MPE707 Assignment Cover Sheetspeculation in the foreign exchange market

Student DetailsLast NameFirst NameStudent ID

MehtaAbhey211817499

Account DetailsUsernameCurrent Password

NANA

Final balance (after all positions have been closed)Number of transactions (spot and forward)

AUD 33287124

Word count (excluding executive summary, footnotes and appendices to the report)Word count2692

Table of Contents

Executive Summary3Introduction :3Day Trading transactions:4Transaction 1 on 28/8/20134Transaction 2 on 28/8/20135Transaction 3 & 4 on 29/8/20136Transaction 5 on 3/9/20137Transaction 6 on 4/9/20137Transaction 6 on 5/9/20138Transactions 7, 8 and 9 on 5/9/20139Transaction 10 on 6/9/20139Employment and economy for transactions 1010Transactions 11,12,13 on 6/9/201311Transactions 14,15, 16 on 6/9/201312Transaction 17,18,19 on 11/09/201312Transaction 20 and 21 on 12/9/201313Transaction 22 and 23 on 13/9/201313Forward Transactions:14Technical Analysis:15Conclusion:15References:16

Assignment topic: Speculation in Foreign exchange market

Executive Summary

This report covers about the main transactions undertaken with easy-forex.com during the time period 28/8/2013 to 13/9/2013. Various financial instruments for forex trading like spot trading (day to day trading), forward trading and limit orders have been extensively. This was done mainly using the website and the ios mobile application throughout this time period but except the weekends as the market closes between Friday New York time at 17:00 until Monday Sydney time 06:00.(Easy-forex 2013)

Initially the transactions undertaken were with a stop-loss of AUD 500 but later on higher variances (stop-loss) AUD10000 were also used. Higher risks even lead to higher losses and higher gains as well. Forex market as usual, was fluctuating to a high extent with lots of rises and pit-falls. USD was on a rising stage in the first week but later in the last week USD was an underperformer compared to the Yen and GBP.

For analyzing the forex trading firstly graphs were used very extensively with different time scales to get an idea of the past and current movements as well. For the past movements, articles were studied from various web resources to access the news, which had led to such movements. Later the news articles on Dailyfx alongside the economic calendar were sorted based on their high priorities and trading was mainly carried for briefings of high, medium importance as per their GMT releases. The first step undertaken was to select the currency pair and then gathering data about its forecasted and actual figures at the right time. The time the news of high importance is released, currencies face the highest movement and hence for short term trading, first half an hour of the news release is speculated. Second step was to analyze the total risk that would be involved per transaction and then used for entry, exit strategy after placing the trade.

Initially when the transactions were carried with lesser risks the free balance was on a positive side of 50200 but when higher risks with higher stop-loss was used, it led to heavy losses for the transaction. The free balance has reduced drastically to 25000 within a day and later the amount was recovered in a slow manner by paying more attention to the news releases deeply and in timely manner. The final free balance as on end date of submission of 16/9/2013 is AUD 33,287.

INTRODUCTION:

Forex market is a major contributor in the economy in todays world. It is the means of buying and selling of currencies in order to make profit. Making profit is very risky as it is very important to firstly choose the currency pair and speculating, whether its going to go up at a given time interval or not. It is not just buying and selling randomly but studying in depth about a particular currency pair by following various trends and news. One of the benefits of this market is that one can trade 24 hours a day weekdays and also has a spot market which comes from on the spot as one can trade immediately.(Forexmarket 2013)

The main factors, which effect the currency movement, are:1- Economic developments due to Growth, Consumption in private sector, inflation and unemployment.2- Monetary fiscal policy due to Interest rate changes, central bank speeches, forecasts and government revenue & expenditure.

Day Trading transactions:

Transaction 1 on 28/8/2013 Ref no. 19457210Buy: USD, Sell: AUD Result: Loss of AUD 500, movement from .8930 to .8970

The home sales date for US was released on this date. There was speculation on the rate to go up for USD but rather there was lot of ups and downs on this day. Though the YOY (year) data was better from expected and from previous year, the MOM (month) data was lesser than expected. Housing data tells about economic turning points and a decline to -1.3% from -0.4% should the consumer confidence was less or the disposable income was low. (Dailyfx 2013)

Fig 1: USD/AUD on 28 aug (XE 2013)

Transaction 2 on 28/8/2013 Ref: 19457369Buy: USD, Sell: EuroResult: Profit of AUD 323, movement from 1.3321 to 1.3292USD was on news to be faring better due to the news of Domestic product price index as the data to be on the positive side for both forecast and previous year. If the numbers for domestic index go up this means the economy is improving and USD would strengthen. Also the Jobless claims for AUG 23, which were released at this time were lesser than previous and from forecasted. This strengthened the Dollar as well. (Dailyfx 2013)

Fig. 2: EUR/USD on 29 aug (XE 2013)

Transaction 3 & 4 on 29/8/2013Ref: 19463690Buy: JPY, Sell: USDResult: Loss of 682, movement from 97.62 to 98.22

Reversal later onBuy USD, Sell JPYRef: 19466510Result: profit of AUD 307, movement from 98.19 to 98.46

The Yen was rising from the news about USs Syria attacks and there was chances of capital to flow to Japan but this news was not supportive for this as USD went stronger than JPY (Baettig 2013)and the above news should have been favorable for JPY, but leaded to a loss of 682 as per Roger Baettig of IBtimes. (See appendix A1)Based on the above loss and by analyzing the movements in the graph, I was under the impression that there should be a reversal done for this transaction by buying USD at 98.19 and this lead to an increase in profit till 98.46 for AUD 307 in short term trading.

Fig 3: USD/JPY on 29/8/2013 (XE 2013)

Transaction 5 on 3/9/2013REF no 19516958Buy USD, Sell EUROResult: Profit of AUD 287, movement from 1.3171 to 1.3158

USD ISM survey (Institute of supply management) is to look into importance and functioning of procurement and the supply chain management of worldwide organizations (ISM 2013).The data was much stronger than expected on for US manufacturing and construction spending and this showed clearly that the economy was gaining power. The manufacturing sector grew with the fastest growth with the activity rising from 54 to 55.7. This beat the expected rate of 54, which led to appreciation of USD. Any reading above 50 is however considered positive and growing (Lopez 2013). Apart from this factor the reports on construction spending and ISM prices paid was higher than forecasted. The main components were inflation and labor, which if positive are an indicator for growth in economy (Dailyfx 2013).

Transaction 6 on 4/9/2013 REF no 19530110Buy USD, Sell CADResult: Loss of AUD 1042, movement from 1.0529 to 1.0479

The news data for US and Canada, both the countries was to be released for US trade balance and rate of interest for Bank of Canada. There was lot of risk involved as data being released for both the countries with short interval of time. The actual data for US trade balance was considerably lower than previous year and from expected as well as shown in below diagram. The trade balance data indicates the difference between exported and imported goods, which is one of the main components of Balance of payment for US and puts heavy pressure on the dollar. When, the imports are greater than exports, this leads to trade deficit. This is because the home country is spending more of its currency to buy foreign imported goods and getting lesser in terms of goods exported. (Dailyfx 2013)

On the other hand the CAD movement and its economic growth is very much dependent on the Bank of Canadas (BOC) interest rate decision. This also indicates the housing sector to be stronger than expected and the GDP is also more consistent than the forecast (Littlestone 2013).

The news release was more in favour for CAD than the USD release and hence the fall at a later stage when the subsequent news of BOC was released.

Figure 4 : United states balance of trades (Taborda 2013)Transaction 6 on 5/9/2013REF no 19545017Buy USD, Sell JPYResult: Profit of AUD 415, movement from 99.71 to 99.90

The release for USD jobless claims, continuing claims, factory orders, ISM non-manufacturing all were to be released from 12:15 to 17:30 GMT. Most of the release was on the positive side than expected and the previous months or quarter. The jobless claims were lesser, continuing claims were lesser as well.Also the USD factory orders were better as this affects the demand and supply. This is the sum of new orders & shipments. Apart from this the ISM non-manufacturing index which is based on purchases and supply survey and how they contribute towards GDP. There was increase in percentage change from 55(forecast), 56(previous) towards 58.6.This information lead to the appreciation, though the amount traded was less and hence less profit (Dailyfx 2013).

Transactions 7, 8 and 9 on 5/9/2013

These transactions were also done with the above speculation after observing that the USD is doing favorably and then traded against JPY again in ref no. 19550327 with a profit of AUD 328. Similarly USD was bought against AUD as well which again lead to a profit of AUD 718 for ref no 19548533. However this data was true for some currencies but the above analysis used was not true for Euro, as the USD had depreciated against it and leaded to a loss of AUD 591 for reference 19546571.

However for Euro there was speculation based on Germany factory orders were lesser than speculated as this indicates the demand for German industrial goods but the fact could be that Euro is not just effected by the German orders and the interest rate decision which remained same for European central bank could have been the reason for the appreciation of Euro against USD. The overnight interest rates for the European central bank are normally changed by either buying or selling government bonds. This affects the economic growth and inflation. Most of the times interest rate are as per speculation but effects the financial markets accordingly (Dailyfx 2013)

Transaction 10 on 6/9/2013REF no 19565900Buy Euro, Sell USDResult: Loss of AUD 1095, movement from 1.3138 to 1.3128

Based on Dailyfxs economic calendar for 6th sep, there was high importance for Change in Non-farm payrolls and unemployment rate. This was interpreted in a wrong manner as the information turned out to be positive for USDs appreciation and lead to a loss due to buying of Euro, instead of USD. The change in non-farm payrolls tells about the change in number of jobs available for the month of August. This data stimulates the job market by adding more jobs and an important factor for the growth of labor in the US. The fed is responsible for keeping the employment growing and this leads to better economy. Apart from this the above data also affects the unemployment change, which is just the opposite i.e. less percentage leads to an increase in overall employment. However high employment leads to better economy and more spending from the consumers and inflationary demands.(Dailyfx 2013)

This data should have been in the opposite transaction with paying attention to the news release time and also trusting the forecasted rate. The below technical analysis was done based on the employment change.

Employment and economy for transactions 10

Economic growth and unemployment are the two sides of a coin. The economic activity is high when there is more production of goods and there is a growing employment. This is just the opposite when there is less economic growth. This affects the demand and supply of labor. Thus an increase in demand or decline in supply will raise the wages and vice versa.The below diagram tells the relation between the shifts in labor demand, which effects the shift in wages W2 and the employment rate L2. This also means that the numbers of organizations have increased and this can lead to an increase in production, technology and human capital. (Webbooks, 2013)

Fig 5: Changes in demand and supply of labor (Webbooks 2013)

Thus employment change plays a very vital role for economic growth and for speculation in forex markets based on data provided for specific countries.

Transactions 11, 12, 13 on 6/9/2013 Buy USD and Sell CAD, JPY & AUD.

This analysis is in regards to the USD rate, which had gone up initially due to the above data in regards to unemployment change and the change in non-farm payrolls. Based on the above loss all transactions were done simultaneously in release of the positive news for the USD. The amount put at risk was high which lead to huge losses in the below ranges. Stop loss should have been increased as later there was an upward trend for USD and this would have minimized the losses.

BuySellRefLoss in AUDMovementUSDAUD195695875000.9147 to .9189USDJPY19571120659099.72 to 99.12USDCAD1956663513061.0489 to 1.0464

Graph showing the USD falling by 70-80 pips in a second, though the data was supportive the loss was very high for USD/JPY.

Figure 7 : USD/JPY on 6/9/2013 (Dailyfx 2013)

Transactions 14, 15, 16 on 6/9/2013Buy USD, Sell JPY.After the above downfall of 70-80 Pips there was to be an upward trend for the USD and but on a long-term basis. The reverse transactions with refs 19582838, 19574684, 19574510 and 19574297 lead to recovery of AUD 6000 (approx.)

Transaction 17, 18, 19 on 11/09/2013Ref nos 19622048, 19621907 & 19621778Buy GBP, Sell USD Result: Overall profit of AUD 6000(approx.)Movement from 1.5731 to 1.5822 (90 pips)The actual news data for GBP industrial production (YOY) was -1.6% and lesser than forecasted amount which lead to this gain. The industrial production is the manufacturing output for mines, factories and energy sector. This is a short-term indicator for UKs industrial activity. This is 25% of the GDP and higher amount leads to higher economy. Even the trade balance was almost double than the forecasted and three times of previous months figure, which favored its value. David song, currency analyst at Dailyfx also gave positive movement about the jobless claims as that was lesser than earlier and economy was improving for GBP to perform (see Appendix 1B). Short term buying of GBP for 30 mins just prior to the news release ticked the profit above anticipation to AUD 6000. The increase against USD can be seen in the below figure for approx. 100 pips. (Dailyfx 2013)

Fig 8 : GBP/USD on 11/9/2013 (Dailyfx 2013)

Transaction 20 and 21 on 12/9/2013Ref nos 19640777 & 19640762Buy USD, Sell AUDResult: Loss in total of AUD 3600 (approx.)Movement from .9233 to .9254

This was a long-term movement in which the AUD had increased steadily towards USD after the elections in Australia during beginning of the week. But, then there was a decline in AUD sharply for 70-80 pips. The downfall was due Australias unsatisfactory employment release. The figures were released by Australian bureau of statistics. This release had come as a surprise as the unemployment rate also increased to 5.8% and this decline of AUD send the USD index to 10,700. Though the currency bought was in favor of the news release but the buying and selling was done at incorrect times, which eventually lead to loss. The below graph shows this downfall for the AUD. (Dailyfx 2013)

Fig 9: AUD/USD on 13/9/2013 (Dailyfx 2013)

Transaction 22 and 23 on 13/9/2013Ref: 19663511 Refs: 19664690Buy: Euro, Sell: USDBuy: CHF, Sell: USDResult: Profit of AUD 432.83Result: Profit of AUD 535

The currency, which is most, affected by data releases of USD is Euro and hence leads to most number of transactions of this pair. The news as per economic calendar for Advance retail sales for August of high importance was due to be released at 12:30 GMT on 13/9/2013. The forecasted was 0.5% increase and better than the previous month of .4%. The data was however lesser by change of just 0.2% at the time of actual release. This was to get the USD down but not instantly as USD had already suffered the whole week due to its downfall. But keeping the transaction running for a longer duration with stop loss set to minimal range lead to profit of AUD 432.

Fig 10: EUR/USD on 14/9/2013 (XE 2013)The retail figures tell about the stability of consumer demand and their confidence in spending. Consumer spending accounts for 66% of the total economic activity in the USA. Apart from this release University of Michigan confidence survey, which is done to look into consumer confidence through hundreds of telephone surveys. Based on poor retail sales release this was too go lower than forecasted and lead to further downfall of the USD. This also affected other currencies trading with USD like CHF, which too lead to a gain of AUD 535.Forward Transactions:

These transactions are done in present scenarios by trading a particular currency based on its future rate and usually till 60 days. The spreads are higher than the day trading. (Easy-forex 2013)Transaction 1 on 28/8/2013:Ref no. 19566866 Buy USD, Sell GBPResult: Profit of AUD 305Movement from: 1.5517 to 1.5483

Forward transactions are normally long term transactions. The one mentioned of GBP/USD was kept open for a longer times and this lead to profit of AUD 305. This was done because of the news release about USD from 28th Aug till 29th Aug as all were leading to a better forecasted figures of the Gross domestic product.GDP affects the overall economic output and if it moves up, the dollar is to strengthen. By looking into this measure this forward transaction was done.Technical Analysis:All the Charts- Line, candle, bar were majorly used for most of the transactions from Dailyfx and long-term, short-terms movements were analyzed extensively. For some of the transactions and particularly for currency pairs of AUD/USD and USD/JPY there were widespread movements of the pips. Profits were made by using the right exit strategy for few and losses as well in order to wait for higher profits.

Conclusion: The movement in forex market is very high and using proper knowledge along with risk calculation is highly important from time to time. One should use all trading tools and strategies for a favorable outcome and most important is to know when its enough to close the transaction, whether its leading to more profit or loss.

References:

Baettig, R. (2013). "Daily Summary on USD, EUR, JPY, GBP, AUD, CAD and NZD." Retrieved 27/8/2013, from http://www.ibtimes.com/daily-summary-usd-eur-jpy-gbp-aud-cad-nzd-1400945.Dailyfx (2013). "Forex Economic Calendar ". Retrieved 28/8/2013, from http://www.dailyfx.com/calendar?tz=&sort=date&week=2013%2F0825&eur=true&usd=true&jpy=true&gbp=true&chf=true&aud=true&cad=true&nzd=true&cny=true&high=true&medium=true&low=true.Dailyfx (2013). "Forex Economic Calendar ". Retrieved 3/9/2013, from http://www.dailyfx.com/calendar?tz=&sort=date&week=2013%2F0901&eur=true&usd=true&jpy=true&gbp=true&chf=true&aud=true&cad=true&nzd=true&cny=true&high=true&medium=true&low=true.Dailyfx (2013). "Forex Economic Calendar." from http://www.dailyfx.com/calendar?tz=&sort=date&week=2013%2F0908&eur=true&usd=true&jpy=true&gbp=true&chf=true&aud=true&cad=true&nzd=true&cny=true&high=true&medium=true&low=true.Dailyfx (2013). "Forex Economic Calendar ". Retrieved 11/9/2013, from http://www.dailyfx.com/calendar?tz=&sort=date&week=2013%2F0908&eur=true&usd=true&jpy=true&gbp=true&chf=true&aud=true&cad=true&nzd=true&cny=true&high=true&medium=true&low=true.Dailyfx (2013). "Netdania." Retrieved 6/9/2013, from http://www.dailyfx.com/charts/netdaniachart?symbol=USD/JPY.Dailyfx (2013). "Netdania." from http://www.dailyfx.com/charts/netdaniachart?symbol=GBP/USD.Easy-forex (2013). "Demo account." from http://www.easy-forex.com/au/.Forexmarket (2013). Retrieved 28/8/2013, from http://www.the-forex-market.com/a-brief-introduction-to-forex.html.ISM (2013). "About ISM." Retrieved 3/9/2013, from http://www.ism.ws/About/?navItemNumber=22327.Littlestone, R. (2013). "Bank of Canada leaves key lending rate at 1.00%." Retrieved 4/9/2013, from http://www.forexlive.com/blog/2013/09/04/canadian-boc-leaves-rates-at-1-0/.Lopez, L. (2013). "U.S. manufacturing, construction data suggest growth pickup." Retrieved 3/9/2013, from http://www.reuters.com/article/2013/09/03/us-usa-economy-manufacturing-idUSBRE9820N820130903.Taborda, J. (2013). "United States Balance of Trade." Retrieved 5/9/2013, from http://www.tradingeconomics.com/united-states/balance-of-trade.Webbooks (2013). " Labor Markets at Work." Retrieved 6/9/2013, from http://www.web-books.com/eLibrary/NC/B0/B63/062MB63.html.XE (2013). "Currency charts." from http://www.xe.com/currencycharts/?from=AUD&to=USD&view=1D.XE (2013). "XE Currency Charts (EUR/USD)." Retrieved 29/8/2013, from http://www.xe.com/currencycharts/?from=EUR&to=USD&view=1D.XE (2013). " XE Currency Charts (EUR/USD)." Retrieved 14/9/2013, from http://www.xe.com/currencycharts/?from=EUR&to=USD&view=1D.XE (2013). "XE Currency Charts (USD/JPY)." Retrieved 29/8/2013, from http://www.xe.com/currencycharts/?from=USD&to=JPY&view=1D.

Appendix:

My Summary:

My Closed positions:

Appendix 1A:From http://www.ibtimes.com/daily-summary-usd-eur-jpy-gbp-aud-cad-nzd-1400945