Synoptic Module on Economic Policy - Essay Example

Synoptic Module on Economic Policy - FX Trading Analyst - Table of Contents I. Introduction ……………………………………………………… 3 II. The Role of FX Trading Analyst in Making Economic Decisions ……………………………………………………...… 4 III. Most Important Applied Economic Theory Used by FX Trading Analyst ……..……………………………………… 6 IV. Most Important Skills Needed by FX Trading Analyst in Using Economic Tools ………………………………….……………... 7 V. Economic Knowledge and Skills I have Learned from Kings University ……………………………………………….... 7 VI. Areas of Knowledge and Skills I Need to Develop Further to Successfully Perform the Role of a Business Owner …………… 8 VII. Conclusion ……………………………………………………….. 9 Appendix ………………………………………………………………… 10 References ………………………………………………………………. 11 Introduction Foreign Exchange, currency or FX Trading is part of the banking industry. There are also some private companies that are also into FX Trading. Foreign Exchange trading exists whenever there is a trading between one monetary currency over another. In fact, this is one of the largest markets in the world in terms of value of cash that is being traded. The market of foreign exchange is unique because of its trading volume and the extreme liquidity of the market. There are times when the market is really active and sometimes it is stagnant over a period of time. The variety of traders in the market even makes the currency trading more interesting because these players could influence the market within a few minutes. The FX trading is also considered as one of the busiest market because of its long trading hours wherein the normal operational time for the currency trading is 24 hours a day except on weekends. According to IFSL estimates based on the semi-annual London, New York, Tokyo and Singapore foreign Exchange Committee data, the average global turnover for the traditional foreign exchange market transaction is almost $2.7 trillion per day as of April 2006. When the non-traditional foreign exchange derivatives and other traded products are included, the average per day would be around $2.9 trillion. (JB, 2007) Trading of the currencies normally occurs between large banks, the central banks, people who speculate the currencies, multinational companies, the government, and other financial markets and institutions. Among the top 10 currency traders as of 2006 includes: UBS AG, Deutsche Bank, Citigroup, Royal Bank of Scotland (RBS), Barclays Capital, Bank of America, HSBC, JPMorgan Chase, Dresdner Kleinwort Wasserstein, and Goldman Sachs. (Royal Bank of Scotland, 2006) For this reason, a good Foreign Exchange Trading Analyst is necessary to conduct a more successful trading. Each of the organizations and institutions that participate in the currency trading has a Foreign Exchange Trading Analyst to take over the decision making for each traded currencies. The Role of a FX Trading Analyst In Making Economic Decisions The role of FX Trading Analyst is to watch over the market trend of each foreign currency since the market is very unstable. Prior to making any trading decisions, the analyst needs to study the economic foundation of the past, present, and future status of each currencyi that is tradable. Since the marketplaces are interconnected, a number of different rates (prices) have to be considered depending on what the bank or the market maker is currently trading. Given that there is too little or no available inside information with regards to the foreign exchange markets, the FX Trading analyst needs to determine the actual causes of the monetary flowsii in the country of the currency being traded. To determine all these information, it is necessary for the analyst to regularly watch the News or read the newspapers. However, large banks have a more competitive edge over the private or individual speculators because banks are able to see their customers’ flow of order. The analyst is free to choose between the use of fundamental analysis or the technical analysis. Both tools are used to detect the increase or decrease of the currency value being traded. Fundamental tools include analyzing the overall macroeconomic environment of the countries with major currency based on the news and currency updates on the GDP, interest rates, investments, international trading, calamities, terrorist attacks, etc. In most cases, a serious terrorist attack is enough to make a sudden change in the trading of currencies. On the other hand, the technical analysis studies the past and present market trend for the traded currency. (See Chart I – Technical Analysis on page 9) Once the analyst has detected a possible increase or decrease in a specific foreign currency, the analysts would start to decide whether to buy or sell the currency. A good example for this case is the September 11 incidence wherein the US currency immediately slides down by significant basis points or pips. At this point, all the currency traders traded to sell the US currency in order for them to earn. In line with the September 11 case, the value of other currencies increases. Therefore, the analyst would either choose to sell the US currency or buy the other tradable currencies. The role of the FX Trading analyst is never easy because the currency that the analyst is trading could cause him/her to loose big amount of money overnight. The strategy the analyst would take will also depend on the amount of investment he/she has with the broker, the bigger the investment means a better chance of earning some profit over time. In worst cases, the analyst also has a choice to leverage the buying and selling of the currencies although this strategy could be very dangerous to traders who are not aware of the risks they are taking. Basically, when the value of a single currency, for example US dollar against the Japanese Yen (USD/JPY) is increasing, the technical graph for the FX Trading of USD/JPY would appear ‘bullish’ – meaning, the market for US dollar is on the upward trend. Therefore, investors would start buying on the US dollar currency (USD/JPY). (Bloomberg, 2007) On the other hand, when the value of a single currency is weakening, the technical graph for a given currency would appear ‘Bearish’ – meaning, the currency market is declining. (Bloomberg, 2007) When the market is neither ‘bullish’ nor ‘bearish’, the market is said to be ‘neutral’, meaning, not much buying or selling occurs in the market. (Bloomberg, 2007) Most Important Economic Theory Used by FX Trading Analyst The FX Trading primarily involves the supply and demand factors in the market. The changes in the supply and demand for a single currency and its value are being influenced by three general factors classified as: economic factors, political condition, and the market psychology. Market psychology includes the speculators’ involvement in the currency markets such that when a news talks about a politically and security unsound environment in a specific country such as the United States for example, most of these speculators would ‘sell’ their US dollar (US$) investment; thus, weakening the currency. Looking at the fundamental theory, government intervention controls over the possibility of inflation or deflation within the country. Government control over this matter would then affect the increase and/or decrease in the global trading of the currencies. The monetary policy, government budget deficits or surpluses, balance of trade levels and trends, and the economic growth and health of the country also affect the supply and demand including the ‘cost’ of money. Most Important Skill Needed by FX Trading Analyst in Using Economic Tools The most important skill that the FX Trading analyst should have is the ability to determine the possible effect of government intervention over the currency being traded. In many cases, terrorist attacks could result to a decrease in the value of the traded currency. In line with this scenario, the analyst should be able to detect that the value of the currency would slide down. Therefore, the analyst should immediately respond to the possible market changes by selling the affected currency. History repeats itself, for this reason, the analyst should also review the past events that took place over the past few years. In other words, the skill of the analyst can be acquired through constant reading and updating of facts and figures. Knowing to read the technical tools used in the forex trading is also an important skills. A lot of traders who are not knowledgeable with the fundamental tools solely depend on the technical analysis of the current market status. Other traders argue that it is not wise to fully depend on the use of the fundamental analysis because in many cases, most of the macroeconomic fundamental events only had a minor effect in the overall situation in the forex trading market. Economic Knowledge and Skills I have Learn from Kings University I learn a lot of economic theories from Kings University. Particularly the study of microeconomic and macroeconomics. Although macroeconomic theories is more applicable in the case of the role of a foreign exchange trading analyst, the knowledge of microeconomic is also important in the sense that it has taught me the basics of the ‘law of supply and demand.’ Basically, I believe that the law of supply and demand is the most important foundation in the world of economics. From the university, I learn to read and understand the basic economic graphs and charts that are normally used as a tool in analysing the market trend of the currencies. Since the university has taught me economic issues related to business and the economies of the Asia Pacific countries, I have indeed gain a strong foundation with regards to the historical knowledge related to their economic situation. This knowledge is very useful when performing the role of FT Trading analyst. The knowledge I have received from the university regarding the use of econometrics is also important in performing future forecast based on the historical data available. The basic knowledge on econometrics can be used in analysing the technical graph of FX Trading. However, since the trading of foreign currency market is very complex and sensitive to a lot of external factors, it would still be a little hard to determine the short-term fluctuations of the currencies. Areas of Knowledge and Skills I Need to Develop Further to Successfully Perform the Role of FX Trading Analyst As soon as I leave Kings University, it is important for me to continuously update me economic skills and knowledge to keep up with the constantly changing economic market situation. In line with the task of FX Trading analyst, I believe that fully understanding the inflows and outflows of money supply could be very useful in analyzing the markets of foreign exchange trading since the flow of money supply is one of the most important determinants of the increase and decrease in the value of money. Further studying and understanding the use of technical tools is also necessary because according to most FX Trading analysts, this tool serves them a good tool in their decision-making strategies. Since there are a lot of speculations happening in the FX Trading markets, I also believe that this tool serve as a more concrete evidence on what is really happening in the past and present markets of currency trading. Maybe forecasting method can also be useful in detecting the possible future market trend using the past trading data. In line with forecasting skills, I still have to learn how to use the available software to track the future market trend of currencies exchange. Conclusion Since the markets of foreign exchange trading is highly competitive, it is necessary for me to continuously update my skills and knowledge on the macroeconomic studies. So far, I have learned a lot from the university teachings and through my research activities. However, I believe that there is more to learn in order for me to be successful in taking the role of FX Trading analyst. *** End *** Chart I – Technical Analysis on FX Trading Source: OANDA FXTrade , 2007 References: 1 Bloomberg (2007) ‘Financial Glossary’ Retrieved: May 27, 2007 < http://www.bloomberg.com/ > 2 JB (2007) ‘Foreign Exchange Market’ Retrieved: May 25, 2007 < http://www.forex-forex-trading.com/ > 3 Royal Bank of Scotland (2006) ‘FX Poll 2006 Results’ Euromoney May 2006. Retrieved: May 25, 2007 < http://www.euromoney.com/ >  Read More