Relative economic strength says that when interest rates are relative high in a country, capital moves in and its currency appreciates. IRP (1 + id) = (S / F) * (1 + if) says that when interest rates are higher, its currency depreciates.
Which one should we follow in the exam?
IRP covers long term forecast while Relative economic strength may cover shorter period currency movement forecast. IRP does not hold over short period.
I see. thank you
relative is not really a forecasting tool. It implies effect on exchange rate from news on the economy and does not provide any insight on level of exchange rate.
Also, relative can be combined with Purchase Power Parity (difference in inflation, higher inflation depreciates). PPP tends to be accurate long-term, but not short-medium, so combine the two do be a boss.