Forex dealers' perspectives on exchange rate determination in Korea

Economic Papers (Economic Society of Australia), June, 2004 by Changmo Ahn, George Fane, Euy-Hoon Suh

Most of those who said they used technical analysis methods--for example, forecasting by extrapolating trends--claimed that they did so only because others did. The more junior and less experienced dealers placed relatively less importance on fundamentals than the older and more experienced ones. There was very widespread agreement on the importance of big players, opinion leaders and market sentiment. It seems that most respondents equate opinion leaders with big players, and probably think of market sentiment as the degree of optimism, or pessimism, about the future strength of the won among these influential agents. The more junior and less experienced dealers again attached even more importance to psychological factors (as defined in section 1), the influence of big players and the relevance of established buy/sell positions than the more senior and more experienced ones.

Of the macroeconomic variables that were listed in the questionnaire as being fundamental to exchange rate determination, the dealers reported that the most important are the trade balance, the inflow of portfolio investment and the interest rate. The least important were the unemployment rate, inflation, the money supply and the GDP growth rate. There was an almost perfect correlation between these findings and the reported speed with which the market incorporates new information about particular variables: it adjusts very rapidly to the most important variables, but more slowly to the least important ones. We conjecture that the slower speed of adjustment of the exchange rate to the less important variables is due to the fact that dealers' customers do not follow announcements about these variables as closely as they follow announcements about the most important variables.