Assessment Task 2- Stage 2 FX report (Group project)

BAF1002 Financial Markets and institutions.

FX session - BAFI-1002-S1-WRK12 Tuesday (Dr.Nirav/Dr.Obaid) Group 11

By Marvin Liu chung ming and Zekai Qi

S3957836 and S3889534
Table of Contents
Introduction:......................................................................................................................2
Market view......................................................................................................................2
Overview and strategy...............................................................................................................2
Analysis.............................................................................................................................2
Foreign exchange and market policies/expectations...................................................................3
Trading Strategy................................................................................................................4
Buy low sell high........................................................................................................................4
Currency prioritisation...............................................................................................................4
Live shared negotiations.............................................................................................................4
Trading Strategy conclusion & Performance Analysis..................................................................5
Challenges..................................................................................................................................6
Secondary task...........................................................................................................................6
References.................................................................................................................................8

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Introduction:
Our team has been given a short-term and a long-term trading objectives as part of a project
to assist clients in developing and putting into practise a plan to meet their unique objectives.
The management team is expecting our team to give a report and a presentation to them that
addresses the problems the customer is having. The report should include a variety of topics,
including a description of the trading strategy intended to help the reader reach the goals, an
explanation of the transactions, an analysis of trading's gains and losses, and a reflection on
the trading experience.
For the main goal, our team will thoroughly describe the exact trading techniques employed,
show the currencies that were bought or sold to reach the trading goal, and also provide the
quotation that was approved for using the strategy. Additionally, we will also explain the
transactions contributing to achieving the trading objective.
The secondary objective is linked to our stage 1 individual market view. Based on the market
views completed by each team member in Stage 1, our team will develop a market outlook
and provide Forex trading strategies to be undertaken.

Market view
Overview and strategy
For our project we will focus more on the currencies such as USD, AUD, EUR, and JPY as
these are the most traded currencies worldwide and those that we focused on trading during
the live session. Those currencies have been affected by various factors over the last few
years and received multiple impacts that we will discuss below
For the USD it has been influenced by the COVID-19 pandemic and the Federal Reserve's
monetary policies to support the US economy. As reported by (CNBC 2021), the Federal
Reserve has kept interest rates low and has implemented various stimulus measures to
counter the economic impact of the pandemic.
The AUD has been boosted by the rise in commodity prices, particularly iron ore, which is
Australia's largest export. As reported by (Reuters 2021), the price of iron ore has reached
record highs, contributing to the AUD's strength.
The JPY is often considered a safe-haven currency and has been influenced by the global
economic uncertainty caused by the COVID-19 pandemic. As reported by the (Japan Times
2021), the Bank of Japan has implemented various monetary policy measures to support the
economy, including the introduction of a new loan program to help struggling businesses.
The EUR has been impacted by the ongoing COVID-19 pandemic and the European Central
Bank's monetary policies. As reported by the (Financial Times 2021), the European Central
Bank has implemented various measures to support the eurozone economy, including the
Pandemic Emergency Purchase Programme.
Our strategy going into the trading session as a bank was to buy currencies such as USD and
AUD as much as we could and a small amount of other currency such as JPY and EUR just
to have more flexibility while trading with corporations and other banks.

Analysis

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The Federal Reserve has indicated that it intends to keep interest rates low for the foreseeable
future, which has resulted in a lack of volatility in the USD; however, ongoing worries about
the economic recovery and inflation may put pressure on the USD in the coming months. The
AUD has been on an upward trend against the USD due to the resilience of the Australian
economy, which has rebounded strongly from the global financial crisis.
Due to worries about Europe's economic recovery and the pandemic's lingering risks, the
EUR has been under pressure. The EUR has been under pressure as a result of the European
Central Bank's signalling of its commitment to sustaining low interest rates and quantitative
easing. The EUR may also continue to be affected by worries about inflation and the
possibility of a delayed economic recovery.

In comparison to other major currencies, particularly the USD, the JPY has remained largely
constant. The Bank of Japan has made it clear that it intends to keep its monetary policy
loose, which has kept the JPY steady. The JPY's gains could be constrained, though, by
worries over Japan's slow economic recovery and low inflation.
Overall, the market trends for the USD, AUD, EUR, and JPY are influenced by a range of
factors, including interest rates, economic recovery, geopolitical tensions, and inflation
concerns. Traders should continue to monitor these factors and conduct thorough market
research to develop effective trading strategies.

Foreign exchange and market policies/expectations

The US Federal Reserve, the Reserve Bank of Australia, and the European Central Bank
implement monetary policy to manage inflation, stabilize the economy, and promote
economic growth. Expectations for changes in interest rates and quantitative easing measures
can affect the supply and demand for each currency. (Federal Reserve Bank of St. Louis,
2021) (Reserve Bank of Australia, 2021) (European Central Bank, 2021)

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Government spending and taxation policies can also impact exchange rates. For example, the
US government's recent stimulus spending could lead to increased inflation expectations,
which may affect the value of the US dollar. (Congressional Budget Office, 2021)
Trade policies, such as tariffs and trade agreements, can also impact exchange rates. For
instance, the US-China trade war has caused fluctuations in the value of the US dollar, while
Brexit negotiations have impacted the value of the euro. (Bloomberg, 2021)
Economic indicators such as GDP, inflation, and employment data can also impact exchange
rates. For instance, strong employment data in the US may increase expectations for
economic growth and inflation, which could affect the value of the US dollar. (Bureau of
Labor Statistics, 2021)

Trading Strategy
Buy low sell high
The buy low sell high strategy is a common approach used in forex trading to try and
generate profits by taking advantage of price fluctuations in the currency markets. The
strategy involves buying a currency when it is undervalued and selling it when it becomes
overvalued, with the aim of making a profit on the difference between the purchase and sale
prices. In our case We planned to intentionally trade a 3point margin above and below the
average market rates with a 7-to-10-point spread. The process involved checking the current
market rates on the right side of the computer and doing some calculations to find the best
possible rate with the appropriate spread. With the help of this technique, we ensured that we
achieved our primary objective and make a profit.

Currency prioritisation
Currency prioritization involves prioritizing different currencies in a portfolio or investment
strategy based on an investor's objectives, risk tolerance, and market outlook (Jones, 2019).
The prioritization of currencies can be a crucial aspect of foreign exchange (forex) trading as
it helps investors manage risk, maximize returns, and achieve investment goals (Smith,
2020).In our case while doing trades in currencies that was part of our currency priority list,
we would trade this currency at a good price such as the USD and AUD and trade currency
that was not a priority at the rates with large spread to dis-encourage them to trade with us
and make the most profit if they accepted the trade.

Live shared negotiations

Live shared negotiations in forex trading refer to the process of traders communicating and
collaborating in real-time to make trading decisions. In this approach, traders share
information, insights, and strategies with one another to arrive at a consensus on the best
course of action. During our trading sessions the live negotiations were very entertaining and
interesting the corporation would call us or we would call them and ask if they were
interested in buying any currencies. They would ask for some currency rates where we would
give them the bid and ask using the buy low sell high and currency prioritisation strategy and
they would ask for better rates and thus we will negotiate to find a middle ground ensuring
that we made a profit as a bank. During the first hour of the session my team and I were
sitting on the wrong table number 14 instead of number 11 therefore no other team tied
contacting us for trades and all the trades we did was a result of us calling the corporations
and banks one by one trying to bargain a deal.

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Trading Strategy conclusion & Performance Analysis
To make a profit in the forex market, it is necessary to determine whether to buy or sell a
currency pair at a certain period. (Hayes A. , 2021) It is necessary to buy the currency pair on
a low point and sell out at high point or sell the currency pair at high point and buy back the
currency pair on low point. To know whether the currency pair is at a low point or in a high
point, their historical currency pair price and several technical analyses will be conducted
before the trade of the currency pair. There are a few transactions made which include
purchasing the AUD/GDP at rate of 0.5279 with an amount of $28,414,472, selling the
currency pair of AUD/JPY at rate of 89.51 with an amount of $22,343,872.
First of all, in the past few years, the AUD/GDP has always maintained at a range of
0.55 and above so buy the currency pair of AUD/GDP at rate of 0.5279 will be a good
decision where it is expected that the AUD/GDP are located at low points. Figure below
indicates the AUD/GDP currency pair chart in these few years. According to the figure, we
can conclude that the AUD/GDP currency pair are experiencing the lowest point in these few
years. According to the historical price analysis, it is a good position or a good rate to buy in
and hold the AUD/GDP currency pair for a certain period. Based on the current new analysis,
the United Kingdom had experienced an economic drop and unstable in political which may
lead to high fluctuation on this currency pair. The orange line describes the buying position
that we did for this currency pair.

Figure 1: The AUD/GDP currency pair chart in these few years.

After that, selling the currency pair of AUD/JPY at rate of 89.51 is acceptable where
the AUD/JPY currency pair are fluctuating extremely. While the AUD/JPY are increasing to
89.65, our trade strategy may buy back the currency pair of AUD/JPY and make profit on this
transaction. Furthermore, as the currency pair of GBP/USD is at a historical low point, it is a

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good choice to hold this currency pair for long term and we buy the currency pair at the rate
of 1.2457.
In short, the overall profit that we made based on our trade strategy is about $35,635,
which can say that our trade strategy is working in the forex market. The profit trade is
discussed in the paragraph above. There are several trading transactions made which didn’t
make a profit or even though have some loss in certain transactions. The lost trading
transactions mainly happen in the currency pair of AUD/USD. It is important to have some
proper analysis of the increment of interest and some expectations on the news which may
affect the trade market a lot.

Challenges
During our trading session my teammate and I suffered a lot of challenges as one group
member decided not to show up therefore, we had to undertake the trades with just the two of
us. One had to both take calls, negotiate and decide what prices to offer or accept at he same
time. Other challenges were that for more than half of the session our group was sitting on the
wrong table assigned and therefore could not receive any calls from other teams and groups
which is very unfortunate. Nonetheless we still made a lot of trades as we kept calling
corporations and banks to secure a profit.

Our first transactions resulted in a profit of $16,000 when we bought AUD and sold GBP at
rates 0.5279 while the market rate was 0.5284 therefore resulting in a quick small profit.
Then we decided to sell some AUD and Buy JPY which was a mistake as our spread was not
wide enough to ensure a profit. This was a mistake on our part during transaction 6. Since
JPY was not our priority we should have given a bigger margin and spread.

Secondary task
For our secondary task we were asked to buy 40million of the currency we researched and
projected its appreciation in the future. In our case we predicted that the USD would
appreciate against the AUD and the JPY. Therefore, our goal was to buy 80 million of USD
and sell our JPY and AUD. As we were very short on time since we realised that we were on
the wrong table and thus had to change table, turn on the computers and log in all over again
we had already lost most of the time to complete the secondary task but still we stayed
positive and started making calls, unfortunately by this time most groups had already
achieved their primary and secondary objectives therefore not leaving us with much options.
Fortunately after lots of negotiations and persisting offers we finally found a table willing to
buy our JPY in exchanged for USD and AUD still we took both trades even though we did

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not want to buy AUD thus with this trade secured we fortunately was able to sell the AUD
and buy on another $20 million USD that we were looking for on our last trades successfully
completing the secondary trades for one group member.
We ended with around $38 millions USD and a negative amount of $29 Millions AUD and
plus 9Million GBP substracting 17millions JPY leaving us with a profit of $38 millions in
AUD which can be considered a success for our second live trading sessions.

If I could change somethings it would be not using the same margin and spread for all
currencies and being more selective by only giving good margins for currency, we want such
as USD and giving worst spread when buying currency such as JPY and EUR since we don’t
believe in its future appreciation. As a team of two we had to do more work than a team of 3
would do in the same amount of time therefore achieving better results but, in our case, I
believe we did our best given the circumstances and were fortunate to being able to learn a lot
from this session thanks to our tutors and lectures.

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References
 Hayes A. . (2021, July 7). How to Create and Manage an Effective Forex Trading Strategy.
Retrieved from Investopedia: https://www.investopedia.com/terms/forex/f/forex-trading-
strategies.asp#:~:text=What%20Is%20a%20Forex%20Trading,fundamental%2C%20news
%2Dbased%20events.

 CNBC. (2021). Fed holds rates steady near zero, says economy is picking up amid 'strong'
gains in hiring. Retrieved from https://www.cnbc.com/2021/04/28/fed-meeting-april-
2021.html
 Reuters. (2021). Iron ore price hits record high at $230/tonne amid robust demand.
Retrieved from https://www.reuters.com/business/sustainable-business/iron-ore-price-hits-
record-high-230tonne-amid-robust-demand-2021-05-10/
 The Japan Times. (2021). Bank of Japan unveils plan to boost lending to pandemic-hit firms.
Retrieved from https://www.japantimes.co.jp/news/2021/05/10/business/economy-
business/bank-japan-lending-program/
 Financial Times. (2021). ECB launches €500bn emergency bond-buying programme.
Retrieved from https://www.ft.com/content/af66242b-8164-4707-b2f9-5a5e3a3849a4
 Federal Reserve Bank of St. Louis. (2021). Monetary Policy.
https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-7-
monetary-policy
 Reserve Bank of Australia. (2021). Monetary Policy. https://www.rba.gov.au/monetary-
policy/
 European Central Bank. (2021). Monetary Policy.
https://www.ecb.europa.eu/mopo/html/index.en.html
 Congressional Budget Office. (2021). The Budget and Economic Outlook: 2021 to 2031.
https://www.cbo.gov/publication/56990
 Reuters. (2021). Dollar slips as Biden's lead in polls boosts risk appetite.
https://www.reuters.com/article/us-global-forex/dollar-slips-as-bidens-lead-in-polls-boosts-
risk-appetite-idUSKBN279063
 Bureau of Labor Statistics. (2021). Employment Situation Summary.
https://www.bls.gov/news.release/empsit.nr0.htm