Inside the Currency Market E-Book

Brian Twomey

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 520

Veröffentlichungsjahr: 2011

Beschreibung

A complete resource to trading today's currency market

Currency movements are impacted by a variety of factors, including interest rates, trade balances, inflation levels, monetary and fiscal policies, and the political climate. Traders use both fundamental data and a variety of technical tools to trade within this market. Inside the Currency Market describes both the underlying dynamics that drive this market and the strategies that can help you capture consistent profits in it.

Page by page, this reliable guide skillfully discusses the structure of the market, its roles in the global economy, the forces that drive currency values, trading strategies, and tactics. It also offers a detailed understanding of how global financial flows, derivatives, and other markets such as oil and gold impact currencies. Along the way, author and professor Brian Twomey provides information on gathering and analyzing global financial data so that traders can gain a "big-picture" perspective when attempting to identify trades.

• Explains virtually every element of the market and can function as a desk reference that puts everyday events into context for traders
• Fundamentally driven trades based on interest rate differentials and trade imbalances are discussed, as well as technical trades involving chart patterns, trends, and trading ranges
• Each chapter contains questions and answers to help readers master the material

The currency market continues to generate interest and attract new retail traders due to the many opportunities available within it. This book will show you how to successfully operate within this arena by making the most informed trading decisions possible.

Leseprobe

Contents

Foreword

Preface

Acknowledgments

Chapter 1: Foreign Exchange Reports

Bank of International Settlements

Triennial Survey

Conclusion

Chapter 2: Currency Trading Beyond the Basics

Pips and Lots

Bid/Ask—The Difference Is in the Spread!

Punishing the United States with Margins

Mrs. Wantanabe and the Margin Japan

Margin: Europe, Switzerland, England, Australia, Hong Kong, and Canada

Rollovers

Rollover Rates and LIBOR

Swap Points and Rollover

Currency Fixing

Factor Swap Points

Day-Count Convention

Triple Rollover

Trade Strategy

Swap Points versus Rollovers for World Wide Traders

National Futures Association and Currencies

Orders: Europe, Australia, New Zealand, Hong Kong, Japan, Switzerland, Canada, and England

Brokers: Yesterday and Today

Exchange Rates: The Impact of Keynes and Mundell-Fleming

U.S. Current and Capital Account

Purchasing Power Parity

OECD-Eurostat PPP Program

Conclusion

Chapter 3: Exchange Rates and Trade Weight Indices

Trade-Weight Methodology

IMF Price Indexes and History

Sweden

Canada

Switzerland

Euro

United States

USDX

U.S. Major and Broad Index

CME Dollar

International Monetary Fund: Role and Function in Trade

Exchange Rate Pass Through and the U.S. Dollar

Indicative versus Reference Rates

Factor Exchange Rates

Trade Weight Indices and Spot Trades

Conclusion

Chapter 4: Short-Term Interest Rates and Money Market Instruments

Repurchase Agreements

Repo-Market Definition

Repo Rates and Repo Interest

Types of Repo Transactions and Spot-Currency Trades

U.S. Repo Market

Bilateral Repo Trade

Tri-Party Repo Infrastructure Reform and White Paper by New York Federal Reserve Bank

Treasury Market Practices Group and U.S. Fails Charges

Japanese Repo Market

Spot Currency and Japanese Repo Rates

New Zealand

European Repo Council

Implications of Survey and Spot Currency

Switzerland

Swiss Repo and Spot Currency

Eurex Zurich Clearing

Great Britain

Canada

Europe

Australia

Repo Rates and Spot Currencies

Eurepo Charts

Intercapital

Dollar Repos or Swap Lines

Chiang Mai Initiative Multilateralization

Conclusion

Chapter 5: LIBOR

SONIA and EURONIA Indices

SONIA, LIBOR, and British Pound Sterling/U.S. Dollar

Seasonality and British Pound Sterling/U.S. Dollar

BBA and LIBOR

Seasonal Spot Currencies and LIBOR

Maintenance Periods

EURIBOR

EONIA

Track EURIBOR and EONIA Rates

Euro, EURIBOR, and EONIA

Australia and New Zealand

Australian Dollar/New Zealand Dollar and Bank Bills

Australian Securities Exchange

Seasonality and Australian Dollar/U.S. Dollar, New Zealand Dollar/U.S. Dollar

U.S. Dollar Pairs and LIBOR

TIBOR and EUROYEN

Repatriation and the Yen

EUROYEN

Euronext and EUROYEN

Euro/Japanese Yen as a Risk Indicator

Seasonality and U.S. Dollar/Japanese Yen

Canada

Seasonality and U.S. Dollar/Canadian Dollar

Switzerland

Seasonality and U.S. Dollar/Swiss Franc

Target Rates Defined

Conclusion

Chapter 6: Government Bonds, Yields, Yield Curves, and Currency Prices

Yield Curves

Currency Trading and Yield Curves

Central Banks and Yield Curves

Bonds and Yields

Euro/U.S. Dollar and U.S. Treasury Bond Yields

British Pound/U.S. Dollar and Bond Yields

U.S. Dollar/Swiss Franc, U.S. Dollar/Canadian Dollar, U.S. Dollar/Japanese Yen and Bond Yields

Carry Trades and Bond Yields

U.S. Treasury Yield Curves and 2- and 10-Year Notes

U.S. Dollar/Swiss Franc, U.S. Dollar/Japanese Yen, and U.S. Dollar/Canadian Dollar

Canada Yield Curve and Bond Issuance

Calculate Canada Bonds and Yields

Yield Curve and U.S. Dollar/Canadian Dollar

Australian Dollar/U.S. Dollar and New Zealand Dollar/U.S. Dollar

British Pound Yield Curve

Gilt Issuance

British Pound/U.S. Dollar

Japanese Yield Curves

Japanese Yield Curve and U.S. Dollar/Japanese Yen

U.S. Dollar/Japanese Yen, Bonds, and Yields

Australia Yield Curve

Factor Australia Yield Curve

Australian Dollar/U.S. Dollar and Australia Yield Curves

Track Australian Dollar/U.S. Dollar

New Zealand

Inflation-Indexed Bonds Factored as a Settlement Price per New Zealand Dollar as Principal

New Zealand Dollar/U.S. Dollar and New Zealand Yield Curves

Track New Zealand Dollar/U.S. Dollar

Australian Dollar/New Zealand Dollar and Yield Curves

Euro Yield Curve

Track the Euro Yield Curve

Euro/British Pound and Yield Curve

Swiss Franc Yield Curve

Swiss Yield Curve

U.S. Dollar/Swiss Franc

U.S. Yield Curve

Dollar Pairs and Yield Curves

Reserve Requirements and Bonds

Cross Pairs, Bonds, and Yields

Trade Strategies

Yield Curves and Currency Prices

Dollar Value of Basis Point and Modified Duration

Conclusion

Chapter 7: Swaps and Forwards

EONIA Swap Index

Australia Bank Bills

New Zealand Swap Rate

Trade Swaps against New Zealand Dollar/U.S. Dollar

Japan

Trade Web, LCH Clearnet, and ICAP

United Kingdom and British Pounds

Canada

Swiss Swaps

United States

Outright Forwards

Calculate Forward Points, Yield Curves, and Spot Prices

Conclusion

Chapter 8: Stock and Bond Markets

Fair Value

Bonds

Reserve versus Funding Currency Pairs

Globex and the Currency Bond/Yield Interplay

New Zealand

Trade Strategy

Australia ASX

Trade Strategy

FTSE and British Pound

Trade Strategy

Euro/British Pound

Japanese Yen

U.S. Dollar

British Pound/Canadian Dollar

British Pound/Swiss Franc

British Pound

Japanese Nikkei 225 and TOPIX Indices

Trade Strategy

Deutsche Boerse DAX, STOXX, Bunds, and the Euro

German Bunds

Euro Trade Strategy

Euro/Canadian Dollar

Euro/Swiss Franc

SIX Swiss Exchange

SIX Swiss Exchange Trading Services

Trade Strategy

Toronto Stock Exchange

Trade Strategy

New York Stock Exchange

Transportation Index, New Zealand Dollar/U.S. Dollar and Australian Dollar/U.S. Dollar

U.S. Dollar/Swiss Franc and Dow Jones Utility Average

Interest Rates

Conclusion

Chapter 9: Currency Cycles, Currency Futures, Options, and Volatility

CME Group Equivalents

E-Micro

Options and Volatility

Volatility and Volatility Indicators

Option Premiums

Barrier Options

Volatility and Value-at-Risk Models

Conclusion

Chapter 10: Technical Analysis

Volume and Open Interest

COT Reports

Bollinger Bands

Simple Moving Averages

Ichimoku Kinko Hyo

Baltic Dry Index

IMF and Special Drawing Rights

Pivot Points

Currency Correlations and Trend Lines

Conclusion

Bibliography

About the Author

Index

Since 1996, Bloomberg Press has published books for financial professionals on investing, economics, and policy affecting investors. Titles are written by leading practitioners and authorities, and have been translated into more than 20 languages.

The Bloomberg Financial Series provides both core reference knowledge and actionable information for financial professionals. The books are written by experts familiar with the work flows, challenges, and demands of investment professionals who trade the markets, manage money, and analyze investments in their capacity of growing and protecting wealth, hedging risk, and generating revenue.

For a list of available titles, please visit our web site at www.wiley.com/go/bloombergpress.

Copyright © 2012 by Brian Twomey. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Twomey, Brian, 1961-

Inside the currency market: mechanics, valuation and strategies / Brian Twomey.—1

p. cm.—(Bloomberg financial series)

Includes bibliographical references and index.

ISBN 978-0-470-95275-7 (hardback); ISBN 978-1-118-14933-1 (ebk); ISBN 978-1-118-14934-8 (ebk); ISBN 978-1-118-14935-5 (ebk)

1. Foreign exchange market. 2. Interest rates. I. Title.

HG3851.T88 2011

332.4'5—dc23

2011021444

To the memory of my grandfather, Richard Francis Schmidt, the greatest stock trader I’ve ever known and a man who taught me not only valuable lessons of life but foundations of the markets at a young age.

Foreword

I met Brian Twomey about five years ago when he came to my office here in North Carolina for a day visit. What immediately struck me about Brian was his “fire-in-the-belly” spirit and go-getter attitude. Brian impressed me with his knowledge of the markets as well as his outstanding analytical prowess. We’ve kept in touch over the years and I was honored to be contacted by Brian’s publisher for the purpose of writing this foreword.

For anybody interested in trading or studying the Forex markets, I would consider this book required reading. I was astounded at the level of detail, especially in terms of the nation-by-nation analyses that is provided. Detailed methodologies, trade strategies, a terrific chapter devoted exclusively to the Libor, and an extensive analysis of currency pairs are also discussed.

At the book’s conclusion, Brian explains “My purpose for this book was to address all the various issues involved that comprise a currency pair not only from a strict trading perspective but to bring an understanding from a whole host of perspectives.” I believe that Brian has achieved this objective tenfold. I predict that this book will serve as an important reference resource for all those interested in the inner workings of world currencies.

I hope you enjoy this book as much as I did.

John R. Hill

President

Futures Truth Co.

Preface

This book answers the question what are the components, the constituent factors that comprise the second side of a currency-pair equation and how should those factors be considered in terms of a trade strategy. A currency pair comprises two sides, a two-nation perspective. In order to understand a currency-pair combination, both sides of the pair must be considered from the two-nation perspective.

The two-nation perspective was fully outlined in this text with not only the trader in mind but researchers, market professionals, and present and future students of the markets.

The genesis of the book framework was derived from the many biases I saw over the years from the academic journals, trader publications, or years of prior books. Each book, each article, and each journal publication offered a point, an insight that would help the reader further his or her knowledge. But each publication taught a perspective, an insight that would eventually lead to the overall understanding of the two-nation operational framework. Yet years may pass before the full learned concepts could actually become operational in a trade strategy and understanding of the market due to the proper knowledge never advanced in one publication. Publications had biases, toward the U.S. dollar side of the currency-pair equation, with no consideration of the second part of the pair.

Spot-currency prices move in the markets based on factors of interest rates but interest rates between two nations rather than one side of a currency pair. The question must then be asked: How does the second nation calculate and factor interest, and what market instruments are available to track the various rates that trade every day in the markets in order to track a trade throughout the various markets?

To trade Australian dollar/Japanese yen, one must understand Japanese TIBOR and Euroyen rates in terms of bank bills and Overnight Cash Rates in Australia. To trade U.S. dollar/Canadian dollar, one must know the U.S. Fed funds rates in relation to Canada’s CORRA and OMMFR interest rates. How those specific interest rates trade and direction of their movements can have profound effects on currency-pair prices.

This book sets out to outline the two-sided currency-pair trade from a whole host of perspectives as it relates nation to nation. It addresses currency pairs from the eight major nations because that is where the vast majority of trade occurs.

Chapter One is an outline of the Triennial Survey released every three years by the Bank of International Settlements (BIS). While that is not new to any publication, the historical surveys are addressed and analyzed so readers can understand the historical composition of the market in its proper context as well as the rise of many varied currency pairs and financial instruments associated with the historical rise of the markets.

Beside the Triennial surveys, the BIS offers annual and quarterly reviews of the currency markets and each is addressed in terms of the specifics of the markets, types of topics addressed, and factors for consideration to understand and evaluate the market.

Foreign-exchange committees formed in the late 1970s and mimic the work of the BIS. Each nation has an FX Committee, but that committee is specific to the nation of trade. Each nation’s FX Committee is fully highlighted.

Chapter Two offers foundation and theories of money and interest. It begins with a historical perspective and answers such questions as supply and demand of money from an operational framework, always highlighted nation by nation. Historically, the demand and supply of money begins with the classical theorist, moves into Keynes, Von Hayek, and Milton Friedman. Theories and perspectives of Purchasing Power Parity are explored in fine detail.

Chapter Three explores trade weight indices from a whole host of perspectives: historical, methodological, index composition, and theories of composition from an economic perspective. Each nation is addressed specifically in terms of formulas, calculations, currency composition, and economic framework, and trade strategies are explained in detail.

Chapter Four begins the open-market valuation and knowledge of interest rates and currency-pair prices from the perspective of repurchase agreements. Each nation is addressed specifically due to the many factors nations consider as they approach their open-market operations. Repo rates establish a floor for interest, yet interest rates rise and fall with markets and economic conditions. Each nation is addressed in all its minute detail to fully understand the operational framework of repurchase-agreement markets.

Chapter Five addresses the most important of open-market interest rates, LIBOR. LIBOR is explained, addressed, and highlighted not only from the well-known British Bankers Association perspective but each nation has its own LIBOR. Each nation’s LIBOR is fully explained in terms of factors of interest rates and what moves currency pair prices associated with those LIBOR rates, and historical views are addressed to the best of my ability. Many currency-pair chart examples accompany each nation’s LIBOR so readers can fully understand each nation’s LIBOR and factors of currency-pair movements and prices.

Chapter Six addresses yield curves first from their historical perspective then each nation’s yield curve is explained and calculated with bond examples and historical perspectives offered. The U.S. market is the most important of the four, so currency-pair chart examples accompany yield curve charts. Factors such as how to trade yield curves are also fully highlighted.

Chapter Seven moves further along the interest-rate curve to address swaps in all their various forms from currency swaps, cross-currency basis swaps, and overnight interest-rate swaps. Each nation’s swap market is highlighted specifically due to the varied nuances of every market. The chapter then moves into outright forwards and forward points. Formulas and calculated examples are offered. A forward point calculated example includes a yield curve and spot price calculated to a forward point.

Chapter Eight addresses stock markets as they relate to currency prices and the bond/yield interplay. Each nation’s stock market is discussed in terms of time of trade, formulas of each nation’s stock market, factors for trade consideration, and relationship to bonds and yields in each market.

Chapter Nine addresses currency-pair conversions, volatility and volatility indicators, formulas, and calculated examples as they relate to currency pairs. A full discussion of volatility is offered not only for currency pairs, but currency options are addressed. Futures contracts in terms of standard versus micro contracts are discussed and fully addressed in terms of currency-pair prices and conversions.

Chapter Ten offers technical indicators, ready-made indicators employed to evaluate trade decisions. Simple moving averages, Bollinger Bands, Ichimoku, and pivot points are addressed due to features specific to the markets. Ichimoku is vital to the Japanese and Asian currency markets since it is not only widely employed but its operational framework must be understood in order to trade Asian markets. Bollinger Bands is important to volatility, simple moving averages to means, and pivot points to support and resistance. Simple moving averages go a step further, as a simple moving average is converted into a volatility indicator. Trend lines are discussed in all their finer details and histories offered. Volume and open interest studies, COT reports, correlations, and the Baltic Exchange is offered due to its importance to the commodity currencies such as Australian dollar, New Zealand dollar, and Canadian dollar.

Acknowledgments

Without the dedicated and efficient help of the Wiley and Bloomberg professionals, this book would not have been possible.

I thank Stephen Isaacs of Bloomberg Press for allowing me an opportunity to write this book. Kevin Commins, Executive Editor of Wiley, assisted in every regard. His decency, dedication, and professionalism is appreciated. Meg Freeborn’s dedication to the manuscript deserves my gratitude. A special thank you to Kimberly Bernard who developed the manuscript; she is appreciated more than words would allow. Her efficiency, dedication, expertise, and knowledge in the development process were genius. A thank you to all at Wiley for their work and effort.

I offer my solemn and heartfelt thank yous to many dedicated market professionals who were vitally important in more than one vital detail of this book. My acknowledgments are offered in a nation-by-nation framework.

New Zealand:

Daniel Pringle calculates the NZX indices on a daily basis. His knowledge, his market skills, his access, and attention to my questions were vitally important to bringing the New Zealand information to my text. A sincere thank you is offered as well to others at the NZX. Thank you to the New Zealand Financial Markets Association for help and time.

Switzerland:

Gazmend Maliqi deserves a special gratitude. Gazmend calculates the Swiss SMI, Switzerland’s main stock market index. His dedication, his help, and market depth and knowledge is again appreciated.

Canada:

Lois Sperling of Insideinformation.com, a high-quality business-intelligence service in Vancouver, British Columbia, I owe a debt of gratitude. When I was pressed for time in terms of due dates, Lois jumped into action and we literally spent Christmas Eve working on the Bibliography together.

Europe:

Cedric Quemener manages the steering committees at the EURIBOR-European Banking Federation and not only offered his valuable time but shared his market insights, access to research publications, and granted permission for use of the Eurepo, EONIA, EURIBOR, and EONIA Swap Index charts. His dedication, professionalism, and decency are appreciated more than words would allow me to offer here.

Thank you to the dedicated market professionals at the London Wholesale Market Brokers Association in London for access to charts and SONIA and EURONIA information.

Martin Duffell is Head of Dealing at the U.K. Debt Management Office. Martin’s time, help, attention, and access to publications to understand gilts in all its finest forms is sincerely appreciated.

Thank you to Euribor-rates.eu for access to charts.

Japan:

Naohiko Baba is one of the most prolific scholar/writers on not only Japan and their markets but his work spans many markets over many years. His work is appreciated.

United States:

A special thank you to Peter Wadkins of Thomson Reuters. Not only is Peter a long-time scholar, trader, and historian of the currency markets but his help over the years with all my questions is sincerely appreciated. Basic questions began more than five years ago and graduated as my own knowledge expanded. Peter’s time, effort, and knowledge is most appreciated. I’m not only honored to know Peter but I’ve looked forward on a daily basis to reading his expert market commentary.

Thank you to Joseph Haubrich at the Cleveland Fed for his years of scholarly work and help to me on my examples.

A special thank you to Jaclyn Sales at FXCM whose dedication is always appreciated.

I’m not only honored to know John Hill, but his dedication as a long time market professional of decency and honesty is widely known throughout the industry of professionals. To John, thank you.

Ron Griess at thechartstore.com I offer my many thank yous.

York County Library:

Special thank you to my friend Troy Beckham, whose computer skills and knowledge helped guide me through well over a year while working on the manuscript. Without Troy’s assistance, this book would never have seen the light of day. Kyle Merck as well deserves my gratitude and thank yous for assisting me with my many chart examples. His computer skills are expert and his devotion to my cause gratifying. My friend Page Hendrix, a research librarian, is thanked for her dedication in compiling research for many, many days. Her attention to my research efforts over these many years is appreciated. And thank you to the many dedicated professionals at the library who have a sincere love for books and information.

CHAPTER 1

Foreign Exchange Reports

Foreign exchange (FX) reports are market-intelligence documents that comprise many facets. Bank reports for example address direct and sometimes short-term market variables such as a short- or long-term trade, a possible central bank interest rate change, or economic variable that directly relates to the market.

Institutional reports address bigger-picture issues that comprise market intelligence in terms of overall trading volume, types of instruments traded, and a fundamental or technical aspect that must be addressed in order for the market to function. Yet these reports address overall market fundamentals and functions so traders and market professionals can understand the big picture as it relates to their overall trade plan. Institutional reports are always forward looking and written by market professionals with the ability to understand and analyze big-picture issues. Much information can be derived from professional reports in terms of strategies, risks, and highlighting of possible scenarios with future implications to profit. The key is to understand the various reports and their implications because some reports are nation specific while others address the overall market as it relates from nation to nation.