Factors Affecting Exchange Rates

Consensus Forecasts

A March 2013 poll by Consensus Economics, which surveys more than 700 forecasters worldwide each month, focuses on the extent to which exchange rate movements are influenced by a range of different factors.

Exchange rates are clearly influenced by a wide range of different factors, and the importance of each varies both from country to country and, for any given currency, over time. This special survey is an attempt to compare and rank the differing degrees of sensitivity with which different currencies respond to these various influences. In addition, as these influences are frequently pushing in different directions, it should also help to determine which factors are likely to dominate. The four graphs on the right and below suggest the direct relationship between currency values and often-cited explanatory factors for the UK pound, the Australian dollar, the Chilean peso and the Norwegian krone.

While we asked our panellists to assign scores to six main factors as independent variables, it is clear that they are interlinked to a large degree. For example, both financial and economic risks impinge upon the Japanese outlook, while concerns about monetary independence create uncertainties over its high debt situation. Following a change in government in late 2012, aggressive quantitative easing (score 8.0) has caused the yen to plummet and a re-pricing of currency risk. True, the outlook for the trade balance (score 5.6) has improved and the decision to bolster the money supply and raise the inflation target to 2.0% (score 4.0 for differential) is reflected in a surge in equity flows (score 3.2). However, having suffered a series of failed initiatives in the 1990s, significant doubts surround efforts to tackle deflation and kick-start the moribund economy (score 3.2 for relative growth). Critics warn that attempts to stoke inflation without deep-rooted reforms might have unintended consequences. Mr. Masaaki Shirakawa, the former Bank of Japan governor has cautioned against political interference in monetary policy and of higher rates that could damage public finances and worsen the country’s debt situation.

In addition to the factors ranked at our request by panellists, we also asked for suggestions of others.

You can download a sample of Foreign Exchange Consensus Forecasts at www.consensuseconomics.com.

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