Forecasting Exchange Rates

CFA Level III
#1

What dif between RELATIVE ECONOMIC STRENGTH theory and CAPITAL FLOWS APPROACH?

#2

Relative Economic Strength looks at which country has the greatest economic growth potential/expectations Capital Flows looks at which country has the hgihest level of foreign investment going into the country.

#3

Seems like capital flow woudl be a result of relative ecnomic strength so that is why I am having trouble drawing the mental line.

#4

Relative economic strength: foreigners will chase high real rates Capital Flows: Foreigners chase stock market returns and foreign direct investment

#5

gotchya…thx

#6

I only see 2 main approaches to forecasting FX rates:

  • focus on goods & services, trade and current account balances

  • focus on capital flows

is the ‘relative strength’ clubbed with the focus on goods & services, trade and current account balances?