Bafi3182 financial markets group 9 team 4 bank 1 _ FX market analysis and trading strategies group report (Week 9) (40%)

BAFI 3182
Financial Markets

FX MARKET ANALYSIS &
TRADING STRATEGIES
REPORT

Lecturer: Ho Dac Viet Huy
Group: 9
Team: 4 – Bank
Word count: 2640 words

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Table of content

I. Executive summary............................................................................................3
II. Introduction........................................................................................................3
III. Discussions about the market view..............................................................4

1. Past FX market behavior.........................................................................................4
1.1. GBP/JPY........................................................................................................4
1.2. GBP/EUR..............................................................................................................5

2. A market view forecast.............................................................................................6
2.1. GBP/JPY........................................................................................................6
a. Inflation....................................................................................................6
b. Interest rate.............................................................................................7
c. GDP growth rate.....................................................................................8
d. Commodity price.....................................................................................8
e. Government intervention.......................................................................9

2.2. GBP/EUR.......................................................................................................9
a. Inflation....................................................................................................9
b. Interest rate.............................................................................................9
c. GDP growth rate...................................................................................10
d. Commodity price...................................................................................10
e. Government intervention.....................................................................11

IV. Trading strategy and performance analysis.............................................11

1. Trading strategy......................................................................................................11

2. Performance analysis................................................................................12
V. Conclusion.........................................................................................................14
VI. Reference......................................................................................................15
VII. Appendix......................................................................................................20

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List of abbreviations

BoE: Bank of England
ECB: European Central Bank
Euro Area: EA
BoJ: Bank of Japan

I. Executive summary

The report is written by Bank 4 with the purpose of discussing GBP/JPY and GBP/EUR from their
past performances by historical events and forecasting the direction it is heading. Inflation, GDP
growth, interest rates, commodity prices, and government intervention will be used to forecast the

behaviors of GBP/JPY and GBP/EUR in the near future. Then, we will present our trading strategies
and analysis our trading performance. Believing that the Pound will strengthen against the Yen and
the Euro so our bank’s goal is to keep as much GBP as feasible. Finally, we gained A$15,391.72,
square one currency (USD), and long £44,447,005 GBP. Overall, the trading session provided us with
greater experiences for next sessions.

II. Introduction

As having a reputation for trading GBP, our bank 4 is a price maker in spot FX for AUD,
USD, EUR, GBP and JPY. Our primary objective is making profit and square them at the end
of day. Regarding the secondary goal, we aim to speculate GBP based on following analysis
about past performance within 2 years and future forecast for the next 3-6 months of
GBP/JPY and GBP/EUR.
This report commenced with research about past behavior and future forecast of GBP/JPY
and GBP/EUR, followed by trading strategies and performance evaluation.

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III. Discussions about the market view

1. Past FX market behavior
1.1. GBP/JPY

Figure 1: GBP/JPY exchange rate from 1/2020 to 4/2022 (Macrotrends 2022)

From figure 1, although GBP/JPY collapsed in Q1-2020, the overall and current upward
trend highlights a strong appreciation of GBP against JPY.

The GBP/JPY plunged by 10% in March and reached the bottom at 129.2754 on 18th March-
2020 due to the first hit of Covid-19. GBP began to decline when the BoE made an

emergency interest rate cut to 0.25% to bolster the economy (Inman 2020). Furthermore, this
was a reflection of UK economy's unique susceptibility to the worldwide economic
disruptions caused by the current pandemic (Ostroff 2020).

In early 2021, GBP/JPY soared as UK economy grew by 7% thanks to vaccine deployment
and Brexit trade agreements. BoE raised its bond-buying program by $263 billion in
November, suggesting an economic improvement (Nagarajan 2020). In Q2/2021, UK
witnessed a greater GDP growth rate than Japan (4.8%>0.3%) (OECD 2021) and higher
interest rate (0.25%>0.1%) (Trading economics & BoE 2021). Altogether, GBP appreciated
against AUD.

In 2022, the Pound continued to dig into resistance against Yen. GBP rallied to its peak at
167.3549 against JPY. The Yen has been dropping recently, as the aftermath of the Russia-
Ukraine crisis has wreaked havoc on currency markets, and it has lost about 6% this year,

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making it the worst-performing G10 currency (Hongxu 2022). Additionally, the depreciation
of JPY against GBY is because the BoJ’s continue to maintain the extremely loose monetary
policy while BoE is intensively tightening its monetary policy stance (McCarthy 2022 & BoE
2022).

1.2. GBP/EUR

Figure 2: GBP/EUR exchange rate from 1/2020 to 4/2022 (ECB 2022)
After peaking at 1.205 in Feb-2020, GBP/EUR reduced to the bottom in March (1.0754).
Since 2021, it has gradually increased with the peak at 1.2138 in Mar-2022 indicating the
overall appreciation of GBP against EUR.
In 2020, GBP/EUR was below 1.16 because Brexit caused uncertain policy expectations in
UK (Coyle 2021). Interest rate declined remarkably to 0.1% (BoE 2022) instigating loss in

investment. So investment demand decreased and demand of sterling dropped. Additionally,
the higher inflation rate 0.88%>0.25% (OECD 2022) and lower GDP growth -9.3%<-6.4%
(IMF 2022) of UK than Eurozone caused the UK's unstable economic growth. Consequently,
GBP depreciated against EUR during 2020.
Since Q1-2021, GBP/EUR rocketed since the rebounce of UK’s GDP from 91.7% to 96.7%
(OECD 2022) owing to Covid-19 vaccination and Brexit trade agreement (Nagarajan 2020).

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In the second half, GBP/EUR showed a positive trend because of EUR’s worse performance
caused by increasing natural gas price (Watson 2021). It resulted from the supply shortage
from Russia and the increasing demand due to low temperature in Eurozone (IEA 2021;
Meredith 2021). Besides, 90% of gas consumption is imported indicating EA heavily relies
on natural gas imports (Gunnella 2022). Thus, the notable increase in gas price lowered
households’ purchasing power, negatively affected consumption and worsened the
Eurozone’s economy (Gunnella 2022). Hence, it weakened EUR. In 2021, UK had a greater
GDP growth rate (6.9%>5.2%) and interest rate (0.1%>-0.5%) than EA (OECD 2022).
Shortly, GBP has appreciated against EUR.

2. A market view forecast
2.1. GBP/JPY
a. Inflation

Figure 3: UK vs Japan inflation rate forecast (%) from January 2022 to 2023 (IMF 2022)
Rising raw material costs, the reversal of the hospitality VAT cut, global supply bottlenecks,
skyrocketing energy and tradable goods prices caused by Omicron and Russia-Ukraine have
impacted remarkably in inflation of both UK and Japan. By Q2-2022, UK’s inflation rate
peaked at 8% which is expected to be nearly 7 times higher than Japan’s (1.2%), exposing
much more expensive prices in UK rather than Japan (BoE 2022; Fujioka & Ito 2022).
Consequently, there will be a decline in the demand for UK exports due to its skyrocketing

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commodity prices globally which lessens the demand for using Pound regarding trading
partners. Furthermore, soaring domestic prices surged UK consumers’ overseas-imported
commodities demand because tradable goods are cheaper than local markets’, which in turn
bolster imports and raise the supply of the GBP, resulting in GBP demand tightness. Thus,
GBP is anticipated to depreciate against JPY in next 3-6 months.

b. Interest rate

Figure 4: UK vs Japan interest rate forecast (%) Jan-2022 - 2023 (BoE 2022, BoJ 2022)
Since Mar-2022, BoE decided to push-up its benchmark-funds rate and maintain it at 0.75%
to reserve the economic instability caused by the ongoing inflation (BoE 2022), meanwhile
the BoJ remained its monetary policy parameters unchanged with cash rate at -0.1%, until the
end of 2023 (Vogado 2022). The higher interest rate would facilitate UK’s capital inflows
and discourage outflows due to UK’s higher returns for investors rather than Japan. The
British residents likely invest larger proportions of their fund to purchase domestic financial
assets instead of foreign assets to gain more. Hence, this escalates the demand and diminishes
the supply of GBP, which results in an appreciation of the GBP against the JPY.

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c. GDP growth rate

Figure 5: UK vs Japan real GDP growth rate (%) from 2021 to 2024 (Statista 2022)
From 2022, both UK and Japan are expected to grow slowly as impacted by downside risks
stemming from Russia-Ukraine conflict. U.K growth is expected at 3.6%, down from 4.4%
(January) and slows to 1.1% in 2023, while Japan’s rate is projected at 2.4% in Q2 and 3.2%
for overall 2022 (KPMG 2022, IMF 2022). The steep downgrade of UK growth likely

reduces investors’ confidence. Private investment is debilitated by uncertainty as lingering
after-effects of breakdown in Brexit negotiations. Consumer spending shrinked due to
squeeze on incomes, rising energy and commodity costs, and tax burden (KPMG 2022). UK
is also a net importer from Feb-2022 while Japan escalates their export 14.7% YoY in Mar-
2022 amid continued policy stimulus, the high vaccination rate, and easing global supply
constraints inducing Japan be worthier to invest (TradingEconomics n.d), which increased
the demand for JPY over GBP, simultaneously, depreciated GBP against JPY in upcoming 3-
6 months.

d. Commodity price
The UK was the largest exporter of platinum worldwide (Garside 2022). Due to the
coronavirus and Russia-Ukraine invasion, the global platinum supply chain was disrupted

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that led to a steady-rise in platinum prices round 1,021 USD per troy-ounce because of high
platinum demand in petroleum refineries, chemical industries, and catalysts production
(Statista 2022), thereby strengthen UK’s exports and bolstering the value-of-Pound further.
Furthermore, Japan is the fifth-largest oil consumer and fourth-largest crude oil importer in
the world, hence, it was impacted significantly by global energy costs (Leussink 2022).
Skyrocketing energy prices since Feb-2022 contributed to booming Japan’s energy imported
prices, which tightened the Yen’s value. Hence, the GBP will appreciate against the JPY.

e. Government intervention
With the purpose of eliminating inflation and achieving a 2% inflation target sustainably at
all coming times, BoE decided to modestly tighten monetary policy over the course of 2022
and 2023 (BoE 2022). They decided to maintain an unchanged bank rate of 0.75% to leash
inflationary pressure and expect further increases if possible (BoE 2022). Besides, UK
increased Money-Supply (M2) to £2993506.00m (~JP¥486474.66bn) at end of 2/2022, while
Japan pumped 1183707.90B JPY in March (TradingEconomics n.d.). This indicates that the

money supply of Japan is larger than UK's, causing JPY depreciation. Hence, GBP
appreciated against JPY in further times.

Based on forecasts of above macroeconomics factors, GBP is expected to appreciate against
JPY in the next 3-6 months.

2.2. GBP/EUR
a. Inflation

Due to the remarkable fuel and commodity prices rising caused by the Russia-Ukraine war
(Sandercock 2022, Harari et al. 2022), both U.K and Eurozone suffered serious impacts from
inflation booming. U.K’s inflation is anticipated to peak at 8% in the Q2-2022 before
declining gradually (Glass 2022), meanwhile, Eurozone inflation reached an all-time high of
7.5% (Liboreiro 2022). The inflation is predicted at the rate of 7.3%, 6.9% and 5.8% for the
Q2, Q3 and Q4 respectively (Nair 2022). The inflation rate in UK exceeds that of the
Eurozone, making UK products and services more costly. This might result in a decrease in
UK exports but an increase in Eurozone imports. Hence, GBP is projected to depreciate
against EUR during the next 3-6 months.

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b. Interest rate
In response to soaring inflation, BoE hiked interest rates back to the pre-pandemic level of
0.75%, with projections that further increases can be predicted throughout 2022 (The Times
2022). Whilst, despite historic inflationary pressures, ECB has maintained interest rates
steady since they anticipate that inflation will continue to remain elevated for longer than
originally anticipated, but will begin to drop this year. The central bank's benchmark
refinancing rate will continue at 0% for the remainder of 2022, while the rate on its deposit
facility will remain at -0.5% (Amaro 2022). With an increased interest rate for the upcoming
3-6 months, UK tends to attract more foreign investors; also, British investors are expected to

invest domestically, increasing demand for and the value of GBP compared to EUR.

c. GDP growth rate
Although UK has few direct economic links to Russia, it is exposed to global energy prices
(Glass 2022). Due to rising inflation, increasing tax and global shocks, BCC reduces its
forecast for UK’s GDP growth in 2022 to 3.6%, which stagnates at 0.2% in Q2 and 0.1% in
Q3, compared to a 0.7% slow in Q1 of this year (BCC 2022). The economy is projected to
recover since the slow rate is beginning to diminish quarter-on-quarter. Meanwhile, EA has
been comprehensively impacted by its reliance on Russia for supply. After Ukraine crisis
weighed on the economy, particularly Germany and Italy, IMF cut the eurozone's growth
projections for 2022 to 2.8% (TRTWorld 2022). These two of Europe's largest economies are
expected to experience negative growth in mid-2022 (IMF 2022), implying that the
Eurozone's growth would be inadequate. Therefore, for the next 3-6 months, UK's economy
is more compelling to invest than EA, appreciating GBP against EUR.

d. Commodity price
As previously stated, UK has benefited from platinum exports due to increased demand
induced by a scarcity of supply. Platinum is used to convert exhaust from automobile engines
into less hazardous waste products (RSC n.d.). Nevertheless, the war in Ukraine-Russia has
disrupted the flow of platinum which will cause the price explosion, severe supply shortage
in the months to come constitutes a strategic threat to EA, since EU is well-known for its
extensive vehicle manufacturing industry, implying imported platinum (Gehrke 2022).
Furthermore, EU is largely dependent on Russia in terms of oil, thus, finding a substitution
supplier is the EU's priority lately, however, it would take time for that adjustment, indicating

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for the next 3-6 months, EU is not an ideal investment (CBS News 2022). Thus, the price rise
in exporting platinum gives GBP more appreciation than EUR.

e. Government intervention
To alleviate the detrimental effect of prices caused by the ongoing war in Ukraine, UK
government set out a package of support measures totalling £11 billion to assist people with
rising energy costs, as well as a £6 billion increase in the National Insurance contribution
threshold this year (KPMG 2022). However, this is just temporary countermeasures until UK
finds other suppliers. Given this context, ECB takes a wait-and-see approach. ECB council
members argue that the Eurozone's problems are driven by external supply shocks, not by any
element that the ECB can control (CNBC 2022). Therefore, the currencies of both economies'
appreciation is ambiguous.

In conclusion, GBP is predicted to appreciate against EUR in the next 3-6 months due to
increased interest rates and GDP growth rate and the benefits of platinum exports.

IV. Trading strategy and performance analysis

1. Trading strategy
For the primary goal, profits are maximised by the difference between buying and selling
foreign currency while squaring all currency positions. We plan to make a wider bid-ask
spread than the standard quote that cannot attract price-takers but achieving higher yield. So,
raising the ask rate/lowering the bid rate by 3-5 pips is moderate. Each team has two-person,
one will take the real quote from Investing.com and record transactions while other will
modify quotes and communicate. Moreover, in previous practice sessions, we easily choose
the final rate wrong. So we create an automatic function to ensure its accuracy. We just need
to provide if we are maker (M) or taker (T), if we sell (S) or buy (B) and the bid and ask,
Excel will give us the right final rate.

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Figure 6: Automatic function to calculate Final rate
As analysed, we suppose JPY and EUR will depreciate in next 3-6 months. For speculative

purposes, our strategy is to long for more GBP which can rise in the future. In the end,
currencies will be converted to AUD to identify total profit. We predicted GBP can
appreciate against AUD since the growth of UK in 2022 is expected to be higher (6.8%) than
Australia (3.5%) (Smith 2022) and the risks to UK from Brexit are subsiding. Besides, a low-
interest rate (0.1%) is the main reason for AUD’s bearishness while 0.75% for UK (Rba
2022). By accumulating GBP, we can obtain profit. As GBP is our main speculation, we will
spend 30-40 minutes to square four left currencies. To sustain squared positions, we will
increase the quote spread by around 20 pips.

2. Performance analysis

Figure 7: Position summary at the end of trading session
We succeeded in raising profit with A$15,391.72 and square USD. This return was gained by
going long GBP which is projected to appreciate in the next 3-6 months.

Figure 8: Transactions conducted to speculate GBP by JPY, AUD and USD

To accumulate GBP, we attempted to contact other banks to sell JPY (1st, 5th transaction) and
AUD (4th, 6th, 10th, 13th transaction) and USD (19th and 20th transaction). Furthermore, AUD
was exchanged most frequently creating an excessive amount of AUD selling
A$107,651,656, which accounted for the largest proportion of AUD selling as we had the
mindset of AUD will fall later but it did not on that day. Therefore, our total profit was low.

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Figure 9: Transaction relating to buying and selling JPY
As mentioned, we bought GBP by JPY at first. After selling JP¥3,349,600,000, we
immediately bought JPY for square position due to its low liquidity. If we did not buy it back
now, it would be difficult to buy it later, generating a huge negative JPY net.
Considering 12th transaction, we wrongly inserted the quote 0.778-83 for JPY/USD, causing

an USD selling amount (US$272,093,680) was 100 times more than the exact number. Thus,
USD’s net displayed a big loss and total profit was around -A$300m based on opening and
closing rate in previous practice session. To lessen the loss, we bought USD by GBP (14th,
16th transaction) because only GBP and EUR had positive net and GBP/USD was higher than
EUR/USD so selling GBP can buy more USD. However, it was insufficient to offset the loss,
so we stopped squaring JPY and purchased additional JP¥2bn by USD to partially
compensate for the huge loss. Then, after double-checking, we discovered the error and
corrected the quote JPY/USD=0.0078-83, leading to USD net $3,538,164. In comparison,
USD was the most suitable currency to square-off. Therefore, the 20th transaction was
launched to sell that amount of USD by GBP to square USD and speculate GBP for future
gains.

Figure 10: 14th to 16th transaction
Regarding the 20th transaction, we received a GBP/USD quote and instead of typing "B” in
the “BUY/SELL” column, we filled "S" making an inaccurate amount for GBP. We expected
this transaction to square USD that is why USD net was accurate, but GBP net was not.
Thus, there was less net GBP than actual (£39,026,408<£44,447,005) causing an incorrect
total profit -A$9,523,893.35 instead of A$15,391.72. This error was caused by the mental

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strain of trading time and the hurry of each transaction. If we were more careful, the outcome
would be better.

Figure 11: 20th transaction with wrong input and amount in commodity currency
Figure 12: 20th transaction with right input and amount in commodity currency

Figure 13: Position summary with wrong 20th transaction

Figure 14: Position summary with right 20th transaction

V. Conclusion

Briefly, GBP will appreciate against JPY and EUR in the next 3-6 months by investigating
past and future foreign exchange markets. Hence, we have effectively implemented a trading
strategy to speculate GBP. We also successfully square-off USD to eliminate exposure of
market risks, but not for all. However, in the trading session, we made few mistakes due to
negligence in data entry and quote offering. Fortunately, we discovered and fixed them for
the accurate final profits A$15,391.72. The GBP’s long position sustains our bank for profits
due to its noticeable appreciation in future periods.

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17

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highs-whilst-gbp-usd-nears-2021-lows/>.

Weisbach, A 2022, ‘European Central Bank to stay flexible as Russia-Ukraine was triggers

‘stagflation’ fears’, viewed 26 April 2022, < />
flexible-as-russia-ukraine-war-triggers-stagflation-fears.html>.

VII. Appendix

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Appendix 1: Inflation rate of UK and Euro Area 2020-2022 (OECD 2022)

Appendix 2: GDP growth rate of UK and Euro Area 1980-2021 (IMF 2022)
Appendix 3: GDP growth rate of UK and Euro Area from Q1 to Q2 2021 (OECD 2022)

Appendix 4: Interest rate of UK and Euro Area 2020-2022 (OECD 2022)
20