Introduction to Cross Foreign Intermarket FX (XFIfx)
1. Market is divided into 2 main segments:
a. Equity - Risked Security
b. Bond - Secured Security
2. Apart of that there are another 2 markets that exist:
a. Commodities
b. Forex
3. As a trader, it is a must to really understand these 4 basic segments and the interrelation.
4. What is FOREX?
“The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate.
The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $2,000 billion per day. (The total volume changes all the time, but as of August 2012, the Bank for International Settlements (BIS) reported that the forex market traded in excess of U.S. $4.9 trillion per day.)
One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.”
- Courtesy of www.investopedia.com
5. Market Players.
a. Major Banks
b. Commercial Entities
c. Central Banks
d. Retails (Brokers, Dealers, Funds)
e. Small Retailers
6. So that every segments will receive a different price from the spread or commission.
a. Major Banks
- EBS System
- Razor Thin Spread
b. Commercial Entities
- Also identify as Commercial Banks
- Platform as like Thompson Reuters, Bloomberg etc
c. Central Banks - Via Major Banks for currency stability, FDI and so forth
d. Retail Players
- Broker or dealers (Front Line) for Major Banks
- Hedge Funds, Pension Funds
- ECN
e. Small retailers
- Meta, Java, Web Platforms
- Using broker or Bank Platform depending on the capital whether it is a platform for broker market maker or platform for ECN
7. The different is the total sum of the fund itself. Major Banks, the fund spread is so small. However, for retail trader like you all the fund is small and spread is also small. It is impossible for Major Banks to use retail trader spread. Try to calculate USD100M order which the spread is 1.2 pips. How much it will be for EUR/USD?
8. As mentioned earlier in the FOREX definition the total volume changes all the time, but as of August 2012, the Bank for International Settlements (BIS) reported that the forex market traded in excess of U.S. $4.9 trillion per day. Which is mean it is the biggest among other markets that are available in the whole world. However, it have to be divided into 4 market segments.
9. FOREX market segments:
a. FX Spot Market
b. FX Futures
c. FX Options
d. ETFs
e. Swap, forward contract (this is the biggest, half of a daily transaction involving government, multinational corporations and banks)
10. From the market segment. Take for example you buy a house:
a. Spot Market
- Buy a completed house at the developer office.
b. Futures
- Buy a under construction house at developer office. Buy a house that will be completed in the future. The house price when it is completed might increase or decrease base on the current market price.
c. Options
- Go to the developer office and pay the booking. When the house is completed options is available whether or not to take or let go the house base on the current market price.
d. ETF
- Buy the developer company share. The developer company might have other business as well as like sell houses, oil, energy etc. When the share going up its profit and when the share goes down it’s
a loss.
e. Swap.
- United States government fix a one price and European government fix at one price. Initially, both parties have agreed on the price they fixed. Nevertheless, when the date to do the exchange the reevaluation is required. The revaluation will be done normally on every 3 months, 6 months and so forth.
11. Spot FX volume is USD1.5T. From this USD1.5T that is traded daily the most vital component is FX Futures.
12. Futures Market that are normally seen are US Index, Eurodollar, WTI, Brent, Copper etc. Perhaps you may heard about Commitment of Traders (COT) Report? That is actually Futures Market.
13. Futures Market comprises of a few segments. The top 5 vital segments to FX Market traders are
a. Currency Futures
b. Metals Futures
c. Commodities Futures
d. Equity Index Futures
e. Bond Futures
New York Session Forecast
Sentiment Update:
During the Asia-Pacific session the main event was the RBNZ rate decision which saw the RBNZ cut rates by 25 basis points as expected. The RBNZ did state that policy is to stay accommodative and that further easing is likely to be necessary. RBNZ Assistant Governor McDermott stated that projections show one more rate cut is likely, but added that there is a possibility for more. Although no specific time frame for additional easing was provided, McDermott did suggest that November is most likely.
There has been little in terms of economic data or news during today's London session. GBP has saw further weakness with cable now firmly below 1.3000 and EURGBP briefly breaking 0.8600. Pressure on GBP amongst a lack of news or data only goes to highlight the markets bearish bias in GBP, however key support is likely to be found as we approach post 'Brexit' lows.
Today's Forecast:
In today’s session we expect the strongest currency to be USD as USD has seen a slight recovery during today's London session from its recent negative sentiment, however due to the lack of risk events or news for today, our view is based on a fundamental perspective which should ultimately see USD strengthen against its fundamentally weaker counterparts. Therefore we will be looking to buy USD on retracements which simply provide better levels to buy from.
The weakest currency is expected to be GBP as amongst a lack of economic data or news, GBP has managed to once again break to fresh session lows with GBPUSD firmly below 1.3000 and EURGBP briefly breaking above 0.8600.
Today's New York session is likely to be light with no major data of note. The next market moving event will be New Zealand Retail Sales in the Asia-Pacific session.
The GBPUSD pair is currently priced at 1.2959.
There are several levels including the current price level which can be considered for selling opportunities:
The price levels below could be used to sell from as price retraces into them:
1.3000, 1.3100, 1.3170
The price level below could be used to sell from as the price breaks out below:
1.2900
Long Term Fundamental Update:
*New updates to the fundamental section will be left in bold for 24 hours*
USD: The Federal Reserve are most likely to leave their current policy unchanged at their next meeting as inflation continues to show little evidence of reaching the Fed's target of 2% in the foreseeable future. If the bank did change its policy in the next 3 months then the move would most likely be a rate hike with many Fed members looking to increase rates once economic data warrants further action. This gives the USD currency an overall bullish tone for the next 3 months.
EUR: The ECB are most likely to leave their policy unchanged at their next meeting because they have already cut their main rates heavily over recent years and they are at what many experts consider to be an ultimate low. If the bank did conduct a policy change within the next 3 months then the most likely move is an increase in its QE programme, because it is still battling low inflation alongside low interest rates, so more powerful action could be needed. This gives the EUR currency an overall dovish bias over the next 3 months.
GBP: The BoE have now officially entered an easing cycle by announcing on August 4 a 25 basis point cut to the Bank Rate and a surprise 60 billion increase in their Asset Purchases. Along with the surprise increase in QE the BoE also stated "the majority of the MPC expect rates to be near 0% by the end of the year" which would imply that another rate cut of 25 basis points can be expected before the year end. Given the BoE latest monetary policy decisions and expectations for further easing this year, we maintain a bearish bias for GBP.
AUD: There is a strong possibility that the RBA will ease policy again during 2016 as many economist believe the door for further easing remains open due to continued low inflation in Australia. As such inflation data for Q3 will be key in regards to future policy expectations, Q3 CPI is not released until October and therefore although the RBA will likely leave policy unchanged at their September meeting, further easing in later meetings remains a strong possibility especially if Q3 CPI disappoints. This therefore maintains our bearish bias for AUD.
NZD: Although the RBNZ have only just reduced rates to new record lows of 2%, most economists and the RBNZ believe additional rate cuts will be necessary before the end of 2016. According to RBNZ Assistant Governor McDermott, November is seen as the most likely meeting for additional cuts. Despite rates in New Zealand now at a record lows, NZD still holds the highest interest rate of all the major currencies and therefore NZD longs will remain attractive as carry trades. Although this may see NZD supported at times, with the RBNZ expected to ease in the coming months we would ultimately expect NZD to weaken against fundamentally stronger currencies and therefore maintain a bearish bias for NZD.
CAD: The BoC are most likely to leave monetary policy unchanged at their next meeting as Canadian inflation is within the BoC’s target range of 1-3% with the economy also supported by accommodative fiscal measures. If the BoC did conduct a policy change within the next 3 months it would likely be a rate cut based on concerns over Canada’s competitiveness since CAD’s appreciation throughout the year. Although this gives CAD a slightly bearish fundamental bias, with most central banks currently in easing cycles CAD has a comparatively neutral bias.
JPY: The BoJ will most likely need to ease policy further in the near future as the increases made to its ETF purchases and USD lending programmes will likely be insufficient in helping inflation reach its target of 2%. Furthermore Kuroda’s pledge to "conduct a comprehensive assessment" of economic and price developments when the BoJ next meet highlights that further easing is still on the table. With further easing by the BoJ likely we continue to maintain a fundamentally bearish view on JPY, however due to its status as a safe haven currency JPY will likely strengthen in times of risk off sentiment.
CHF: The SNB are most likely to leave their policy unchanged at their next meeting as interest rates in Switzerland already remain at a record low of -0.75%. If the SNB were to change policy in the next 3 months it would likely be a rate cut as inflation continues to remain far below the SNB’s target. This gives CHF an overall bearish tone.
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