Which of the following are short-term drivers of currency valuation?

The choice that identifies surprise changes in interest rates, inflation, and trade as short-term drivers of currency valuation is correct because these factors directly and immediately affect the flow of capital and the demand for currencies in the foreign exchange market.

Interest rates play a crucial role in currency valuation; when a country’s central bank unexpectedly changes interest rates, it can lead to immediate reactions from investors. Higher interest rates typically attract more foreign capital, which increases demand for that currency, leading to appreciation. Conversely, lower interest rates may lead to capital outflows and depreciation.

Inflation is another significant factor. When inflation rates are higher than expected, the purchasing power of that currency decreases relative to others, leading to a depreciation in currency value. If inflation is lower than anticipated, it tends to strengthen the currency, as it represents a more stable purchasing power.

Trade, especially unexpected changes in trade balances, can influence currency valuation on a short-term basis. A surprising trade surplus indicates that a country sells more goods abroad than it buys, increasing demand for its currency, while a trade deficit can have the opposite effect.

Other factors mentioned, such as relative prices and bonds, may influence currency valuation, but they are typically slower to affect the market compared to the direct impacts of interest rates