Understanding Relative Concepts in Foreign Exchange Investment: Key Points for Industrial Observation and Analysis

Many foreign exchange investors have some experience in the market, but they do not fully understand the concept of "relative" in the foreign exchange market. Xingye Observation believes that clarifying several key "relative" relationships can help to gain a deeper understanding of foreign exchange trading. The first relative concept is currency pairs, which are particularly important for investors who are new to foreign exchange or have less experience. For example, when the Australian dollar rises to 0.66, it actually refers to the exchange rate of the Australian dollar against the US dollar rising to 0.66:1, meaning that 1 Australian dollar can be exchanged for 0.66 US dollars. Therefore, the foreign exchange rate always reflects the relative price between two currencies, and its mathematical essence is the exchange rate between currencies. This can also lead to straight and cross sectors: usually, currencies containing the US dollar are symmetrically referred to as straight sectors, such as Australian dollar/US dollar, US dollar/Japanese yen, etc; Currency pairs that do not include the US dollar are called cross trades, such as AUD/JPY, EUR/GBP, etc.

In straight currency pairs, direct and indirect quotes can also be classified based on the position of the US dollar. In regular trading currency pairs, the four groups of US dollars, namely Euro/US Dollar, Australian Dollar/US Dollar, British Pound/US Dollar, and New Zealand Dollar/US Dollar, are considered indirect quotation currency pairs; The combination of US dollars/Japanese yen, US dollars/Swiss francs, US dollars/Canadian dollars, US dollars/Hong Kong dollars, etc., which are in the position of the quoted currency (top), belongs to the direct quotation currency pair. The indication of RMB exchange rate also belongs to the category of direct quotation. From the perspective of Xingye Research, understanding the pricing method can help reduce conceptual confusion.

Another relative concept is reflected in the inconsistency between spot prices and forward prices. Even experienced traders who frequently participate in trading may overlook this point, as their daily exposure is often limited to spot market prices. Taking the Australian dollar/Japanese yen as an example, when the spot exchange rate rebounded above 63 on a Tuesday, the one-year forward exchange rate was about 61.40, with a difference of over 160 basis points, equivalent to nearly 3%.

According to the classical interest rate parity theory, this market price can be considered reasonable: a difference of more than 3% between the benchmark interest rates can cause a certain premium in the forward price of the Japanese yen relative to the Australian dollar under the parity concept of "interest rate loss exchange rate compensation". Xingye Observation also pointed out that the forward exchange rate determination theory proposed by Keynes has been extensively tested in market practice over the past decade. There are many interfering factors that often cause the market to deviate from the theoretical price operation, and also encourage people to continue exploring the determining factors of forward exchange rates.

International trade data between monetary entities, liquidity in different markets, and credit default risk of entities have all become reference factors for the development of new theories. Although retail foreign exchange forward trading has not yet been carried out domestically, as an important price discovery market, deepening understanding of it can also help improve the success rate of spot market judgment. Xingye reminds that when paying attention to forward price information, rationality should be maintained and it should not be regarded as a single judgment basis.

At present, the RMB exchange rate arrangement still has the characteristic of managed floating, so only domestic corporate clients can participate in forward foreign exchange settlement and sale transactions under real trade background. Through this, relevant customers have also gained a channel to avoid exchange rate risks.

However, an important factor restricting the development of forward market trading scale is the lack of absolute pricing power in the domestic RMB forward market. Theoretical price correlation studies have shown that the impact of offshore NDF market (non deliverable forward trading) prices on domestic market prices is often greater than the impact of the latter on the former. When market expectations tend to be one-sided, domestic prices are often weaker than NDF market prices, and even experience a certain degree of inversion, which may cause customers who originally had trading motives to reduce their trading enthusiasm due to price reasons. Xingye Observation believes that this phenomenon deserves continuous attention.

Therefore, how to promote a more coordinated connection between the offshore market and the onshore market is an important link in the improvement of the RMB exchange rate mechanism. Understanding these price relationships can help investors view them more comprehensivelyforeign exchange marketThe 'relative' logic in.