Sunday, October 2, 2022
HomeGlobalWhat do exchange rate forecasts tell us?

What do exchange rate forecasts tell us?

I have to confess that, in my years as an analyst and forecaster, I have always been struck by the deep interest that some participants have in forecasting the exchange rate. Of course, I am not referring to the importance per se of such a financial variable, but of what said agents see in the forecast itself. Access to exchange rate projections is simple, in fact, it is an abundant element. Central banks, brokerages and data provision services are focused on consolidating expectations surveys among private sector analysts, where the exchange rate is an unavoidable item. In this context, and being one of those analysts myself, I allow myself to present four reflections.

First, the forecast usually requested is the annual closing level, but what does this mean? Should we interpret the estimate as that of the exchange rate level at the close of December 31? If this were the case, it would be worth asking ourselves what is the analytical or business value of knowing the estimate of one of the 250 days of annual operation. Its importance could be rescued if we assume that the trajectory for the rest of the year is a straight line between today’s closing level and the available estimate or forecast for the year’s closing. In this case, anyone who observes the dynamics of the exchange rate both in the medium and in the short term would know that the above would not be very advisable.

One of the main users of the forecast is corporate treasuries, for budget planning purposes. In this sense, wouldn’t it be more useful to use an average estimate for the year? In a similar way to the way they use the forecast of economic growth for the year in turn -in the form of an average.

Second, those active users of the exchange rate forecast should keep in mind the wide dispersion that often exists among analysts’ projections. For example, in the most recent “Citibanamex Survey of Expectations” there are year-end estimates as far away as 19.20 and 21.70 pesos per dollar for the end of this year. Of course, it is decided to give a weight to the “consensus” that can be represented by both the average and the median, considering all available estimates. Here the difference is also usually variable. Currently, this difference is equivalent to almost 20 cents (average of 21.02 compared to a median of 21.20) – which can be significant in budget planning.

Third, I would venture to suggest that exchange rate estimates are among the most changeable elements in the surveys. In the case of the Citibanamex Survey, the median estimate of the exchange rate at the end of this year has changed by about 40 cents since it began, which would mean an appreciation of almost 2% -an already significant magnitude change from the exchange point of view.

Fourth, and on a more constructive note, at the end of the day, the exchange rate estimates and their dynamics during the year could be useful in deducing the analyst’s view of the dollar, whether related to the expectation of interest rate differentials interest and/or as a result of the interaction of risk premiums. The foregoing, knowing that the Mexican peso does not belong to itself, that is, it often tends to reflect factors other than local or idiosyncratic events.

Recent posts