Part 1: Individual Market View Report

Each of you is part of a team and is required to conduct independent research that will feed into your group report. This research consists of outlining and explaining the behaviour of a self-selected pair of exchange rates over the past (i.e., your interpretation of historical data). You must exclusively choose from currencies listed above and make sure each team member is studying a different currency pair. 

THE PAIR I CHOSE IS JPY/USD SO PLEASE USE THIS PAIR

In this task, you are required to do some research in order to form a view regarding current and future market conditions.

• Do you think that exchange rates will go up or down in the next 3 to 6 months? 
• Why do you think this? 

1. For this, you should first identify the economic factors that influence the foreign exchange rates (review the course materials). Then you should collect and use financial news and news regarding national and international events which are likely to have an impact on the market.
2. For news and market data, you must use Eikon Online, a professional financial data platform used by industry practitioners and experts. You can also use additional sources such as professional magazines, institutional websites and newspapers.
3. Do not simply quote other people’s opinions. You should present your opinion, and explain in your own words why you hold that opinion in a way that shows that you understand the theory behind the determination of the exchange rates. You can certainly quote evidence that supports your opinion, and this evidence must be correctly referenced (do not submit copies of your collected articles with your report). For your view, you should use at least five references.

Very important: You should conduct thorough research and discuss your market view prior to developing your trading strategies as a team in the next stage.

Maximum of 700 words in length with a tolerance of + 10% 

Introduction

Over the past year The EUR/USD currency exchange rate has been experiencing a downward trend in favor of USD being stronger compared with EUR. As of the first quarter of 2018 there was a sudden drop in the exchange rate between EUR/USD and henceforth till today there has been showing a gradual decreasing trend in the chart which can be shown in Fig.1. The major factors affecting these fluctuation in exchange rate will be inflation between the countries, their interest rates, and level of national debt. By comparing the factors between these 2 countries we will be able to forecast what the exchange rate be over the next 6 months

Figure 1 EUR/USD Exchange rates, (Eikon 2019)

1. Inflation rate

By comparing the inflation rate between the Eurozone and US we can show that the exchange rate follow the rules that with higher the inflation rate, it will lead to an eventual decline in exchange rate for that respective currency. For the span of 1 year from July 2018 to July 2019 there was there has been a downward trend on EUR/USD of 1.1742 to 1.1074 which was decrease of 668 pips which can be shown from Fig 1. This is highly influenced by the rate of inflation between the 2 zone of interest which can be then shown in Fig 2. By forecasting the inflation rate we can then forecast the EUR/USD exchange rate. Forecast wise, inflation in the United States is expected to raise by 1.70% by the end of this year quarter and the inflation rate of for Euro area will be at 1.20% (Trading Economy, 2019).This statement is also backed up by a news report by New Europe stating that from a 1.7% inflation rate will lead to the inflation to become 1.2% by the end of the quarter (New Europe, 2019). Hence US having a higher inflation rate will result in a weaker exchange rate this shows that by using just inflation there will be an increase in the EUR/USD exchange rate.

Figure 2 United States & Euro area Inflation Rate (Trading economics 2019)

2. Commodities

By having a higher commodity price it will lead to a raise in the exchange rate of that country due to an increase in export revenue (Emanuel, Fernando, & Andreas, 2016).

The ongoing trade war between US and China is yet to stop and China is even introducing 2 new tariff on American exports that will hit about $75 million worth of agriculture products, cars and automotive products and oil exported from the U.S. These auto tariff could be as high as 25% but mostly will be around the range of 5% to 10% (Andrew, 2019). Due to the increase in the tariff due to my prediction it will lead to a decrease in the export in US goods out of the country, hence leading to a decline in USD currency rate.

On Euro area side of the story, there has been a setback due to the fact that the White House agreed to delay new tariffs on imported automobiles and parts for six months as of May of 2019 (Bryce B. 2019). Hence before such tariffs are imposed over the next 6 months I speculate that there will be an increase in the export before the tariff by US is imposed. As such EUR will have a rise in their exchange rate. Below the graph will show an example of the forecast of Euro area and U.S.

Figure 3. United States Exports Forecast (Trading economics 2019)

Figure 4. European area Exports Forecast (Trading economics 2019)

Conclusion

After conducting all these research it is safe to say that by the end of 6 months which is on March 2020 there will be an increase in the strength of the US dollar and a decrease in the strength of the Euro at the rate in which both country inflation is going.

Whereas we are able to capitalize and forecast that from September to November the Euro currency will appreciate in value due to its export increase of automobile before the tariff hits. So in summary my forecast will be to that from September to November there will be an increase in Euro currency on this period and eventually by the end of the 180 days period starting from early September, US will eventually catch up on its currency value which will then cause the rates of EUR/USD to be lower.

Reference

Andrew S. 2019, ‘China Unveils New Tariffs as Trade War Escalates’ viewed on 12 September 2019

Bryce B, 2019, ‘EU Trade Chief Says U.S. Car Tariff Threat ‘Not Based on Facts’ viewed on 12 September 2019 https://www.bloomberg.com/news/articles/2019-09-04/eu-trade-chief-says-u-s-car-tariff-threat-not-based-on-facts

Eikon EUR/USD Exhange rate, 2019, Thomson Reuters, viewed on 11 September 2019,

https://apac1.apps.cp.thomsonreuters.com/web/Explorer/EVzCORPxCHARTzEIKONCHART.aspx?s=EUR%3D&st=RIC

Emanuel, Fernando, Andreas 2016 ‘BIS Working Papers No 551 When the Walk is not Random: Commodity Prices and Exchange Rates’ pp. 2

Euro Area Export Rate, 2019, Trading Economics, viewed on 11 September 2019, https://tradingeconomics.com/euro-area/exports

Euro Area Inflation Rate, 2019, Trading Economics, viewed on 11 September 2019,

https://tradingeconomics.com/euro-area/inflation-cpi

New Europe, 2019 ‘Euro area annual inflation rate to lower’ viewed on 12 September 2019, https://www.neweurope.eu/article/euro-area-annual-inflation-rate-to-lower/

United States Export Rate, 2019, Trading Economics, viewed on 11 September 2019, https://tradingeconomics.com/united-states/exports

United States Inflation Rate, 2019, Trading Economics, viewed on 11 September 2019,

https://tradingeconomics.com/united-states/inflation-cpi

1

2.4EUR/USD: Jeremy Seetoh Heung Weng, s3834522

The Euro (EUR) is the second most used currency globally with an estimated amount of 341 million users daily. A total of 37 countries uses EUR. The European Central Bank (ECB) is the only central bank managing the EUR.

2.4.1 Past and Present Currency Analysis

Over the past one year, the EUR has a depreciating trend against the USD. From 20 February onwards, the EUR started to appreciate against USD. The spot rate from 11 March 2019 to 10 March 2020 increased from 1.1247 to 1.1347, a total of 1000 pips. The highest recorded value of EUR against USD is 1.1447 on 9 March 2020, while the lowest recorded value is 1.07847 on 20 February 2020.

Figure 1: EUR/USD Spot Rate 11 March 2019 – 10 March 2020 (Eikon, 2020)

Brexit

Brexit was an international event for the European Union (EU), where United Kingdom (UK) left the EU. The entire event lasted from 23 June 2016 to 31 January 2020. Figure 2 shows EUR against USD throughout the period of Brexit.

Figure 2: EUR/USD Spot Rate 25 February 2015 to 24 February 2020 (XE, 2020)

The EUR showed signs of depreciation against the USD when majority of the public voted UK to withdraw from the EU. However, the value of EUR appreciated when then Prime Minister of UK, Theresa May, announced that UK will still be part of the EU for two years. When UK agreed with the EU on the ‘divorced bill’ on 8 December 2017, the EUR can be seen having a depreciation trend against the USD. Moreover, the EUR continued to depreciate when UK officially left the EU on 31 January 2020 (Power, 2019). Brexit is one factor causing economic instability resulting in a decreasing economic growth of the EU as shown in Figure 3.

Figure 3: Economic Growth of the EU (Europa, 2020)

With a decrease in economic growth, a dealer will prefer to opt for a short position, which will result in an increase in supply of the EUR. This causes the exchange rate to decrease explained in Figure 4.

Figure 4: S-D Model on Brexit effect on EUR

EU-US Trade Relations

In 2018, the EU is the largest exporter and second largest importer of US. From 2008 to 2018, the EU is seen having an increasing trend in trade surplus with US as shown in Figure 5. This means that the EU is exporting more products to US compared to their import.

Figure 5: EU-US Trade 2008-2018 (Europa, 2019)

There has been a trade tension between US and EU in recent years. This has been largely influenced by President of USA, Donald Trump, threatening to impose tariffs on multiple products from EU. One example is imposing 25% tariff on vehicles (Pramuk, 2020). However, negotiations between the two countries are still on-going to work out on a deal which will improve trading relationships. This will affect exports of the EU as vehicles are the second highest exports of EU to US in 2018 (Workman, 2019). With tariffs in place, manufacturers and companies will increase the price of the products. This means consumers will have to pay a higher price for the imported products, causing exports of EU to fall. With higher imports, there will be an increase in supply. This leads to the exchange rate to decrease, explained in Figure 6.

Figure 6: S-D Model on EU-US Trade affecting EUR

Monetary Policies

The interest rate of EU is determined by the ECB while the Federal Reserve Board determines the interest rate of US. Due to the Coronavirus affecting global economies, numerous Central Banks have lowered their interest rate. Statistics on 4 March 2020 showed the interest rate of US has decreased from 1.75% to 1.25%. The ECB maintained at 0% but deposit rates were reduced to -0.5% (Lee, 2020).

With the ECB having a negative deposit rate, it discourages deposit made to the ECB. This results in the ECB having lesser EUR. A decrease in supply leads to EUR appreciating against USD as shown in Figure 7.

Figure 7: S-D Model on Monetary Policies affecting EUR

2.4.2 Future Market Conditions for EUR/USD

In my opinion, the spot rate of EUR/USD will fluctuate in the next 6 months. With measures from the ECB, the early stages of the next 6 months will see the EUR generally appreciating against USD. However, the poor economic growth will see the EUR start depreciating against USD, but the spot rate will not hit a record low. This is because the exports of EU can still contribute to the economic growth and trade relationships between EU and US can be further improved on.

References

EUR/USD (Point form)

Euro is the second most used currency worldwide with an estimated amount of 341 million users daily. (

https://europa.eu/european-union/about-eu/euro/which-countries-use-euro_en

).

There is only one central bank managing the euro, the European Central Bank. (

https://www.thebalance.com/what-is-the-euro-3305928

).

The graph shows the exchange rate of EUR/USD. (

https://www.xe.com/currencycharts/?from=EUR&to=USD&view=1Y

)

37 countries uses Euro (

https://www.thebalance.com/what-is-the-euro-3305928#countries-that-use-the-euro

)

Factor 1: Brexit

The graph shows the exchange rate of EUR/USD throughout the whole period of Brexit. (

https://www.xe.com/currencycharts/?from=EUR&to=USD&view=5Y

). Reference for explanation (

https://www.theweek.co.uk/100284/brexit-timeline-key-dates-in-the-uk-s-break-up-with-the-eu

). As shown in the graph, the Euro depreciated when the UK voted to leave the EU in the third quarter of 2016. The value of the Euro appreciated when then Prime Minister of the UK, Theresa May, announced that the UK will still be part of the EU for the next two years in the first quarter of 2017. On 8 December 2017, the UK agreed a deal on the UK ‘divorced bill’ with the EU. This has caused the Euro to depreciate against USD since 2018. On 31 January 2020, the UK left the EU officially, resulting in a significant depreciation of the Euro where the value decreased from $1.11 on 1 February 2020 to $1.08 on 20 February 2020. The effect of Brexit has led to a decrease in economic growth of the EU, which could result in a recession for the EU in the near future. (

). Brexit reference (

https://www.bbc.com/news/uk-politics-32810887

). 

Brexit can cause political instability (

https://www.reuters.com/article/us-britain-eu-ecb/brexit-could-lead-to-political-instability-in-eu-ecbs-makuch-idUSKCN0Z60G1

) Economic growth table (

https://ec.europa.eu/eurostat/documents/2995521/10159272/2-31012020-BP-EN /435a608a-c9f9-9043-52a1-43ee8cb03d8f

) 

Factor 2: Trade

US-EU trade stats

https://ustr.gov/countries-regions/europe-middle-east/europe/european-union

US-EU trade tension

https://www.cnbc.com/2018/08/21/trump-us-to-put-a-25percent-tariff-on-every-car-from-european-union.html

https://www.cnbc.com/2019/12/13/ustr-weighing-100percent-tariffs-on-new-eu-products-including-whiskies.html

https://www.cnbc.com/2019/10/03/us-eu-trade-fight-could-drag-on-after-victory-at-wto-clete-willems.html

(favour US on tariff)

https://www.politico.com/news/2020/01/16/eu-trade-chief-urges-reset-in-us-relationship-amid-tensions-099745

(negotiations)

https://www.ft.com/content/ae259de2-57db-11ea-a528-dd0f971febbc

(negotiation)

https://lot.dhl.com/timeline-how-the-u-s-eu-trade-dispute-took-shape/

(timeline)

https://www.cnbc.com/2020/01/21/trump-says-he-is-serious-about-tariffs-on-european-cars.html

(threat)

https://ec.europa.eu/eurostat/web/products-eurostat-news/-/DDN-20190520-1

(stats)

Factor 3: Interest Rate

https://www.investopedia.com/ask/answers/who-determines-interest-rates/

https://europa.eu/european-union/about-eu/institutions-bodies/european-central-bank_en

https://www.cnbc.com/2020/03/04/coronavirus-federal-reserve-other-central-banks-cut-interest-rates.html

https://www.washingtonpost.com/business/2020/03/03/economy-coronavirus-rate-cuts/