Market Analysis Australian

Australian Forex Market Analysis

The need for intelligent monitoring systems has become a necessity to keep track of the complex forex market. The forex market is difficult to understand by an average individual. However, once the market is broken down into simple terms, the average individual can begin to understand the foreign exchange market and use it as a financial instrument for future investing. This paper is an attempt to compare the performance of a Takagi- Sugeno type neuro-fuzzy system and a feed forward neural network trained using the scaled conjugate gradient algorithm to predict the average monthly forex rates. The exchange values of Australian dollar are considered with respect to US dollar, Singapore dollar, New Zealand dollar, Japanese yen and United Kingdom pound. The connectionist models were trained using 70% of the data and remaining was used for testing and validation purposes. It is observed that the proposed connectionist models were able to predict the average forex rates one month ahead accurately. Experiment results also reveal that neuro-fuzzy technique performed better than the neural network.

Keywords: Forex prediction, neurocomputing, neuro-fuzzy computing, scaled conjugate gradient

1 Introduction
Creating many international businesses, the globalization has made the international trade, international financial transactions and investment to rapidly grow. Globalisation is followed by foreign exchange market also known as forex. The forex is defined as a change in a market value relationship between national currencies (at a particular point in time) that produces profits, or losses, for all foreign currency traders (Long and Walter, 2001). As such, it plays an important role of providing payments in between countries, transferring funds from one currency to another and determining the exchange rate (Forexcapital, 2001).
The forex is the largest and the most liquid market in the world with a daily turnover of around

1 trillion U.S.
dollars (Usfxm, 2001). It was founded in 1973 with the deregulation of the foreign exchange rate in the USA and other developed countries. Namely, before 1973 the fixed exchange rates regime was used for global currency relationships. It was based on the Bretton Woods’ agreement from 1944 with American dollar as an anchor for all free world currencies. The American dollar has been a reserve currency for the world that was
based on gold standard. No other country guaranteed to exchange its currency for a gold. However, in 1960s and early 1970s the global economic crisis brought on by the worldwide inflation has shown that The United States were not able any more to meet the gold standard. With a rise of inflation more dollars became worth less, and dollars holders around the globe sought the safety of gold. As a consequence, many nations were unable to maintain the value of their currencies under the Bretton Woods regime, and the U.S. gold reserves significantly
fell. Then, in 1973 the floating exchange rate system was created establishing markets’ prices rule. The system is dynamic, generating greater trade and capital flows. It is expanding with rapid technological innovations. In particular, the foreign exchange market has become an over-the-counter market with traders located in the offices of major commercial banks around the world. Today, communication among traders goes on using computers, telephones, telexes, and faxes. Traders buy and sell currencies, but also they create prices. The exchange of currencies, however, is in the form of an exchange of electronic messages.

Most of the trading in the forex market takes places in several currencies: U.S dollar, German mark, Japanese yen, British pound sterling, Australian dollar, Canadian dollar. More than 80 percent of global foreign exchange transactions are still based on American dollar. There are two reasons for quoting most exchange rates against the U.S. dollar. The first has to do with simplicity to avoid enormous number of dealing markets if each currency were traded directly against each other currency. A second is to avoid the possibility of triangular arbitrage. That is, since all currencies are traded with respect to the dollar, there is only one available cross rate
and no possibility of arbitrage (Grabbe, 1996).
The forex market is 24-hour market with three major centers in different part of the world: New York, London, and Tokyo. It is the busiest in the early morning New York time since banks in London and New York are simultaneously open and trading. Its centers open and close one after the other. If it is open in Tokyo and Hong Kong, it is also open in Singapore. Then if it opens in Los Angeles in the after noon, it will be also open in Sydney the next day in the morning.
At present the forex market includes the participation of commercial banks around the globe, with a tendency tospread to corporate, funding and retail institutions.