Long-horizon exchange rate expectations

We study exchange rate expectations in surveys of financial professionals and find that they successfully forecast currency appreciation at the two-year horizon, both in and out of sample. Exchange rate expectations are also interpretable, in the sense that three macro-finance variables—the risk-neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP—explain most of their variation. There is no “secret sauce,” however, in expectations: After controlling for the three macro-finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample.