Go to a source that allows you to assess recent exchange rate movements (such as

Question

Go to a source that allows you to assess recent exchange rate movements (such as Yahoo.finance) of JPY/USD trends over the past year . Go to cmegroup.com to obtain the current (making sure to include the date you select) futures price for the RMB and calculate (use the annual percentage formula) whether the JPY is currently trading at a discount or at a premium to the USD. Make sure to include the specific maturity date of the futures contract you select (try to find one with a maturity date of approximately one year from now).

Compare the forecasts for the future movement of the JPY/USD using a “Technical” forecasting approach to what would be predicted using a “Market” forecasting approach.   How would you interpret what each type of these two forecasts tells you? Which do you thing is more accurate, and why?

Explanation / Answer

As on 10/03/2014 the exchange rate between JPY and USD is as below:

1 JPY = 0.009110 USD

The exchange rate per JPY to USD was around $0.009 during January to August, and then it began to fall and touches $0.008 at the end of the year.

This is a clear trend of JPY weakness, since in exchange of JPY smaller dollar amount was available. Therefore, the market forecasting approach indicates yen weakness in future.

But this situation will no longer stay in the future, since Japan is running at 2.5% GDP growth. Increase in GDP indicates more export which leads to earn more USD and bringing down the yen—dollar gap. Therefore, the technical forecast indicates that JPY will be more close to USD in future.    

Technical approach is more accurate, since it sets basis on the assumption and evaluation through the whole economy.   

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