The Ppp Theory Is a Strong Predictor of Short-Run Movements
The PPP theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.
The Fisher Effect states that a country's "real" rate of interest is the sum of the "nominal" interest rate and the expected rate of inflation over the period for which the funds are to be lent.
The International Fisher Effect states that for any two countries,the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates for the two countries.
The International Fisher Effect has proven to have substantial power at predicting short-run changes in spot exchange rates.