(TIỂU LUẬN) FX market view and dealing session group report first of all, an analysis of the performance of the two currency pairs AUDUSD and GBPUSD

Financial Market FX market view and dealing session group report Subject Code Location & Campus Group Number BAFI 3182 RMIT Vietnam, HCMC Nguyen Thuy Duong-s3699363 Dinh Huy Long-s3713527 Student name Nguyen Hong Minh-s3698197 Truong Tuan Sang-s3670508 Lecturer James Murphy Table of Contents Executive summary 2 Introduction 2.3 Market view 2.3.1 FX market past behaviour 2.3.2 Analysis and market view 2.4.1 Trading strategy 2.4.2 Performance Analysis 11 Conclusion 14 References 15 Appendices 18 1 Executive summary This report is made from our trading group acting as a major treasury and as the representative for Fosters Corporation with the main objective is to analyze and forecast the performance of two currency pairs: AUD/USD and GBP/USD, as well as appropriate strategies for valuable trading First of all, an analysis of the performance of the two currency pairs: AUD/USD and GBP/USD based on indices over the past years and how the economic factors of associated nations affected the trends The intense of USChina has reached the climax leading to a significant effect of Australian Dollars The second part is an estimation of the macroeconomic performance of the two currency pairs selected above for the next to months as an attempt to predict their future exchange rates Finally, a discussion of our trading strategies as well as our performance Our team has two strategies which are to check if other competitive traders are interested in purchasing our current currencies, and then come up with a strategic plan to purchase other valuable currencies by looking at the attractive exchange rates for future appreciation Overall, our trading session has achieved a target of $75m USD 2 Introduction The corporation we were assigned was a leading enterprise in the food, beverage and leisure industry To sustain the operation and growth, we need to raise GBP 60m to take over a bottling company in London and an extra of USD$75m to pay off our subsidiaries’ taxes Our current capital amount is AUD$680m from 30 days of bank bill sales, plus an additional JPY 23,500m from Samurai bond sales Our key goal is to rely on the fluctuation of foreign currency exchange rates to make it profitable for the company Besides, we need to forecast the behaviour of currency pairs In order to fulfil these two tasks, we need to consider and analyse the market before starting the trading session This report has two main parts consisting of an analysis of the market views, which covers the past performance of two pairs of currencies, followed by their future trends; and from currency trading sessions, our group develops trading strategies based on our analysis of the market 2.3 Market view 2.3.1 FX market past behaviour Pair: AUD/USD Figure AUD/USD Exchange Rate (2017-2019) Source: Adapted from Thomson Eikon Reuters (2019) AUD/USD exchange rate has fluctuated significantly over the past two years Overall, there is a decreasing trend from 2017 to 2019 beginning at USD$0.75 in 2017, reaches the peak rate of USD$0.8092 on the 29th of January 2018 and decreased to the lowest at USD$0.6702 on the 1st of October 2019 From 2018 to late 2019, there is a decreasing trend in the price of goods due to the stability of the RBA cash rate of Australia at 1.5% (Appendix 3), however, the US catches up with the rapidly increasing rate increases rapidly (Appendix 2) This means constant return rate for investors for Australia meanwhile the US pulls the foreign investments away from Australia because of increasing interest rates as higher promising rate of returns on investment Furthermore, as shown in Appendix and Appendix 3, Australia’s cash rate drops lower than the US’s cash rate as a result of the intense of US-China trade war (Cox 2019) The US imposed taxes on export goods from China and other countries that have relationships with China such as Australia Hence, it influences Australia’s trade because of the increase in trade barriers, trading costs and disruption of regional product networks (Zammit 2019) For these reasons, the AUD demand decreases relative to the increase in demand of USD As a result, the value of AUD decreases relative to the USD, therefore AUD is depreciated against USD as shown in Figure Pair: GBP/AUD Figure GBP/AUD Exchange Rate (2016-2018) Source: Adapted from Thomas Eikon Reuters (2019) Figure demonstrates the frequent volatility of the GBP/AUD exchange rate over the past two years GBP/AUD rate falls to the lowest of $1.7442 AUD in November 2018 and reaches to the highest of AUD$1.9254 by the end of 2019 In general, despite the fluctuation during 2018, the overall trend is at a low exchange rate However, by the end of July 2019, the trend of the exchange rate significantly increases The United Kingdom has an inflation rate of 0.6% higher than in Australia in 2017 and 0.4% higher in 2018 (Appendix 6) This means the GBP is depreciated in 2018 since the Brexit crisis occurred in 2016 This leads to the lowest of AUD$1.74 in November 2018 and an increase in exchange of GBP to other currencies because the GBP value is dropped (Office for National Statistics 2018) Moreover, the UK’s net export experiences a negative figure while Australia shows a more positive net export figure Negative net export means the amount of UK exports for goods and services is less than the amount it imports to the country, therefore, lower demand for GBP Meanwhile AUD shows the opposite Positive net exports for Australia means Australia exports goods more than its imports, therefore, the demand for Australian dollar increases relative to the UK Hence, GBP is depreciated against AUD from 2018 to mid-2019 However, the trend flips to an increase sign GBP is appreciated against AUD by AU$0.1636, starting from a dramatic fall in July 2019 and reach the highest of AU$1.924 by the end of 2019 due to the change in monetary policy (Skinner 2019) According to Bruce (2019), the UK is an exporting channel for Australia to ship goods to countries in the EU Due to this incident, Australia is at risk of lower UK’s investments in the country and the decrease in export of Australia’s goods to the EU Therefore, less demand for AUD in late 2019 hence GBP is appreciated against the AUD 2.3.2 Analysis and market view Pair: AUD/USD Figure months forecasted AUD/USD exchange rate Source: Thomson Eikon Reuters (2019) It is forecasted that AUD will depreciate against the USD in the next months Amadeo (2019) states that Australia's inflation rate will be 1.9% which is below the Fed’s target rate by 2% The purchasing power is decreased by 1.9% in 2019 compared 2018 and the higher inflation of 1.9% in 2019 while the inflation rate was 1.26% in 2018 (Webster 2019) Moreover, according to Karp (2019), the Reserve Bank of Australia has cut the interest rate to a record low which is 0.75% to help recover the economy at the end of the year Hence, businesses withdraw their investment in Australia that leads to the consumption of Australia will decrease Therefore, the AUD is still depreciating against USD in the next months Meanwhile, the US President promised to bring economic growth by 4% increase Also, the interest rate is anticipated to remain thanks to The Federal Open Market Committee reduce the interest rate for the current fed funds rate which is 2% The manufacture of US is expected to grow faster than the growth of the general economy Above all, the cost of transportation, materials, food for business will reduce in cost which increase the profit margins To sum up, the USD will increase in value in the next year compared to AUD because of good news in the economy Pair: GBP/AUD Figure 6 months forecasted GBP/AUD exchange rate Source: Thomson Eikon Reuters (2019) In the early months of 2020, the GBP/AUD exchange rate tended to increase slightly thanks to the following policies: On October 1, the Reserve Bank of Australia (RBA) for the third time cut the basic interest rate this year in the context of many concerns about the domestic economic situation were not positive The economy has recorded the lowest annual growth in the past decade As of June 2019, the Australian economy grew by 1.4% in just 12 months (Pandey,2019) So, the central bank of Australia has adjusted its prime rate down 0.25% to 0.75% - a record low in the country's history (Mair,2019) The decision is to support the job market, increase income for workers and build consumer confidence, thereby promoting economic growth and of course the value of the domestic currency will increase Government needs to maintain low interest rates in the long term to achieve the targets of reducing unemployment and inflation Australia has one of the world's most expensive living costs, but has recently struggled with stagnant wage growth, unemployment at 5.2%, and reduction in housing prices (The Urban Developer,2019) Consumers will tighten spending and reduce demand in the short term, however, with government stimulus packages will lead to economic growth With the above mentioned trend, the GBP/AUD exchange rate will tend to increase slightly in 2020 but then will increase slowly and tend to decrease due to the instability in the US-China trade war On the other hand, the British economy not falling into recession, because the economy grew by 0.3% compared to quarter 2, after negative growth in quarter compared to with the first quarter(Romei,2019) But this bleak growth is not good news for a government that is preparing for a general election scheduled for the coming months The Brexit crisis, starting with the referendum in the summer of 2016, has led to a decline in investment and productivity in the UK economy, prompting many economic experts to call the Bank of England (BoE) additional measures to support growth must be implemented Prices from the beginning of the year to February rose 1.9%, close to the official inflation target of 2% (BBC,2019) This proves that prices are rising enough to signal that the economy is alive, but not too fast to cause instability For more than 10 years, the base rate of the BoE has been less than 1% the BoE has set that rate to keep inflation in line with the target for about two years They estimate that two years is the time for interest rates to affect prices (mainly through spending and borrowing habits of households and businesses) If the trend of rapid wage increase continues, there will be an official agreement on Brexit, and the economy will not be negatively affected With the current trend when many parts of the global economy are slowing down, and the risk of a negative Brexit is still there, the British economy will probably face many unexpected events which can lead to sudden changes in exchange rates In short, GBP/AUD tends to increase in the near future because the UK government tends to post interest rate and the country's economy is quite stable while Australia is in a passive position so that they have to decrease the value of the local currency to balance the market 2.4.1 Trading strategy Figure Trading Transaction Log Figure Final Positioning Figure Opening and closing rate The primary task of our team is to achieve an exchange of US$75m and £60m GBP for our corporation to settle subsidiary’s taxes and to take over the bottle company in London With the starting asset of AU$680m and 23,500m JPY, we aim to purchase all the currencies we need for the company to be able to finish the plan At the same time, we also try to minimise the loss because of the difference in the exchange rates between currencies Firstly, as a price taker, we need to look for the bank that offers the most attractive rate for AUD/USD currency To this, we contact available banks and compare their bid rates We have successfully made transactions with bank with a total of US$25m from AUD At the same time, we decided to exchange JPY to GBP with bank as the rate was affordable as we predicted earlier However, bank offered an attractive rate of 0.5285 for AUD/JPY, we bought 1.4b JPY added in to our existing JPY We are only able to make transaction for GBP by JPY as planned as we want to create a cash flow Moreover, we received a high quote of 1.89 from bank to successfully deal a total of 15m GBP But later we were able to make deal with bank for 20m GBP with a much lower rate To achieve the target of 15m GBP, we planned to call for bank We spitted 15m GBP into separated deals to negotiate a better rate for each transaction rather than purchase at once The secondary objective is to predict the trend of currencies for our trading more profitable As the market view analyses about the AUD/USD pair, AUD is predicted to depreciate against USD Historical trend shows that AUD/USD rate decreased steadily since January 2018 however AUD would appreciate against the USD in the next months Hence, if our forecast is correct for the next months, it is an advantage for us to try our best to not only to fulfil the target, but also purchase as much USD as possible in the market Moreover, the GDP of the United States has increased sharply since 2016 and the economy of the US also witnessed a good growth in recent years that also explained why USD would 10 appreciate AUD in near future That's why we used US$107,253,275 to bought US$75m Regarding GBP/AUD, we also wanted to buy enough GBP and some more GBP to make profit as we forecasted that GBP will appreciate against AUD within the next months because Australia’s export decreases due to disconnection of the UK channel to the EU Therefore, we used AUD$94.36m to buy 60m GBP However, there is not enough GBP to circulate in the market therefore we only achieve the target of 60m GBP Overall, our priority is to use AUD effectively to purchase other currencies instead of using JPY to minimise the risk The exchange rate of JPY to other currencies is much lower than the exchange rate of AUD to USD and GBP In addition, holding a large amount of AUD can cause loss when our organization exchanges AUD for other currencies Australia is trying to recover the economy in 2020 but the AUD will continue to decrease in value until the economy of Australia completely recovers Based on our prediction, we used AUD to exchange for other currencies in most of our transactions 2.4.2 Performance Analysis Our strategy for primary objective was to rapidly trade our current AUD and JPY for USD and GBP since the demand for our currencies is limited We also planned to attain quotations of AUD/USD from several banks and conducted the trade with the bank with the best rate to minimise our loss However, the actual performance was not as expected The team was frustrated by the time limitation and the busyness of section, therefore, we mixed up our plan We decided to make deals with any banks that agreed to buy AUD for USD Consequently, we bought USD$25m by three transactions with bank (trade 1, 11 & 4) at a higher rate than the following five transactions which we bought the remaining USD 50 million with bank (trade 10-14) It means that although the team successfully acquired US$75m, we failed to buy them at the cheapest price If we patiently looked around at the market and waited for the deal with bank 7, we would increase our profit by approximately AUD$1.85m When it came to buying GBP, our plan was not on track as well, however, we still managed to source enough GBP 60m We planned to trade all our JPY for GBP At first, we found a competitive rate for JPY/GBP and succeeded to exchange JPY 1.416m for 10m GBP However, there was little demand toward JPY, we could not solely use JPY to trade for GBP as planned Moreover, we mistakenly acquired more JPY as we miscalculated that we were in short of JPY to sufficiently purchase the remaining required GPB The team had to use AUD to trade for GBP For all of the AUD to GBP transactions (trade 6-9, 15-21), we successfully traded at better rates than the exchange rate of the day The underlying ground to justify the cheaper exchange rate might be because banks and other corporations believed that GBP would depreciate against AUD due to the uncertainties of Brexit However, the trading outcome was not optimum for those last orders As we expected the fluctuation in the exchange rate between AUD and GBP when trading with bank at the final phase of the session, we conducted several small deals instead of trading a single large deal with a belief that the latter rates might be better Yet it turned out a different situation The rates did fluctuate as we anticipated but in an upward trend If we had bought GBP 15m once at the GBP/AUD rate of 1.8936 as in trade 15, we would save AUD$900 At the end of our primary task, we made a profit of around AUD$6.25m at the end of the session, however, the profit earned would have been better if we had a proper strategy Moreover, we were in the big short position of AUD which would affect the profitability of our secondary task The reason is that we 12 forecasted that AUD would appreciate against the USD in the next six months, thus we would sell AUD for USD in the future for profit For the secondary task, we speculated that AUD will appreciate against the USD as in the market forecast part, therefore we decided to hold on the remaining of $458m AUD with the expectation that the AUD/USD would increase to 0.6828 in the next months which is 0.13% higher than the spot rate For the leftover JPY, we wanted to go short in JPY for AUD to increase our amount of AUD to invest for future AUD/USD trading However, due to the low demand for JPY, banks offered a higher exchange rate for AUD/JPY than we expected and if we traded at those prices, the corporation would incur a loss Therefore, we could not trade our JPY for AUD as intended The team ran out of time before we would come up with a new strategy for JPY As a result, we still had an abundant quantity of JPY in the reservation From this session, we have learnt several lessons to enhance our performances in future sessions Firstly, our task delegation should be improved We assigned one member to the calculation and the other members to the call However, it turned out that the calculation workload was high, so only one member was not sufficient to handle the task As a result, under the time pressure and the busyness of the trade, the team made a wrong calculation which led to a wrong buying decision Secondly, we should build our strategy more thoroughly with more scenarios and back-up plans As not everything went as planned during the session, while we did not have enough time to devise our strategy, in consequence, we were in a small crisis and could not make the best decision 13 Conclusion The report was based on our corporation trading session for foreign currencies to achieve goals Our team has several strategies and the prediction on the movement of currencies rate and tries to achieve the goal with minimum loss However, due to the variability of the FX markets along with the unprofessionalism of the team, the trading happens to be different from our forecast But at the end, our team still manages to fulfil the task 14 References Amadeo, K 2019, ‘US Economic Outlook for 2019 and Beyond’, the balance, viewed December 2019, BBC News 2019, ‘Inflation rises on increases in the cost of food and wine’, BBC News, viewed December 2019, Bruce, M 2019, ‘How a post-Brexit Europe will affect our exports’, The New Daily, September, viewed 12 December 2019, Cox, J 2019, ‘Fed cuts interest rates, but indicates a pause ahead’, CNBC, 30 October, viewed 11 December 2019, Janda, M 2017, ‘Australian dollar pushed higher by US dollar weakness’, ABC News, 20 September, viewed 11 December 2019, Karp, P 2019, ‘Reserve Bank cuts interest rates to historic low of 0.75% to boost weak economy’, The Guardian, October, viewed December 2019, 15 Mair, J 2019, ‘Australia central bank seen cutting rates twice, introducing QE in 2020: Westpac’, Reuters, viewed December 2019, Office for National Statistics 2018, ‘Exploring foreign investment: where does the UK invest, and who invests in the UK?’, Office for National Statistics, viewed 11 December 2019, Pandey, S 2019, ‘Australia central bank looks set to cut rates in June as growth sputters’, Reuters, viewed December 2019, Romei, V 2019, ‘UK economy set to avert recession despite August stumble’, Financial Times, viewed December 2019, The World Bank 2019, ‘External balance on goods and services (% of GDP) United Kingdom, Australia’, chart, The World Bank, viewed 11 December 2019, 16 The World Bank 2019, ‘GDP Growth Rate (Annual %) - Australia, United States’, chart, The World Bank, viewed 11 December 2019, The World Bank 2019, ‘Inflation, consumer prices (annual %) - Australia, United Kingdom, chart, The World Bank, viewed 11 December 2019, The World Bank 2019, ‘Inflation, consumer prices (annual %) - Australia, United States’, chart, The World Bank, viewed 11 December 2019, Thomson Eikon Reuters 2019, ‘Australian Dollar/US Dollar FX Spot Rate’, chart, Thomson Eikon Reuters, viewed 11 December 2019, Thomson Eikon Reuters 2019, ‘Bank of England - BOE Bank Rate’, chart, Thomson Eikon Reuters, viewed 11 December 2019, Thomson Eikon Reuters 2019, ‘Reserve Bank of Australia - RBA Cash Rate’, chart, Thomson Eikon Reuters, viewed 11 December 2019, Thomson Eikon Reuters 2019, ‘UK Pound Sterling/Australian Dollar FX Cross Rate’, chart, Thomson Eikon Reuters, viewed 11 December 2019, 17 Webster, I 2019, ‘Inflation in 2019 and Its Effect on Dollar Value’, in123calculator, viewed December 2019, Zammit, K 2019, ‘Economic overview: December quarter 2018’, Reserve Bank of Australia, Department of Agriculture - ABARES, viewed 11 December 2019, Appendices Appendix GDP Annual Growth Rate of Australia and the United States (2016-2018) Source: Adapted from The World Bank (2019) 18 Appendix US Federal Reserve of the United States (2017-2019) Source: Adapted from Thomson Eikon Reuters (2019) Appendix RBA Cash Rates of Australia (2017-2019) Source: Adapted from Thomson Eikon Reuters (2019) Appendix Inflation Rate (Annual %) of Australia and the United States (2015-2018) Source: Adapted from The World Bank (2019) 19 BAFI3182(SGN)/BAFI3230 FINANCIAL MARKETS PEER REVIEW FORM (One sheet per team, to be submitted BY TEAM LEADER on Canvas) In the following table, please put the team member’s names as indicated (leave some cells blank if you only have less people in your team) Give a mark (out of 100) to each of your teammates for his/her participation in this project Each team member is expected to respect his/her teammates’ decision and not to harass him/her on this peer review process Also, every team member needs to sign this form showing the consent towards the agreement on their contribution mark Team members’ names and write as which parts are completed by them from the team assignment (Not writing this part may result in no marks ): Introduction – Nguyen Thuy Duong 2.3.1 Market View Past Behaviours – Nguyen Thuy Duong 2.3.2 Market View Forecast – Dinh Huy Long and Truong Tuan Sang 2.4.1 Trading Strategy – Dinh Huy Long and Nguyen Hong Minh 2.4.2 Performance Analysis - Truong Tuan Sang Conclusion – Nguyen Hong Minh Reference – Nguyen Thuy Duong Appendices – Nguyen Thuy Duong Edit, Format and Submit – Nguyen Thuy Duong Contribution (%) Contribution (%) Contribution (%) Contribution (%) (Nguyen Thuy Duong) (Truong Tuan Sang) (Dinh Huy Long) (Nguyen Hong Minh) 100% (self) 100% 100% 100% Truong Tuan Sang 100% 100% (self) 100% 100% Dinh Huy Long 100% 100% 100% (self) 100% Nguyen Hong Minh 100% 100% 100% 100% (self) Name: Nguyen Thuy Duong Signature 20 ... trading First of all, an analysis of the performance of the two currency pairs: AUD/USD and GBP/USD based on indices over the past years and how the economic factors of associated nations affected the. .. consisting of an analysis of the market views, which covers the past performance of two pairs of currencies, followed by their future trends; and from currency trading sessions, our group develops... trends The intense of USChina has reached the climax leading to a significant effect of Australian Dollars The second part is an estimation of the macroeconomic performance of the two currency pairs