Exchange Rates In Forex Markets

As we know traditional forex exchange rates models are really very helpful in trying to predict long-term exchange trends, however, they aren’t that beneficial when predicting the short-term moves. The economists have realized that a greater focus is required in applying the general rules of economics to the specific dynamics of the currency market and especially the short term trends. This approach of using economic principles in forex market exchange rates is some times known as forex economics. It is important to highlight here that forex economics does not mean creating an entirely new field of forex currency analysis. Rather, it is to create a more focused framework, using those existing economic principles that are relevant to the exchange rates in forex market and when required, combining with other analytical techniques provide an integrated approach to forex exchange rates analysis.

Some modifications are needed to be done in order to make this new theory which comprising of economic principles and analysis techniques work to predict trends in exchange rates in forex.. Economists are working in order to figure out how to make the traditional exchange rate models more accurate in predicting forex exchange rate moves. To a significant level, technical and flow analysis have succeeded however, there is a need to acknowledge that these disciplines have had success precisely because they focus on solving the problem of predicting short-term exchange rate moves. Suggesting that other types of analysis which have better success rate in predicting short-term moves in forex market exchange rates moves does not mean that the efforts which are being put into improving the economic analysis should be stopped. What is required at the moment is to focus more on the specific dynamics of the forex market. Only then can we hope to get measurably better results in applying economic analysis to the prediction of short term exchange rates in forex market. Before that, we need to have a much better idea of the specific dynamics that are at work in the forex market itself.

The forex currency markets have a different set of dynamics as compared to other financial markets. Unlike in the case of equity or fixed income markets, the large number of traders in foreign exchange currency market is speculators of one sort or another. As we know, economic theory approaches the issue of exchange rates by trying to find a theoretical equilibrium level, against which one can measure over- or undervaluation relative to the actual exchange rate. While it is debatable whether or not these exist in other financial markets, we do know that these are not the reality in the forex market.

According to majority of traders in forex market, forex market is a perfect market. This however is not true. The impact of information affecting exchange rates at any one time is so huge that all forex market practitioners cannot possibly absorb all of it all of the time. The exchange rates in forex are always in state of flux and imbalance. The economic fundamentals which can affect forex market exchange rates are themselves in a constant state of flux, one must equally assume that the equilibrium itself is in a constant state of flux—which to an extent calls into question the idea of it being equilibrium in the first place. Therefore, it is clear that short tern trend analysis equilibriuin points you in the right direction and it gives you no idea of when you will get there or where you might have to turn off along the way.