Predicting Currency Exchange Movements

Predicting currency exchange movements has always been questioned by both academics and dealers. One will come across give very little support for exchange rate movements being either completely predictable or never being predictable. But majority believes that the currency exchange movements were more likely to be sometimes predictable.

It is simpler to forecast currency exchange movements for intra-day exchange rate than for periods of less than six months and periods longer than six months. Several factors can be identified to have a major influence on forex rates depending on the time horizon in question. The intra-day currency exchange movements are mainly influenced by order placements. Other factors include over-reaction to news, speculative forces, bandwagon effects and technical trading, while predicting forex movements.

It is very difficult to obtain data on the volume and price of individual trades, due to the confidential nature of inter-dealer trades. As the order placements have a major influence on intra-day forex rate movements, this indicates that one should study the order flows to reveal information on trading behavior and to predict forex movements.

However, for an increased time horizon increases, particularly for greater than six months, the economic fundamentals have a growing impact on currency exchange movements. The other factors diminish in significance. Speculative forces and bandwagon effects have the same degree of impact intra-day and over the medium run.

Technical trading, involving historical exchange rates which are used to forecast currency exchange movements has its greatest influence on medium run exchange movements. However, unlike economic fundamentals, technical trading has little impact on long-run currency exchange rate movements.

To conclude, it is agreed upon that predicting currency exchange movements can be based on changing economic fundamentals. However, this explanation holds true over the longer term. Although any economic announcement saw the forex rates react within less than a minute to correct the price anomaly in the current exchange rates.