To maximize forex return and mitigate risk to exposure forex forecast is very significant. It is vital to forex trader and traders who deal in international currencies alike. There are many ways to forecast foreign exchange rates but in this article we will talk about the four most popular ways to forecast exchange rate.
Forex Rates forecast with Purchasing Power Parity (PPP)
The purchasing power parity (PPP) is probably the most popular method of forecasting exchange rate as a result of the way it is being propagated by a lot of economic textbooks. The PPP approach forecasts that the exchange rate will adjust to counterbalance price alterations as a result of inflation based on this primary theory.
One of the most popular uses of the PPP forecast method is demonstrated by the Big Mac Index, compiled and published by The Economist. This easy-to-use indicator tries to estimate if a currency is undervalued or overvalued depending on the price of Big Macs in a lot of countries. Since Big Macs are almost prevalent in all the countries they are sold, comparing their prices would act as the foundation for the index.
Forex exchange forecast through Relative Economic Strength
The relative economic strength method of forex forecast utilizes economic growth in various countries to be able to forecast the direction of exchange rates. The basis for this method of forecast is because of the notion that a strong financial environment and possibly high growth rate is probably going to make more foreign investors invest in a country. For these investors to be able to invest in the said country, they need to buy the country’s currency. This will increase the demand for the local currency thus leading to a possible rise in the exchange rate.
This forex forecast method in addition to examining nations relative economic strength also considers the general investment flows into the country l and factors that boost foreign investments in a country like a high interest rate. On the contrary when a country has low interest rate, it discourages investors and leading to a drop in the demand for the country currency. This in turn causes the currency rate of the country to depreciate in value.
This method of exchange rate forecast does not provide the investor with the precise value of what the potential rate for exchange rate would be. Instead, it gives the trader a general sense of the possible rise and fall in exchange rate of a particular currency at a particular time.
For the best result make use of this forecast method together with other forecast method to arrive at a conclusive result.
Forex forecast through the economic model.
This forex rate forecast commonly involves collection of facts regarding all the factors that are known to affect exchange rate and designing a model that links these factors to the exchange rate. The factors utilized in this forex rate forecast method is based on economic theory; however, you can integrate any variable that is considered to be among fact ors that influence exchange rate.
Forex rate forecast through the Time Series Model
The time series model of exchange rate forecast is completely technical in nature and is unconnected to any form of economic theory. One of the most frequently used time series method of forex forecast is referred to as the autoregressive moving average (ARMA) process. The underlying principle for utilizing this method depends on the notion that previous price behavior and price movement can be replicated in the future and so they are utilized to forecast future price. Entering the past times series at in a computer generates a forecast model for you.