Just put all together with little added value. hope it helpful and look foward to hearing other views.
shorterm wise, as FangLin pointed out, FX movement is affected buy shortterm supply and demand. when US IR goes up, capital flows into US to earn higher return with expectation for further rate increase. but the hot money will react quickly to events. and when hot money move out a country, currency depreciates and bubbles occurr (97 south asia, and south america 1990's crisis). Thailand's short term US liability before the crisis was very high, when hot money want to get out, local borrower also want to buy foreign currency to pay their debt. if asia countries have had a heath financial system and balance, that crisis won't have that huge effect.
in Long term, the interest rate parity tends to hold and is one tool to forecast long-term FX rate trend.
The well known rule is:
The currency for country with higher interest rate depreciate against others
The currency for country with lower interest rate appreciate against others
annual % chng in FX approx. equals difference in interest rate.
under this rule, when country USA have 2% higher interest rate than Country SG, currency USD is supposed to depreciate 2% annually againist currency SGD.
In the Famous 1992 pound speculation, UK government was abliged to stick to 6% band of UK vs Mark. But during that time, UK had very high inflation ( UK inflation at three times the rate of Germany's) and housing bubble formed, yet it followed Eruop/German to have a fixed FX. these gave Soros and other traders fundamental basis to short pounds and long mark.
what makes it complicated in FX analysis, as i feel, is the real growth and inflation. during recession, government typically reduce the IR to stimulate the economics. So when growth slow, IR will reduce. this is exactly happnend in USA now. Vice visa, growth high, inflation concern and IR will rise.
So far, all discussion based on capital account. Now let's look at import and export that also plays major roles in FX. When domestic mkt slow, import drop, demand for foreign currency drop, hence local currency appreciate. This is partially offset by the fleeing capital that moves to foreign country with better growth and place depreciation pressure on domestic currency.
Inflation is generally bad for currencies. currency with higher domestic inflation will depreciate eventually. it's very intersting to see how MAS use FX to deter inflation. MAS allows SGD to appreciate so that the import cost for fuel/crude keep stable (this idea was borrowed from MrDjay). This strategy works well so far when the major source of inflation comes from imported crude resources and domestic economic is not overheated. once the property sector begin to create some bubble, interest rate will be used.
So 3-4 major factors (also + fiscal policy) influce Fx trend. Some offset each other in many senarios and makes FX aweful to me...
My view on RMB, Going up in long term due to it's mammoth export surplus.
(China still get that much supplus when 100M t-shirt exchanges for one airplane...)
RMB Appreciation is double-edge sword: loss in large foreign reserve, gain in domestic sector upgrading. Now in china, the most direct way to earn some money is doing manufacturing and export... this won't and can't work for long. it's just critical for government to help middle-age labors to upgrade and transform to other sectors. well, guess it's easier to say than to do. local government just focus on GDP and nothing else (they announced to have envriomental measure besides GDP early this year and then withdrawed it).
Huasing Association 1999 - 2013