FOREX TRADE JOURNAL: INTRADAY OPPORTUNITIES P.

29
Strategies, analysis, and news for FX traders

September 2012 Volume 9, No. 9

Commodity currencies orbit China p. 6 Septembers FX event risk p. 10

Early morning forex setup: Time is of the essence p. 14

Dissecting the Singapore dollar p. 18

CONTENTS

Contributors .................................................4 Global Markets Commodity currency outlook hinges on China .........................................6
The Middle Kingdoms economic path may dictate the course of the Aussie, New Zealand, and Canadian dollars. By Currency Trader Staff

Global Economic Calendar ........................ 24

Important dates for currency traders.

Currency Futures Snapshot ................. 25 Managed Money Review ....................... 25

Top-ranked managed money programs

International Markets ............................ 28

Numbers from the global forex, stock, and interest-rate markets.

On the Money The mountain of event risk ..................... 10

September is shaping up to be a key month for the FX market and the global economy. By Barbara Rockefeller

Forex Journal ...........................................29

Intraday buy triggers (and triggers again).

Trading Strategies Canadian early riser................................. 14

A patterns edge proves to increase when applied at a certain time of day. By Currency Trader Staff

Looking for an advertiser?

Click on the company name for a direct link to the ad in this months issue. eSignal FXCM Las Vegas Traders Expo

Advanced Concepts Singapore dollar avoids the dire straits .......................................... 18

Singapores dollar presents a unique case: a currency mostly immune to outside influence, marching to its own interest-rate drum and able to prosper during a long rally. By Howard L. Simons

Questions or comments?
Submit editorial queries or comments to webmaster@currencytradermag.com
2 September 2012 CURRENCY TRADER

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CONTRIBUTORS

FOREX TRADE JOURNAL: INTRADAY OPPORTUNITIES P. 29

Strategies, analysis, and news for FX traders

A publication of Active Trader

September 2012 Volume 9, No. 9

For all subscriber services:

www.currencytradermag.com

Commodity currencies orbit China p. 6

Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag.com Managing editor: Molly Goad mgoad@currencytradermag.com Contributing editor: Howard Simons

Septembers FX event risk p. 10

Early morning forex setup: Time is of the essence p. 14

Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag.com

Dissecting the Singapore dollar p. 18

President: Phil Dorman pdorman@currencytradermag.com Publisher, ad sales: Bob Dorman bdorman@currencytradermag.com Classified ad sales: Mark Seger seger@currencytradermag.com

q Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on a wide range of economic and financial market issues.

Volume 9, Issue 9. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2012 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.

q Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund.

September 2012 CURRENCY TRADER

GLOBAL MARKETS

Commodity currency outlook hinges on China

The Middle Kingdoms economic path may dictate the course of the Aussie, New Zealand, and Canadian dollars.
BY CURRENCY TRADER STAFF

The currencies of countries with economies closely tied to the production and export of commodities have been on fire this summer. The Australian dollar (AUD) gained nearly 11 percent vs. the U.S. dollar (USD) from June to mid-August, while the New Zealand dollar (NZD) jumped a little more than 10 percent (Figure 1). Meanwhile, the Canadian dollar (CAD) climbed almost 6 percent during that same time vs. the U.S. dollar (Figure 2). Given the healthy summer run-up, some currency FIGURE 1: COMMODITY CURRENCIES DOWN UNDER

watchers say commodity-linked currencies could be hitting a wall, as all the good news is already priced into the market. However, speculation the U.S. Federal Reserve might pull the trigger on a third round of quantitative easing (QE3) has traders thinking about the possibility of a new wave of liquidity that could ignite another rally in risk assets commodity currencies key among them. Some analysts believe the Canadian dollar is the relatively safer play in the commodity currency group. With its close trade ties to the U.S., the CAD is not as vulnerable as its Australian and New Zealand counterparts to fallout from Chinese economic weakness. Lets take a look at country-specific fundamentals, monetary policy, and key events that could impact commodity currencies in the near term.

On top down under

The Australian (top) and New Zealand dollars (bottom) both rallied smartly vs. the U.S. dollar starting in June.
6

Australia has been in a relatively strong position economically in recent years, managing to sidestep much of the carnage in the wake of the 2008 global financial crisis. Moodys Analytics associate economist Katrina Ell says 2012 is shaping up to post above-trend economic growth, forecasting a 3.6-percent GDP rate for the year.
September 2012 CURRENCY TRADER

The Australian economy is traveling well through 2011, says Jay Bryson, global economist at Wells Fargo. If severe global headwinds, she notes. Australia has an you see much slower growth in China, plus the recession enviable unemployment rate of just over 5 percent conin Europe Australia is sensitive to the industrial producsidered near-full employment strong growth, and low tion cycle. inflation. The Reserve Bank of Australia (RBA) has been in an Ell says global demand for hard commodities, particueasing mode; its benchmark lending rate stands at 3.5 larly from China, is keeping Australia resilient. percent. The RBA has cut rates by 125 basis points since The Chinese economy is undergoing a soft [patch], November 2011, Ell says. The cuts were a response to she says. We believe the second quarter of 2012 was severe global uncertainty and weakness, coupled with the trough in resource demand, and we should see some concerns the Australian economy was expanding a touch gradual improvement going forward as the stimulus from below trend. Beijing helps commodity demand pick up. Nonetheless, Australias rate is still much higher than However, Chinas strength or weakness will be a key those of other major central bank rates, including the U.S. determinant of Australian economic activity and currency Fed at 0-0.25 percent, the European Central Bank at 0.75 performance in the months ahead. Greg Anderson, North percent, the Bank of Canada at 1 percent, and Norways American head of FX strategy at Citi Group, says the Norges Bank at 1.5 percent. Aussie currency is used as an Asian barometer or proxy. Now that growth is generally back on track despite The Asian growth story is a key factor as to why the downside risks emanating from the global econAussie has underperformed the Canadian dollar and the omy we expect the RBA is unlikely to cut rates further, Norwegian krone over the last month (late-July to lateEll says. In recent minutes from monetary policy board August), he says. The markets are concerned China has meetings, the bank has indicated it is comfortable with slowed down a lot more than they will admit. Im reasonrates sitting at [their current level]. ably optimistic, but the data out of Asia right now does not Others, however, see the potential for lower rates. look particularly good. Australian lending rates are only slightly below long-term China reported a surprise narrowing to a $25.1 billion averages, so theres plenty of room for further easing, trade surplus in July, as exports increased a mere 1 percent says Sean Callow, senior currency strategist at Westpac over the prior years figure, data Anderson describes as Institutional Bank. We expect an additional 50 basis horrible. points in cash rate cuts in Q4 as global growth momentum If we get that for a few more months, the Aussie will slackens further, especially in Asia. China, especially, looks take a tumble, he says. to be some months from bottoming out and the RBAs Anderson adds the forex market is banking on the FIGURE 2: CANADIAN DOLLAR Chinese authorities doing whatever is necessary [to support their economy] and that the July data was a blip. He warns the Aussie dollar could decline 10 percent if the August and September trade data is bad. The ongoing discussion is not whether the Chinese economy will come back to earth thats already happening but whether the landing will be hard or soft. Of course, with China everything is relative; most countries would kill for Chinas softening economic numbers. We could see GDP a tad under 8 percent, and then 8.5 percent in 2013, but thats a far cry from the double-digit growth China expeThe Canadian dollars spring-summer rally took the USD/CAD pair down to support around rienced even in 2010 and .9800.
CURRENCY TRADER September 2012 7

GLOBAL MARKETS

China view has been on the optimistic side which suggests it will be disappointed by further softness.

Canada

Like Australia, Canada also has boasted structurally sound fundamentals, but is on pace to grind out a 2-percent GDP reading in 2012, according to Moodys Analytics. Jonathan Basile, economist at Credit Suisse, also pegs Canadian 2012 output at 2 percent. Concerns about the U.S. fiscal cliff, among other factors, is positioning Canada for slower growth, according to Basile. We think it will be plodding along, but dont expect rate hikes anytime soon, he says. It is not recession, but its an outlook that should keep rate hikes at bay. Why would you want to raise interest rates when other central banks around the world are cutting rates? Moodys Analytics economist Bodhi Ganguli previously had a 2.2-percent GDP forecast for Canada this year, but external risks have weighed on that outlook. Canada is doing better than everyone else, but external risks coming mainly from the U.S. and if the Eurozone recession intensifies could have a negative impact on the U.S. recovery, and thats a problem for Canada, he says. There are risks on the Canadian home front, too. The debt-to-income ratio has climbed to 150 percent for Canadian households, while its fallen to 110 percent for the U.S. Ganguli says. U.S. consumers have been deleveraging because of the financial crisis, but the low rates have encouraged Canadians to borrow more. In Canadas favor, however, is an absence of fiscal uncertainty, according to Ganguli. They have a stable government and a very clear policy, he notes. There is no fiscal cliff. Business owners feel more confident to hire, while many employers in the U.S. are waiting because they arent sure which way policy is going to go. Overall, analysts seem to believe the Canadian currency is a better bet at this time because of its lack of exposure to Asian demand. We think the Canadian dollar has a very bright future, says Michael Woolfolk, managing director at BNY Mellon. Charles St-Arnaud, FX strategist at Nomura, cites the currencys relative stability: The Canadian dollar tends to be less volatile than the Aussie, he says, adding that he would rather hold it than the Australian dollar in the event of slower-than-expected growth in China. Canada is much better positioned on Asia weakness because it primarily exports to the U.S., Anderson notes.

ing in expectations far below trend growth this year. Also, the NZD rally has put pressure on the export side of the economy, as the higher exchange rate erodes export competitiveness. Fred Gibson, associate economist at Moodys Analytics, pegs 2012 GDP growth in New Zealand at 2.2 percent, following 2011s 2-percent pace. The recession in Europe, anemic U.S. recovery, and broader slowdown across China and the rest of Asia are weighing on export-facing sectors, he says. Domestically, steady business investment will drive the economy, while private consumption and government spending will grow below trend. New Zealands central bank lending rate currently stands at 2.5-percent. The Reserve Bank of New Zealand has kept rates at a record low since March 2011, citing weak domestic and external growth, Gibson says. Inflation is at the lower end of the 1-3-percent target band, allowing policymakers to focus on growth. The elevated kiwi has continued to keep a lid on imported inflation, while at home, subdued economic activity and a weak labor market have kept demand-driven pressures at bay. Going forward, Gibson expects more of the same. Moodys Analytics forecasts the RBNZ will initiate a tightening cycle to help subdue rising inflationary pressures expected at that time. While New Zealand doesnt have major trade ties to the Eurozone, the recession in Europe has still made itself felt in the kiwi economy. The direct impact from the European crisis isnt so concerning, given the Euro area only accounts for 8.5 percent of kiwi exports, Gibson says. Yet weak European demand is spilling over to weaker global and Asian growth, hurting New Zealands exports. Domestically, the uncertainty in global financial markets and weak global growth is weighing on consumer and business confidence, curbing household spending and business hiring.

FX action

New Zealand

As most FX traders are aware, the New Zealand dollar tends to trade in tandem with the Aussie dollar, and it also has significant Chinese exposure. External global factors have been weighing on the New Zealand economy, result8

Traders and analysts are looking for a decision regarding QE3 to emerge from the Sept.12-13 FOMC meeting. Another round of quantitative easing would likely extend the recent rallies for commodity currencies. This will be important for Aussie/dollar and New Zealand/U.S. dollar given the huge impact of QE2, Callow says. AUD/USD rallied about 12 cents from Bernankes August 2010 Jackson Hole speech to the ultimate announcement in November 2010. However, Callow also points out history doesnt tend to neatly repeat itself, and QE3s impact is unlikely to be as significant. Large-scale QE3 could be worth about three cents on AUD/USD, but these gains would be vulnerable to the weight of Chinas slowdown, he says. Both AUD/ USD and NZD/USD should lose about two cents if the Fed holds off on QE.
September 2012 CURRENCY TRADER

FIGURE 3: EUROPE VS. AUSSIE Anderson speculates a QE3 announcement could support a 5-10-percent rally into the beginning of November and a 3-6-percent gain for the Canadian dollar. No QE announcement obviously inflates the downside risk for the commodity currencies, especially the Aussie dollar. There is a case to be made the Aussie dollar is more than fully valued, and its sensitivity to developments in Asia is significant, says Bob Lynch, head of G-10 FX strategy Americas at HSBC. If things go south in Asia, the Aussies vulnerability would increase. His firm has the Aussie/dollar pair retreating toward .9500 by year-end and the New Zealand dollar posting a 6-8-cent decline. Lynch adds there may be a better chance for the Canadian dollar to remain strong for the remainder of the year. In late August he had a year-end target of .9700 for dollar/Canada. Callow sees some potential plays to watch near-term in the Aussie cross rates. Euro/Aussie and sterling/Aussie look to have further upside as soft commodity prices chip away at the pricey Aussie dollar, he says. Meanwhile, the ECB will be taking strong steps to shore up Eurozone bond markets, and the UK economy is showing signs of life after a dismal first half. Targets of EUR/AUD 1.25/1.26 and GBP/AUD 1.56 seem achievable, still leaving Aussie dollar historically strong (see Figure 3). Finally, risk sentiment is a major factor for the commodity currencies. Woolfolk advises monitoring the Aussie/yen cross as a gauge of risk appetite. In late August, that cross was trading around 82.00 (Figure 4). Above 80.00 in Aussie/yen risk is on, below 80, risk is off, Woolfolk says. y

The Euro/Aussie dollar and British pound/Aussie dollar rates have room to rise if commodity softness weighs on the Australian currency.

FIGURE 4: AUSSIE/YEN

The Aussie/yen cross may signal the markets risk appetite in the months to come.
9

CURRENCY TRADER September 2012

On THE MONEY ON the Money

The mountain of event risk

September is shaping up to be a key month for the FX market and the global economy.
BY BARBARA ROCKEFELLER

The forex market has a long tradition of major events in July, August, and September. The Bretton Woods agreement was decided July 1-22, 1944. President Richard Nixon ended Bretton Woods on Aug. 15, 1971 by taking the U.S. off the gold standard. The Plaza Accord (an agreement to devalue the dollar) was signed Sept. 22, 1985. (The Louvre Accord reversing dollar devaluation, however, occurred in February 1987.) Apart from a flow of economic data pointing in the direction of a global recession, nearly every one of the events entails government intervention in markets and intervention always creates moral hazard, or the perception among market players they can avoid any unhappy consequences of risk-taking because the government will rescue them. Following in that line, we face a mountain of event risk this September that has been building all summer: Both Fed chief Ben Bernanke and European Central Bank (ECB) chief Mario Draghi will speak at the annual Kansas City Fed Economic Policy Symposium in Jackson Hole, Wyo., Aug. 31. The troika report on Greeces budget compliance is due this month, with the country expected to request another two years to meet targets, if not request additional bailout funds. The German Constitutional Court will rule on the legality of the European Stability Mechanism (ESM), which is scheduled to replace the European Financial Stability Fund (EFSF) and may be a buyer of new sovereign debt. The reports of accounting firms hired to evaluate the Spanish banking sector will be used to determine the actual size and terms of the potentially 100 billion bailout that was agreed to in principle. The ECB holds a regular policy meeting on Sept. 6 and may cut interest rates. Also, Draghi may deliver details on ECB bond purchases in the secondary market according to some formula to cap spreads against
10

Bunds The Federal Reserve meets Sept. 12-13 and is expected to announce QE3. We will get additional data on the existing recession in Europe and the impending recession in China, with ongoing questions about whether the U.S. will avoid recession, too (see Recession favors the dollar, Currency Trader, August 2012).

Moral hazard

The minutes of the July 31-Aug. 1 Fed policy meeting affirmed that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery. The prevailing consensus is that QE3 will be announced at the conclusion of the Sept. 12-13 policy meeting, and if not, at the Oct. 23-24 meeting. A delay until October would put the decision only two weeks ahead of the Nov. 6 elections. (The Fed has previously cut rates in October ahead of a November presidential election, notably in October 2008, but that was during the Lehman Brothers crisis.) Because the Fed is, to a certain extent, on the ballot in November with Republican candidate Mitt Romney claiming he wants to replace Bernanke, end quantitative easing, and possibly return to the gold standard you might think the bank would want to sit on its hands until after the election. But the Fed has declared it is worried not only about contagion from the European crisis but also about the fiscal cliff the U.S. is approaching in January which, if mishandled, would cause a certain recession. The Budget Office predicts GDP would contract 0.5 percent in 2013 if the $600 billion in tax hikes and budget cuts are allowed to go forward on Jan. 1. Congress shows no inclination to act until after the election, so the Fed will likely have to step into the leadership role. Moral hazard occurs when people take on more risk than they should because they expect to be rescued by
September 2012 CURRENCY TRADER

some other agent (generally a government) if events turn against their position. In the case of the U.S. economy this autumn, the Fed is deliberately allowing the creation of a moral hazard for what it perceives as a greater good the welfare of the overall economy. Moral hazard is taking the form of speculators feeling safe taking bigger positions in equities and commodities (including oil) than cooler heads would see as reasonable. We see moral hazard in a broader and deeper context in Europe, where ECB chief Draghi changed the institutional management game permanently in August. At the beginning of the month, Draghi announced he would do whatever it takes to keep the Eurozone in place, including having the ECB intervene in secondary government bond markets. This was a major policy shift that ran headlong into longstanding German opposition in fact, two top German officials have resigned because of disapproval of the ECB buying bonds. But in making his announcement, Draghi noted only one member of the ECB executive board (obviously Germany) opposed the initiative. Draghi has never singled out a member before. Draghi shifted the argument with Germany, as the Financial Times put it, from an insurmountable philosophical disagreement to a negotiable difference on the proper tools for achieving a common purpose. In a perfect world, Germany is right. For the ESM to buy government bonds and the ECB to backstop bond-buying in the secondary market creates moral hazard on a giant scale. But Draghis stance is it doesnt matter whether Germany is correct about the notion that rescued governments lose their incentive to clean up their fiscal acts. What does matter is saving the Eurozone. Draghi did give Germany a concession: Any country getting a bailout in the form of bond buying has to ask for it out loud and has to knuckle under to the standards of conduct it agreed to when it originally signed the various Eurozone treaties. In a way, its a victory for the enforceability of contracts. Draghi invented a new form of pan-European politics that now includes the central bank. This is not the same politics central banks escaped when they became independent, but rather the establishment of a top-down joint entity with the EFSF/ESM that has true political power the power of the purse. Whereas before central banks sought independence to escape self-serving local politicians, now local politicians may be seeking to escape the central bank.
CURRENCY TRADER September 2012

Politicians want intervention? It comes with a price, and a very high one. Spanish Prime Minister Mariano Rajoy and Italian Prime Minister Mario Monti know perfectly well what has happened, which accounts for their reticence in responding to the Draghi statement. Spain wants to know what the conditions are before it seeks a bailout, and as far as anyone knows, the ECB has not responded with an exact list. The press calls it a game of chicken. Its unclear where the International Monetary Fund (IMF) comes into things, if at all. Now that Draghi has asserted leadership, no member can go behind his back to the IMF with cap in hand. The securities purchase program carried no strings up to now. The ECB is thought to have bought only about 200 billion in bonds before abandoning the technique in favor of its long-term refinancing operation last fall and again in February. But now the European Establishment is the ECB and the ESFS/ESM together. The ECB is demanding a say in fiscal matters alongside the EFSF/ESM new territory for a central bank. Critics say Draghi is making a power grab. This is perfectly true and welcome. Somebody had to, if the Eurozone experiment is to thrive. The biggest defect in the Eurozone design is the absence of a Ministry of Finance. The new joint ECB/EFSF venture doesnt make up for that absence, but its a start. So far the response to the Draghi initiative has been positive. Draghis credibility is proved by the Euro rising off the July 24 low at 1.2040 to a high of 1.2590, a 550-point gain, as of Aug. 31 (Figure 1). This is a drop in the bucket compared to the Euros total decline from its May 2011 high, but its symbolically sizeable. The yield on Spanish government 10-year Treasuries rose to a Euro-era high of 7.29 percent in June but fell more than 100 basis points to 6.19 percent on Aug. 22. The market doesnt seem care the ESM does not yet exist and cannot launch until the German Constitutional Court issues a ruling (expected Sept. 12). And never mind that the ECBs ability and willingness to buy a countrys sovereign paper is not yet fully established. One question the market is wrestling with is how, exactly, the ECB will implement intervention. Sovereign bond market intervention is an entirely different animal from FX market intervention, where most trades are speculative in nature and FX changes are of secondary importance to fund managers, whose primary focus is the core return or yield on underlying instruments. But in the bond market,
11

ON THE MONEY

investors look to the rate of return that is commensurate with quality, i.e., ratings. The ratings agencies are likely scratching their heads over how to rate a country like Spain once the ECB starts capping the Spanish spread against Bunds. The ECB doesnt admit that its bond-buying plan will center on spread-capping, but if it does, the spread will be a secret not released to the public. Just as with the Bank of Japans imaginary line in the sand for FX market intervention, the spread caps are sure to become the subject of intense speculation. There are many reasons the ECB would want to keep spread-cap information a secret. First, governments cant be allowed to think they can get away with issuing too much debt because the ECB is always there to protect them from their mistakes. This is the origin of the crisis and Draghi claims to be cold-hearted against a sob story, but the deeper meaning is that the ECB is pretending to curb moral hazard while in fact engaging in a new form of it. Secondly, the bond gang can add. If a specific spread cap is named or guessed, the market will push prices to that exact level. Markets always push, and this time the intent may be to get the least unprofitable exit. Besides, what method would be used to determine a cap? The arguments would go on forever, especially since the cap for one country (Spain) would surely differ from the cap for another Currency Trader Mag
September 2012 Fig 1. Draghi-Inpsired Euro Correction

FIGURE 1: DRAGHI-INSPIRED EURO CORRECTION

100.0%

61.8%

50.0%

38.2%

23.6%

(Italy). Among the many factors the ECB would have to consider would be past default behavior (Spain being the worst offender, historically) and the credibility of meeting ECB conditions. Third, we still dont know how much money were talking about. If the market pushes too far and the ECB has to spend too much, it risks losing credibility. How much is too much? We dont know, but you can bet the ECB does. And fourth, the Bundesbank remains opposed to the ECB buying bonds. It looks like Draghi won that one by positioning the Bundesbank as just one voter among many executive board members, but his credibility with the BBK matters, too, not least because bond buying that fails in any material way would promote the political forces in Germany calling for a referendum on remaining in the Eurozone. The German referendum idea comes and goes, but never goes away entirely. As the Eurozone saga evolves over the coming month, the role of intervention is sure to attract serious attention. One important ECB official, board member Joerg Asmussen, boldly said, A currency can only be stable if its future existence is not in doubt a reference to convertibility risk. If bond yields in peripheral countries are so high they suggest reversibility of the Euro, then they are reflecting a currency risk and not just the risk of default. Insofar as the ECB acts to avoid a breakup of the Eurozone, its not engaging in bailouts but rather 1.51 defending the Euro itself. In other 1.50 1.49 words, bond market intervention is 1.48 1.47 currency market intervention. And 1.46 1.45 this is what justifies the Asmussen 1.44 1.43 remark that bond buying can be open1.42 ended (unlimited in scale), just like 1.41 1.40 currency market intervention. And 1.39 1.38 yet we know, or think we know, that 1.37 1.36 intervention causes mispricing and 1.35 mispricing causes a suboptimal allo1.34 1.33 cation of resources. In other words, 1.32 1.31 intervention is justified only if you 1.30 1.29 believe that markets are inherently 1.28 unstable and economists and govern1.27 1.26 ment officials know better. 1.25
1.24 1.23 1.22 1.21 1.20 1.19 1.18

A surprise from left field

0.0%

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Draghis credibility is proved by the Euro rising off the July 24 low at 1.2040 to a high of 1.2590, a 550-point gain, as of Aug. 31.
Source: Chart Metastock; data Reuters and eSignal

As Europe falls into recession over the next few quarters, its not clear China will avoid a hard landing, too, although not outright recession in the formal sense of two quarters of contracting GDP.
September 2012 CURRENCY TRADER

12

But the data is frightening. Some analysts estimate Chinese central bank may be about to repeg the yuan, growth is not the officially advertised 7.5 percent, but more which is a form of intervention. The global financial envilike 4 to 5 percent. Land purchases for housing developronment is chock-full of moral hazard. ment are down 24.3 percent in the first seven months of Curiously, this is not causing stress readings to rise, and the year, although more than 70 cities are initiating new in fact the Volatility Index (VIX) has been flirting with programs that might provide an offset. Before recovering record lows below 14. We may think that means an excess somewhat in June and July, housing prices in the 70 cities of unwarranted complacency, but maybe not market had fallen for eight months. Chinese steel mills are default- players like intervention, perhaps because it gives them the ing or deferring shipments on as much as 4 million tons of illusion that someone is in charge. If so, we have to expect iron ore after the price fell. Prices of Chinese steel and iron the Euro to be a prime beneficiary, especially if good U.S. ore declined in July to their lowest levels since 2009. The data makes the world safe for the embrace of risk. Unless China Iron and Steel Association said domestic steelmaka Black Swan comes along, we may expect to see the Euro ers saw profits plunge 96 percent year-over-year in the first test the resistance line around 1.2642 as of Sept. 1. If resishalf a disaster zone. Exports to Asia fell 5 percent and tance is broken, we can expect at least a 24-percent retracefell almost 25 percent to Europe. The big state-owned minment to 1.2747 of the major down move from 1.4940 (May ing and transport companies reported losses for the first 4, 2011) to 1.2043 (June 18, 2012). Magic numbers are silly, half of the year. but realistically, many players will be watching the level, And global investors have noticed: Foreign direct invest- so we must watch it, too. ment fell 8.7 percent year over year in July and is down 3.6 Get ready to climb the mountain of event risk, and be percent in the first seven months of 2102. prepared for avalanches. y A Chinese hard landing has meaning beyond the obvious for commodity-exporting countries (Canada, Australia, For information on the author, see p. 4. Brazil, Indonesia, et al). Global investor confidenceMag Currency Trader would September 2012 be shaken, too. If the slowdown is Fig 2. Chinese Yuan (Weekly, Inverted) structural rather than cyclical, there FIGURE 2: CHINESE YUAN, WEEKLY (INVERTED) may not be much the government 6.15 6.20 can do, and even a local government 6.25 6.30 6.35 spending binge on infrastructure will 6.40 6.45 struggle in the face of a simultaneous 6.50 6.55 6.60 drop in revenue from corporate profits 6.65 6.70 and land sales. 6.75 6.80 6.85 That pretty much leaves one thing 6.90 6.95 the government can control Chinas 7.00 7.05 7.10 currency (Figure 2). The yuan has 7.15 7.20 been on a rising trajectory since it 7.25 7.30 7.35 was unpegged in 2005, but note the 7.40 7.45 re-pegging from August 2008 to June 7.50 7.55 7.60 2010 during the global financial crisis. 7.65 7.70 China engaged in a massive stimulus 7.75 7.80 program during this period in addition 7.85 7.90 7.95 to re-pegging the currency. It worked 8.00 8.05 before and it wouldnt be surprising to 8.10 8.15 8.20 see it deployed a second time. 8.25

Bottom line

8.30 8.35 8.40

There are signs of intervention everywhere. The Fed is intervening in the U.S. bond market. The ECB is about to intervene in the bond market. The
CURRENCY TRADER September 2012

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2013

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The yuan has been on a rising trajectory since it was unpegged in 2005, but note the re-pegging from August 2008 to June 2010 during the global financial crisis.
13

TRADING STRATEGIES

Canadian early riser

A patterns edge proves to increase when applied at a certain time of day.

BY CURRENCY TRADER STAFF

The U.S. dollar/Canadian dollar pair (USD/CAD) often gets short shrift in the financial press, perhaps because it seems to lack the transcontinental excitement of other exchange rates. The U.S. and Canada are close trade partners, in the same time zones, and share a friendly border and (mostly) the same language. Those who have traded the two North American dollars are familiar with the pairs sometimes-stodgy, oftenfrustrating nature: a great deal of overlap in trading ranges from day to day and congestive, clunky price trends rather FIGURE 1: MOVING SIDEWAYS

than soaring rallies or sell-offs the recent price action in Figure 1 providing a good example. The pair entered a long-term downtrend in 2002 (not shown) that reversed briefly and dramatically in late 2007. The downtrend reasserted itself in March 2009 (when the USD/CAD rate topped 1.3000), taking price back down to around .9400 in July 2011. Over the past two years, though, the pair has mostly wandered aimlessly in a range between .9500 and 1.0500, and in late August 2012, the pair was almost exactly where it was a year earlier, hovering around .9900. Although such observations might lead some to quip, So why should I bother trading it? other traders likely appreciate the pairs relative calmness, if not its trend-friendliness. As we shall see, analyzing intraday time frames reveals certain patterns and tendencies with the potential to provide opportunities for short-term traders.

On the half-hour

Figure 2 marks three 30-minute bars in the USD/CAD pair on Jan. 3, 2012 the 6:30 a.m., 7 a.m., and 10:30 a.m. ET bars. Each of these bars concluded a pattern satisfying the following criteria: 1. Three consecutive lower lows, the last of which is lower than the previous 19 lows and at least 0.0005 below the immediately preceding low.

In late-August, the choppy USD/CAD pair found itself back where it was a year earlier.
14

September 2012 CURRENCY TRADER October 2010 CURRENCY

FIGURE 2: PATTERN EXAMPLES 2. Consecutive lower closes in the second-to-last and third-to-last bars. As formulas, the criteria can be defined as: 1. 2. 3. 4. 5. 6. Close[1]<Close[2] Close[2]<Close[3] Low[0]<Min(Low[19]:Low[1]) Low[1]<Low[2] Low[2]<Low[3] Low[1]-Low[0]>=0.0005

Where 0, 1, 2etc., refer to the most recent bar, one bar ago, two bars ago, etc. The chart inset in Figure 2 zooms in on the first two examples and highlights the bar numbers (except for the 19-bar low) according to the formula. These back-to-back signals were followed by a modest upswing and then a retreat to a slightly lower low and the final signal, which was followed by a much more extended rally. There is nothing magical about the pattern definition; it is simply one way to define relatively frequent downside price thrusts or corrections on this time frame. The low-to-low drop required between the final two bars, the 19-bar low (8.5 hours), and the consecutive lower close simply ensure there is at least three consecutive 30-minute bars of solid selling. (The 30-minute time frame was selected somewhat arbitrarily, with one eye on identifying patterns that could form within a single trading session and another on avoiding too-

The pattern culminates with a four-bar pullback that makes a 19-bar low.

FIGURE 3: PATTERN PERFORMANCE

While the pairs benchmark performance is flat to down, the pattern shows evidence of a bullish edge.

CURRENCY TRADER September 2012

15

TRADING STRATEGIES

FIGURE 4: PATTERN FREQUENCY BY TIME OF DAY

Most patterns concluded by 11 a.m. ET.

short time frames that were unlikely to produce worthwhile price moves.) These unoptimized rules were based on a few examples from late 2011 and early 2012. Between Aug. 22, 2011 and Aug. 21, 2012, a period spanning more than 12,000 thirty-minute bars, this patterned formed 142 times between 6 a.m. and 8 p.m. ET, or a little more often than every other day. Figure 3 shows how the USD/CAD pair performed after these patterns. The blue lines represent the average and median price moves from the closing price of the last bar of the pattern (bar 0) to the closes of the next 16 thirtyminute bars. The gray and black lines are the average and median close-to-close moves for all one- to 16-bar periods in the analysis highlighting, again, the pairs net sideways price action over roughly the past year (the average line is almost perfectly flat and hugs the x-axis). The slight negativity of the median line emphasizes the pairs range had a minor downside bias. The post-pattern price action, by contrast, obviously skews to the upside, although not exceptionally consistently. While the average close-to-close gain moves mostly higher until bar 10, the more volatile median gain peaks at day 7 before swinging lower to bar 12, and finally turning
16

higher to meet the average gain at bar 16. These results suggest the pair rallies slightly or trades sideways after many patterns, while a smaller number are larger winners (larger being relative in this case, as the pairs intraday moves are typically modest). Both lines outperform the markets typical behavior at almost all intervals, though. The bullish bias is evident in the odds of higher 30-minute-bar closes after the pattern. While the percentage of a higher close for any one- to 16-bar move in the analysis period ranged from 49.18 percent to 49.64 percent, the average percentage after the pattern was 55.37 percent, ranging from a low of 52.11 percent to 59.86 percent (the percentage was 57 percent or higher at bars 5-7).

Clock watching

An initial review found few clues regarding potential signal quality in the price action immediately preceding the final three bars of the pattern. However, analyzing the time of day the patterns occurred revealed some clear tendencies. Figure 4 shows how frequently the pattern concluded in different 30-minute bars between 6:30 a.m. and 8 p.m. ET (i.e., the 630 bar is the 30 minutes of trading ending
September 2012 CURRENCY TRADER

FIGURE 5: BAR 7 RETURNS BY TIME OF DAY

Patterns that concluded by 10 a.m. or earlier were the most consistently profitable after seven bars.

at 6:30 a.m.). Most of the patterns occurred before 11 a.m., and there are two notable spikes with this period: 6:30-7 a.m. and 9-9:30 a.m. Interestingly, after a drop-off in frequency after this period, there is a slight bump in the number of instances after 4 p.m. ET (1600) the end of the New York day forex trading session. Knowing when a pattern is likely to occur is one thing, knowing if that time makes any difference is another. Figure 5 provides some insight on this point. It shows the average post-pattern gain or loss at bar 7 an interval chosen because it was the coincident early high point for both the average and median returns (refer to Figure 1) and the interval with the second-highest winning percentage (58.45 percent). Patterns that concluded at 10 a.m. or earlier were, on average, in the black at bar 7, while the rest of the day was mixed: Late morning through early afternoon was the most notable negative stretch. (Because there was only one pattern instance that ended on the 15:30 bar, the results in the chart reflect the average of the four patterns from the 15:00 bar and the 15:30 bar instance.) The percentage of gains for patterns that formed earlier in the day were higher as well: At bar 7 price was higher

67.65 percent of the time for patterns occurring at 10 a.m. or earlier, but only 48.65 percent of the time for those that completed at 10:30 a.m. or later. Overall, the stars align for the pattern in that its largest and most consistent gains tend to occur when its signals are most plentiful. That this period happens to fall in the hours preceding the New York U.S. forex sessions open and the first hour of that session should not be surprising volatility is usually highest at the beginning and ends of trading days but its a bonus the pattern appears to be more, rather than less, stable during this period.

Taking what the market gives

Although the USD/CAD pair hasnt done much for intermediate- to long-term trend-followers recently, shorterterm analysis shows that a seemingly lackluster market can provide opportunities, as long as you maintain realistic expectations. In this case, time-of-day analysis suggested an intraday buy setup pattern with a minor bullish edge had a much more favorable outcome if applied earlier in the trading session. The Trade Journal shows the outcome of two of the most recent signals triggered by this pattern. y

CURRENCY TRADER September 2012

17

ADVANCED CONCEPTS TRADING STRATEGIES

Singapore dollar avoids the dire straits

Singapores dollar presents a unique case: a currency mostly immune to outside influence, marching to its own interest-rate drum and able to prosper during a long rally.
BY HOWARD L. SIMONS

The city-state model is so successful in Asia you really have to wonder why it has not been tried on a large scale elsewhere. The politics of too many places where a large citys interests have to be balanced against those of a hinterland, including Paris in France, Tokyo in Japan, Vienna in Austria, or Mexico City in Mexico, are such you have to wonder why both sides simply do not wish each other the best and get on with their separate lives. This essentially describes why the islands separated from the tip of the Malay Peninsula by the Johor Straits, and from the Indonesian island of Sumatra by the Singapore and Malacca Straits, are an independent entity. Singapore had been governed separately by the British since 1819 and was home to a thriving hodgepodge of merchants and traders from the region, including a very large Chinese contingent that created a free-market laboratory without having the self-awareness of doing so. The islands famous fall to Japan in 1942, replete with the story of the huge shore batteries pointing irretrievably out to sea when the Japanese army was rude enough to arrive by land, was the largest single defeat ever suffered
18

by the British in their long imperial history. Between the end of World War II and the islands separation as an independent republic in 1965, it went through several phases, including union in what was then known as the Federation of Malaya (see Malaysia On The Jagged Edge, Currency Trader, June 2011). Singapore, under its long-time overseas Chinese ruler Lee Kwan Yew, became an exemplar of the Asian model of economic freedom combined with what Americans especially would regard as an authoritarian political system. Only Japan in Asia has a higher per capita GDP.

Two countries, two carries

As has been the case for nearly every currency examined in East and South Asia, we have to look at the Singapore dollars (SGD) relationship against both the U.S. dollar and the Japanese yen. The SGD has been climbing steadily against the USD for more than a decade; the only interruption of note occurred during the financial crisis of 2008-2009. Even so, the options market tends to get nervous about the strong SGD
September 2012 CURRENCY TRADER

FIGURE 1: OPTIONS MARKET NERVOUS ABOUT STRONGER SGD

2.5 2.3 1.175 1.225
XS Vol

SGD Per JPY, Inverse Scale

(Figure 1). If we take the excess volatility for the SGD (the ratio of implied volatility on threemonth SGD forwards divided by the high-low-close volatility for the SGD, minus 1.00) we see sustained high levels during the 2009-2011 rally. As much of this rally was driven by ultra-low short-term interest rates in the U.S., the high measure of excess volatility really measures anxiety regarding the sustainability of American policies as much as any level or trend for the SGD. The SGD cross rate vs. the JPY has a markedly different history (Figure 2). The SGD strengthened during the yen carry trade heyday in 2005 and 2006, but outside of that episode it has traded in a 1.45-1.65 range over the past decade. There is no active option market from which we can construct an excess volatility calculation.

2.0 1.8 [Implied Vol. / HLC Vol.] - 1 1.5 1.3 1.0 0.8 0.5 0.3 0.0 -0.3

1.275 SGD Per USD, Inverse Scale, Led 3 Months 1.325 1.375 1.425 1.475 1.525 1.575 1.625 1.675 1.725 1.775 1.825 Oct-04 Oct-05 Jan-11 Feb-09 May-02 May-03 Sep-06 Sep-07 Sep-08 Aug-09 Feb-10 Apr-04 Apr-05 Apr-06 Mar-07 Mar-08 Aug-10

Jan-99

Jun-99

Jun-00

Jun-01

Jul-11

Dec-99

Dec-00

Nov-01

Nov-02

Nov-03

Jan-12
Jan-11

Even though the SGD has been climbing steadily against the USD for more than a decade, the options market tends to get nervous about the strong SGD.

FIGURE 2: SGD STABLE AGAINST YEN

1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70 1.75

SGD Stable Against Yen

Interest-rate differentials

Regardless of the SGDs course against either the dollar or the yen, its movement has been independent of expected interestrate differentials against the USD since 1999 and against the JPY since 2004. These expected interest-rate differentials are the
CURRENCY TRADER September 2012

Oct-05

Jul-11

Jul-12

-0.5

1.875

Jan-12

Feb-09

Aug-09

May-03

Sep-06

Sep-07

Sep-08

Feb-10

Apr-04

Oct-04

Apr-05

Apr-06

Mar-07

Mar-08

May-02

Other than a strengthening phase during the yen carry trade heyday of 2005-2006, the SGD has traded between 1.45-1.65 vs. the yen over the past 10 years.

Aug-10

Jan-99

Jun-99

Dec-99

Jun-00

Dec-00

Jun-01

Nov-01

Nov-02

Nov-03

Jul-12

19

ADVANCED CONCEPTS ON THE MONEY

FIGURE 3: SGD NOT A FUNCTION OF RELATIVE INTEREST-RATE EXPECTATIONS TO USD

1.175 1.225 SGD Per USD, Inverse Scale, Led 3 Months 1.275 1.325 1.375 1.425 1.475 1.525 1.575 1.625 1.675 1.725 1.775 1.825 Feb-00 May-02 Dec-02 Jan-04 Aug-04 Apr-01 Oct-01 Jul-03 Sep-00 Jan-99 Jul-99 1.875
SGD Per USD SGD FRR - USD FRR

1.000 0.875 0.750 0.625 0.500 0.375 0.250 0.125 0.000 -0.125 -0.250 -0.375 -0.500 -0.625 -0.750 -0.875 -1.000 -1.125 Aug-08 Feb-09 Sep-09 Nov-10 Apr-10 May-11 Dec-11 Jul-12 -1.250 SGD FRR6,9 - USD FRR6,9

The SGDs movement has been independent of expected interest-rate differentials vs. the USD since 1999.

FIGURE 4: SGD NOT A FUNCTION OF RELATIVE INTEREST-RATE EXPECTATIONS TO JPY

1.20 1.25 SGD Per JPY, Inverse Scale, Led 3 Months 1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70 1.75 1.80 1.85 Oct-01 Oct-05 May-11 Feb-00 Sep-00 Feb-09 May-02 May-06 Aug-04 Mar-05 Aug-08 Sep-09 Dec-11 Apr-01 Jan-99 Jan-04 Jun-07 Jan-08 Apr-10 Jul-99 Jul-03 Dec-02 Nov-06 Nov-10 Jul-12 1.90 -1.50
SGD Per JPY SGD FRR - JPY FRR

1.00

0.50 SGD FRR6,9 - JPY FRR6,9

0.00

-0.50

-1.00

The SGD has also moved independently of expected interest-rate differentials vs. the JPY since 2004.

differences between the forwardrate ratios between six and nine months (FRR6,9) of the USD or JPY one on hand and of the SGD on the other. The FRR6,9 is the forward rate between six and nine months divided by the ninemonth rate itself. The more this measure exceeds 1.00, the steeper the money-market yield curve. This is a very strong hint the SGD trades independently of normally applied standard interest-rate arbitrage. Does the SGD instead follow, as so many minor currencies do, a straight three-month interest-rate spread? The answer provided by Figures 5 and 6 is something of a weak yes. The eye sees and the brain interprets patterns where none actually exist, but the convergence between the USD rate and the interest-rate spread between Singapore and the U.S. since the U.S. went to quantitative easing in March 2009 is visible, and the three-month rate spread between Singapore and Japan has paralleled the cross rate for more than a decade. As both Japan and the U.S. have pushed their three-month
September 2012 CURRENCY TRADER

May-06

Nov-06

Jun-07

20

Mar-05

Jan-08

Oct-05

FIGURE 5: SGD HAS CONVERGED TO SHORT-TERM RATE SPREAD TO USD

1.175 1.225 1.275 1.325 SGD Per USD, Inverse Scale 1.375 1.425 1.475 1.525 1.575 1.625 1.675 1.725 1.775 1.825 Oct-04 Oct-05 Oct-06 May-02 May-03 May-04 Sep-07 Sep-08 Aug-09 Feb-10 Apr-05 Apr-06 Mar-07 Mar-08 Mar-09 Nov-02 Nov-03 1.875
SGD Per USD SGD-USD

0.50% 0.25% 0.00% -0.25% -0.50% -0.75% -1.00% -1.25% -1.50% -1.75% -2.00% -2.25% -2.50% -2.75% -3.00% -3.25% -3.50% -3.75% Feb-11 Aug-10 Aug-11 Jan-12 Jul-12 -4.00% Three-Month Yield Spread, SGD - USD

rates down toward zero percent for long stretches of time, this is equivalent to saying the SGD simply follows the Monetary Authority of Singapores lead. This is, after all, a free-market economy within a political system intolerant of the Frank Sinatra My Way school of thought.

Asset returns

Whenever standard interest-rate arbitrage does not drive currency rates and the country in question does not have an export sector dominated by a single commodity or group of commodities, we should look toward relative investment flows. Here the link between the USD and the SGD is far stronger than the link between the JPY and the SGD reflecting, perhaps, the reduced role of Japanese banks and yen-denominated loans in South Asia following the 1997-1998 crisis. If we map the excess carry return for borrowing the USD and lending the SGD against the relative performance of the two stock markets in USD terms, we see a general conformity, one that
CURRENCY TRADER September 2012

There is some visible convergence between the USD rate and the interest-rate spread between Singapore and the U.S. since the U.S. went to quantitative easing in March 2009.

FIGURE 6: SGD PARALLELS SHORT-TERM RATE SPREAD TO JPY

1.20 1.25 1.30 SGD Per JPY, Inverse Scale 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70 Jan-99 Jul-99 Feb-00 Sep-00 Apr-01 Oct-01 1.75
SGD Per JPY SGD-JPY

3.3% 2.8% Three-Month Yield Spread, SGD-JPY 2.3% 1.8% 1.3% 0.8% 0.3% -0.2% -0.7%

Oct-05

May-11

May-02

May-06

Aug-04

Mar-05

Aug-08

Feb-09

Sep-09

Dec-02

Nov-06

Nov-10

Dec-11

Jan-04

Jun-07

Jan-08

Apr-10

Jul-03

The three-month rate spread between Singapore and Japan has paralleled the cross rate for more than a decade.

Jul-12

21

ADVANCED CONCEPTS ON THE MONEY

FIGURE 7: USD CARRY INTO SGD MATCHES RELATIVE STOCK PERFORMANCE

120
USD: SGD Carry Relative Performance: Vs. U.S.

375% Excess Carry Return: USD Into SGD, March 1, 1999 = 100 350% 325% 300% 275%

Relative Performance In USD Terms Singapore Vs. U.S., March 1, 1999 = 100%

115

110

105

250% 225%

100

200% 175%

95

150% 125% 100% May-01 Feb-03 Apr-00 Oct-04 May-05 Mar-99 Mar-04 Mar-08 Sep-08 Apr-09 Nov-09 Dec-10 Sep-99 Sep-03 Aug-07 Nov-00 Dec-01 Dec-05 Feb-12 Jun-10 Jun-06 Jan-07 Jul-02 Jul-11

90

85

75%

Mapping the excess carry return for borrowing the USD and lending the SGD against the relative performance of the two stock markets (in USD terms) reveals a general conformity that held even during the 2008-2009 financial crisis.

FIGURE 8: JPY CARRY INTO SGD DIVERGED FROM RELATIVE STOCK PERFORMANCE AFTER MARCH 2009
130 125 Relative Performance In USD Terms Singapore Vs. Japan, March 1, 1999 = 100% 120 115 110 105 100 95 90 85
JPY : SGD Carry Relative Performance: Vs. Japan

375% 350% 325% Excess Carry Return: JPY Into SGD March 1, 1999 = 100 300% 275% 250% 225% 200% 175% 150% 125% 100% Oct-04 Feb-03 Jul-11 May-01 May-05 Sep-99 Sep-03 Aug-07 Sep-08 Nov-00 Dec-01 Dec-05 Nov-09 Dec-10 Feb-12 Apr-00 Mar-99 Mar-04 Mar-08 Jun-06 Jan-07 Apr-09 Jun-10 Jul-02 75%

held even through the 2008-2009 financial crisis (Figure 7). Nothing of the sort can be said for the Japanese parallel (Figure 8). Here the excess carry returns oscillated into and out of conformance and diverged for good after the March 2009 global market low or, should we say, since Singapore joined the global stock market rally while moribund Japan did not. What we have in Singapore is a currency befitting its status as a city-state: Independent, marching to the beat of its own interest-rate drum, barely swayed by outside developments and able to prosper during that most feared of events in a world filled with competitive devaluators, a long rally. Perhaps the benchmark Straits Times index should be renamed the Un-Dire Straits index. y For information on the author, see p. 4.
September 2012 CURRENCY TRADER

These excess carry returns oscillated into and out of conformance and diverged for good after the March 2009 global market low.

22

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GLOBAL ECONOMIC CALENDAR

CPI: Consumer price index ECB: European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. FND (first notice day): Also known as first intent day, this is the first day on which a clearinghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillment of a futures contract. The clearinghouse also informs the seller. FOMC: Federal Open Market Committee GDP: Gross domestic product ISM: Institute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: Purchasing managers index PPI: Producer price index Economic release (U.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m.

September 1 2 3 4 5 19
U.S.: August ISM manufacturing report Australia: Q2 GDP Brazil: August CPI Canada: Bank of Canada interestrate announcement Australia: August employment report Brazil: August PPI UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: August employment report Canada: August employment report Mexico: Aug. 31 CPI and August PPI UK: August PPI LTD: September forex options; September U.S. dollar index options

20

21 22 23 24 Chicago fed national activity index 25 26 27

U.S.: August housing starts South Africa: August CPI Japan: Bank of Japan interest-rate announcement FDD: September forex futures; September U.S. dollar index futures (ICE) U.S.: August leading indicators Brazil: August employment report Germany: August PPI Hong Kong: Q2 GDP and August CPI Mexico: August employment report

8 9 10

28
U.S.: July trade balance

11 France: Q2 employment report 12 13 14 15 16

The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.

South Africa: Q2 GDP France: August CPI Germany: August CPI Japan: August PPI UK: August employment report U.S.: August PPI and FOMC interest-rate announcement Hong Kong: Q2 PPI U.S.: August CPI and retail sales India: August PPI

29 30 1 2 3 4

U.S.: Q2 GDP and August durable goods Germany: August employment report South Africa: August PPI UK: Q2 GDP U.S.: August personal income France: Q2 GDP and July PPI India: August CPI Japan: August employment report and CPI

U.S.: September ism report Canada: August PPI

October

17 September U.S. dollar index futures

LTD: September forex futures;

18

(ICE) Hong Kong: June-August employment report South Africa: Q2 employment report UK: August CPI FND: September U.S. dollar index futures (ICE)

UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: September employment report Brazil: September CPI Canada: September employment report Japan: Bank of Japan interest-rate announcement LTD: October forex options; October U.S. dollar index options

24

September 2012 CURRENCY TRADER

CURRENCY FUTURES SNAPSHOT as of Aug. 31

Market EUR/USD AUD/USD GBP/USD CAD/USD JPY/USD CHF/USD MXN/USD U.S. dollar index NZD/USD E-Mini EUR/USD

Sym EC AD BP CD JY SF MP DX NE ZE

Exch CME CME CME CME CME CME CME ICE CME CME

Vol 228.9 124.0 99.8 86.5 72.2 39.7 35.5 19.0 14.1 3.8

OI 313.4 164.6 114.6 114.8 144.0 57.6 176.4 64.2 28.1 5.9

10-day move / rank 2.09% / 82% -0.80% / 27% 1.22% / 82% 0.36% / 22% 1.53% / 100% 2.09% / 82% -0.23% / 17% -1.75% / 89% -0.36% / 40% 2.09% / 82%

20-day move / rank 1.62% / 63% -1.94% / 100% 1.53% / 80% 1.49% / 47% 0.31% / 23% 1.66% / 69% -0.07% / 0% -1.49% / 71% -1.65% / 89% 1.62% / 63%

60-day move / rank -0.17% / 0% 3.74% / 43% 2.12% / 37% 3.98% / 83% 1.73% / 27% -0.13% / 3% 5.91% / 47% -1.63% / 63% 4.03% / 38% -0.17% / 0%

Volatility ratio / rank .19 / 25% .25 / 48% .20 / 7% .15 / 12% .39 / 85% .19 / 23% .21 / 43% .25 / 45% .24 / 47% .19 / 25%

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts. The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each markets liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to todays close. 20-day move: The percentage price move from the close 20 days ago to todays close. 60-day move: The percentage price move from the close 60 days ago to todays close. The % rank fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the short-term volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.

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(as of July 31 ranked by July 2012 return) July return 12.03% 10.40% 10.10% 9.00% 8.88% 8.51% 7.80% 7.15% 5.46% 5.10% 2012 YTD return 4.19% 2.68% 5.39% 10.22% -4.75% 11.67% 12.56% 7.07% 24.71% 1.75% $ Under mgmt. (millions) 1.1 519 849 5 3335 1.1 5.1 22.4 978 11

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Based on estimates of the composite of all accounts or the fully funded subset method. Does not reflect the performance of any single account. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

CURRENCY TRADER September 2012

25

INTERNATIONAL MARKETS

CURRENCIES (vs. U.S. DOLLAR)

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency Swedish krona Swiss franc Euro Russian ruble Canadian dollar New Zealand dollar Great Britain pound Thai baht Chinese yuan Indian rupee Australian Dollar Singapore dollar Brazilian real Hong Kong dollar South African rand Japanese yen Taiwan dollar Aug. 27 price vs. U.S. dollar 0.1514 1.04197 1.251215 0.031435 1.007995 0.81119 1.58118 0.0321 0.157955 0.01806 1.04054 0.799615 0.49351 0.12892 0.11908 0.01271 0.033380 1-month gain/loss 4.89% 2.55% 2.54% 2.21% 2.08% 1.98% 1.55% 1.50% 0.87% 0.78% 0.50% 0.24% 0.18% 0.01% -0.60% -0.63% -1.58% 3-month gain/loss 8.64% -0.03% -0.06% -0.85% 3.75% 7.59% 0.93% 1.39% 0.10% 0.67% 6.62% 2.48% -1.93% 0.09% 0.08% 1.27% -0.98% 6-month gain/loss -0.75% -6.64% -7.00% -8.30% 0.74% -2.98% -0.39% -2.68% -0.53% -10.88% -2.70% 0.44% -15.63% -0.03% -9.53% 3.21% -1.37% 52-week high 0.1589 1.2697 1.4506 0.0347 1.0233 0.8534 1.6383 0.0334 0.1589 0.0218 1.0808 0.8309 0.6288 0.129 0.1427 0.0132 0.03430 52-week low 0.1374 1.0074 1.2099 0.0291 0.9467 0.7397 1.5308 0.031 0.1552 0.0174 0.9478 0.7606 0.4801 0.1281 0.1159 0.0119 0.032 Previous 4 16 17 6 9 11 14 12 15 2 1 3 5 13 10 7 8

GLOBAL STOCK INDICES

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
26

Index FTSE MIB Nikkei 225 CAC 40 Xetra Dax BSE 30 All ordinaries FTSE/JSE All Share Bovespa Hang Seng FTSE 100 S&P/TSX composite Swiss Market S&P 500 Straits Times IPC

Aug. 27 15,012.87 9,085.39 3,462.83 7,047.45 17,678.81 4,372.90 35,767.70 58,111.00 19,798.67 5,775.70 12,048.82 6,491.30 1,410.44 3,044.49 39,972.85

1-month gain/loss 10.41% 6.06% 5.57% 5.35% 4.99% 3.27% 3.16% 2.75% 2.72% 2.64% 2.40% 2.02% 1.77% 1.53% -3.63%

3-month gain/loss 14.98% 5.73% 13.80% 11.45% 7.69% 6.13% 8.05% 5.25% 5.31% 7.83% 4.17% 10.67% 5.86% 9.23% 6.19%

6-month gain loss -7.95% -5.69% 0.62% 2.89% 1.34% 0.42% 5.60% -10.93% -6.69% -2.36% -5.13% 5.65% 3.13% 3.32% 5.79%

52-week high 17,158.70 10,255.20 3,600.48 7,194.33 18,523.80 4,515.00 35,767.70 68,970.00 21,760.30 5,989.10 12,798.50 6,554.10 1,426.68 3,088.45 41,600.60

52-week low 12,295.80 8,135.79 2,693.21 4,965.80 15,135.90 3,905.20 29,674.20 49,433.00 16,170.30 4,868.60 10,848.20 5,128.80 1,074.77 2,521.95 32,077.90

Previous 11 15 2 1 14 8 10 3 13 12 9 4 7 5 6

Italy Japan France Germany India Australia South Africa Brazil Hong Kong UK Canada Switzerland U.S. Singapore Mexico

September 2012 CURRENCY TRADER

NON-U.S. DOLLAR FOREX CROSS RATES

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair Franc / Yen Euro / Yen Canada $ / Yen New Zeal $ / Yen Euro / Real Pound / Yen Euro / Aussie $ Canada $ / Real Aussie $ / Yen Pound / Aussie $ Euro / Pound Franc / Canada $ Euro / Canada $ Aussie $ / Real Euro / Franc Pound / Canada $ Yen / Real Pound / Franc Aussie $ / New Zeal $ Aussie $ / Canada $ Aussie $ / Franc Symbol CHF/JPY EUR/JPY CAD/JPY NZD/JPY EUR/BRL GBP/JPY EUR/AUD CAD/BRL AUD/JPY GBP/AUD EUR/GBP CHF/CAD EUR/CAD AUD/BRL EUR/CHF GBP/CAD JPY/BRL GBP/CHF AUD/NZD AUD/CAD AUD/CHF Aug. 27 81.95 98.405 79.3 63.815 2.535334 124.355 1.202495 2.0425 81.86 1.519635 0.79129 1.03371 1.24129 2.108365 1.20086 1.568645 0.025755 1.517535 1.282885 1.03225 0.99859 1-month gain/loss 3.18% 3.16% 2.73% 2.63% 2.36% 2.22% 2.02% 1.90% 1.14% 1.05% 0.97% 0.46% 0.45% 0.32% -0.01% -0.51% -0.81% -0.97% -1.44% -1.55% -2.00% 3-month gain/loss -1.34% -1.36% 2.43% 6.22% 1.90% -0.38% -6.27% 5.79% 5.27% -5.33% -1.00% -3.65% -3.68% 8.71% -0.03% -2.72% 3.27% 0.97% -0.89% 2.76% 6.65% 6-month gain loss -9.58% -9.91% -2.39% -6.00% 10.23% -3.53% -4.37% 19.40% -5.73% 2.38% -6.61% -7.32% -7.68% 15.32% -0.35% -1.11% 22.29% 6.70% 0.28% -3.41% 4.21% 52-week high 97.58 111.34 84.49 68.81 2.6261 132.81 1.3943 2.0447 88.31 1.626 0.8853 1.2547 1.4231 2.1525 1.2406 1.6354 0.0262 1.5434 1.3229 1.0755 1.0328 52-week low 78.81 94.65 72.63 57.23 2.2481 117.58 1.1614 1.6226 72.72 1.4637 0.7779 1.0128 1.2164 1.6879 1.1123 1.5429 0.0207 1.2705 1.2439 0.9981 0.8322 Previous 19 18 9 11 20 13 21 10 6 15 14 16 17 7 5 12 8 3 2 4 1

GLOBAL CENTRAL BANK LENDING RATES

Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate Rate 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3.5 2.5 7.5 3 1.875 8 5 Last change 0.5 (Dec 08) 0-0.1 (Oct 10) 0.25 (July 12) 0.5 (March 09) 0.25 (Sept 10) 0.25 (Aug 11) 0.25 (June 12) 0.5 (March 11) 0.5 (Aug 12) 0.25 (July 12) 0.125 (June 11) 0.5 (Apr 12) 0.5 (July 12) Feb. 2012 0-0.25 0-0.1 1 0.5 1 0-0.25 4.25 2.5 10.5 3.25 1.875 8.5 5.5 Aug. 2011 0-0.25 0-0.1 1.5 0.5 1 0-0.25 4.75 2.5 12 3.25 1.875 8 5.5
27

CURRENCY TRADER September 2012

INTERNATIONAL MARKETS
GDP AMERICAS
Argentina Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore

Period
Q1 Q2 Q2 Q1 Q2 Q1 Q1 Q1 Q2 Q2 Q2 Q2

Release date
6/8 8/31 8/31 6/29 8/14 6/28 6/21 6/6 8/10 8/31 8/13 8/24

Change
-4.3% 6.6% 0.1% 0.3% 0.7% 0.5% 0.8% 0.3% -1.5% 3.4% 0.3% -0.5%

1-year change
13.7% 5.6% 3.5% 1.8% 1.7% 1.9% 7.8% 4.1% 3.6% 12.0% 1.4% 4.1%

Next release
9/21 11/30 11/30 9/28 11/15 9/27 9/11 9/5 11/16 11/30 11/12 11/23

EUROPE AFRICA ASIA and S. PACIFIC

Unemployment AMERICAS

Period
Q2 June July Q1 July April-June July May-July July Q2

Release date
8/21 7/26 8/10 6/7 8/30 8/15 8/9 8/16 8/31 7/31

Rate
7.2% 6.1% 7.3% 9.6% 5.8% 8.0% 5.2% 3.2% 4.3% 2.0%

Change
0.1% 0.3% 0.1% 0.3% 0.6% -0.2% 0.0% 0.0% 0.0% -0.1%

1-year change
-0.1% -0.1% 0.0% 0.4% -0.3% 0.1% 0.1% -0.3% -0.4% -0.2%

Next release
11/19 delayed 9/7 9/6 9/27 9/12 9/6 9/18 9/28 10/31

EUROPE

ASIA and S. PACIFIC CPI

Period
Argentina July July July July July July July Q2 July July July July Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date
8/10 8/8 8/17 8/14 8/10 8/14 8/22 7/15 8/21 8/31 8/31 8/23

Change
0.8% 0.4% -0.1% -0.4% 0.4% 0.2% 0.3% 0.5% 2.1% 1.9% -0.3% 0.3%

1-year change
9.9% 2.8% 1.3% 1.9% 1.7% 2.6% 4.9% 1.2% 1.6% 9.8% -0.4% 4.0%

Next release
9/12 9/5 9/21 9/12 9/12 9/18 9/19 10/24 9/20 9/28 9/28 9/24

AMERICAS

EUROPE AFRICA ASIA and S. PACIFIC

PPI AMERICAS EUROPE AFRICA ASIA and S. PACIFIC

Argentina Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Period
July July June July July July Q2 Q2 July July July

Release date
8/10 8/29 7/31 8/17 8/10 8/30 7/23 7/27 8/14 8/10 8/29

Change
1.2% -0.5% -0.9% 0.0% 0.0% 1.6% 0.5% -0.5% 0.2% -0.4% 0.8%

1-year change
12.9% 0.3% 1.3% 0.9% 1.7% 5.4% 1.1% 3.6% 6.9% -0.5% -1.5%

Next release
9/12 10/1 9/28 9/20 9/7 9/27 11/2 9/13 9/14 9/12 9/28

As of Sept. 3 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

28

September 2012 CURRENCY TRADER

FOREX TRADE JOURNAL

Intraday buy triggers (and triggers again).

TRADE
Date: Monday, Aug 27, 2012. Entry: Long the U.S. dollar/ Canadian dollar pair (USD/ CAD) at .9889. Reason for trade/setup: The trigger for the trade was the 30-minute time frame setup described in Canadian early riser. With the pair having established a swing low on Aug. 21 in the neighborhood of the support implied by the April lows, the position will be played partially for a very shortterm profit, with another portion held in anticipation of a larger up move on the daily time frame. Initial stop: .9823, a little below the Aug. 21 low. Initial target: .9942, just below the Aug. 22-24 highs; take partial profits and raise stop to protect remainder of position. Second target: .9994, just below par.

Source: TradeStation

RESULT
Exit: Trade still open. Profit/loss: +.0035, marked-to-market at .9924 around 4:15 p.m. ET on Aug. 30. Outcome: The pair behaved as anticipated in the immediate aftermath of the signal, which occurred on the 11:30

a.m. ET bar. Those who have already read Canadian early riser might remember the analysis indicated patterns that concluded around this had a negative expectancy unfortunately, the position was initiated before this bit of analysis was conducted. After the initial rally, the pair sold off to around .9840 on Aug. 28 before rebounding. (Both the 9:30 and 10 a.m. bars on Aug. 28 would have qualified as completed buy setups if not for the 9 a.m. inside bar, which interrupted the patterns required string of three consecutive lower lows. It is worth investigating the performance of such patterns to see if inside bars can be ignored.) A second signal occurred on the 9 a.m. bar on Aug. 29, but this signal was not acted upon because the original trade was still in the red. The stop was raised to .9858 when the pair pushed above .9900, and will be raised to breakeven if price hits the initial target (as of 4:15 p.m. ET on Aug. 30, it had rallied as high as .9931). y
Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.

TRADE SUMMARY Date 8/27/12 Currency pair USD/CAD Entry price .9889 Initial stop .9823 Initial target .9942 IRR 0.80 MTM .9924 Date 8/30/12 P/L point
.0035

% .35%

LOP .0042

LOL
-.0047

Trade length 4 days

Legend IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade). MTM: marked-to-market the open trade profit or loss at a given point in time.

CURRENCY TRADER September 2012

29