Annotated-Financial-markets- Assignment 202.docx PDF

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FINANCIAL MARKETSFX market analysis and Trading strategies report Group Assignment 2. Lecturer: Huy Pham Team membersName Student IDNguyen Ngoc Thanh An sNguyen Dang Thuy Duong sBui Hai Phuc SPham Tan Phat STABLE OF CONTENTS1/ EXECUTIVE SUMMARY OR SYNOPSIS...............................................

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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 ..................................................................................................................................2 3/ MARKET VIEW ....................................................................................................................................3 3.1/ FX market past behavior (performance).......................................................................................3 3.1.1 AUD/GBP....................................................................................................................................3 3.1.2 USD/AUD....................................................................................................................................5 3.1.3 GBP/USD ....................................................................................................................................6 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

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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 2 years (2017-2019) and the forecast of changes of exchange interest rates in the next 3 to 6 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.

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3/ MARKET VIEW 3.1/ FX market past behavior (performance) 3.1.1 AUD/GBP

Figure 1. 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 3 months; however, could not change much in the rate when it continued to slip down to 0.544 (lowest rate in the last 2 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 3

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, min is 1.05 which leads to the average is 1.17. 3.1.2 USD/AUD

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Figure 3. 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 2 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.

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Figure 4. 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

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Figure 5. 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.

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Figure 6. 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

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Figure 7. 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

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Figure 8. 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 9. United State inflation rate 2014-2020 (sourced from Thomson Reuters Eikon)

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The inflation rate experienced an upward trend in the past 4 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.

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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)

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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 5 years, the currency of this country, as same as USD, would appreciate.

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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%) do 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 inc...