(TIỂU LUẬN) task 1 exchange rate forecasting models

Subject code BAFI3200 Subject name International Finance Campus Assessment name Lecturer Student name & ID: Group SGS Exchange Rate Forecasting Table of Contents Executive Summary Introduction .1 Task 1: Exchange rate forecasting models .1 Data Source Purchasing power parity .2 PPP Model construction PPP Regression result & analysis: PPP Residual Plot: PPP Forecasting for Q1/2021: Uncover Interest rate Parity (UIP) .5 UIP Model Construction: UIP Regression result & analysis: UIP Residual Plot: .6 UIP Forecasting for Q1202: Macro-based Model .7 Macro-based Model construction Macro-based regression result & analysis: Macro-based Model forecasting for Q1/2021: .10 Task 2: Composite Forecasting .11 Task 3: Qualitative Factors .12 Sweden policy in terms of QE program .12 Sweden’s labour market 12 Economic Growth in Covid-19 Pandemic 13 Sweden import and export policy .13 References: .14 Executive Summary The purpose of this report is to calculate and forecast the exchange rate of EUR/SEK for Quarter in 2021 The data set used in this report is collected from Quarter of 2003 to Quarter of 2020 By applying regression analysis for Purchasing Power Parity model, Uncovered Interest Rate Parity, and Macro-based model, we come up with the forecasted exchange rate EUR/SEK based on each model, with 10.6964, 10.388 and 10.5353, respectively The results derived from models indicates that the exchange rate of EUR/SEK will be depreciating To generate a more trustful forecasted exchange rate EUR/SEK, we decided to construct Composite Forecasting Model, which is the combination of models above, and produce the final exchange rate EUR/SEK in Q1/2021, with the result of 10.5415 To support the forecasting results from the models, we also discuss the qualitative factors and events affecting the depreciation of EUR/SEK, which are Sweden policy in terms of QE program, Sweden’s labour market, Economic Growth in Covid-19 Pandemic, Sweden import and export policy 0|Page Introduction According to Reinhart and Reinhart (2001), the exchange rate is determined as the value of a currency of a nation in terms of the other country’s currency Having a deep understanding about the causes affected by the exchange rate, investors could seize opportunities and receive profit by predicting how it will change in future In this report, the exchange rate of SEK/EUR in Q1 2020 is forecasted by applying quantitative and qualitative methods In quantitative methods, there are four models used in order to anticipate the exchange rate The first model, we used the inflation rate differential between Sweden and Euro area, known as PPP theory The next model is interest rate parity that uses the differential of interest rate of two countries The third model attached six macro factors including inflation, interest rate, oil price, GDP growth rate, money supply and current account balance Thus, in the last model, the most significant variables will be chosen by using the backward elimination In terms of qualitative, the movement Sweden and Euro area exchange would be forecasted by analyzing the relevant economic events Task 1: Exchange rate forecasting models Data Source Table 1: Data sources used in our report 1|Page Purchasing power parity Purchasing power parity (PPP) is an economic theory which uses the “basket of goods” approach in order to compare different countries Purchasing Power Parity (PPP) tends to center around the aggregate price levels whereas the law of one price (LOP) focuses on an individual level (basing on Sorkin 2012) According to International Monetary Fund Research (1976), PPP among two countries includes two versions such as absolute PPP and relative PPP Absolute PPP is considered as the ratio of the countries' price levels or the product of the exchange rate in a base period Relative PPP is the ratio of the countries’ price indices According to Flood and Taylor (2005), absolute PPP supposes that the exchange rate is the same with the ratio of national price levels while relative PPP shows that the shift in the exchange rate accompanies the shift in relative national prices Therefore, a country suffering higher inflation will hope to decrease its currency The formula for absolute PPP: st = (pt - pt*) + t The formula for relative PPP: st = (pt - pt*) + t In which: St : The spot exchange rate (Domestic price of foreign currency) at time t pt : The domestic price level at time t pt*: The foreign price level at time t PPP Model construction Basing Alastair J.Waithe (2010), the relative PPP be tried utilizing bivariate regression analysis by estimating the equation % S = + * (Inf Euro Area + Inf Sweden) + In which: % S: The percentage change in the spot exchange rate % P: The percentage change in the domestic price level (Domestic Inflation) % P*: The percentage change in the foreign price level (Foreign Inflation) : The arbitrary constant term (the intercept) : The coefficient of the regressors : The error (residual) term Apply to this case, considering the domestic currency is Euro (EUR) and the foreign currency is Sweden (SEK), the regression model would be indicated in terms of difference inflations between the Euro Area (Home country) and Sweden (Foreign country) (basing on Hauner, Lee and Takizawa, 2010): % EUR/SEK = 0+ 1* (Inf Euro Area + Inf Sweden) + 2|Page In which: Inf Eu: Inflation rates in the Euro Area Inf Sweden: Inflation rates in Sweden Figure 1: Regression result of PPP PPP Regression result & analysis: According to figure 1, the relationship between percentage change of exchange rate and inflation rate of Euro area and Sweden is: - The intercept coefficients �0 is 0.0045 that is expected that the value of exchange rate between two countries will be 0.0045 when there is no different between their inflation - The slope of coefficients is - 0.00537 has showed the negative relationship between the exchange rate of EUR/SEK and inflation rate differentials It will be explained that a 1% increase in inflation rate will lead to an increase in % change of spot rate by 0.00537% - The R-square is 0.031 which means there are only 3.1% of percentage change of exchange rate variation is explained by inflation rate differentials between Sweden and Euro area - The P-value is extremely high (14.5%), much higher than 0.05 implies that the null hypothesis is true The results were not statistically significant Hence, there is no relationship between two variables 3|Page PPP Residual Plot: Figure 2: Inflation differenntial residual plot The residual plot diagram displays the most of errors are randomly dispersed around the horizontal axis and fluctuate around -0.08 and 0.006 which is relatively low, indicating a good fit model PPP Forecasting for Q1/2021: Time 2020 - Q4 2021 - Q1 Inflation Predicted % change of EUR/SEK differential exchange rate -0.6052 0.00776198 -0.7 0.00827106 Table 2: PPP model exchange rate forecast 10.6086096 10.696354 (Data adapted from Trading Economics (2020)) To predict the exchange rate in Q1 – 2020, we use the differentials of inflation rate in Q3 2020 plugging to regression equation: Based on above equation, exchange rate in Q4 2020 is predicted increase by 0.77% Hence the expected ER of Sweden and Euro area is 10.61 According to Trading Economics (2020), the differences of inflation between Sweden and Euro area are predicted slowly increase from -0.7 to 0.2 in the first three quarters in 2021 IN case of PPP model is truth, the exchange rate of EUR/SEK is sightly increase following the differential inflation However, the p-value of this model is too high, the forecasting exchange rate is not reliable due to the unclear relationship between the change of EUR/SEK and the inflation difference Uncover Interest rate Parity (UIP) The general concept of the Interest Rate Parity (IRP) explains the changes of the exchange rate related to the nominal interest rate differential between two countries Furthermore, we have two different 4|Page covered and uncovered interest arbitrage With the uncovered interest arbitrage, we will predict the future spot rate and also use that future sport market to exchange currency Hence, due to we are not hedged against possible risk, our profit gain or loss will be affected by market exchange rate Otherwise, with covered interest arbitrage, after having the prediction for future exchange rate, we will have a forward contract at which we will sell currency in the future Nevertheless, using a covered interest arbitrage can limit the potential risk and make profits from the market UIP Model Construction: The equation of UIP model to be examine will be: UIP Regression result & analysis: Figure3 UIP Regression Model The Equation for UIP Regression is that: S EUR´/ SEKt =−0.006617827+0.00821196 ×(i EUR −iSEK )t It can be analysed from the UIP regression result that:  The intercept β0 is −0.006617827 , expressing that the difference between the interest rates of both regions valued at at time t will lead to the fall in the change of exchange rate EUR/SEK by −0.66 % in the same period 5|Page  The coefficient β is 0.00821196 acts the indicator that if the interest rate differential of the both interest rates increases by 1% at time t, the change of the exchange rate will also increase by 0.82% in the same period  The R-squared is calculated at 0.039796375 , showing that about 3.97% of the variations of the change of the Exchange rate between EUR and SEK can be explained by the change of the both interest rates This can be inferred that there is an insignificant relationship between change in exchange rate and interest rate differential between EUR and SEK  The p-value is recorded at 0.097784411 (approximately 9.77%, which is higher than the significant level 5%) illustrate that there is no specific relationship between the change of the exchange rate and interest rate differential between EUR and SEK UIP Residual Plot: Figure IR differentials Residual Plot From the UIP regression model, the IR differential Residual Plot is provided for testing whether or not the model is good fitted According to the data from the figure, the residuals value ranging from -0.05 to 0.08, which is considered relatively low rate, represents the UIP model is highly accurate UIP Forecasting for Q1202: Expected Time (Quarterly) Forecast Inflation Euro Area 2020 Q4 2021 Q1 Sweden Inflation % change Expected differential EUR/SE Spot rate K 0.0% 0.0% 0.0% -0.66% 0.0% 0.0% 0.0% -0.66% Table The UIP model exchange rate forecast 10.4572 10.388 Due to the booming of the COVID-19 around the world, which leads most of the European region suffering from one the worst recession in the economy This urged the European Central Bank decisively reduce the interest rate down to 0% or lower in order to minimize the loss from the sudden 6|Page pandemic Also, from the data provided by Trading Economics, they predicted that the interest rate will remain 0% until 2021, causing interest rate differential of EUR and SEK will remain Therefore, the change of EUR/SEK will maintain at decreasing rate at –0.66% for each quarter until the end of 2021 From the calculating, EUR/SEK is predicted to fall at the value of 10.5269, as the EUR is expected to depreciate against SEK Macro-based Model Apart from the PPP and UIP models for forecasting the exchange rate (ER), there have been several studies on forecasting the ER using monetary fundamentals According to Mark and Sul (2001), there is an increasing magnitude of ER return regression slope coefficients and R squared as the prediction horizon increases Simultaneously, there is also an improvement in forecast accuracy using out-ofsample monetary fundamentals relative to the random walk under the same condition (Faust, J et al., 2002, p 36) Based on the two statements, we have constructed a multifactor regression model using the following variables: 1) Short term Interest rate: The effect of interest rate on ER can be expressed through either Chicago view (asset market approach) and Keynesian approach (international goods market approach) (Hüseyin Şen et al., 2019) Regarding the Chicago view, under perfectly flexible prices, a change in market interest rate is primarily affected by the expected rate of inflation If domestic interest rates were higher than the rest of the world, the increases in expected rate of inflation would also be expected by the market participants, putting pressure on the exchange rate to increase (due to the depreciation effect of inflation) On the other hand, the Keynesian view suggests that a higher interest rate would create an attractive market for capital inflows into the host country (as the returns for investment of foreigners increases), leading to an appreciation of the domestic currency through a rise in demand of the domestic currency 2) Inflation rates: Several studies conducted by Giavazzi and Giovannini (1989), Velasco (1996), and Dornbusch (2001) have proved that in a stable exchange rate regime, not only the price is stable, but the efficiency of monetary policy is also increased Under that condition, a country with a relatively higher inflation rate against the rest of the world is likely to suffer from external deficits, leading to a fall in its foreign exchange reserves (Hüseyin Şen et al., 2019) 3) Percentage change in oil prices: 7|Page The connection between the oil market and currency market has long been established Early research on the role of oil prices by Golub (1983) and Krugman (1983) revealed that when oil prices rise (fall), an oil-exporting (oil-importing) country may witness an appreciation (depreciation) in its currency (Reboredo, J C 2011, p 420) Furthermore, study on oil price movements’ impacts on exchange rate by Bloomberg and Harris (1995) based on the law of one price highlighted that since oil is homogenous and internationally traded in USD, a depreciation in USD reduces the oil price in foreigners’ perspective, hence increasing their purchasi ng power and oil demand, pushing up the crude oil price in USD (Reboredo, J C 2011, p 420) 4) Relative change in real GDP: The effect of real GDP has a different effect on the exchange rate, depending on which channel is considered (trade balance or capital flows) In terms of trade balance, if the growth rate of domestic income were faster than foreign income, the imports would also grow with a faster pace, leading to a higher demand for foreign currency (in order to make imports payment) As a result, the domestic currency will witness a depreciation On the other hand, a faster economic growth is associated with a higher return in domestic assets Therefore, foreign investors will seek an opportunity to invest in domestic assets, pushing up the demand for domestic currency, hence decrease the exchange rate (appreciation) (Moosa, I, A 2009, p 106) 5) Change in money supply: The justification for the impact of change in money supply to ER can be expressed through inflation Theoretically, when a substantial amount of money is injected to the market, it would lead to an increase in inflation, depreciating the value of domestic currency against other foreign currencies (Sean, M et al, 2018, p 64) 6) Current account (CA) to GDP ratio: There have been many developments since the original study about exchange rate adjustment to CA imbalances with the price-specific-flow adjustment mechanism under the gold standard by David Hume in the 18th century In all of these models, regardless of the exchange rate regime, the real exchange rate (RER) movement is found to accompany the adjustment to current account imbalance For example, a CA surplus following a demand shock will enable the RER to appreciate, either through nominal exchange rate appreciation or through a rise in domestic inflation, reducing competitiveness and exports while favouring imports (Gervais et al., 2015, p 87) 8|Page Macro-based Model construction The model is constructed based on the data in Q1/2003 to Q3/2020 (all variables are at time t-1, except percentage change in EUR/SEK exchange rate), the regression equation of change in EUR/SEK exchange rate is written as below: EUR /SEK)t ¿ ¿ S¿ ´¿ (1) Where: EUR /SEK)t ¿ ¿ S¿ at time t ( ∆ % iEUR−∆ %iSEK )t −1 :relative change in short term interest rate at time t-1 ( ∆ %π EUR −∆ %π SEK )t−1 :relative change in inflation rate at time t-1 ∆ %oilpricet −1 : percentage change in oil price at time t-1 (∆ %GDP EUR −∆ %GDP)t−1 :relative change in GDP at time t-1 s s (∆ %M EUR−∆%M SEK )t −1 : relative change in money supply at time t-1 (CA/GDP EUR −CA /GDP SEK )t −1 : relative change in current account ratio to GDP at time t-1 ε t : error terms at time t Macro-based regression result & analysis: The following figure represents the summary output of the regression model (1): Figure First Macro-based model regression results 9|Page To begin with, the R square is computed as 0.179 implies that only 17.9% variance in the percentage change in EUR/SEK spot rates can be explained by the changes in the independent variables, the remaining 82.1% is due to other factors In addition, as looking at the p-value, there is a fact that only the lagged relative change in GDP has a p-value < 0.05 (0.0033), thus the null hypothesis of β 0=0 is rejected Therefore, with 95% level of confidence, the lagged relative change in GDP is proved to be statistically significant On the other hand, all other independent variables have their p-value > 0.05 (figure), thus the null hypothesis of β 0=0 is accepted Therefore, with 95% level of confidence, the relative change in GDP is proved to be statistically insignificant In order to build a stronger model, we decided to eliminate all insignificant variables, the regression equation has become: EUR /SEK)t ¿ ¿ S¿ ´¿ The summary output of equation (2) is demonstrated as follow: Figure Second Macro-based model regression model Although our R square drops from 0.179 to 0.1473, which is a result of eliminating all of the insignificant variables, there is an improvement in adjusted R square from 0.1008 to 0.1348, indicating that more variance of EUR/SEK exchange rate can be explained by the variance of a significant variable (the lagged relative change in real GDP) Therefore, the new model is proved to be more reliable than the previous model The slope of relative change in real GDP is 1.07, which indicates a positive relationship between the lagged relative change in GDP and the percentage change in spot rate, implying that for every 1% increase in the relative change in GDP, the EUR/SEK exchange rate increases by 1.07% 10 | P a g e Macro-based Model forecasting for Q1/2021: In Q4-2020 and Q1-2021, the manufacturing sector is expected to be the main driver of GDP in the Euro Area which is forecasted at 2.2% and 1.5% respectively (Istat 2020) Meanwhile, In Sweden, the real GDP growth rate is forecasted to be -4.4% and 1.5% in Q4-2020 and Q1-2021 respectively (Statista 2020) The economic activities in Sweden witnessed a steep fall in the second half of 2020 due to the COVID-19 The manufacturing sector is severely affected by disruptions in the cross-border supply chain, causing plant closures across the country On the other hand, the strong decrease in equipment investment was partly compensated by continued growth in public and housing investment In 2021, the growth rate of investment in Sweden is anticipated to remain relatively low However, the Swedish economy is expected to recover soon in 2021, supported by a strong growth in public consumption, and the recovery of private consumption which is reflected in the recovery of the labour market, weak inflation rate, and the unwinding savings (pandemic-induced) Simultaneously, a strong rebound of exports is expected in parallel with the global economic recovery As a result, the real GDP of Sweden is believed to increase by 3.25% in 2021, confirming the reliability of the quarterly data that we found on Statista GDP growth (forecasted) 2020 -Q4 2021 -Q1 Relative change %change in exchange EUR/SEK and in real GDP rate (forecasted) -4.40% 6.60% 1.0063 10.4764 1.60% -0.10% 1.0056 10.5353 Eurozone Sweden 2.20% 1.50% Table The Macro-based model exchange rate forecast As a result, using the equation (2) above, the EUR/SEK exchange rate is forecasted to increase by 1.0063% (10.4764) and 1.0056% (10.5353) in Q4-2020 and Q1-2021 respectively, indicating the EUR will depreciate against the SEK Task 2: Composite Forecasting According to Blake, Beenstock & Brasse (1986), composite forecasting exchange rate is defined as combination of numerous forecasting approaches (PPP, UIP and Macro-Based model), which are based on the historical data of the exchange rates in the same examined periods The reason that many consultancy departments using composite method is that it helps to maximize the best possible forecasting outcomes and reduce the limitations underlying in individual forecasting approach, especially applied in forecasting exchange rates (Lapide, 2008) In this report, we decided to apply composite forecasting method, built upon the relative strengths, in which weights are calculated based on the Mean Squared Forecast Errors (MSE) Below is the formula for weights calculation 11 | P a g e MSE w T+1 = n ) ∑ ( MSE i=1 Below is the Mean Squared Errors of models, which it can be found in our Excel file for more detailed calculation:  MSE PPP =0.00063  MSEUIP =0.00063  MSE Macro−based =5.33137 Weights of models:  0.000636 =0.4977 w PPP = 1 + + 0.000636 0.00063 5.33137  0.00063 =0.5023 w UIP= 1 + + 0.000636 0.00063 5.33137  5.33137 =0.0000594 w Macro −based = 1 + + 0.000636 0.00063 5.33137 The next step is to determine the forecasting exchange rate of EUR/SEK for Q3/2021, based on the following formula ^S c =w ppp × ^S PPP +w UIP ×S^ UIP +w Macro−based ×^S Macro −based Based on the regression result in task 1, the forecasted exchange rates of EUR/SEK in Q1/2021:  ^S =10.6964 PPP  ^S UIP=10.388 12 | P a g e  ^S Macro − based =10.5353 ^S =0.4977 ×10.6964 +0.5023 ×10.388 +0.0000594 × 10.5353 c ^S c =10.5415 Therefore, based on the composite forecasting approach, the best possible of the forecasted exchange rate EUR/SEK is 10.5415 Task 3: Qualitative Factors Sweden policy in terms of QE program Sweden’s central bank launched a quantitative easing (QE) program in order to support the economy which could go through the negative impact of Covid-19 outbreak According to Holly Ellyatt (2020), there was an improvement of the size and scope of its asset purchases from 300 billion Swedish krona ($320 billion) to 500 billion SEK In addition, the corporate bonds will belong to the program from September to June 2021 The central bank tends to maintain the interest rate at 0% in order to control the demand of currency As a result, this would favor SEK appreciation against EUR Sweden’s labour market Covid 19 epidemic pushed Sweden's unemployment rate to increase from 7.5% to 9.8% in the first half of 2020 (based on Trading Economics 2020) However, after June, it tended to decrease to 7.8% in October According to Gary Howes (2020), Sweden's especially loosened up reaction to the Coronavirus pandemic - it broadly picked not to take part in the cruel lockdowns the remainder of Europe decided on In addition, SEB forecast the country to report -8.0% quarter-on-quarter, -7.0 year-on-year whereas this is complimenting compared to the Eurozone's -12.1% quarter-on-quarter reading and -15.0% year-on-year reading announced today Moreover, some economists suppose that the appearance of a rotation out of U.S assets into EU assets in progress as of now There is a great opportunity for countries like Sweden and its currency Therefore, Sweden’ s economy is expected to thrive and so EUR would depreciate against SEK Economic Growth in Covid-19 Pandemic Covid-19 pandemic is one of the examples to test the relationship between economic growth and exchange rate With the different solution to deal with Covid-19, Sweden and Eurozone have a different impact on economic growth and the exchange rate is also affected strongly In this case, we are assuming that other factors have not affected the exchange rate According to Meredith, Sweden recognized the contracted approximately 8.6% in second quarter, meanwhile eurozone suffer plummet 12.1 percent The difference in covid-19 approach leading to the difference in economic growth As a 13 | P a g e result, the Sweden currency has appreciated strongly compared to the Euro currency in the last quarters Sweden import and export policy Since 2015, Sweden has planned to push import and export higher until 2020 Sweden did many things to achieve that goal including depreciation of their currency Based on Statistics Sweden, in 2018, Sweden currency depreciated against Euro by 5.8 percent As a result, from march 2018 to march 2019, the product price index had increased by 8.4 percent in export and by 7.2 percent in the import market With PPP theory, which means the exchange rate between Sweden and Euro would be affected also by import and export In conclusion, the export and import affected exchange rate and vice versa Consequently, Sweden currency depreciate against Euro currency 14 | P a g e References:  Coakley, J, Flood, RP, Fuertes, AM, & Taylor, MP, 2005, ‘Purchasing power parity and the theory of general relativity: the first tests’, Journal of International Money and Finance, vol.24, no 2, pp 293-316  Faust, J et al 2002, ‘Exchange rate forecasting: the errors we’ve really made’, July 11th 2002, Journal of International Economics (2003), vol 60, viewed December 18th 2020, p 36  Gary Howes (2020), Swedish Krona Leads Pound Sterling as July's Best Performing G10 Currency, More Ahead, viewed 16 December 2020,  Gervais et al., 2015, ‘Current account dynamics, real exchange rate adjustment, and the exchange rate regime in emerging-market economies’, October 22nd 2015, Journal of Development Economics (2016), vol 119, viewed December 16th 2020, p 87  Holly Ellyatt (2020), Sweden’s currency has strengthened — with no coronavirus lockdown — and the trend could continue, CNBC, viewed 16 December 2020,  Hüseyin Şen et al., 2019, ‘Interest rates, inflation, and exchange rates in fragile EMEs: A fresh look at the long-run interrelationships’, September 18th 2019, The Journal of International Trade & Economic Development (2020), vol 29, no 3, p 291  International Monetary Fund Research, 1976,‘The Purchasing Power Parity Theory of Exchange rates: A Review Article’, International Monetary Fund, viewed December 2020,  Istat 2020, ‘Eurozone GDP starts to recover’, September 29th 2020, Istat, Eurozone economic outlook, viewed December 17th 2020,  Lee, J, Takizawa, H, and Hauter, D, 2011, ‘In which exchange rate models forecasters trust?’, International Monetary Fund, May, viewed December 2020, 15 | P a g e  Meredith, S 2020, 'Sweden’s second-quarter GDP fall was its worst in modern history — but outperformed many in Europe', CNBC, August, viewed 18 December 2020,  Moosa, I, A 2009, International finance an analytical approach, 2009, McGraw-Hill Australia, viewed December 18th 2020, p 106  Reboredo, J C 2011, ‘Modelling oil price and exchange rate co-movements’, July 15th 2011, Journal of Policy Modeling 34 (2012), viewed December 11th 2020, p 420  Reinhart, CM, & Reinhart, VR, 2001, ‘What hurts most? G-3 exchange rate or interest rate volatility’, National bureau of economic research  Sean, M et al, 2018, ‘MONEY SUPPLY, INFLATION AND EXCHANGE RATE MOVEMENT: THE CASE OF CAMBODIA BY BAYESIAN VAR APPROACH’, November 21st 2018, Journal of Management, Economics, and Industrial Organization, Vol.3, No.1, viewed December 11th 2020, p 64  Sorkin, I, 2012, ‘The Law of One Price and the Financial Crisis: Evidence from the U S and the Canadian Equity Markets’, Semantic Scholar, viewed December 2020,  Statista 2020, ‘Growth forecast for gross domestic product (GDP) in Sweden from 2020 to 2023’, August 27th 2020, Statista, viewed December 20th 2020, < https://www.statista.com/statistics/1109576/gdp-growth-forecast-in-sweden/>  Statistics Sweden 2019, 'Depreciation of the Swedish krona raised import and export prices', SCB, 26 April, viewed 18 December 2020,  Trading Economics (2020), Sweden Unemployment Rate, Sweden, viewed 16 December 2020,  White, S 2019, ‘Japan cuts view of exports as U.S.-China trade war hurts trade’, Reuters, 29 January, viewed December 2020, 16 | P a g e 17 | P a g e ... in task 1, the forecasted exchange rates of EUR/SEK in Q1/20 21:  ^S =10 .6964 PPP  ^S UIP =10 .388 12 | P a g e  ^S Macro − based =10 .5353 ^S =0.4977 ? ?10 .6964 +0.5023 ? ?10 .388 +0.0000594 × 10 .5353... viewed December 18 th 2020, p 10 6  Reboredo, J C 2 011 , ‘Modelling oil price and exchange rate co-movements’, July 15 th 2 011 , Journal of Policy Modeling 34 (2 012 ), viewed December 11 th 2020, p 420... model PPP Forecasting for Q1/20 21: Time 2020 - Q4 20 21 - Q1 Inflation Predicted % change of EUR/SEK differential exchange rate -0.6052 0.0077 619 8 -0.7 0.0082 710 6 Table 2: PPP model exchange rate forecast