MPE707 Assignment Cover Sheet
MPE707 Assignment Cover Sheet
speculation in the foreign exchange market
Trimester 1, 2024
Student Details:
Last Name First Name Student ID
Account Details:
Username Current Password
IBF- Account Balance (provide the final balance after you have closed all positions and cancelled all pending orders):
AUD Balance My Closed Trades (provide the number of transactions in each of the boxes below except for the last box):
Day Trading (number of transactions, including pending orders that have been captured) Forwards (number of transactions) Pending Orders (number of orders placed, including those that have been captured or not) EasyTrade and Vanilla Options (number of transactions - note this is not required but you must report the number here if you have traded. EasyTrade/options can be counted toward the 12 required trades) Names of currencies, commodities and indices traded (such as AUD, USD) (note commodities and indices are not required but you must report if you have traded) Word count (excluding executive summary, footnotes and appendices to the report):
Word count Executive summary
<<Enter your half-page Executive summary here>>
Component 1
<<Enter your response to Component 1 here>>
Component 2
<<Enter your response to Component 2 here>>
Appendix
<<Enter your appendix here>>
International Banking and Finance (MPE707)
Assignment - Trimester 1, 2023
Student Details:
Last Name First Name Student ID
BhuiSaptarshi223130833
Account Details:
Username Current Password
IBF-16 vAzirws2
Account Balance (provide the final balance after you have closed all positions and cancelled all pending orders):
AUD Balance 36,413.21AUD
My Closed Trades (provide the number of transactions in each of the boxes below except for the last box):
Day Trading (number of transactions, including pending orders that have been captured) 9
Forwards (number of transactions) 1
Pending Orders (number of orders placed, including those that have been captured or not) 5
EasyTrade and Vanilla Options (number of transactions - note this is not required but you must report the number here if you have traded. EasyTrade/options can be counted toward the 12 required trades) 2
Names of currencies, commodities and indices traded (such as USD, GBP) (note commodities and indices are not required but you must report if you have traded) CHF/AUD,AUD/NZD, GBP/JPY,USD/CHF, USD/CAD,EUR/GBP, GBP/USD,EUR/USD,AUD/USD
Word count 2513
Executive Summary
This report provides an overview of my trading activities and performance in the foreign exchange market using the easyMarkets trading platform. I traded a range of financial instruments, including currency pairs such as CHF/AUD, AUD/NZD, GBP/JPY, USD/CHF, USD/CAD, EUR/GBP, GBP/USD, EUR/USD, AUD/ USD and implemented a total of twelve transactions. During the trading period, I experienced both losses and profits. The total losses in my account were justified by two factors: the use of stop loss orders and manually closing positions when necessary. However, I managed to achieve a profit in some trades too.
To conclude, I actively employed risk management activities throughout the time of trading. By utilizing stop loss orders and manually closing positions when necessary, I aimed to control potential losses and protect my account balance. The overall strategy focused on analyzing the trading environment and applying theoretical tools to make informed trading decisions.
Component 1
In the months leading up to March 2023, the overall trading ambiance associated with AUD/USD currency pair was massively affected by diverse macroeconomic condition which revolves around global economic progress, rise in inflation, fluctuation in interest rate and drastic developments in the context of geopolitical ambiance. One of the main drivers which propelled AUD/USD exchange rate was the distinction in monetary policies between the US Federal Reserve as well as Reserve Bank of Australia. While the Reserve Bank of Australia maintained the overall interest rate at 0.1% which is also regarded as historic low as far as Australian economy is concerned, the accommodative policy stance was upheld significantly by the Federal Reserve (Sobol & Szmelter, 2020). This divergence in monetary policy solitarily made Australian dollar much more lucrative for investors who are looking for higher yields. As a consequence of which, the overall USD currency pair is consolidated extensively. Another factor that has positively affected the currency pair was the seamless and constant economic recuperation from the global pandemic, which essentially consolidated the Australian export sector by 5.2% in comparison to 2020 (Umar & Gubareva, 2020). As a result of which the commodity price incremented which has substantiated the development and progress of Australian dollar. In a similar vein, the drastic fluctuation of inflation rate across the US has also essentially paved a new way for the Australian dollar. To put it in simple perspective, the consumer price index associated with U.S. dollar increased by 0.6% in March 2023, which solitarily fuelled the concern that Fed Reserve is looking forward to tightening its grip over the monetary policy. This speculation in the US market afflicted the economy extensively (Fasanya et al. 2021). As a consequence of which, the US dollar started experiencing nosedive in consecutive trading sessions. As far as geopolitical development is concerned, the relationship between China and Australia has been experiencing some crest and troughs over the past couple of years. The Australia China trade war which began in 2018 significantly afflicted the Australian economy, even after Biden administration resumed office in 2021, not much drastic change has taken place in this particular context (Zhang & Chen, 2019). This tension with China has caused Australia a massive fortune in terms of its export. On top of that the Ukraine Russia conflict has also contributed to the Australian USD exchange rate in terms of volatility. With the rise in tension, the concerns regarding ramifications in global oil price as well as geopolitical instability on a broader scale has weighed significantly on the sentiment of Australian investor, which is reflected in periodic decline of Australian dollar. Even though the GDP of Australia experienced a steep incline by 3.1% in 2022, this fastest and the strongest growth was actually diluted extensively by the rise in inflation, which was around 0.9% in the March quarter. This was above market expectation, as a result of which, sudden increment in fuel price has necessitated consumer rebound in spending. Aside from that, the trade surplus also narrowed in January 2023, as exports experienced tremendous impediment caused by Australia China trade war. Although it is expected by several economists that it would eventually phase out (Aslam et al. 2021). However, the aftershock of the trade war along with sudden rise in inflation has significant ramification in the Australian economy.
Component 2
The GBP/AUD currency pair seems to be a viable option for trading in the present market context, based on a confluence of technical indicators. Firstly, the 50-day and 200-day Moving Averages suggest a bullish trend, with the former positioned above the latter, indicating a possible bullish crossover (Soto et al. 2021). Additionally, the Relative Strength Index (RSI) signals an overbought market, implying an impending price correction, which is consistent with the stochastic oscillator. The MACD confirms the bullish trend, with the line situated above the signal line. Moreover, the Fibonacci retracement levels indicate that the pair is trading above the 61.8% level, suggestive of a bullish trend. The Bollinger Bands also indicate an overbought market, and the Ichimoku Cloud is indicative of a bullish trend, with the pair trading above the cloud. Finally, the Average Directional Index (ADX) demonstrates a strong bullish trend, with the reading above 25. In conclusion, these technical indicators collectively suggest a potential bullish trend in the short to medium term for the GBP/AUD currency pair, making it an attractive prospect for trading (Lau, 2020).
The CAD/AUD currency pair appears to be a promising candidate for trading in the ongoing market landscape, based on a combination of technical indicators. Firstly, the 50-day and 200-day Moving Averages suggest a bullish trend, with the former situated above the latter, indicating a potential bullish crossover. The Average Directional Index (ADX) also signals a strong bullish trend, with a reading above 25. Additionally, the Fibonacci retracement levels indicate that the pair is trading above the 50% level, which suggests a bullish trend. Furthermore, the volume chart indicates that trading activity has increased over the past few days, potentially indicating a trend continuation or reversal (Wang et al. 2021). The Commodity Channel Index (CCI) confirms the bullish trend, with the reading above the +100 level, indicating a potential overbought market. Finally, the MACD indicates a bullish trend, with the signal line situated above the histogram. In essence, these technical indicators collectively suggest a potential bullish trend for the CAD/AUD currency pair in the short to medium term, making it a potentially attractive option for traders interested in the commodity market. In terms of its fundamental backdrop, the performance of the Canadian economy and its correlation with Australia are vital in comprehending the possible direction of the CAD/AUD exchange rate. As a commodity-based currency, the CAD is highly sensitive to the global dynamics of oil and gas prices. Therefore, monitoring the global demand and supply of these commodities can provide valuable insights into the potential movements of the CAD/AUD pair (Ni et al. 2019). Furthermore, economic data releases, including GDP, employment, and inflation data from Canada and Australia, can also impact the currency pair, necessitating their monitoring.
The trader viewed JPY AUD from a fundamental standpoint, where the Bank of Japan and Reserve Bank of Australia have both declared their intentions to maintain their respective interest rates at low levels for the foreseeable future. The Bank of Japan has confirmed its commitment to adhere to its existing monetary policy until the attainment of its 2% inflation target, which take a considerable amount of time generally. Likewise, the Reserve Bank of Australia has signalled its desire to maintain low interest rates until inflation is durably within the 2-3% target range, a scenario that is unlikely to materialize before 2024 at the earliest (Morkunas, Paschen & Boon, 2019). Consequently, the interest rate differential between the JPY and AUD will remain relatively steady in the immediate to medium term. In addition, the JPY is deemed a safe-haven currency that generally benefits from global economic uncertainty or instability, while the AUD is considered a commodity currency that is affected by fluctuations in commodity prices.
The NZD/AUD currency pair is a lucrative prospect for trading in the current market context, owing to an array of technical indicators. The Alligator indicator, comprising three smoothed moving averages with varying periods, indicates a bullish trend with the green line positioned above the red and blue lines. This trend is further validated by the HeikenAshi candlestick chart, which shows a preponderance of green candles (Daian et al. 2020). The Ichimoku Cloud also supports a bullish trend, with the pair trading above the cloud and the Chikou Span (lagging line) above the price, evincing a continual bullish trend. The Commodity Channel Index (CCI) posits that the pair is overbought, with the reading above the +100 level. The Relative Strength Index (RSI) corroborates an overbought market, consistent with the CCI. The Average Directional Index (ADX) confirms a strong bullish trend, with the reading above 25, indicative of a trending market. Fundamentally the trader analyzed that the NZD/AUD currency pair is influenced by several economic factors, which generally revolves around interest rate differentials along with trade balance, as well as political events. The Reserve Bank of New Zealand (RBNZ) and Reserve Bank of Australia (RBA) regularly make monetary policy decisions that impact the currency pair. Additionally, as both countries are significant commodity exporters, fluctuations in commodityprices, particularly dairy, are likely to affect the exchange rate (Schrimpf & Sushko, 2019).
It is fair to state that even if technical analysis tools are incorporated duly throughout the course of conducting the trade, it is coupled with extensive research which are aligned with fundamental analysis in order to determine the policy events, its ramifications, consequences of geopolitical actions, economic data and fluctuations which inherently influences the monetary policy as well as fiscal policy which are defined by the incumbent regime of nations. Aside from that, risk management has been emphasized significantly throughout the course of executing the trade, which is only feasible provided the trader is well versed in terms of accumulating necessary information which is instrumental in terms of determining appropriate entry and exit points (Hui, 2022). Apparently, it would seem that technical analysis is great for reflecting the support and resistance levels. However, in reality, without fundamental knowledge, substantiating technical analysis and conducting the trade is absolutely naive approach towards trading.
Risk management plays a quintessential facet of maintaining a successful trade in the financial market. As far as incorporating risk management tools in the trading platform of easyMarket is concerned, there are several tools that are utilized during the course of executing those trades, so that the capital can be safeguarded, even if the overall trade is subjected to adverse circumstances (Yang et al. 2019). In the following segment, the risk management tools that are primarily emphasized during the course of trading are elaborated extensively:
Stop loss order: The name stop loss order is pretty self-explanatory in nature, since it assists the trader to limit their loss in terms of their risk appetite. During adversarial situations, when the trade goes against the speculated direction, the trader can automatically execute a trade within a predetermined price level, thereby preventing any further losses in the platform of easyMarket. One of the characteristic attributes of this platform is that not only it is featured with standard stop loss order, but at the same time aspects such as guaranteed stop loss or trailing stop loss order also assist trader to manage their strategy and act according to the changing circumstance in the financial market (Schrimpf & Sushko, 2019).
Taking profit orders: The take profit order is categorized as an order that traders generally use in order to lock profit from a particular trade. Simply put, if the currency pair of USD AUD is trading at certain value and the trader is looking for an opportunity to pocket the profit, then prior to executing the trade, the take profit order should be inculcated by the trader. This can necessarily be translated into the fact that after a certain price range, the trade would then automatically exit from the position. Simultaneously, trailing take profit order and guaranteed profit orders are also present in easyMarket platform.
Margin requirement: The collateral that a trader deposits to maintain an open the trade account in easyMarket platform assist a trader to opt from diverse financial instruments that are available for trading. In another words, the trader can utilize the margin requirement in order to not only manage their risk exposure but at the same time safeguard their capital during ups and down in trading.
Leverage options: Leveraging is quite common for traders who associate themselves in forex trading, in view of the fact that by investing a small amount of money, the returns are proportionately higher. Hence, it assists the trader to generate wealth within a short span of time, provided all other necessary facets that are required to be intricately analyzed are conducted by the trader with due diligence (Schrimpf & Sushko, 2019).
Technical indicators: Important technical indicators such as moving average, RSI and volume chart are present in easyMarket platform along with a plethora of tools. One of the interesting aspects that should be taken into consideration in this particular context is that all these indicators are oriented to safeguard at traders portfolio from adverse scenarios. For instance, incorporating moving average is inculcated by the trader in order to understand the mean trend price of the particular currency pair in this moment. If the trader sets the moving average to 14 units, it means for 14 consecutive units (hour in hourly chart or minutes, depending upon the chart time frame), the moving average will simply represent the mean price of the particular currency pair for the last 14 units of time. On a similar note, incorporating multiple indicators in order to understand the risk associated with the trade is also carried out in this trading. For instance, incorporating moving average with RSI and validating the response by using volume graph represents the number of trades that have already taken place previously and the feasibility of trend in the particular currency pair. This information opens up new horizons for the trader. Since not only is insight assist the trader to gain cognizance regarding the currency pair, but at the same time important levels of support and resistance can also be determined by the trader to evaluate the gravity of a particular potential entry and exit points for the trade (Hui, 2022). Aside from relative strength index in this particular instance, stochastic indicator has also been used.
All of the aforementioned tools are primarily offered by easyMarket as a plethora of risk management tools that the trader can utilize in order to regulate their risk exposure and safeguard the invested amount. These tools have one thing in common that all of these approaches assist trader to make informed decision and act accordingly in the ever-changing course of the forex market. However, extensively relying on an indicator is also not recommended, since it jeopardizes the fundamental integrity of trading. Informed decisions can only be associated with incorporating multiple risk management tool and knowledge regarding the particular currency pair from the macroeconomic perspective.
References:
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Fasanya, I. O., Oyewole, O., Adekoya, O. B., & Odei-Mensah, J. (2021). Dynamic spillovers and connectedness between COVID-19 pandemic and global foreign exchange markets.Economic Research-Ekonomska Istraivanja,34(1), 2059-2084.
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Umar, Z., & Gubareva, M. (2020). A timefrequency analysis of the impact of the Covid-19 induced panic on the volatility of currency and cryptocurrency markets.Journal of Behavioral and Experimental Finance,28, 100404.
Wang, Q., Li, R., Wang, Q., & Chen, S. (2021). Non-fungible token (NFT): Overview, evaluation, opportunities and challenges.arXiv preprint arXiv:2105.07447.
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Appendix:
