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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      

To download a sample issue of Foreign Exchange Consensus Forecasts please click on the button to below or continue reading to learn more about this special survey.


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In our August 2013 special survey of factors affecting exchange rates, we asked our panellists to rank the current importance of a range of different factors in determining exchange rate movements (against the US dollar, unless otherwise noted). Scores were assigned to each of the 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. Given that different currencies are influenced by a wide range of factors, we limited the variables considered to a common list of six factors which we asked our panels to assess for every currency. In addition, we asked panellists to suggest, and rank, other factors which they felt to be of particular importance. The most frequently cited (if any) of these for each currency appears in the right-hand column.

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 6.3 4.7 6.3  7.7 (6.7) 4.7 Sovereign Debt Risks (6.0)
Japanese Yen 6.0 5.0 6.3 7.3 (6.7) 4.7 Quantitative Easing (7.2) 
UK Pound 7.7 5.0 5.7 8.3 (6.7) 4.3 US$/€ Exchange Rate (5.0)
Swiss Franc* 4.3 5.3 6.0 6.3 (5.3) 4.0 Safe Haven Inflows (8.0)
Central Bank FX Policy (8.0)

Asia Pacific
           
Australian $ 7.3 4.5 5.8 8.2 (6.8) 4.4

Commodity Prices (7.0) China Growth (7.0)

New Zealand $ 7.0 4.5 6.0 8.3 (6.8) 4.3 Commodity Prices (8.0)
Singapore Dollar 7.5  6.3 5.5 5.5 (5.3) 6.5 Implicit FX Management (8.0)
Taiwan Dollar
7.3 5.0 6.3 6.3 (5.5) 6.0 Relations with China (5.0)

Eastern Europe
           
Czech Koruna* 6.7 5.0 4.3 6.7 (6.7) 4.0 FX Intervention (8.0) 
Polish Zloty* 6.3 4.7 4.7 7.3 (7.0) 4.7 FX Intervention (8.0)  
Russian Rouble 8.0 6.0 5.0 7.5 (7.5) 4.5  

Latin America
           
Argentinian Peso 7.7 6.0 6.7 6.5 (6.0) 3.3 Currency Management (8.0)
Chilean Peso 7.7 4.3 6.7 5.3 (5.3) 5.3 Copper Prices (8.0)
Mexican Peso 8.0 6.0 5.7 7.0 (7.0) 6.7 Structural Reforms (10.0)
Venezuelan Bolivar 7.0 8.0 7.0 0.0 (7.0) 8.0 Gov. FX Policy (9.0)
Oil Prices (9.0)

* 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. 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.

Source: Foreign Exchange Consensus Forecasts, August 2013.