As financial planners who recommend the use of Dimensional funds we have access to regular articles written by Jim Parker, a Regional Director at Dimensional Funds Australia. In his most recent article Jim looks at the rise of the Australian dollar and looked back at what analysts were predicting at the beginning of the year.
Jim reports that according to a Reuters poll of currency analysts with the major domestic and international banks conducted in January, it was predicted that the Australian dollar would be around 78 cents by July and 76 cents by early 2008. The current exchange rate of the Australia dollar places it at 22% above these levels.
This finding yet again shows the failure of forecasting. These analysts are paid to make these forecasts but more often than not they get it wrong and not just by a small margin.
Some current predictions see the $A reaching parity with the $US. Given the recent history of predictions would you feel comfortable relying on their predictions?
The clear lesson to be learnt is that nobody really knows how exchange rates nor equity markets will be into the future. Trying to make or follow predictions is fraught with pitfalls.