The Fundamental Analysis of Foreign Exchange

Interest rate fair price (IRP)

The interest rate fair price stipulated that, if the American interest rate is higher than the Japanese interest rate, then US dollar to a Japanese Yen depreciation, the depreciation scope decides according to the prevented the non- risk fraudulently obtained foreign exchange. In the future the exchange rate could reflect in the forward exchange rate as stipulated. In our example, the Japanese Yen which is bought by the forward exchange rate is much shorter then the Japanese Yen which is bought by the immediate exchange rate the Japanese Yen. The Japanese Yen is regarded as the premium. After 1990s, without any evidence indicated that the interest fair price theory is still ineffective. Is clearly opposite with this theory, currency usually does not depreciate based on high interest rate, instead it will prevent the inflation to rise in the future and it will appreciate as a highly benefited currency.


International payment balance pattern

This theory said that the foreign exchange rate must be in its balance level - - namely it is able to have the stable checking account remaining sum exchange rate. Country which has trade deficit, its foreign exchange reserve will be reducing, and finally it will cause its domestic currency value to reduce (depreciation). Cheap currency causes this country’s commodity to have the price superiority in the international market, simultaneously also causes the import product to become expensively. After a period of adjustment, the import quantity is compelled to drop, exportation quantity rise, thus causes the trade remaining sum and the currency is stable to the state of equilibrium.

It is same with the purchasing theory, the international payment balance pattern mainly stresses on the trade commodity and the service, but has neglected the whole world circulation of capital day by day vital function. In overall, the money not only pursues the commodity and the service, moreover from generally says, pursues financial property and so on the stock and bond. This kind of capital class enters the international payment balance capital account project, thus may balance in the checking account deficit. The circulation of capital increase has the property market pattern.


Intervention

In addition, sometimes, the government can intervene in the money market, it prevents the currency from a non-ideal level. The money market intervention is carried out by the Central Bank, usually it has short-term influence to the foreign exchange market. The Central Bank may adopt another way of buying and selling the domestic country currency, or unites other Central Bank to carry the intervention together, it obtains a more remarkable effect. Or, some countries can try to influence the currency value by giving warning or threat.

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