Exchange Rate Forecasting And Speculation

Exchange rate forecasting and speculation are both closely related to the issues of the efficiency of foreign exchange markets.  For example, if speculators can profit from forecasting exchange rates markets cannot be efficient.  By efficiency we mean here the effective use of all relevant information by people buying and selling foreign exchange.  After explaining the vehicles of foreign exchange speculation, the evidence on market efficiency is examined.  Then it turns to the record on exchange-rate forecasting, including a comparison of chartist versus fundamental forecasting techniques.  The record of chartists versus fundamentalists is linked back to market efficiency, specifically to the ability to earn from speculation using simple trading rules.  It should be mentioned at the outset that opinions differ widely on the topics discussed and by no means do all finance researchers agree that abnormal speculative returns and market inefficiencies have been detected.  Nevertheless, despite a traditional predisposition against finding abnormal returns to speculation, market inefficiencies, and chartist forecasting success, when it comes to foreign exchange markets, traditional notions face a challenge.  For example, central banks and international organizations have at times been major players in the foreign exchange market, whereas in most financial markets such as stock markets, there are generally no massive players.  Some believe speculators may be able to profit from judging the action of official organizations.  When may think of foreign exchange speculators, they have an image of fabulously rich people in large limousines, wearing vested suits and making handsome profits with little regard for the ordinary citizen.  However, our initial purpose here is not to discuss the possible merits or evils of speculation, but rather to simply describe the different ways to speculate.  As we shall see, these are the same as the different ways to hedge, but when actions are taken without the offset of an underlying exposure such as a foreign-currency account receivable or payable.