Hi.
From the study text, I am given to understand that interest rate differentials are predictors of exchange rates over the long term.
What are the predictors of short term movements in exchange rates?
Thank you guys.
Capital movements. Depending how big is the country and how much flexible is the capital market, short-term exchange rates will move accordingly.
Capital movements are directed by expected variations in interest rates.
Other drivers of short-term exchange rates are exportations and importations (look both as net), direct foreign capital investments (are huge inflows of foreign currency), and also payments (money transferences).
I’ll just add that in general most of the exchange rate forecasting models (RPP, IRP, etc.) discussed in the curriculum are generally better at forecasting longer-term exchange rate paths and (much) less effective at predicting short-term movements. Predicting short-term movements, from what I’ve gathered, is akin to estimating where, for instance, the stock price of Apple will be in the next couple months.
Of course it is; it’s all supply and demand, both of which can fluctuate unpredictably.