Predicting FX Movement

Demetri Papacostas, Francesco Tonin

Forecasting FX is a critical preoccupation of all FX market participants. Whether you are a spot dealer concerned over the next 10 seconds or a corporate chief financial officer (CFO) deciding whether you want to build a plant in Australia that will have a 20-year productive life, your actions will be contingent on your expectations of future FX rates. This chapter will not try to explore with any rigour the spectrum of approaches, nor evaluate the best way to predict FX. We will quickly summarise some of the more common approaches, and then focus on the available tools used by the main players. There are countless books in print that delve into the topic from different perspectives, including the classic on exchange rate determination by our colleague, Mike Rosenberg (Rosenberg, 2003). Following Mike’s approach, we can begin to break down predictive movements for defined future periods: short, medium and long term.

Short- to medium-term movements include intraday and multiday forecasts up to a few months. The most common approach used by traders is to look at charts and apply one of a myriad different studies and methodologies to predict what the market will do. This is part

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