Notes From the Book Flashcards
Events that move the forex market on a grand scale
Macro economic events
Events that make the market tick on a daily basis
Micro economic events
This market is a crucial component of the financial marketplace and can influence currency trends
The Bond Markets
What is economic expansion?
a period of economic growth.
What is a recession?
a considerable decline in economic activity.
What is deflation?
Occurs when there is not enough money available to purchase goods.
This shows a lack of spending by the government and investors and may cause the economy to decrease due to higher levels of unemployment.
However, The cost of goods and services will be more affordable
What is inflation?
An oversupply of money to purchase goods. This causes the price of goods and services to increase, but the purchasing power of the currency will fall.
What is GDP?
Gross Domestic Product– The overall value of goods and services a country generates in an entire year.
How is GDP used?
GDP is used as a benchmark to determine whether the central bank should fight off recession or manage inflation.
GDP is also used as a way of measuring the size of a country’s economy.
What is C.I.G.NE (GDP formula)?
C- Consumer Consumption
I- Investment
G- Goverment spending
NE- Net Exports
What is the most relevant indicator of economic health and why?
GDP Growth Rate- Investors compare country growth rates to discover the best investment opportunities
What is Current account?
Measures a country’s earnings from the trade balance.
The goal is to increase earnings by exporting more goods and services than it imports. (Trade Surplus).
Capital Flows
Money sent from overseas investors.
Positive capital flow means that investments from overseas investors exceed outflows to other countries.
How does capital flow create demand for a currency?
Investors have to exchange their money for the currency they invest in.
Risk-off
investors tend to sell these riskier assets and buy “safer” assets, ones that are typically less vulnerable to a weakening outlook or negative investor confidence. This is “Risk-Off.”
Risk-On
When investor sentiment is optimistic about the economy, geopolitics, and industry, riskier assets tend to get pricier. That is known as “Risk-On
These countries are considered Safe havens in times of uncertainty.
USD, JPY, and CHF
Always factor in a country’s _______ when assessing the global situation.
Economic profile.
ex. if the global setting is risk-off. USD, CHD, JPY should appreciate.
Unless JPY is going through QE or some type of government intervention.
How do we measure Risk-On vs Risk-Off?
With the VIX
Readings above 20= Risk-off
Readings below 20= Risk-on
What does the VIX measure?
US Market volatility
What is a bond?
A bond is debt security or an IOU. Borrowers (Government or corporation) issue bonds to raise money from investors willing to lend them money for a certain amount of time.
They provide a cheaper source of borrowing.
Bond Price
The Cost of the bond
ex. $1000
Bond Yield
The interest that the bondholder is paid by the bond issuer (Government)
ex. 10% or $100
When bond prices rise, what happens to bond yields?
Bond yields go down.
By Comparison, which instrument is considered safer in the eyes of investors:
Bonds or Currencies, and why?
Bonds– since they’re guaranteed by the borrower.
In a risk-off environment, what is likely to happen in the bond market?
Investors will buy into the bond market because it offers more stability.
Again, when the demand (Price) starts to rise for Bonds, what will happen to the bond yields?
The yields will fall
Safe Haven Government Bonds
US Treasuries, UK Gilts, German Bund
If Bond yields decrease and Bond prices increase, what will happen to the demand of the following currencies?
USD, JPY, CHF and why?
Their demand will increase.
Lower bond yields w/ higher bond prices mean investors are in a risk-off state and seeking safer options for their money.
USD, JPY, CHF- are safe haven currencies.
Higher bond yields will cause a country’s currency to________?
Appreciate, because of capital flow.
investors have to exchange their money to the local currency in order to buy the bond of that country and receive a higher yield.
What are bond spreads?
It’ s the difference in bond yields between two countries.
ex.
Country 1 yield= 2%
Country 2 yield=3%
Bond spread= 1 %
Why are bond spreads important?
bond spreads give us clues on which currencies will appreciate and depreciate in value.
How do investors use bond spreads?
Investors look for a sufficient difference in a currency pair’s bond spread and trade them against each other
High yield vs low yield= great profit potential.
Who has the most influence in the currency markets?
The Central Banks
What are the four major areas of focus for a central bank?
Inflation
Employment
Growth
Production
How do central banks use: Interest rates?
They raise or cut rates to control inflation and the supply of money.
How do central banks use: Reserve requirement?
They increase or decrease the reserve requirement for banks to boost or restrict lending. this is to control the supply of money
How do central banks use: Open market operations?
The use open market operations by selling and buying gov. bonds to control supply and demand of money
How do central banks use: Price limit?
they’ll set a floor or a ceiling as a defense point for the currency.
Ex. Japan will not allow price to go under 1.20
How can we get clues on what to expect from the central banks and their plans for currency
Following their
- press releases,
- meetings and paying attention to their Market commentaries.
What is the main focus of central banks?
To analyze Macro and Micro Economic data to measure the overall health of the economy.
What is fiscal policy?
fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to monitor and influence a nation’s economy.
What is monetary policy?
It’s the process of central banks to control money supply in order to maintain currency stability.
