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GBP/JPY and USD/JPY Analyse what will happen to these exchange rates in the next 3-6 months....

GBP/JPY and USD/JPY

Analyse what will happen to these exchange rates in the next 3-6 months. Based on the theory (use at least three), include relative interest rates, relative inflation rates, relative growth rates, government intervention and exchange rate expectation. You may also use other factors that may affect the exchange rate (e.g. commodity prices in the nation). In the analysis, if you have looked at a particular indicator, you must write why you believe that this indicator will cause a currency to appreciate or depreciate against another. Once have completed the analysis, must state clearly what you believe will happen to the currency pair of your choice.

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Expert Solution

The 3 month interest rates in UK as of today stands at around 0.80%(Libor) whereas the 6 month interest rates stand at around 0.89%(Libor).These rates are much higher than those in Japan which stand at 0.0311%(Libor) for 3 months and 0.266%(Libor) for 6 months. However the highest interest rates are found in USA and stand at around 2.321%(Libor) for 3 months and around 2.533%(Libor) for 6 months.

The rate of inflation in UK as on July 2018 stands at around 2.5% whereas that in Japan is around 0.9%. UK thus has a higher rate the Japan. However USA has the highest inflation rate at around 2.9%

The GDP of UK is growing at around 0.4% whereas that of Japan is growing at around 0.5%. USA once again is higher at around 4.2%.

Higher interest rates are known to increase the value of the country's currency. It attracts foreign investments. This eventually leads to an increase in demand for the currency leading to a rise in the rate.

Rate of inflation also plays a major role in determining the currency rate as higher the inflation, lower will be the currency rate. Inflation rates are closely linked to interest rates. A country where interest rates are low offers higher consumer spending power and facilitates growth which causes demand to exceed supply lading to inflation. As the demand for a country's produce increases, the demand for its currency thus causing it to stengthen. Thus we can say that higher inflation rates can indirectly increase the value of the currency but does not seem to have a direct effect like interest rates.

A high GDP is indicative of a robust economy and attracts investors leading to a demand for the currency. An expanding economy leads to consumer spending which is soon followed by inflation causing a government toincrease the rate of interest in an effort to curb it. Thus we can say that higher GDP leads to strengthening of the county's currency.

GBP-JPY

From the above data we can see that the interest rates and the inflation rate are higher in UK than in Japan whereas their GDP is almost at par with each other. This leads one to believe that GBP is more likely to be the stronger currency as compared to JPY.

Similarly USD appears to be the stronger currency as compared to JPY. Besides higher interest rates, inflation rates and GDP, USD also has the advantage of being the dominant reserve currency of the world.

An analysis of the above factors reveals that it would be prudent to trade the GBP-JPY currency pair as GBP is likely to strengthen against the Japanese yen.


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