Relational Analysis Module

Every decision taken by every investor, trader or speculator, in every financial market everywhere in the world is about money. Nothing else – just money.

We all borrow money in a variety of different ways, and the bond market is structured in such a way as to allow all sorts of bodies, including countries, governments, municipal authorities and private companies, to borrow money for a variety of reasons. So let me take a simple example to explain how the bond market works.

But how do we analyse this huge market to help us in our trading? And here the answer is yield.

Just like bonds, commodities are generally ignored by the majority of forex traders, but for very different reasons. Bonds are ignored because they are considered to be complicated and confusing and of little value, an image I hope to shatter in this book.

The third of the four capital markets is probably one that is very familiar, and agains is one few, if any forex traders ever consider, and that is equities.

The last of our four capital markets is the forex or currency market, which is unique for a number of reasons.

Bonds are the basic ingredient of the world’s debt capital markets, and is where money is borrowed by, and lent to, governments, companies, organisations and countries.

So, how do we interpret what the bond markets are telling us, but before doing so let’s look at some bond market terminology, and in particular what is meant by “yield”.

Now in terms of yield there are three types, and these are: Nominal yield, current yield, and 
yield to maturity. And it is the second and third of these which are most useful to us as forex traders.

Now perhaps we come to the most complicated aspect of yield, namely, the yield to maturity. And this is the aspect of yield we need to analyse when considering the bond markets over a longer time horizon, and is what is known as the yield curve. This is often simply referred to as “yield.”

Finally let me cover one of the bond markets I mentioned in another video podcast, namely the Eurodollar market, and for this we need to turn to the futures market.

Equity markets are all about risk and return. Higher risk assets yield higher returns, and if there is one sacred belief in trading and investing, it is that equities are the best asset class to hold for the longer term.

But which are the principle exchanges, and which indices do we need monitor, and what do they tell us about the money flow.

As I have already mentioned, the primary index to watch during the US trading session is the S&P 500 index, as approximately 75% of the companies listed have a very strong US connection, so can be considered to be a good proxy for the US economy.

But at this stage of explaining equity markets and their importance to us as forex traders I would like to introduce two other key analytical tools.

In order to understand the commodity markets, we need to step back in time a little and consider them from several different perspectives, for two reasons.

In the commodity markets there are there three principle sectors, namely agriculture, energy and metals. Agriculture covers all the basic staple products such as wheat and corn, and soybean for which China is the largest market.

Let’s now turn to another key commodity, which oil, and here there are three things we can say about oil with complete confidence.

Having considered oil producers and world oil reserves, we now need to consider the consumer end of the equation, and as you would expect, at the top of the list are the USA and China in that order.

Having looked at oil in detail I now want to consider another of the key commodities, and that’s copper, and its relationship, both to the broad markets, and more particularly to currencies.

As forex traders one of the first things we have to learn and appreciate is the role the US dollar plays in the financial markets.

But why do countries adopt a currency peg and what are the benefits? But perhaps a supplemental question is why is this important even to a scalping forex trader. And the answer is the Euro!

So where does Japan fit as the world’s third largest economy, having only recently been surpassed by China.

Exports are the life blood of the Japanese economy, so a strong yen makes exports increasingly expensive for overseas buyers, creating the possibility of a fall in demand for Japanese products with a consequent slide into recession. As a result the Bank of Japan is always acutely aware of the yen exchange rate, particularly against […]

When it comes to the euro, the most recent addition to the world order of currencies, where do we start? And perhaps the most obvious place is at the end, rather than the beginning.

In the last twenty years, Germany has undergone two traumatic events.

It may come as surprise but once upon a time the British pound, was the currency of first reserve. In fact this was the case for much of the 20th century, and it was only replaced in the latter half due to economic weakness, before being replaced by the US dollar.

Blessed with a wealth of natural resources Australia has always had a reputation for having a strong economy, and indeed is one of the few global economies to have emerged relatively unscathed from the Great Financial Crisis.

In many ways the Canadian economy is very similar to that of Australia.

Staying with the commodity currencies, although New Zealand is a relatively small country, it retains a strong and vibrant export market.

If we hop across the English channel, and drive through France we will arrive at Switzerland which, geographically, sits at the heart of Europe yet it is not part of the European Union.

In this video podcast I would like to introduce some currencies which although not heavily traded by most forex traders, are nevertheless important, and can tell us a lot about market sentiment and money flow.

And now I want to cover a very different currency and country, namely Brazil and the Brazilian real, which is a relatively new currency, and only adopted in 1994.

The relationships we have considered so far are those created through the various inter-market linkages which tie the four capital markets together through the gateway of risk and return.

The same principles of correlation can also be applied to other major currencies such as the commodity currencies of the Canadian dollar, the New Zealand dollar and the Australian dollar. And here there are several correlations which are interesting and bear detailed examination.

Now let’s move on to the yen based pairs in the yen complex. And here the relationships are more straightforward with the yen as the counter currency for each pair.

Next I want to consider the euro complex, and the picture here is a little more complicated.

And moving to the commodity currency cross pair complex, and starting with the Canadian dollar, what we tend to find here, as indeed is the case with many currency pairs, is that those matched with risk currencies will tend to correlate relatively closely.