What are the Key Fundamentals for Currencies?

what influences moves market so each market is very specific in terms of the factors that drive it and so when you come to currency markets it's all about interest rates and so the question is why well at least over the short and let's say three to six months currency is cash and what you do with cash you stick it in a bank and the bank will pay you interest rate as well now maybe not so much there used to be the case back in the early eighties with you could earn maybe 14 15 percent by sticking it into a back now let's say that Indiana make sure there's Norway Norway I think this may be one 2% something like that Australia does sue and I one and a half percent not as a short-term New Zealand does so there's still some countries that pay I think Russia is even more certainly Argentina Brazil do even more interest rate I think Brazil something like 8% to 9% but so this is an interesting so the question is if I live in a country where I get negative interest rates but there is country with massive amounts of interest rates wouldn't I have the desire to invest over there and so the answer is yes and so obviously interest rates are important because they represent the amount you can earn on your investment ultimately this is what people want to do that's why the invest in things to earn returns and the way you earn return on cash is interest rate so interest rates drive currencies and it's the most important factor and who sets interest rates at least over the short term central banks and that's why people go absolutely nuts when central bank's change their policy and so it's to a certain extent ironic when central bank's over the last decade or so try to engage in forward guidance make it clear become transparent to the market which way they're going problem is there for guidance wisdom necessarily that's for it because if you look at the reactions in the markets they tended at least on particular days on essential bank releases announcements or make statements you do have very wide price ranges on those particular days so that shows you again how important these central bank centers are what are the key fundamentals for currency so we covered straight because currencies are cash cash and interest so you look where the interest rates are now we also said that trade drives currency flow so therefore you have a market exchange rate that you see on the broker screen 124 pound but imagine this with it's a favorite example cuz it easy to understand you're going on a holiday trip to the states and you're in New York City and you're thirsty so you buy a bottle of Evian water you don't open it up for whatever reason you bring it back to London now you walk past the corner store in London you see the exact same bottle same labels in plastic same want to seem everything now let's say that you spent a dollar in the States and the bottle here is a pound now you could swap these two products and you wouldn't notice it because they're identical so one dollar to one pound that makes the exchange rate one on the other hand I just said the exchange rate in the market is 120 so because we have this flow of cash due to international flow of goods and people needing to exchange prices for goods and because themselves have an inherent value separate from cash they also impose an exchange rate and this is called the purchasing power parity or PPP for short and so you can always compare that to where the actual market quotes it if you want it's the same as with equities you know a value investor will look at an equity and say well it's got this inventory and it's got this factory and it's got these assets and so the value should be this but market is either quoting it way below way above so it's actually very conservative or has overlooked it and it's a gem or it's completely hysterical and I should completely ignore them that's that particular companies it's the same with currencies some currencies are massively overvalued for whatever reason there's always lots of reasons why and some currencies are very undervalued now these kinds of factors actually take way longer to play out maybe three to five years so what you're therefore looking at when you want to trade this is not so much look at one currency and trail it maybe we're like six months based upon value but look at rag currencies according to their intrinsic value and let me keep on oscillating and buy the ones that are undervalued till the ones that are overvalued and keep on oscillating and extract profit out of the markets by looking at these valued trades over the very soul we set there for long term it's about prices and stickiness of prices and about inherent value of things over the medium term it's interest rates through the six months because the central bank sets it over the very short term it tends to be momentum transfer long so when price moves in one direction really does move and that's driven sort of like market hysteria by flows necessitated due to financial transactions or mergers and acquisitions so that's maybe really a two week three weeks a three month rise when you've got very short term kind of movement which in essence our mean reversion in nature and that's the one thing that we exploited in our fund for the very fact that you need to eat off certain assets tends to be very explosive if you look at commodities when they go they do go and stocks as well you know penny stocks can go to ten twenty dollars overnight currently just don't do that they trains in the band and so by exploiting that kind of mean reversion which means it just goes up and down you can always decide the trade at the edges and go against the moves and try to capture that so you've got these various factors that drive profit and by focusing on these in various proportions to the amount of money you have you can construct a portfolio that grabs the results so what we tried to say that you have to have a good grasp of fundamentals in order to trade in currencies or can you do it without really understanding fundamentals so the question is how do you represent these fundamentals so when people say they understand something what is it that they actually understand so let me be very very specific when I approach fundamentals I try to find or be able to express them numerically so some people will have economic arguments and look at the entire kind of dynamic as to one social factor will influence other people to take a decision of them out of this comes an outcome so that's sort of economic thinking and kind of stuff you find in textbooks with with these cobweb diagrams just going to be very hand wavy and the other approach is to try to quantify what you're looking at and then look at history to see what influenced it or with that level influence the market and so do I have a deep understanding of the fundamentals no do I understand where they get the numbers from and create maths model have a deep understanding of the math model yes and so that's the approach I would take so I suppose it's along with an answer depends upon your approach not necessarily you

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Keywords: trading currencies, interest rates, currency trading, how interest rates affect currency movements, currencies fundamentals, forex fundamentals, fundamental analysis

Id: PP71qZC1oik

Length: 7min 23sec (443 seconds)

Published: Tue Feb 21 2017