The Foreign Exchange Matrix: A New Framework for Traders to Understand Currency Movements

It misses one star because it is dated. A lot has happened in the last few years. The authors might consider an update, as it is written so well.

Barbara Rockefeller and Vicki Schmelze show a precise and holistic view about Forex. Great book, but it’s not for novice!

I’m a foreign exchange professional with over 20 years’ experience in the business. I’ve worked for years on trading floors in some of the biggest FX houses. Yet even I found this well-researched and up-to-date book to be filled with new insights into the market I’ve spent my career following. The Foreign Exchange Matrix combines the academic research into theories of how exchange rates are determined with the authors’ knowledge of how traders sitting at their screens actually make decisions and determine the market. It brings theory down to earth by grounding it in the authors’ considerable experience with how things work in practice, as well as how they should work in theory. The Mundell-Fleming theory is all very well and good, but when the non-farm payrolls come out, people have one nanosecond to decide: do I buy or do I sell? It’s this intersection between the inescapable long-term trends in the FX market caused by economic forces and the day-to-day noise of people buying and selling that’s difficult to understand yet essential for people who want to trade in this market. “The salient question in FX analysis is in fact: how do traders rank various multiple variables and events to determine whether they want to buy or sell a currency?” That’s the kind of question you’ll find raised – and answered – in this important book. I’ve recommended it to countless colleagues and clients who’ve learned the basic “whats” of the FX market and now want to start understanding the deeper “whys.” People who are looking for something beyond the introductory level to understand how the FX market really works.

One of the key benefits of this book is that it encompasses and explains the many changes that have taken place since the 2008 financial crash. That cataclysmic event changed many of the behavioural patterns of FX traders and therefore changed the way that currencies trade. These changes are dealt with and explained in this book, making it essential reading for anyone who wants to understand how the market is trading today. As an added benefit, it’s written in a clear and jargon-free style, as befits two such accomplished writers. Highly recommended.

A well written book enjoyed reading.
Would rate as a read if are looking to learn aspects about what FX market is.

Considering the size and scale of global foreign exchange (FX) markets, the importance of currency valuations to trade and investment, and the impact of wide swings in valuations on daily economic life for billions of people, any book that can provide a coherent means of understanding it all has value. Along these lines, Barbara Rockefeller and Vicki Schmelzer’s The Foreign Exchange Matrix: A New Framework for Understanding Currency Movements is well worth the read.Rockefeller is an international economist and a forecaster specializing in foreign exchange, while Schmelzer is a veteran in the foreign exchange field, currently being a senior financial journalist at Market News International.

Put together in a compact 276 pages, Rockefeller and Schmelzer write in a clear, straightforward style that provides a solid context as to the hows and whys of the foreign currency markets. Before plunging into their matrix concept, the authors set the stage by noting that FX market is driven more by pure speculation and global investment flows than by economic ideas and facts; FX players “thumb their noses at the efficient market hypothesis and the concept of rational expectations; FX has a disconnect puzzle in which factors that should move the market do not (such as the three decades of persistent trade surpluses in Japan and deficits in the U.S.); and FX does not have a benchmark rate of return that traders and investors must try to match and surpass”. They also believe that FX traders are vastly more disciplined than traders in other sectors, partially because they use technical analysis (that point can be disputed).

How then to deal with this uniquely different market? Rockefeller and Schmelzer use what they refer to as the FX Matrix, which is “a grid format of multiple factors and players in the FX market and the way they interact”. Central to this is random matrix theory. The authors note, “”random matrix theory is borrowed from physics and used to do things like remove idiosyncratic noise from correlation studies in designing optimum portfolios, leading to better estimates of component risk.” Simply stated, the matrix carefully analyzes and weights a wide range of factors and their variables to ultimately produce an idea of currency direction. Matrix theory is something used by central bankers, hedge funds, carry traders, multinational corporations and a host of others.

The book has 12 chapters, which start by identifying the key issues and work through such issues as interest rates, forecasting, positions and flows, and technical analysis. Considering the global economic volatility that has rocked markets since 2008, perhaps the most interesting chapter is about the euro. A tightly written chapter, Rockefeller and Schmelzer provide an excellent discussion as to the euro’s evolution as a reserve currency and how the European sovereign debt crisis has impacted it. They note that the European Monetary Union (EMU) has devised a new “gold standard” of sovereign financial governance – monetary and fiscal excellence. Along these lines, one of the more astute observations is as follows: “It seems implausible that a new reserve currency can be born out of a single principle – control of inflation and public debt to specific levels – without all of the features and benefits of a reserve currency, especially a rockhard unwillingness to default on sovereign debt. And yet the EMU is permitting default while getting the rest of the world to name it something else and the rest of the world is willing to buy into the fiction because it is so enchanted with the new gold standard.” The authors are hopeful about the euro’s future, in that it “may well arrive at reserve currency status one day, just later than the founders wanted and foresaw.”

The Foreign Exchange Matrix has a lot to offer for those intrigued by the global FX market. It is not for those looking for easy beach reading (unless you are a professor of finance). We strongly recommend Rockefeller and Schmelzer’s book, especially for people interested in investing in the FX market and for business students, both at undergraduate and graduate levels.

I believe George Soros is going to like this book! His theory of “reflexivity”, which is his own take on the “madness of crowds” view of the market, keeps coming up as one of the primary investment approaches you need to win at – or at least understand – how the currency markets work.
The authors, Barbara Rockefeller and Vicki Schmelzer, clearly explain using dramatic examples that prove Soros’ reflexivity proposition — where Soros believes that the biases of the big market participants, such as hedge funds and Sovereign Wealth Funds, often enter into how they value the Euro or the US dollar, which in turn radically shifts the price of these instruments. The traditional ways of looking at economic fundamentals, in particular the “efficient market theory”, gets run over and left at the side of the road by the biases of the big players.
The authors also adapt a concept called “matrix” theory, which, as they explain in the first chapter, is a form of sophisticated analysis that Ben Bernanke at the FED employs when trying to assess levels of country risk in the world’s financial system. They use their matrix model to try and determine how the big market players like the central bankers, hedge funds, Sovereign Wealth Funds, the big interbank traders, carry traders, multinational corporations, large mutual and pension funds and ETFs, as well as retail investors, and high frequency traders, all tend to act differently to all the different types of fundamental news, the perceptions and expectations about news worthy events, as well as to important indicators in technical analysis.
One of the most interesting relationships that they refer to is how the currency traders at the largest banks, who are essentially the brokers for some of the largest hedge funds and Sovereign Wealth Funds, also often invest large speculative or proprietary accounts for the banks they work for. These big traders in turn clearly get to see how the large hedge funds and Sovereign Wealth Funds are trading before anyone else does. And obviously they sometimes act on this privileged information. Is this illegal? No it is not. The authors point out that Congress has not passed any legislation to prevent this kind of “front running”.
So, given that the biggest bank traders clearly have an edge in playing the game, if we ourselves wish to profit from this kind of market behavior, (“when in Rome”, do as the big bank traders do) then it makes sense to try and think like the big hedge funds, the Sovereign Wealth Funds, and the big bank traders. Do these large traders use fundamental analysis, technical analysis, or the George Soros theory of reflexivity?
Rockefeller and Schmelzer point out that the big players are much more likely to use technical analysis in making their trading decisions rather than traditional economic fundamental analysis. And the authors also show that the Soros theory of reflexivity is extremely important. And in my opinion, if we as investors can understand what particular bias or market perception that the big players are using at a particular time, than, in addition to using basic technical analysis, then we ourselves would have an edge as well. All we really need then is a good crystal ball.
The authors also do a superb job of explaining risk appetite and risk aversion, and they think that the concept of risk is of exceptional importance in understanding the currency markets as a whole. They explain this concept with a multitude of examples throughout. The biggest players most definitely react to the shifts in market sentiment concerning risk more than any other factor.
This is a thinking person’s book, and I believe it deserves the full 5-star rating. Although it is not always easy reading, given the complexity of the currency markets, happily both Barbara Rockefeller and Vicki Schmelzer are both excellent writers. They “add a spoonful of sugar (to make) the medicine go down.”
It’s a good book.

quality product at fair price