50,000 is a lot of money that can grow to even larger proportions if properly understood how to trade different currencies. Our team was given this money in attempt to grow the funds through trading various currencies that we believe were appreciating and depreciating. Our main source to perform this was articles from Bloomberg. We were looking for current information that could help us make the most optimal trade. We struggled at first understanding the data that was the main contributor to our -274.99 loss. However, our last two trades equated to 287.35. The overall return was -.55%, but with the last two only our return jumped to .57%. Our improvement reflects our dedication as a team and our better understanding of the material. Both the returns and data for trades are in our Appendix. The following paper will address the currencies used, factors that affect the currency exchange rates, our decision explanations, regression analysis, and what we learned from the project.
The main currencies we used for the report are currencies from Australia (AUD), New Zealand (NZD), Euro (EUR), Japan (JPY), and the U.S. (USD). Australia and New Zealand’s economy have a strong correlation in that a lot of New Zealand’s exports go to Australia. Per the BusinessDay article attached, Australia’s economy is having a slower than expected recovery from the recent global recession and it is therefore negatively affecting New Zealand’s exports. When an economy is struggling, it may be pressured to devalue their currency in order to encourage more exports to have money come into the country rather than out. The Euro is positioned to rival the USD according to our class textbook and notes. However, the Greece crisis and amongst other countries such as Spain’s fiscal problems make the currency volatile. The USD, being a dominant reserve currency, is also subject to much risk. The coming fiscal cliff presents a major challenge for the country and could affect the exchange rate. Japan has been a steady economy ever since World War II but is still not excused form volatility. A recent stimulus package in the article attached is expected to make the Yen decline. We also reflect later on in the paper about the strong export potential of Japan.
If a country’s interest rates are high, that country’s currency will generally strengthen the country’s currency. From the OANDA article attached, a central bank may be pressured to lower interest rates if a country is underperforming. This will make it cheaper to borrow and thus lower a country’s currency. However, a strong currency will encourage more foreign direct investment given higher interest rates will lead to higher returns for investors. This is especially true if the interest rate parity does not hold and there is a chance for arbitrage. From the same article, employment outlook also affects a country’s exchange rates. When an economy is struggling and many people are without jobs, than consumer spending declines. There reduce demand for that country’s currency and therefore it will devalue. Imports and exports are also indicators of a country’s currency. When a country is importing more that is an indicator that its currency is weak. The opposite holds in that if a country is exporting more its currency is weak. Unlike the classic gold system where it works out itself, governments may need to intervene to balance imports and exports.
Our first trades were AUD/USD and NZD/USD. We found an article on Bloomberg attached at the end that stated the AUD and NZD were currently trading at three week high and we thought it wouldn’t change right away. We also read in the article that there was speculation that stimulus would debase the U.S. currency, which is why we traded the AUD and NZD against the USD. A week later, we suffered a 224.9 loss. We were focused too much on the short term thinking we could make a quick gain from the recent surge in AUD and NZD. However, we weren’t looking...
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