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Exchange rates: looking ahead

CHANGES: Exchange rates

IF YOU’RE a small business owner, an investor or just a private individual with an interest in travelling or settling somewhere else, knowing how exchange rates are likely to change over time can significantly improve your prospects.

To put it simply, when you change money you want to get as much as you can of the currency you’re buying for the amount you’re selling, so you want to make the exchange when the rate provides you with maximum advantage. Following trends day to day is something most people can get the hang of with a bit of practice but when you’re making long-term decisions you need to look further ahead. This article will help you to understand how this works and how you can expect major currencies to shift position over time.

How long-term forecasts are made

Making long-term exchange rate forecasts requires two things: mathematical modelling based on trends over time and an awareness of developing events. For the latter, some understanding of politics, military tensions, history, social and environmental science is useful. For the former, experts extrapolate data from both long and short-term exchange rate trends and interrelate the two using one of a number of complex formulae.

Over time, predictions themselves are then compared to reality, and the resulting data is used to refine and improve them. Different variables are examined to establish their predictive power. The result is that although it may seem obscure, this modelling system gradually gets better and better at making predictions accurately.

The big issues

At any given time, forecasters take into account world events that could affect the way different currencies move. With some types of event, the impact is fairly easy to predict and can be modelled over time. Climate change, for instance, is going to place increasing pressure on the economies of countries with significant amounts of low-lying coastal territory and their currencies can be expected to decline as a result, while the combination of China’s historical One Child Policy and its cultural preference for boys means that its population demographic is ageing rapidly and will have a negative impact on its currency over the next 20 to 30 years.

Meanwhile, improvements in telecoms across large parts of sub-Saharan Africa are leading to the rapid development of those countries and, as local businesses take advantage, are set to exert lasting positive pressure on their currencies. You can calculate the impact of many factors like these for yourself – just be alert to the possibility of black swan events, those big, unexpected ones – like the 2013 tsunami that hit Japan – that come from out of nowhere and can have a big impact on the fortunes of individual countries.

The pound and the US dollar

So, what about predictions for the next few years? Although it’s one of the most common transactions made, predicting the future value of the pound to the dollar is a particularly tricky one at present for two reasons: uncertainty around Brexit and uncertainty around the Trump regime, both of which could develop in a number of very different ways. Most experts expect the former to have a more significant overall impact and therefore expect the pound to drop significantly against the dollar from March 2019 through to around July 2020, when they expect the fall to level off for a short period.

This fits with the fact that falls of this magnitude (around 6% to 12%) are usually punctuated by periods of greater stability as investors who have tried to hold out for as long as possible bow to pressure and shift their assets; it also reflects the unknowns around the US presidential election. It’s expected that the pound will weaken again around May 2021 and continue to do so through until at least the end of 2022, potentially dropping quite a bit lower.

The pound and the euro

If you’re thinking about making an international money transfer in the near future in order to avoid problems with a potentially weak pound, would the euro be a safer bet than the dollar? Concern has been expressed about the way that the EU, as well as the UK, could be weakened by Brexit. Early concerns about more countries leaving seems to be decreasing, however, as – despite difficulties in Italy and Poland – tensions overall seem to be settling down.

Some experts now predict that the euro will be a little stronger than the dollar over the next three years, and it’s expected to rise consistently against the pound. Ongoing pressure on the Australian, Canadian and New Zealand dollars and the unstable economic situation in China are all working to its advantage.

Overall, this is an unusually difficult period in which to make international currency predictions but while that might mean short-term frustration, it’s a wonderful learning opportunity.

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