CURRENCY EXCHANGE

(1998) A previous article from one of the Federal Reserve Boards stated that it was nigh on to impossible to determine what way currencies would move, how quickly or just about anything else. It wasn't quite a crap shoot, but it wasn't (it appeared) worthwhile to try and hedge against currency fluctuations. A most recent article in the Fed Board of Philadelphia pretty much said the same thing. "....exchange rates don't seem to be affected by economic fundamentals in the short run. Being able to predict money supplies, central bank policies or other supposed influences doesn't help forecast the exchange rate. Economists have found instead that the best forecast of the exchange rate, at least in the short run, is whatever it happens to be today". "We see that exchange rates seem to be influenced by market sentiment rather than by economic fundamentals. In practice, using the monetary, overshooting and the portfolio balance modes to make exchange rate forecasts is difficult because the analyst never knows the true value of the economic fundamentals." They do mention a new method called Garch (volatility clustering phenomenon to predict future volatility) might provide some insight, but it appears that it is too new and untested for reliable forecasting. In essence therefore, I just try to focus on returns WITHOUT relying on currency fluctuations to provide big gains. In the same context, if the returns are not projected that high in a foreign market, I need to realize that the higher political risk is tantamount to higher currency fluctuation and I could go from positive to negative quickly. As an example, look at Mexico. They looked like revamped economic miracles in the early 1990's- then their entire country almost collapsed. The peso's value plummeted. It therefore appears that most people that are successful in gauging the currency movements may have been more lucky than anything else.