Twomey B. - Inside the Currency Market: Mechanics, Valuation and Strategies

Contents

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To the memory of my grandfather, Richard Francis Schmidt, the greatest stock trader Ive ever known and a man who taught me not only valuable lessons of life but foundations of the markets at a young age.

Copyright 2012 by Brian Twomey. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Twomey, Brian, 1961

Inside the currency market: mechanics, valuation and strategies / Brian Twomey.1

p. cm.(Bloomberg financial series)

Includes bibliographical references and index.

ISBN 978-0-470-95275-7 (hardback); ISBN 978-1-118-14933-1 (ebk); ISBN 978-1-118-14934-8 (ebk); ISBN 978-1-118-14935-5 (ebk)

1. Foreign exchange market. 2. Interest rates. I. Title.

HG3851.T88 2011

332.4'5dc23

2011021444

Foreword

I met Brian Twomey about five years ago when he came to my office here in North Carolina for a day visit. What immediately struck me about Brian was his fire-in-the-belly spirit and go-getter attitude. Brian impressed me with his knowledge of the markets as well as his outstanding analytical prowess. Weve kept in touch over the years and I was honored to be contacted by Brians publisher for the purpose of writing this foreword.

For anybody interested in trading or studying the Forex markets, I would consider this book required reading. I was astounded at the level of detail, especially in terms of the nation-by-nation analyses that is provided. Detailed methodologies, trade strategies, a terrific chapter devoted exclusively to the Libor, and an extensive analysis of currency pairs are also discussed.

At the books conclusion, Brian explains My purpose for this book was to address all the various issues involved that comprise a currency pair not only from a strict trading perspective but to bring an understanding from a whole host of perspectives. I believe that Brian has achieved this objective tenfold. I predict that this book will serve as an important reference resource for all those interested in the inner workings of world currencies.

I hope you enjoy this book as much as I did.

John R. Hill

President

Futures Truth Co.

Preface

This book answers the question what are the components, the constituent factors that comprise the second side of a currency-pair equation and how should those factors be considered in terms of a trade strategy. A currency pair comprises two sides, a two-nation perspective. In order to understand a currency-pair combination, both sides of the pair must be considered from the two-nation perspective.

The two-nation perspective was fully outlined in this text with not only the trader in mind but researchers, market professionals, and present and future students of the markets.

The genesis of the book framework was derived from the many biases I saw over the years from the academic journals, trader publications, or years of prior books. Each book, each article, and each journal publication offered a point, an insight that would help the reader further his or her knowledge. But each publication taught a perspective, an insight that would eventually lead to the overall understanding of the two-nation operational framework. Yet years may pass before the full learned concepts could actually become operational in a trade strategy and understanding of the market due to the proper knowledge never advanced in one publication. Publications had biases, toward the U.S. dollar side of the currency-pair equation, with no consideration of the second part of the pair.

Spot-currency prices move in the markets based on factors of interest rates but interest rates between two nations rather than one side of a currency pair. The question must then be asked: How does the second nation calculate and factor interest, and what market instruments are available to track the various rates that trade every day in the markets in order to track a trade throughout the various markets?

To trade Australian dollar/Japanese yen, one must understand Japanese TIBOR and Euroyen rates in terms of bank bills and Overnight Cash Rates in Australia. To trade U.S. dollar/Canadian dollar, one must know the U.S. Fed funds rates in relation to Canadas CORRA and OMMFR interest rates. How those specific interest rates trade and direction of their movements can have profound effects on currency-pair prices.

This book sets out to outline the two-sided currency-pair trade from a whole host of perspectives as it relates nation to nation. It addresses currency pairs from the eight major nations because that is where the vast majority of trade occurs.