How good are professional exchange rate forecasts?

Future exchange rate trends are of vital importance for many economic decisions. The recent gain in strength of the euro over the US dollar clearly show the negative impact of such unexpected exchange rate changes. In order to optimise risks and profits from exchange rate changes, numerous enterprises practise active currency management. Exchange rate forecasting is an important condition of any currency management. Since there is no exchange rate model that leads to satisfactory results, the enterprises frequently resort to the forecasts of professional analysts. At the Chair for Economics, Monetary and International Economic Relations at Würzburg University, the usefulness of such market forecasts was tested. The result was quite sobering: The market forecasts of the three providers included in the study (Consensus Economics, Reuters, ZEW Financial Market Survey) supplied no useful decision-making help for internationally active enterprises. Furthermore, the analysis showed that the examined market forecasts are not compatible with the concept of rational expectations. The analysts orient themselves too strongly on exchange-rate developments observed at the time of the forecasting. This behaviour can be explained very well by means of the anchoring and adaptation heuristics that play an important role in the literature of behavioural finance.