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 ..................................................................................................................................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
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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
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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

increased and the leftovers that has dropped down) to be more competitive so that we can make a
profit.

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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.

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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 1 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

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< />18


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Luke McGee 2019, ‘Boris Johnson could be the last prime minister of the United Kingdom’,
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2019, < />Michael, J 2017, ‘Why has the Bank of England increased interest rate? It ran out of option’, The
Guardian, 2 November, viewed 3 August 2019,
< />Paul, K 2019, ‘Australia's economic growth slowest in 10 years amid calls for swift action’,The
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relative to macroeconomic fundamental?”, Journal of Economics and Finance, 35(4), 456-472,
viewed 3 August 2019.
Swati, P 2019, ‘Australia's central bank ready to cut rates again 'if needed'’, Reuters, 16 Jul 2019,
viewed 5 Aug 2019, < />Workman, D 2019, Iron Ore Exports by Country, World's Top Exports, viewed 3 August 2019,
< />
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