Currency forecasting refers to the ability to predict the long-term value, movement and price of a currency. We have seen that there are, at least, two approaches to predicting price changes. The first is a href="http://forextrading.about.com/od/fundamentalanalysis/a/fundamental_ro.htm" jquery1242417447937="36">fundamental analysis. The second is technical analysis. However, technical analysis is more useful to develop trading strategies that predict future price movements.

Market conditions are not an important factor to technical traders. Fundamentalists are typically attempting to forecast market behavior and then predict how a currency will respond in such a market environment. To do so, fundamental traders develop models from which to formulate a trading strategy. Technical traders skip directly to developing a trading system What economists look at when it comes to currency forecasting? Balance of Payments Theory: The balance of payments theory states that exchange rates should be at their equilibrium level, which is the rate that produces the stability to the current ac­count balance. Countries with trade deficits experience a run on their for­eign exchange reserves due to the fact that exporters to that nation must sell that nation's currency in order to receive payment. The cheaper cur­rency makes the nation's exports less expensive abroad, which in turn fu­els exports and brings the currency into balance Trade Flows: The trade balance of a country shows the net difference over a period of time between a nation’s exports and imports. When a country imports more then it exports the trade balance is negative or is in a deficit. If the country exports more than it imports the trade balance is positive or is in a surplus. Capital Flows: In addition to trade flows, there are also capital flows that occur among countries. They record a nation's incoming and outgo­ing investment flows such as payments for entire compa­nies, stocks, bonds, bank accounts, real estate, and factories. The capital flows are influenced by many factors, including the financial and economic climate of other countries. Capital flows can be in the form of phys­ical or portfolio investments.