Forex Market Education
Taking a look back at this week and considering a lot of journalism out there it can be said that a lot of people got this week totally wrong with a very poor understanding how markets actually work in synchronization with US interest rate policy. Perhaps this is why the words of the FOMC and Fed Chair Janet Yellen are probably the most studied words in global markets today. US interest rate policy affects the whole world and because the global economy is so dependent on the US economy it is very critical that we get back down to some very essential basics in understanding global macro-economics.
The four cornerstones of of global macro-economics are as follows:
1. US government interest rates - from 30 day Fed Fund to 30 year T-Bond.
2. The value of the US Dollar compared to other major currencies as reflected through the USDX.
3. The commodities markets particularly represented by the price of crude oil.
4. The US equities markets particularly represented by the SP 500.
The understanding how US interest rates move is based upon the monthly assessment of US macro-economic data such as retail inflation, unemployment rate, the housing market, consumer spending and manufacturing. Moreover, economists build their perspective of US interest rate policy around a pricing model which incorporates time-lag dynamics with the basic understanding that what is happening now may not actually show up in statistical evidence until 2-3 months ahead with data analysis, computation and final adjustment and revision. In this manner traders often forget the concept of time-lag dynamics and that is why sometimes they get caught in big mistakes as in the case of traders trying to buy gold bullion the last 4 weeks with the mistaken notion of an emerging gold bull market and shorting the US Dollar and shorting the SP 500. Bank economists work with very complicated econometric models to reduce the time-lag dynamics of US economic data and price expectancy of the future towards a price actuality in the present. Therefore with this understanding bank traders usually end up spotting a move far ahead of the usual journalism and small trader reports. That being said let's now turn to one of my favorite websites for educational material: Bookboon.
The cornerstone of the value of the US Dollar is the official interest rate of the US Federal Reserve. Therefore the study of US Treasury markets is vital for an understanding of the direction of the US Dollar. The bond markets are the domain of interest rates from overnight along the forward yield curve far out in time to perhaps 10, 20 and 30 years depending on which country and interest rate you are studying.
Please read the following book by Prof. AP Faure entitled "Bond Market: An Introduction".
http://bookboon.com/en/bond-market-an-introduction-ebook
Description
The debt market is usually categorised into the short-term debt market (STDM) and long-term debt market (LTDM), and includes marketable and non-marketable debt. The money market is comprised of the STDM and the deposit market (which is overwhelmingly of short duration). The bond market is the marketable arm of the LTDM. Bonds are issued by governments (all levels), companies and special purpose vehicles, and there are many types and many risks to holding them. The bond market is an important asset class, yielding returns second to equities. The bottom end of the bond yield curve reflects money market rates (which reflect monetary policy) and its longer end reflects the shorter end, expectations in respect of the shorter end (which includes future inflation), as well as confidence.
The four cornerstones of of global macro-economics are as follows:
1. US government interest rates - from 30 day Fed Fund to 30 year T-Bond.
2. The value of the US Dollar compared to other major currencies as reflected through the USDX.
3. The commodities markets particularly represented by the price of crude oil.
4. The US equities markets particularly represented by the SP 500.
The understanding how US interest rates move is based upon the monthly assessment of US macro-economic data such as retail inflation, unemployment rate, the housing market, consumer spending and manufacturing. Moreover, economists build their perspective of US interest rate policy around a pricing model which incorporates time-lag dynamics with the basic understanding that what is happening now may not actually show up in statistical evidence until 2-3 months ahead with data analysis, computation and final adjustment and revision. In this manner traders often forget the concept of time-lag dynamics and that is why sometimes they get caught in big mistakes as in the case of traders trying to buy gold bullion the last 4 weeks with the mistaken notion of an emerging gold bull market and shorting the US Dollar and shorting the SP 500. Bank economists work with very complicated econometric models to reduce the time-lag dynamics of US economic data and price expectancy of the future towards a price actuality in the present. Therefore with this understanding bank traders usually end up spotting a move far ahead of the usual journalism and small trader reports. That being said let's now turn to one of my favorite websites for educational material: Bookboon.
The cornerstone of the value of the US Dollar is the official interest rate of the US Federal Reserve. Therefore the study of US Treasury markets is vital for an understanding of the direction of the US Dollar. The bond markets are the domain of interest rates from overnight along the forward yield curve far out in time to perhaps 10, 20 and 30 years depending on which country and interest rate you are studying.
Please read the following book by Prof. AP Faure entitled "Bond Market: An Introduction".
http://bookboon.com/en/bond-market-an-introduction-ebook
Description
The debt market is usually categorised into the short-term debt market (STDM) and long-term debt market (LTDM), and includes marketable and non-marketable debt. The money market is comprised of the STDM and the deposit market (which is overwhelmingly of short duration). The bond market is the marketable arm of the LTDM. Bonds are issued by governments (all levels), companies and special purpose vehicles, and there are many types and many risks to holding them. The bond market is an important asset class, yielding returns second to equities. The bottom end of the bond yield curve reflects money market rates (which reflect monetary policy) and its longer end reflects the shorter end, expectations in respect of the shorter end (which includes future inflation), as well as confidence.
Always use your own better judgment and try to build a picture of trade logic combining both technical and fundamental understanding.
Pieter Bergli - Trader X16
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