Portfolio Balance Approach
This approach is based on the relative price of assets, specifically with the relationship between the relative price of domestic and foreign bonds and the exchange rate, where it is assumed that it ‘s supply and demand is affected by changes in monetary and/or fiscal conditions.
Taking into account the monetary side, a cut in interest rates by the central bank will cause outflows from domestic interest rate bearing securities into cash, as explained by the Monetary Approach article. This causes a reduced demand for domestic bonds, which instead causes an increased demand for foreign currency bonds, which in turn causes domestic currency to depreciate.
From the perspective of the fiscal side, if a government expands its fiscal policy in the face of an economic downturn, it should lead to increased domestic bond supply and also a higher interest rate for existing domestic bond holders, thus leading to an increased domestic bond demand and decrease in foreign bond demand and eventually appreciation of the domestic currency.
All this really sounded too simple, and in fact, it has fared poorly in predicting the direction at which exchange rate goes, and in fact the prediction might be in the opposite direction in certain cases in short-term cases. Therefore, only use this to determine/predict long-term trends.