Inside the Currency Market: Mechanics, Valuation, and Strategies
By Brian Twomey
Bloomberg Press, 2012
$75.00; 317 Pages
In “Inside the Currency Market” author Brian Twomey, an independent trader and author, demonstrates how currency movements are influenced by a variety of factors, including interest rates, trade balances, inflation levels, monetary and fiscal policies and the political climate. He also discusses fundamentally driven trades based on interest rate differentials and trade imbalances, as well as technical trades involving chart pattern trends and trading ranges.
Once in a while a book comes along that is highly informative yet at the same time baffling. Highly informative because it offers in great detail methodologies, trade strategies and nation-by-nation analyses that make it a must-read for anyone trading or wishing to trade the forex markets. Baffling because, from the perspective of this reviewer at least, the charts, mathematical equations and, for example, margin ratios for Japan’s repo market to sell makes me wish I had a better grasp of math.
However, mathematical and algebraic skills alone are not a pre-requisite to understanding how international currencies are traded. Twomey’s insights into currency pairings from the perspective of each country in that pairing are the central theme of the book. For example, to trade Australian dollar/Japanese yen the trader must understand Japanese Tibor and Euroyen rates in terms of bank bills and Overnight Cash Rates in Australia.
“The real purpose for my book is to understand the second side of a currency pair equation so a pair is fully understood for its purpose, history movements and factors that make it move,” he says. Twomey accomplishes that.
Twomey has a background in journalism and political science, and uses those skills and knowledge to good effect. Clearly he has a command of his subject, and students at Gardner-Webb University, where he is an adjunct professor of political science, might want to quiz their teacher on trading forex.
He addresses quite detailed concepts in terms of currency pairs, margin rollover, brokers and histories as they relate to exchange rates. Further, he examines the conditions and formulas needed to understand true exchange rates. Twomey goes on to offer a country-by-country breakdown of exchange rate policy, and his examination of the London Interbank Offered Rate (Libor), the overnight interest rate that banks charge other banks for borrowing, is thorough. Libor originates in the United Kingdom, but those interest rates travels to all markets and is informed by an internal Libor inside each nation’s bank market.
Another chapter is dedicated to government bonds, yields, yield curves and currency prices. Swaps and forwards are examined, as are the bond/yield interplay, which is reflected and priced into stock markets; and finally there is a chapter on technical analysis.
That chaper delves into volume and open interest, simple moving averages and the fascinating Ichimoku Kinko Hyo, an old Japanese indicator used throughout Asia. Twomey touches on the role of the Baltic Dry Index whereby the venerable Baltic Exchange in London tracks the movement of dry goods by sea. This section also explores the International Monetary Fund and Special Drawing rights. A solid bibliography and 12-page index follow.
Patrick Kelly is a freelance writer with a background in commodity market reporting.