Long-Horizon Exchange Rate Expectations

We study exchange rate expectations in surveys of financial professionals and find that they successfully forecast currency appreciation at the two-year horizon, both in and out of sample. Exchange rate expectations are also interpretable, in the sense that three macrofinance variables - the risk-neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP - explain most of their variation. Moreover, there is no “secret sauce” in expectations: after controlling for the three macro-finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample.

Download