G04 T05 FX Market View and Dealing Session Group Report PDF

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Financial MarketFX market view and dealing sessiongroup reportSubject Code BAFI 3182Location & Campus RMIT Vietnam, HCMCGroup Number 4Student nameNguyen Thuy Duong-s Dinh Huy Long-s Nguyen Hong Minh-s Truong Tuan Sang-sLecturer James MurphyTable of Contents Executive summary........................

Description

Financial Market FX market view and dealing session group report

Subject Code Location & Campus Group Number

BAFI 3182 RMIT Vietnam, HCMC 4 Nguyen Thuy Duong-s3699363 Dinh Huy Long-s3713527

Student name

Nguyen Hong Minh-s3698197 Truong Tuan Sang-s3670508

Lecturer

James Murphy

Table of Contents 1.

Executive summary......................................................................................................... 2

2.

Introduction ................................................................................................................... 3 2.3

Market view ......................................................................................................... 3

2.3.1

FX market past behaviour ................................................................................ 3

2.3.2

Analysis and market view ................................................................................. 6

2.4.1

Trading strategy .................................................................................................. 9

2.4.2

Performance Analysis......................................................................................... 11

3.

Conclusion.................................................................................................................... 14

4.

References .................................................................................................................... 15

5.

Appendices ................................................................................................................... 18

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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 2 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 3 to 6 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.

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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 1. AUD/USD Exchange Rate (2017-2019). Source: Adapted from Thomson Eikon Reuters (2019). 3

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 2 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 1.

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Pair: GBP/AUD

Figure 4. GBP/AUD Exchange Rate (2016-2018). Source: Adapted from Thomas Eikon Reuters (2019)

Figure 4 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. 5

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 5. 6 months forecasted AUD/USD exchange rate Source: Thomson Eikon Reuters (2019)

It is forecasted that AUD will depreciate against the USD in the next 6 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 6

in the next 6 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. 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 7

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 2 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 8

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 7. Trading Transaction Log

Figure 8. Final Positioning

Figure 9. Opening and closing rate

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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 do this, we contact available banks and compare their bid rates. We have successfully made 3 transactions with bank 1 with a total of US$25m from AUD. At the same time, we decided to exchange JPY to GBP with bank 3 as the rate was affordable as we predicted earlier. However, bank 1 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 1 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 3 to successfully deal a total of 15m GBP. But later we were able to make 1 deal with bank 7 for 20m GBP with a much lower rate. To achieve the target of 15m GBP, we planned to call for bank 6. We spitted 15m GBP into 7 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 6 months. Hence, if our forecast is correct for the next 6 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

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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 6 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 1 (trade 1, 11

2 & 4) at a higher rate than the following five transactions which we bought the remaining USD 50 million with bank 7 (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 6 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 6 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 do the calculation and the other members to do 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 scenario...