Please look at attached.
BAFI1002 FINANCIAL MARKETS MARKET VIEW
The foreign exchange market is an ever-so-changing area of the financial markets. In the foreign exchange market, we see extremely rapid movements in exchange rates within a matter of seconds. It is this that makes the FX market a very high risk but very high reward area to trade in.
Traders often prepare trading strategies that can allow them to take advantage of movements in exchange rates. Generally, trading strategies are based on market analysis, which examines past, present and future conditions of the market. These trading strategies are often implemented with the goal to achieve the highest profit, something that we call “speculation”.
In the forthcoming dealing sessions you will take the role of FX traders within your company to either raise capital in particular currencies or to be a price maker. You will also be required to speculate in the short term which is where you must apply your trading strategy.
Market view guidelines
To complete the market view, you are required to analyse one currency pair out of the following currencies: AUD, USD, JPY, EUR and GBP.
You can choose any combination of these currencies, so something like AUD/USD and AUD/JPY is acceptable, and so is AUD/USD and JPY/GBP. You are required to analyse what will happen to these exchange rates in the next 3-6 months. Based on the theory that you have learnt in class in the FX topic (exchange rate determination), you are required to analyse these exchange rates based on the economic indicators of the respective countries. The indicators you learn in this subject include relative interest rates, relative inflation rates, relative growth rates, government intervention and exchange rate expectation. You may also use other factors that may affect the exchange rate (e.g. commodity prices in Australia). It is a good idea to use at least three of the indicators that you have learnt in class if you want your market view to be strong. In your analysis, if you have looked at a particular indicator, you must write why you believe that this indicator will cause a currency to appreciate or depreciate against another.
Once you have completed your analysis, you must state clearly what you believe will happen to the currency pair of your choice. For example, if analysing AUD/USD and you expect the exchange rate to go down, you should state that the AUD would be expected to depreciate against the USD. Keep in mind that currency appreciation and depreciation happens against another currency, so statements like “the AUD will appreciate” and “the AUD/USD will appreciate” do not make sense. Note that only a qualitative forecast is required (i.e. currency X appreciate/depreciate against currency Y), a quantitative forecast goes beyond the scope of this subject.
You are expected to source your information and relevant statistics from reputable sources. DO NOT use generic sources such as Trading Economics and Wikipedia, which might attract penalties. These sources get their information from official sources. Therefore, you should be able to get the data from these official sources. For example, if you are after the cash rate of Australia, you can easily source that from the Reserve Bank of Australia rather than get that information from Trading Economics.
Note that you should keep a list of your references somewhere handy; you will need to write up your market view for your final report.
The format of the market view
The market view will be done individually to be uploaded online on Canvas BY FRIDAY OF WEEK 7.
You will be marked on the following basis:
• Presentation quality
• Strength of arguments
• Number of indicators and references
• Clear and concise points made
• Clear conclusion made on currency pairs
Online via Canvas.
Other things you should keep in mind
Please note that there is not a lot of time between when the topic FX part B lecture is presented and when your market view is due. I suggest you read ahead. You are welcome to ask the teaching staff questions for clarifications.
Diagrams are good. If you want to use a chart of historical exchange rates, go ahead. If you want to use a supply and demand diagram, these are good too, but please construct your own supply and demand diagrams like the ones found online will probably not be to your benefit. In general, diagrams are extremely useful for supporting your answers and greatly encouraged.
Make sure that you are considering historical data of a reasonable timeframe. For example, citing the events of 9/11 as a reason why the USD has depreciated against currency X or the bombing of Hiroshima and Nagasaki and its influence on Japan’s economy is not really valid when you are forecasting within the next few months. In general, short-term forecasts should use short-term history.