Research Discussion Paper – RDP 8609 The Performance of Exchange Rate Forecasts
July 1986
Abstract
Since the floating of the Australian dollar the forecasting of exchange rate movements has become more difficult and received much more attention. As a result, some participants in the foreign exchange market have, on a number of occasions, come under criticism for their inability to predict exchange rate movements. This paper seeks to evaluate these criticisms through an examination of exchange rate forecasts made by market participants (as published in the Autralian Financial Review from March 1985 to December 1985). The accuracy of the $A/US$ forecasts is compared with that of forecasts generated from a number of simple forecasting rules as well as forecasts of the US$/Yen exchange rate. In general, the simple forecasting rules provide superior forecasts to those provided by the individual market participants. However, under some criteria, the mean of the individual participants' forecasts may be preferred to these simple forecasting rules. Further, the comparison of the US$/Yen forecasts with the $A/US$ forecast shows the former to be generally more accurate.