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ECONOMIC FACTORS AFFECTING EXCHANGE RATES

In addition to our regular monthly surveys of projections for over 90 currencies we also undertake a special survey of factors affecting exchange rates in Foreign Exchange Consensus Forecasts (in March and August) for the currencies listed below.

G7 & Western Europe Asia Pacific Eastern Europe Latin America Africa
US Dollar/Euro Australian Dollar Czech Koruna Argentinian Peso South African Rand
Japanese Yen Indonesian Rupiah Hungarian Forint Brazilian Real  
UK Pound Malaysian Ringgit Polish Zloty Chilean Peso  
Canadian Dollar New Zealand Dollar Russian Rouble Colombian Peso  
Norwegian Krone Philippine Peso Turkish Lira Mexican Peso  
Swedish Krona Singapore Dollar   Peruvian New Sol  
Swiss Franc South Korean Won   Venezuelan Bolivar  
  Taiwan Dollar      
  Thai Baht      

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We ask our panellists to rank the current importance of a range of different factors or economic indicators in determining exchange rate movements (against the US dollar, unless otherwise noted). Scores are assigned to each of the economic factors shown in the table below on a scale of 0 (no influence) to 10 (very strong influence). The consensus results are the averages of individual panellists' scores for each factor or economic indicator. Given that different currencies are influenced by a wide range of factors, we limited those considered to a common list of six (relative growth, inflation differential, trade/current account balance, short- and long-term interest rate differentials and equity flows, which we asked our panels to assess for every currency. In addition, we asked panellists to suggest, and rank, other factors or economic indicators which they felt to be of particular importance in determining exchange rate movements. The most frequently cited of these for each currency appear in the right-hand column of the table below, with the exception of a few currencies for which two main factors or economic indicators were equally frequently cited.

The table and text commentary below represent a small portion of this special survey taken from our August 2009 issue of Foreign Exchange Consensus Forecasts.

CONSENSUS RANKING OF EXCHANGE RATE DETERMINANTS
Exchange Rates per US$, unless Otherwise Stated Relative Growth Inflation Differential Trade/
Current Account		 Interest Rate Differentials
Short (Long) 		Equity
Flows		 Other Factors (Score)
G-7 & Western Europe
            
Euro 6.6 2.3 4.8  5.8 (5.3) 3.5  No Quantitative Easing (8.0)
Japanese Yen 5.2 2.8 4.8 6.8 (6.0) 5.3 Risk Aversion (7.0) 
UK Pound 6.8 2.8 5.0 6.8 (6.0) 5.3 Importance of the City (7.0)
Euro Rate (5.0)
Swiss Franc* 3.3 2.3 3.6 6.3 (5.0) 4.0 Geo-Political Risks (7.0)

Asia Pacific
            
Australian $ 6.1 2.9 4.7 6.6 (5.6) 5.8 Commodity Prices (7.0)
New Zealand $ 5.8 2.8 4.8 7.2 (6.2) 5.4 Commodity Prices (7.0)
A$ Trend (7.0)
Philippine Peso 5.0  7.0 7.0 4.0 (6.2) 5.4  
Thai Baht
 7.0 6.0 5.0 4.5 (6.3) 8.5 FX Intervention (9.0)

Eastern Europe		            
Czech Koruna* 5.5 2.5 8.0 7.0 (3.5) 6.0 Net FDI (7.0) 
Hungarian Forint* 4.0 3.0 4.0 8.0 (5.0) 5.0 Risk Appetite (7.0) 
Russian Rouble 4.0 4.5 7.0 4.0 (3.5) 4.0 Crude Oil Prices (10.0)

Latin America		            
Argentinian Peso 4.3 5.0 6.3 3.0 (3.0) 3.3 FX/Macro Management (8.0)
Brazilian Real 6.3 6.0 5.8 6.3 (5.0) 6.8 Commodity Prices (5.0)
Mexican Peso 5.7 5.3 5.3 6.0 (5.3) 5.0 Reform Agenda (8.0)
Oil Prices (6.0)
Peruvian New Sol 5.3 4.5 6.3 5.3 (4.8) 7.0 Copper Prices (5.0)

* Analysis refers to determinants of the exchange rate against the euro.

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. This special survey 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.

In addition to the six main factors ranked at our request by panellists (relative growth, inflation differentials, the trade or current account balance, short- and long-term interest rate differentials and equity market flows), we also asked for suggestions of other factors affecting exchange rates. The far right column in the table above 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. Commodity prices are, unsurprisingly, considered an important driver affecting ‘commodity currencies’ as their country (notably those in Latin America) depends heavily on the export of raw materials for income.

Confidence in the global economic outlook (i.e. the pace and magnitude of the recovery path) is a key influence of capital flows and exchange rates. Our latest survey revealed that, in several instances, relative growth has overtaken nominal rate differentials as the most powerful driver of currency movements. This has been the case not only for the OECD industrialised country currencies, but for emerging ones in Asia and Latin America as well. Unsurprisingly, inflation has declined in importance, as immediate price risks are considered to be minimal. Expectations regarding medium-term inflation remain a consideration but the primary focus of government policy has thus far been on limiting the downturn and preventing their economies from entering an extended period of stagnation.

A portion of text from Foreign Exchange Consensus Forecasts, August 10, 2009