Predicting Foreign Exchange Rate Movements: An Application of the Ensemble Method

This paper investigates the relationship between macroeconomics variables and foreign exchange rate direction and predicts this direction using an ensemble method. We classified exchange rate movements into two classes, appreciation and depreciation. We employed monthly data for macroeconomic variables and the currency price of the US dollar, Euro, Japanese Yen and British pound against the South African rand. The results show that the ensemble method provides an accurate prediction for the appreciation of the Euro, US dollar and British pound and depreciation of the Japanese Yen. Stock price and terms of trade are more responsible for appreciating the US dollar.