Key Points of “Currency Trading and Intermarket Analysis”

currency trading-420x627

Here’s the key points of Forex Trading book titled “Currency Trading and Intermarket Analysis” by Ashraf Läidi. The book is quite expensive but worth well the price. I thought it would be helpful to outline the key points:

Gold up -> Buy AUDUSD

Intetest rate up, stable market -> Gold down

Commodity currency = AUD CAD NZD, correlate positively with gold

Gold correlate + with AUD EUR JPY NZD
Gold correlate – with USD

Gold goes up as equity down

Gold goes up along commodities except at certain phase where gold exclusively goes up during economic threat

Oil goes up -> inflation soars, GDP down -> Interest rate up -> stronger currency but recession

Oil and USD goes down -> oil importer currency up, cheaper oil, better trade balance

Slow growth GDP is not good for oil price, slower demand leads to excess of supply and tumbling price

Gdp up, better trade balance, lower unemployment -> currency rise

Low yield currency dropped when global growth improved (strong economic data from US or China

Copper goes with AUD
Oil goes with CAD

Assessing risk appetite in currency market: equity indexes, volatility index, speculator’s future commitments, corporate bond spreads

When risk is being avoided, JPY CHF up

Market borrow from low interest rate currency for funding investment in equity and other higher yielding currency

Countries with current account deficit have higher interest rate and weaker currency. When US market declined, buy JPY because money invested there are borrowed from cheap JPY (with low interest rate)

Volatility Index above 30 -> JPY CHF up

Corporate bond spread (corporate bond – treasury bond yield) high mean bad economy, VIX high, low mean good economy, VIX low

Stronger economuc report -> Rising inflation -> reduce bond value and increase bond yields

Difference between Fed Funds rate and 10-YR treasury yield
Upward sloping bond yield curves precedes economic expansion ( expectation of future high inflation)

Flat yield curves precedes economic slowdown or expansion

Inverted yield curves signal economic slowdown and often harbinger of recession -> sign of future stock market declines, Fed rate cuts

Inverted 10-2 yield curve -> next 0-18 months USD going down, US market going down

Yield curve is a more effective indicator than macroeconomic indicator (GDP, employment)

Gold-Oil ratio historical average =15, a 20-30% declined from recent high is a drag on US economy, recession signal

Depreciating currency -> cheaper export, reduce import demand -> reduce CAD

Strenghtening currency -> increase CAD

Negative trade balance -> slower GDP

When Fed funds rate lowered, US investor is benefited from weaker USD paid to foreign investor investing in US and stronger currency from US investment abroad

As USD weaken, more foreign investor interested in investing in US, but US investor interested investing in foreign investment. Since 2003 there’s more outflow than inflow

Corn, soy and wheat = AUD NZD CAD Brazilian Real
Oil = CAD Russian Rubel Norwegian Krone Poland Mexican Peso Brazilian Real
Copper, gold = AUD Peruvian Sol Chile Peso ZAR

Peaking 10-2 yield spreads is an indication for Fed Rate increase (in the next 5+- 10 months)

Inverted 10-2 yield spreads is an indication for Fed Rate cut (in the next 3-18 months)

Tightening = interest rate hike
Easing = interest rate cut

Peaking 10-2 and bottoming USDJPY are two predictor of future interest rate hike by Fed

Weak USD -> Stronger JPY EUR AUD etc -> declining export of the counter currency and higher dollar denominated commodity (oil, gold, etc) -> high inflation

Today equity/gold and equity/commodity ratio is too high historically

Published by Journeyman

A global macro analyst with over four years experience in the financial market, the author began his career as an equity analyst before transitioning to macro research focusing on Emerging Markets at a well-known independent research firm. He read voraciously, spending most of his free time following The Economist magazine and reading topics on finance and self-improvement. When off duty, he works part-time for Getty Images, taking pictures from all over the globe. To date, he has over 1200 pictures over 35 countries being sold through the company.

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