Most foreign exchange trading protagonists focus their trades on technical indicators, particularly those trading the British pound or the Euro. They do not often take heed of movements in other markets for hints as to the direction of the market. These other markets could provide useful insight in trading and often they hold the key to profitable trades.
Professional managers in the foreign currency market often look at secondary market for confirmation of a position. They use advanced charts to reveal vital relationships between markets. Some of the markets they keep an eye on are the Canadian dollar and crude oil, and the Australian dollar and gold futures.
The Currency Futures Market
Currency futures and other derivative instruments are wonderful tools to use to confirm the short-term trends related to foreign exchange rates. Stock brokers often look at market volume to confirm momentum. In foreign exchange trading, traders make use of currency future open interest to try and gauge the demand for a specific currency. This information is useful to predict the demand in the future for currencies as well as for commodities.
There are analysts who view both commercial and non-commercial transactions. However, it is stated that the non-commercial position is more important. This positioning is normally done by those entities that are speculators. The trick is to determine if there is pending demand for a particular currency which would hint at a particular directional movement in the market, such as an extended period of open interest high in the Aussie dollar. Heightened interest in a particular currency indicates that a fair portion of the trading market is on a particular side of the marketplace. This makes the opposite result more probable. If every trader goes long in the market, what would happen when the time comes to sell?
Bond Yields and Foreign Exchange Trading
The bond markets and currency markets are closely related to each other. The direction of both these markets is dependent upon the economic climate and monetary policy of a country. When global investors notice a strengthening of a country’s economy, they tend to purchase bonds offered by that country as they are always on the lookout for a stable, high rate of return on their investments. This causes an increase in the demand for that currency which will increase its value.
Money managers generally watch these short-term bond yield patterns to confirm if there is a trend forming in the forex market. A positive movement in one of the assets precedes movement in the other.
The Credit Default Swaps
This is a fairly unknown market which can be a good indicator of long-term sentiment for particular currencies. Credit default swaps can be classified as contracts that protect a buyer against a possible credit event. It was introduced in the past 14 years and has been widely used since then. An illustration of this is where a money manager insures the credit-worthiness of a stipulated amount in government bonds by remitting an insurance premium. If there is a debt crisis or in the case of default, the money manager would have grounds to recoup the full value of those bonds. This makes credit default swaps a perfect indicator of how bearish or bullish a particular currency market is.
If used correctly, these indicators can offer confirmation of trades which could boost your return.