Exchange Rates: Stock Market Performance

This type of chart is intended to predict exchange rates based on flow of funds analysis and relies upon stock  market performance as the key indicator in recent years. Our Best Guess is based on Chart Technical Analysis for the local stock market.
 
Buy & sell signals are represented by red arrows embedded in the exchange rate index. These Buy & Sell signals indicate changes in the forecast direction of exchange rates a year into the future. Buy signals are generated when the foreign exchange rate is predicted to rise. Sell signals arise when the converse applies.
 
In each chart the exchange rate is shown as the thick white line on the right hand axis. The explanatory variable, the local stock market index, uses the left hand axis, shown as the thin yellow line. The left-had axis is drawn to the same scale to highlight the significance of stock market movements for the exchange rate. For comparability exchange rate indices have been rebased to set year-end 1994 at 100.
 
This strategy works on the assumption that flow of funds trends are rarely instantaneous, but spread out over time, so are suitable for long term investors to exploit. However, in times of crisis this is not the case.
 
Since the Bretton Woods system of fixed exchange rates broke down in 1972, there have been three different eras. Initially exchange rates were determined mainly by trade issues (See Balance of Payments). Then bond investors were the dominant force (See Interest Rates and Bond Yield). However in recent years, equity investors have had the greatest influence. Therefore this strategy was ineffective in earlier years but has been increasingly useful in the past two decades.