Strategies, analysis, and news for FX traders

January 2012 Volume 9, No. 1

FX winners and losers: 2012 outlook p. 6 The grim implications of the “dollar carry trade” p. 22 2011’s FX lessons for 2012 p. 12 Swinging with outside bars in the pound/dollar p. 18


Contributors .................................................4 Global Markets Slower global growth in 2012, but recession unlikely .......................................6
Eurozone remains key risk as a new year of forex trading unfolds. By Currency Trader Staff

Events .......................................................28
Conferences, seminars, and other events.

Currency Futures Snapshot ................. 29 Managed Money Review ....................... 29
Top-ranked managed money programs

On the Money............................................12 The curious events of 2011 — and what they mean for 2012
Several strange things happened in the markets during 2011. By examining them, we might be able to make some useful deductions regarding 2012. By Barbara Rockefeller

International Markets ............................ 30
Numbers from the global forex, stock, and interest-rate markets.

Forex Journal ...........................................33
Trading a triangle consolidation.

Trading Strategies Outside weeks in the British pound ....... 18
A potential longer-term swing opportunity emerges from the mostly haphazard performance after outside weeks in the pound/dollar pair. By Currency Trader Staff

Looking for an advertiser?
Click on the company name for a direct link to the ad in this month’s issue. eSignal FXCM Nadex

Advanced Concepts The long, awful life of the dollar carry trade...................................... 22
A failure to maintain the return on the dollar will inevitably lead to the end of its status as the world’s principal reserve currency. By Howard L. Simons

Global Economic Calendar ........................ 28
Important dates for currency traders.

Questions or comments?
Submit editorial queries or comments to
2 January 2012 • CURRENCY TRADER

4 January 2012 • CURRENCY TRADER . Rockefeller is the author of Technical Analysis for Dummies. and consultant at Citibank and other financial institutions. No. published in Japan in 1999. PO Box 487. 18 Contributing writers: Barbara Classified ad sales: Mark Seger seger@currencytradermag. Rockefeller is on the board of directors of a large European hedge fund. 2001). 22 2011’s FX lessons for 2012 p. Past performance does not guarantee future results. ad sales: Bob Dorman Contributing editor: Howard Simons FX winners and losers: 2012 outlook p.. trader. Volume 8. Copyright © 2011 TechInfo. Illinois 60047. All rights President: Phil Dorman pdorman@currencytradermag. Lake Zurich. Around the World (John Wiley & Sons. strategy or approach. 2011).CONTRIBUTORS PLAYING THE AUSSIE DOLLAR CONSOLIDATION P. Traders are advised to do their own research and testing to determine the validity of a trading idea.rts-forex. and news for FX traders A publication of Active Trader ® January 2012 Volume 9. 2000). and How to Invest Internationally. 24/7 Trading Around the Clock. 33 Strategies. and a strategist for Bianco Research. A book tentatively titled How to Trade FX is in the works. She has worked as a forecaster. Second Edition (Wiley. 12 Swinging with outside bars in the pound/dollar p. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. Marc Chandler. It is not meant to recommend. Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag. promote or in any way imply the effectiveness of any trading system. Inc. q Barbara Rockefeller (www. analysis. Trading and investing carry a high level of risk. 1 For all subscriber services: www. Issue 12. The Global Trader (John Wiley & q Howard Simons is president of Rosewood Trading Inc. 6 The grim implications of the “dollar carry trade” Publisher.currencytradermag. Inc. Currency Trader is published monthly by TechInfo. The information in Currency Trader magazine is intended for educational purposes is an international economist with a focus on foreign exchange. He writes and speaks frequently on a wide range of economic and financial market issues. and currently publishes two daily reports on foreign Managing editor: Molly Goad Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag.

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the prime one being the ongoing uncertainty surrounding the European sovereign-debt crisis. Some economists argue the Eurozone is already in a mild recession.S. albeit at something less than a full gallop. The worst-case scenario is for a disorderly breakup of the FIGURE 1: U. dollar made strong gains in late 2011. Fed will initiate a third round of quantitative easing. Still growing. economic recovery and whether or not the U.S. The major debates at the outset of the new year are whether that rally can be sustained. “The world economy will January 2012 • CURRENCY TRADER 6 .S. dollar index (DXY) rallied smartly in late 2011 — about 10 percent off its May lows into year-end.S. Elsewhere. Then there are the uncertainties surrounding the pace of the U. with the bulk of those gains occurring in the final two months of the year (Figure 1). most analysts seem to agree the economy will continue to move forward. a so-called “QE3” campaign. if the Euro will rebound. DOLLAR INDEX Eurozone — a lingering black cloud on the global horizon despite its relatively low probability. In the forex arena. but recession unlikely Eurozone remains key risk as a new year of forex trading unfolds. and how other currencies are likely to perform in 2012.S. the U. slowing growth and rising inflation in emerging market economies present another challenge to the global economy.GLOBAL MARKETS Slower global growth in 2012. which will likely have a spillover effect on its trading partners and ultimately slow global growth. Source: TradeStation At the global level. BY CURRENCY TRADER STAFF At the start of the new year. the global economy faces several challenges. the U. but… Driven by safe-haven buying.

Meanwhile. slower growth is forecast for China in 2012. managing director at BNY Mellon. with emerging economies growing at a much faster pace than developing economies.75 percent range in 2012. including South Korea and Singapore. excluding Japan. The market is impatient for some kind of resolution. Concerns Asia is growing too much. Portugal is in a severe downturn.8 percent. global economist at Wells Fargo.S. In it’s 2012 Global Economic Outlook. “What you are dealing with is politics.” Woolfolk says the top issue facing the global economy in 2012 is whether the Eurozone will emerge from the crisis as a political union or an economic union. for the year. after growing at a 7. “We are calling for Italy and Spain to be in recession. “By the end of February.7-percent recessionary reading in 2009. compared to a 1.” But as has been the case for the better part of the year.1 percent in 2010. There’s nothing on the horizon to disrupt that trend in the coming year. He forecasts a recession in the Eurozone at least through the first half of the year. “That’s the manufacturing base of the world right now. respectively. coming in at 2. we should have a good sense of [what’s to come]. following the earthquake. Meanwhile.” he notes. “Greece is in a depresCURRENCY TRADER • January 2012 sion. while Germany and France will continue to grow. and the Eurozone lag far behind. He adds the strength in the global economy this year will come from Asia. who forecasts global GDP in the 2.2 percent for 2012.” Sinai says.” Surveying global economies Moving around the globe. Allen Sinai. lurching from hope to renewed skepticism and back. for a very simple reason. but that could mean something closer to a 7-percent GDP pace. “By far the strongest growth will be coming out of emerging markets. too soon seem to 7 . and has had mixed reactions to the steps European politicians have announced thus far. down from 9.5-percent growth pace for developing economies. But they have to choose.” he says.” he says. According to the International Monetary Fund (IMF). Nomura estimates emerging economies grew at a 6. “The thought of some low-probability event next year causing Armageddon is fantasy.” says Decision Economics’ chief global economist Dr. “China is coming off an 11-percent pace [in recent years] — that decline sends ripples through Asia. down from last year’s 9-percent level.1 percent for 2011. “Asia is far stronger than any other part of the world.3 percent. the U.3-percent GDP forecast for 2012. Asia continues to post the strongest GDP growth. either. global economic output totaled 5. Nomura economists wrote. “We expect the Eurozone to enter recession and growth in the rest of the world to slow. he pegs the odds of a disorderly collapse of the Eurozone at less than 50 percent. but expects a decline to 3. they’ll see a return of capital to their markets.” And politics is always an uncertain game. all predictions of global economic health circle back to Europe. “The worse-case scenario is what we have right now — a lack of decision. following the -0.” he says. agrees the global economy will continue to grow in 2012. which Nomura estimates at 8. The other Asian powerhouse.5 percent and 1. Jay Bryson. Japan is expected to return to growth with a 2.3-percent pace in 2011.” says Michael Woolfolk. A disorderly breakup of the Euro represents a palpable risk to the global outlook: Europe’s leaders must act.” Woolfolk has a more pragmatic — and positive — take on the current situation. “I don’t know how patient markets will be.” he explains.2 percent in 2011.3 percent.5 to 2.” Woolfolk expects some sort of resolution over the next couple months. “But we don’t think it’s tail risk. “assuming Europe doesn’t blow up.keep on expanding in 2012.” Sinai also sees Europe as the main source of economic weakness.9 percent. “When they decide what they want to be when they grow up. India. Nomura forecasts China’s GDP growth in 2012 at 7.6-percent rate in 2011.” he says. There remains a two-track global economy. “That will determine the growth trajectory for the Eurozone.2 percent rate this year. “We could have a do-or-die moment where the European Central Bank president has his back against the wall and he either has to buy all outstanding Italian government debt or face a Eurozone blow-up.and tsunami-triggered recession that pushed 2011 GDP growth down to -0. but at a slower pace than 2011 and 2010.” Although Bryson says the European crisis remains the global economy’s biggest risk.” Bryson warns. markets have responded haphazardly to the various announcements coming out of Europe. is expected to remain steady at around 7. Nomura pegs 2011’s global economic growth at 3. Latin America also remains strong at an estimated 2011 pace of 4.9 percent.

Growth is slowing and inflation is slowing. should resolve.S.S. deficits. Inflation pressures have dissipated around the world. Nomura forecasts a 4-percent GDP pace for Australia in 2012 and a 3. and 4. or some countries simply not signing on for the fiscal plan. Despite its relative weakness.GLOBAL MARKETS have receded.1 percent for Mexico. 3. he sees a one-in-five risk the world economy will fall into recession in 2012.” Sinai says.S. A return to stability in Europe and risk appetite could mean a reversal in the recent dollar uptrend. 6. Source: TradeStation Driven by the ongoing uncertainty in the Eurozone. But that doesn’t seem to be a risk now.” Dollar reversal? Asian currencies.” he says. dollar has been riding higher amid a wave of risk aversion and safe-haven flows in recent months. It’s a mess and that makes it tough to forecast and quantify. Recent FIGURE 2: SINGAPORE DOLLAR economic data has come in stronger than expected. in part due to their roles as commodity exporters to Asia.” Regarding Europe. “Our country has too many problems — long-run growth problems. “Political and fiscal unity would be very difficult to achieve in a year and we don’t think that will happen in 2012. In 2011. and Sinai forecasts approximately 4-percent GDP growth for the region in 2012. including hopeful signals from the labor market.S.” he says. “The markets are good to the U. looks poised to surprise on the upside.3-percent pace for New Zealand. In general. the dollar could drop quite sharply.2 percent for Brazil.” January 2012 • CURRENCY TRADER 8 . “Ultimately.” Bryson says. the United States could offer up a surprise. and also because of their fairly strong fiscal pictures. including the SGD. “The global uncertainty has been good for the dollar and will continue to be good for the dollar in the first half. We have to be negative on the dollar. “We could see a break-up of some sort — some countries like Greece or Portugal voluntarily leaving. “The U. “That will help support the world economy. the currencies follow economic performance and economic conditions of countries. “There was a risk China would overheat.” says Greg Anderson. Sinai agrees safe-haven buying has been supporting the U. Sinai says the primary risk is for the continent to fall into a severe recession and slow other economies down.S. dollar. but if the negatives outside of the U. director of FX strategy at Citi.3 percent for Colombia. according to Nomura. but says other bearish factors will likely re-emerge longer term. and politics.” The Latin American region also remains a powerhouse. The Australian and New Zealand economies are also expected to remain strong in 2012. according to some analysts. estimated GDP was 8 percent for Argentina. in times of stress. a bright point globally is that food and oil prices have stabilized and come down in the past four to five months. the U. may fare well in 2012. “A few months ago some emerging economies were starting to overheat.

though not necessarily vs.S. dollar as a safe haven. “The creditworthiness of the dollar and the growth potential of the U. Many analysts see bullish potential for the FIGURE 4: CANADIAN DOLLAR Nick Bennenbroek. and Norway as safe havens down the road. “Interest-rate issues and super-low Fed rates as far as the eye can see do not make the dollar very attractive.advfn. dollar. Source: TradeStation CURRENCY TRADER • January 2012 9 . head of currency strategy at Wells Fargo. Canada. Anderson expects to see a slow shift away from the U. expects progress on the Europe debt crisis.” he says. economy are second-rate. the U. which should help broader financial markets stabilize.FIGURE 3: CHINESE YUAN/RENMINBI The Chinese currency could continue to appreciate this year. Source: www.S.” Anderson speculates the markets might look to Australia. However.S.

stability in Europe would support global equity markets in 2012. New Zealand dollar (NZD). “The uncertainty on how deep the downturn will be is a negative.075 for the KRW. “The bullish factors are tied primarily to U.78 for the BRL. Anderson points to the Canadian dollar as the currency to watch in 2012 (Figure 4). “There are an awful lot of decisions that need to be made right at the beginning of 2013 — those [Super Committee-triggered] budget cuts start in January 2013. Another potential driver in the second half of the year could be the For 2012. “If we have a tightly contested election over control of Congress and the White House — that kind of uncertainty could prove to be bearish for the dollar in the second half. chief currency strategist at Forex. the Bush tax cuts expire. which is a negative for the currency. long-run growth potential. Bennenbroek sees 12-month upside targets of FIGURE 5: TOUGH ROW TO HOE FOR EURO 96. Sinai forecasts 10-percent gains for the Singapore dollar (SGD) and the KRW vs.S. “The Canadian dollar could be one of the big winners in 2012.S. and 1. sell Euro. Other potential bullish forex plays include Asian currencies. Source: TradeStation Almost everyone agrees the Euro will have a rough 2012 (Figure 5). He cites the Canadian dollar (CAD). dollar.” Anderson says.S. and the debt ceiling will be triggered and the new administration won’t even be inaugurated yet. Brazilian real (BRL). Losers The Euro still faces major headwinds in 2012. However. “The Euro is a clear loser. “Buy Canada.” Sinai says. 82.S. growth.” Brian Dolan. the U. a broad array of currencies January 2012 • CURRENCY TRADER 10 . of all the central banks it is probably the closest to tightening policy.S.15 area. and the political uncertainty is also a negative. the Swedish and Norwegian krone and the Euro. he adds it is likely to perform better against currencies other than the U.” Currency winners According to Bennenbroek. It has excellent credit fundamentals. 1.” He forecasts Euro weakness vs. pointing to potential cross opportunities vs.” In light of historical correlations.” he says. We expect the Euro to decline vs.00 for the NZD. dollar (Figure 2). presidential election.” Sinai says. The region (plus Australia and ex-Japan) is bolstered by bullish economic fundamentals.00 for CAD. sell NOK. there appear to be more bearish than bullish factors on the horizon for the U.” he says.GLOBAL MARKETS Overall. which could help bolster certain currencies. “The Asian currencies are the most preferred. attractive interest rates. also highlights the Canadian dollar as a potential winner. buy Canada.S. Also.20-1. and stable politics. and Korean won (KRW) as currencies that have “shown sensitivity to equity market gains. The ECB will be lowering rates further. dollar in 2012 to the 1. and a 3-percent gain for the Chinese yuan/renminbi (Figure 3). which insulates it from Europe to a certain extent. the U.

the U. Callow says EUR/USD bears can “juice up their return” on long EUR/CHF positions by choosing long USD/CHF (targeting at least 1.” he says.22. but I’m sure there will be some surprise simple and you know when you’re wrong.93-0. “There’s Iran. What happens if the region. perhaps 1. What happens if we find out some Swiss franc vs.” Arab Spring moves into Saudi Arabia? North Korea has Of Swiss fundamentals.including the Singapore dollar. senior currency strategist at Westpac unknowable.S.” over-year in November). the Korean won. This looks like a good opportunity to sell Bryson says. and there’s little chance of resurDolan notes its unlikely significant trends will develop gent inflation given its sluggish economy and still very in the FX arena. Source: TradeStation CURRENCY TRADER • January 2012 11 . Also.”y months. I would “It’s hard to predict events like the Japan earthquake or be short the Swiss franc.30 achievable by mid-year. he says the SNB forecasts assume “It is a shorter-term environment. “People the market will drive the EUR/CHF rate higher in coming should remain short-term focused. they’re a lot closer to nuclear weapons that we thought? dollar. “I expect the floor to be raised to at least 1. “If the SNB leaves the floor at 1.20 or — worse — is unable to defend it.” he says.10). exit the trade. Figure 6) at the December policy change in world politics and markets.” back under 1. the Aussie Crystal ball and New Zealand dollars. Callow notes Switzerland is an unstable government — who knows how that will play already experiencing deflation (core CPI -1 percent yearout.” he says. and the Chinese yuan. in the 0.25 no later than the March policy review and see 1. then of course we would The Swiss franc may offer shorting opportunities. they are highly likely to raise the EUR/ CHF floor again.94 its oil fields.20 floor on Euro/ These events are a reminder of how quickly things can Swiss franc (EUR/CHF. Those who don’t want to be long Euro vs. “To choose just one currency. “If it does not. say.” Anderson notes. Aside from the uncertainties of relatively known quantities Another potential bearish play is the Swiss franc. “[The trade is] fairly the Arab Spring. with the dollar supported by bouts of safe-haven demand and probably the strongest growth profile in the G7. a policy that suddenly restored a FIGURE 6: SWISS MISS great deal of credibility to the SNB after its failure at ad hoc intervention in preceding years. National Bank (SNB) maintained its the markets. accord. there’s always the risk of the unknown and ing to Sean Callow. Institutional Bank. The Swiss events.05. meeting. strong currency. Euro but also potentially vs. which disappointed some and pulled the pair “There’s a whole host of risks in the geopolitical bucket. anything Does that mean F-16s are going to fly? If Iran shuts down can buy dollar/Swiss (USD/CHF). oil prices would spike.” he says.

and a potential slowdown in Since the 2008 crash.5 Europe is more likely to bring deflation than inflation in the coming year.2 single most important factor driving 1.2000 or parity. But over the past year or two.6 for the Euro to fall. possibly as low as 1.On THE MONEY ON the Money The curious events of 2011 — and what they mean for 2012 Several strange things happened in the markets during 2011.4 The European Central Bank (ECB) 1.S. will reassert themselves in the forex market.S. 1. simplistic or oversimplified as that 1. it’s interest rates (and FIGURE 1: EUR/USD. but the Euro did not fall. dollar (EUR/USD) pair.2 the dollar for the past three years. Figure 1 is a monthly chart of U.1 may seem when there have been so 1. The underlying 1. MONTHLY expected interest rates) that express the fundamentals in a usable way. sovereign debt — and the dollar index rose 10 percent over the next six weeks.S. After all.0 M J ASOND2004 J ASOND2005 J ASOND2006 J ASOND2007 J ASOND2008 J ASOND2009 J ASOND2010 J ASOND2011 J ASOND2012 J ASOND2013 J AS AM AM AM AM AM AM AM AM AM AM gridlock.1 many other shocking factors in the news. 1. on August 5. government 1. each big move in the EUR/USD pair can be linked to the China.3 of quantitative easing (QE). the market has been beleaguered by risk-on/risk-off sentiment that has little connection to either inflation or growth rates. engaging in quantitative easing or the ECB raising rates. including U. deep Eurogroup policy differences. At year-end 2011. in December 2011. The strange case of the rising Euro Analysts wonder when core fundamentals. This may say more about the respect traders decline to bestow upon ratings agencies and less about the countries being rated.S. For example. but it’s certainly an odd outcome. Quantitative easing has been the 1.3 it might also institute its own version 1. There really were fundamentals at work all along — we just weren’t viewing them with a long enough telescope. Traders prefer to look at interest rates and central bank Barbara Rockefeller policy bias than at growth and inflaCurrency Trader Mag Jan 2012 Figure 1: EUR/USD (Monthly) tion. we might be able to make some useful deductions regarding 2012. the consensus is 1. data — Reuters and eSignal the Euro/U.4 is more likely to reverse the ruinous Trichet 2011 rate hikes than stand pat. Moody’s placed 15 of 17 Eurozone members on credit watch for a possible downgrade. S&P downgraded U. The 2006 Euro rally was propelled at January 2012 • CURRENCY TRADER 12 .5 concept is that looming recession in 1. By examining them. such as inflation-adjusted relative growth rates. Source: Chart — Metastock. Earlier. BY BARBARA ROCKEFELLER 1. and institutional factors that logically should have impacted currencies one way instead caused the opposite effect.

en. To show the bias of the ECB. cutting rates by 25 basis points.html).75 percent in October 2008). most CURRENCY TRADER • January 2012 3500 2500 2000 3000 2500 500 000 2000 500 1500 0 1000 988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 3: Nikkei 225 Stock Index The Shanghai index bubble bears an eerie resemblance to the Nasdaq Rockefeller Currency Trader Mag Jan 2012 Figure 2: Shanghai Composite (Red) vs.75 percent and by July. 4. the Fed admitted it might expand the program — and in March 2011. 2011 that it had no plans to engage in further QE and rates would remain the same into mid-2013. NASDAQ (BLACK) 6500 6000 6500 6000 5500 5500 5000 5000 4500 4000 4500 3500 3000 4000 least in part by ECB rate hikes — two within four months. even as the European economy was starting to show signs of contraction (www. FIGURE 3: NIKKEI 225 STOCK INDEX 4100 4000 3900 3800 3700 3600 3500 3400 3300 3200 3100 3000 2900 2800 2700 2600 2500 2400 2300 2200 2100 2000 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 x10 19821983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Japan’s Nikkei stock index has failed to recover its high from more than two decades ago. And earlier in December. 15. The ECB is already conducting a form of QE as it buys the sovereign debt of peripheral countries.5 percent in December.S. it raised rates twice in 2011 (in April and July). 13 . and sure enough.25 percent. speculation was rife that another round was inevitable. new ECB chief Mario Draghi began reversing the previous regime’s rate hikes. The power of QE to influence the dollar may have ended when the Fed announced on Dec. By March 2007 the rate was 3. The variable rate refi operation took rates from 2 percent in March to 3. each big move in the EUR/USD rate can be linked directly either to the U. engaging in QE or QE2. including March 2006. it did.ecb. Since the 2008 crash. Nasdaq FIGURE 2: SHANGHAI COMPOSITE (RED) VS. in January 2011. Although the first round of QE ended in October 2010. or the ECB raising rates. In 2008 the ECB switched to the fixed-rate version and again rates were high (3.

2011. With the Fed avowedly on hold for another year and the ECB engaging in rate cuts and stealth quantitative easing. EUROTOP 300 (PURPLE. World equity markets are in bear market mode. but a warning all the same that central banks cannot control everything they seek to manage. In November. possibly to near 1. Just as the Nasdaq has not recovered its bubble high from more than a decade ago. Figure 2 shows the Shanghai Composite with the Nasdaq “tech wreck” bubble spike from a few years earlier.441 by Dec. FRANKFURT DAX (ORANGE) 6400 6300 6200 6100 6000 5900 5800 5700 5600 5500 5400 5300 5200 5100 5000 4900 4800 4700 4600 4500 4400 4300 4200 4100 4000 3900 3800 3700 3600 3500 3400 3300 3200 3100 3000 2900 2800 2700 2600 2500 2400 2300 2200 A S O N D 2007M A M J J A S O N D 2008M A M J J A S O N D 2009M A M J J A S O N D 2010M A M J J A S O N D 2011M A M J J A S O N D 2 Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 5: S&P 500 (Black) vs. the Greek Athens index failed to recover as much as the French CAC-40 or the German DAX index during 2010.0500. the Nikkei has failed to recover its high in more than two decades. The Nikkei fell from a peak of 38. but the Shanghai index bubble sure looks like the Nasdaq bubble. the ECB failed to mop up liquidity in the seven-day repo to the same amount as the bond purchases. The ECB endeavors to sterilize these purchases. 2011. and may have January 2012 • CURRENCY TRADER 14 . In April 2011 and again in late November. LEFT AXIS) 700 650 600 550 500 450 400 350 300 250 200 150 100 050 000 950 900 850 800 750 700 650 600 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1650 1600 1550 1500 1450 1400 1350 1300 1250 1200 1150 1100 1050 1000 950 900 850 800 750 700 650 600 2. What’s a bear market got to do with it? The S&P 500 outperformed most global stock indices in 2011. the shortfall was a little more than €9 billion — hardly at the Fed’s gigantic levels. In Figure 4. but is not always successful. meaning they are down 20 percent or more from peak levels (Figures 2-5). recently that of Spain and Italy. Eurotop 300 (Purple—Left Axis) From its peak to close on Dec. but it is still tracking (highly correlated) to the Eurotop 300 on a long-term basis. PARIS CAC (BLACK).ON THE MONEY Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 4: European Bear Markets Athens: Blue/Paris CAC: Black/Frankfurt DAX:Orange 770 760 750 740 730 720 710 700 690 680 670 660 650 640 630 620 610 600 590 580 570 560 550 540 530 520 510 500 490 480 470 460 450 440 430 420 410 400 390 380 370 360 350 340 330 320 310 300 290 280 270 FIGURE 4: EUROPEAN BEAR MARKETS — ATHENS (BLUE).989 to 8. 27. All bubbles do not look alike (see the Nikkei bubble and burst in Figure 3). FIGURE 5: S&P 500 (BLACK) VS. it’s difficult to see how the Euro can avoid a third lower low on the monthly chart. 23.957 at year-end 1. the Athens stock index was down 88 percent — and still falling.

0 85. and certainly under the U. Dollar Index (Blue—Left Axis) FIGURE 6: 10-YEAR NOTE INDEX (BLACK..5 90.S. highly correlated to) the Eurotop 300 over the longer time frame (Figure 5).0 81.5 86. falling yields are accompanied by a rising dollar — the safe-haven effect.0 83.5 81. we should assume Treasuries yields will CURRENCY TRADER • January 2012 110 55 105 50 100 45 95 40 90 35 85 30 80 25 75 20 70 15 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20 On a longer-term basis. Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 7: 10-year Note Index (Black) vs. U.0 90. equity markets outperform others in the coming year.5 84.S.5 91.Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 6: 10-year Note Index (Black) vs. Treasuries.5 85. 23. 2011.0 73.0 79. company earnings are quite good today but vulnerable to recession in Europe or a slowdown in China.0 88. well under the Shanghai historical norm (brief though it may be). most prominently the U. universally declining equity prices send investors fleeing for safe havens. The CAC fell 49 percent and the DAX 30 percent. dollar and U.S.5 71.0 86.5 87.0 72.5 79. DOLLAR INDEX INVERTED SCALE (BLUE. RIGHT AXIS) VS.0 80. a declining U. because of good earnings and an improving economy.0 82.5 83.0 71.5 77. the Athens index was down 88 percent and still falling. From the peak to the close on Dec. outperforming them in 2012. it is still tracking (i.0 70. Dollar Index Inverted Scale (Blue—Left Axis) 69. For example. LEFT AXIS) 125 70 120 65 115 60 “led” the other two down during 2011. benchmark of about 18.S. a falling tide lowers all boats in a crisis. Even if the U.0 84.0 89.5 75. 15 .5 80.5 88.0 78.5 70. Some analysts speak of the U.e.5 74.5 76.5 72. LEFT AXIS) 45 44 43 42 41 40 39 38 37 36 35 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 On the shorter time frame.S.S.0 2008 Mar prMay unJul Aug OctNov A J Sep Dec2009 MarAprMay Jul Aug OctNov Sep Dec2010 MarAprMay JunJul Aug OctNov Sep Dec2011 MarAprMay JunJul AugSep OctNov 2 Dec FIGURE 7: 10-YEAR NOTE INDEX (BLACK. But as we have learned to our sorrow.5 73. equity markets as “decoupling” from the rest of the equity world and. DOLLAR INDEX (BLUE. analysts say (assuming we want to accept earnings numbers from these companies) the price/ earnings ratio of the Shanghai index is around 10 to 11.5 82.0 75.S.5 78. Real equity market fundamentals don’t necessarily rule.0 76.0 74. Investors seek the highest real return — except when they are seeking the safest parking place without regard to return. If equity prices continue to drop. Here again we are faced with one of the FX market’s enduring perversities — normally a falling yield is detrimental to a currency.0 87. dollar index generally accompanies falling Treasury yields.5 89. RIGHT AXIS) VS.0 77. And while the S&P 500 outperformed most global stock indices in 2011.

the 50-percent 2000 retracement around $1.S. stock market providing support to the dollar.6% 38.ON THE MONEY drop. as the new year progresses and you hear some equity analyst saying it is the U. Something is going on. France) in great danger of losing their own triple-A ratings. whole world is about to be consumed by inflation. but we do know something about breakouts. it would fall hyperinflation with quantitative easing. 24). 4. For information on the author. but fixed-income investors seeking a safe haven regardless of yield. Gold is falling despite the obvious unsustainability of having a European bailout fund rated triple-A and backed by countries (notably. past few years. equities that may support the dollar.S. 23. see p. fall1250 ing gold prices imply a rising dollar. After all.80 (futures basis) and has fallen ever since. and gold has persistently dropped even as the ECB was buying Spanish and Italian bonds in December. on Aug. We cannot expect a single past corrective move to be copied sense.8% 100.565. despite the silliness of calling it “money” when its peak to its Dec. you can blow a raspberry. falling yields are accompanied by a rising dollar. and with the on the list is the application of Fibonacci retracement levels Bank Rockefeller of Japan having engaged in QE for years. or 34 the Fed and Bank of England are unleashing the dogs of percent. And yet. 1500 This is not a forecast. One idea is that gold is now being seen 3. the safe-haven effect.295 1600 1550 vs. What’s the role of gold? as just another risky commodity rather than the ultimate Gold has been a major source of entertainment over the safe haven.90 (March 17) to $681 (Oct. So. On the Figure 8: Gold Continuous Most-Traded Futures Contract gold chart. 15 low of $1. We want to 1450 1400 follow the gold price. The long time frame in Figure 6 shows how a falling yield brings with it a falling dollar index. gold fell it cannot be used for actual transactions. 450 S O N D 2007M A M J J A S O N D 2008M A M J J A S O N D 2009M A M J J A S O N D 2010 A M J J A S O N D 2011M A M J J A S O N D 2012M A M J you can’t use gold to buy shoes. 2011 gold peaked at $1.295. 16 January 2012 • CURRENCY TRADER . then the traditional role of gold as an antidote to government perfidy makes to $1. Now that the ECB is also engaging in quantitative exactly. 1850 1800 The retracement line that is closest to 1750 the one-time 34-percent correction in 1700 1650 2008 is the 50-percent version ($1.0% A 50-percent retracement of the gold rally would take price down to around $1. It’s not foreigners buying U. $1.0% 23. Gold’s appeal as a safe haven is underSo far the price of gold has fallen around 13 percent from standable. 1200 1150 We already have a forecast of a rising 1100 dollar because of risk aversion driving 1050 1000 those seeking a safe haven into dollars 950 900 and Treasuries. It’s probably not central bank activity.033. and the 1950 1900 62-percent retracement around $1. if not in a straight line (Figure 8). sovereign rating. 550 500 financially and economically. If it were to mimic the last correction. More central banks (China) are buying than talking about selling.45. High easing (even if it doesn’t name it as such).S.262. surely the Barbara Currency Trader Mag Jan 2012 once a breakout is confirmed. too.y 0.295.60. We are so accustomed 850 to the inverse relationship of gold and 800 750 the dollar that we fail to consider that 700 650 down-trending gold because of risk 600 aversion actually makes more sense.154. In 2008.0% 61.912.443. The peak came about two weeks after the S&P downgrade of the U. the 38-percent retracement FIGURE 8: THE GOLD BUG lands at about $1. because if the 1350 1300 correction continues to develop. If you believe from a peak of $1. or well below the trendline on Figure 8.262).2% 50. But look again — in the shorter time frame in Figure 7 with the dollar index inverted.

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are decidedly negative.TRADING STRATEGIES Outside weeks in the British pound A potential longer-term swing opportunity emerges from the mostly haphazard performance after outside weeks in the pound/dollar pair. The pair ended the period a little below where it started it. dollar pair (GBP/USD) in recent years. easy to identify. 13 years during which the pair staged a multi-year uptrend and a massive collapse that more than wiped it out in little more than 12 months. BY CURRENCY TRADER STAFF Basic price patterns such as outside bars (those with higher highs and lower lows than the bars preceding them) are attractive because they’re simple. at least through week 8. and offer compelling stories. the median (blue) and average (red) returns diverge dramatically. Below the numbers designating weeks 1-12 on the x-axis are percentages (“%>0”) January 2012 • CURRENCY TRADER October 2010 • CURRENCY 18 . Figure 1 shows the pound/dollar rate during the analysis period (1998 through 2011). Also included are the average and median 12-week returns for all weeks during the analysis period. but the regression line shows a slight upside bias for the entire span. Meanwhile. aside from a spike into positive territory at week 4. which barely deviates from the x-axis) are virtually flat for the 12-week horizon. The average returns flit above and below the breakeven line before moving higher at week 6. Outside weeks The 1998-2011 analysis period had a very minor upside bias. The returns are measured from the close of the outside week to the closes of each of the 12 subsequent weeks. thus failing to establish any clear trend or bias between the two periods. The following analysis looks at what has happened after outside weekly bars in the British pound/U. of course — it represents short-term uncertainty or discombobulation: Price has pushed both below the previous bar’s low and above its high. the overall median returns (gray line) exhibit the minor upside bias shown in Figure 1. While the overall average returns (the black line. Figure 2 shows the median and average returns in the 12 weeks after the 73 outside weeks (OW) that occurred during the analysis period. Getting back to the performance after the outside weeks.S. In the case of the outside bar. the median returns. the story is — absent any other contributing factors. The research revealed an FIGURE 1: ANALYSIS PERIOD unexpected application of outside weeks in this currency pair — as somewhat counterintuitive swing bars.

73 percent (at more in agreement (in direction. In this case. moves skewed the average returns higher. at which point price mostly moved higher (although the was higher at week 1 only 46. in the following charts. There are many ways to measure the placement of the close — relative to a previous price point.) Figure 3 shows the performance after the 38 instances of higher-closing outside weeks. The initial weeks are characterized by a bullish bias. the overall market performance will be represented by the pound/dollar’s median return line. Overall. in all subsequent charts. relative to the same week’s opening price. for clarity. and by week 8 the odds of a higher close are less than 39 percent. but the more representative FIGURE 2: ALL OUTSIDE WEEKS outcome at any interval was for a lower close after an outside week. and where it falls within the week’s range.indicating how often the close of that week was higher weeks. the close 5. Figure 4 presents the picture for lower-closing outside weeks — and it is a surprisingly faithful inversion of Figure 3: After the 35 instances of these CURRENCY TRADER • January 2012 The somewhat positive average performance after outside weeks is offset by the much more negative median returns. the odds of a higher close were below 50 per. and found little difference between the two Accordingly. Nonetheless. Aside median return remained well below the pair’s benchmark from week 4. FIGURE 3: OUTSIDE WEEKS WITH HIGHER CLOSES Initial minor bullishness after up-closing outside weeks disappears by week 8. the median return line turns sharply lower after week five and subsequently plunges into negative territory. if not magnitude) than week 8). the divergent median and average returns after outside bars suggest these returns are simply a more volatile representation of the pound/ dollar’s ultimate trendlessness during this time window. The stable uptrend of the average line through week 8 is somewhat misleading. and were as low as 39. 19 . in Figure 3.58 percent of the time. a higher close (HC) refers to an outside week that closed higher than the previous week. while a lower close (LC) refers to the opposite.returns). we measured the close relative to the previous week’s close and whether it was above or below the opening price. the pound/dollar moved mostly lower until week than the close of the outside week — for example. Higher and lower closes The most basic parameter to add to an outside week is the location of its closing price — a higher or lower close implying potential bullish or bearish sentiment. (Also. At all intervals except week 3 the odds of a The implication is clear: A smaller number of large up higher close were less than 50 percent. the median and average returns are here cent at all intervals.

the median down move is more than 0. a short trade could be initiated on the close of a downclosing outside bar.71 percent (10034. horrible adverse moves during the 2008 meltdown (not shown) represent the other side of the coin.29). Here. The median return at week 8 is above 1. Figure 6 shows an almost perfect (and entirely coincidental) example from 2010.2 percent.80 percent. Although the outside bars analyzed here don’t appear to be the source of any sustained or sizable moves (there was really no reason to expect they would be). with the odds of a lower close at 65. Figure 5 shows the price moves after going long five weeks after a down-closing outside week. which would be covered and reversed to the long side after five weeks.and eight-week inflection points are marked after the two consecutive down-closing outside weeks January 2012 • CURRENCY TRADER 20 . to take advantage of the upturn in returns shown in Figure 4. The subsequent upswing peaked one bar after the eight-week optimal exit suggested by Figure 5.65 percent. the five. with an associated probability of 67. Of course. For example. with more typical results perhaps represented in Figure 7. At week 5 after a down-closing outside bar. the pivots from bearish to bullish or vice versa — especially in the case if Figure 4 — suggest it might be worthwhile to look into the potential of a two-part weekly swing setup. Through week 8 the returns and/or odds of a higher close increase. and the low close of the down swing occurred five days later. FIGURE 5: WEEK 5 LONG ENTRY Bullishness prevails five to eight weeks after long entries five weeks after down-closing outside weeks.TRADING STRATEGIES FIGURE 4: OUTSIDE WEEKS WITH LOWER CLOSES Swinging both ways Bearishness after down-closing outside weeks reverses after five weeks. The pound/dollar pair moved lower immediately after the down-closing outside bar.

6. 4.5. 6. 2. which is much more representative of the numbers in this set than 28. The median is less susceptible than the mean to distortion from extreme. which is followed by a nine-week rally. 7. y Average and median The mean (or average) of a set of values is the sum of the values divided by the number of values in the set. For example. 3. and the mean of the remaining seven numbers is 4. FIGURE 7: RECENT SIGNALS More recent signals show the ideal setup from Figure 6 is not representative of the majority of cases.FIGURE 6: IDEAL SETUP in August. price moves significantly lower after the exit short/ go long bars (“5”). The implied long trades exited at the bars marked with 8s would have eked out modest gains while suffering large open-trade risk. 7. and 200 is 4. add them and divide by 10 to get the mean. the mean of 1. non-representative values. which is much more in line with the majority of numbers in the set. A final short signal on the down-closing outside bar in early November would have been covered and reversed in early December. These signals from 2010 represent a near-perfect setup: An initial short signal is reversed five weeks later by a long signal. If a set consists of 10 numbers. 2. 4. This time. The median of 1. 5. 5. A statistical weakness of the mean is that it can be distorted by exceptionally large or small values. although the outcome of that implied long position was still undecided in early January. CURRENCY TRADER • January 2012 21 . Take away 200. The median of a data set is its middle value (when the set has an odd number of elements) or the mean of the middle two elements (when the set has an even number of elements). and 200 is 28. The median can help gauge how representative a mean really is.5 ((4+5)/2). 3.5 (228/8).

awful life of the dollar carry trade.100% opening intermeeting “surprise” Avg. The carry trade returns that follow are based on January 2012 • CURRENCY TRADER 22 . Singapore.010% ping of BNP-Paribas.5 percent to 6 percent. IR Return cut in the target federal funds rate from 6. This was in the early days of the Federal Reserve’s drive toward near zero-percent interest rates. a little more than a week after the European Central Bank started the bailout machine going with a backstop0. awful life of the dollar carry trade A failure to maintain the return on the dollar will inevitably lead to the end of its status as the world’s principal reserve currency. Let’s update the original analysis with a different starting FIGURE 1: THREE-MONTH INTEREST RATE RETURNS ON SELECTED point — the Aug. the consequences of which have dominated many of the articles in this space in 2010 and 2011. August 2008).” Currency Trader. the Federal Reserve began its era of trying to solve any and all problems in financial markets with more money for less. It was at this point.001% 0. Those monetary policy episodes led to the primacy of the dollar carry trade in world finance. Taiwan.100% 0. and more than seven months before the first bout of quantitative easing. Standard Deviation Of Daily Return Average Daily Return The interest rate return on the USD has declined toward the zone populated by Asian exporters such as Hong Kong. BY HOWARD L. All of the analyses and comparisons in August 2008 used the January 1999 inception of the Euro as a starting point to have as long of a consistent history as possible.010% 0.001% Carry trade decomposition All currency trades can be broken into their interest-rate spread component and their spot rate components. a pre0.ADVANCED CONCEPTS TRADING STRATEGIES The long. IR Return Std. 2007 deciCURRENCIES AUGUST 2007 ONWARD sion by the FOMC to engage in its first rate-cutting move. The dollar carry trade — the borrowing and selling of the greenback to fund all manner of other purchases in lands where the printing presses run more slowly — required something of an argument in August 2008 (see “The short. ARS TRY BRL ZAR IDR INR MXN PHP COP AUD NZD PLN PEN NOK CLP GBP DKK SEK KRW EUR CZK CAD THB USD TWD HKD CHF SGD JPY 0. before the full force and fury of the 2008 financial panic. and Japan. 17. SIMONS The world can change a great deal after more than three years and make what once seemed impossible understated.

Taiwan. 1. and Taiwan. The correlation matrix has only a JPY has gained on the carry trade even as the interest rate component has been small handful of USD and TWD negative. Thailand. USD 0.0% 0.030% Average Daily Return Vs.4% 0. interest rate returns. ⎡⎛ HY ⎞ LYS ⎤ t Long Returnt = ⎢⎜1+ 3t ⎟ * ⎥ −1 ⎣⎝ 260 ⎠ LYSt−1 ⎦ LY Short Returnt = 3t 260 Four currencies (MXN. a sign they are using short-term interest rates 14. such as the ARS and TRY.0% less cycle on their semilogarith4.0% as a macroeconomic adjusting Total device.2% 1. the MXN.0% the correlation matrix between them became more uniform and -5. the current actually have negative spot-rate changes offset by high interest-rate spreads.0% interest rate returns. NetCarry Returnt = Long Returnt − Short Returnt What do these interest rate carry returns look like since The dollar carry August 2007? First.005% 0.5% 0. adopted and maintained a short-term interest rate policy way out of sync with the rest of the world. 3.FIGURE 2: RISK AND RETURN IN THREE-MONTH CARRY AGAINST USD AUGUST 2007 ONWARD 0. Dev.005% -0. The AUD stands out on the other side as having a very strong carry return from both its spot rate and interest-rate spread components.1% 0.035% 0.000% -0. BRL.5% Rate in lieu of currency fluctuations Spot 12.025% 0. -0. Korea. problems via printing money (see “How Eastern Europe and GBP shift into a negative carry return as the result of got carried away.010% 0. KRW.0% August 2007. and Japan. the Philippines. The AUD.010% -0. Figure 1 shows the interest rate return Now let’s examine the total return from the carry trade of on the USD has slipped down toward the zone populated by Asian exporters such as Hong Kong.2% 0. Singapore. 24-25) for the ARS.7% 0. both the absolute 9. which also has tried to solve Please note how four currencies.3% 0. -3. Finally. HKD. borrowing three-month USD and lending the proceeds in three-month LIBOR of the other 28 currencies (Figure 2). Return Std. 2. FIGURE 3: DECOMPOSING THE DOLLAR CARRY TRADE have unusually high standard AUGUST 2007 ONWARD deviations of returns on their 17. The Average Annual Spot Rate And Interest Rate Returns JPY COP AUD TWD CAD HKD MXN GBP PHP TRY ARS CLP THB PLN implications here are indisputable: The U. AUD. August 2009) is in this weak spot-rate returns.S. and GBP) shift into a negative carry return as the result of weak spot-rate returns.045% 0.5% mic axes to display: The world became a lower-rate place after 2.015% JPY PHP COP TRY CLP AUD NOK SGD CAD TWD MXN HKD KRW EUR GBP ARS CHF CZK SEK NZD PEN THB BRL DKK ZAR PLN IDR INR -0.0% borrowing at the three-month LIBOR rate of the lower-yielding currency (LY3) and lending at the three-month LIBOR rate of the higher-yielding currency (HY3).8% 0. Whereas large -8. which has benefited low-rate neighborhood. correlations as negative.4% 1. The returns on the higher-yielding currency are adjusted for the daily changes in the spot rate for the lower-yielding currency (LYS).5% more positive. only Switzerland.020% 0.040% 0. 1. and NZD showed negative correlations of Several of the strongest currencies on a carry trade basis. A 260-day trading year is used.5% interest rate returns and their standard deviations require one 7. Four Asian countries.3% 1.020% Avg. HKD. CURRENCY TRADER • January 2012 KRW CHF NZD PEN SGD DKK IDR NOK SEK ZAR CZK BRL EUR INR 23 . KRW.015% 0.1% Standard Deviation of Daily Returns 1.5% In addition to global shortterm interest rates shifting lower.9% 0.” Currency Trader.0% swaths of Table 1 (p.6% 0.

880 0.856 0.900 1.000 0.088 0.758 0.979 0.618 0.952 0.395 0.775 0.568 0.489 0.913 0.276 0.641 0.858 0.868 0.625 0.388 0.760 0.471 0.856 0.913 0.840 0.901 0.953 0.666 0.000 0.555 0.067 0.592 0.360 0.969 0.372 1.868 0.702 0.778 1.707 0.876 0.517 0.585 0.833 0.844 0.472 0.898 0.890 0.765 0.654 0.570 0.628 0.000 0.686 0.585 0.126 0.816 0.902 0.641 0.632 0.601 0.921 0.640 0.580 0.867 0.756 0.689 0.S.834 0.ADVANCED CONCEPTS ON THE MONEY TABLE 1: CORRELATION OF THREE-MONTH INTEREST RATE TOTAL RETURNS SINCE AUGUST 2007 ARS ARS AUD BRL CAD CHF CLP COP CZK DKK EUR GBP HKD IDR INR JPY KRW MXN NOK NZD PEN PHP PLN SEK SGD THB TRY TWD USD ZAR 1.113 0.741 0.891 0.695 0.195 0.960 0.771 0.450 0.446 0.665 0.231 0.258 0.057 0.916 0.595 0.676 0.903 0.596 0.450 0.945 0.813 0.351 0.350 0.524 0. (Table continues on p.000 0.739 1.672 0.000 0.374 0.000 0.612 0.883 0.613 0.807 0.550 0.204 0.) 24 January 2012 • CURRENCY TRADER .247 0.977 0.841 0.149 0.490 0.878 0.474 0.359 0.798 0.880 0.739 0.763 0.808 0.704 AUD BRL CAD CHF CLP COP CZK DKK EUR GBP HKD IDR INR Only a handful of USD and TWD correlations are negative.497 0.761 0.723 0.819 0.701 0.017 0.943 0.450 0.445 0.753 0.867 1.616 0.650 0.243 0.000 0.588 0.964 0.856 0.389 0.560 0.657 0.000 0.363 0.904 0.839 0.136 0.836 0.804 0.858 0.783 0.764 0.649 0.848 0.145 0.780 0.834 0.460 0.685 0.211 0.783 0.649 0.678 0.857 0.927 0.707 0.359 0.214 0.963 0.646 0.569 0.428 0.817 0.504 0.799 0.929 0.523 0.208 0.523 0.613 0.818 0.423 0.665 1. The implication is that the U.789 1.692 1.464 0.545 0.000 -0.307 0.571 0.734 0.218 0.666 0.650 0.607 1.904 0.852 0.765 0.003 0.729 1.130 0.490 0.778 0.890 0.828 0.000 0.835 0.357 0.732 0.486 0.373 0.671 0.687 0.832 0.522 0.772 0.624 0.894 0.639 0.871 0.589 0.834 0.000 0.885 0.592 0.644 0.289 0.412 0.185 0.781 1.420 0.408 0.781 0.736 0.776 0.662 0.000 0.179 0.466 0.716 0.475 0.454 0.608 0.405 0.099 -0.273 0.925 0.199 0.501 0.639 1.144 0.643 0.327 0.010 0.619 0.045 0.326 0.236 0.881 0.150 0.717 1.694 0.953 0.651 0.642 0.804 0.970 0.572 0.541 0.689 0.672 0.000 0.909 0. adopted and maintained a shortterm interest rate policy way out of sync with the rest of the world.000 0.503 0.888 0.273 0.382 0.355 0.441 0.612 0.170 0.334 0.946 0.719 0.884 0.957 0.969 0.407 0.572 0.690 0.693 0.702 0.882 0.700 0.912 0. 25.181 0.931 0.600 0.702 0.553 0.117 0.519 0.292 0.792 0.849 0.501 0.793 0.378 0.104 0.673 0.796 0.643 0.597 0.231 0.558 0.737 0.194 0.718 0.

562 0.039 0.207 1.294 0.625 0.399 0.143 0.884 0.000 0.620 0.379 0.646 0.000 Only a handful of USD and TWD correlations are negative.609 0.673 0.858 0.743 1.662 0.456 0.543 0.719 1.956 0.779 1.597 1.595 0.526 0.750 0.822 1.000 0.TABLE 1 (CONTINUED): CORRELATION OF THREE-MONTH INTEREST RATE TOTAL RETURNS SINCE AUGUST 2007 JPY ARS AUD BRL CAD CHF CLP COP CZK DKK EUR GBP HKD IDR INR JPY KRW MXN NOK NZD PEN PHP PLN SEK SGD THB TRY TWD USD ZAR 1.723 0.142 -0.609 0.115 0.785 0.000 0.803 0.337 KRW MXN NOK NZD PEN PHP PLN SEK SGD THB TRY TWD USD ZAR 1.230 0.536 0.951 0.113 0.738 0.837 -0.000 0.650 0.863 0.919 0.724 0.789 0.000 0.242 0.092 0.719 0.116 0.000 0.296 0.744 0.285 0.526 0.522 0.525 0.792 0.160 0.555 0.780 1.802 1. adopted and maintained a short-term interest rate policy way out of sync with the rest of the world. CURRENCY TRADER • January 2012 25 .660 0.706 0.069 0.883 0.679 0.705 1.610 0.000 0.949 0.192 -0.758 0.704 0.409 0.369 0.208 0.000 0.708 0.857 1.591 0.254 0.000 0.198 0.514 0.469 0.471 0.940 0.000 0. The implication is that the U.454 0.832 0.948 0.132 0.468 0.865 1.691 0.803 1.508 0.671 0.778 0.807 0.866 0.755 0.567 0.050 0.218 0.000 0.631 0.855 0.734 0.677 1.S.607 0.000 -0.000 0.000 0.713 0.

While the asserJanuary 2012 • CURRENCY TRADER 26 .0% Average Annual Return On Dollar Carry Trade 12.5% Average Annual Return On Spot Rate Component Of Dollar Carry Trade There is no evident relationship between equity markets and currency spot rates.5% 5.ADVANCED CONCEPTS ON THE MONEY FIGURE 4: WEAK POSITIVE CORRELATION BETWEEN DOLLAR CARRY AND EQUITIES 20% Average Annual Equity Market Return. Much of this deterioration is the result of the breakdown in the spot rate component. The assertion made so often in these pages. USD 15% 10% 5% 0% -5% -7.5% 0. the JPY has gained on the carry trade even as the interest rate component has been negative.5% -10% immensely from Australia’s role as a supplier to fast-growing East and South Asian economies. That has deteriorated into a weak positive correlation with a subunitary beta of 0. The interest rate spread component has a stronger but not very significant deterministic relationship to relative equity performance (Figure 6).0% 2.0% 7.5% 5. The formerly strongly positive correlation between global equity returns and the dollar carry trade has deteriorated. The logical rejoinder FIGURE 5: NO CORRELATION BETWEEN SPOT COMPONENT OF DOLLAR CARRY AND EQUITIES 20% Average Annual Equity Market Return. USD 15% 10% 5% 0% -5% -5. If we redisplay these carry trade returns as the average annual combination of their interest rate spreads and spot rate changes.0% -2.5% -5.0% -10% When we last looked at average annual global equity returns as a function of the return on the dollar carry trade.599 as opposed to the 1.5% 0. actually have negative spot-rate changes offset by high interest rate spreads (Figure 3). we see how several of the strongest currencies on a carry trade basis. This suggests global equity returns are less a function of the dollar carry trade now than they were previously. such as the ARS and TRY. stands out on the other side as having a very strong carry return from both its spot rate and interest rate spread components. we saw a marked positive correlation. equity markets are agnostic to any level of currency spot rates. is borne out in the absence of a defined relationship (Figure 5).0% -2.0% 2.0% 7.5% 10. Japan is an exception in the other direction.492 beta (ex Turkey and Argentina) we saw in August 2008 (Figure 4). 10.

but it has yet to rise in response to higher equity prices. noting how monetary policy 0% appeared to be set in response to equity market downturns and -5% in callous disregard to the global consequences of money-printing.0% 625 response to higher equity prices 600 6. including dollar weakness.5% 250 to a longer-term diminution of 0. 3. While three-month USD LIBOR fell in response to weaker equity prices as measured by the MSCI FIGURE 7: WORLD EQUITIES NO LONGER AFFECT U.5% the return on the world’s princi525 pal reserve currency will lead to 5.0% 500 the end of its use as such.5% 0. asset -10% bubbles outside of the U.0% countries hold it and maintain 325 1.5% as it had in 2004-2006 (Figure 7)..0% of American policymakers — 275 the cheap-dollar policy will lead 0. it has yet to rise in 7. FIGURE 6: WEAKLY POSITIVE CORRELATION BETWEEN RATE COMPONENT OF DOLLAR CARRY AND EQUITIES 20% 15% Implications 10% I excoriated the behavior of the 5% U.5% 425 has benefited immensely from 400 3. Treasury and the Federal Reserve in the August 2008 analysis.0% the dollar’s role as the reserve 375 2. It quite literally is being carried away. Nov-03 Jan-11 Jul-11 10.5% Three-Month USD LIBOR Led One Month Oct-04 Oct-05 Feb-09 Aug-09 May-02 May-03 Sep-06 Sep-07 Sep-08 Feb-10 Apr-04 Apr-05 Apr-06 Mar-07 Mar-08 Aug-10 Jan-99 Jun-99 Jun-00 Dec-99 Dec-00 Jun-01 Nov-01 Nov-02 For information on the author.0% 450 becomes available. deterministic relationship to relative equity performance. As the U. y -2. such are the dynamics of capital flows in a carry trade world. see p. The interest rate spread component has a stronger but not very significant The opposite has not been true.Average Annual Equity Market Return.0% MSCI World Free Index 27 .0% 2. 4.5% 475 now then once an alternative 4.5% currency over the years — other 350 2.5% 5.5% its value despite the best efforts 300 1.0% 225 relative American welfare in the global economy. 3-Mo. SHORT-TERM RATES World index. and the financing of economic growth Average Annual Return On Rate Component Of Dollar Carry Trade outside of the U.0% The unwillingness to maintain MS World Free 550 5.S.0% 7.S. as it did in 2004-2006. USD 575 6. USD tion that higher short-term interest rates in a country contribute to a relatively strong stock market performance might have seemed incongruous throughout much of history.S. via carry trade mechanisms.S. CURRENCY TRADER • January 2012 The three-month USD LIBOR fell in response to weaker equity prices. if not 4.S.

January 1 2 3 4 5 6 19 U.S. 8:30 a. FND (first notice day): Also known as first intent day.: January ISM manufacturing index Hong Kong: Q4 GDP U. Event: CBOE Risk Management Conference Date: March 11-13 Location: Hyatt Regency Coconut Point Resort and Spa at Bonita Springs.S.: December durable orders and leading indicators Brazil: December employment report South Africa: December PPI U.: December employment report Brazil: December CPI LTD: January forex options. 19-22 Location: Marriott Marquis Event: The International Traders Expo London Date: March 23-24 Location: Queen Elizabeth II Conference Centre. 10:00 a.: FOMC interest-rate announcement Australia: Q4 CPI Japan: Bank of Japan interest-rate announcement U.m.S.S. 9-12 Location: Gaylord Palms Resort For more information: Go to Event: The International Traders Expo New York Date: Feb.: January employment report LTD: February forex options.m.m. 8:30 a. Fla. New York For more information: Click here. 8:30 a.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.S.-Dec. 8:30 a.: Q4 employment cost index Germany: December employment report India: December CPI Japan: December employment report U.S. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.: December ISM manufacturing index Germany: November employment report Canada: November PPI U.: December retail sales France: December CPI Germany: December CPI UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.S.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.: Q4 GDP (advance) Japan: December CPI India: December PPI Japan: December PPI UK: December CPI U. dollar index options (ICE) 20 21 22 23 Australia: Q4 PPI 24 25 U. 8:30 a. dollar index options (ICE) February 1 2 3 The information on this page is subject to change.m. 28 January 2012 • CURRENCY TRADER . January U.S.m.: December PPI Canada: Bank of Canada interestrate announcement South Africa: December CPI UK: December employment report U.moneyshow. London For more information: Click here. employment report Canada: December CPI Germany: December PPI Hong Kong: December CPI 7 8 9 Brazil: December PPI 10 11 12 13 14 15 16 17 18 U.S. For more information: Go to www. February U. EVENTS Event: The World MoneyShow Orlando Date: Feb.: November trade balance UK: December PPI 26 27 28 29 30 U. The clearinghouse also informs the seller. 10:00 a.: December CPI and housing starts Australia: December employment report Hong Kong: Oct. 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.m. 8:30 a.S. 8:30 a.S.m.m.cboermc.m. PMI: Purchasing managers index PPI: Producer price index Economic release (U.m.S.S. FOMC: Federal Open Market Committee GDP: Gross domestic product ISM: Institute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract.m.: December personal income 31 U.S. 8:30 a.

78% 11. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.30% / 13% -0. in thousands. BarclayHedge Rankings: Top 10 currency traders managing more than $10 million (as of Nov.53% -0. in thousands.6 139. 2.4 18. 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).7 65.01% / 0% -2.48% 5.3 109.20 / 5% .93% / 48% -2. 9.01% / 50% -0.70% 2.9 165.0 592. 7. 30 Market EUR/USD AUD/USD GBP/USD CAD/USD JPY/USD MXN/USD CHF/USD U. The % rank is the percentile rank of the volatility ratio over the past 60 days.34% 5. For example.5 6.4 9.61% -9. 20-day moves.21 / 30% . 10.1 10-day move / rank -0.2 1.36% / 19% 2.21% 4.2 111. It is intended only to provide a brief synopsis of each market’s liquidity. for the 20-day move.6 Trading advisor 1. 20-day move: The percentage price move from the close 20 days ago to today’s close.11% 8. while a reading of 0% means the current reading is smaller than the previous readings.11 / 3% . Price activity is based on pit-traded contracts. OI: 30-day open interest.0 25.71% / 100% 0.61% 7.22% / 0% 20-day move / rank -3. it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves.0 4. 7. 5.64% / 75% -1.55% / 38% 1. CenturionFx Ltd (6X) Friedberg Comm. 60-day move: The percentage price move from the close 60 days ago to today’s close.85% / 0% 1.14 / 3% . 2.11 / 3% Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).8 6.) JCH Capital Mgmt (Global Currency) INSCH Capital Mgmt (Kintillo X3) ACT Currency Partner AG Floyd Cap'l Mgmt (Currency) Premium Currency (Currencies) CenturionFx Ltd Quaesta Capital AG (v-Pro Vol.05% -5.6 81.9 6. 5.8 15.92% / 29% 2.85% 0.6 23. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable).18% / 21% Volatility ratio / rank . See the legend for explanations of the different fields. 4. 6. 6.27% -2. 8.22% / 0% 1.09% / 11% 4.96% 2.84% / 44% -2.27% 2.21% 2.7 1.26 / 5% .6 21.10% 12.91% / 32% -0.35% 2. The information does NOT constitute trade signals.2 87.9 1.08% $ Under mgmt. 8.32 / 55% .97% 22.0 55.51% 0.93% / 54% 3.15% / 9% 1.08% / 84% -1.06 / 0% .8 101.0 55. Mgmt. (SHCFP) 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.33% 2.) Gedamo (FX Alpha) Four Capital (FX) ForexAtom Sagacity (HedgeFX100) Adantia (FX Aggressive) Capricorn Currency Mgmt (FXG10 EUR) Blue Fin Capital (Managed FX) GTA Group (FX Trading) MatadorFX (MFX1) Halion Capital (Conservative) Overlay Asset Mgmt.6 7.19% 5.1 108. The “% rank” fields for each time window (10-day moves.CURRENCY FUTURES SNAPSHOT as of Dec.20% 0. LEGEND: Volume: 30-day average daily volume. direction. Does not reflect the performance of any single account.7 17.) 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. the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves. 3. 9. A reading of 100% means the current reading is larger than all the past readings.38% 5.81% / 65% -2.4 20.7 35.18% / 3% -1.07% 0.79% 1. 1. 3.30 / 33% .25% 7.06% 2011 YTD return 62. dollar index NZD/USD E-Mini EUR/USD Sym EC AD BP CD JY MP SF DX NE ZE Exch CME CME CME CME CME CME CME ICE CME CME Vol 256.4 130. 10. etc.0 1. it shows how the most recent 20-day move compares to the past sixty 20-day moves.70% / 100% -1.8 65.99% 0.56% / 36% -0. (millions) 18. (Curr.27% 29.5 21. for the 60-day move.20% 1.19% / 45% -0. 30 ranked by November 2011 return) November return 22.22% / 100% -0.2 OI 245.27% 2.3 2.64% / 75% 60-day move / rank -2.2 30.96% 25.S.12 / 15% .38% / 100% 0.69% / 64% 0.87% 0.48% 1. 4.8 1.30% 17.83% 39.18% / 21% 7. 10-day move: The percentage price move from the close 10 days ago to today’s close. and levels of momentum and volatility.14% 4.8 3.19% -8.23% 2. CURRENCY TRADER • January 2012 29 .52% / 8% -3.

534.80 38.78% -4.62% -8.15% -1.071.391.0306 0.34% 1.7606 1.INTERNATIONAL MARKETS CURRENCIES (vs.80 24.00 11.93% -15.03510 0.169.77 20.727.273.35% 2.08% -0.50 33.58% 2.135.771.95 15.77% 2.51% -8.468.64% 0.23% -0.15741 0.965.55 56.70% -1.829.00 10.85% -19.0321 0.29% -4.40 36.S.895.4842 0.018465 1-month gain/loss 4.52% 1.9478 0.83% -3.62 14.53793 0. dollar 0.249.52% 0.793.693.0314 0.924.0336 0.507.995.75% 4. U.40 2.01569 0.00 14.26% -10.24% -0.77203 1.50% 4.5409 0.83% -3.75% -3.37% 6-month gain loss -1.66% 3.30 1.55% 9.08 8.29% 1.34% 2.38% -13.666.13% 6-month gain/loss -15.78% -3.01284 1.1227 1.564455 0.0117 1.92% 0.876.43% -12.9467 0.60 4.23% -1.79 13.695.70% -23.145735 0.63% -4.97% -9.27% -12.423.75% 0.05% -2.70 2.1505 0.50% 0.41 5.06% -20.2901 0.0181 Previous 16 14 17 9 15 13 8 6 7 2 3 1 5 4 12 11 10 GLOBAL STOCK INDICES Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Switzerland U.95% 52-week high 6.79% 3. DOLLAR) Rank Currency 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 South African rand Australian Dollar New Zealand dollar Canadian dollar Swedish krona Brazilian real Singapore dollar Great Britain pound Russian ruble Chinese yuan Taiwan dollar Hong Kong dollar Thai baht Japanese yen Swiss franc Euro Indian rupee Dec.87 10.93% 1.86 18. 28 5.518.36% 1.1427 0.30 1.10% 3-month gain/loss -2.06939 1.0226 52-week low 0.64% 1.644.72% -10.80 71.03201 0.600. U.59% -1.7207 0.30 16.19% 3.791.87 5.141.45% 0.69% 2.62% -7.18 4.1518 1.25% 0.0132 1.07% -1.37% 0.09% -6.13% 1.521.56% 5.25 15.51% 0.1288 0.10% 1.832 1.72% -3.50% 1.94% -9.23% 7.38% 6.S.30 2.26% -16.S.10 1.60 23.5288 0.90 Previous 3 8 6 1 13 14 10 15 4 7 2 12 5 9 11 30 January 2012 • CURRENCY TRADER .0366 0.52% 0.37% -2.728.59% 4.50 3.35% -3.27 4.1662 0.00 47.1166 0.739.21 8.76% 3.105.370.12857 0.64 5.86% -0.848.659.76% 52-week high 0.51% 0.1281 0.329.41 31.82% 2.65 0.170.60% -14.14% -1.10% -4.00 31.280.1578 0.032995 0.115.8797 1.80 52-week low 4.52% -2.68% 0.50% 0. 28 price vs.85 1-month gain/loss 6.20 28.6702 0.06 7.77 4.031835 0.1028 0.67 3.76% 0.069.891.24% -1.18% -1.3779 1.306765 0.98021 0.50% -1.135.06% 2. UK Mexico Hong Kong France Japan Italy Brazil Canada South Africa Germany Australia Singapore India Index Swiss Market S&P 500 FTSE 100 IPC Hang Seng CAC 40 Nikkei 225 FTSE MIB Bovespa S&P/TSX composite FTSE/JSE All Share Xetra Dax All ordinaries Straits Times BSE 30 Dec.059 0.664.796.23% 0.0269 1.77328 0.58 6.64% 0.39% -1.59% 2.67% 1.72% 3-month gain/loss 6.29% 2.

61% 0.64% 2. 2010 0-0.5 Last change 0.835285 2.43% 12.39% -5.462945 0.59604 0.1 (Oct 10) 0.25 2.355 1.25 1.35 1.58% -2.4806 1.0246 0.92% 4.00% -5.3746 105.46 67.1778 0.15% -13.5 1 0.125 (June 11) 0.5 11 3.53% 1.14% 4.76% -2.97 1.0135 1.25 0.25 0-0.88815 88.72 56.75 3 10.5 (Nov 11) 0.07% -3.83% -3.26% -6.72% 5.19% 1.25 3.16% -7.20% 2.45% 2.25 4.77% -11.1 1.68% 8.04% 0.625 6.84% 1.S. 10) June 2011 0-0.5 CURRENCY TRADER • January 2012 31 .96% -1.25 (Dec 11) 0.15% 6-month gain loss 9.15% -0.25 (Aug 11) 0.0612 139.23% 12.1 1 0.5367 1.93% 2.33315 1.9038 2.11% 4.5 1 0.75 7.036195 121.12% 4.28658 1-month gain/loss 18.42925 1.1 1 0.3 101.82% 0.54029 1.5585 1.0186 0.875 8.4228 52-week low 1.5997 1.09% 6.87% 1.5 (March 11) 0.5585 0.83% -6.25 (Dec 11) 0.35% -3.99% -3.5 1.NON-U.7 1.462945 1.88% 1. 28 1.7477 72.95 1.19 1.25 (June 11) 0.8282 1.63 1.24 1.41% -1.09% -3.4316 1.19% 4.2354 82.71% 4.6066 72.25 0-0.5 (March 09) 0.3569 1.5 5.5 5.89% -1.25 0-0.68% 0.60% 2.79 122.5 (Nov.62% 3-month gain/loss 4.12% -1.75 2.023865 0.31 101.5 1 0-0.25 (Sept 10) 0.12 60.88815 76.9749 89.31347 83.875 1.25 5.25 (Oct 11) 0.8 1.8297 2.82219 1.20% 6.6354 0.5 (Dec 08) 0-0.35% -1.36% 52-week high 1.2846 Previous 8 14 20 21 10 16 4 18 12 3 9 19 17 7 1 15 6 2 13 11 5 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 0-0.85% -6.25 1.04% -3.2811 1.86 1.77% -5.5302 0.16% 20.5 Dec.77% -7.04% 0.9708 117.84% -6.40% 1.26% -1.1778 0.63 1.1692 1.94979 79.78% 0.25 4.15% 2.090975 1.6373 1.53% 9.83% -5.73% -2.75 2. 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 Euro / Franc Aussie $ / Franc Aussie $ / Yen New Zeal $ / Yen Aussie $ / Real Canada $ / Yen Pound / Franc Aussie $ / Canada $ Pound / Yen Canada $ / Real Aussie $ / New Zeal $ Franc / Yen Euro / Yen Pound / Canada $ Yen / Real Euro / Pound Euro / Real Pound / Aussie $ Franc / Canada $ Euro / Canada $ Euro / Aussie $ Symbol EUR/CHF AUD/CHF AUD/JPY NZD/JPY AUD/BRL CAD/JPY GBP/CHF AUD/CAD GBP/JPY CAD/BRL AUD/NZD CHF/JPY EUR/JPY GBP/CAD JPY/BRL EUR/GBP EUR/BRL GBP/AUD CHF/CAD EUR/CAD EUR/AUD Dec.25 4.5 12.

4% 9.2% -0.6% 1.1% 2. Nov. PACIFIC Unemployment AMERICAS Period 11/21 12/22 12/2 12/1 11/30 12/14 Nov.-Nov. Nov. Nov. PACIFIC PPI AMERICAS EUROPE AFRICA ASIA and S. Nov.3% -0.1% 0.4% 4.3% 0.2% 0.3% 0. Nov. Africa Australia Hong Kong India Japan Singapore Period Nov.3% 5.5% 0.3% 12/8 12/19 12/28 10/31 Rate -0.4% 4. Nov. Nov.3% 1.4% 0.9% 2.1% 1-year change 2/22 1/26 1/6 3/1 1/3 1/18 0.7% 1.0% 0.5% 5.5% 1-year change 9.1% 10.2% 0.5% 2. Q3 Q3 Nov.6% 0.1% 2. Nov.0% 14.1% -1.4% 8. Africa Australia Hong Kong India Japan Singapore Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore Period Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Release date 12/16 12/6 11/30 12/23 11/15 12/22 11/29 12/7 11/11 11/30 11/14 11/25 Change -5.4% 0.2% -0.6% 5.4% 2.0% 1.5% 3.0% 0.3% 0. Brazil Canada France Germany UK S.2% 5. Release date 12/16 11/30 12/23 12/20 12/9 12/15 10/24 12/13 12/14 12/12 12/29 Change 0.3% 0. Q3 Nov.3% -0. Q3 Release date 7.1% 0.1% Next release 3/9 3/6 3/2 3/28 2/15 3/27 2/28 3/7 2/1 2/29 2/13 2/24 EUROPE AFRICA ASIA and S.2% 0.0% 3.4% 10.1% 0.6% 9.8% 6.5% 6.1% 0.6% 6. Nov.5% 5.0% 10.1% 1.1% 4. Rate: Unemployment rate.5% -0.6% 5.5% 2. 30 LEGEND: Change: Change from previous report release.3% 3. Sept.2% 5.2% 0. Nov.1% 0.INTERNATIONAL MARKETS GDP AMERICAS Argentina Brazil Canada France Germany UK S.6% 0.7% 4.6% 2.9% Next release 1/13 1/5 1/31 1/20 1/13 1/26 1/23 3/13 1/16 1/16 1/27 As of Dec.0% 1-year change 16.6% 0. Nov.9% 3.4% 1-year change 12.7% Next release 1/13 1/9 1/20 1/12 1/12 1/16 1/18 1/25 1/20 1/31 1/27 1/25 AMERICAS EUROPE AFRICA ASIA and S.7% -0. Africa Australia Hong Kong India Japan Singapore Release date 12/16 12/8 12/20 12/13 12/9 12/13 12/14 10/26 12/20 12/30 12/28 12/23 Change 0. 32 January 2012 • CURRENCY TRADER .5% 1.1% 0. Oct.9% -0.5% -0.2% 7. NLT: No later than.7% 9.8% 1. Nov.7% 5.0% -0.0% Change -0.5% 6.1% 3.1% 2.6% 0.2% -0. Nov. PACIFIC CPI Period Argentina Nov.1% 0.5% 0.6% -0.7% 9. Nov.8% 6.7% 11.4% 5.2% 0.6% 8.3% 16.1% -0.1% Next release 2/22 12/22 12/2 12/1 1/3 12/14 1/19 1/19 1/31 1/31 EUROPE ASIA and S. PACIFIC Argentina Canada France Germany UK S. Nov. Nov.

S.) Initial target: . Fortunately.0099 point -0.00 LOL -.0209. Outcome: This trade spent virtually no time in the money. anticipating another swing down toward the up-sloping lower trendline. the loss was fairly small as the position was initiated relatively close to the pattern’s upper boundary. the pair pulled back sharply. price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. Entry: Short the Australian dollar/U.FOREX TRADE JOURNAL Trading a triangle consolidation.0099 Trade length Legend — IRR: initial reward/risk ratio (initial target amount/initial stop amount). (Requiring a close above this threshold is intended to protect against an intraday penetration of the boundary that is followed by a reversal back within the pattern. 30 and propelling price even higher in the first days of the new year. 2011. dollar pair (AUD/USD) at 1. The rebound to the entry limit level was simply the first swing of an up move that pushed the pair out of the top of the triangle. Reason for trade/setup: The Aussie/dollar pair has formed a large triangular consolidation dating back to October (see daily chart inset). TRADE Date: Thursday. initial (pre-trade) reward-risk ratios are conjectural by nature. After hitting 1. However. Initial stop: A daily close above the consolidation pattern’s upper trendline. a short position was entered when price rebounded to 1. 29. Source: TradeStation RESULT Exit: 1. TRADE SUMMARY Date 12/29/11 Currency pair AUD/USD Entry price 1. MTM: marked-to-market — the open trade profit or loss at a given point in time. stopping the trade out on Dec. LOP: largest open profit (maximum available profit during lifetime of trade).97% % LOP 0. which is a little above the mid-December low. LOL: largest open loss (maximum potential loss during life of trade). As a result. Dec.0110.0099. because individual trades are dictated by immediate circumstances. y Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. Profit/loss: -.9870. CURRENCY TRADER • January 2012 33 . with the latest upswing off the mid-December lows taking price to within a few ticks of the down-sloping upper trendline connecting the late-October and early December highs (blue lines in both charts). 28.0209 Date 12/30/11 P/L -.0110.0200 on Dec.0110 Initial stop - Initial target - IRR - Exit 1.

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