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Macro Currency Strategy February 2014
Long-term forecasts Long term planning assumptions We normally publish FX forecasts with about an 18-24 month time horizon. The purpose of these forecasts is to give customers a very short hand way of identifying where we see the principal risks in the FX market over the next year or so. As always, we would caution against taking our point forecasts too seriously. They are only designed to show whether we see the principal risk as being that a currency goes up or down, a little or a lot over the coming year. Long experience has shown us that when we are basically right on market direction, the market moves further and more quickly than we dare forecast, and one year targets can be reached very quickly. When we have the direction wrong, we can be wrong for a very long time. Given the problems of forecasting out one year, many are understandably reluctant to venture a view for further out. However, we are aware that a number of our customers have a need for some indication of the likely FX market direction over a longer term horizon for planning purposes. So again, with some trepidation, we publish longer term forecasts. If our one year forecasts need to be treated with caution, it goes without saying that
Methodology The forecasts presented on the following two pages are based on the following methodology: 1
Short-term forecasts to the end of 2015 are taken from our existing numbers
2
We estimate long term ‘fair value’ exchange rates based on a rate that would be consistent with long term external balance sustainability. These are essentially PPP values adjusted for some notion of sustained long term capital flows and are sometimes called fundamental equilibrium exchange rates (FEERs). For a discussion of these, and alternative estimates, see Peterson Institute for International Economics, Policy Brief, June 2010.
3
We assume a gradual convergence to the long term ‘equilibrium’ levels over the five years beyond our short-term forecast horizon.
Compared with the last time we reviewed our long term forecasts (see Currency Outlook ‘August 2013’, August 2013), the major changes have been in the EM currencies, in particular the so-called ‘fragile five’ group. In the G10 space, we see Sterling and the euro as already close to long term ‘fair value’ levels.
the longer term numbers are even less to be relied upon. Nevertheless, we are aware that decisions and plans have to be made, and that a defensible set of forecasts may be of some value.
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