Most of the Analysts and Companies consider Exchange Rate as one of the core factors in their analysis and predictions since the fluctuation in the currency exchange rate would have a favorable or unfavorable impact on the share price and on the earnings as well. It is one of highly influential macroeconomic factors as it plays a significant role in trade and capital flows.
In simple terms, Forex or Exchange rate is a rate at which one currency will be exchanged for another. But on broader side, the value of one country’s currency & purchasing power in relation to another country currency.
There are basically two types of international exchange rate systems – fixed and floating. In a fixed exchange system, countries establish the ratio of their currencies and then commit to maintaining those rates. In floating exchange system, a country can elect to allow the market to set the value of its currency. So, when there is increased demand for a currency, its value increases relative to other currencies in floating system.
The differences/fluctuations in the below factors would be a proportionate influence on the exchange rates:
- Inflation
- Interest rates
- Trade - Goods & Services
- Public Debt
- Export and Imports, Terms of Trade
- Political Stability & Economic performance
On the investing side, Currency ETFs are high in demand as they aim to replicate movements in currency in the foreign exchange market by holding currencies either directly or through currency-denominated short-term debt instruments.
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