Internation finance Essay

Submitted By cpalmx
Words: 1470
Pages: 6

Foreign exchange can be based on some methods to predict, but as the growth of the cycle, the forecasting will be less and less accurate. I will use some useful methods for currency forecasts, and then predicts for each currency, US Dollar, Euro and British Pound relative to the Australian Dollar for the next 12 months, and based on the forecast result, make a allocation plan for each currency, try to make money from the forecasts.

Firstly, I would like to try forecasts the future spot rate for US dollar against Australian dollar. The determination for exchange rates is complex. Inflation rate in Australia is expected to be consistent with 2-3 per cent over the next two years, and the interest rate is leave the 2.5 per cent unchanged. (Reserve bank of Australia, 2014) However the inflation in the US is running below the 2 per cent, and the interest rate is maintain to 0-0.25 per cent. (Federal Reserve System, 2014) According to the parity condition approach, the inflation rates are relevant to relative PPP, another one is relative interest rates relevant to the International Fisher Effect, and these two methods are both used to forecast future spot exchange rates. According to the listed data, could be calculated relative PPP and International Fisher Effect, which is clearer for the result.
Relative PPP, assuming:

International Fisher Effect, assuming:

= 0.93USD/AUD*[(1+0.0025)/ (1+0.025)] =0.9096 USD/AUD

Actually currencies with high interest rates and inflation rates tend to depreciate, the value of dollar should fall and those currencies with low interest rates and inflation rates tend to appreciate.
In other hand, according to the asset market approach, prospects for economic growth and profitability are also relevant to forecasting exchange rate. In Australia, the new data reflect the moderate growth for economy. There is a slightly improve in the Labor market in this year, rather than an accelerated deterioration. (Reserve bank of Australia, 2014) and the same economic conditions also occurs in the U.S, the fiscal policy is restraining economic growth, however the extent of restraint is diminishing. Labor market conditions improved, with the unemployment rate declining further. (Federal Reserve System, 2014) on the other hand, As the U.S. economic growth, in the case of bullish on the US dollar prices, the Australian dollar exchange rate may accelerate the decline.

Secondly, I would like try to forecast the future spot rate for Euro against Australian dollar. Also according to the parity condition approach, relative PPP and the International Fisher Effect are relevant to forecasting analysis. The aims of inflation rate for ECB is below or close to 2 per cent, however the inflation is remain low in the short run, averaging 0.6 per cent in 2014, link to the Australia’s inflation rate.
Relative PPP, assuming:

Compare to Australia’s interest rate 2.5 per cent, the interest rate on the main refinancing operations of the Euro system will be decreased by 10 basis points to 0.05 per cent. (European central bank, 2014)
International Fisher Effect, assuming:
= 0.69EUR/AUD*[(1+0.0005)/ (1+0.025)] =0.6742 EUR/AUD
These results also reflect the Australian dollar could be depreciated, the value of Australian dollar is fall, and means 1 AUD get less Euro, because of the higher interest rate and inflation rates.

Another method for forecast is asset market approach, relevant to the GDP, economy growths or conditions. European Central Bank (ECB) announced a monetary stimulus package to help return inflation to a rate consistent with its objective for price. (European Central Bank, 2014) The real GDP growth projection for 2014 has been revised downwards by 0.2 percentage point, reflects the result of the weaker than expected in the second quarter and lower exports in the second half of this year. In addition, under the background of geopolitical tensions, reduce exports and the impact of global demand, to a lesser extent,…