Some of the key factors affecting the exchange rate include economic factors: trade deficit, inflation, interest rate differences and deficit. Political factors that can affect monetary and exchange rate policy of the country or its economic fundamentals.
There are several economic theories that attempt to explain the dynamics of the foreign exchange market in compliance to the above factors. There are two types of analysis in the foreign exchange market to assess a currency pair and try to predict how they would address the future price.
Fundamental analysis is usually used by long-term investors. This analysis considers the macroeconomic fundamentals of the various areas such as bank rate, gross domestic product, inflation, industrial production index and the unemployment rate and tries to make predictions based on the relative performance of these indicators.
Technical analysis is the method used mostly by speculators in the short and medium term. They use it to try to predict the movements and daily fluctuations of currency pairs in the market. This analysis is to capture in a graph of the price of a currency pair a set of trend lines, training and technical indicators that help predict immediate price movements.
However, it should be noted that this type of analysis has been criticized as subjective. This applies to all markets, including Mauritius Forex License.
The exchange rate regime is part of the monetary policy adopted by the monetary authorities, which largely determines the behavior of the exchange rate of the currency vis-à-vis other currency (or a particular currency).
Floating exchange rate regime
The floating exchange rate regime is based on the determination of the exchange rate of each currency against the other by the interaction of supply and demand for different currencies on the foreign exchange market without government intervention.
However, in case of high volatility in the exchange rate, monetary authorities may intervene in the foreign exchange market either selling or buying a currency or currencies or by introducing the exchange control.
In this context, monetary authorities fix the exchange rate of their currency against another currency or a basket of other currencies. To maintain this parity, the monetary authorities should take a buy position and sell on the forex market and be able to meet any demand, otherwise the exchange rate would be fixed. Bands of fluctuation in the exchange rate are usually quite low.
To be sure they can meet speculative selling of the local currency against foreign currency, monetary authorities accumulate foreign exchange reserves in foreign currencies. Monetary authorities may at any time decide to alter the parity of their currency against the currencies of reference.
