Posted: September 9th, 2022

International Finance
Assignment 2

International Finance
Assignment 2

MONITORING MOVEMENT IN THE FOREIGN CURRENCY VALUE
Factors that are likely to affect the value if the foreign currency of concern over time.
There are several factors that affect the value of foreign currency over time when having an international business located in different parts of the world. The following are some of the reasons why the value of the foreign currency might be affected.
Inflation Rates
Inflation refers to the rapid increase in prices of goods and services of a country within a short period. One major effect of inflation is that it causes the currency of a country to lose value as it is compared to the currency of another country. Therefore, if the inflation rate of a country is lower, the country’s currency will tend to appreciate as compared to another country whose inflation is high. The rate of inflation is lower when there is a slower increase in prices of goods and services. In other words, the process is stable.
On the other hand, the rate of inflation is higher when there is an increase in prices at a faster rate. Therefore, inflation affects foreign currency in such a way that, where there is a high inflation rate, the currency of that country depreciates or loses value with time. Similarly, a country that experiences a low inflation rate, its currency seems to appreciate or gain value with time. Consequently, the high inflation rate is accompanied by high-interest rates.
Interest Rates
When engaging in international business, it is expected that changes in interest rates consequently affect the value of the currency and the exchange rates for the US dollar. The interest rates, forex rates and inflation are closely related since their increases or decreases can either lead to depreciation or appreciation of the currency. However, an increase in interest rate leads to an increase in the value of currency or causes appreciation of the currency, since higher interest rates would mean high rates to lenders. As a result, foreign capital is attracted, causing a rise in exchange rates.
Balance of payment of the country
The balance of payment may refer to all international financial transactions and trade made by the residents of a country. The balance of payment reflects a country’s’ earnings on foreign investment. The balance of payment can lower the value of the currency. For instance, when there is much spending’s on imports leading to a balance of payment deficit causing depreciation in the currency.

Government Debt
Government debt refers to the national or public debt owed by the central bank. A country with the high national debt is likely to experience inflation due to less acquisition of foreign capital. Therefore the effects of inflation are evident as discussed above. Therefore, the country experiences inflation and the value of the currency are likely to go low since inflation leads to depreciation. Terms of Trade
It refers to the ratio of exports to imports prices that is related to the balance of payment and current account. The terms of a trade-in a country might improve if prices of exports are greater than the prices of the imports. Consequently, when prices of exports are higher than the prices of imports, higher revenues are seen in the country. As a result, the demand for the country’s’ currency increases leading to an appreciation of the country’s currency (increase in the value of the currency)
Political Stability and Performance
Political stability and performance of a country is an important determinant of whether the currency of that country will gain or reduce value. The stability of the currency in a country is directly related to the political stability in that country. Therefore, a politically stable country tends to attract more investors. As a result, the country experiences an increase in foreign capital leading to an appreciation of the country’s domestic currency. On the other hand, a country characterized by confusion and political instability tends to experience depreciation in terms of its currency. Consequently, depreciation in currency leads to loss of value of the currency in international exchange.
Recession
Recession is experienced by a country when the interest rates of the country fall, hence reducing the chances of foreign capital acquisition. Consequently, the country experiences depreciation, which leads to the loss of value of the country’s currency as compared to the currency of the other country.
Speculation
The economic analysis involves speculative analysis. For example, a country’s currency may be expected to either increase or decrease in value. If a country’s currency is expected to increase in value, foreign investors are likely to demand more of that country’s currency so that they can make more profits. On the other hand, when a country’s currency is expected to lose value, foreign investors will tend to shy away from making investments decisions. As a result, the country lacks foreign capital hence depreciation leading to a decreased value of the currency.

DETERMINING WHETHER IFE HOLDS
According to the Trading Economics (2020), the two countries; Egypt and the United States have different interest rates in the last four quarters. In this section, we shall compare and review the exchange between the country of interest (Egypt) and the United States. In addition to that, the exchange rate percentage is also reviewed. Furthermore, the International Fisher Effect of the year is analyzed to determine whether it holds.
Firstly, the International Fisher Effect (IFE) refers to an economic concept that states the expected disparity or differences between the exchange rates of two currencies are equal to the nominal interest rates of their countries. Some of the important points to note are; IFE states that the exchange rate can be predicted through the differences in nominal interest rates. Also, IFE states that countries with a higher nominal interest tend to experience a high inflation rate.
The IFE is primarily based on the analysis of rates of interests related to gift and destiny threat-loose investments, including Treasuries, and is used to assist expecting foreign money moves. It is in contrast to different techniques that completely use inflation prices within the prediction of trade charge shifts, instead of functioning as a combined view bearing on inflation and interest prices to a currency’s appreciation or depreciation.
The principle stems from the idea that actual interest costs are unbiased of different a monetary variable, which includes modifications in a nation’s monetary coverage, and offer a higher indication of the fitness of particular forex inside a worldwide market. The IFE presents for the idea that nations with lower hobby charges will in all likelihood also experience lower ranges of inflation, which can result in will increase inside the real price of the associated forex while compared to different countries. By comparison, international locations with better interest charges will revel in depreciation inside the value in their currency.
The Central Bank of Egypt has been the key player in determining the interest rates of the country. According to Trading Economics (2020), the interest rates in Egypt were at its lowest at 8.75% after lowering the deposit rate to 50 bps. The Corona Virus has also been having affected the interest rates greatly in both Egypt and the USA. The lending rate increased from 8.75% to 9.75%. However, the interest rate of Egypt proved to be steady over the last several months. The Interests rate has remained unchanged from 9.75%. Despite the many challenges brought about by COVID 19, policymakers in Egypt have managed to maintain a steady interest rate. Inflation is also one of the factors that have always affected the interest rates. However, Egyptians policymakers have managed to handle the impact of inflation. The figure below shows the rate of inflation in the last one month In Egypt.

Egypt Interest Rates for the last one year

Similarly, the United States has also managed to maintain a steady interest rate. The United States has had a blow in the fight against COVID 19. From November 2019 to October 2020, the USA has had a number of changes on their interest rates. However, the interest rates of the country were maintained and kept stable over the past months. The USA had the lowest interest of 0.25 since the beginning of COVID 19. From November 2019 to March 2020, the interest rate was at 1.75. Nevertheless, in March, after the spreading of the virus, the interest rate was lowered to 0.25%.
An interest rate for the last one year

MONITORING EXCHANGE RATES TRENDS
Exchange rate refers to the value of one currency as compared to the other. The US dollar is normally the standard currency used in the world. However, in this case, the focus is in the country in which an international corporation is to operate. The country where international business is to start is Egypt. Therefore, the exchange rates of Egypt are analyzed over the last sixty days.

According to the trends in the table above, for the last five weeks, the interest rates have decreased drastically. The average interest rate for the last five weeks is 15.71. As a result of the gradual decrease, there will be appreciated in terms of the currency of Egypt. Since a decrease in exchange rates compared to the US dollar leads to an increase in the value of the currency hence appreciation and an increase in exchange rate leads to depreciation hence causing loss of value of the currency.

References

Trading Economics. (2020). Egypt Interest Rate | 1991-2020 Data | 2021-2022 Forecast | Calendar | Historical. Tradingeconomics.com. Retrieved 28 October 2020, from https://tradingeconomics.com/egypt/interest-rate.
CompareRemit. (2020). 8 Key Factors that Affect Foreign Exchange Rates. Compareremit.com. Retrieved 28 October 2020, from https://www.compareremit.com/money-transfer-guide/key-factors-affecting-currency-exchange-rates/.

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