FOREIGN MARKET ANALYSIS AND

TRADING STRATEGIES REPORT

Course name Financial Markets

Lecturer

Number of pages

Group members

Due Date

1
Table of Contents

1. Executive summary ........................................................................................................... 3

2. Introduction....................................................................................................................... 3

3. Market analysis and trading strategy ............................................................................... 5

3.1. FX Past Performance .......................................................................................................... 5

3.1.1. USD/JPY ........................................................................................................................................ 5

3.1.2. EUR/USD ....................................................................................................................................... 6

3.2. Analysis and market view ................................................................................................... 7

3.2.1. Inflation Rate ................................................................................................................................ 7

3.2.2. Annual GDP Growth .................................................................................................................. 12

3.2.3. Interest rate ................................................................................................................................. 15

3.2.4. Governmental interventions ...................................................................................................... 18

3.2.5. Summarized market views ......................................................................................................... 18

3.3. Trading Strategy ................................................................................................................ 19

3.3.1. Objective ...................................................................................................................................... 19

3.3.2. Trading Strategy ......................................................................................................................... 20

3.3.3. Performance analysis .................................................................................................................. 21

4. Conclusion....................................................................................................................... 22

5. Appendice ........................................................................................................................ 22

References ............................................................................................................................... 30

2
 1. Executive summary

The study focuses mainly on evaluating foreign market patterns and prospects in order to

benefit BIDV forex trading. The study analyzes and analyzes 2 currency pairs across 3 parts:

the pair's past results, the present situation and forecast, trading plan to use the analyzed data.

Our group has gathered information on the patterns of the two pairs over the period 2018-

2019 in the previous market performance region and analyzed incidents during significant

fluctuations. We have considered some significant market influencing attributes, such as

inflation, annual GDP growth, interest rates and government intervention, to examine the

market view. We then analyse the future market trend for USD / JPY and EUR / USD.

Lastly, techniques are planned and used in ways that benefit the company by using the

information provided to maximize the market potential.

In terms of six month, it is predicted that both JPY and EUR to depreciate against USD, which

is reason that we suggest BIDV to use the existing JPY and EUR to buy more USD instead.

After six months, the bank will sell that amount of money bought in JPY and EUR to bring in

profits.

2. Introduction

Vietnam's or BIDV Joint Stock Commercial Bank is a major Vietnamese government-

managed bank. The bank is the largest holder of capital and has one of the highest net profits.

We plan to invest in major currency pairs, USD / JPY and EUR / USD, with a belief in the

direct approach to the sector.

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In Japan, the government has conservatively regulated the monetary policies as the country's

overall trend and has maintained the price of yen weak to increase sales across the globe. It

makes the establishment for the pair exchange simple and although the USD / JPY rate is

generally constant, the event of rapid price adjustment is still highly profitable.

The EUR / USD pair currency is a similar case, which lasts for a long time at its level. The

only shifts in the euro are in contrast with the pound even after the Brexit crisis, as we depart

Britain and do not have any impact on the USD / EUR pair. This consistency is a trustable

source of investment opportunities for long-term investments in the pair.

With that in mind our team hope to build on the trend and make investments in these two

pairs. The study is broken into three sections: the past years performance, current and future

performance of the two pair, and the strategy to be implement to take full use of these

information. Our team will develop a 6-month overall plan with the strategy analysis, which

clearly specifies the objective and execute the plan.

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 3. Market analysis and trading strategy

3.1. FX Past Performance

3.1.1. USD/JPY

Figure 1. USD/JPY exchange rate 2018-2019 (Eikon)

The graph shows how the pair shifted from September 2018 till September 2019. USD/JPY

started high, then dropped at the beginning of 2019. In June 2019, it displayed signs of recovery

before a fall. The yen had appreciated against the dollar since September 2018 that financial

experts had proposed the cause related to the US federal reserve interest rate cut in 2019

(Washingtonpost, 2019). The monetary policies of Prime Minister Shinzo Abe had not

achieved the goal of increasing the inflation rate up to 2 percent in 2018 (Bloomberg, 2019)

and subsequently disturbed and losing the trust the financial members of the US treasury. The

importance of this pair will eventually be changed with time and attention is required to achieve

high trade performance, with many considerations including perception of shareholders and

policy management.

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 3.1.2. EUR/USD

Figure 2. EUR/USD exchange rate 2018-2019 (Eikon)

The price of EUR was 1.17 in September 2018 but was then increased to 1.18. in September

2018. From October 2018 to November 2019, EUR/USD decreased slightly during the

European session on USD strength and poor Eurozone economic activity. In August, German

industrial orders dropped more than expected, and near the lower end of its 1.09-1.12 medium

term range EUR / USD will maintain intense trading. In August Tuesday, a deeper downturn

in German industrial output will justify the extremely welcoming "open-ended" ECB's stance

and weigh EUR / USD." (James Skinner, 2019)

In the second quarter of 2019, the economic growth of the U.S. is slowing as a consequence of

the trade war, a key part of the policies of Trump. (Kimberly Amadeo, 2019). In the first

semester of this year economic growth reached strong 2.5%, above the 2.0% rate in the second

semester last year. But the economic research company has warned us that tariffs will decrease

actual sales and imports will "plunge." (Yusuf Khan, 2019)

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 3.2. Analysis and market view

3.2.1. Inflation Rate

 U.S. Inflation Rate

Figure 3. U.S. Inflation Rate

Source: Trading Economics (2019)

The relative inflation rates will be the first attribute which influence the exchange rate.

Purchasing power is directly impacted by inflation. Inflation at a lower rate would lead to

higher purchasing power relative to the trading partners, thus rising export demand and hence

raising USD demand. Import demand will decrease and therefore USD supply will be smaller.

The U.S. inflation rate was at 2.2% in November 2018 and fluctuated within the 2% and 1.5%

level from November 2018 to October 2019. As the employment rate rises, the US inflation

will gradually increase (Mutikani, 2019). In the hope that the American economy will be high,

low unemployment will continue or decrease. Therefore, in the next quarter, inflation will

continue at roughly 2%. The anticipated decline in unemployment will have a positive effect

on USD and continue to value it against other currencies

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Last month, the US central bank cut rates for the third time in this year and declared a split in

the facilitation process which began in July when it first decreased the costs of lending as of

2008. Joel Naroff (2019) it is the economy that many of us have found inflation to be mild to

moderate growth, which has no downward trend.

With the U.S. economy expected to be strong, low unemployment rate will continue to be

maintained or decrease. That will keep the inflation of at nearly 2% for the next quarters. The

expected increased inflation will negatively impact the USD value, contributing to depreciate

it against other currencies.

Figure 4. U.S. inflation rate forecast

Source: Adapted from Tradingeconomics (2019)

 Japan Inflation Rate

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 Figure 5. Japan inflation rate

Source: Reproduced from Tradingeconomics (2019)

Throughout periods Japan's inflation rate fluctuated. In April 2019 this fell to 0.9% from 0.8%

in November 2018 to 0.2% in the next two months. Following a quarterly increase in sales tax,

fuel prices dropped for the first time in 31 months and transportation costs decreased in the

eleventh straight month, they stayed at the lowest rate of inflation since February. Consumer

prices are stable for the third consecutive month on a seasonally adjusted basis.

he Bank of Japan will sustain its quick monetary policy to increase inflation. Consumers have

invested less than expected and inflation is likely to rise quite gradually (Kyodo, 2019).

9
 Figure 6. Japan inflation rate forecast

Source: Reproduced from Tradingeconomics (2019)

On the contrary of normal belief, with Japan inflation increasing, it is expected to contribute to

the appreciation of the JPY against the USD.

 EU Inflation Rate

10
 Figure 7. Actual historical EU inflation rate

Source: Reproduced from Tradingeconomics (2019)

From November 2018 to December 2018, the EU inflation rate decreased dramatically from 2

to 1.6% and leveled off to March 2019. The inflation rate of April 2019 but decreased

immediately in the following months and stood at 1.1 in October 2019. The inflation rates were

right in the midst of the generally acceptable price stability concept — i.e. the inflation rate of

0% to 2%. These inflation rates are much lower than the ECB's around 2 percent medium-term

target, and are the focus of futile discussion on the current position of the bank.

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 Figure 8. EU inflation rate forecast

Source: Reproduced from Tradingeconomics (2019)

It is anticipated that in the next six months the EU inflation rate will increase from the current

level to a 1.4% point. It is expected that this rising in inflation would further depreciate the

Euro against the USD.

3.2.2. Annual GDP Growth

 U.S. Annual GDP Growth

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 Figure 9. Historical U.S. GDP Annual Growth Rate

Source: Reproduced from Tradingeconomics (2019)

Since January 2017, the US economy was strongly recovering from 2 to 2.8 percent by the end

of July 2018 with continuous GDP growth. In the second quarter of 2018, GDP growth hit an

impressive 3.2%. This strong US economic growth has partly driven the US dollar to appreciate

the JPY and EUR recently, as the US attracts more money for small import investment.

Nevertheless, progress in 2019 was sluggish over the next 6 months and in the next 6 months

was between between 2.1 and 2.5%. (Tradingeconomics, n.d.). This will lead the US currency

to depreciate. The GDP growth rate is projected to decline by around 1.9 percent in 2020.

 Japan Annual GDP Growth

13
 Figure 10. Historical Japan GDP Annual Growth Rate

Source: Reproduced from Tradingeconomics (2019)

Unlike the United States, Japan's GDP growth rate drops from 2.5 percent to only 0.8 per cent

from the start of 2018. Furthermore, in the fourth quarter of 2018, the GDP growth rate was

even negative, and rise back to 1.7 in the next two quarters of 2019. Since March 2018, the yen

has therefore depreciated against the dollar.

Figure 11. Japan GDP Annual Growth Rate Forecast

Source: Reproduced from Tradingeconomics (2019)

Japan's economy, with the hopes that it will expand far slowly than the US, would attract

foreign capital and boost dollar demand over the yen.This is expected to lead to the depreciation

of the yen against the dollar.

 EU Annual GDP Growth

14
 Figure 12. Historical EU GDP Annual Growth Rate

Source: Reproduced from Tradingeconomics (2019)

Like the Japanese economy in the second quarter 2019, the EU's annual growth in GDP slowed

from 2.8% to only 1.4%. According to Trading Economics global macro models and analysts

expectations, the annual GDP rate of growth in Euro Area is expected to be 1.00% by the end

of this quarter. In the future, GDP's annual growth rate will be projected at 1.00 per year in the

Europe for 12 months. In the long term, according to econometric models of the Trading

Economics, the average GDP growth rate in the European zone is estimated to be around 1.20

million by 2020.

3.2.3. Interest rate

 US Interest rate

15
 Figure 13. Historical US Real Interest Rate

Source: Reproduced from Tradingeconomics (2019)

Interest Rate in the United States is expected to be 1.75 percent by the end of this quarter.

Looking forward, we predict that US interest rate will be 1.50 in 12-month time. The US Fed

Funds Rate is forecast in the long term to rise by 2.00% by 2020.

 Japan Interest rate

16
 Figure 14. Historical Japan Real Interest Rate

Source: Reproduced from Tradingeconomics (2019)

The Bank of Japan deliberately put a negative interest rate on the economy in response to the

ongoing slowdown in economic growth in Japan. The negative interest rate aims to boost

consumer spending, improve prices for consumers and thus increase business profits. (Soble,

2016). In February 2018 the governor of the Bank of Japan, Haruhiko Kuroda, said that the

rate of interest did not see any signs of growth in the nearest future as inflation was still small.

(Kihara, 2019).

With low and low interest rates, Japan will not attract capital inflows in the near future. That

prediction would continue to depreciate the yen against the US dollar because the American

interest rate is expected to increase and draw the inflow of money into the United States. (as

analyzed in previous section)

 EU Interest rate

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The EU interest rate was also extremely weak, at 0%, as was Japan's interest rate. The interest

rate is so low, claims European Central Bank President Mario Draghi, because of a surplus of

profit-making deposits reserves (European Central Bank, 2019). The economic dynamics are

expected to slow down and the inflation rate is again expected to fall below the 2% target rate;

economists in a Reuter poll predict that the EU's rate is 0 percent. (Sarkar, 2018).

3.2.4. Governmental interventions

The divergence in government policies are one of the major factors influencing exchange rates.

For starters, the interest rates between this pair shall be affected by the Federal Reserve (FED)

and the European Central Bank (ECB). The FED desire is to strengthen the US economy as a

stimulus measure through different quantitative easing tranches. The goal of this concern is to

optimize jobs and price stability (Beckmann and Czudaj 2019). The ECB's focus, on the other

side, seeks to improve growth by purchasing government bonds strictly for price stability.

When confrontations emerged, this difference influenced the EUR and USD exchange rate.

Due to the decision by the US Government to affect trade relations with China, the EUR / USD

exchange rate is expected to fall in the next months. In 2019, the president of the United States

issued a tariff statement targeting China, a policy for avenging China's intellectual property

theft. The value of the US dollar has been affected by government policy of this kind, since

most shareholders remain skeptical of what the move could mean. Therefore, the government

policy will drop the value of the EUR/USD.

3.2.5. Summarized market views

The USD has continuously appreciated against the JPY and EUR from the analysis above. The

inflation rates for Japan and the EU are both higher than that of the US, which results in the

appreciation of not only JPY and EUR but also the currency pair. Finally, due to the new

18
policies of the U.S, it negatively affects the import and export of Japan and EU, which poses a

significant threat to the GDP growth of these 2 countries. The market for US dollars is

forecalled for decrease as traders begin to sell US dollars to consider the accrued gains from

the previous US dollar rise, although this is still better than that of Japan and the EU and the

increase in inflation.

EUR/USD Forecast:

Figure 15. EUR/USD Exchange Rate Forecast

Source: Tradingeconomics (2019)

USD/JPY Forecast:

Figure 16. USD/JPY Exchange Rate Forecast

Source: Tradingeconomics (2019)

3.3. Trading Strategy

3.3.1. Objective

At the conclusion of this session, we are mainly aimed at ensuring that investors continue to

benefit from our role. There are always some trade and investment risks to eliminate this

potential threat, however, that we can minimize through the formation of forward contracts.

First of all, the shortage of resources should be taken into account. Trading with such large

amounts will establish conditions that are not fulfilled because bank reserves are inadequate.

This can be done effectively as far as the bank reviews the current balance before each trading

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session and then extracts a reasonable sum thereby retaining a stable fund. In addition, if

speculative currencies do not react as expected, there are risks to the loss of organization. As

the bank's treasury department, our focus is income protection.

3.3.2. Trading Strategy

Our primary objective was to raise ￥143,000 Yen and €283,000 Euro with a starting balance

of $10m USD. On the basis of the previous section's 6 month forecast, both the Yen and the

EUR would depreciate against the Dollar, so my team suggests that we use these two currencies

as the bank’s capital currencies to buy in USD. Thus, in late June 2020, we will sell these

existing USD back to Yen and EUR to gain additional profit. The prediction is that the Yen

and EUR will depreciate against the Dollars, so we will sell the Yen at a competitive price.

That is to achieve the objective of maintaining a short yen role and a long euro position.

Assume that BIDV has 5 million JPY and 5 million EUR each, and we will trade for USD.

USD/JPY

Month USD JPY Rate USD/JPY

Now 46,057.47 5,000,000 108.56

June 2019 46,349.93 5,142,988 110.96

142,988

To maximize the profit, BIDV can store their $ in the Federal Reverse with the interest rate of

1.27% to earn interest, which means that:

Àter 6 months: we will have $46,057.47 x(1+1.27%/2) = $46,349.93

Profit: ￥5,142,988 -￥5,000,000= ￥142,988

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USD/EUR

Month USD EUR Rate USD/EUR

Now 5,715,592 5,000,000 0.8748

June 2019 5,751,886 5,283,107 0.9185

283,107

After 6 months: $5,715,592x (1+1.27%/2) = $5,751,886

Profit: €5,283,107- €5,000,000 = €283,107

3.3.3. Performance analysis

The risk that BIDV can face in the future is that the FX rate can change immediately due to

some global events or tax policies. We suggest the bank should use monthly interest rate for

liquidity and divide it into 2 cases. At first, if USD/JPY or USD/EUR reach a peak immediately

for example much greater than 110.96 or 0.9185 in just 2 months, the bank must square their

position to maximize the profit. In second case, if the bank can estimate the depreciation of

both currency pairs, squaring their position immediately can prevent the loss in trading.

At the same time we'll hold a big expansion for the pair to gain profit and deter people to buy

euro because the currency won't appreciate much. We will then focus on selling our USD and

EUR long currencies to make profit and square our positions.

Both JPY and EUR are deemed unstable and have a medium risk. The forecast cannot be 100%

reliable since currencies can shift in an unexpected direction, so it is advised to exchange in

small volumes daily in order to reduce risks and square them quickly.

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 4. Conclusion

Our group research and data so far has helped our team to devise a plan that focuses both on

short-term investment with the yen as well as on long-term investment with the euro against

the dollar. If our prediction of the trend is true, the profit that the bank will have are 142,988

JPY and $283,107 EUR after 6 months. The key concern seems to be centered around the USA

and their condition which affects all pairs of currencies. The forex market figures in these

countries often confirm that, as the price of Yen becomes stabilised, the currency would

depreciate in contrast with the US dollar.

5. Appendice

Figure 1. USD/JPY exchange rate 2018-2019 (Eikon)

22
Figure 3. EUR/USD exchange rate 2018-2019 (Eikon)

Figure 3. U.S. inflation rate

Source: Trading Economics (2019)

23
 Figure 4. U.S. inflation rate forecast

Source: Adapted from Tradingeconomics (2018)

Figure 5. Japan inflation rate

Source: Reproduced from Tradingeconomics (2019)

24
 Figure 6. Japan inflation rate forecast

Source: Reproduced from Tradingeconomics (2019)

Figure 7. Actual historical EU inflation rate

Source: Reproduced from Tradingeconomics (2019)

25
 Figure 8. EU inflation rate forecast

Source: Reproduced from Tradingeconomics (2019)

Figure 9. Actual historical U.S. annual GDP growth rate

Source: Reproduced from Tradingeconomics (2019)

26
Figure 10. Actual historical Japan annual GDP growth rate

Source: Reproduced from Tradingeconomics (2019)

Figure 11. Japan annual GDP growth rate forecast

Source: Reproduced from Tradingeconomics (2019)

27
Figure 12. Historical EU GDP Annual Growth Rate

Source: Reproduced from Tradingeconomics (2019)

Figure 14. Historical Japan Interest Rate

Source: Reproduced from Tradingeconomics (2019)

Figure 13. Historical U.S. Interest Rate

Source: Reproduced from Tradingeconomics (2019)

28
 Figure 15. EUR/USD exchange rate forecast

Source: Reproduced from Tradingeconomics (2019)

Figure 16. USD/JPY exchange rate forecast

Source: Reproduced from Tradingeconomics (2019)

29
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