasting, and it is a difficult task particularly for those who are not engaged in the market on a daily basis. FX forecasting has a relatively low predictive power as uncertainty always remains a factor, but nonetheless each market participant is responsible for developing an educated guess about what direction exchange rates will move in the short, medium, and long term. The following two techniques are used most commonly to generate an FX forecast. Technical Analysis – Technical analysis uses historical market data to predict shorter and longer-term future exchange rate movements, whereby past prices and volume helps serve as a guide for the future. Fundamental Analysis – Fundamental analysis uses current economic indicators to predict future exchange rates, and considers factors such as interest rates, earnings, employment, GDP, housing, and manufacturing among other areas to assess the present state of the economy and help guide the future. Many market participants use a combination of both technical and fundamental analysis to develop a forecast. Applying these techniques using the euro as an example, a forecaster could use technical analysis by looking at the historical data provided by the Federal Reserve for the Euro/US dollar exchange rate since the introduction of the euro in 1999 to the present day. The forecaster can then observe the range of values, and identify that the high was 1.5759 in July of 2008 and the low was 0.8525 in October of 2000. Given the current euro exchange rate of 1.1800, the forecaster can conclude that the present valuation is towards the lower end of the trading range between 0.8525 and 1.5759 and perhaps is undervalued. Building upon that premise, a forecaster can then use fundamental analysis to assess the current state of the economy in the Eurozone where the euro is used. If the forecaster anticipates a slowdown in economic growth, sluggish earnings, weaker employment, a decline in housing, manufacturing, and GDP, and a low interest rate environment, then there might be more room for the euro to depreciate. Conversely, if the forecaster expected strong growth in economic activity, healthy earnings, rising employment, positive trends in housing, manufacturing, and GDP, and a corresponding rise in interest rates, then perhaps the euro will appreciate in value. All forecasts need to be scaled to a specific time frame, and each market participant must use their best judgment to assess how supply and demand factors will impact foreign exchange rates. There are various views and perspectives among market participants that can differ for good and substantive reasons, and the interpretation of how supply and demand factors determine exchange rates and the generation of a FX forecast is more of an art than a science. A sound foreign exchange market forecast can be challenging to develop in house, so some organizations rely on the consensus forecast among experts or research and insight shared by their banking partners or financial institution to help guide them. To learn more about forecasting foreign exchange rates, sign up for FX Initiative’s currency risk management training for complete access to our educational videos, interactive examples, and live webinar events. We walk you through real-world scenarios and simulated strategies from leading global organization such as Apple to illustrate key learning concepts in a practical and easy to understand format. Foreign exchange is a key component of international business, and FX Initiative can help you mitigate risk and maximize opportunity abroad. Ready to start learning FX Risk Management? Click here to get started! The FX Initiative Team support@fxinitiative.com Related Posts Practice Pricing Foreign Exchange Option Contracts Option contracts are financial contracts that give the buyer the right, not the obligation, to buy or sell a quantity of a particular currency at a specific exchange rate, called the strike rate, on or before a pre-arranged date. A call option is the right to buy a particular currency, and a put option is the right to sell a particular currency. An option is a right, not an obligation, so it will be exercised only when it is favorable to do so. An option is comprised of two value drivers, (1) intrinsic value, which is the difference between the strike rate on the contract and the then prevailing spot rate in the market, and (2) time value, which is any excess value beyond intrinsic value related to time to maturity. A purchased option begins its life as an asset in the amount of the option premium paid to the counterparty at inception, typically purely time value, and will expire with a either a positive intrinsic value or zero fair value. When intrinsic value is positive, it is referred to as ... End-of-Year Foreign Exchange (FX) Education With 6 weeks remaining in 2020, take advantage of end-of-year foreign exchange (FX) education by completing our 6 part foreign exchange risk management training program. Whether you need to research a foreign exchange educational topic related to your global business, or want to simulate a foreign exchange risk management strategy using our interactive examples, we offer a wide array of quality informational topics and tools that can help you manage FX risk. FX Initiative is designed to make complex foreign currency matters simple and manageable, and is accessible 24 hours a day 7 days a week to meet your global business needs whenever and wherever a foreign exchange opportunity arises so you can make the right decisions to meet your FX objectives. FX Initiative helps Banking & Treasury Professionals answer FX risk management questions such as: How to manage currency risk? How to draft a FX risk policy? Where to look for FX risk exposures? What currency risks to hedge and how? Which strategies meet FX hedge objectives? What are the economics? How to do FX accounting? Get acquainted with all of the educational topics and interactive examples available exclusively to subscribers. ... Explore How To Forecast FX Rates Want to explore how to forecast FX rates? FX Initiative’s FX Market Overview course provides proven best practices and real world examples to help you forecast future exchange rate movements in the $5+ trillion daily FX market, the largest and most liquid market in the world. Get started with our foreign exchange risk management training, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Start Training > Download the PDF Simulating Foreign Exchange Strategies In the field of foreign exchange (FX), companies are managing currency risk exposures and hedging strategies more effectively by using business intelligence (BI) tools that provide data analysis and visualization. To support global businesses, FX Initiative offers a unique suite of specialized simulation tools that model common FX risk management strategies and demonstrate best practices for preserving assets on the balance sheet and mitigating FX gains on losses on the income statement. Our FX Transaction Simulator helps treasury professionals gain valuable insight by modeling the economic and accounting impact of specific hedging strategies for underlying foreign exchange exposures such as revenues, expenses, receivables, and payables. Users can simply input their company specific and foreign exchange market variables, and then test a variety of hedging strategies, which include not hedging or hedging with a forward contract, vanilla option or zero cost collar. The resulting output is a highly detailed interactive FX risk analysis that charts the economic payoff of your selected hedging strategy, ranks the alternative hedging strategies, and reports the accounting journal entries and t-accounts with authoritative references to U.S. generally accepted accounting ... Simulating Foreign Exchange Strategies In the field of foreign exchange (FX), companies are managing currency risk exposures and hedging strategies more effectively by using business intelligence (BI) tools that provide data analysis and visualization. To support global businesses, FX Initiative offers a unique suite of specialized simulation tools that model common FX risk management strategies and demonstrate best practices for preserving assets on the balance sheet and mitigating FX gains on losses on the income statement. Our FX Transaction Simulator helps treasury professionals gain valuable insight by modeling the economic and accounting impact of specific hedging strategies for underlying foreign exchange exposures such as revenues, expenses, receivables, and payables. Users can simply input their company specific and foreign exchange market variables, and then test a variety of hedging strategies, which include not hedging or hedging with a forward contract, vanilla option or zero cost collar. The resulting output is a highly detailed interactive FX risk analysis that charts the economic payoff of your selected hedging strategy, ranks the alternative hedging strategies, and reports the accounting journal entries and t-accounts with authoritative references to U.S. generally accepted accounting ... Simulating Foreign Exchange Strategies In the field of foreign exchange (FX), companies are managing currency risk exposures and hedging strategies more effectively by using business intelligence (BI) tools that provide data analysis and visualization. To support global businesses, FX Initiative offers a unique suite of specialized simulation tools that model common FX risk management strategies and demonstrate best practices for preserving assets on the balance sheet and mitigating FX gains on losses on the income statement. Our FX Transaction Simulator helps treasury professionals gain valuable insight by modeling the economic and accounting impact of specific hedging strategies for underlying foreign exchange exposures such as revenues, expenses, receivables, and payables. Users can simply input their company specific and foreign exchange market variables, and then test a variety of hedging strategies, which include not hedging or hedging with a forward contract, vanilla option or zero cost collar. The resulting output is a highly detailed interactive FX risk analysis that charts the economic payoff of your selected hedging strategy, ranks the alternative hedging strategies, and reports the accounting journal entries and t-accounts with authoritative references to U.S. generally accepted accounting ... Comments are closed.