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The Foreign Exchange Matrix: A new framework for understanding currency movements

Book Description

The foreign exchange market is huge, fascinating and yet widely misunderstood by participants and non-participants alike. This is because its unanswered questions are numerous. For instance, what is the purpose of the $4 trillion per day trading volume? What determines currency trends and who are the players in the FX arena? Does FX drive other financial markets, or is it the passive end-product of all the other markets? FX is without clear supply and demand factors, so how do traders determine sentiment and price direction? Much is written in an effort to answer these questions, but a lot of it is just noise. In the 12 pieces here, Barbara Rockefeller and Vicki Schmelzer draw on their combined 50 years' experience in foreign exchange to cut through the clutter and provide an elegant and razor-sharp look at this market. Their analysis is accurate, useful and enlivened by many anecdotes and examples from historic market events. They cover: - How the matrix concept can help observers understand foreign exchange market action - What professional FX traders take into consideration before entering into positions - Whether the FX market can be forecast - The interplay between foreign exchange and other financial markets - How technology has levelled the playing field between big and small players, and at what cost - Whether the prospect of reserve currency diversification away from the dollar is likely - The toolkit that central banks use to manage national economies and the effect of this on currencies 'The Foreign Exchange Matrix' is the go-to book for anyone seeking a deeper understanding of the world of foreign exchange.

Table of Contents

  1. Cover
  2. Publishing details
  3. About the Authors
  4. Foreword
  5. Introduction
    1. Easy answers
    2. Decoding how the FX market really works
    3. Risk aversion
    4. Information overload
    5. The FX market is not what you think
  6. Chapter 1 – The Matrix Concept
    1. What is the matrix?
    2. The primitive matrix
    3. The matrix process
    4. Perversity of the FX market
    5. The actors
  7. Chapter 2 – Review of Risks
    1. Risk and contagion
    2. Risk gauges
    3. Conclusion
  8. Chapter 3 – Global Attitude Toward Risk
    1. Overview of risks
    2. Summary
  9. Chapter 4 – Interest Rates and Interest Rate Differentials
    1. Why interest rates matter
    2. Inflation dynamics
    3. Interest rate curve shifts as FX drivers
    4. Inflation expectations and what the market watches
    5. When safe-haven trumps yield
    6. Conclusions
  10. Chapter 5 – Forecasting FX
    1. Traders, economists and theories
    2. The disconnect puzzle
    3. The Taylor Rule
    4. Institutional overrides
    5. Government intervention in the FX Market
    6. Emerging market interventions
    7. Summary
  11. Chapter 6 – Positions and Flows
    1. Observing positions and flows
    2. Volume in Retail FX
    3. Where FX traders can find information on positions and flows
    4. Conclusion
  12. Chapter 7 – Intermarket Analysis
    1. Overview of big-picture intermarket ideas
    2. Considering notable ‘correlated’ markets
    3. Conclusion
  13. Chapter 8 – Technical Analysis in Foreign Exchange
    1. The prevalence of TA in FX
    2. Why technical analysis is pervasive in FX
    3. How to go with the flow – technical analysis in action
    4. Systematic, rule-based trading
    5. A riff on sentiment
    6. Conclusion
  14. Chapter 9 – The FX Files of Trading
    1. FX roots
    2. Enter the electronic dealing platforms
    3. FX gets wired
    4. Algomania
    5. Bigger is better – effect of bank size on FX trading
    6. Algo news
    7. Conclusion
  15. Chapter 10 – Be Careful What You Wish For: Reserve Diversification and the Future of the Dollar
    1. Introduction
    2. What is a reserve currency?
    3. How to qualify for reserve currency status
    4. Reserve currencies are always doomed
    5. Somebody has to lead
    6. The gold standard is a non-starter
    7. The SDR is a non-starter, too
    8. Other reserve currencies
    9. The changing shape of how currency reserves are held
    10. Military power and reserve currency status
    11. Hard vs. soft power
    12. Evaluating China’s prospects as a reserve currency issuer
    13. What’s next
  16. Chapter 11 – The Euro and the New Gold Standard
    1. The euro as a reserve currency
    2. The EMU as a sovereign
    3. Judging sovereigns
    4. Hegemony and reserve currency investors
    5. The new gold standard
    6. Evaluating the euro zone debt crisis
    7. Contagion
    8. Conclusion
  17. Chapter 12 – The Central Bank Tool Kit and How it Affects Foreign Exchange
    1. Non-standard measures
    2. Quantitative easing
    3. Capital controls
    4. Peg-o-my-heart
    5. Intervention
    6. Conclusion