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As currencies often move in response to economic growth, spare capacity is a good indicator for future growth potential

Visitor: Can you explain what causes movements in real effective exchange rates?

RouteMaster: Yes, we have two types of chart that show the key variables. The first is the state of the economy, expressed as the degree of spare capacity, otherwise known as the GDP Output Gap. Here also we have made our own calculations so subscribers can see this ratio on a comparable basis for all currencies we analyse, as we do for every chart type. Once again forecasts are included. The other is the difference in real interest rates, which we have also calculated back several decades years.

This chart is more encouraging to bulls of Demoland's currency. The economy seems to be picking up relative to that of the world as a whole, suggesting that the currency should do likewise, if our econometric model is to be trusted, and that is only as good as the Consensus Forecasts on which it is built.