“Currency Market Analysis“
> Explanatory Article by Marios Kyriakou, MSc Economics
About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.
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<Last updated 14.04.2020>
Hi! If you are interested in online trading currency pairs please read carefully the below article so you can be informed about what is causing currency moves.
Intraday Trading Volume
We call Volume/Quantity the amount traded when a transaction (Buy or Sell) takes place. Most of the trading volume comes from traders that buy and sell based on intraday price movements.
In high Liquidity Environment, we have relatively small price changes while in an Illiquid environment we have big and sometimes huge price changes. Liquidity is very important because it determines how easily price can change over a given time period.
Why Timing is Important
For speculation reasons on Forex direction you will only need to factor in what can be affecting one of the currencies in the pair. The international currency market isn’t confined in a single market exchange (not centralized) but involves a global network of world exchanges, so each trading day is broken down into several trading sessions.
Currency Trading and Timing
In general, currencies are traded 24 hours a day, but not every currency is
always traded in the same volume. Traders around the globe tend to trade
in their local/national currency as these are the most familiar to them and they have a certain affinity for it.
> a Japanese trader would most likely prefer a currency pair that contains the JPY.
> an American Trader would tend towards pairs that contain the USD.
That is why someone should pay attention to time.
Sessions and Trading Hours
New York & London [12:00 – 16:00] GMT
London & Tokyo [07:00 – 09:00] GMT
Tokyo & Sydney [00:00 – 06:00] GMT
They overlap throughout the day as different markets open and close. When these sessions overlap they create high volatility hours, thus opportunities to trade and generate profit within those hours.
The first session is Asia-Pacific session. In GMT time, Australia starts the trading day, with Sydney opening from 9pm to 6am the following day, followed by Japan from 11pm to 8am, and then joined by Hong Kong and Singapore.
Then comes Europe, with London, opening at 7am and closing at 4pm and finally, the US concludes the day, with New York opening from 12pm to 9pm. At this point forex volatility will begin to wind down before the whole process begins a new a few hours later.
Intraday traders rely on volatility within the trading day itself to increase their P&L. By definition, FX traders that are looking to open and close trades within one session need price movement.
The beginning of each trading session is when the big institutions, such as Central Banks release their monthly and yearly data or meet to make important monetary decisions. UK’s major data releases come out at around 9-9.30am, while the US tends to publish its numbers between 12.30 pm and 3.30pm GMT.
Best Time to Trade
There is no such thing as best, a ‘perfect’ time period within which one can trade forex, but there will be times that are perhaps “better” than others (in terms of volatility), for some specific forex pairs.
Unsurprisingly, each forex pair is most active when at least one of its markets is open. For example, USD/JPY will be busiest during the Asian and US sessions, while the EUR/USD will be at its most volatile when the European and US sessions overlap.
How Fixed Income Securities affect Currency Movements
Fixed income securities (including bonds) are investments that offer a fixed payment at regular time intervals.
Economies that offer higher returns on their fixed income securities should attract more investments.
How global Equity markets affect Currency Movements
Equity markets can help gauge currency movement.
Invest in stocks in Japa > a European investor must first exchange his euros (EUR) into Japanese yen (JPY).
This increases demand for JPY causes the value of the JPY to appreciate. On the other hand, selling euros increases its supply, which drives the euro’s value lower.
When the outlook for a certain stock market is looking good, international money flows in. (currency of denomination appreciates caused of increased demand for that currency).
> Strong stock market = strong currency as more capital is exchanged for JPY to buy stocks the JPY appreciates.
How bond yields affect Currency Movements
Bond is a financial instrument issued by an entity when it needs to borrow money. Bonds typically have a defined term to maturity, wherein the owner gets paid back the money he loaned, known as the principal, at a predetermined set date.
It is known that bond prices and bond yields are inversely correlated. Bond yields actually serve as an excellent indicator of the strength of a nation’s stock market, which increases the demand for the nation’s currency.
Bond spread represents the difference between two countries’ bond yields. As the bond spread between two economies widens, the currency of the country with the higher bond yield appreciates against the other currency of the country with the lower bond yield.
For example, if one bond is yielding 7% and another is yielding 4%, the spread is 3 percentage points or 300 basis points.
If interest rates fall, the value of investments related to interest rates falls. Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. (we are talking about the old bonds issued before the current rate fall).
If interest rates rise, investors move away from stocks and other high-risk investments, increased demand for “less-risky instruments” such as U.S. bonds and the safe-haven U.S. dollar pushes their prices higher.
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