Introduction to International Finance

Author: Lan Faqin
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Publishing Time: Not Available
Features: As previously mentioned, the fundamental factors influencing exchange rate fluctuations include economic factors, psychological expectation factors, information factors, and state intervention factors, etc. These factors are the main variables adopted in exchange rate forecasting. The analysis, refinement, and organization of these factors provide the raw material for establishing exchange rate forecasting models and conducting actual exchange rate forecasts, laying the foundation.
II. Methods of Exchange Rate Forecasting
Currently, there are five methods available for exchange rate forecasting internationally: technical forecasting, econometric forecasting, judgmental forecasting, market forecasting, and hybrid forecasting.
(A) Technical Forecasting
Technical forecasting is a method that analyzes historical exchange rate fluctuations to identify regular patterns and thereby estimate future spot exchange rates.
1. Forms of Technical Forecasting
Technical forecasting exists in two forms: subjective or "obvious logic" models and statistical models.
- The primary tool for subjective models is exchange rate fluctuation charts. For example, an exchange rate forecaster observes a chart of a currency's fluctuations over a past period and notices a pattern: after three consecutive days of depreciation, the currency appreciates on the fourth day. If the same pattern occurs again—three consecutive days of depreciation—the forecaster predicts that the exchange rate will also move in the same direction, meaning it will appreciate on the fourth day.
- The primary tool for statistical models is computers. For instance, an exchange rate forecaster uses a computer to identify the trends and turning points in a currency's historical exchange rate fluctuations. If the same trends and turning points reappear, future spot exchange rates can be predicted accordingly.
2. Advantages and Disadvantages of Technical Forecasting
Technical forecasting is a very short-term prediction method. Its main advantage is high accuracy in the short term. However, for multinational corporations, the short-term nature of technical forecasting is not conducive to formulating long-term business strategies. Additionally, technical forecasting does not provide point estimates or estimates of the range of future exchange rate fluctuations, so it is often not utilized by multinational corporations. For speculators, who trade frequently, using technical forecasting requires in-depth analysis of exchange rate fluctuations and their predictions, often necessitating payment of higher fees to specialized foreign exchange forecasting companies. Moreover, identifying regular patterns from historical exchange rate data is time-consuming, making this method unsuitable for their needs.
(B) Econometric Forecasting
Econometric forecasting, also known as fundamental forecasting, uses econometric models to combine various major economic variables that influence exchange rate fluctuations into a variable set to predict exchange rates. Relevant economic variables include inflation rates, interest rates, national income, consumption, investment, savings, trade, money supply, and labor productivity, among others.
1. Forms of Econometric Forecasting
The primary form of econometric forecasting involves establishing a mathematical model to comprehensively analyze the impact of various economic variables on exchange rate fluctuations. Below is an example to illustrate the application of econometric forecasting.
Assume a bank is requested by a multinational corporation to forecast the percentage change in the exchange rate between the Deutsche Mark and the U.S. dollar next month. For simplicity, assume the bank's forecast includes only two economic variables