Foreign Exchange Market Analysis

The report analyzes the behavior of two currency pairs over the next three to six months and suggests trading strategies for maximizing profit. The economic factors influencing the exchange rates are examined, and the bank is advised to maintain a balance in the foreign exchange market as a price maker. Risk management strategies are also suggested to overcome future risks.

Foreign Exchange Market Analysis

Executive Summary
The financial institutions play a significant role in managing and strengthening the economy
of a country. However, the financial institution faces problems while trading in the foreign
exchange market. The foreign exchange market enables the market participants to purchase,
sell, speculate and exchange currencies. The current and future market conditions will be
carried out in order to understand the performance of two currencies in the next three to six
months. The fluctuation in the market imposes a significant impact on the values of the
currencies. Thus, the economic factor influences the exchange rates in the market. The
collection of information will assist to determine the factors that have imposed an impact on
the market. The devise trading strategies would be implemented by the organizations on the
basis of the market circumstances. The strategies will assist the organization in making a
decision of which currency to purpose or sell. The portfolios of the currencies would be
created in order to enable the bank for taking advantage of the predicted changes in the
exchange rates. The trading strategies would be implemented by taking into account price
maker trading the currency on a daily basis based on the needs of the clients. An appropriate
understanding of the market is important as it enables to make decisions which lead to the
growth of the organization.
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Table of Contents
Executive Summary...............................................................................................................................1
Table of Contents..................................................................................................................................2
Introduction...........................................................................................................................................3
Analysis and market view (forecast)......................................................................................................3
Trading strategy.....................................................................................................................................5
Conclusion.............................................................................................................................................6
References.............................................................................................................................................8
Appendices..........................................................................................................................................10
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Introduction
Commonwealth Bank of Australia is the leading provider of financial services in Australia.
The bank also offers retail, fund management, insurance, superannuation, institutional
banking, share broking products and investment services (Commbank, 2018a). The main
objective of the report is to explain the market view concerning the behaviour of two
currency pairs over the next three to six months. It will also include trading strategies that
will be undertaken for maximizing the profit of the bank. AUD/USD currency pairs will be
taken because an Australian bank will be examined and US dollars is considered to be one of
the strongest currencies in the world. The current and future market conditions will be
examined in order to understand the exchange rates of the currency pairs. The analysis of the
economic factors will also be determined that influences the exchange rates. The devise
trading strategies would be implemented for the next six months on the basis of the market
view. The Commonwealth Bank of Australia will use the strategy for making a decision
which currency to buy or sell. The report will appropriately depict the market analysis,
trading strategies and concluding the main theme. The implementation of appropriate
strategies can assist an organization to overcome problems in an appropriate manner.
Analysis and market view (forecast)
The demand level for a currency imposes a significant impact on the market price. For
example, if people want to purchase AUD/USD and then sell it then the value of AUD would
go up. The increase in the selling of AUD/USD explains that AUD value would go down.
The AUD/USD shows that amount of US dollar is needed for purchasing an Australian
dollar. The changes in the economic factors of a nation impose significant impact on the
relationship between the values of two currency. If a decision is taken by Federal Reserve to
boost the economic growth of the country then the Australian dollar would depreciate in
relative to the US dollar. However, there are many factors that assist in determining the
strength and weakness of a currency. The economic growth, high volatility and increase in
the manufacturing activities in US lead to increase in the value of Australian dollar. It is due
to the close link between the commodity prices.
The AUD/USD is considered to be one of the well known currency pair used for carrying
trades. The traders are attracted towards the currency due to the rate of exchange fluctuations.
However, the values of these currencies are fluctuated due to the global market environment.
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It is also determined that the relationship between the Aussie and US dollar is always not
predictable. Thus, the investors and organizations should implement appropriate strategies in
order to understand the future value of these currencies. The economic factors influence the
exchange rates of the currency pairs (AUD/USD). The factors that have been determined and
examined are as follows:
The decrease in global growth
The AUD/USD has come under pressure due to the decrease in global growth. It is expected
that the AUD will lose its value in relative to the USD. It is also seen that during the
increased volatility period in the market leads to falling in the Australian dollar. The US
dollar is considered to be reserve currency in the world and government bonds of US are
considered to the safe investment. Thus, when there is a high risk in the financial markets
than the demands of these bonds increases (Commbank, 2018b).
Commodity prices
Australia heavily depends on the trade activities for developing its economy. The
commodities such as coal and iron ore are considered to be some of the largest export
products from Australia. The decrease in the prices of these commodities can lead to a sharp
decline in the trading activities of Australia (Forexct, 2018). The trading activities are
referred to the ratio of the prices of export to import estimated by the Australian Bureau of
Statistics. It is expected that the slowing demand will lead to a falling in the price of these
resources. It will result in a decrease in the demand of the Australian dollars because the
currency will not be used for purchasing the resources. The weakness or strength of the
AUD/USD currency also largely depends on what is impacting the value of these resources.
Therefore, the fall in the price of these commodities would lead to the fall in the AUD in
relative to the USD (Rollins, 2016).
Interest rate
The change in the rate of interest affects the value of a currency and also its exchange rate.
The increase in the rate of interest causes the currency of a country to appreciate which is
because the higher rate of interest provides higher prices to the lenders. Thus, it results in the
increase in the foreign investments which causes an increase in the exchange rates. It is
expected that the differences in the rate of interest between the Reserve Bank of Australia and
the Federal Reserve would impose a significant impact on the exchange rate of AUD/USD.
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The Australia economy at present is functioning well which is considered to be a positive
sign. It is expected that the growth of the Australian economy will increase the value of AUD
in relative to USD (Top Rated Forex Brokers, 2018).
Inflationary Pressures
The increase in the price of the commodities leads to an increase in inflation within the
economy. The inflation rate is to be managed by the government with the application of
appropriate strategies. The inflation also imposes significant impact on the growth and trade
of the organizations in the global market. The fluctuations in the market impose significant
impact on the foreign exchange rate of the currencies. However, the inflation rate would not
be high in future but it can affect slightly the value of the currency. The slight increase in
inflation can depreciate the value of the Australian dollar against the US dollar (Ross, 2018).
Asian currencies
Australia exports three-quarters of its products to Asia and the Australian Dollar is often
considered as the proxy for the continent. If the currencies of Asia are under pressure then it
imposes an impact on the exchange rate of AUD/USD. The development of the economy of
China means an increase in the purchase of the Australian resources that raise the price of
these commodities. Thus, many investors attracted to the Australian dollar during this period.
It is expected that the economies in Asia will grow which would appreciate the value of AUD
against the USD (Hsing, 2015).
Trading strategy
The determination and evaluation of devise trading strategies will assist the Commonwealth
Bank of Australia to decide which currency to buy or sell. The proactive trading strategy
explains acquiring a higher position before the release of the data by making a decision on the
basis of the forecast results. The reactive approach explains entering the market after the
publication of the data. The mixed approach can also be used by the organization (Carbaugh,
2011). The Commonwealth Bank of Australia can make a decision on the basis of the
forecasted result. It is forecasted that the US dollar will remain consistent in comparison to
the Australian Dollar for the next three to six months. The forecasted results are based on the
past evidence and it cannot be guaranteed that the performances of these currencies will be
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the same as forecast. However, the Commonwealth Bank of Australia should make a decision
on the basis of the forecasting results in order to overcome any kind of risks that may arise.
The timing of trading the currencies can also make differences in making profits at the end of
the day. The time periods offer higher volatility levels and volume requirements for
generating substantial profits. The bank would get the highest volume and largest daily
moves during the Australian working hours and during the active trading hours of US
(Valdez and Molyneux, 2016). Thus, the Commonwealth Bank of Australia can carry out its
trading activity between 6:00 to 8:00 GMT and 00:00 to 2:00 GMT. The gathering of data
and information can also assist to make decisions. The daily charts and historical price charts
can be used for making the decision. The bank cannot make assure that the decisions will
provide benefit. However, the chances of getting benefits are considered to be high with the
implementation of such strategies (Day Trading, 2018).
The resistance or support can be a diagonal or horizontal line but the point depicts the price
has been revered off for at least two times. It consists of the starting point of
resistance/support line. The trade set up of the organization need to take place slightly below
or above. The resistance and support directly whether the organization should be ready for
carrying out it is trading because a breakout or reversal can be fast approaching (Dasgupta,
2010). The breaking of price above the consolidation then the organization can carry out its
trade. On the other hand, the movement of price above the consolidation means the
organization should not carry out it's trading.
The implementation of risk management is also considered to be very much important for an
organization. The determination of risk parameters will also to overcome risks that may arise
in future. The forecasted results have depicted that the AUD will more likely to depreciate
against USD in future (Marshall, 2013). Thus, the risk management strategy needs to be
based on the estimated forecasting result. The trading of AUD/USD produces substantial
profits consisting of rich volatility and liquidity. However, the tough competition in the
market creates fluctuations in the trading activities. The bank needs to be aware of both the
interest rates and monetary policy set by the RBA and the Fed because these factors make
huge fluctuations in the foreign exchange market. The technical analysis consisting of news
and real-time chart can be capitalized on the bearish or bullish patterns (Naas and Lysne,
2010).
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The Commonwealth Bank of Australia has to make the decision of buying or selling the
currencies on the basis of the forecasting result. For example, if it is expected that the
Australian dollar will fall in relative to the US dollar then the Commonwealth Bank of
Australia should utilize the Australian dollars for purchasing the US dollars. The
Commonwealth Bank of Australia would sell the USD with the aim of gaining more AUD.
The bank would focus on maintaining a balance in the foreign exchange market as it is a
price maker (Steele, 2009).
The US dollar is expected to remain firm for the next three to six months. The spread of
AUD/USD is 1.3-9.1. It is expected that the currency would depreciate then the spread would
be 1.10-9.8. It will assist in keeping the profit margins similar. The Commonwealth Bank of
Australia can face problems while trading in future but the implementation of strategies will
assist to gain profit for the bank (Viney, 2011). The bank has to understand the market in an
appropriate manner before making the decision of purchasing or selling the currencies.
Conclusion
The forecasting result has depicted that the chance of depreciation of Australian dollar is
more than the US dollar. It is expected that the US dollar would remain firm for the next
three to six months. The fluctuations in the global market will lead to a falling in the value of
the Australian dollar in comparison to the US dollar. The devise trading strategies need to be
implemented by the Commonwealth Bank of Australia in order to meet the needs of the
clients. The development of the economy would lead to the development of the organizations
and people of the country (Tavidze, 2007). Thus, it is the responsibility of the major financial
institutions to maintain a balance within the market. The bank can face difficulties while
implementing trading strategies. The risk management strategies can assist to overcome the
risks and gaining maximum benefit from the market. The management of Commonwealth
Bank of Australia should understand the market situation while implementing the strategies
and focusing gaining maximum benefits.
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References
Carbaugh, R. (2011). Global economics. 13th ed. Mason (Ohio): South-Western Cengage
learning.
Commbank (2018a). Personal banking including accounts, credit cards and home loans -
CommBank. [online] Commbank.com.au. Available at: https://www.commbank.com.au/
[Accessed 4 Nov. 2018].
Commbank (2018b). What makes the Australian dollar move?. [online] Commbank.com.au.
Available at: https://www.commbank.com.au/guidance/economy/what-makes-the-australian-
dollar-move--201605.html [Accessed 4 Nov. 2018].
Dasgupta, P. (2010). Economics. 6th ed. New York, NY: Sterling.
Day Trading (2018). Trading AUD/USD - daytrading.com. [online] Daytrading.com.
Available at: https://www.daytrading.com/audusd [Accessed 4 Nov. 2018].
Forexct (2018). Characteristics of the AUD/USD Currency Pair. [online] Forexct.com.au.
Available at: https://www.forexct.com.au/article/characteristics-of-the-aud-usd-currency-pair
[Accessed 4 Nov. 2018].
Hsing, Y. (2015). Determinants of the Aud/Usd Exchange Rate and Policy Implications.
[online] Aessweb.com. Available at: http://www.aessweb.com/pdf-files/aefr-2015-5(2)-326-
332.pdf [Accessed 4 Nov. 2018].
Marshall, A. (2013). Principles of economics. 8th ed. Houndmills, Basingstoke, Hampshire:
Palgrave Macmillan.
Naas, B. and Lysne, J. (2010). Financial markets and the global recession. 8th ed. New York:
Nova Science Publishers.
Rollins, A. (2016). 6 factors that drive the Australian dollar. [online] Intheblack.com.
Available at: https://www.intheblack.com/articles/2016/07/14/6-factors-that-drive-the-
australian-dollar [Accessed 4 Nov. 2018].
Ross, M. (2018). The Aussie dollar rollercoaster (explained for economic amateurs). [online]
ABC News. Available at: https://www.abc.net.au/news/2018-07-05/the-australian-dollar-ups-
downs-explained/9923638 [Accessed 4 Nov. 2018].
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Steele, J. (2009). The Market. 1st ed. New York: Disney/Hyperion Books.
Tavidze, A. (2007). Global economics. 2nd ed. New York: Nova Science Publishers.
Top Rated Forex Brokers (2018). AUD/USD. [online] Top Rated Forex Brokers. Available
at: https://www.topratedforexbrokers.com/education-and-guides/aud-usd/ [Accessed 4 Nov.
2018].
Valdez, S. and Molyneux, P. (2016). An introduction to global financial markets. London:
Palgrave Macmillan.
Viney, C. (2011). Financial market essentials. 7th ed. North Ryde, N.S.W.: McGraw-Hill
Australia.
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Appendices
Figure: Spreads
Source: (Investing, 2018)
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