In this article we will examine the different models used in fundamental analysis to predict changes in currency prices which are used by analysts of the most important investment banks. These models may be of interest to all traders who want to increase their knowledge regarding fundamental analysis applied to the Forex market. Currently there are seven main models for forecasting exchange rates:
- The Theory of the Balance of Payments (BOP)
- The Purchasing Power Parity (PPP)
- The Interest Rate Parity Model
- The Monetary Model
- The Real Interest Rate Differential Model
- The Asset Market Model.
- The Currency Substitution model
Each of these models has its own advantages and disadvantages when it comes to analyzing and predicting the behavior of currencies. In some cases they have fallen into disuse because the economists see that there are more appropriate models or the assumptions in which the models were based are no longer entirely valid. It is also important to understand that these models are used to study the movement of the currency market in the long term and therefore are not applicable for predicting the behavior of prices in the short term, in which case we recommend the use of other tools such as technical analysis and fundamental analysis focused on economic indicators that may impact the market in the short and medium term (one example of these indicators is that of non-farm payroll figures, which usually results in a strong reaction in the financial markets).