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. The special survey on page 34 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 (listed on previous page) as independent variables, it is clear that they are interlinked to a large degree. The anticipated ‘tapering’ of US policy accomodation (page 3), following earlier suggestions from Federal Reserve Chairman, Ben Bernanke, has heightened currency issues. FX policy may be influenced by a potential sharp reversal in capital flows, which could cause balance of payment problems and fuel currency volatility. Some governments, notably those in the emerging world, have warned of defensive exchange rate strategies to preserve financial stability, including capital controls or FX intervention.
The trade/current account is ranked as the most important influence on the exchange rate of Indonesia (score 8.5), due to concerns about debt, followed by the inflation differential (score 7.8). In Latin America, with the exception of Argentina and Venezuela, where fundamentals have been eroded by erratic government policy, most seem well positioned to handle financial shocks due to resilience in growth (ranked between 7.0 and 8.0) and surpluses in trade.
In addition to the factors ranked at our request by panellists, we also asked for suggestions of others. The far right column in the table on previous page shows only the most often cited or highly-ranked, with the exception of a few currencies for which two main factors were both frequently cited.