Forecasting Exchange Rates

 How we use econometric models to forecast exchange rates

The spines on these hedgehog charts show that year end forecasts predicted the right direction for the US$ most years.

This hedgehog chart illustrates the way our financial forecasting works.

The thick white line in this example is the  exchange rate of the US Dollar against the global benchmark, IMF Special Drawing Rights. We use this example as the best proxy for global exchange rate movements .

The thin yellow line is the forecast derived from econometric modelling for the average exchange rate during the year, based on figures for key economic variables, actual to 1998 and based on consensus forecasts for 1999 and 2000 as at mid year 1999.

The thick orange line is the exchange rate forecast, converted into a moving average, such that inflection points are shown at year end.

The broken red line is the exchange rate forecast that would have arisen at the beginning of each year, had the key economic variables been forecast correctly for the year.

As you can see, in this particular example, the score over 25 years was 18 wins, 3 losses and 4 draws.