WHAT MOVES THE CURRENCY MARKET IN THE LONG TERM?
WHAT MOVES THE CURRENCY MARKET IN THE LONG TERM? CURRENCY FORECASTING—WHAT BOOKWORMS AND ECONOMISTS LOOK AT ___________________________________________________________ For more avid students of foreign exchange who want to learn more about fundamental analysis and valuing currencies, this section examines the different models of currency forecasting employed by the analysts of the major investment banks. There are seven major models for forecasting cur rencies: the balance of payments (BOP) theory, purchasing power parity (PPP), interest rate parity, the monetary model, the real interest rate differ ential model, the asset market model, and the currency substitution model. Balance of Payments Theory The balance of payments theory states that exchange rates should be at their equilibrium level, which is the rate that produces a stable current account balance. Countries with trade deficits experience a run on their foreign exchange reserves due