You may have heard that the EU’s single currency the Euro is currently tracking against the US dollar at an all-time low. The exchange rates between the dollar and the euro has drawn a lot of focus onto global foreign exchange (forex) markets which have seen some unusual activity for some time now.
In this post we are going to take a closer look at forex markets generally, how currencies move, and what the implications are for businesses and travelers. We will share some insights into how to make currency predictions, and how to lock in the best exchange rates or best currency rates.
How Currencies Move
While global currency exchange rates have remained relatively stable for some years now ( at least since the last great upsets of 2007/2008), they are by no means fixed. Rather, a nation’s currency can gain or lose value against other currencies depending on a wide number of factors including how that nation is currently fairing politically and economically. For example, the British Pound saw a bit of a decline following the result of the Brexit referendum in 2016, and then the Russian Rouble has seen some pretty wild fluctuations over the last decade reflecting the country’s tempestuous relationship with the rest of the world.
Coming back to the Euro, the once mighty currency is currently experiencing a bit of a freefall. It is currency trading at something nearing 1 to 1 with the dollar (meaning €1 – $1) whereas just 12 months ago the “normal” exchange rate was around 1.20 (meaning that €1.20 – $1). The reasons for this are a mixture of political instability in the Eurozone, inflation coupled with low interest rates in the EU, and of course the war in Ukraine.
As for the consequences of this, well it is good news for American businesses who buy goods from Europe, and excellent news for American travellers looking to visit Europe as their trip is now effectively 15% – 20% cheaper than it would otherwise have been. On the other hand, Europeans will find visiting the states to be rather expensive right now and of course, any American companies exporting to Europe may find that their customers can no longer afford their goods.
How To Make Currency Predictions
Recognizing currency changes in retrospect is all good and well, but many businesses and even travelers know that there is an advantage to be gained from successfully anticipating changes in currency exchange rates and capitalizing on them. But is it really possible to make currency predictions?
Well the answer is yes – kind of. Although there is no foolproof system for making currency predictions we will look at some of the different analytical styles and methods used in order to make predictions;
Fundamental analysis basically means paying attention to global events and governmental monetary policy in order to try and predict exchange rates. A few key drivers that inform a fundamental analysis of a currency include the host country’s economic growth, inflation, employment rates, interest rates and geopolitical factors.
Technical analysis on the other hand is less concerned with the “why” and entails studying the markets detached from any external reality and simply trying to spot upward, downward or sideways trends based on past data. There are a number of tools that can be used in a technical analysis including moving averages which seeks to ‘smooth out’ historic price data, calculating the average exchange rate of a given time period.
Purchasing Power Parity (PPP) is a method that compares the price of consumer products across different countries. For example if a Big Mac costs £1 in the UK and $1 in the US, then the exchange rate should be 1:1 using PPP. However, if the exchange was 1:2 then that would be considered an anomaly and the prediction would be that the rate would soon correct itself.
Interest Rate Parity (IRP) takes the same approach as PPP but uses financial asset yields (adjusted for interest rates) instead of consumer items. Similarly, the Real Interest Rates (RIR) approach is based on the idea that currencies from a nation with high interest rates will appreciate in value against currencies from nations with lower interest rates on the grounds that high rates attract foreign investment.
The Payment Theory and Asset Market Models are methods that focus on how the flow of trade, in and out, of a country impacts the value of its currency. The underlying presumption behind this theory is that a country’s currency will depreciate if it imports more goods and services than it exports, and vice-versa. This method can be very useful as it directly measures one country’s imports against another’s and is therefore a powerful method for comparing their respective currencies.
Of course, it is possible to try to combine any number of these methods although there is frequent discord between them. Ley people hoping to predict currency rates may also wish to follow reputable publications who report on matters of global business such as The Financial Times and the Wall Street Journal.
Getting The Best Exchange Rates
Anybody looking to secure themselves the best exchange rate needs to know how to anticipate changes and how to act on them.
For example, a US based business or citizen who thinks they will need Euros in the near to intermediate future, may wish to seriously consider buying the Euro’s now regardless of whether or not they need them at this exact time.
This is simply because the Euro rate is at a historical low and is unlikely to fall any further. The primary reason for the parity between the Dollar and the Euro is the interest rate differential; the European Central Bank has been reluctant to raise interest rates in the Eurozone, but it seems likely that they will soon have to act and doing so will probably curb the Euro’s descent. On the other hand, a worsening of the war in Ukraine may result in further losses to the Euro if the conflict spills over into the Eurozone.
Getting the best exchange rates is also about being ready to act when the rates are optimal. Opening a multi currency account or an account with a forex trader allows the buyer to purchase a currency when the rate is good and then hold onto the foriegn currency until it is needed.
Final Thoughts on Currency Predictions & The Best Currency Rates
In summary, there is no foolproof guide on how to make currency predictions. Rather it is a case of studying how currencies move, paying attention to world events & global markets, and then being ready to take a bit of a gamble.
And remember, the key to locking in the best exchange rates is also a matter of acting when the markets are favourable. The best currency rates one day may turn into something less attractive the next, so waiting too long can prove to be a mistake.