Foreign Exchange Trading
Modern Monetary Theory or Modern Money Theory (MMT)
The Modern Monetary Theory is an alternative to the traditional macroeconomic theory. Generally, MMT suggests that there is no limit to the quantity of money that can be created by a central bank. The only limit comes from the impact of inflation. In short, MMT suggests that countries and governments controlling reserve currencies can borrow and spend as much as they need to achieve employment, and later, create more currency to repay their debt.
MMT Economists are focused on fiscal policies
According to MMT, governments can create new money through their fiscal policy. The government’s fiscal policy is focused on budgeting and includes:
Government spending, and
Triffin Dilemma (Reserve Currency Paradox)
Robert, Baron Triffin was a Belgian-American economist who was openly against the Bretton Woods monetary system. Triffin dilemma or else Triffin paradox refers to countries whose currencies are used as global reserve currencies, like the United States and the US dollar.
Describing the Triffin Dilemma
Identified in the 1960s, the Triffin dilemma describes a situation where there is a conflict of interest between short-term domestic objectives and long-term international objectives. These are some facts regarding the country that is issuing the global reserve currency:
(1) The need for an extra supply of foreign exchange reserves
The country issuing the global reserve currency must supply other countries with an additional supply of its currency to meet the international demand for foreign exchange reserves.
Order Book Trading Analysis
An order book can be used for quantifying the market’s intentions in the short term.
“With the advent of electronic trading, markets have moved to a system in which liquidity provision has become decentralized...The rule-driven execution of orders in these limit order books and the extensive data that is available for order-driven markets makes them ideal candidates for stochastic modeling.” (2)
What is an Order Book?
An order book is a ledger showing the Depth of the Market (DoM) consisting of a complete list of buying and selling orders for a particular financial-traded asset at a particular time. Every trading order in the book includes price and volume. Every exchange uses an order book to record, match, and execute trading orders.
Five Traditional Exchange Rate Theories
The traditional exchange rate models seek the identification of an equilibrium between two economies to calculate the fair value of the exchange rate. An equilibrium is based on the relative valuation of an identical commodity, relative inflation, relative level of real interest rates, etc.
These are the key exchange rate models and the relative pricing method they use:
1. Purchasing Power Parity (PPP) → Relative pricing of goods
The Purchasing Power Parity (PPP) model or else the “law of one price” estimates the adjustment needed on the exchange rate between countries for the exchange to be equivalent to each currency's purchasing power.
Forex brokers are financial companies that provide access to the Foreign exchange market by linking retail and institutional capital and the network of banks that offer liquidity.
How to Choose a Forex Broker?
These are the key issues to keep in mind when choosing Forex brokers:
ENSURING THE SAFETY OF FUNDS
- Is the Forex broker regulated by a trustable authority such as FCA UK, ASIC, or even CySEC?
- Is the Forex broker headquartered in a safe country?
- Does the Forex broker operate for more than 3 years in the market?
Key Cross-Asset Correlations
A cross-asset correlation measures the degree to which the price of a financial instrument is affected by a change in the price of another instrument of a different asset class.
Introduction to Cross-Asset Correlations
The globalization of the economy and the unification of the world financial markets into a common area of investment opportunities are the drivers of the increased cross-asset correlations we have witnessed over the past 20 years.
In general, a correlation between two variables expresses an average relationship that is backed by historical data. The correlation coefficient receives values between -1.0 and +1.0, and that means:
+1.0 is the perfect correlation reflecting identical movements/directions
-1.0 is the perfect negative coefficient reflecting identical opposite directions