FX market analysis and trading strategies report

FINANCIAL MARKETS FX market analysis and Trading strategies report Group Assignment 2.2 Lecturer: Huy Pham Team members Name Student ID Nguyen Ngoc Thanh An s3753330 Nguyen Dang Thuy Duong s3754165 Bui Hai Phuc S3748872 Pham Tan Phat S3712364 TABLE OF CONTENTS 1/ EXECUTIVE SUMMARY OR SYNOPSIS .2 2/ INTRODUCTION 3/ MARKET VIEW 3.1/ FX market past behavior (performance) .3 3.1.1 AUD/GBP 3.1.2 USD/AUD 3.1.3 GBP/USD 3.2/ Analysis and market view .8 3.2.2 Inflation rate .8 3.2.3 Government intervention 11 3.2.4 Brent Crude Oil prices 12 3.2.5 Brief market view conclusion 14 4/ TRADING STRATEGY AND PERFORMANCE ANALYSIS .15 4.1/ Trading strategy 15 4.1.1 Primary task 15 4.1.2 Secondary task 15 4.2/ Performance analysis 16 4.2.1 Primary task 16 4.2.2 Secondary task 16 5/ CONCLUSION .17 6/ REFERENCES LIST 17 1/ EXECUTIVE SUMMARY OR SYNOPSIS The object of ABN AMRO Bank’s report is to figure out the effective and profitable strategy in the short and long term of those currency pair: AUD/GBP, GBP/USD and USD/AUD This report briefly analyses the past and current performance of the pairs as well as analysis the market conditions based on these economic indicators: inflation rate, government intervention and brent crude oil prices We also forecast the change of currencies by using those indicators to come up with the suitable for each trading strategy Our analysis proves that the USD will appreciate against both AUD and GBP The market view provides the insight of market conditions, which shows how indicators impact the change of currencies and their relation At the end of the day, the bank gained 6,555,751.26 AUD as a profit During the trading session, we have experienced some unexpected situations which can be recognized as risk 2/ INTRODUCTION ABN AMRO Bank N.V is a Dutch bank established in 2010 which is a combination of many banks and business with long history (ABN AMRO 2019) This report primarily focuses on these three pairs of currency: AUD/GBP, GBP/USD and USD/AUD In order to make profit from the square opening position, it is vital to understand the financial market by evaluating the movements in exchange rates and market’s conditions The first part of the report is Market View which shows the past behaviors of the chosen currency pairs in the last years (2017-2019) and the forecast of changes of exchange interest rates in the next to months; there is also some analyses about the economic factors of each country The second part is about the Trading Strategy focusing on how the bank maximizes the profit 3/ MARKET VIEW 3.1/ FX market past behavior (performance) 3.1.1 AUD/GBP Figure AUD/GBP exchange rate from December 2017 to September 2019 (Adapted from Thomson Reuters Eikon) There is a significant decrease in exchange rate at the end of 2017 and continued to drop down to 0.548 in March 2018 A slight rise in the following months; however, could not change much in the rate when it continued to slip down to 0.544 (lowest rate in the last years) and rose up to 0.5593 in September 2019 which nearly equal to the exchange rate in June 2018 According to Jonathan Watson, the trade wars between China and the United States in 2019 may be the factor that affect the exchange rate, which led to the fact that many investors will find more confidence in the Australian economic outlook ahead and the Australian dollar can rise or fall according to sentiments related to the global economy, since it depends heavily on its exports of raw materials like Iron Ore and Aluminium UK market conditions can also affect the AUD/GBP exchange rate when business confidence in the UK economy remains on edge due to Brexit and the potential impacts that stem from the UK leaving the European Union This uncertainty has the potential to hold back business investment Most countries usually use interest rates to control monetary policy – as interest rates affect people’s behaviours around borrowing and saving, which controls the GBP by affecting the amount of money in circulation to reduce inflation and confidence in the currency Figure The forecast of AUD/GBP exchange rate from September 2019 to Jun 2020 (Adapted from Thomson Reuters Eikon) Due to the factors that affect the exchange rate such as monetary policy, market conditions or the Brexit, AUD is forecasted to appreciate against GBP in the future when the maximum is 1.25, is 1.05 which leads to the average is 1.17 3.1.2 USD/AUD Figure USD/AUD exchange rate from December 2017 to September 2019 (Adapted from Thomson Reuters Eikon) The exchange rate goes up dramatically from the end of 2017 to December 2018 From the beginning of 2019, although there are some small reductions, however the exchange rate slightly rise up to 1.4704 in September 2019 Quite similar to GBP/AUD, monetary policy and market conditions are factors that affect the exchange rate Monetary policy in the USA is controlled by the Federal Reserve, which controls the exchange rate through money supply, the buying and selling of government securities and the setting of interest rates For market conditions, after the Global Financial Crisis (GFC), USA has been slower than other countries to recover Although employment is down nationally and the domestic workforce appears to be getting back to pre-GFC levels, the USD is still yet to see the strength it exhibited in years past.The Federal Reserve has stated that it expects inflation to continue to rise in 2018, and it is likely it will hike up interest rates as a result This could aid in bolstering a recovering USD as the year goes on There is also continued uncertainty around the political/governance situation With the federal government shutting down over ongoing funding issues earlier this year, the uncertainty is set to impact negatively on the USD Figure The forecast of USD/AUD exchange rate from September 2019 to Jun 2020 (Adapted from Thomson Reuters Eikon) Due to the factors that affect the exchange rate such as monetary policy, market conditions and especially the trade war (which affect a lot), USD is forecasted to appreciate against AUD in the future when it can rise up to 1.25 and the future average calculation will reach 1.17 3.1.3 GBP/USD Figure GBP/USD exchange rate from December 2017 to September 2019 (Adapted from Thomson Reuters Eikon) The exchange rate goes up and down constantly from 2017 to 2019 Since March 2018, the overall trend is downward sloping Before, the rate kept increasing up to the rate 1.4015 According to Elaine (2019), many factors like the lowest unemployment rate in the past 17 years (4.1%), low inflation and considerable tax reforms cause the rise of interest rate quarterly Additionally, the Bank of England decided to increase the interest rate from 0.5% to hold inflation to 2% (Michael 2017) The GBP/USD has decreased dramatically, the rate falls down to 1.2693 on Jun 2019 Furthermore, it keeps dropping to 1.216 at the end of September 2019 Mentioned above, the Bretix causes the GBP depreciating against USD Since there is not yet a final decision, many investors tend to “move asset” from UK stock to other currencies or asset like gold which does not relate much to the EU, reducing the GBP value more (Andrew & Brian 2018) Besides, in July 2019, the US dollar was “bolstered by the Federal Reserve more hawkish than expected tone on US monetary policy” (Collin 2019) In general, the GBP depreciates against USD Figure The forecast of GBP/USD exchange rate from September 2019 to Jun 2020 (Adapted from Thomson Reuters Eikon) GBP is forecasted to appreciate against the USD in the upcoming time, which is a positive news to the UK Although the Bretix saga is complicated and has no end, the Pound-to-Dollar is believed to have a positive outlook in long-term (Elaine 2019) The value can be up to 1.33 if Britain finally leaves the EU with a deal (Jonathan 2019) 3.2/ Analysis and market view 3.2.2 Inflation rate Australia Figure Australia inflation rate 2014-2020 (sourced from Thomson Reuters Eikon) Starting at 2.51% in 2014, the Australian inflation rate experienced a sharp decrease to 1.51% in the next year Thereafter, it continued to fall slightly and increase to almost 2% in the last two years The inflation rate in the current year is expected to remain at around 2%, however, it is forecasted to increase in the next year The stable and low inflation rate in the two most recent years would ease uncertainty and fear of both local and foreign investors may encounter and encourage them to invest more, leading to appreciation of the currency The United Kingdom Figure United Kingdom inflation rate 2014-2020 (sourced from Thomson Reuters Eikon) Over the first 5-year period, the UK inflation rate witnessed a wild fluctuation in a range from 0% to nearly 2.7% The inflation rate in 2019 is expected to decrease considerably to 1.84%, while the following year is forecasted to sit at 2% The United States Figure United State inflation rate 2014-2020 (sourced from Thomson Reuters Eikon) 10 The inflation rate experienced an upward trend in the past years to around 2.5% in 2018 The inflation rate in this current year is expected to be at 2%, however, it is forecasted to increase in the future With the rising inflation rate, it may result in a fall in currency value 3.2.3 Government intervention Australia The most important factors that depreciated the Australian dollar against the US dollar are capital flows and the interest rate differential (Sun and An 2011) This can be illustrated that the US interest rate was usually around 2% to 2.5% in 2018 while the figure for Australia was around 1.5% (Eikon) The extended differential interest rate between the two countries has lead to AUD continuously depreciated against USD In the early of 2019, Reserve Bank of Australia (RBA) has their interest rate unchanged until the last two months, when they decided to reduce it twice by 25 basis points each time from 1.5% to only 1% (RBA 2019) This act can be illustrated that the Australia’s economy grew 1.8% in the last year 2018, its slowest pace since 2009 (TheGuardian 2019) The slow economic growth prolonged to the first two quarters of 2019 However, the 1% interest rate does not seem enough to support the economy since RBA is ready to cut rates again to increase employment rate and progress towards the inflation target (Swata, P 2019) The expansionary monetary policy is applied by the central bank of Australia to stimulate economic growth by lower unemployment rate and taxes cut (Cornish, S 2016) However, this policy may make the AUD to depreciate more as decreased cost of borrowing, leading to higher inflation or even higher when they cut rate for the third time in the future Eventually, the AUD will decrease in value The United Kingdom Brexit has been a persistent main event in the UK economy for the last few years However, this event will have its end in October which is three months from now as Prime Minister Boris Johnson commitment to take Britain out of the EU without a deal (Luke McGee 2019) In 2017, the UK trade with the EU was sitting on a deficit, exporting £274 billion worth to the EU while importing £341 billion worth (Finance Monthly 2018) The EU is also the largest trading partner of the UK as the EU made up to 54% of all UK imports and 46% of all UK exports (Matthew Ward 2019) Furthermore, nearly 30% of the food consumed in the UK have their origins from the EU (BBC 11 News 2019) With that being said, this decision will put UK economy in jeopardy When brexit takes place, an increase import taxes and might be transport delay will be applied on a considerably large scale of imports as the EU is the UK’s largest trading partner Foods in the supermarkets will be either empty on shelves or at higher prices As a result, the price of those commodities increases due to an upsurge in demand as the expected behaviour of the consumer in this case is to reserve, leading to higher inflation rate as the prices increase while the production remains In addition, the Bank of England will cut their interest rate by 25 basis points in response to the global economy crisis as a result of trade war and the risk of leaving the EU (David, M & Andy, B 2019) The outcomes of these decisions are the fall of GBP currency in value followed by a slower economic growth The United States The value of the U.S dollar has been a strong and fast growing currency in the past few years due to its increase in value in a short time, which is reported that it strengthened at 25% in 2014 and 2015 (Kimberly, A 2019) The trade war goes on intensely between US and China as Donald Trump planning on slap a 10% tariffs on $300 billion China imports (Katelyn, C 2019) To maintain the economy, the Federal Reserve is ready to support any economic weaknesses by interest rate cuts (Jeff Cox 2019) This is likely to happen as the Fed also stated that the trade war pressure hinders the economic growth For that reason, although the Fed does not want any potential determinants that cause the USD depreciation, they have to give it up to cut the interest rate for maintaining the economic growth, which is far more important to keep the currency value in the long run After witnessing four times increasing the interest rate last year, there was an extended pause as the inflation rate has been consistently low (Bloomberg 2019), this coupled with the trade war, the cut on interest rate would be perfectly feasible to happen The decision of cutting interest rate results in lower foreign investment for the country, which lowers demand for the currency, this will evidently lead to the currency depreciation, slightly decreases the US dollar value 12 3.2.4 Brent Crude Oil prices It is generally accepted that the movement of commodity prices has created difficulties for policymakers and business leaders, including crude oil Based on the recently-established research of De Schryder and Peersman (2016), there is an interesting perspective on the link between exchange rates and the oil demand of oil importing nations Firstly, below is the trend of the World’s natural gas price from 2014 to 2024 (forecasted) illustrating the stability in the prices for crude oil importing nations from now to the near future Figure 10 World brent crude oil price from 2014 to 2024 Source: Adapted from Thomson Reuters Eikon (2018) 13 Figure 12 Oil - imports ranking Source: Adapted from Index Mundi Australia Australia is the world’s top iron ore producer and exporter (Workman, D 2019) that it exported the highest dollar value worth: US$46.7 billion (50.4% of total iron ore exports) of iron ore More interestingly, the oil prices somehow influence the cost of iron ore for the latter often consists of shipping costs; hence, there is a link between the crude oil price and AUD The United Kingdom Likewise, The United Kingdom was 16th for the world’ greatest crude oil importer (Mundi 2018) which means it imports less crude oil compared to The United States, then somehow is less likely to take advantage from the variabilities of this price Clearly, as stated in the report of PwC in 2015, the lower cost of production from the plunge in crude oil prices across a range of energy intensive goods will be passed on to consumers to varying degrees, and so reduce inflation directly Lastly, thanks to the unfluctuating trend in the oil’s price from 2019 to the following years, the currency of this country, as same as USD, would appreciate 14 The United States According to Index Mundi (2018) The United States held the first place of global oil importing rankings 2019 experienced a global drop in the price of crude oil from $71.071/bbl to $61.767 and undoubtedly, The United States’ economy would be affected In general, the drop in crude oil prices effect of firms cater to the U.S consumers more than the average companies To be specific, candy and soda (+7%), beer and liquor (+10%), and tobacco (+16%) well; both tourism (+11%) and restaurants, hotels and motels (+8%) greatly benefited from lower oil prices as consumer demand rose So did retail sales (+14%) Amazon (+38%) and Home Depot (+32%) (Baumeister, C 2016) Obviously, the drop significantly boosts the consumption as well as declining the price of production As a result, from 2019 to 2014, the price of crude oil is forecasted to have negligible changes 3.2.5 Brief market view conclusion From all the aforementioned factors analyzed above, we forecast all of the three currencies USD, AUD and GBP would be going down However, USD has the least decrease in value, while AUD ranks second and GBP value reduces the most 4/ TRADING STRATEGY AND PERFORMANCE ANALYSIS 4.1/ Trading strategy 4.1.1 Primary task Starting at the square position, the primary task is to make profit at the end of the trading session or be square again We accept to trade these five currencies: AUD, USD, GBP, EUR and JPY Firstly, we check the opening bid and ask rate at the beginning of the trade to select a specific standard quote of each currency pair to provide for the corporation and other banks After a few trades, we alter the quotes based on the situation of each currency at that moment (which one has increased and the leftovers that has dropped down) to be more competitive so that we can make a profit 15 The second step is that we refer the bid and ask rates on Thomson Reuter Eikon and check the quotes of other banks in order to assess quotes for our next trading move Specifically, after gathering the quotes, we decide which currency we should keep or sell There are two ways that we are planning to make profit through trading:  We receive calls from corporation and head to a successful deal (we still have to consider the currency before heading to deal) After that, we trade the currency we have made to other bank which has higher bid rate compared to our previous ask rate in order to make a profit  “Buy low, sell high”, we will be a price taker Firstly, we will call every bank and select a suitable bank with good quotes to trade We will buy at the low ask rate of a bank and sell that currency to another bank with a high bid rate in order to make a profit 4.1.2 Secondary task From the market view above, we have forecasted that US dollar will take the dominant position over the other two currencies AUD and GBP in the near future, while GBP will experience the most significant depreciation We will seek to buy USD at the best bid rate from other banks by selling AUD or GBP as much as possible Moreover, we also planned on selling GBP at this time to minimize the loss when the depreciation occurs in the future However, our goal is to accomplish two tasks, we may not trade excessively to the point that we can be at loss, therefore, the maximum budget to trade for USD and AUD depends on the balance between profit and loss made during the session 4.2/ Performance analysis 4.2.1 Primary task At the end of the trading session, we successfully made profit from square position As a price maker, we could control the amount of each currency we earned by adjusting the rate of two-way quotes of each currency pair higher or lower which could change the buyer's decision This strategy worked most of the time and brought 6,555,751.26 AUD which is the final result of our trading 16 On the other hand, we could not make much profit as a price taker We could make one deal only because most of the given two-way quotes could not bring higher return; therefore, we decided to keep the chosen currency This strategy took time to call and make decision but low return, thus, we only used it to trade two currency pairs We prefer keeping than trading because the last thing we want to avoid dropping down a lot in currency pairs More specifically in our trading work, we got a strong reduction in GBP, as a result we nearly got a loss in total profit There was an unexpected case that we could not refuse a trade A corporation asked to exchange GBP to JPY Based on our quick research, JPY was forecasted to be volatile that its value would be lower, we refused to trade by providing a high bid rate However, the corporation still accepted the quote so that the trade was deal This could be seen as our profit loss 4.2.2 Secondary task We could not achieve our secondary trading strategy to the fullest as we encountered problems of having different currencies such as JPY that we did not have a market view on However, we sold the residual JPY for USD, which was mainly for profit making in the primary task but also partly achieve the secondary task of storing USD for future reselling 5/ CONCLUSION By way of conclusion, throughout all of our analysis and research using the data concerning the past behaviors together with other macroeconomics determinants namely Inflation rate, Government intervention & Brent Crude oil prices of AUD/GBP; USD/AUD; GBP/USD, it can be proven that in the very near future, all of the above-mentioned currencies would be undoubtedly dropping down However, USD value will still hold the greatest place compared to the two other, while GBP’s one would diminish the most Last by not least, assuming the market takes its courses as forecasted, our bank will surely gain the profit of 6,555,751.26AUD 6/ REFERENCES LIST 17 Abnamro.com, n.d., “History timeline ABN AMRO”, ABN AMRO, viewed August 2019, Andrew, U & Brian, L 2018, ‘Why Bretix is causing turmoil for the Pound and other markets’, The Conversation, 13 December, viewed August 2019, Baumeister C, Kilian L 2016, “Lower oil prices and the U.S economy: Is this time different?”, Brookings Papers on Economic Activity, viewed August 2019, Bloomberg 2019, ‘‘Game over, we win!’: Donald Trump wants to draw US Federal Reserve into trade war against China’, South China Morning Post, 15 May 2019, viewed Aug 2019, Colin, L 2019, ‘British Pound to US Dollar (GBP/USD) Exchange Rate Hits New Post - 2017 Worst As Bank Of England Cuts UK Growth Outlook’, Exchange Rate, August, viewed August 2019, Cornish, S., 2016 MONETARY TARGETING IN AUSTRALIA Milton Friedman: Contributions to Economics and Public Policy, p.334 Craig 2019, ‘Factors Affecting the GBP to AUD Exchange Rate’, The Australian Expat Investors, 10th July 2018, viewed August 2019, Craig 2019, ‘Factors impacting the Australian Dollar to US Dollar Exchange Rate’,The Australian Expat Investors, 10th July 2018, viewed August 2019, David, M & Andy, B 2019, ‘UPDATE 3-Bank of England cuts growth forecasts as Brexit and global worries mount - Reuters News’, Thomas Reuters Eikon, Aug 2019, viewed Aug 2019 Elaine, H 2019, ‘Comprehensive Pound To Dollar Exchange Rate Review For 2018-BrexitEmbroiled GBP Slides 6% Versus USD’, Exchange Rate, January, viewed August 2019, 18 Finance Monthly 2018, ‘UK Imports And Exports: What Have We Really Got?’, Finance Monthly, 18 Dec 2018, viewed Aug 2019, Holmes, F 2018, “5 World Currencies That Are Closely Tied to Commodities”, U.S Global Investors Frank Talk, September 2018, viewed August 2019, Indexmundi.com 2018, Oil imports - Country Comparison - TOP 50, Index Mundi, viewed on August 2019, Jeff Cox 2019, ‘Fed’s rate cutting helps provide cover for Trump to wage the trade war’, CNBC, Aug 2019, viewed Aug 2019, Jonathan, C 2019, ‘Bretix with a deal would give strelling a boost’ Reuters News, July, viewed August 2019, Jonathan, W 2019, ‘Pound to Australian Dollar forecast: Will GBP/AUD rise or fall ahead?’, Pound Sterling Forecast, 26th July 2019, viewed August 2019, Katelyn, C 2019, ‘Trump slaps additional 10 per cent tariff on $300 BILLION of Chinese goods ’, Daily Mail, Aug 2019, viewed Aug 2019, Kimberly, A 2019, ‘Dollar Strength and Why It's So Strong Right Now’, The Balance, 14 March 2019, viewed Aug 2019, Lucy, R, Mike, H & Dominic, B 2019, ‘No-deal Brexit: 10 ways it could affect you’, BBC, August 2019, viewed Aug 2019, 19 Luke McGee 2019, ‘Boris Johnson could be the last prime minister of the United Kingdom’, CNN, Aug 2019, viewed Aug 2019, Matthew Ward 2019, ‘Statistics on UK-EU trade’, Parliament UK, 24 Jul 2019, viewed Aug 2019, Michael, J 2017, ‘Why has the Bank of England increased interest rate? It ran out of option’, The Guardian, November, viewed August 2019, Paul, K 2019, ‘Australia's economic growth slowest in 10 years amid calls for swift action’,The Guardian, Jun 2019, viewed Aug 2019, PwC 2015, “3-The impact of lower oil prices in the UK economy”, PwC, viewed August 2019, < https://www.pwc.co.uk/assets/pdf/ukeo-oil-prices-march-2015.pdf> Reserve Bank of Australia 2019, ‘Statement By Philip Lowe, Governor: Monetary Policy Decision | Media Releases’, Jun 2019, viewed Aug 2019, Sun, W., & An, L 2011, “Dynamics of floating exchange rate: how important are capital flows relative to macroeconomic fundamental?”, Journal of Economics and Finance, 35(4), 456-472, viewed August 2019 Swati, P 2019, ‘Australia's central bank ready to cut rates again 'if needed'’, Reuters, 16 Jul 2019, viewed Aug 2019, Workman, D 2019, Iron Ore Exports by Country, World's Top Exports, viewed August 2019, 20 ... specific, candy and soda (+7%), beer and liquor (+10%), and tobacco (+16%) well; both tourism (+11%) and restaurants, hotels and motels (+8%) greatly benefited from lower oil prices as consumer demand... position, it is vital to understand the financial market by evaluating the movements in exchange rates and market? ??s conditions The first part of the report is Market View which shows the past... Bank’s report is to figure out the effective and profitable strategy in the short and long term of those currency pair: AUD/GBP, GBP/USD and USD/AUD This report briefly analyses the past and current