I see so many questions relating to "How do Hedge Fund/Investment Banks/Trading Firms trade?". While most people on Forex
have no idea, they like to tell people their two cents. Top funds/banks/traders do not use technical analysis as they are solely a derivative of price. They use Fundamental analysis and leading indicators such as Volume. Be warned, the following is not for the faint-hearted and requires some (albeit basic) economic understanding. However, this might demystify fundamental analysis for you. If you can understand what I'm saying here, you are doing better than 90% of most retail traders. Enjoy.
1. Explain how factors that affect the demand for a currency, or the supply of a currency, affect the determination of an equilibrium exchange rate.
• In a floating exchange rate regime, the exchange rate is determined by the demand for and supply of a currency.
• The demand for a currency is represented by a downward-sloping demand curve. A lower exchange rate will increase the competitiveness of a country’s exports, thus attracting buyers of the local currency in order to purchase those goods, services, and financial assets.
• The supply of a currency is represented by an upward-sloping demand curve. As the local currency appreciates, the relative cost of foreign currencies falls, thus attracting sellers of the local currencies (i.e. buyers of the foreign currency).
• The equilibrium exchange rate is at the intersection of the demand and supply curves. In an efficient market, any other exchange rate would result in an increase in either demand or supply, thus maintaining the equilibrium exchange rate.
• A country that maintains a linked exchange rate, crawling peg or managed float exchange rate regime, whereby the local currency is tied to another currency such as the USD, or a basket of other currencies, is effectively tied into supply and demand factors that affect the currency or the basket of currencies to which it is linked or pegged.
2. Understand how the major factors that influence exchange rate movements operate, particularly:
a. Relative inflation rates
• Of the theories advanced to explain the exchange rate, and changes in the equilibrium rate, the Purchasing Power Parity (PPP) theory is the longest standing.
• PPP theory contends that movements in exchange rates will ensure that the cost of identical goods and services will be equal across countries. A change in inflation represents a change in prices in a country; PPP argues that a change in relative inflation rates between countries will be offset by a change in the exchange rate.
• Under PPP, a country with a higher inflation rate relative to another country can expect its currency to depreciate.
• Perhaps the most critical shortcoming of PPP is that there are variables in addition to inflation that affects the value of a currency.
• PPP calculations that apply inflation differentials between two countries can be used to determine the expected change in the exchange rate.
b. Relative national income growth rates
• Changes in relative national income growth rates also affect an exchange rate. For example, increased national income will typically result in increased imports and therefore an increase in the supply of the local currency on the FX markets. However, in a dynamic market, increased national income might encourage business growth, with associated local and overseas investment. This will also have an impact on demand and supply factors in the FX markets.
• An increase in the relative rate of growth is likely to result in an increased demand for imports, which will result in a depreciation of the currency.
• On the other hand, an increase in the growth rate may also result in an increase in foreign investment inflows, which will cause the currency to appreciate.
• Both the above mechanisms are likely to operate, with the balance between the two changing from time to time.
c. Relative interest rates
• Relative interest rates also affect an exchange rate. For example, a relative increase in local interest rates will attract overseas investors; these investors will purchase the local currency and sell their own currency. Investors need to consider interest rate differentials in conjunction with forecast changes in the exchange rate. Future exchange rate changes will affect the value of future cash flows associated with international investments.
• It is important to determine whether the change in interest rates are due to inflationary expectations, or a change in the real rate of interest.
• If the increase in interest rates is a result of an increase in inflation expectations, a currency should depreciate. However, if the increase is due to a rise in the real rate of interest, then the currency should appreciate.
d. Exchange rate expectations
• In addition to the economic fundamentals, exchange rate expectations are important in determining the FX value of a currency.
• Exchange rate expectations have a strong influence on exchange rates. Market participants analyse new information in order to try and forecast future impacts on an exchange rate. It may be possible to adopt a specific market indicator as a proxy for exchange rate expectations. For example, in Australia, the commodity price index is often used as a proxy. If sufficient participants form a view, the exchange rate will move; speculators play a large role in forming exchange rate expectations.
• The modelling of expectations is a particularly difficult task. Theoretically, expectations should be formed on the basis of the expected values of economic fundamentals. However, the FX market often reacts to new information before the impact on the longer-term economic fundamentals is fully analysed.
e. Central bank or government intervention
• The actions of governments or central banks are another variable that may be important in the FX markets.
• The monetary policy setting of a central bank will impact upon the demand and supply factors that affect an exchange rate. Also, a central bank or government may intervene in the FX markets to influence directly the level of an exchange rate by intervening in international trade flows, intervening in foreign investment flows or conducting FX transactions in the markets.
• For example, in an attempt to increase the FX value of its currency, a central bank may sell foreign currency and buy the local currency; alternatively, to reduce the value of its currency, the central bank may buy foreign currency. Alternatively, a government may implement policies that change tariff, quota or embargo settings relating to goods and services.
3. Explore regression analysis as a statistical technique applied to variables that impact on an exchange rate.
• Regression analysis is a quantitative method that measures how movements in variables impact on another variable.
• A regression model that measures percentage changes in an exchange rate should include variables of relative inflation rates, relative national income growth, relative interest rates, government or central bank invention and exchange rate expectations.
• The model will calculate regression coefficients that measure the responsiveness of the exchange rate to a particular variable.
• A dummy variable may be used for variables that do not have a data set (e.g. government intervention). A value of one would be assigned to periods where intervention occurred and the value zero to non-intervention periods. An indication of periods when central bank intervention occurs may be changes in the central bank’s holding of local and foreign currency reserves.
Forex sentiment analysis can be a useful tool to help traders understand and act on price behavior. Learn how to get the most out of understanding trader sentiment here with the US #Elections2020 ... Why do we use Regression Analysis ? As mentioned above, regression analysis estimates the relationship between two or more variables. Let’s understand this with an easy example: Let’s say, you want to estimate growth in sales of a company based on current economic conditions. You have the recent company data which indicates that the growth in sales is around two and a half times the growth ... Our multiple regression allows us to go through and look at all of the data and make predictions based on it. Now regressions aren't perfect, but they do give us a way to map to harness mounds of ... Leslie C.O  analyzed the trend from historical Forex data using linear regression equation to investigate the historical data and discover the trends patterns in Forex. These trends patterns ... Regression Analysis and Statistical Approach on Socio-Economic Data Syeda Farha Shazmeen1, Mirza Mustafa Ali Baig2, M. Reena Pawar3 Abstract Statistical analysis and data mining addresses the broad area of data analysis, including data mining algorithms, statistical approaches and practical application. Statistical methods and algorithms can be combined to form the basic idea such as factor ... Forex analysis is used by retail forex day traders to determine to buy or sell decisions on currency pairs.It can be technical in nature, using resources such as charting tools. It can also be ... Charting economic data can help you learn more about the macro world and see the bigger picture. This chart shows weekly Initial Jobless Claims in the US. In other words, it shows you how many people are filing for unemployment each week. The big spike, which has never been seen before in economic history, shows what the COVID-19 slowdown did to the economy in... Economic Analysis of Micro Data – WS 2020/21. Lecturer: Prof. Dr. Thorsten Schank (Lecture), Vivien Voigt (Tutorial) ID Number: 3281 (Lecture), 3286 (Tutorial) Contact Time: 2 SWS lecture and 2 SWS tutorial: Credit points: 6 ECTS for Master students: Time/Place : Tue, 14:15 – 15:45, online via MS Teams Wed, 16:15 – 17:45, online via MS Teams: First Session: Tue, 10.11.2020: Language ... Regression Analysis and Statistical Approach on Socio-Economic Data September 2013 Conference: International Conference on Emerging Trends,Technology and Research Analysis of Economic Data has, over three editions, become firmly established as a successful textbook for students studying data analysis whose primary interest is not in econometrics, statistics or mathematics. It introduces students to basic econometric techniques and shows the reader how to apply these techniques in the context of real-world empirical problems.
Regression for Causal Inference 2019 Fall @ Xiamen University ----- Modern Data Analysis for Economics This course offers a unified introduction to the principles and methods of statistical ... This lecture is for course 509 (Economic Data Analysis) about chapter 4 on multiple regression. The date of lecture is 22 August 2020. This lecture is for course 509 (Economic Data Analysis) about chapter 5 on Regression with Dummy Variables. The date of lecture is 5 September 2020. Regression example using World Bank Data How to learn forex fundamental analysis part 2. Going through all of the major economic data releases that have an impact on the economy,. These are all data points that should be well ... Introduction - Part 1 - Over the coming weeks in this series, I will be proving a variety of key necessities to learn and understand forex fundamental analys... A brief explanation of the output of regression analysis. For more information visit www.calgarybusinessblog.com