Most investors, both new and more experienced, based almost all of their investments only on a variety of technical indicators. Very rarely, they pay more attention to aspects that provide a lot of helpful tips in determining the direction in which a currency pair will follow. Sometimes, certain assets of investment markets is the key to winning the opening position or to avoid failure.
The managers of investment funds for years examine secondary markets for confirmation before they open a position. These professionals, by using very sophisticated software charts, are able to see the relationships that exist between certain types of markets, so that they have the information about the investment. Some of these correlations are commonly known – oil and the Canadian dollar and gold futures and the Australian dollar. Some are not so well known, such as the exchange rate of the US dollar / Japanese yen and the short-term rate of return on Japanese government bonds.This article presents some of the key markets that may offer valuable information about the direction in which the price will change in the forex market.
The underestimated bond market
While it may seem very strange, treaties and bonds are strongly linked. The direction for both of these investment assets is closely linked with the state a country's economy and its fiscal policy. If the economy of a country is in good shape and is strong, international investors will buy bonds issued by the government of a country – in search of a secure and stable rate of profit. This situation will naturally increase demand for the currency of that country and henceby increase the value of the currency. International investors who are interested in investments in other countries, always have to make trades in the currency of that country.
This is why all the managers of investment funds, observes the short-term bond yields in order to confirm that they are in relation to the favorable currency trend. The movement in one asset records can predict or confirm the movement in another.
One of the couples, which is subject to this relationship is the exchange rate of the US dollar / Japanese yen. The forex currency pair USD / JPY turns into a near synchronization with Japanese short-term bonds – and exactly two-year government bonds. This relationship was very strong especially in 2010.Most of the participants in the foreign exchange market had seen a strong currency in the yen. The global economy is coming out on track after the recession, the Japanese export companies fared much better than their American counterparts – which resulted in a greater increase in Japan as a country. As a result of this international investors saw more opportunities and prospects in the Japanese market and began to invest in short-term government bonds. This in turn caused an increase in the value of the yen against the dollar.
Foreign currency short-term contracts (futures)
Derivative financial instruments (derivatives) – such as short-term contracts on contracts are another great tool for confirming the formation of short-term trends in exchange rates.
Market brokers and investors are looking for the right moment that will be pointed to the right number on the market. In forex trading in order to determine whether the currency is in demand, investors will keep an eye on the number of open contracts on a short-term currency. This information can be used not only to predict the demand for a currency but also to other products on the market rotated (commodities).
Some analyzes point out both the commercial transactions and non-commercial, but the most important thing, is however to keep a close eye on the commercial items. Non-commercial positions are mainly concluded by individuals engaged in speculation of the market. The point is to have information about closed for the day demand for a given currency in order to determine or confirm the potential direction of the market. For example, many are interested in a particular currency (a large number of contracts) means that most investors are on the same side of the market – which means that the opposite result on the market is more likely. When most investors think that the value of a pair will increase or has open long positions, what happens when all of a sudden they decide to sell holdings?
Contracts CDS – Credit Default Swap
The CDS market is relatively unknown. CDS is a derivative instrument used for credit risk transfer and is an excellent tool for illustrating the demand for currency data.
CDS contracts are in the market for about 14 years and serve to protect the position of the buyer before any claims for payment are made. For example, the manager of the funds can insure credit on the amount of $ 100 million in Japanese government bonds by paying a premium insurance. The credit crisis manager will be then able to recover the value of the bonds. As in the case of short-term contracts on contracts, CDS contracts allow you to specify whether a currency is overvalued or undervalued. During the credit crisis in the European Union in 2010, confirmed CDS contracts, lack of interest in European assets – CDS contracts (insurance costs) soared to record high levels.
These indicators can provide invaluable information when making investment decisions and thus increase the rate of return on their investment projects, especially in the current days of global economic instability. For the economies that are inter-related to one another it pays to understand what the relationship between the different markets is.