Money Market Trading Strategies for a Singapore Bank in the Australian Market

Learn about the behaviour of money market rates in Australia and the trading strategies used by Amundi Singapore for DBS Bank. Read about the risks involved in implementing these strategies.

Running head: FINANCIAL MARKETS AND INSTITUTES
Financial Markets and Institutes
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
This report is developed on the assumption that a money market dealing team is working
for a large Singapore bank and it is engaged in trading money market products in the Asian
Pacific region. In this case, it is assumed that Amundi Singapore is the money market team
assigned to handle the money market products of DBS Bank from Singapore to Australia. The
three factors that would affect the behaviour of the money market interest rates of the nation
include economic growth, credit market, inflation and consumer price index. The trading
strategies that would be used include use of online trading technologies, loan advances, business
lending and commercial bills. Finally, the risks involved in implementing such strategies would
include availability of budget and time along with the security concern.

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Table of Contents
Introduction:....................................................................................................................................3
1. Behaviour of money market rates in Australia for the past three years:.....................................3
2. Behaviour of the Australian money market interest rates over the next six months:..................5
3. Explanation of the money market trading strategies:..................................................................8
4. Risks and obstacles to be encountered in implementing strategies:............................................9
Conclusion:....................................................................................................................................10
References:....................................................................................................................................11

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Introduction:
In this report, it is assumed that a money market dealing team is working for a large
Singapore bank and it is engaged in trading money market products in the Asian Pacific region.
In this case, it is assumed that Amundi Singapore is the money market team assigned to handle
the money market products of DBS Bank from Singapore to Australia. The report intends to
provide a brief explanation of the money market rates in Australia for the previous three years
and forecast of the same in the next six months. The latter segment would focus on providing a
brief explanation of the money market trading strategies along with the risks and obstacles to
implement those strategies.
1. Behaviour of money market rates in Australia for the past three years:
It has been identified that the Australian money market has faced the impact of the global
financial crisis that occurred in 2007. In order to deal with this situation, the reserve bank of the
nation has made some modifications in relation to the dealing operations. From 2015, the reserve
bank has raised supplies of highly liquid deposits, which are risk-free. This has helped in
minimising effect of the money market issue (Bouchaud et al. 2018). The investments in money
market are significant due to their dual functions as a temporary fund repository waiting for
investment in other projects and as a main component of the domestic supply of money.
In international economics, the domestic money markets form the backbone of the global
currency markets supplying the main exchange medium to transact global commerce. The
offshore banking centres are involved in dealing mainly with the investments in the money
market. This is because of various limitations on their ability in order to conduct portfolio and
activities related to direct investment (Busch, Bauer and Orlitzky 2016). The relations in money

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market take place mainly among the credit system institutions primarily for securing reserves for
their operations, instead of between industrial capitalists and financial institutions. In the
Australian money market, loan able money capital is traded in the form of a commodity among
the capitalists specialising in its accumulation and eventual advance to the merchants,
industrialists and others. Due to this, there is homogeneity of credit in the money market and it is
greatly social by nature. The central bank is the instinctively emerging bank of banks, which
regulates the money market (Cavusgil et al. 2014). The central bank credit takes into account
money lending on repayment condition along with interest. However, the development of loan
able money capital now develops from the pivotal bank of the credit system and this is intended
primarily at the banks functioning in the money market.
Year January Feb Mar Apr May June July Aug Sep Oct Nov Dec
2017 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
2016 2.00% 2.00% 2.00% 2.00% 1.75% 1.75% 1.75% 1.50% 1.50% 1.50% 1.50% 1.50%
2015 2.50% 2.25% 2.25% 2.25% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Table 1: Interest rates of Australia over the past three years
(Source: Reserve Bank of Australia 2018)
According to the above table, it could be observed that the interest rates of Australia have
remained constant starting from July 2016 to December 2017. As the table shows, the interest
rate of Australia in January 2015 was the highest and it is incomparable to the rates of the recent
years. This has declined in the next month to 2.25% and it has remained constant until April
2015. The interest rate has lost its momentum again to 2.00% in May 2015 and the rate has

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remained constant until April 2016. The decline is inherent further to 1.75% starting from May
2016 to July 2016. Finally, the rate has declined to 1.5% in August 2016 and this rate has
remained the same until December 2017. The interest rate and money market of Australia are
identical, since they have experienced some critical times and they have recovered from the
situation. A possible reason for the previous fall of interest rate is the advanced expense on few
goods.
In few instances, a financial lender tends to spend at one, which results in a negative
change in time preference of purchase. As a result, it leads to creation of lower rate of interest
(Chiang et al. 2015). Another possible reason of the previous interest rate problem is the
inflation expectations, which were not achieved because of the financial crisis. Since inflation
results in greater prices for industries and businesses, it develops the requirement for the
borrower in compensating any additional expense to the lender spending on stuffs with rising
prices (Kidwel et al. 2016).
2. Behaviour of the Australian money market interest rates over the next six months:
Economic growth:
It has been observed that Australia would accomplish greater numbers for the
manufacturing industry of the nation. It is expected that the manufacturing sector would rise in
numbers and size through structural changes to be initiated on the part of the government. The
nation would concentrate on maintaining increasing demand for its mineral products and the
development of greater export numbers (Kusolpalalert 2018). In addition, Australia is expected
to continue enjoying the support that the labour market provides to the economy. Thus, there
would be rise in employment in the labour market.

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Inflation and consumer price index:
The rates of inflation of Australia would continue to recover along with gaining new
momentum after the global financial crisis. There would be minimisation of consumer price
index and inflation rates to acceptable levels, since the nation has recovered effectively after
2007. The factors that would cause variations in consumer price index and inflation constitute of
effective monetary policies, fixed rates of exchange along with price controls and stable wage
(Li et al. 2017). Such positive changes would result in declining prices, which would help in
minimising inflation in the nation.
Credit market:
The interest rates do not move in tandem with the expectations of the market. However,
the shape of the yield curve is an effective barometer of what is probable to occur to the rates of
interest (Lustig and Verdelhan 2016). The yield curve depicts the perspectives of the investors
and borrowers participating in the market during that period, which is not identical with the
estimations of the business economists and commentators. At the time of quoting exchange rates
and interest rates on the part of the banks to the customers, it is necessary to understand whether
the customers intend to lend, borrow, purchase or sell. As a result, it is adequate for the bank in
quoting a one-way price (Lynch 2018).
However, on certain occasions, the customers need two-way prices. Generally, the
quoting bank is considered as the price-maker, while the other party is the price-taker. The
currency swaps could be used for seeking benefit of expected changes in interest rate
differentials with the help of opening and closing gaps in the market of foreign exchange
(Meagher and Goodwin 2015). The gain or loss from initiating and shutting down a foreign

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r1
r2
S
M
D1
D2
Interest rate (%)
Quantity of money per period
exchange gap relies on the swaps curve movement, variations in the spot rate and shape of the
swaps curve. Thus, benefit could be obtained from the estimated fall in the interest differential
by purchasing forward of a nation in a swap before the fall in discount. The advantage of the
forward discount could be sought with the help of an outright forward purchase; however, this
would result in a position of net exchange (Miranda-Agrippino and Rey 2015).
There could be improvement in money and credit market over the upcoming six months;
in case, the strategies that the reserve bank of nation has used are utilised properly. There could
be improvement in the interest rates in the upcoming six months, as it has remained constant for
a longer timeframe. Moreover, the recovery in the financial sectors would help the credit and
money market of Australia to achieve greater value in the next six months. The situation could
be illustrated further with the help of the following demand and supply graph:
Figure 1: Demand and supply graph of the Australian money market

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(Source: Reserve Bank of Australia 2018)
3. Explanation of the money market trading strategies:
The primary trading strategy of the money market to be used is online trading
technology. This is because it would enable in making transactions while gaining an insight
regarding the market changes. It has been observed that there is significant impact of technology
in the financial markets in a variety of ways in conventional times and greater costs of
communication have resulted in natural barriers between the stock exchange minimising the
overall competition between them. Hence, the Paris Bourse primarily traded various stocks at
various time in contrast to the NYSE (Moloney 2014). Money market trading would be easy with
the help of online trading technologies, as the team would not have to worry about the market
changes. The other trading strategies that Amundi Singapore could use would constitute of the
following:
Loan advances:
This specific strategy would concentrate on the use of greater interest rates. In addition,
this strategy would attempt to restrict those involved in conducting such practice. If the rates of
interest were high, the number of people committing on loan advances would be minimised.
Only those having loan advances would be provided greater interest rates, while the other
borrowings would be provided with the primary consideration (Valdez and Molyneux 2015).
Commercial bills:
The commercial bills strategy would need to be small instalments on payments. As the
economy of Australia has recovered after the global financial crisis of 2007, it needs to pay bills
and other expenditures at an affordable rate. Thus, it is necessary for the government of the

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nation to ensure that the payments of bills on instalment without enhancing the interest on such
liability.
Business lending:
It is crucial for the Australian government to encourage business lending for those sectors
still recovering from the effects of the economic crisis to attain a better stature. The government
would provide funds to those organisations needing the same; however, it is necessary to impose
restrictions along with the minimising the lent amount (Moore and Wang 2014). Thus, it could
accept the request of borrowing; however, it needs to assure the amount of funds available,
which is required to be incurred for public purposes and other significant endeavours.
4. Risks and obstacles to be encountered in implementing strategies:
The primary risk while implementing the strategy would be the presence of budgets and
other sources of finance. It is necessary for the government to ensure that the budget utilised for
the strategies would be sufficient for fulfilling all the needs of the nation. Another risk is related
to the security concern of the online trading technologies to be used (Rime, Schrimpf and Syrstad
2016). If the use of online trading technologies is made, the traders would receive all the
information. However, most organisations do not want to provide useful stuffs; if the same could
be used against them. Due to such behaviour of the organisations, the traders would not disclose
any information about the orders hold, trades finished and positions hold. The final risk would be
the amount of time to be spent in using these strategies, since each strategy could not be
completed within a shorter timeframe.

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Conclusion:
Based on the above discussion, it could be cited that the Australian government has made
some changes mainly in dealing operations to ensure smooth functioning of the money market.
The three factors that would affect the behaviour of the money market interest rates of the nation
include economic growth, credit market, inflation and consumer price index. The trading
strategies that would be used include use of online trading technologies, loan advances, business
lending and commercial bills. Finally, the risks involved in implementing such strategies would
include availability of budget and time along with the security concern.

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References:
Bouchaud, J.P., Bonart, J., Donier, J. and Gould, M., 2018. Trades, Quotes and Prices: Financial
Markets Under the Microscope. Cambridge University Press.
Busch, T., Bauer, R. and Orlitzky, M., 2016. Sustainable development and financial markets: Old
paths and new avenues. Business & Society, 55(3), pp.303-329.
Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose, E.L.,
2014. International business. Pearson Australia.
Chiang, T.C., Li, J., Tan, L. and Nelling, E., 2015. Dynamic herding behavior in Pacific-Basin
markets: Evidence and implications.
Kidwell, D.S., Blackwell, D.W., Sias, R.W. and Whidbee, D.A., 2016. Financial institutions,
markets, and money. John Wiley & Sons.
Kusolpalalert, A., 2018. The relationships of financial assets in financial markets during recovery
period and financial crisis. AU Journal of Management, 11(1), pp.36-45.
Li, H.C., Lai, S., Conover, J.A., Wu, F. and Li, B., 2017. Stock Returns and Financial Distress
Risk: Evidence from the Asian-Pacific Markets. In Growing Presence of Real Options in Global
Financial Markets (pp. 123-158). Emerald Publishing Limited.
Lustig, H. and Verdelhan, A., 2016. Does Incomplete Spanning in International Financial
Markets Help to Explain Exchange Rates? (No. w22023). National Bureau of Economic
Research.

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Lynch, D., 2018. Observations on the utility of FX global code. Law and Financial Markets
Review, pp.1-5.
Meagher, G. and Goodwin, S. eds., 2015. Markets, rights and power in Australian social policy.
Sydney: Sydney University Press.
Miranda-Agrippino, S. and Rey, H., 2015. World asset markets and the global financial
cycle (No. w21722). National Bureau of Economic Research.
Moloney, N., 2014. EU securities and financial markets regulation. OUP Oxford.
Moore, T. and Wang, P., 2014. Dynamic linkage between real exchange rates and stock prices:
Evidence from developed and emerging Asian markets. International Review of Economics &
Finance, 29, pp.1-11.
Reserve Bank of Australia. (2018). 2017 | Interest Rate Decisions | RBA. [online] Available at:
https://www.rba.gov.au/monetary-policy/int-rate-decisions/2017/ [Accessed 4 Mar. 2018].
Rime, D., Schrimpf, A. and Syrstad, O., 2016. Segmented money markets and covered interest
parity arbitrage.
Valdez, S. and Molyneux, P., 2015. An introduction to global financial markets. Palgrave
Macmillan.