In our recent webinar, we delved into the often-debated topic of the accuracy of FX forecasts. The discussion was illuminating, providing a mix of critical analysis and practical advice for businesses navigating the complex world of foreign exchange. Here are the key takeaways from the session.
The Reliability of FX Forecasts
One of the central themes of the webinar was the inherent limitations of FX forecasts:
Harry Mills, Director @ Oku Markets:
“Banks spend a lot of money and effort in producing predictions for future FX rates: my argument is that they’re just simply following the spot rate.”
Forecast data from banks, economists, and analysts surveyed by Bloomberg show how period-end exchange rate forecasts can change over time; with the main driver on the forecast being the underlying spot price at the measurement time.
The following images show how the Q1 and Q2 forecasts for GBPUSD changed over time, mostly following the spot price.
And here we can see all available future forecast periods that seem to reflect movements in the spot rate, more than anything else:
The Practical Use of FX Forecasts
Paul Plewman, Chief Operating Officer @ Currency Transfer:
“If it’s titillation and just casual interest in what the bankers are putting out there then of course read it, enjoy it, and have a laugh at them at the end of the quarter…but if you’re trying to price your business based on the future forecasts that the banks are pumping out then a word to the wise.”
This advice is crucial for businesses: while FX forecasts can be interesting, they should not be the sole basis for critical financial decisions.
An Alternative Approach: Focusing on Volatility
A more effective approach to using bank FX forecasts, is to model and price volatility and consider the likely trading range for a given currency pair across a time period.
Harry Mills, Director @ Oku Markets:
“Model volatility instead: think about volatility instead of a directional move.”
By focusing on volatility, businesses can better prepare for a range of potential scenarios, rather than relying on often inaccurate directional forecasts. This proactive approach can help mitigate risks and enhance financial stability.
Aligning FX Management with Business Goals
A key takeaway from the webinar was the importance of aligning FX management strategies with broader business goals:
Paul Plewman, Chief Operating Officer @ Currency Transfer:
“What are your goals? It doesn’t matter where the forecast may or may not be. What are your business goals and does the current market condition drive into that and deliver to that?”
This perspective emphasises the need for a strategic alignment between FX management and overall business objectives. Understanding and prioritising business goals can help in making informed decisions that support long-term success.
The Necessity of a Hedging Policy
Harry Mills, Director @ Oku Markets:
“Every business should have one, it doesn’t need to be War and Peace, and could very well simply be a single page with: how much, how far, how often, whom, and then why..”
A robust hedging policy provides a framework for managing currency risk, ensuring that businesses are prepared for market fluctuations. It doesn’t need to be overly complex, but it should clearly outline the key aspects of the hedging strategy.
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