Forex Talking

Fundamental Analysis of Forex

Theories of Exchange Rate Determination: Bases can be attributed to economic factors, financial factors, political factors and crises. Economic factors differ from the other three factors in terms of confidence in their release. The dates and times of economic data are well known in advance, at least, among industrialized countries. Here are a few known theories briefly exchange rate determination.

Purchasing Power Parity: Purchasing power parity states that the price of goods in one country should be equal to the price of the same product in another country, exchanged at the current rate of one right price. There are two options for purchasing power parity theory version of absolute and relative version. According to the absolute version, the exchange rate is simply the ratio between the two countries' general price level, which is a weighted average of all goods produced in the country. But this version works only when you can find two countries that produce and consume the same goods. Moreover, the absolute option assumes that transport costs and trade barriers are insignificant. In fact, transport costs are significant and dissimilar worldwide.

Relative Version PPS: A relative version, the percentage change in the exchange rate in view of the base period should equal the difference between the percentage change in the level of domestic prices and the percentage change in foreign price level. Relative versions PPP also not free of problems, it is difficult or arbitrary definition of the base period, trade restrictions remain real and complex issue, as well as with absolute version, weighing various price indices and the inclusion of different products in the indices make comparisons difficult, and in the long run, The domestic price ratio could change, bringing the rate to deviate from relative PPP.

Elasticity Theory: The theory of elasticity believes that the exchange rate is merely the price of foreign exchange, which maintains the balance of payments in the balance. For example, if imports from the country strong, the trade balance is weak. Therefore, increasing the rate of exchange, which led to the growth of exports, and triggers, in turn, increase its domestic income, coupled with the reduction of its foreign income. At the time, the growth of domestic income will increase domestic consumption, both domestic and foreign goods, and thus more demand for foreign currency, the decline of foreign income will initiate a reduction in domestic consumption in the country in domestic and foreign goods, and therefore less demand for its own currency.

Modern Theories of Short Term Monetary Exchange Rate Volatility: Modern monetary theory on short term fluctuations in the exchange rate takes into account short term capital markets, role and long term impact on commodity markets for foreign currency. These theories believe that the discrepancy between the exchange rate and purchasing power parity is due and demand for financial assets and international opportunities.

Portfolio Balance Approach: balanced portfolio approach believes that the demand for currency caused by the demand for financial assets, rather than demand for the currency as such.

The Synthesis of Traditional and Modern Monetary Views: In order to better comply with previous theories to the realities of the market, some of the more stringent conditions were adjusted in the synthesis of traditional and modern monetary theory.