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Strategies, analysis, and news for FX traders
August 2011 Volume 8, No. 8
The Aussie dollar bull: Running on empty or refueling? p. 6
Why doesn’t the Euro do what it’s supposed to? p. 10
Hong Kong dollar: Still made in Japan p. 24
Trading the CMI: A trend/range hybrid strategy p. 20
Contributors .................................................4 Global Markets Aussie dollar stalls .....................................6
The Australian currency has long since rallied past its pre-financial collapse high, but some analysts think its bullish run may have run out of fuel for the time being. By Currency Trader Staff
Global Economic Calendar ........................ 30
Important dates for currency traders.
Conferences, seminars, and other events.
Currency Futures Snapshot ................ 31 . International Markets ............................ 32
N umbers from the global forex, stock, and interest-rate markets.
On the Money Puzzles and perversity in FX .................. 10
ave the financial markets been besotted by H gazing into the starry eyes of the Euro? By Barbara Rockefeller
The Euro’s significance ........................... 16
Despite all the talk of countries leaving — or being thrown out of — the EU, Europe really has no Plan B. By Marc Chandler and Rab Jafri
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Click on the company name for a direct link to the ad in this month’s issue. eSignal FXCM Price Futures Group World Research Group
Trading Strategies Tackling trending and ranging markets with CMI ..................................... 20
A two-part system uses a simple indicator to trigger both trend and countertrend trades By Daniel Fernandez
Advanced Concepts Hong Kong dollar still made in Japan.... 24
The legacy of Japan’s glory days and the exceptional case of the Hong Kong dollar By Howard L. Simons
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August 2011 • CURRENCY TRADER
Copyright © 2011 TechInfo. q Daniel Fernandez is an active trader with a strong interest in calculus. A book tentatively titled How to Trade FX is in the works. All rights reserved. Jafri has a bachelor’s degree in economics and international relations from The Ohio State University and a master’s degree from The New School University in global finance. Inc.com Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag. Issue 8. The information in Currency Trader magazine is intended for educational purposes only. Rockefeller is on the board of directors of a large European hedge fund. and economics who has been focusing on the analysis of forex trading strategies. Inc. Rockefeller is the author of Technical Analysis for Dummies. he works for one of the largest banks in New York. 2000). He is the author of Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange (Bloomberg Press. Lake Zurich. Around the World (John Wiley & Sons.currencytradermag. Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag. Currency Trader is published monthly by TechInfo. Information in this publication may not be stored or reproduced in any form without written permission from the publisher.rts-forex. 24/7 Trading Around the Clock. and speaking about global capital markets. 4 . Jafri also spent several years with Terra K Partners. Prior to this role. Chandler appears regularly on CNBC and Bloomberg Television. Marc Chandler. The Global Trader (John Wiley & Sons.com Publisher. Traders are advised to do their own research and testing to determine the validity of a trading idea. particularly algorithmic trading and the mathematical evaluation of long-term system profitability. Second Edition (Wiley. He has worked for several consulting firms and banks as well as a hedge fund in the early 1990s. It is not meant to recommend.com) is an international economist with a focus on foreign exchange.com Volume 8.com) is the head of global foreign exchange strategies at Brown Brothers Harriman and an associate professor at New York University’s School of Continuing and Professional Studies.co. Fernandez is a graduate of the National University of Colombia. strategy or approach. statistics. writing market commentary for the FX and commodities research desk.CONTRIBUTORS q Howard Simons is president of Rosewood Trading Inc. where he majored in chemistry. 2001). and a strategist for Bianco Research. trader. PO Box 487. She has worked as a forecaster. and How to Invest Internationally.com). writing. writing monthly articles as well as building several different FX financial products. and currently publishes two daily reports on foreign exchange.com Contributing editor: Howard Simons q Barbara Rockefeller (www. Past performance does not guarantee future results. a financial advisory firm specializing in foreign exchange markets. covering risk and controls for the FX derivatives desk. an online foreign exchange broker in New York. Trading and investing carry a high level of risk. promote or in any way imply the effectiveness of any trading system. and consultant at Citibank and other financial institutions. 2011). Illinois 60047.edu. For the past two years he has published his research and opinions on his blog “Reviewing Everything Forex. 2009).com Managing editor: Molly Goad mgoad@currencytradermag. q Rab Jafri has several years of capital markets experience with a focus on forex. Currently.com President: Phil Dorman pdorman@currencytradermag.” which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://mechanicalforex. He writes and speaks frequently on a wide range of economic and financial market issues.. He can be reached at firstname.lastname@example.org Classified ad sales: Mark Seger seger@currencytradermag. A publication of Active Trader ® For all subscriber services: www. published in Japan in 1999. ad sales: Bob Dorman bdorman@currencytradermag. August 2011 • CURRENCY TRADER Contributing writers: Barbara Rockefeller. q Marc Chandler (marc@terrak. concentrating in computational chemistry. Chandler has spent more than 20 years analyzing. Jafri worked with FXCM.
com www. 2011 New Yorker Hotel New York.com/Forextrading Organized by: .worldrg.Forex Trading for Retail Traders Become a More Efficient and Profitable Trader by Learning Successful Trading Techniques from Expert Traders and Advisors While Saving Money on Brokers and Taxes September 12 .14. NY Register with promo code EJP993 to save $50 off the standard conference rate! TO REGISTER CALL 800-647-7600 OR 781-939-2500 e-mail: info@worldrg.
although it pushed to a new high at 1. BY CURRENCY TRADER STAFF Long the darling of “hot-money” FX traders. from around .75 percent. “The flare-up in the European sovereign-debt crisis. or “kiwi.1079 on July 27 before turning lower again. the AUD has lost some attractiveness.S. Nonetheless. Over the past three months. as of Aug.9703 to 1. just a little below its highest level vs.1011 on May 2. wide-ranging consolidation between November 2010 to mid-March 2011. questions about Chinese growth prospects as the October 2010 • CURRENCY TRADER August 2011 • CURRENCY 6 . but some analysts think its bullish run may have run out of fuel for the time being.0400-1. some of the catalysts that have propelled the Aussie dollar higher over the past two years may be absent in the relatively near future. making sizable new gains more difficult than they have been in the recent past. Aussie/dollar has largely traded within the 1. The advance has stalled since then amid a bevy of factors that have dampened global risk appetite. Source for all charts: TradeStation After a lengthy. FIGURE 1: CHANGING OF THE GUARD Despite boasting the highest central bank lending rate among major industrialized nations at 4. Indeed. dollar (AUD/USD) pair jumped more than 13 percent (low to high) over the next six weeks. it appears to be almost a changing of the guard.0800 range. with Aussie bulls handing over the baton to the New Zealand dollar (NZD).” which has outperformed the AUD in recent months. the U. 2. the Aussie/U.GLOBAL MARKETS Aussie dollar stalls The Australian currency has long since rallied past its pre-financial collapse high. dollar in nearly 30 years (Figure 2). although any bearish sentiment surrounding the recent consolidation must be put in context considering the currency was. the Australian dollar (AUD) has lost some of its luster in recent months as its impressive rally phase has sputtered into a sideways range (Figure 1).S. Recent action In recent months momentum seems to have swung away from the Aussie dollar (top) toward the New Zealand dollar (bottom).
“Chinese policymakers will likely engineer a soft landing for the domestic FIGURE 2: A GENERATIONAL HIGH economy as they move to contain rising inflation pressures. generally expected –– although these projections remain stratospheric compared to most industrialized (especially Western) economies.1000 marked its highest level since the beginning of 1982.7 percent in 2012. Australia’s growth is also expected to slow somewhat. but have more recently bounced back.” he says. and EU have fiscal policy tightening on the agenda. “Australia’s destiny is determined by commodity prices.1-percent year-over-year gross domestic product (GDP) growth rate in 2011. “A lot of the hot money has switched from long Australia to long Kiwi. the bulk of Australian exports head to China or other Asian destinations. –– all markets that experienced reversals between May and July. director FX strategy at CitiFX. the trajectory for commodity prices –– and hence.” Tempered growth figures for China are. Moody’s Analytics is forecasting a 2.” Australia is a big exporter of base metals and grains (especially wheat).5 percent) and they are in the process of signalling further rate hikes. New Zealand has the second-highest rates (2. “China’s growth is expected to moderate a little to 9. A major commodity exporter. and 8. we expect commodity prices to pick up and the Aussie dollar to grind higher with them. in fact. Anderson notes. strategist at Barclays Capital in Sydney. including the Australian dollar. bolstered by its close trade relationship with China. but that’s still more than strong enough to support very strong growth in Australian exports. associate economist at Moody’s Analytics. and a more general soft patch in the global economy led to softer demand for risk assets globally. Australian growth –– are likely to flatten out. Australia has the highest rates in the G10 countries.4 percent in 2011. Stacey describes Australia as a “growth taker” and says the future is not quite as rosy as some portray it.” says Greg Anderson. which in turn are determined by the global policy stance. “Given the fact that Asia is tightening monetary policy and the U.’ That reduces the chances of a nasty commodity price reversal. both monetary and fiscal policies. “Australia has significantly benefited from China’s strong demand for hard commodities. 8. Australia. the pace of Chinese growth remains a key factor. The kiwi’s recent surge has been more a matter of perceived upside potential on the interest-rate than immediate edge. Additionally.” Roberts says.4 percent in 2013. while Nomura offers a more 7 CURRENCY TRADER • August 2011 . “If the global growth picture picks up and we get past global contagion events. Australian growth rate The AUD/USD pair’s recent push above 1. chief economist. China’s voracious appetite for raw commodities –– prices for which have risen in recent years –– has underpinned Australia’s growth prospects.authorities continued to tighten monetary policy. strong infrastructure investment in Asia and Japan’s reconstruction will sustain strong demand for Australia’s steelmaking products.” says Stephen Roberts. such as iron ore and coking coal. A soft landing will ensure that Chinese demand for Australia’s coal and iron ore exports will remain upbeat in 2011. Given China absorbs approximately 25 percent of Australian exports.” says Katrina Ell. at Nomura Australia.” Economic outlook Australia has long been a solid economic performer. “Barclays Capital believes China will have a ‘soft landing.” says Gavin Stacey.S. “The New Zealand dollar has been on fire for the past two months. However. but they are parked there.” he says.
Wells Fargo is also factoring in the impact of natural disasters –– and not just domestic ones. others see that early-May peak as a strong ceiling.1400-1. “The outlook for RBA rate hikes has faded as the non-resource sector of the Australian economy has softened. paying down debt and expressing persistent concern over the economy. the Australian economy has hit a soft patch.25 percent. has a more bearish Australian GDP pace of 1. On the upside. Play that range and go with whatever way it breaks out. “If it was not bad enough that massive flooding and storms ravaged the northeastern part of the country earlier this year.” they wrote. “Watch that range. The most concerning development has been the fall in confidence. leaving little in the way of upside potential. “We have a neutral view for the Australian dollar. 2 it was leaving its overnight lending rate unchanged at 4. Employment growth has moderated from the rampant hiring seen in 2010.” wrote economists at Wells Fargo Securities in the July 15 Global Chartbook research note. the RBA has hiked rates six more times to bring the official rate to the current 4. However. In their July 21 forex weekly research note.” Credit Suisse analysts summed it up as follows in their July 22 Global Economy Monthly Review: “Locally. The strength of the currency has been a large contributor to the stark divergences within the multi-speed economy.8 percent. Aussie plays Wells Fargo head of currency strategy Nick Bennenbroek sees more of the same in terms of price action. Societe Generale analysts had a more negative take on the Aussie currency.S. “At the most recent meeting. “We expect the AUD to weaken towards parity in [the second half] but there are also risks of further AUD weakness if the global economy slowdown October 2010 • CURRENCY TRADER August 2011 • CURRENCY . when it hiked its cash rate target by 0. however. “At the May [RBA] meeting there was an indication of a pause in raising rates. they indicated they will remain on the sidelines.” Anderson adds.” Roberts says.1500 zone. dampening retail trade figures.7-percent annualized rate in the first quarter. Others are watching for a push out of the Aussie/U.9 percent (pointing to the economic disruptions from the devastating Queensland floods earlier in the year) following 2010’s 2. but the Australian consumer is very cautious. “The challenges mostly relate to prospects for global growth.GLOBAL MARKETS ON THE MONEY upbeat forecast of 2. across businesses and consumers. “Inflation is moderate and the recovery in Australia is showing signs of slowing.0400 and 1. especially in Australia’s major export markets in Asia. an abrupt shift of views is one of the factors behind the stalled Aussie rally. Despite the strongest domestic consumption numbers since the second quarter of 2010. The pessimism may seem excessive for an economy with 4. real GDP contracted at a 4.” The RBA announced Aug. the disasters in Japan sapped demand for Australian exports to its primary trading partner. “Some in the market are thinking the RBA could cut rates. Sean Callow.” 8 Interest rates: Hike or ease? The Reserve Bank of Australia (RBA) has been actively tightening monetary policy since October 2009.” Now market watchers are seeing the possibility of a move in the opposite direction.1000 level could open the door to the 1. but whether all of Australia’s potential “good news” is priced into its currency.com.1000. pulled lower by the largest quarterly drop in exports since the height of the global recession in 2009.1000 may be a top for the time being.” says Brian Dolan. However. Barclay’s Stacey. Until this spring.25 percent to 3. but the gloom is evident nonetheless. Since then.7-percent pace. chief currency strategist at Forex.” Callow says. and rate hikes that were priced in have been priced out.75 percent.” he says. and many consumers are taking advantage by buying overseas items online. and consumers are cautious in the face of rising living costs. “A confluence of natural disasters and weather systems across Asia has been arguably more disruptive to Australian GDP growth than the global recession.” Roberts says.75 percent.” Dolan says of the AUD/USD pair’s congestion between 1. dollar current consolidation. senior currency strategist at Westpac Institutional Bank adds. “The outlook for the mining sector remains positive. “Just above 1.” The debate seems to be not whether Australia is relatively strong right now. the financial markets had expected additional monetary policy tightening in 2011.9-percent unemployment and growth likely to pick up in the second half of 2011. Dolan says a rally through the 1. fiscal policy is now contractionary. “A number of analysts are now calling for the next move to be a cut.
In a July 19 AUD/USD Outlook.2500 by mid-to-late July (Figure 4). –– perhaps it’s better to play crosses short term. with underlying USD weakness and confidence in Asia’s resilience cushioning the pair despite a clear deterioration in Australia’s outlook. “Contagion from Europe could easily knock AUD/USD to 1.S.2100-1. Reserve Bank of New Zealand suggests AUD/NZD can fall further.02 and potentially towards parity. while the rare contrast of markets expecting the opposite trajectory for RBA rates vs. economy –– a likely ratings downgrade from S&P etc.” Stacey pegged 1.27001. 9 . the bank wrote: “AUD/USD has spent very little time outside the broad 1.” with a 1. citing the 1. had fallen below 1. Opportunities against other currencies may be more attractive in the near future.0800 range since May.0400-1.2200. Short AUD positions are currently attractive and we recommend short AUD/KRW (Korean won) positions and a calendar spread option trade.200 target in that cross rate. we see the range-break as more likely to the downside multi-week. “But given the troubles of the U. AUD/JPY for instance could slip to 81. some analysts argue. and Europe.000 as his year-end target for Aussie/dollar. Given the risks from the U.2800 zone as an “attractive selling opportunity. Dolan agrees the Aussie/Kiwi cross has trading potential.” The AUD/NZD pair.becomes further entrenched.3700 in early March. with scope for 1. which topped out above 1.” Callow says.S.” Analysts at Westpac Institutional Bank also expressed concerns about the Aussie dollar.0200 or below.00 or lower (Figure 3). y CURRENCY TRADER • August 2011 FIGURE 3: AUSSIE/YEN CROSS RATE Is the choppy AUD/JPY pair poised for another down swing? FIGURE 4: AUSSIE/KIWI CROSS RATE Some analysts see the potential for the AUD/NZD to fall further despite its substantial drop from its March high. perhaps as far as 1.
The Euro has demonstrated it doesn’t pay to bet against it except in the shortest of time frames. the market is behaving in a perverse manner. Actually. In fact.140 daily data points).e. The only way to judge that is to see whether it worked reliably and consistently in the past — i. you can make a case equally for the Euro to crash or the 10 August 2011 • CURRENCY TRADER . perilously close to the boom-bust line of 50. After taking losses in FX. For example. I often remind readers that institutional factors can always trump the fundamentals. The ZEW chief attributed the drop to the European sovereign-debt morass and questioned whether Germany can continue to grow in light of the unstable global economy. another top macro hedge fund manager. Since sovereign default was not an issue in either the 37-year or the 12-year time period. Louis Bacon.1. A few days later. in July the German ZEW expectations index fell to a worse-than-expected 30-month low of -15.640 data points). What’s the ordinary retail trader to do if the experts are puzzled? Worse. it could be argued that “all of FX history” should really start in January 1999 when the Euro came into existence. context does change. the Euro rose when it should have fallen. and also well below forecasts. or a mere 12 years (2.. But here the ultimate shortcoming of technical analysis — time frame — jumps up to bite us on the nose. that’s not saying much. The Euro rose. 37 years is not much at all (about 8. we lack a historic benchmark to consult. both traders’ funds are heavily in cash — 75 percent in the case of the Soros’ Quantum Fund. Now is the time to consult a chart or two. and today we have a unique set of conditions never seen before in all of FX history.On THE MONEY ON the Money Puzzles and perversity in FX Have the financial markets been besotted by gazing into the starry eyes of the Euro? BY BARBARA ROCKEFELLER George Soros says he is baffled by the FX market today and asserts it is inherently unstable. Again.8. Case for the uptrending Euro Depending on the time frame you choose for your charts. A real statistician would sneer at the paucity of data.3 to 50. shares a similar view. In statistical analysis of price developments. the flash composite purchasing managers index for July fell from 53. But while people (traders) don’t change much. A technical indicator is only as useful as the time frame over which it can be expected to work reliably and consistently. since “all of FX history” should be defined as the era of floating rates that began in 1974. it “should” have fallen. or 37 years. the dreaded back-test.
40 1.20 1.0% 1.65 0.6% 1.Barbara Rockefeller Currency Trader Mag August 2011 Fig 1: The Case for the Euro Rally 1 FIGURE 1: THE BULLISH VIEW 1. 11 months in 2005-06. Even in the current situation.8% 1.0% Euro to shoot to the moon.45 1.55 1.00 0. The market is madly in love with the concept of the Eurozone and its key symbol.25 1.60 1. for a total of 33 months out of 129.40 1. aside from the penetration of the channel extension in 2010 to today.45 23.00 0.15 50.35 23.50 1.60 1.15 0.35 38.85 100. if roughly. defined the uptrend.40 1.0% 1.0% 1. the Euro has broken out above long-term (hand-drawn) resistance shown in Figure 2. it has spent only four prolonged periods under the 200-day moving average: four months in 2001.90 1. Source for all: Charts— Metastock. It has also broken resistance formed by an Andrews pitchfork.45 1.65 1.70 1. including policy paralysis.70 1.0% 1.80 99 2007 May2000 Jun JulAug Sep 2001 ec 008 2002 Mayun 2003Sep Nov 2 D Mar Apr J Jul Aug OctNov ec 2004 D 2009 Mar2005 Apr May Jul Aug ep Nov ec 2006Oct D 2007 Mar prMay JulAug 2009 ov ec 2010 Apr ayun S 2010 A 2008 Sep N D 2011 Mar M J 2011 Sep ct Oct JulAug O 20 N The Euro’s upswing has pushed it above the resistance represented by the down trendline and the Andrews Pitchfork. The 2010 retracement was only a little more than 50 percent of the primary up move. slide right off the currency’s back.8% 1. Critics sometimes call it the “Teflon Euro. data — Reuters and eSignal Barbara Rockefeller Currency Trader Mag August 2011 Fig 2: The Case for the Euro Rally 2 FIGURE 2: PUSHING ABOVE RESISTANCE 1. But the longer-term time frames all support the idea of a persistently strong Euro.15 61.6% 38.50 1.2% 1.80 99 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20 The Euro has spent only four notable periods below the 200-day moving average since bottoming in October 2000.65 0. 11 .30 1. In fact.20 1.30 1. the market became besotted with the Euro after its first year.05 1. The linear regression channel has accurately.2% 1. and nine months in 2010.95 1. In short. nine months in 2008-2009.” because bad economic data and stupid policy decisions. the Euro.30 1.05 1.35 1.10 1.55 1.10 1.60 1.55 1.25 50. amid an all-but-certain Greek default and CURRENCY TRADER • August 2011 0. or about 30 percent of the time.50 1.05 0. Figure 1 shows in the years since the Euro bottomed in October 2000.85 100.10 0.90 0.0% 61.70 1.95 0.20 1.25 1.
How can we make a technical case for the Euro to fall.35 1.45 1.15 1.46 1.60 1. If past is prologue.51 1.53 1. The 20-day and 55-day moving averages are sloping downward and prices are sandwiched between them and the green 200-day moving average.05 61.20 1.25 1.ON THE MONEY Barbara Rockefeller Currency Trader Mag August 2011 Fig 3: The Case for the Euro Rally 3 FIGURE 3: A MILD DOWNTREND 1.50 1. is also transposed to the current low.34 1. the Euro’s downtrend is mild.17 1.24 1.0% D 2005 A MJ J A S ON D 2006 AMJ J A S O N D 2007 A MJ J A S O N D 2008 A MJ J A S O ND 2009 A MJ J A S O N D 2010 A MJ J A S ON D 2011 A MJ J A S ON D 2012 A new Fibonacci retracement shows the Euro has twice retraced more than 62 percent of its big down move –– not exactly a picture of a currency headed for hell in a hand basket.8% 50.55 1.27 1.45 1.18 1.31 1.40 1. 2011. In Figure 5.65 100.29 1.5366 by the first week of November 2011.70 1.2% 23.0% 1.43 1.500 by the end of the year.28 1.6% 0.35 1.59 1.37 1. This is not the picture of a currency headed for hell in a hand basket.19 1.60 1. The new Fibonacci retracement shows the Euro has retraced more than 62 percent of the big down move — twice.33 1. Figure 4 shows the robustness of the Euro in another way. If this line is repeated.52 1. as it “should” given the current sovereign-debt crisis and the universal prognosis of no solution for several more months? Only by looking at shorter-term charts. and the down-sloping linear regression channel in Figure 3 lacks much slope.30 1.48 1.56 1.15 1.22 1.40 1.58 1.38 1.10 1. Barbara Rockefeller Currency Trader Mag August 2011 Fig 4: The Case for the Euro Rally 4 FIGURE 4: THE CASE FOR THE EURO RALLY 1.50 1.39 1. This is a noticeably feeble downtrend.44 1.57 1.36 1.16 1.42 1.21 1.13 April May June July AugustSeptember November 2012 February Marc an existential crisis (will the Eurozone exist in five years?).61 1. transposed to the current low using the exact same slope and distance. the Euro decisively broke below the up-sloping linear regression channel (gray) on May 6.30 1. A second linear regression (black) from the low in January to the high in May 2011.0% 38.26 1.49 1.54 1. The slope of a trend is how we judge its strength. October 2010 • CURRENCY TRADER August 2011 • CURRENCY 12 .41 1.14 1. The red line is a linear regression of the upmove from June to November 2010.23 1. Other side of the (Euro) coin 2010 February April May June July August eptember November S 2011 February Two linear regression lines imply the potential for the Euro to eclipse 1.32 1.25 1.20 1. the Euro should reach 1.47 1.5695 by end-December this year. the Euro should rise to 1.55 1.
Falling in love with a currency is not quite the same thing as falling in love with a position.24 38.25 1. For the Euro to recover fully from the latest break in the longterm uptrend.4214 to 1.30 1.3364. Conditions are somewhat similar: The first period was when the extent of the Greek sovereign-debt crisis was becoming clear and the Euro stopped dropping upon the invention of the European Financial Stability Fund.39 1.FIGURE 5: THE CASE FOR THE EURO DECLINE 1.52 1.28 1.53 1. If trading has some of the elements of gambling. The 62-percent Fibonacci retracement falls at 1.35 1.38 1.34 1.37 1.16 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011Feb Mar Apr May Jun Jul Aug Sep Oct Nov D Barbara Rockefeller Currency Trader Mag August 2011 Fig 6: The Case for the Euro Collpase 2 Transposing the linear regression line of the last big down move (late November 2009 to mid-June 2010) and transposing it to the current move suggests a Euro decline to 1.19 1.49 1.4578 (from May 4).0% 61. We can draw a strong resistance line and. Figure 6 repeats the exercise of calculating a linear regression trendline of the last big down move (lateNovember 2009 to mid-June 2010) and transposing it to the current move.51 0.2450 by November.48 1.22 1. The most recent is at 1.18 1.34 1.4578 (from July 4) and the more distant one is at 1.33 1. the Euro has to break resistance at 1. it has to surpass the two previous highs (gold horizontal lines in Figure 6).37 1.31 1. it may rally again as new arrangements are announced.27 1.46 which was horizontal in late July.3661.32 1. in that we need to apply probabilities to possible outcomes.43 1.42 1.0% Barbara Rockefeller Currency Trader Mag August 2011 Fig 5: The Case for the Euro Collpase 1 1.2450 by November this year.53 1.47 1.52 1.50 1.33 1.31 1.25 1.51 1.6% 1. the Euro “should” drop to 1.42 1.44 1.40 1. but traders can CURRENCY TRADER • October 2010 TRADER • August 2011 23. the 20-day and 55-day moving averages are declining down.27 1.28 1.46 1.21 1.48 1.20 1. get a range at the end of August between 1.24 1.0% 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28 7 14 21 28 4 11 18 25 2 9 November December 2011 February March April May 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 5 12 19 26 June July August September The Euro decisively broke below the up-sloping linear regression channel in May. To achieve those levels.36 1. In short.4410 on August 1.23 1.2% 50. FIGURE 6: MORE ON THE DOWNSIDE 1.35 1.8% 100. and the prices are sandwiched between them and the green 200-day moving average.29 1. the event risk favors the Euro.26 1.38 1. 13 .29 1. One of the causes of the Euro’s drop is recognition the EFSF is will need to be beefed up. Just as the Euro rallied after the EFSF was invented.44 1.41 1.45 1. imagining a parallel support line.41 1.39 1.30 1. the Euro has demonstrated over time that it doesn’t pay to bet against it except on the shortest of time frames.17 1.26 1.47 1.49 1.40 1.45 1. If history repeats.55 1.50 1.32 1.43 1.36 1.54 1.
to be sure. June 2011 Blessing or curse? More than anything. March 2011 The “relationship” between the dollar and oil is widely misunderstood. y For information on the author. The founders of the Eurozone would not tolerate talk of the conditions under which a country could leave.S. as is the case in the U.” The curious case of the prime customer Currency Trader. be excused for having a longlasting bias in favor of the Euro. But again. routinely apply exchange rate forecasts in their monthly reports. The Eurozone and the Euro must survive because European leaders will it to survive. The Fed wouldn’t dare. Experiment continues The Eurozone is a grand experiment — a stateless state. It has nothing to do with the long-lasting bias against the dollar. Be careful what you wish for: The reserve currency dilemma Currency Trader. April 2011 The big intervention on behalf of the yen isn’t as unique as many market players think.S. it’s a matter of customers. for a can-do skillset.’ best interests” causes havoc in dollar levels. It’s bold and brave. either. the Euro’s ability to surmount obstacles is based on a bewitched and besotted trader population. a currency without a Treasury. The Euro thrives whether growth is rising or falling and whether interest rates are appropriate to economic conditions. see p. Besides. and is not really a rejection of the dollar. Market failures and the future of the dollar Currency Trader. such as the German Bundesbank. Other central banks. through thick and thin. The Euro is robust. and quite rightly. It recovers from horrible policy errors that would fell a lesser currency. But that’s what it is. May 2011 Direction in FX is not a matter of fundamentals. It’s a must-do attitude that vies with the U. Traders forgive foot-in-mouth comments from officials when anything other than “a strong dollar is in the U. and “love” is not really an acceptable analytical term. We lack anything in conventional economic or financial analysis to name it. the Washington circus over the debt ceiling — controlling the share of the government relative to GDP and balanced budget — is a disgrace. Traders are impressed. 14 October 2010 • CURRENCY TRADER August 2011 • CURRENCY . By comparison. Except in France. 4 Related reading By Barbara Rockefeller: The dirty little secret of big-picture macro in FX Currency Trader. July 2011 The unreal reality of real return and currency movement. European officials are careful in speaking about the Euro. the dollar’s long-term downtrend is an unavoidable symptom of being the “reserve currency. but that doesn’t mean a correct reading of the situation will change the outlook for the dollar.ON THE MONEY The Euro recovers from horrible policy errors that fell a lesser currency. the Eurozone has fiscal principles and anti-inflation principles long-term investors like (especially those in Asia).S. It’s just a love affair. The Greek default is but a hiccup. The strange story of intervention Currency Trader. all the legacy banknotes were burned to ashes. but not utterly silenced.
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which meant low interest rates. BY MARC CHANDLER AND RAB JAFRI Editor’s note: This is excerpted from an article that will appear in the October issue of Active Trader magazine. Its first master is political and it did not arise as Athena did. beside the point. popping out of Zeus’ head. are products of innovation. form a sustainable monetary union without political union? This experiment is being tested currently under conditions of dramatic imbalances among the participants of the union. Role The monetary union that emerges on the other side of the crisis will be different than the one that entered it. except for very short-term borrowing. This required increased coordination and cooperation (which lends itself to compromises and exchanging favors). but a few basic points have been overlooked. However. It would share its ubermark with the rest of Europe — in the form of the Euro — as well as share the Bundesbank’s anti-inflation credibility (under the auspices of the European Central Bank headquartered in Frankfurt). Europe is evolving. and this includes that of the European Central Bank (ECB). many observers mistake this evolution with the demise of the experiment itself. Europe really has no Plan B. European institutional capacity has grown during the crisis. Much has been said and written about these issues. and the explanation is evident on two levels.On THE MONEY ON the Money The Euro’s significance Despite all the talk of countries leaving — or being thrown out of — the EU. Europe’s monetary union is simply one of the most important experiments of our time. as well as some erosion of sovereignty. the European Stabilization Mechanism. fully grown and armored. The European Financial Stabilization Facility and its successor. Political nature The most fundamental point is what brought about this experiment. European countries have been cooperating (though not always smoothly) since the 1950s on an increasing range of political. 16 That the Eurozone is not an optimal currency zone and does not satisfactorily address some economic problem is. which has bought covered bonds and sovereign bonds — something most would have thought unimaginable five years ago. It is not. At its heart. it was an economic solution to a fundamental political problem: Under what terms could Germany be reunited after the Berlin Wall fell? A number of countries often historically vexed by Germany effectively united to tie Germany’s fate “once and for all” to the rest of Europe. on newsstands in September. The first is the role of Europe in the 21st century and the second is a function of a costAugust 2011 • CURRENCY TRADER . Can the countries whose wars against each other largely shaped the past millennium. Monetary union is evolving. and economic issues. if not longer. which is possible when it is politically expedient. quite frankly. social. three members have been effectively locked out of the capital markets.
While contagion may have been the operative principle earlier in the European debt crises. Ireland has extended its 2010 contraction into 2011. This is the alpha and omega of so much commentary: Greece simply needs to devalue — full stop. lawyers are debating the issue. Economic growth has been uneven. there is no Plan B. mainly because of the short-term scheme and flexible time arrangements in the manufacturing sector. Surely the elites in Europe recognize the 21st century is likely to be a Pacific Century. The argument is. The employment situation looks equally bleak. and Spain recorded negative year-end growth. As one might imagine. You can plot trendlines for 49 markets on actual market performance. There would be a much deeper eco- The most recent quarterly report from the Bank of International Settlements (BIS) indicates just how important it is for Europe to contain its current crises. it increasingly appears to have become a failure of the European Policy makers to contain the crises themselves. 17 . but it appears that to leave the monetary union a country would have to leave the European Union. In one direction lies integration. Get your free copy of this invaluable trading tool today! http://offers. rather than market averages. if Greece dropped out it could devalue its currency.benefit analysis.S. is a Pacific power. And beneath the economy lies political unwillingness to agree on a single solution for the peripheral region. However. The data. This isn’t the only challenge the European economy faces. Spain (with unemployment around 20 percent) and Ireland have been hit hardest as a result of the collapse in construction and austerity measures added to Greece’s woes. Greece has crashed because of austerity measures. this locus has shifted. Germany’s unemployment rate is lower today than it was before the crises started. gauges the risk exposures of the lenders’ national banking systems and shows one way a “contagion” could be transmitted through the financial system (Figure 1). you will see at a glance how long-term trends can create profitable trading opportunities. Denmark’s recent decision to unilaterally impose border controls illustrate the already fragile conditions. Cost-benefit analysis Unbalanced growth and contagion Most arguments that Greece or Germany should exit the monetary union are not the product of serious cost-benefit analysis. Moreover. Europe is on the edge of a significant demographic shock that will push it further in a diminutive direction. Until the early 1980s. It would still have to service that debt. Europe is not. This has never happened. which includes European bank holdings of the public and private debt of different European countries. in the other lies marginalization and irrelevance. thereby reducing its debt burden and making its exports more competitive.pricegroup. Weak growth coupled with high levels CURRENCY TRADER • August 2011 Free charts! With Commodity Research Bureau’s long range charts. However. It would produce a banking crisis in Greece. the northern Atlantic had been the center of the world economy for two centuries. The European elite have no alternative vision of a future than one of integration. How is the relatively small western peninsula of the Eurasian landmass going to be relevant in a Pacific Century? The U. Greece’s debt is in Euros. On the opposite end. A failure of monetary union could weaken the larger integration efforts. Let’s start with Greece. of unemployment could spell trouble for countries that already have high levels of public debt. along with profound economic and financial crises.com/charts Futures and options trading involves substantial risk of loss and may not be suitable for everyone. and a devaluation of a new drachma would lead to a sovereign default. More trade now goes over the Pacific than the Atlantic.
see p. Germany also was quite willing to finance peripheral European countries’ purchases of German goods. Most arguments appear to focus only on the first order of impact. The scar tissue from the Lehman debacle is still too visible for them to accept the risk of an attempt for an orderly restructuring of Greek debt. It passed in France by only the smallest of margins. if Greece left the union. There also would be severe knock-on effects outside of Greece. Nor will they be pushed. Social dislocation and political instability would likely result.” Germany has done well as the first among equals in Europe. Officials will have to revisit these issues again when they acknowledge Ireland can no more re-enter the capital markets next year than Greece. The move never would have been approved. but the challenge to Germany is just as stark. judging by opinion polls. would do to regain competitiveness lost though inflation and rising relative unit labor costs. aggravate concerns Ireland and Portugal would follow suit. Moreover. Source: eurostat (http://epp. not just the periphery. not diminish. Germany has been the single biggest beneficiary of the Eurozone. The challenge presented by the crisis for the periphery is clear. The full version of this article appears in the October issue of Active Trader magazine. the European elite are loath to jump into the abyss. While diversifying a growing part of its exports to China. 4. August 2011 • CURRENCY TRADER .eurostat. A second-order impact of the failure of Greece and its banking system.europa. if not more so: Should it exert political leadership commensurate with its financial prowess. “Keep your friends close and your enemies closer. German exposure to Greece is roughly the equivalent of 50 percent of German exports to Greece over the past decade. some would add). A default would wipe out Greece banks and the ECB itself would have to be recapitalized. Germany Perhaps Germany should leave the union before its taxpayers have to be tapped again. what is the future of Greece outside the EU and EMU? How will it compete in the world economy? The debt problem at the periphery of Europe reflects a competitive problem. on sale in September.ec. Germany never had a referendum on giving up the mark in exchange for the Euro. Monetary union has effectively denied its members the ability to devalue. the risk premium for the remainder of the Eurozone would likely increase. which is what from time to time they.eu) nomic contraction. any competitive gain that devaluation would garner for Greece would quickly be eroded from the higher inflation. There have not been many successful examples of a sovereign reintroducing a currency for the sole purpose of devaluing it. For example.ON THE MONEY FIGURE 1: EUROPEAN BANK EXPOSURE TO PUBLIC AND PRIVATE BIS data gauging the risk exposures of national banking systems shows one way a “contagion” could be transmitted through the financial system. even the shopkeepers rejected the new currency. y For information on the authors. It is not a solution for Greece’s or Europe’s woes. Ironically. 18 Nonetheless. When Ecuador tried something similar. With no clear alternative. As Sun Tzu instructs us. keeping what may appear to be Lilliputians from eroding German competitiveness. and to what end and at what cost? Greece or Germany leaving monetary union would be a failure of the European project. These forces could jeopardize the firewall that has thus far protected Spain (and Italy. Even if Greece’s debt were to disappear overnight. along with very high inflation. which its exit would entail.
classic trend-following strategies work very well when the market has a high degree of directionality but they fail — often for extended periods — when the market trades more randomly. trading has been directional). Let’s see how a system that uses the Choppy Market Index (CMI) to trade both ranging and trending markets performs in terms of achieving this goal.e. Notice the CMI gives no information about whether the market has been moving up or down overall. The ideal solution to this problem would be a system that can benefit from both trending and ranging market conditions to generate a smoother equity curve with much shorter drawdowns and higher profit levels. while a low CMI value implies the market has moved in one direction and then reversed (perhaps more than once) — that is. The realities of trading. malized value between zero and 100: CMI = ((ABS(C-C[n]))/(H[n]-L[n]))*100 Where ABS = absolute value C = most recent close C[n] = close n bars ago H[n] = highest high of past n bars L[n] = lowest low of past n bars When the CMI is high (near 100) it means the difference between the most recent close and the close n bars ago is nearly as large as the high-low difference during that period (i. This value is then multiplied by 100 to give us a nor20 .TRADING STRATEGIES Tackling trending and ranging markets with CMI A two-part system uses a simple indicator to trigger both trend and countertrend trades BY DANIEL FERNANDEZ Because trading systems are designed to take advantage of specific aspects of market behavior. Because the raw CMI tends to fluctuate wildly. it simply measures the market’s degree of choppiness. make this ideal an elusive goal. it is often smoothed with a moving average. The following system August 2011 • CURRENCY TRADER The Choppy Market Index The CMI is a simple indicator that gauges whether the market has behaved in a choppy (non-directional) manner or a trending (directional) manner. For example. trading-range environment. The indicator calculates the difference between the most recent bar’s close and the close n bars ago and then divides this value by the difference between the highest high and lowest low over these n bars. it has been in a choppy. they are typically very well adjusted to certain conditions and vulnerable to others.. however. regardless of direction.
while the trending strategy assumes a higher CMI (reflecting a trendier environment) implies a continuation of the most recent 20-bar close-toclose move. trend trade shown in green). Exit trades when the CMI moves above 50.000 account balance. 3. the trending component triggered.81. Both strategies will exit positions when the CMI crosses the median line of 50.000/(100. 3. age true range (ATR): Lot Size = 0. The first entry rule will tackle the range problem.0123. Enter a long when the 10-bar SMA of the 60-bar CMI is above 60 and the difference between the current bar’s close and the close 20 bars ago is positive.S. or $81. 2. Soon after. The range-strategy trade was triggered after a decline in the Australian dollar/U. causing trades to be closed (if the change was unfavorable) or remain open (if the change leads to further profits). and a 14-day ATR of 0. Enter a short when the 10-bar SMA of the 60-bar CMI is above 60 and the difference between the current bar’s close and the close 20 bars ago is negative. 2.000.01*100.000*0. A CMI system The easiest way to build a daily strategy that can profit from both ranging and trending conditions using the CMI is to design two sets of entry and exit rules that tackle these problems separately.uses a 60-period CMI smoothed with a 10-period simple moving average (SMA). the exit rules adequately limit risk since moderate changes on the daily chart will cause the CMI to rise or fall significantly. 1. which suggests uncertainty about whether the market is ranging or trending. while the second one will tackle the trending problem.000 contract size. Enter a long when the 10-bar SMA of the 60-bar CMI is below 40 and the difference between the current bar’s close and the close 20 bars ago is negative. 21 . $100. dollar pair (AUD/USD) caused the CMI to drop below 40 (signaling range conditions) and exited when the CMI detected the beginning of trending conditions. Figure 1 shows two sample trades from March 2011 (range trade shown in blue. while the subsequent trend trade signaled when the CMI was rising.0123)) = 0. Range strategy rules: 1. Exit trades when the CMI moves below 50. The range part of the strategy assumes drops in the CMI (reflecting a choppier environment) imply a completion of the current range (a move in the opposite direction of the most recent 20-bar close-to-close move). the trade size would be: (0. Trend strategy rules Trade size is adjusted according to market volatility using the 14-day averCURRENCY TRADER • August 2011 The range component signaled a trade when the CMI was dropping. Although the strategy does not use a hard stop-loss. Enter a short when the 10-bar SMA of the 60-bar CMI is below 40 and FIGURE 1: SAMPLE TRADES the difference between the current bar’s close and the close and the close 20 bars ago is positive. assuming a $100.01*(account balance)/(contract size * 14-day ATR) For example.
using trading costs of 3.86 2. 2011 (11. The low Ulcer Index (7.7 55% 2.56% 21.45 66 7. which generally have Ulcer Index values above 9.61 53% 1.024 days for the portfolio). risk per trade Trade costs (pips) 6.81 66 8.11 132 7.S. Testing the system System results were comparable for the two currency pairs. drawdown Reward/risk ratio Win % Profit factor No. Another interest characteristic was both strategies’ performance during choppy range periods.8 58% 2.21 2. with a slight edge going to NZD/USD. with the rangetrading strategy effectively profiting from the sideways movements while the trending strategy repeatedly attempted to profit from any small breakouts or extensions of the range.43% 1. respectively. dollar (NZD/ USD) from Jan. Although the strategy failed to achieve large profits within rangSeptember 2010 • CURRENCY TRADER August 2011 • CURRENCY 22 . The strategy was tested on daily data in the AUD/USD pair and the New Zealand dollar/U. and the other drawdowns not particularly frequent. annual profit Max.86) for the portfolio suggests the strategy would be psychologically easier to trade than many other trend-following systems. Figure 2 shows both strategies worked together in ranging conditions.75% 21.80% 3. Table 1 summarizes the system’s performance. it was not particularly deep. limiting drawdowns despite generating relatively small profits during the range periods. The most interesting aspect of the tests results was arguably the system’s ability to smooth returns by reducing losses when strong ranging periods developed in both currency pairs.33 2.59% 1.5 NZD/USD 9.72% 1.5 years).47% 8 Portfolio 15. 1.21% 30.TRADING STRATEGIES TABLE 1: SYSTEM PERFORMANCE SUMMARY AUD/USD Avg. Although the longest drawdown was quite prolonged (1. 2000 to June 1. of trades Ulcer Index Avg. FIGURE 2: COMPONENTS WORKING TOGETHER The range-trading and trend-trading components worked together.63% - and the trade was subsequently exited when the CMI indicated an emerging range environment.5 and 8 pips.
The portfolio profit factor was notably high. Finally. Also. it has potential to be applied to CURRENCY TRADER • October 2010 TRADER • August 2011 There were three losing years in the test period. these results were achieved without any optimization. highly directional markets (such as FIGURE 4: ANNUAL RETURNS in 2008). others. including higher profits and a lower Ulcer Index (refer to Table 1). but two of them were smaller than -1 percent. y Figure 3 shows the equity curves for the individual curFor information on the author. two of them were very small (less than 1 percent) and the third was immediately followed by an equally profitable Among the system’s favorable characteristics is the fact that the drawdowns for year. The two pairs’ results are fairly similar.ing periods — primarily because of losses triggered on a wider portfolio of currencies. Robust optimization might breakouts that were quickly reversed — drawdowns were also lead to more favorable results. Notice that although there were three losing years. Also. 4. Although the results shown here were limited to two currency pairs that initially indicated a favorable combination of trending and ranging conditions in which to test the system. Additional suggestions The system suggests it’s possible — given realistic expectations — to create strategies using a core concept that can tackle both trending and ranging conditions. underscoring the high reward the strategy generated in the long term. their drawdowns generally occurred at different times. although the NZD/USD had slightly better statistics. although classic trend-folthe individual currencies were generally not concurrent. rency pairs as well as the portfolio. both on these pairs and sharply reduced. 23 . lowing systems almost always generate high profits on rapidly developing. highlighting the solid overall returns FIGURE 3: EQUITY CURVES (especially for the portfolio). see p. this strategy posted its best performance under less-volatile conditions (such as 2007) when retracements that led to short-term ranges ensured the best odds of capturing profits from both sides of the system. The system’s annual returns were quite favorable (Figure 4).
know when to keep its mitts off. as we shall see. China’s financial center has been shifting slowly and surely to Shanghai. which are occasionally quite high. The mainland was smart enough to. the cross rate between the CNY and HKD is of little interest. It is just a tough place for people who like to breathe. As the Chinese yuan has been either pegged or managed against the USD since the 1997 return of the Crown Colony to China. financial expertise. some of which are a remnant of Japan’s glory days. the long-term banking relationships between Hong Kong and Japan. the biggest threat to Hong Kong comes not from any political repression or an economic squeeze. which means it either has to let its short-term interest rates swing about or it has to August 2011 • CURRENCY TRADER 24 . and a guide for how to manage a boisterous free-market economy in a very crowded place. However. the very act of running the numbers and getting your hands dirty with the data (inasmuch as anything digital can get your hands dirty) occasionally reveals one of those little gems that make an economist’s life worth living. This is a currency that should have disappeared after the British returned the former crown colony to China in 1997. Moreover. As a simple truism.S.ADVANCED CONCEPTS TRADING STRATEGIES Hong Kong dollar still made in Japan The legacy of Japan’s glory days and the exceptional case of the Hong Kong dollar BY HOWARD L. bluntly. but rather from clouds of pollution streaming southward from Guangzhou’s industries. but for some obvious political reasons did not. the only — way of correcting all of those suppositions and misconceptions we have otherwise. Let’s take the Hong Kong dollar (HKD). SIMONS One of the reasons we should run the numbers on each and every currency we find is data analysis is the best — indeed. Hong Kong can choose to fix its exchange rate. The HKD has been managed within FIGURE 1: EXCESS VOLATILITY LEADS HKD’S SMALL CHANGES a very tight band against the U. a country can fix its exchange rate or it can fix its shortterm interest rates. as the booming city-state provided real value in terms of commercial contacts. dollar. but Hong Kong still plays a role. lead (by three months on average) the very small moves allowed in the exchange rate and spike whenever speculation about a CNY revaluation increases. but it cannot fix both simultaneously. Ironically. Volatility The excess volatility readings. make the HKD/JPY crossrate far more critical than commonly recognized.
25 . much of which goes to pay exporters. We can measure the insurance dimension of this market by comparing the implied volatility of threemonth HKD forwards for a USD holder to the HKD’s high-low-close volatility. seeking to diversify their holdings. and it is. This ratio. The Hong Kong Monetary Authority (HKMA) certainly has its hands full in this regard given the very large swings in the exchange value of the USD and the small returns on holding shortterm USD deposits in recent years.9 and USD FRR6. if any. minus 1. The resulting excess volatility readings thus are quite high at times and they lead the very small movements allowed in the exchange rate by three months on average. and vice-versa. No one should be surprised the excess volatility readings spike whenever speculation increases regarding a revaluation of the CNY and fall otherwise. the U. It also must contend with the large-scale inflows of capital from external sources. we should expect its realized high-low-close volatility to be artificially low. um. the HKMA will shift its target band against the USD. the HKD weakens against the JPY.9 has led the exchange rate only modestly since May 2002 FIGURE 3: RELATIVE INTEREST RATE EXPECTATIONS A clue that the relationship to focus on is the one between Japan and Hong rather than Hong Kong vs.engage in frequent purchases or sales of USD to maintain the peg. is the excess volatility for the HKD. Finally.00. Because the currency itself is pegged. and to the outflow of capital from the mainland from those.S. The June 2010 revaluation is marked with a CURRENCY TRADER • August 2011 FIGURE 2: RELATIVE INTEREST RATE FOR HKD/USD RATE The difference between the HKD FRR6. the on-again/off-again nature of China’s willingness to let the CNY revalue — in the “on” state since June 2010 — has created a great deal of volatility as traders speculate on the magnitude and timing of that revaluation and to what extent.: As the interest rate expectations gap steepens in favor of the HKD. a measure that incorporates intraday price range as well as interday price change (Figure 1).
The difference between the HKD FRR6. which is the rate at which we can lock in borrowing for three months starting six months from now. Asset carries There is a weak. If we August 2011 • CURRENCY TRADER 26 . As the interest rate expectations gap steepens in favor of the HKD. As we have seen in so many cases.9 and USD FRR6. We can measure the forward rate ratio between six and nine months for each currency. the steeper the money market yield curve is and the more the market expects short-term interest rates to rise. divided by the nine-month rate itself.S. prospective returns on assets often drive the flow of speculative funds into and out of an economy and therefore affect the currency. the U. and inverse relationship between the USD-HKD carry return and the relative performance of Hong Kong and. but it can’t fix both simultaneously. FIGURE 4: CARRY AND STOCK MARKET PERFORMANCE green vertical line. and Hong Kong play only a minor role in the exchange rate.9 exceeds 1. Interest rate expectations One consequence of Hong Kong’s unusual situation is relative interest rate expectations between the U.00.9 has led the exchange rate only modestly since May 2002 (Figure 2). This is our first clue the proper relationship to focus on is the one between Japan and Hong Kong as opposed to Hong Kong vs.S.9? The weak and meandering relationship seen for the USD now becomes a much closer and more direct one (Figure 3). the HKD weakens against the JPY and vice-versa.9 to the JPY FRR6. irregular. The JPY-HKD carry has a much stronger inverse relationship to the relative performance of Hong Kong and Japanese equities (bottom). American equities (top). The more this FRR6. What do we see if we shift the basis of comparison from the USD FRR6.ADVANCED CONCEPTS ON THE MONEY A country can fix its exchange rate or it can fix its short-term interest rates.
but it is one of the few places where pension funds. Can we confirm this by taking a look at the relative performance of commercial property markets in the U. Japan and Hong Kong? Real estate is less liquid than equities. one involving the carry from JPY into HKD and the relative performance of Hong Kong equities against American equities reveals a much stronger inverse relationship. life insurance firms and other investors who need longmaturity assets can place a great deal of money.FIGURE 5: CARRY AND REAL ESTATE PERFORMANCE Except for the late-2008 global financial crisis. As an aside. Each episode of USD or JPY carry trade unwinding appears to be met with a flow of funds back into Hong Kong and each restarting of these carry trades appears to be involve funds flowing out of Hong Kong.S. the relative performance of Hong Kong real estate vis-à-vis Japanese real estate actually leads the currency carry trade by three months on average.. Hong Kong markets are behaving as if the city-state is one of the funding sources of global carry trades and not one of its beneficiaries. the more we should expect Hong Kong equities to outperform. A similar comparison between Hong Kong and Japan. and inverse relationship (Figure 4). we see a weak. irregular. What can we infer? It appears the more short-term interest rates rise outside of Hong Kong from carrytrade funding sources or the more either the USD or JPY rise against the HKD. the argument 27 CURRENCY TRADER • August 2011 . Restated. compare the carry return on borrowing USD and lending HKD to the relative performance of Hong Kong equities against American equities.
No one would design it this way. If short-term interest rate movements are limited by the willingness of the HKMA to wreak havoc on those markets simply to maintain the HKD band. we can compare the performance of the currency carries to the relative performance of Hong Kong real estate to both U. As property prices decline. We must note a major exception for the late-2008 global financial crisis. but the relative performance of Hong Kong real estate vis-à-vis Japanese real estate actually leads the currency carry trade by three months on average.S. and its principal financial links appear to be more a function of trades vs. Call it the inverse. Once again. yen are repatriated and the carry return from the yen into the Hong Kong dollar is pressured.S. 28 August 2011 • CURRENCY TRADER . however. This stands as a confirmation to the observation made in the equity cases. the adjustment burden tends to get shifted to long-term instruments as funds flow into and out of capital assets rather than short-term deposits. One observer recalls making such a statement about Japan during its real estate bubble of the 1980s. see p. and that is exactly how the famously free-market residents of Hong Kong would have it. The shorter FIGURE 6: HONG KONG YIELD CURVE PRONE TO BEARISH STEEPENING maturities are anchored. real estate has been a moribund investment in Japan over both of its Lost Decades. but the longer maturities tend to rise and fall quite a bit and make the Hong Kong bond market prone to bearish steepening plays. and not to the Chinese yuan. The Japanese case presents an interesting difference: Not only is the relationship much stronger. that you can make more people but you cannot make more real estate does not hold particularly well. and while there are more Japanese and no more Japan today. The U.S. even though both halves of the statement are largely true (“largely” because Hong Kong has engaged in some landfill projects in the harbor over the years to create more real estate). A note on the yield curve An exceptional case Although the shorter maturities are anchored. This is readily apparent in the fluctuations of the Hong Kong coupon yield curve since the global market low of March 2009 (Figure 6). just as it was in equities. but the facts are what they are. case is as disjointed in real estate as it was in equities. reverse carry trade if you will. and Japanese real estate (Figure 5). 4. y For information on the author. in making this statement.ADVANCED CONCEPTS ON THE MONEY As property prices decline. the Japanese yen as a legacy of Japan’s glory-days expansion into Asian banking. yen are repatriated and the carry return from the yen into the Hong Kong dollar is pressured. the longer maturities tend to rise and fall quite a bit and make the Hong Kong bond market prone to bearish steepening plays. The Hong Kong dollar is full of exceptions: It is a managed currency with a peg set to the U.
full page ad to come CURRENCY TRADER • August 2011 29 .
S.m. Las Vegas For more information: Go to www. 8:30 a.: July personal income Canada: July PPI 30 Japan: July employment report 31 1 2 3 4 5 6 South Africa: Q2 GDP Canada: Q2 GDP Germany: July employment report India: Q2 GDP and July CPI September France: Q2 employment report 15 Japan: Q2 GDP 16 UK: July CPI U.com August 2011 • CURRENCY TRADER . 15 CPI 25 26 27 28 U.S.moneyshow. 8:30 a. 10:00 a.S.: July personal income UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.com/vcms/?scode=013104 30 Event: The Futures & Forex Expo Las Vegas Date: Sept. 16-19 Location: Bally’s Resort.: July employment report Brazil: July CPI Canada: July employment report Japan: Bank of Japan interest-rate announcement UK: July PPI LTD: August forex options.S.asp Event: International Traders Expo Date: Nov.: Q2 GDP (second) Japan: July CPI Canada: July CPI 5 6 7 8 9 10 11 12 13 14 Brazil: July PPI U.m.: July ISM manufacturing report U.salonAT. 22-24 Location: Caesars Palace. 8:30 a.m. 19-21 Location: Vancouver Convention Centre For more information: Go to www.S.: July retail sales France: July CPI Hong Kong: Q2 GDP 29 France: July PPI U.S. PMI: urchasing managers index P PPI: Producer price index Economic release (U.m.: FOMC interest-rate announcement Mexico: July 31 CPI and July PPI Germany: July CPI Japan: July PPI U. 8:30 a.m.: July durable goods South Africa: July CPI Brazil: July employment report Mexico: Q2 GDP and July employment report South Africa: July 25 U. 17 UK: June employment report 18 Hong Kong: May-July employment report U.S.moneyshow.tradersexpo.: July CPI 7 Brazil: Q2 GDP. August U.S.S. France For more information: Go to www.m. The clearinghouse also informs the seller. dollar index options (ICE) 19 Germany: July PPI 20 21 22 Hong Kong: July CPI 23 24 Mexico: Aug. 8:30 a. 8:30 a.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. FOMC: Federal Open Market Committee GDP: ross domestic product G ISM: nstitute for supply I management LTD (last trading day): The final day trading can take place in a futures or options contract.m. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.m. 16-17 Location: Paris. August CPI and PPI U.com/events/Forex_Options_Expos. 10:00 a.S.: July PPI India: July PPI Germany: Q2 GDP The information on this page is subject to change. FND (first notice day): Also known as first intent day.m.: Fed beige book Australia: Q2 GDP Canada: Bank of Canada interestrate announcement Japan: Bank of Japan interest-rate announcement 8 EVENTS Event: Sixth Annual Free Paris Trading Show Date: Sept.m. 8:30 a. Las Vegas For more information: Go to www.com Event: The World MoneyShow Vancouver 2011 Date: Sept. 8:30 a.S.S. August 1 2 3 4 U. 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.: June trade balance Australia: July employment report U.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.m.S.
27% / 96% Volatility ratio / rank . etc.34 / 78% .33 / 45% .16% 1.77 1.0 50. The “% rank” fields for each time window (10-day moves.97% / 29% 60-day move / rank -3.6 1.5 3.2 13. OI: 30-day open interest.41 19. 6. direction.43 2011 YTD return -24.37% 10.46% 4.2 44.58 1.) 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.04% / 92% -3.05 -4. it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves.6 110.6 83.98% 3.4 1. The % rank is the percentile rank of the volatility ratio over the past 60 days.17 23.9 109.71% 10.98% / 90% 2.89 0.64 -3.1 4.37% 4.S. 9.05% 1.19% 2.97% / 82% 4. 20-day move: The percentage price move from the close 20 days ago to today’s close.8 48.70% / 70% 20-day move / rank -0.13 -1.19% / 72% 0.72% / 27% 1.0 3.87% / 79% 2. 7. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices).CURRENCY FUTURES SNAPSHOT as of July 29 Market EUR/USD AUD/USD GBP/USD JPY/USD CAD/USD CHF/USD MXN/USD U.63% 2.4 103.09% / 10% -0. 8. for the 20-day move.10% 10. for the 60-day move.02% / 78% -1.35% / 20% -1.0 102.79 $ Under mgmt. 6.85% / 28% 6.27 5.58 0.0 2.60% 5.30% 35. Friedberg Comm.0 56.7 19.51% / 96% 0.72 0. 2.69 / 90% .6 28.06% / 16% 3.87% 20.2 29.0 58. 60-day move: The percentage price move from the close 60 days ago to today’s close.6 5.16% 2. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.97% / 29% 2.51% / 16% 4. Does not reflect the performance of any single account. 4. A reading of 100% means the current reading is larger than all the past readings. The information does NOT constitute trade signals. (Curr.2 2.17 17.71 / 95% .7 102. Price activity is based on pit-traded contracts.0 5.3 3. It is intended only to provide a brief synopsis of each market’s liquidity.71% / 100% 1.28% / 92% -0.02% / 81% -1.0 66.33% / 9% 9.70% / 70% 3. in thousands.4 121.1 13.72% 16. 10.8 117. BarclayHedge Rankings: Top 10 currency traders managing more than $10 million (as of June 30 ranked by June 2011 return) June return 11.64% 9. 4.06% / 90% 1.94% / 75% 1.3 10-day move / rank 1. 9.2 2. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable).93 4.27% / 96% 2.9 2. (Forex) Chelkowski Top 10 currency traders managing less than $10M & more than $1M Based on estimates of the composite of all accounts or the fully funded subset method.22% / 63% 6.03% / 78% 0.92% 0.) MIGFX Inc (Retail) A-Venture Capital Vortex FX AG (VFMA) CenturionFx Ltd (6X) Gedamo (FX Alpha) ACT Currency Partner AG 24FX Management Ltd QFS Asset Mgmt (QFS Currency) Excalibur Absolute Return Fund Wealth Builder FX Group (Low Risk) Halion Capital (Conservative) Valhalla Capital Group (Int'l AB) Baron AM (Quant Strategic FX) GTA Group (FX Trading) Adantia (FX Aggressive) BEAM (FX Prop) Drury Capital (Currency) Capricorn Currency Mgmt (FXG10 USD) Marek D.90% 1.8 4. while a reading of 0% means the current reading is smaller than the previous readings.17% / 29% -0.7 30.0 880.4 10. (millions) 78. 20-day moves. CURRENCY TRADER • August 2011 31 .6 109.2 Trading advisor 1. 7.9 6. in thousands. 8. 10. For example. See the legend for explanations of the different fields.27 / 37% .44 / 57% .09 -0.02 1. 2.2 0.58 / 88% .3 25. 5.85% 1.39% / 16% 11. 5.58 / 88% Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).88 8. 10-day move: The percentage price move from the close 10 days ago to today’s close. dollar index NZD/USD E-Mini EUR/USD Sym EC AD BP JY CD SF MP DX NE ZE Exch CME CME CME CME CME CME CME ICE CME CME Vol 335. it shows how the most recent 20-day move compares to the past sixty 20-day moves. LEGEND: Volume: 30-day average daily volume.50 / 98% . Mgmt.49% 5. 3. 1. the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves. 3.32% / 95% 3.26 / 38% .9 OI 182. and levels of momentum and volatility.
091685 0.24% 4.597.414.17% 6-month gain loss -10.8823 0.03470 0.22% -3.67 31.24564 1.60 6.227.432.60 14.1338 0.9406 0.409.916.76% -2.65% -2.6702 0.070.29% -4.3184.108.40.206% -2.23% -6.7321 0.02249 0. U.295.891.50 24.273.47 1.70 5.128365 0.05% -1.53% -2.33% -5.22% -2.24564 1.58% 1.830395 0.54 10.68% 3.535 0.75% -1.06% 0.904.60% -1.5516 0.67% 3-month gain/loss -7.80 3.71% -4.01% -0.68% 52-week high 0.876.87 6.31% -4.15% -1.03% 4.23% -4.169.63 18.494.14% -2.370. U.1662 1.833.108.33% -6.75% -5.0227 0.0305 0.60 52-week low 58.55% -2.60% -3.81% -1.75% 1.50 35.91% -2.23% 0.252.59% 52-week high 73.35% -6.469.0966 0.69 5.61% -2.40% -5.830395 0.58 7.15919 1.739.S.10 38.032.07% -5.012805 0.S.04% 0.84 5.65055 1.80 4.1282 0.03% 0.01% -7.04% -13.22% -1.51% -1.1555 1.51 4.55% -2.03510 0.55% -4.25 13.148965 0.65055 1.813.71% -2.41 5.612.67% 1.466.67% -7.0314 1.288.059145 0.64% -3.93% -1.06 1.2646 0.93% -3.80 20.01% -8.67% -8.52% 3.10 17.57% -4.033665 0.60 22.44% -3.19 1-month gain/loss 5.70% -4.00 18.63 Previous 5 2 8 1 13 15 3 7 9 12 4 6 10 11 14 32 August 2011 • CURRENCY TRADER .60 11.67% -5.50% -3.INTERNATIONAL MARKETS CURRENCIES (vs.25% -3.12% 6-month gain/loss -0.1518 0.51% -6.00 23.313.36% 2. DOLLAR) Rank Currency 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Hong Kong dollar Taiwan dollar Chinese yuan Euro Russian ruble Great Britain pound Indian rupee South African rand Singapore dollar Japanese yen Thai baht Swedish krona Swiss franc Australian Dollar Brazilian real Canadian dollar New Zealand dollar July 27 price vs.094.30 5.33% -8.90% -2.069.46% 0.64% -0.600.9449 0.00 30.869295 1-month gain/loss 0.68 4.012805 0.0211 0.1352 0.24% -0.21 8.0366 1.28% -2.48% -6.039.329.0338 0.18% 0.39 1.48% -8.350.62% -13.89% -7.S.04% 2. dollar 0.0114 0.6987 Previous 7 9 10 11 8 2 6 15 12 16 4 1 17 5 14 3 13 GLOBAL STOCK INDICES Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Brazil Italy France Switzerland Mexico India Canada South Africa U.50% -0.446485 0.541.988.44% 13.856.304.00% -2.07 5.0312 0.470.55% 1.26% 5.059145 0.23% 0. Germany Australia Hong Kong UK Singapore Japan Index Bovespa FTSE MIB CAC 40 Swiss Market IPC BSE 30 S&P/TSX composite FTSE/JSE All Share S&P 500 Xetra Dax All ordinaries Hang Seng FTSE 100 Straits Times Nikkei 225 July 27 58.46% -3.155405 1.27 3.89 7.734.30% 1.91% -4.00% -0.20 26.34% 1.48% -0.036255 1.193.910.31% -2.44% -2.80 21.67% 3-month gain/loss -0.80% 5.869295 52-week low 0.60 3.63583 0.90 3.047.103.61 10.68% 5.50 33.21% 5.11% -0.4842 0.1466 1.129 0.90 2.70 17.
6642 122.87% 1.75 1.313235 112.30% 1.5 5.72 74.25 82.25 (March 11) 0.25 4.47% -8.45% 0.25 (Nov 10) 0.0212 1.47% -7.04% 10.26% -1.05% -0.25 0.5 (Dec.46% 6-month gain loss -0.69% 2.25 2.75 0.22348 1.25 0-0.36% -7.13% 2.85% 2.885 1-month gain/loss 2.63 1.5 3 1.1 1.0186 1.82% -0.53% 1.1 1.28% -0.365715 2.75 56.75 3 11.34% -0.NON-U.4316 2.85% 3-month gain/loss -3.3746 1.25 4.05% -1.75 1.25 (Sept 10) 0.71 67.47% 3.125 (June 11) 0.50% 2.26% -0.88% -8.1671 1.5 July 2010 0-0.96% 1.16% -3.33% -0.11% -7.9818 97.86% -0.625 6.4859 0.89% -3.91% -1.5 12.678095 1.29% 9.35% 1.49% 1.35% 3.89% 3.968 0.82% -1.87% 0.324995 1.7515 1.75 2.80% -10.589 0. 2011 0-0.5 0.875 8 5.1 (Oct.544485 1.07% -1.42% 1.885 52-week low 1.36% -4.09% 1.5 (March 11) 0.75 2.1 1 0.2811 2.96 1.030725 0. 10) 0.71% 2.5 1 0.59% 0.5 Last change 0.454 1.876405 97.41% 2.1467 1.46% 12.8643 80.10) Jan.9241 0.9038 139.86 Previous 9 18 14 11 17 3 10 16 1 12 21 15 19 4 8 7 2 20 6 5 13 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 0-0.62807 0.25 0.280 85.019685 1.95 67.83% -5.43 0.5 0.25 1.527 1.25 (July 11) 0.0513 0.S.5 (Nov.31% 4.6412 1.26% -4.5 (March 09) 0.04% -1.86% -0.60% -3.17608 1.725 0.18637 1.8161 126.25 (March 09) 0.55% 0.69% -0.375 5.7507 0.31% 0.04% 0.42% 2.161235 1.884245 127. 08) 0.42% 52-week high 1.5302 1.46 88.25 (July 11) 0.3103 106.55% 0.498445 0.3858 1.41% -0.75 6.280 89.5 1 0.5 CURRENCY TRADER • August 2011 33 .25 4.75 (July 11) 0.5 3 10.47% 0.2947 1.2257 1.255835 1. 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 Aussie $ / New Zeal $ Euro / Canada $ Euro / Real Pound / Canada $ Euro / Aussie $ Euro / Franc Pound / Aussie $ Yen / Real Pound / Franc Euro / Yen Franc / Canada $ Aussie $ / Canada $ Euro / Pound Pound / Yen Aussie $ / Real Canada $ / Real Aussie $ / Franc Franc / Yen Aussie $ / Yen Canada $ / Yen New Zeal $ / Yen Symbol AUD/NZD EUR/CAD EUR/BRL GBP/CAD EUR/AUD EUR/CHF GBP/AUD JPY/BRL GBP/CHF EUR/JPY CHF/CAD AUD/CAD EUR/GBP GBP/JPY AUD/BRL CAD/BRL AUD/CHF CHF/JPY AUD/JPY CAD/JPY NZD/JPY July 27 1.1 1 0.19 1.42% -4.3842 1.57 78.97% -1.
2% 1-year change 9.0% 8.1% 2.7% 3.0% 0.1% 2.2% 11.9% 1-year change 12.1% -0.1% -0.2% 6.1% -0.6% 13. 34 August 2011 • CURRENCY TRADER .0% -0.9% 4. PACIFIC CPI Period Argentina June June June June June June June Q2 June June June June Brazil Canada France Germany UK S.3% -1.1% -0.5% 7.7% 4. PACIFIC Unemployment AMERICAS Period Q1 June June Q1 June March-May June April-June June Q2 Release date 5/20 7/19 7/8 6/3 7/28 7/13 7/7 7/19 7/29 7/29 Rate 7.1% -0.7% -0.1% 0. NLT: No later than. Africa Australia Hong Kong India Japan Singapore Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore Period Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Release date 6/17 6/3 5/30 6/29 5/13 6/28 5/31 6/1 5/13 5/31 5/19 5/27 Change -5.0% -0.7% 1.6% 2.1% 0.4% 3.0% 17.4% 90. PACIFIC PPI AMERICAS EUROPE AFRICA ASIA and S.2% 9.6% 2.9% -0.6% 4. Africa Australia Hong Kong India Japan Singapore Release date 7/14 7/7 7/22 7/12 7/12 7/12 7/20 7/26 7/21 7/29 7/29 7/25 Change 0.1% 0.0% 0.2% 6.0% -0.9% Next release 8/12 8/19 8/29 8/19 8/5 8/25 10/24 9/15 8/15 8/10 8/29 As of Aug.3% 5.6% 1-year change 9.1% 0.2% 1.2% -1.1% -0.1% 5.3% 2.9% 4.4% 2.5% 5.2% 6. Africa Australia Hong Kong India Japan Singapore Period June June June June June June Q2 Q1 June June June Release date 7/14 7/29 7/30 7/20 7/8 7/28 7/26 6/13 7/14 7/12 7/29 Change 0.8% -0.9% -0.6% 5.0% 1.9% -0.1% 7.5% -0.INTERNATIONAL MARKETS GDP AMERICAS Argentina Brazil Canada France Germany UK S.9% 3.2% Next release 9/16 9/6 8/31 9/28 8/16 10/5 8/30 1/9 8/12 8/31 8/15 8/19 EUROPE AFRICA ASIA and S. PACIFIC Argentina Canada France Germany UK S.1% 1.9% 1.8% -0.3% -0.1% 0.9% -0.1% 4. 1 LEGEND: Change: Change from previous report release.8% 3.4% 8.7% 7.7% 0.3% 8.7% -0.7% 7.5% 4.2% 0.4% 6.2% 5.2% Next release 8/12 8/19 8/19 8/12 8/10 8/16 8/24 10/26 8/22 8/31 8/26 8/23 AMERICAS EUROPE AFRICA ASIA and S.1% 0.1% 3.1% 0.4% 0.1% 0.1% 0.3% 4.7% 2.0% 3.2% 1.2% -3.6% 0.2% -4.2% 5.5% 0.1% Change 0.7% -0.4% 9.1% Next release 8/22 8/25 8/5 9/1 8/31 8/17 8/11 8/18 8/30 10/31 EUROPE ASIA and S. Rate: Unemployment rate.2% 1-year change -0.2% 7.7% 11.
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