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Special Surveys 1) Factors Affecting
Exchange Rates FACTORS AFFECTING EXCHANGE RATES In our August 2007 special survey of factors affecting exchange rates, we asked 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 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 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.
*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. As well as 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. Nominal interest rate differentials and relative growth remain the most important of the six main factors ranked for most Western European currencies, while trade and current account positions play an important medium-term role for emerging market currencies. Among the ‘other factors’ affecting exchange rates, ‘market volatility’ has been cited as important for the Japanese yen and the Swiss franc. In their respective countries, the decision to invest abroad for more attractive returns is encouraged by low returns or borrowing costs domestically. (The significant inflow/outflow of funds is sometimes illustrated by seasonal weakness/strength in the yen, even though economic fundamentals in terms of growth and inflaton have improved.) Conversely, as liquidity conditions tighten globally, investors are becoming more risk averse and the unwinding of carry trade positions could encourage "refuge" currencies to appreciate. Source: Foreign
Exchange Consensus Forecasts, August 2007. TRENDS IN PRODUCTIVITY AND WAGES In our August 2007 special survey of trends in productivity and wages, we asked our panellists' projections for growth in numbers of employees and wage or employment costs between now and 2019, along with consensus forecasts for real and nominal GDP growth over the same period. Using indices derived from these projections, we have calculated forecasts for broad measures of productivity growth (real and nominal GDP per employee) and an indicator of unit wage costs (calculated by dividing the employment cost indices by the indices of real GDP per employee). Although some of the wage definitions used are imperfect measures for total compensation per employee, our calculated indices do provide us with a general indication of future trends in unit wage costs.
This month’s special question on productivity and wages coincides with the release of the preliminary US productivity report for the second quarter by the Bureau of Labor Statistics. Non-farm business productivity – measured as output per hour of all persons – increased by a firm 1.8% (q-o-q annualized) from a previously reported 0.7% advance in the January-March period. However, the Bureau’s year-on-year figures show non-farm business productivity edging up by only 0.6% during the June quarter, which underscores the more muted trend in output per hour compared with the past few years. Consensus Forecasts’ own calculations of productivity – which we measure as real output (GDP) per employee – indicate that it is likely to remain even more subdued during 2007 as a whole, managing only a 0.4% rise to coincide with a 2.8% jump in wage unit costs. In 2008, though, our panel predicts a rebound of 1.4% in US productivity. Moreover, the resurgence in unit wage costs is expected to wane this year. In the UK, long-term estimates for output per employee are close to US rates; nonetheless, strong increases in average earnings should leave UK unit wage costs comparatively higher over the forecast horizon. Elsewhere, German productivity is projected to remain above the pace of US output per employee over the medium-term. However, lingering structural impediments like over-regulation and higher labour costs in the Euro zone are likely to restrain productivity growth. In Japan, though, output per worker is expected to reach high levels going forward while unit wage costs remain modest. For further information, including economic data
on other countries, see the complete study in Consensus
Forecasts, August 2007.
In our January 2007 special survey of forecast probabilities, in addition to their central (most likely) forecasts in the consensus economic survey, we asked our panellists to assess the probabilities of a range of alternative outcomes for each of the listed variables, i.e. GDP forecasts, consumer price inflation forecasts and the current account balance in 2007, as well as for exchange rate forecasts (for the euro, the Japanese yen, the UK pound and the Canadian dollar) against the US dollar by the end of January 2008. This analysis is an attempt to quantify the risk that these economic indicators might turn out to be significantly higher or lower than individual forecasts currently suggest, and allows us to compile consensus probability distributions to identify those areas of greatest uncertainty in the economic outlook for the G-7 industrialized countries.
The second half of last year was dominated by US dollar weakness, as falling growth expectations (and what that might mean for US monetary policy) were compounded by the country's ever-present current account and fiscal deficits. The prevailing market uncertainty led to downward pressure on the US currency, and corresponding appreciation in the euro, UK pound, Canadian dollar and Japanese yen. However, more recently, the US$ has seen a modest rebound on the back of improving sentiment over growth fundamentals. Currencies like the euro, UKŁ and C$ are expected to fluctuate within a +/-4% range, with a 51% likelihood that the Canadian currency will remain especially stable. However, forecast probabilities for the Japanese yen show a wider spread, with a 47% probability of greater yen appreciation, perhaps because the Bank of Japan is expected to tighten monetary conditions.
For further information, including economic data on other countries, see the complete study in Consensus Forecasts, January 2007. |
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Consensus forecasts are mean averages of individual panellists’ predictions of the performance of various economies over a given time. However, most forecasters would also attach some probability to various – perhaps radically different – outcomes or scenarios. These probabilities provide a wider assessment of the risk attached to the consensus and are often based on unexpected or extreme movements in key variables, such as exchange rates or commodity prices, which could alter a central forecast. Alternatively, they could also reflect a more uncertain economic climate. Every year in January, we ask our panellists to supplement their central forecasts for GDP growth, inflation and the current account balance for the year ahead with a set of probabilities of the outcomes falling in specified ranges shown in the tables. The ranges differ from country to country and from variable to variable, but were chosen so that the central range (the middle column in the tables and charts) encompassed the consensus forecast from last month's survey. We also show probability distributions for oil prices as well as for the major cross rates of the G-7 currencies. Here, we ask for the probability of the percentage change in the exchange rate between the survey date and January 2007 falling in seven set ranges. The results are shown above. 
While our respondents assign a large 51% probability that US growth will hover between 2% and 2.5% this year, there is an additional 27% likelihood that the recovery could surpass current expectations. An increasingly upbeat outlook, moreover, may have delayed the chances of an interest rate cut and could even lead to further Fed tightening. US inflation concerns, though, have seen a modest fallback, with signs of easing underlying pressures leading to a 40% probability that headline consumer price increases could decelerate to below this year’s 1.8% forecast. Part of the moderation in sentiment has been linked to sharp falls in oil and commodity prices. Indeed, respondents predict a 50% chance that the oil price will remain below US$60 per barrel by end-January 2008. GDP growth probabilities among the other major Euro zone countries, meanwhile shows some divergence. This month's VAT hike in Germany has left our panel determining a 48% likelihood that growth will be close to its 1.5% consensus forecast this year, while fiscal tightening has led to a 53% probability that Italy will manage between 1.1-1.4% growth. French and Euro zone observers are more optimistic, with a whopping 82% chance that growth in France could hit 1.7% or above.