Tag: Asset Investment Management

Fundamentals and FX Futures

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Market participants can trade futures contracts that represent the relationship between two currencies, also known as the foreign exchange (Forex, FX) market. FX futures contracts are regulated and traded on the open market, just like all futures contracts, which is a major difference compared to the cash Forex market, where each dealer sets their own prices with no common exchange. This transparency in currency futures benefits foreign exchange traders.

FX contracts are priced based on how much of one country’s currency it takes to buy one unit of another country’s currency. Contracts, like Euro/U.S. dollar futures, allow you to trade based on the exchange rate between the euro and U.S. dollar. Most futures contracts are based on a foreign currency in terms of U.S. dollars; the Euro/U.S. dollar futures contract is priced based on how many U.S. dollars it takes to buy one euro.

You can also trade cross rate futures, which allow you to trade the relationship between two foreign currencies, such as Euro/British Pound futures, where both the base and foreign currency are not in U.S. dollars. The fundamental analyst will look at certain factors to determine where the price of the currencies they are trading might move next.

Exchange Rates

Since exchange rates are a direct comparison of two currencies, the fundamental analyst will evaluate the relative differences between economic factors rather than their absolute values. The analyst will look at factors that make the economies of the two countries different and will attempt to determine how each economy will perform in the future, allowing them to make an assumption about the movement of the exchange rates between the two countries. While the analyst will spend the most time comparing the two countries in terms of relative values, the absolute value each country’s economy will also impact the exchange rate.

For example, if you compare two currencies where there is 20% or higher inflation, the economic conditions will be much different than if you compare two currencies where the countries have less than 5% inflation. The difference in inflation rates between two countries will tend to have a larger effect than the absolute level of inflation.

Price Influencers

Since futures are priced as a ratio, there are a combination of changes that can influence price:

  • The base currency can strengthen, thus decreasing the price of the currency futures contract
  • The base currency can weaken,  increasing the price of the currency futures contract. For example, if the U.S. dollar strengthens against the euro, the price of the EUR/USD futures contract will decrease
  • The quote, or terms, currency can strengthen, increasing the price of the currency futures contract
  • The quote, or terms, currency can weaken, decreasing the price of the currency futures contract. For example, if the euro strengthens against the U.S. dollar, the price of the EUR/USD futures contract will increase

Economic Factors

There are also a number of economic factors that affect the price of currency futures including inteste rates, inflation and trade with foreign countries.

Fundamental analysts will look at interest rates, and variables that affect interest rates, for the two currencies they are trading.

Interest rates impact the demand for currencies. If interest rates are high in a particular country, the demand for their bonds will be high as investors look to make investments that offer a higher relative rate of return compared to the alternatives. As investors buy bonds, the demand for the currency increases because the foreign buyer needs to exchange their currency for the foreign currency to purchase the bonds. This demand leads to an increase in the relative value of that country’s currency.

Fundamental analysts will look at the relative levels of inflation in each country to evaluate the strength of each currency.

Inflation decreases the buying power of a country’s currency. This causes a country with higher inflation to have a weaker currency, meaning the price of the foreign exchange futures will increase.

For example, if the rate of inflation in the United States is higher than the rate of inflation in the United Kingdom, the U.S. dollar will decrease in price relative to the British pound. A trader interested in the GBP/USD futures contract will see the price increase, meaning it will take more U.S. dollars to buy a British pound.

Trade between countries will influence the relative value of a country’s currency. Countries that export more will have a currency more in demand, increasing the relative value of their currency.

If the United States exports more good than it imports, demand for its currency will be high and the value of the dollar will increase. If the U.S. exports relatively more goods than the European Union, then the U.S. dollar might increase in value and the EUR/USD futures contract could decrease in price.

The interactions can be complex and fundamental traders will create models to show the relationships between the economy and foreign exchange futures.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Euro FX Futures

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CME Euro FX futures and options allow you to take positions on the value of the euro currency versus the U.S. dollar. These deep and liquid currency contracts grant traders wide exposure to the economy of the Eurozone,  a monetary union of 19 of the 28 European Union member states which have adopted the euro as their common currency. The Eurozone ranks as the fourth largest trading partner of U.S.

Euro FX futures and options are valuable tools for gaining or hedging exposure to the euro as well as managing exposures to the U.S. dollar. Given the importance of these two currencies in the world economy, you can see increased activity in times of global market volatility driven by interest rate changes, inflation announcements and other monetary policy changes as well as payroll, unemployment and geopolitical events.

The Contract

Euro FX futures trade on CME Globex Sunday through Friday from 5 p.m. to 4 p.m. Central Time (CT), with daily trading breaks from 4 p.m. to 5 p.m. (CT), and is priced in U.S. dollars per euro. The Euro FX futures contract is available in standard [6E], e-mini [E7] and e-micro [M6E] contract sizes, allowing market participants to carefully calibrate levels of market exposure. Euro futures currently expire on a quarterly basis, and the contract’s minimum tick value is $6.25 for both standard size and E-mini Euro contracts, and $1.25 for the E-Micro contract.

Trading Euro FX Futures and Options

Euro FX can also be traded as options in weekly, monthly and quarterly formats which expire on Fridays, and in both European- and American-style. Euro options markets are extremely liquid and allow tremendous flexibility in managing existing option positions across multiple expiration dates targeted trading based on market movement and the ability to trade high impact economic events.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Japanese Yen Futures

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Japanese Yen futures (6J) allow market participants to take a position in the value of the yen against the U.S. dollar.

A majority, 80%, of the global foreign exchange (forex) market is concentrated on seven currencies. The yen is the third-most commonly traded. Because the Japanese economy is one of the largest in the world, and Tokyo is an important financial center, the relative dominance of the Japanese currency is appropriate.

However, for the last 30 years, Japan has experienced subpar economic growth, which lead its central bank to take a uniquely interventionist role in the currency and bond markets. This combination of a vibrant trade-based economy paired with Bank of Japan-depressed interest rates gives the yen unique properties sought by traders.

The Contract

Each Japanese Yen futures contract represents 12,500,000 Japanese yen with a minimum price fluctuation of .0000005 per yen increment. The contract trades Sunday-Friday from 5 p.m. to 5 p.m. Central Time (CT), with a daily 60-minute break at 4 p.m. CT.

Watching the Markets

Like all participants in the forex market, those taking a position on the yen should monitor the release of economic data such as GDP, retail sales and inflation.

As typical of all major currencies, the valuation of the yen is largely influenced by the activities of Japan’s central bank. For the past few decades, the BOJ strove to keep interest rates low, which allowed traders to profit by selling the yen and using the proceeds to buy higher yielding currencies.

This transaction, known as the carry trade, is popular in low-interest rates and low-volatility environments, which often characterizes the yen trade.

Nonetheless, investors should remain vigilant as the Bank of Japan has a reputation of intervening in the currency markets when the yen moves in a direction that could hurt its export-based economy.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Canadian Dollar Futures

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Canadian Dollar futures (6C) at CME Group allow you to trade the value of the Canadian dollar against the U.S. dollar in a liquid and transparent market.

As the sixth-most widely held reserve currency, the Canadian dollar, popularly called the loonie, is one of the most widely traded currencies in the foreign exchange (forex) market.

Though Canada’s GDP ranks 10th in the world, it ranks ninth in the world in terms of dollar-value exports and is an important commodity producer.

The Bank of Canada is known for its lack of intervention in the currency markets which, when coupled with Canada’s fiscal discipline and high interest rates, give the loonie a relative stability that is rare.

The Contract

Each Canadian Dollar futures contract represents 100,000 Canadian dollars with a minimum price fluctuation of $.00005 per Canadian dollar increment. The contract trades Sunday-Friday from 6 p.m. to 5 p.m. Eastern Time (ET) with a daily 60-minute break at 5 p.m.  ET.

Trading the Markets

Market participants trading the CAD/USD with the futures contract should watch for all the traditional factors that impact exchange rates, such as purchasing power and interest rate parity, along with releases of economic data such as GDP, retail sales, inflation data and general daily news.

Predictably, by virtue of geography and tightly intertwined trade, the value of the Canadian dollar can be closely connected to the economic health of the U.S. As the U.S. accounts for more than 50% of Canada’s exports, and vice versa, the currencies can sometimes move in lockstep.

Another important note, 60% of Canada’s exports are commodities, and commodity prices can influence investor sentiment regarding the loonie. Oil’s influence is particularly large; traders tend to buy the loonie when oil is on the rise.

Overall, the Canadian dollar is becoming an increasingly viable alternative to the U.S. dollar and is poised to gain importance in the forex market in years ahead.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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British Pound Futures

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British Pound futures (6B) at CME Group allow you to take positions on the value of the British pound sterling currency versus the U.S. dollar.

Once the world’s leading currency, the pound lost its preeminence with the dissolution of the British Empire in the 1940s. Because the U.K. remains the sixth largest economy and London is a financial hub, the pound remains the third-most widely held reserve currency and the fourth-most widely traded currency.

The Contract

Each British Pound futures contract represents 62,500 British pounds with a minimum price fluctuation of .0001 per British pound increments. The contract trades Sunday-Friday from 5 p.m. to 6 p.m. Central Time (CT) with a daily 60-minute break at 4 p.m. CT.

Trading the Market

This GBP/USD pair represented by 6B is frequently traded, very liquid and characterized by tight bid-ask spreads and nearly nonexistent arbitrage opportunities.

Therefore, investors that wish take a position on the pound are well advised to understand the relative strength between the British and U.S. economies and their interest rates. Stronger British economic performance often translates to a higher pound against the dollar.

Conversely, the dollar typically strengthens against the pound when the U.S. economy outperforms Britain’s. As such, market participants should follow releases on broad economic data such GDP, retail sales and inflation as well as any statement issued by either the Bank of England or the Federal Reserve.

Finally, with New York and London both serving as global financial hubs, industry-specific news concerning U.S. or British banks could also impact the contract’s value.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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About Australian Dollar Futures

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Australian Dollar futures (6A) allow you to trade the value of the Australian dollar against the U.S. dollar in a liquid and transparent market.

The AUD/USD is typically the fifth-most traded currency pair in the foreign exchange (forex) market. Though Australia only ranks 13th in the world in terms of GDP, its status as an important commodity producer and key trading partner with developing Asian economies gives its currency an outsized importance.

Australia has a stable government, fiscal discipline and an approach to business and law that is attractive to investors and not always typical of the APAC countries. When these qualities are paired with its central bank, The Reserve Bank of Australia, with a sparse history of intervention and success at controlling inflation, it is little wonder that Australia’s currency attracts interest from a global marketplace eager to invest in the region.

The Contract

Each AUD/USD futures contract represents 100,000 Australian dollars with a minimum price fluctuation of $.0001 per Australian dollar. The contract trades Sunday-Friday from 6 p.m. to 5 p.m. Eastern Time (ET) with a daily 60-minute break at 5 p.m. ET.

Trading the Market

Market participants trading the AUD/USD futures contract should watch for the traditional factors that impact exchange rates, such as purchasing power and interest rate parity, along with releases of economic data such as GDP, retail sales, inflation data and general daily news.

Additionally, Australia’s economy is largely driven by metal and agricultural commodities and the value of the Australian dollar generally rises and falls in partner with the commodity indexes.

People taking a stake in 6A monitor reports from Australia’s Bureau of Agricultural and Resource Economics and Sciences for supply developments in mining, weather and harvests.

Due to Australia’s close trading ties with China and other developing countries in the APAC region, stories that reflect growing demand in those countries ultimately cascade into changing valuations in 6A.

These factors make the Australian dollar attractive for investors wishing to go long on commodities and profit from the seemingly insatiable resource demand of Asia’s emerging economies.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Supply and Demand: Ferrous Metals

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Ferrous metals, metals that contain iron, are distinct from both precious and base metals. They include raw materials like iron ore and steel scrap as well as semi-finished products such as hot rolled coil.

Iron Ore

Iron Ore is found in the earth’s crust and mined from open pits. China is the world’s largest producer, consumer and importer of iron ore, producing 1.3 billion metric tonnes, equivalent to 44% of the world’s output. Australia is the second-largest producer of iron ore and has the world’s largest deposits. Chinese iron ore deposits are of lower iron content than those typically found in Australia and Brazil.

Iron ore is the key ingredient in the steel making process using the blast furnace. The earliest blast furnaces date back to first century in China. In a blast furnace, which is lined with refractory brick, iron ore, coke and limestone are heated to produce liquid iron. Once a blast furnace is started, it will continuously run for years, with only short stops for planned maintenance. The temperature in a blast furnace can reach up to 4200 °F (2300 °C).

Steel is also produced via an Electric Arc Furnace (EAF) using steel scrap. About one-third of the world’s crude steel is made in an EAF. In an EAF, the scrap metal is charged using graphite electrodes to heat the metal. The temperature reaches 6300ºF (3500ºC). In the U.S., steel is typically produced using EAFs rather than blast furnaces.

Steel production using EAFs compared with primary steel production using a blast furnace has some benefits including the ability to use 100% recycled scrap feedstock, thereby being less energy-intensive and the flexibility to start and stop production being more responsive to changes in demand.

Iron Ore Market Fundamentals

Iron ore supply has been increasing over the last 10 years in response to China’s industrialization during the commodity super cycle. To meet China’s demand for iron ore, which is the key ingredient in steel making which is required for construction and white goods, world supply from iron ore mines increased.

This had an impact on the way iron ore was priced. In the decades between the 1960s and the millennium, iron ore prices were stable with plentiful supply. But China’s demand for iron ore caused prices to rise, and miners and steel makers who had traditionally agreed on annual prices following long negotiations, moved to quarterly prices in 2010 and then eventually spot pricing.

Iron ore is transported via ocean freight on capsize vessels. Some of these very large ore carriers have a deadweight capacity of 400,000 metric tonnes.

Steel

Steel scrap is collected from recyclable materials left over from product manufacturing and consumption. Scrap collection and supply is responsive to changes in price.

Steel Production

China is the world’s largest steel-producing country representing over half of all crude steel. In 2015 it produced 50.3% of the world’s 1,599.5 million metric tonnes. Japan (105.15 million metric tonnes), India (89.58 million metric tonnes), the United States (78.92 million metric tonnes) and Russia (71.11 million metric tonnes) make up the top five steel producing countries.

Steel Demand

Different types of steel are produced according to the properties required for their application, such as density, strength, thermal conductivity and elasticity. They are broadly categorized into carbon steels, alloy steels, stainless steels and tool steels. Steel is used in construction of bridges, roads, railways and buildings. It is also used in the white goods sector, which includes large electrical goods such as refrigerators and washing machines, named such because they are typically white in color.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Base Metals Supply and Demand

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Copper Production

Copper ore is found in the earth’s crust and is either mined from open pits or underground. Most of the world’s copper ore originates from Chile (approximately 30%). The Escondida copper mine in northern Chile is the world’s largest copper mine by reserve. In 2012, it had 32 million metric tons in copper reserves.

Copper ore is processed by breaking the rocks into smaller pieces and is turned into copper concentrates through the process of beneficiation. Then, through the smelting process, copper is extracted from the ore. Once copper is extracted from the smelter, it is melted and cast as anodes. High-purity copper cathodes are created from anodes in the final step of the process.

Copper is a commodity and, if meeting all specifications, can be delivered into exchange-approved warehouses.

Copper Market Fundamentals

Copper supply has increased over the last 10 years in response to China’s industrialization during the commodity “super cycle.” To meet China’s demand, world supply from copper mines doubled over the period 1994-2014. Copper’s price performance is well-linked to the performance of the Chinese economy.

Mining companies have been cutting costs since 2003, and with any fall in demand, cutting the cost of production has been a way to maintain profitability. The collapse of oil prices from $115 per barrel in June 2014 to under $35 in February 2016 also reduced the price of copper because mining and refining are energy-intensive. The currencies of copper-producing countries have fallen, down 10.4% in 2014 from 2013, and down by 13.4% in 2015 from 2014 (USGS, Bloomberg, CME Group). This would have reduced labor costs.

Copper is widely used in both industrial and commercial markets, from electronics and plumbing to power generation, and is viewed as a reliable indicator of economic health. Copper is often referred to as Dr. Copper because of its ability to predict turning points in the global economy.

Other factors that positively impact copper demand are government-backed copper, intensive power infrastructure, home appliance subsidy schemes, and promotion of electric vehicles. The growth in urban population with higher disposable incomes increases demand for buildings, home appliances and consumer electronics.

Aluminum Production

China is the world’s largest aluminum producer, representing 54% of the world’s 58 million metric ton production in 2016, based on International Aluminium Institute data.

Aluminum is produced through the electrolysis of bauxite (aluminum ore). Australia is the number one bauxite producer, followed by China and Brazil. Bauxite is mined, crushed and processed to remove silicon impurities.

Alumina, the common name for aluminum oxide, is extracted from bauxite. Alumina is extracted through aluminum smelting by the Hall-Héroult electrolysis process. This requires a great deal of energy and smelters are often located near hydro-electric power plants. Primary aluminum is then cast into ingots or used in alloys.

Aluminum is a commodity and, if meeting all specifications, can be delivered into exchange-approved warehouses.

Aluminum Market Fundamentals

The production of aluminum has shifted to China over the last 15 years. During this period, demand increased ninefold.

 

China is therefore both a producer and consumer of aluminum. Currently, there is an over-supply of global aluminum, which has put global prices under pressure.

The production of aluminum requires tremendous amounts of electricity. Many smelters in China connect directly to the electrical grid and provide a baseline power demand for underserviced regions in the country. In China, aluminum production serves more than one purpose; it provides the metal for the domestic market, powers communities and provides jobs and economic growth for many municipalities.

The cost of production in China was around $1550/mt and at the start of 2016 and 35% of producers operated at a loss.

Regional differences in aluminum markets are clear when you compare China to the U.S., which is currently in a structural deficit. Aluminum producers have fared better than copper producers because they have cut production and reduced inefficiencies in response to the lower prices and high stockpiles. Demand for automotive vehicles, which are increasingly aluminum intensive, power transmission investment, housing development and electrical appliances create aluminum demand.

In the U.S., the substitution of aluminum for steel in car manufacturing, such as Ford’s F-150 model, will be positive for demand. Whereas the fall in consumption of carbonated soda drinks, the largest share of demand for can sheet in North America, will weigh on the aluminum demand.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Introduction to Base Metals

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Introduction to Base Metals

Base metals are non-ferrous industrial metals including copper, aluminum, lead, nickel, tin and zinc.

Common Usage of Base Metals

Base metals appear in industrial and commercial applications.

  • Copper – commonly used in wiring in electrical equipment due to its excellent conductivity.
  • Aluminum – commonly used in the transportation industry for use in aircraft, cars and bicycles. Being largely resistant to corrosion, aluminum is also used in the food and beverage industry for drinks cans, kitchen foil and packaging.
  • Lead – is soft, highly malleable and ductile and is predominantly used commercially in the manufacture of batteries.
  • Zinc – often used in alloys, where a metal is made by combining two or more metallic elements to give improved properties, creating brass by combining zinc with copper. Zinc alloys are often used in industries such as shipbuilding and commercial uses in cars, electrical components and household fixtures.

Who Trades Base Metals?

Different types of firms are actively engaged in Base Metals trading for a variety of reasons. Some firms are hedging a physical price exposure due to their involvement in the supply chain of the metal. Others trade Base Metals as an investment asset.

Trading Base Metals

There are two main ways to manage risk in the base metals markets: by trading futures and options with CME Group, or by trading forwards over the counter. Our base metals futures and options cover a wide range of products and are either physically-delivered or cash-settled using price reporting agency indexes or assessments.

Futures contracts are standardized contracts for the purchase and sale of financial instruments or physical commodities for future delivery on a regulated commodity futures exchange.

Forward contracts are customized contracts between two parties to buy or sell assets at a specified price on a future date and are privately negotiated and traded over-the-counter.

Futures and forwards contracts are similar in nature but note the benefits of trading futures over forwards.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Trading the Metals Markets

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Trading the Metals Markets

The metals market is really several markets. Precious metals such as gold and silver are often thought of as jewelry markets while base metals such as copper go into homes and manufacturing. Platinum and palladium are precious metals, but are used in automobiles while gold is many things to many people – a currency, an inflation hedge, a barometer of the economy, a central bank tool and of course, a commodity.

Collectively, metals markets offer investors access to truly global markets that are connected to everything from the computer industry to construction to macro-economics and geopolitics. This brings in a broad range of participants from commercial hedgers, to central banks to institutional traders and individuals looking for opportunities and diversity. The markets are sometimes volatile and unpredictable, which means they also offer flexible and creative trading opportunities, as well as ways to protect and hedge against broader moves in the stock and commodities sectors. Traders looking to tap into this major global commodity sector access to precious and base metal futures virtually 24-hours per day

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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