Few if any currency managers attempt to forecast precise exchange rates. The trick is to predict directional moves. Different managers work to different time horizons but, broadly speaking, currency management can be separated into two categories: a technicals-based approach and one that looks to fundamentals.
Most forex experts today trade using statistical models based on historical data, which attempt to identify forthcoming upward trends (buy opportunities) or downward trends (sell opportunities). Economic data play no part in these views. This is the technicals approach.
Trading purely on the basis that the past will predict the future might sound dangerous but most currency experts, even those with a bias towards economic fundamentals, take technicals into account because of the innate inefficiencies in the forex markets. "Trending is one of the ways that inefficiencies manifest themselves," says Paul Duncombe, head of currency management at State Street Global Advisers (SSgA).
Choose a model and stick to it Technicals-based currency managers are adamant that when markets change quickly, perhaps because of a regime change or market collapse, model-driven signals should not be abandoned. Mean reversion occurs steadily over a given period of time, and short-term influences on markets will not affect that.