- Changes in Terms of Trade (= price of exports divided by price of imports) is a function of changing commodity prices (energy, industrial metals, agriculture, live stock).
- Extract sensitivity estimates (the coefficients in a regression) to predict terms of trade.
- Changes in Real Exchange Rates ( = price of one unit foreign currency in domestic currency * ratio of foreign and domestic price levels) is a function of two key parameters.
- Terms of Trade
- Relative productivity levels -- measured by, say, per-capita output per hour etc.,
My own guess is that there are three key parameters that affect the short term exchange rate fluctuations:
- Global capital flows -- that chase the second-order effects anticipated changes in terms of trade.
- Changes in US deficits (budgetary and trade) -- this is particularly accentuated by the coming US electoral-cycle.
- Idiosyncratic events -- particularly emerging market macroeconomic instabilities.