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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.

Events .......................................................30
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

Looking for an advertiser?
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

Questions or comments?

Submit editorial queries or comments to


Jafri also spent several years with Terra K Partners. where he majored in chemistry.com Volume 8. She has worked as a forecaster. q Rab Jafri has several years of capital markets experience with a focus on forex. 2000). Marc Chandler.com Publisher. Chandler has spent more than 20 years analyzing. Jafri worked with FXCM. Inc. and economics who has been focusing on the analysis of forex trading strategies.com). For the past two years he has published his research and opinions on his blog “Reviewing Everything Forex. Around the World (John Wiley & Sons. He has worked for several consulting firms and banks as well as a hedge fund in the early 1990s. Second Edition (Wiley. Inc. writing monthly articles as well as building several different FX financial products. q Daniel Fernandez is an active trader with a strong interest in calculus.com Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag. trader. 4 . Currency Trader is published monthly by TechInfo. Rockefeller is on the board of directors of a large European hedge fund. Copyright © 2011 TechInfo. He writes and speaks frequently on a wide range of economic and financial market issues. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. and a strategist for Bianco Research. August 2011 • CURRENCY TRADER Contributing writers: Barbara Rockefeller.com) is an international economist with a focus on foreign exchange. The information in Currency Trader magazine is intended for educational purposes only. and How to Invest Internationally. He is the author of Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange (Bloomberg Press. It is not meant to recommend. particularly algorithmic trading and the mathematical evaluation of long-term system profitability. published in Japan in 1999.rts-forex. All rights reserved. Trading and investing carry a high level of risk. 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. 2009). A book tentatively titled How to Trade FX is in the works.CONTRIBUTORS q Howard Simons is president of Rosewood Trading Inc. a financial advisory firm specializing in foreign exchange markets.” which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://mechanicalforex. PO Box 487. and speaking about global capital markets. writing. q Marc Chandler (marc@terrak.currencytradermag. Prior to this role.co.. Lake Zurich.com President: Phil Dorman pdorman@currencytradermag. 2001). statistics.com Contributing editor: Howard Simons q Barbara Rockefeller (www. he works for one of the largest banks in New York. Issue 8. strategy or approach. Rockefeller is the author of Technical Analysis for Dummies. The Global Trader (John Wiley & Sons. 2011). Past performance does not guarantee future results. Chandler appears regularly on CNBC and Bloomberg Television.edu. A publication of Active Trader ® For all subscriber services: www.com Classified ad sales: Mark Seger seger@currencytradermag. and currently publishes two daily reports on foreign exchange. covering risk and controls for the FX derivatives desk. concentrating in computational chemistry. Traders are advised to do their own research and testing to determine the validity of a trading idea. Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag. ad sales: Bob Dorman bdorman@currencytradermag. an online foreign exchange broker in New York. Fernandez is a graduate of the National University of Colombia. He can be reached at dfernandezp@unal. 24/7 Trading Around the Clock. Currently.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. and consultant at Citibank and other financial institutions. promote or in any way imply the effectiveness of any trading system.com Managing editor: Molly Goad mgoad@currencytradermag. writing market commentary for the FX and commodities research desk. Illinois 60047.

14.com www.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 .worldrg.com/Forextrading Organized by: . 2011 New Yorker Hotel New York. 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.

Nonetheless. Over the past three months. from around . dollar (AUD/USD) pair jumped more than 13 percent (low to high) over the next six weeks. although any bearish sentiment surrounding the recent consolidation must be put in context considering the currency was. Recent action In recent months momentum seems to have swung away from the Aussie dollar (top) toward the New Zealand dollar (bottom). the AUD has lost some attractiveness.” which has outperformed the AUD in recent months.S. the Aussie/U. FIGURE 1: CHANGING OF THE GUARD Despite boasting the highest central bank lending rate among major industrialized nations at 4.1011 on May 2. with Aussie bulls handing over the baton to the New Zealand dollar (NZD). as of Aug. Aussie/dollar has largely traded within the 1.S. it appears to be almost a changing of the guard.0400-1.1079 on July 27 before turning lower again. wide-ranging consolidation between November 2010 to mid-March 2011. the U. some of the catalysts that have propelled the Aussie dollar higher over the past two years may be absent in the relatively near future. just a little below its highest level vs. 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). dollar in nearly 30 years (Figure 2).GLOBAL MARKETS Aussie dollar stalls The Australian currency has long since rallied past its pre-financial collapse high. The advance has stalled since then amid a bevy of factors that have dampened global risk appetite. Indeed.0800 range. but some analysts think its bullish run may have run out of fuel for the time being. although it pushed to a new high at 1. “The flare-up in the European sovereign-debt crisis.9703 to 1. making sizable new gains more difficult than they have been in the recent past. or “kiwi.75 percent. Source for all charts: TradeStation After a lengthy. 2. questions about Chinese growth prospects as the October 2010 • CURRENCY TRADER August 2011 • CURRENCY 6 . BY CURRENCY TRADER STAFF Long the darling of “hot-money” FX traders.

China’s voracious appetite for raw commodities –– prices for which have risen in recent years –– has underpinned Australia’s growth prospects. New Zealand has the second-highest rates (2. Australian growth rate The AUD/USD pair’s recent push above 1. “A lot of the hot money has switched from long Australia to long Kiwi.1000 marked its highest level since the beginning of 1982. the pace of Chinese growth remains a key factor. in fact. while Nomura offers a more 7 CURRENCY TRADER • August 2011 . –– all markets that experienced reversals between May and July.5 percent) and they are in the process of signalling further rate hikes. “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. “Given the fact that Asia is tightening monetary policy and the U.” Economic outlook Australia has long been a solid economic performer. Australia’s growth is also expected to slow somewhat.S. but have more recently bounced back. Anderson notes.” says Stephen Roberts.” says Greg Anderson. but they are parked there. Australian growth –– are likely to flatten out. both monetary and fiscal policies. we expect commodity prices to pick up and the Aussie dollar to grind higher with them. “Barclays Capital believes China will have a ‘soft landing. strategist at Barclays Capital in Sydney.authorities continued to tighten monetary policy. “The New Zealand dollar has been on fire for the past two months. but that’s still more than strong enough to support very strong growth in Australian exports. “If the global growth picture picks up and we get past global contagion events.” Roberts says. chief economist.4 percent in 2013. Australia has the highest rates in the G10 countries. Additionally. Given China absorbs approximately 25 percent of Australian exports.7 percent in 2012. director FX strategy at CitiFX. associate economist at Moody’s Analytics. such as iron ore and coking coal.1-percent year-over-year gross domestic product (GDP) growth rate in 2011. A major commodity exporter. Moody’s Analytics is forecasting a 2. including the Australian dollar.” Australia is a big exporter of base metals and grains (especially wheat). the trajectory for commodity prices –– and hence. bolstered by its close trade relationship with China.” Tempered growth figures for China are. and EU have fiscal policy tightening on the agenda. strong infrastructure investment in Asia and Japan’s reconstruction will sustain strong demand for Australia’s steelmaking products. “Australia’s destiny is determined by commodity prices. The kiwi’s recent surge has been more a matter of perceived upside potential on the interest-rate than immediate edge. and a more general soft patch in the global economy led to softer demand for risk assets globally. at Nomura Australia.” he says.” says Katrina Ell.4 percent in 2011. “China’s growth is expected to moderate a little to 9. which in turn are determined by the global policy stance. A soft landing will ensure that Chinese demand for Australia’s coal and iron ore exports will remain upbeat in 2011. “Australia has significantly benefited from China’s strong demand for hard commodities. Stacey describes Australia as a “growth taker” and says the future is not quite as rosy as some portray it.’ That reduces the chances of a nasty commodity price reversal.” he says. generally expected –– although these projections remain stratospheric compared to most industrialized (especially Western) economies. However. 8.” says Gavin Stacey. and 8. Australia. the bulk of Australian exports head to China or other Asian destinations.

but the Australian consumer is very cautious. The most concerning development has been the fall in confidence. Since then. Barclay’s Stacey.7-percent annualized rate in the first quarter. “The challenges mostly relate to prospects for global growth. the financial markets had expected additional monetary policy tightening in 2011.” Roberts says. The strength of the currency has been a large contributor to the stark divergences within the multi-speed economy. however. “A number of analysts are now calling for the next move to be a cut.1400-1.9 percent (pointing to the economic disruptions from the devastating Queensland floods earlier in the year) following 2010’s 2. The pessimism may seem excessive for an economy with 4. “The outlook for the mining sector remains positive. “Some in the market are thinking the RBA could cut rates. across businesses and consumers. chief currency strategist at Forex. an abrupt shift of views is one of the factors behind the stalled Aussie rally.” Callow says.1000. Despite the strongest domestic consumption numbers since the second quarter of 2010. “If it was not bad enough that massive flooding and storms ravaged the northeastern part of the country earlier this year. Wells Fargo is also factoring in the impact of natural disasters –– and not just domestic ones.1000 level could open the door to the 1. others see that early-May peak as a strong ceiling. the Australian economy has hit a soft patch.” says Brian Dolan. Play that range and go with whatever way it breaks out. “Watch that range. and many consumers are taking advantage by buying overseas items online.” wrote economists at Wells Fargo Securities in the July 15 Global Chartbook research note. Others are watching for a push out of the Aussie/U.1000 may be a top for the time being.75 percent. Dolan says a rally through the 1. “Inflation is moderate and the recovery in Australia is showing signs of slowing.” he says. but the gloom is evident nonetheless. dampening retail trade figures. especially in Australia’s major export markets in Asia. paying down debt and expressing persistent concern over the economy.75 percent. “A confluence of natural disasters and weather systems across Asia has been arguably more disruptive to Australian GDP growth than the global recession.” Anderson adds.” Dolan says of the AUD/USD pair’s congestion between 1.0400 and 1. when it hiked its cash rate target by 0.25 percent to 3.1500 zone.25 percent. the RBA has hiked rates six more times to bring the official rate to the current 4. leaving little in the way of upside potential. “At the May [RBA] meeting there was an indication of a pause in raising rates. “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 . “We have a neutral view for the Australian dollar. the disasters in Japan sapped demand for Australian exports to its primary trading partner. senior currency strategist at Westpac Institutional Bank adds. fiscal policy is now contractionary.9-percent unemployment and growth likely to pick up in the second half of 2011.GLOBAL MARKETS ON THE MONEY upbeat forecast of 2. pulled lower by the largest quarterly drop in exports since the height of the global recession in 2009. real GDP contracted at a 4. Sean Callow. and consumers are cautious in the face of rising living costs.com. has a more bearish Australian GDP pace of 1. On the upside.7-percent pace. and rate hikes that were priced in have been priced out.S. 2 it was leaving its overnight lending rate unchanged at 4. Societe Generale analysts had a more negative take on the Aussie currency. “Just above 1.” 8 Interest rates: Hike or ease? The Reserve Bank of Australia (RBA) has been actively tightening monetary policy since October 2009.” The RBA announced Aug. However.” Now market watchers are seeing the possibility of a move in the opposite direction. “The outlook for RBA rate hikes has faded as the non-resource sector of the Australian economy has softened. but whether all of Australia’s potential “good news” is priced into its currency.” Credit Suisse analysts summed it up as follows in their July 22 Global Economy Monthly Review: “Locally. Until this spring. Employment growth has moderated from the rampant hiring seen in 2010. dollar current consolidation. Aussie plays Wells Fargo head of currency strategy Nick Bennenbroek sees more of the same in terms of price action.” Roberts says.” The debate seems to be not whether Australia is relatively strong right now.8 percent. In their July 21 forex weekly research note. However.” they wrote. they indicated they will remain on the sidelines.

with underlying USD weakness and confidence in Asia’s resilience cushioning the pair despite a clear deterioration in Australia’s outlook.S.2200.0200 or below.” with a 1. which topped out above 1.27001. Dolan agrees the Aussie/Kiwi cross has trading potential.” Callow says.00 or lower (Figure 3). the bank wrote: “AUD/USD has spent very little time outside the broad 1. economy –– a likely ratings downgrade from S&P etc.2100-1. AUD/JPY for instance could slip to 81.0800 range since May. 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. In a July 19 AUD/USD Outlook. while the rare contrast of markets expecting the opposite trajectory for RBA rates vs.2800 zone as an “attractive selling opportunity.” Analysts at Westpac Institutional Bank also expressed concerns about the Aussie dollar.000 as his year-end target for Aussie/dollar. Reserve Bank of New Zealand suggests AUD/NZD can fall further. some analysts argue. “Contagion from Europe could easily knock AUD/USD to 1. Short AUD positions are currently attractive and we recommend short AUD/KRW (Korean won) positions and a calendar spread option trade.2500 by mid-to-late July (Figure 4). Opportunities against other currencies may be more attractive in the near future.02 and potentially towards parity.” The AUD/NZD pair. we see the range-break as more likely to the downside multi-week. citing the 1. perhaps as far as 1. had fallen below 1.S. 9 . “But given the troubles of the U. –– perhaps it’s better to play crosses short term.200 target in that cross rate. Given the risks from the U.0400-1.becomes further entrenched. with scope for 1. and Europe.3700 in early March.” Stacey pegged 1.

640 data points). A technical indicator is only as useful as the time frame over which it can be expected to work reliably and consistently. Louis Bacon. and also well below forecasts. perilously close to the boom-bust line of 50. the dreaded back-test. context does change. that’s not saying much. I often remind readers that institutional factors can always trump the fundamentals. The Euro rose. the market is behaving in a perverse manner.8. 37 years is not much at all (about 8. What’s the ordinary retail trader to do if the experts are puzzled? Worse. both traders’ funds are heavily in cash — 75 percent in the case of the Soros’ Quantum Fund. or 37 years. the Euro rose when it should have fallen.1. A real statistician would sneer at the paucity of data. Again.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. another top macro hedge fund manager.e. Case for the uptrending Euro Depending on the time frame you choose for your charts. Now is the time to consult a chart or two.. in July the German ZEW expectations index fell to a worse-than-expected 30-month low of -15. it “should” have fallen. For example. 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. the flash composite purchasing managers index for July fell from 53. you can make a case equally for the Euro to crash or the 10 August 2011 • CURRENCY TRADER . After taking losses in FX. since “all of FX history” should be defined as the era of floating rates that began in 1974. Since sovereign default was not an issue in either the 37-year or the 12-year time period. we lack a historic benchmark to consult. In statistical analysis of price developments. it could be argued that “all of FX history” should really start in January 1999 when the Euro came into existence. The only way to judge that is to see whether it worked reliably and consistently in the past — i.3 to 50. The Euro has demonstrated it doesn’t pay to bet against it except in the shortest of time frames. But here the ultimate shortcoming of technical analysis — time frame — jumps up to bite us on the nose. and today we have a unique set of conditions never seen before in all of FX history. But while people (traders) don’t change much. A few days later.140 daily data points). Actually. or a mere 12 years (2. In fact. shares a similar view.

It has also broken resistance formed by an Andrews pitchfork.6% 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 Euro has broken out above long-term (hand-drawn) resistance shown in Figure 2.35 1.15 50.60 1. for a total of 33 months out of 129.30 1.40 1.10 0.6% 38. Even in the current situation.05 1. The 2010 retracement was only a little more than 50 percent of the primary up move.35 38.30 1. Figure 1 shows in the years since the Euro bottomed in October 2000.05 1.40 1.50 1. But the longer-term time frames all support the idea of a persistently strong Euro.70 1. or about 30 percent of the time.45 1.65 1. In fact.25 1.30 1.60 1.00 0.0% Euro to shoot to the moon. it has spent only four prolonged periods under the 200-day moving average: four months in 2001.50 1.85 100.15 0. defined the uptrend.70 1. including policy paralysis.2% 1.45 23. 11 .” because bad economic data and stupid policy decisions.0% 1. slide right off the currency’s back.60 1.40 1.10 1.70 1.10 1. aside from the penetration of the channel extension in 2010 to today.50 1. The linear regression channel has accurately.85 100.35 23. and nine months in 2010. if roughly. Critics sometimes call it the “Teflon Euro.90 0.00 0.2% 1.8% 1.8% 1.20 1.95 0.0% 1.65 0. amid an all-but-certain Greek default and CURRENCY TRADER • August 2011 0. The market is madly in love with the concept of the Eurozone and its key symbol.20 1. 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. the Euro.0% 1.15 61.25 1.90 1.25 50. In short.05 0.0% 1.45 1.65 0. Source for all: Charts— Metastock. nine months in 2008-2009.80 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. 11 months in 2005-06. the market became besotted with the Euro after its first year.Barbara Rockefeller Currency Trader Mag August 2011 Fig 1: The Case for the Euro Rally 1 FIGURE 1: THE BULLISH VIEW 1.55 1.55 1.55 1.95 1.0% 61.20 1.

2% 23. This is a noticeably feeble downtrend. The new Fibonacci retracement shows the Euro has retraced more than 62 percent of the big down move — twice. 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 1.5695 by end-December this year.61 1. October 2010 • CURRENCY TRADER August 2011 • CURRENCY 12 .17 1.13 April May June July AugustSeptember November 2012 February Marc an existential crisis (will the Eurozone exist in five years?).48 1.27 1.8% 50. the Euro decisively broke below the up-sloping linear regression channel (gray) on May 6.34 1.57 1.05 61.60 1.25 1.25 1.51 1.31 1.40 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 1.28 1.20 1.37 1.15 1.23 1.39 1.38 1.0% 1.29 1. If past is prologue.53 1. The slope of a trend is how we judge its strength. the Euro should rise to 1.500 by the end of the year.65 100.41 1.45 1. A second linear regression (black) from the low in January to the high in May 2011.6% 0.10 1.26 1. This is not the picture of a currency headed for hell in a hand basket.50 1.44 1.42 1.58 1. 2011.50 1. and the down-sloping linear regression channel in Figure 3 lacks much slope. 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.24 1. The red line is a linear regression of the upmove from June to November 2010.35 1. the Euro should reach 1.33 1. transposed to the current low using the exact same slope and distance.32 1.43 1.16 1.54 1.21 1.22 1.19 1.55 1.0% 38.30 1. the Euro’s downtrend is mild.18 1.15 1.36 1.46 1.70 1.35 1. If this line is repeated. is also transposed to the current low.47 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 1.45 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.52 1.40 1.20 1.14 1.56 1. Figure 4 shows the robustness of the Euro in another way.30 1.5366 by the first week of November 2011.55 1. How can we make a technical case for the Euro to fall.59 1.60 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. In Figure 5.49 1.

53 1. For the Euro to recover fully from the latest break in the longterm uptrend. The 62-percent Fibonacci retracement falls at 1. the event risk favors the Euro.19 1.52 1.38 1.42 1.8% 100.47 1. the Euro has to break resistance at 1. Falling in love with a currency is not quite the same thing as falling in love with a position.52 1. To achieve those levels. If history repeats.27 1.6% 1.4578 (from July 4) and the more distant one is at 1. If trading has some of the elements of gambling.35 1.34 1.40 1.17 1.25 1.36 1.22 1.27 1.30 1.39 1.50 1.45 1.48 1.40 1.41 1. it may rally again as new arrangements are announced.24 38.3661.31 1.2450 by November this year.32 1.42 1.30 1.50 1. We can draw a strong resistance line and.20 1.38 1.23 1.47 1. it has to surpass the two previous highs (gold horizontal lines in Figure 6).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. 13 .46 1.44 1. the 20-day and 55-day moving averages are declining down. and the prices are sandwiched between them and the green 200-day moving average.21 1. Just as the Euro rallied after the EFSF was invented. The most recent is at 1. FIGURE 6: MORE ON THE DOWNSIDE 1.55 1.29 1.18 1.FIGURE 5: THE CASE FOR THE EURO DECLINE 1. get a range at the end of August between 1.37 1.3364.2450 by November.34 1.28 1.2% 50. In short. 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. 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.29 1.37 1.31 1.36 1.4410 on August 1. but traders can CURRENCY TRADER • October 2010 TRADER • August 2011 23.49 1.51 1. in that we need to apply probabilities to possible outcomes.41 1.26 1. the Euro “should” drop to 1.33 1.25 1.35 1.24 1.43 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 1.53 1.45 1.33 1.39 1. One of the causes of the Euro’s drop is recognition the EFSF is will need to be beefed up.54 1.28 1.49 1. the Euro has demonstrated over time that it doesn’t pay to bet against it except on the shortest of time frames.0% 61.4214 to 1.4578 (from May 4).32 1.0% Barbara Rockefeller Currency Trader Mag August 2011 Fig 5: The Case for the Euro Collpase 1 1.51 0.46 which was horizontal in late July.44 1. imagining a parallel support line.26 1.43 1.48 1.

S. all the legacy banknotes were burned to ashes. but that doesn’t mean a correct reading of the situation will change the outlook for the dollar. Other central banks.S. May 2011 Direction in FX is not a matter of fundamentals. July 2011 The unreal reality of real return and currency movement.’ best interests” causes havoc in dollar levels. Market failures and the future of the dollar Currency Trader. and “love” is not really an acceptable analytical term. The Euro is robust. to be sure. Traders are impressed. and is not really a rejection of the dollar. the Euro’s ability to surmount obstacles is based on a bewitched and besotted trader population. it’s a matter of customers. European officials are careful in speaking about the Euro. be excused for having a longlasting bias in favor of the Euro. The founders of the Eurozone would not tolerate talk of the conditions under which a country could leave. It’s a must-do attitude that vies with the U. a currency without a Treasury. Experiment continues The Eurozone is a grand experiment — a stateless state. either. The Eurozone and the Euro must survive because European leaders will it to survive. The strange story of intervention Currency Trader. the dollar’s long-term downtrend is an unavoidable symptom of being the “reserve currency. The Greek default is but a hiccup. Except in France. Besides. for a can-do skillset. It has nothing to do with the long-lasting bias against the dollar. But again. as is the case in the U. the Eurozone has fiscal principles and anti-inflation principles long-term investors like (especially those in Asia). It’s bold and brave.S. We lack anything in conventional economic or financial analysis to name it. and quite rightly. Traders forgive foot-in-mouth comments from officials when anything other than “a strong dollar is in the U. but not utterly silenced. routinely apply exchange rate forecasts in their monthly reports. But that’s what it is. By comparison. such as the German Bundesbank. The Euro thrives whether growth is rising or falling and whether interest rates are appropriate to economic conditions. 4 Related reading By Barbara Rockefeller: The dirty little secret of big-picture macro in FX Currency Trader. see p. It’s just a love affair. through thick and thin. It recovers from horrible policy errors that would fell a lesser currency. The Fed wouldn’t dare. the Washington circus over the debt ceiling — controlling the share of the government relative to GDP and balanced budget — is a disgrace. y For information on the author. 14 October 2010 • CURRENCY TRADER August 2011 • CURRENCY . March 2011 The “relationship” between the dollar and oil is widely misunderstood. June 2011 Blessing or curse? More than anything.ON THE MONEY The Euro recovers from horrible policy errors that fell a lesser currency. April 2011 The big intervention on behalf of the yen isn’t as unique as many market players think. Be careful what you wish for: The reserve currency dilemma Currency Trader.” The curious case of the prime customer Currency Trader.

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if not longer. Role The monetary union that emerges on the other side of the crisis will be different than the one that entered it. are products of innovation. fully grown and armored. and the explanation is evident on two levels. the European Stabilization Mechanism. three members have been effectively locked out of the capital markets. Europe really has no Plan B. The European Financial Stabilization Facility and its successor. It is not. on newsstands in September. 16 That the Eurozone is not an optimal currency zone and does not satisfactorily address some economic problem is. which meant low interest rates. quite frankly. European institutional capacity has grown during the crisis. Its first master is political and it did not arise as Athena did. many observers mistake this evolution with the demise of the experiment itself. European countries have been cooperating (though not always smoothly) since the 1950s on an increasing range of political. beside the point. but a few basic points have been overlooked. as well as some erosion of sovereignty. Europe’s monetary union is simply one of the most important experiments of our time.On THE MONEY ON the Money The Euro’s significance Despite all the talk of countries leaving — or being thrown out of — the EU. popping out of Zeus’ head. Can the countries whose wars against each other largely shaped the past millennium. Monetary union is evolving. Political nature The most fundamental point is what brought about this experiment. The first is the role of Europe in the 21st century and the second is a function of a costAugust 2011 • CURRENCY TRADER . which is possible when it is politically expedient. 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). which has bought covered bonds and sovereign bonds — something most would have thought unimaginable five years ago. 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. However. At its heart. social. 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. and this includes that of the European Central Bank (ECB). 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. Europe is evolving. Much has been said and written about these issues. This required increased coordination and cooperation (which lends itself to compromises and exchanging favors). and economic issues. except for very short-term borrowing.

You can plot trendlines for 49 markets on actual market performance. thereby reducing its debt burden and making its exports more competitive. In one direction lies integration. Until the early 1980s. 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. 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). is a Pacific power. but it appears that to leave the monetary union a country would have to leave the European Union. A failure of monetary union could weaken the larger integration efforts. it increasingly appears to have become a failure of the European Policy makers to contain the crises themselves. Greece has crashed because of austerity measures. This is the alpha and omega of so much commentary: Greece simply needs to devalue — full stop. The European elite have no alternative vision of a future than one of integration. and a devaluation of a new drachma would lead to a sovereign default. Europe is not. if Greece dropped out it could devalue its currency. 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. and Spain recorded negative year-end growth. this locus has shifted. On the opposite end. More trade now goes over the Pacific than the Atlantic. It would produce a banking crisis in Greece. Get your free copy of this invaluable trading tool today! http://offers. 17 . The data. along with profound economic and financial crises. Surely the elites in Europe recognize the 21st century is likely to be a Pacific Century. It would still have to service that debt. the northern Atlantic had been the center of the world economy for two centuries. The argument is. While contagion may have been the operative principle earlier in the European debt crises. rather than market averages. you will see at a glance how long-term trends can create profitable trading opportunities. of unemployment could spell trouble for countries that already have high levels of public debt. 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. Europe is on the edge of a significant demographic shock that will push it further in a diminutive direction. And beneath the economy lies political unwillingness to agree on a single solution for the peripheral region. Germany’s unemployment rate is lower today than it was before the crises started. How is the relatively small western peninsula of the Eurasian landmass going to be relevant in a Pacific Century? The U. mainly because of the short-term scheme and flexible time arrangements in the manufacturing sector. Greece’s debt is in Euros. As one might imagine. This has never happened. However. which includes European bank holdings of the public and private debt of different European countries. in the other lies marginalization and irrelevance. there is no Plan B. Let’s start with Greece. Economic growth has been uneven. Ireland has extended its 2010 contraction into 2011. Moreover. However. lawyers are debating the issue.benefit analysis.S. The employment situation looks equally bleak. Weak growth coupled with high levels CURRENCY TRADER • August 2011 Free charts! With Commodity Research Bureau’s long range charts. This isn’t the only challenge the European economy faces. Denmark’s recent decision to unilaterally impose border controls illustrate the already fragile conditions.com/charts Futures and options trading involves substantial risk of loss and may not be suitable for everyone.pricegroup.

even the shopkeepers rejected the new currency. There have not been many successful examples of a sovereign reintroducing a currency for the sole purpose of devaluing it. It is not a solution for Greece’s or Europe’s woes. keeping what may appear to be Lilliputians from eroding German competitiveness. on sale in September. if not more so: Should it exert political leadership commensurate with its financial prowess. some would add). It passed in France by only the smallest of margins. “Keep your friends close and your enemies closer. Even if Greece’s debt were to disappear overnight. Germany also was quite willing to finance peripheral European countries’ purchases of German goods. the risk premium for the remainder of the Eurozone would likely increase. Monetary union has effectively denied its members the ability to devalue. any competitive gain that devaluation would garner for Greece would quickly be eroded from the higher inflation. A default would wipe out Greece banks and the ECB itself would have to be recapitalized. When Ecuador tried something similar. Nor will they be pushed.europa. and to what end and at what cost? Greece or Germany leaving monetary union would be a failure of the European project. The challenge presented by the crisis for the periphery is clear. For example. Moreover.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. The full version of this article appears in the October issue of Active Trader magazine. As Sun Tzu instructs us.ec. the European elite are loath to jump into the abyss. While diversifying a growing part of its exports to China. but the challenge to Germany is just as stark. The move never would have been approved. 18 Nonetheless. would do to regain competitiveness lost though inflation and rising relative unit labor costs.eurostat. not just the periphery. A second-order impact of the failure of Greece and its banking system. along with very high inflation. August 2011 • CURRENCY TRADER . which is what from time to time they. German exposure to Greece is roughly the equivalent of 50 percent of German exports to Greece over the past decade. 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. if Greece left the union. y For information on the authors.eu) nomic contraction. Source: eurostat (http://epp. Social dislocation and political instability would likely result. Germany Perhaps Germany should leave the union before its taxpayers have to be tapped again.” Germany has done well as the first among equals in Europe. 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. These forces could jeopardize the firewall that has thus far protected Spain (and Italy. not diminish. judging by opinion polls. Germany has been the single biggest beneficiary of the Eurozone. There also would be severe knock-on effects outside of Greece. With no clear alternative. which its exit would entail. Officials will have to revisit these issues again when they acknowledge Ireland can no more re-enter the capital markets next year than Greece. Ironically. Most arguments appear to focus only on the first order of impact. aggravate concerns Ireland and Portugal would follow suit. Germany never had a referendum on giving up the mark in exchange for the Euro. see p. 4.


it has been in a choppy. For example. 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. regardless of direction. however.. 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. Because the raw CMI tends to fluctuate wildly. trading has been directional). Notice the CMI gives no information about whether the market has been moving up or down overall. make this ideal an elusive goal. they are typically very well adjusted to certain conditions and vulnerable to others. 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 is often smoothed with a moving average. This value is then multiplied by 100 to give us a nor20 . 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. The realities of trading. trading-range environment. malized value between zero and 100: CMI = ((ABS(C[0]-C[n]))/(H[n]-L[n]))*100 Where ABS = absolute value C[0] = 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. 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. it simply measures the market’s degree of choppiness.e.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. while a low CMI value implies the market has moved in one direction and then reversed (perhaps more than once) — that is.

Although the strategy does not use a hard stop-loss. Exit trades when the CMI moves above 50. 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. trend trade shown in green).01*(account balance)/(contract size * 14-day ATR) For example. and a 14-day ATR of 0. the trending component triggered. 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.01*100. 1. 2. 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. while the subsequent trend trade signaled when the CMI was rising. Exit trades when the CMI moves below 50. Range strategy rules: 1.uses a 60-period CMI smoothed with a 10-period simple moving average (SMA).000*0. 3. 3. 2. while the second one will tackle the trending problem. causing trades to be closed (if the change was unfavorable) or remain open (if the change leads to further profits). the exit rules adequately limit risk since moderate changes on the daily chart will cause the CMI to rise or fall significantly.000 account balance. 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. assuming a $100. 21 .0123. while the trending strategy assumes a higher CMI (reflecting a trendier environment) implies a continuation of the most recent 20-bar close-toclose move. $100. age true range (ATR): Lot Size = 0.81. The range-strategy trade was triggered after a decline in the Australian dollar/U. Soon after.000 contract size. or $81. Both strategies will exit positions when the CMI crosses the median line of 50.000. Figure 1 shows two sample trades from March 2011 (range trade shown in blue. 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. 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. the trade size would be: (0.S.000/(100. 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). 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. The first entry rule will tackle the range problem.0123)) = 0. which suggests uncertainty about whether the market is ranging or trending.

80% 3. it was not particularly deep. and the other drawdowns not particularly frequent.5 and 8 pips. Testing the system System results were comparable for the two currency pairs.024 days for the portfolio). which generally have Ulcer Index values above 9.59% 1.8 58% 2.56% 21.21 2. of trades Ulcer Index Avg.TRADING STRATEGIES TABLE 1: SYSTEM PERFORMANCE SUMMARY AUD/USD Avg. 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.63% - and the trade was subsequently exited when the CMI indicated an emerging range environment. 2000 to June 1.47% 8 Portfolio 15.81 66 8. annual profit Max.75% 21. using trading costs of 3.43% 1. Another interest characteristic was both strategies’ performance during choppy range periods. 1.33 2. Although the longest drawdown was quite prolonged (1.S.86 2.45 66 7. respectively.72% 1.11 132 7. limiting drawdowns despite generating relatively small profits during the range periods.21% 30. The strategy was tested on daily data in the AUD/USD pair and the New Zealand dollar/U. dollar (NZD/ USD) from Jan. Figure 2 shows both strategies worked together in ranging conditions. The low Ulcer Index (7.61 53% 1.5 years).5 NZD/USD 9. drawdown Reward/risk ratio Win % Profit factor No. FIGURE 2: COMPONENTS WORKING TOGETHER The range-trading and trend-trading components worked together. with a slight edge going to NZD/USD. 2011 (11.7 55% 2.86) for the portfolio suggests the strategy would be psychologically easier to trade than many other trend-following systems. Table 1 summarizes the system’s performance. Although the strategy failed to achieve large profits within rangSeptember 2010 • CURRENCY TRADER August 2011 • CURRENCY 22 . 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. risk per trade Trade costs (pips) 6.

it has potential to be applied to CURRENCY TRADER • October 2010 TRADER • August 2011 There were three losing years in the test period. 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. The two pairs’ results are fairly similar. underscoring the high reward the strategy generated in the long term.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. y Figure 3 shows the equity curves for the individual curFor information on the author. both on these pairs and sharply reduced. although the NZD/USD had slightly better statistics. but two of them were smaller than -1 percent. 4. although classic trend-folthe individual currencies were generally not concurrent. see p. Notice that although there were three losing years. Also. including higher profits and a lower Ulcer Index (refer to Table 1). Also. their drawdowns generally occurred at different times. The system’s annual returns were quite favorable (Figure 4). lowing systems almost always generate high profits on rapidly developing. rency pairs as well as the portfolio. highly directional markets (such as FIGURE 4: ANNUAL RETURNS in 2008). 23 . these results were achieved without any optimization. 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. Finally. 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. highlighting the solid overall returns FIGURE 3: EQUITY CURVES (especially for the portfolio). 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. others. The portfolio profit factor was notably high.

the biggest threat to Hong Kong comes not from any political repression or an economic squeeze. 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. As a simple truism. Moreover. which are occasionally quite high. As the Chinese yuan has been either pegged or managed against the USD since the 1997 return of the Crown Colony to China. but rather from clouds of pollution streaming southward from Guangzhou’s industries. Let’s take the Hong Kong dollar (HKD). Volatility The excess volatility readings. financial expertise.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. but it cannot fix both simultaneously. This is a currency that should have disappeared after the British returned the former crown colony to China in 1997. the long-term banking relationships between Hong Kong and Japan. SIMONS One of the reasons we should run the numbers on each and every currency we find is data analysis is the best — indeed. China’s financial center has been shifting slowly and surely to Shanghai. bluntly. The mainland was smart enough to. but Hong Kong still plays a role. The HKD has been managed within FIGURE 1: EXCESS VOLATILITY LEADS HKD’S SMALL CHANGES a very tight band against the U. However. know when to keep its mitts off. which means it either has to let its short-term interest rates swing about or it has to August 2011 • CURRENCY TRADER 24 . a country can fix its exchange rate or it can fix its shortterm interest rates. and a guide for how to manage a boisterous free-market economy in a very crowded place. the only — way of correcting all of those suppositions and misconceptions we have otherwise. Hong Kong can choose to fix its exchange rate. as we shall see. Ironically. lead (by three months on average) the very small moves allowed in the exchange rate and spike whenever speculation about a CNY revaluation increases. the cross rate between the CNY and HKD is of little interest. make the HKD/JPY crossrate far more critical than commonly recognized. some of which are a remnant of Japan’s glory days. as the booming city-state provided real value in terms of commercial contacts. It is just a tough place for people who like to breathe. dollar. but for some obvious political reasons did not.

and to the outflow of capital from the mainland from those. um.engage in frequent purchases or sales of USD to maintain the peg.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. and vice-versa. seeking to diversify their holdings. 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. 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. No one should be surprised the excess volatility readings spike whenever speculation increases regarding a revaluation of the CNY and fall otherwise. Because the currency itself is pegged. 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. the HKMA will shift its target band against the USD. is the excess volatility for the HKD. and it is. 25 . if any. we should expect its realized high-low-close volatility to be artificially low.9 and USD FRR6. Finally. 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. a measure that incorporates intraday price range as well as interday price change (Figure 1). 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. It also must contend with the large-scale inflows of capital from external sources. the U.00. much of which goes to pay exporters. the HKD weakens against the JPY. minus 1.S.: As the interest rate expectations gap steepens in favor of the HKD. This ratio.

ADVANCED CONCEPTS ON THE MONEY A country can fix its exchange rate or it can fix its short-term interest rates. prospective returns on assets often drive the flow of speculative funds into and out of an economy and therefore affect the currency. If we August 2011 • CURRENCY TRADER 26 .00. the HKD weakens against the JPY and vice-versa. and Hong Kong play only a minor role in the exchange rate. As we have seen in so many cases. We can measure the forward rate ratio between six and nine months for each currency. but it can’t fix both simultaneously.9 has led the exchange rate only modestly since May 2002 (Figure 2).S. FIGURE 4: CARRY AND STOCK MARKET PERFORMANCE green vertical line. Interest rate expectations One consequence of Hong Kong’s unusual situation is relative interest rate expectations between the U.S. What do we see if we shift the basis of comparison from the USD FRR6. the steeper the money market yield curve is and the more the market expects short-term interest rates to rise.9 to the JPY FRR6. which is the rate at which we can lock in borrowing for three months starting six months from now. As the interest rate expectations gap steepens in favor of the HKD. divided by the nine-month rate itself.9 exceeds 1. The JPY-HKD carry has a much stronger inverse relationship to the relative performance of Hong Kong and Japanese equities (bottom). Asset carries There is a weak. and inverse relationship between the USD-HKD carry return and the relative performance of Hong Kong and. irregular. the U.9? The weak and meandering relationship seen for the USD now becomes a much closer and more direct one (Figure 3). The difference between the HKD FRR6. 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. American equities (top).9 and USD FRR6. The more this FRR6.

Restated. 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. compare the carry return on borrowing USD and lending HKD to the relative performance of Hong Kong equities against American equities. As an aside. 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. A similar comparison between Hong Kong and Japan. life insurance firms and other investors who need longmaturity assets can place a great deal of money. Can we confirm this by taking a look at the relative performance of commercial property markets in the U. the argument 27 CURRENCY TRADER • August 2011 . we see a weak. Japan and Hong Kong? Real estate is less liquid than equities. 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. but it is one of the few places where pension funds.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.FIGURE 5: CARRY AND REAL ESTATE PERFORMANCE Except for the late-2008 global financial crisis. the more we should expect Hong Kong equities to outperform. irregular. 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. and inverse relationship (Figure 4)..

4. The Hong Kong dollar is full of exceptions: It is a managed currency with a peg set to the U. This is readily apparent in the fluctuations of the Hong Kong coupon yield curve since the global market low of March 2009 (Figure 6). real estate has been a moribund investment in Japan over both of its Lost Decades. and Japanese real estate (Figure 5). Once again.S. As property prices decline. and that is exactly how the famously free-market residents of Hong Kong would have it. 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. and not to the Chinese yuan. we can compare the performance of the currency carries to the relative performance of Hong Kong real estate to both U. 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. 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. Call it the inverse. 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). y For information on the author. in making this statement. This stands as a confirmation to the observation made in the equity cases.S. One observer recalls making such a statement about Japan during its real estate bubble of the 1980s. reverse carry trade if you will. yen are repatriated and the carry return from the yen into the Hong Kong dollar is pressured. see p. The U. and while there are more Japanese and no more Japan today. the Japanese yen as a legacy of Japan’s glory-days expansion into Asian banking. A note on the yield curve An exceptional case Although the shorter maturities are anchored. but the longer maturities tend to rise and fall quite a bit and make the Hong Kong bond market prone to bearish steepening plays. No one would design it this way. case is as disjointed in real estate as it was in equities.ADVANCED CONCEPTS ON THE MONEY As property prices decline.S. that you can make more people but you cannot make more real estate does not hold particularly well. just as it was in equities. and its principal financial links appear to be more a function of trades vs. the longer maturities tend to rise and fall quite a bit and make the Hong Kong bond market prone to bearish steepening plays. however. The shorter FIGURE 6: HONG KONG YIELD CURVE PRONE TO BEARISH STEEPENING maturities are anchored. yen are repatriated and the carry return from the yen into the Hong Kong dollar is pressured. The Japanese case presents an interesting difference: Not only is the relationship much stronger. 28 August 2011 • CURRENCY TRADER . We must note a major exception for the late-2008 global financial crisis. but the facts are what they are.

full page ad to come CURRENCY TRADER • August 2011 29 .

m. August CPI and PPI U. dollar index options (ICE) 19 Germany: July PPI 20 21 22 Hong Kong: July CPI 23 24 Mexico: Aug.: July CPI 7 Brazil: Q2 GDP.S. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.m.S.S. 15 CPI 25 26 27 28 U.moneyshow.S.S. 8:30 a. 8:30 a. 16-19 Location: Bally’s Resort.S. PMI: urchasing managers index P PPI: Producer price index Economic release (U. 16-17 Location: Paris. Las Vegas For more information: Go to www.S. 8:30 a.: July durable goods South Africa: July CPI Brazil: July employment report Mexico: Q2 GDP and July employment report South Africa: July 25 U.: Q2 GDP (second) Japan: July CPI Canada: July CPI 5 6 7 8 9 10 11 12 13 14 Brazil: July PPI U.m.S. 10:00 a.S. 8:30 a. 8:30 a.: July PPI India: July PPI Germany: Q2 GDP The information on this page is subject to change.S.com/events/Forex_Options_Expos. 17 UK: June employment report 18 Hong Kong: May-July employment report U. 8:30 a.S.: June trade balance Australia: July employment report U.moneyshow.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.m.S.com Event: The World MoneyShow Vancouver 2011 Date: Sept. 10:00 a.S. 22-24 Location: Caesars Palace. Las Vegas For more information: Go to www.tradersexpo. 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. 19-21 Location: Vancouver Convention Centre For more information: Go to www.: July employment report Brazil: July CPI Canada: July employment report Japan: Bank of Japan interest-rate announcement UK: July PPI LTD: August forex options.: 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. France For more information: Go to www. FND (first notice day): Also known as first intent day.: FOMC interest-rate announcement Mexico: July 31 CPI and July PPI Germany: July CPI Japan: July PPI U.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a. August U. August 1 2 3 4 U.com August 2011 • CURRENCY TRADER .: 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.: July ISM manufacturing report U.salonAT.com/vcms/?scode=013104 30 Event: The Futures & Forex Expo Las Vegas Date: Sept. 8:30 a.: July retail sales France: July CPI Hong Kong: Q2 GDP 29 France: July PPI U.m.m.: July personal income UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.m.S. 8:30 a. The clearinghouse also informs the seller.asp Event: International Traders Expo Date: Nov.m.m.m. 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.

6 110.39% / 16% 11.58 1.72 0. etc. 4.06% / 90% 1.8 4.13 -1. while a reading of 0% means the current reading is smaller than the previous readings.S.89 0.77 1. for the 20-day move.79 $ Under mgmt.0 50.87% / 79% 2.6 1.33 / 45% .3 10-day move / rank 1.10% 10.51% / 96% 0. See the legend for explanations of the different fields.7 19. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable).51% / 16% 4. 10.17% / 29% -0.2 0.97% / 29% 2.49% 5. 5. it shows how the most recent 20-day move compares to the past sixty 20-day moves.72% / 27% 1.85% / 28% 6.4 121.88 8.2 Trading advisor 1.02% / 78% -1.58 / 88% Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).09 -0.0 3.0 102.50 / 98% .35% / 20% -1. 8. CURRENCY TRADER • August 2011 31 . the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves. Price activity is based on pit-traded contracts. 20-day move: The percentage price move from the close 20 days ago to today’s close.94% / 75% 1.16% 1.2 29.7 102.) 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.37% 4.7 30. 4.3 3.9 2. LEGEND: Volume: 30-day average daily volume. 10-day move: The percentage price move from the close 10 days ago to today’s close. BarclayHedge Rankings: Top 10 currency traders managing more than $10 million (as of June 30 ranked by June 2011 return) June return 11.0 56.28% / 92% -0.9 6.6 5.4 1.) 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. (Curr. in thousands.05 -4.19% 2.22% / 63% 6.58 0.30% 35. 8.6 83.44 / 57% .97% / 82% 4. 3.1 4.9 109. direction. 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). for the 60-day move.43 2011 YTD return -24. 10.19% / 72% 0.04% / 92% -3. It is intended only to provide a brief synopsis of each market’s liquidity.90% 1.63% 2. 5.2 13. in thousands.3 25.2 2. and levels of momentum and volatility.03% / 78% 0.71% 10.0 66. 2.0 2.6 28. 3.64 -3.17 23.4 103.98% / 90% 2.71% / 100% 1. 60-day move: The percentage price move from the close 60 days ago to today’s close.02 1.71 / 95% .16% 2.9 OI 182.58 / 88% .06% / 16% 3. Does not reflect the performance of any single account.98% 3.4 10. (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.97% / 29% 60-day move / rank -3.17 17. 6.2 2.09% / 10% -0. Mgmt. The “% rank” fields for each time window (10-day moves.37% 10.34 / 78% .02% / 81% -1. For example.05% 1.8 117. 7.92% 0.27 / 37% .2 44. 9.72% 16. 2.27% / 96% 2.32% / 95% 3. 9.69 / 90% .70% / 70% 3.46% 4. 20-day moves.87% 20. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.1 13.8 48. Friedberg Comm.60% 5. The % rank is the percentile rank of the volatility ratio over the past 60 days.41 19.85% 1.6 109.33% / 9% 9. 7. The information does NOT constitute trade signals. 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.CURRENCY FUTURES SNAPSHOT as of July 29 Market EUR/USD AUD/USD GBP/USD JPY/USD CAD/USD CHF/USD MXN/USD U.27% / 96% Volatility ratio / rank . it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves.70% / 70% 20-day move / rank -0.0 5.0 880.64% 9.0 58. (millions) 78. 6.27 5. OI: 30-day open interest.26 / 38% .93 4.5 3. A reading of 100% means the current reading is larger than all the past readings. 1.

46% -3.869295 52-week low 0.22% -2.87 6.65% -2.70 5.51% -1.1518 0.67% -5.31% -2.48% -8.9406 0.27 3.33% -6.50 24.65055 1.30% 1.06% 0.00 23.1282 0.0338 0.833.65055 1.41% -2.19 1-month gain/loss 5.55% -2.44% -2.69 5.63583 0.370.24564 1.105.14% -2.11% -0.329.07 5.01% -8.63 Previous 5 2 8 1 13 15 3 7 9 12 4 6 10 11 14 32 August 2011 • CURRENCY TRADER . U.15919 1.169.80 4.80 20.869295 1-month gain/loss 0.22% -3.18% 0.75% -5.48% -6.55% 1.51 4.59% 52-week high 73.01% -0.53% -2.0314 1.103.313.988.26% 5.68% 5.05% -1.50 35.91% -2.23% -4.50% -0.830395 0.60 11.04% 0.54 10.032.059145 0.23% -6.10 17.68% 3.67% 1.155405 1.1662 1.30 5.6702 0. U.52% 3.60 14.9449 0.70% -4.91% -4.44% 13.71% -4.739.71% -2.910.41 5.15% -1.20 26.108.04% -13.02249 0.68% 52-week high 0.33% -5.24564 1.81% -1.039.50% -3.01% -7.24% -0.10 38.S. 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.67% -8.0114 0.22% -1.25 13.148965 0.55% -2.44% -3.916.80 3.23% 0.03% 4.0227 0.67% 3-month gain/loss -7.069.4842 0.372.469.295.033665 0.409.80 21.93% -3.541.64% -3.0312 0.193.29% -4.414.50 33.168.8823 0.830395 0.58% 1.04% 2.INTERNATIONAL MARKETS CURRENCIES (vs.7321 0.446485 0.432.24% 4.33% -8. dollar 0.304.93% -1.612.227.734.0305 0.21% 5.0366 1.813.0211 0.61% -2.60% -3.273.25% -3.51% -6.89% -7.891.059145 0.094.876.1555 5. 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 58.00 30.350.75% 1.90% -2.03470 0.60 52-week low 58.091685 0.470.00 18.129 0.2646 0.60 3.856.68 4.904.89 7.63 18.57% -4.61 10.6987 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.67% 3-month gain/loss -0.62% -13.40% -5.03510 0.47 1.84 5.00% -0.00% -2.67 31.128365 0.34% 1.036255 1.S.600.64% -0.60 22.46% 0.90 2.48% -0.31% -4.1338 0.21 8.60 6.5516 0.35% -6.67% -7.535 0.466.494.070.012805 0.597.17% 6-month gain loss -10.0966 0.1352 0.39 1.012805 0.28% -2.36% 2.90 3.23% 0.60% -1.S.70 17.03% 0.06 1.58 7.55% -4.75% -1.1466 1.76% -2.07% -5.047.12% 6-month gain/loss -0.

1 1 0.50% 2.75 56.9241 0.1 1.42% 52-week high 1.2947 1. 10) 0.25 2.42% 1.5 1 0.53% 1.25 0-0.25 4.36% -4.498445 0.10) Jan.5 (March 11) 0.96% 1.8643 80.365715 2.3858 1.89% -3.11% -7.25 (March 09) 0.96 1.1467 1.33% -0.26% -4.69% -0.04% -1.9038 139.25 (Nov 10) 0.75 1.968 0.69% 2.25 (July 11) 0.75 0.1 1.75 3 11.678095 1.25 1.75 6.26% -1.7515 1.46 88.16% -3.5 CURRENCY TRADER • August 2011 33 .4316 2.05% -1.5 (Nov.527 1.45% 0.35% 1.280 85.5 July 2010 0-0.8161 126.88% -8.57 78.82% -1.29% 9.31% 0.87% 1.4859 0.2257 1.725 0.75 1.59% 0.375 5.25 4.09% 1.5 (Dec.17608 1.885 1-month gain/loss 2.0186 1.885 52-week low 1.26% -0.86 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 0-0.60% -3.25 (Sept 10) 0.30% 1.161235 1.3103 106.83% -5.41% -0.9818 97.25 4.NON-U.5 0.47% 0.255835 1. 08) 0.5 3 1.6412 1.3746 1.0212 1.S.95 67.86% -0.35% 3.7507 0.72 74.42% -4.97% -1.884245 127.04% 0.1 1 0.5 0.91% -1.71% 2.5 5.82% -0.87% 0.5 1 0.544485 1.25 0.876405 97.5302 1.41% 2.1671 1.875 8 5.3842 1.07% -1.55% 0.18637 1.75 2.25 (July 11) 0.46% 6-month gain loss -0.75 (July 11) 0.75 2.5 (March 09) 0.0513 0.47% -8.030725 0.25 (March 11) 0. 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 1.85% 2.46% 12.86% -0.85% 3-month gain/loss -3.6642 122.25 82.43 0. 2011 0-0.5 3 10.280 89.625 6.454 1.04% 10.05% -0.55% 0.89% 3.1 (Oct.313235 112.28% -0.36% -7.47% 3.5 Last change 0.019685 1.47% -7.19 1.25 0.34% -0.71 67.63 1.22348 1.31% 4.49% 1.324995 1.125 (June 11) 0.80% -10.42% 2.2811 2.13% 2.5 12.62807 0.589 0.

9% 3. Rate: Unemployment rate.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.6% 0.3% -1. 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 -5.2% -1.1% 0.5% 7.1% 7.9% 1-year change 12.0% 3.4% 8. 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% 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.1% 3.1% 5.7% 7.2% 6.2% -4.3% 4. 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. 34 August 2011 • CURRENCY TRADER .0% 1. PACIFIC PPI AMERICAS EUROPE AFRICA ASIA and S.4% 9.1% 1.2% 6.1% -0.7% 2.4% 6.6% 2.1% 0.1% Change 0.1% 2.2% 1.7% 4.0% -0.2% 9.9% -0.2% 1-year change -0.7% -0. 1 LEGEND: Change: Change from previous report release.1% 0.6% 5.1% 2.7% 3.0% -0.9% 4.1% -0.1% 0.1% -0.4% 0.0% 8.6% 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% 0.6% 13.9% -0.3% 2.9% 1.2% 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.8% -0.8% -0.0% 0.7% 0.4% 2.1% 0.3% -0.3% 5.4% 90.2% 1-year change 9.9% -0.5% 4.1% -0.1% 0.4% 3.5% 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. NLT: No later than.7% 1.7% -0.8% 3.3% 8.2% 1.7% -0.2% 6.5% -0.1% 0.1% 0.2% 5.1% -0.0% 17.0% 0.6% 1-year change 9.0% -0. PACIFIC Argentina Canada France Germany UK S.2% 7.6% 2.5% 0.1% -0.7% 7.2% 5.1% 4.9% 4.9% -0.7% 11.INTERNATIONAL MARKETS GDP AMERICAS Argentina Brazil Canada France Germany UK S.2% 11. PACIFIC CPI Period Argentina June June June June June June June Q2 June June June June Brazil Canada France Germany UK S.2% 0.2% -3.

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