Economic roadblocks for the Yen p.

Trading the Asian

session’s predictable nature p. 18

Time-adjusting intraday
range and volume data p. 22

Rough seas ahead

for dollar, Euro? p. 12

The effects of
British pound devaluation p. 26
 contents

Contributors....................................................... 4 Advanced Strategies

No man is an island, but the UK is ........... 26

Global Markets Has the UK benefited from its competitive

The yen: A drive to 1995? ........................6 devaluation of the pound?

The yen has managed to hold its own — and By Howard L. Simons

then some — vs. the dollar in recent years, but

there may be a cap to this bullishness. Currency Futures Snapshot................. 30

By Currency Trader Staff

International Markets............................. 32

On the Money Numbers from the global forex, stock, and

A season of FX discontent......................... 12 interest-rate markets.

The opposing viewpoints of the Fed and the

ECB represent a serious issue that will have a Global Economic Calendar......................... 35

huge effect on the dollar and the Euro. Important dates for currency traders.

By Barbara Rockefeller
Events . ......................................................36

Trading Strategies Conferences, seminars, and other events.

Asian pattern, European trade................... 18

It might be difficult to trade non-Asian curren- Key Concepts.............................................36

cies during the Asian forex session, but one of

this period’s tendencies can set up a trade for

Looking for an
the European session.
advertiser? 
By Currency Trader Staff
Click on the company name for a direct

link to the ad in this month’s issue.

Time-adjusted range and volume.............. 22
Adjusting intraday data to the time of day can
dbFX
highlight a market’s unique characteristics and

trade potential. eSignal

By Caspar Marney
The Futures & Forex Expo

FXCM

Paris Trading Show

Questions or comments?
Submit editorial queries or comments to
webmaster@currencytradermag.com.

 August 2010 • CURRENCY TRADER

 contributors

q Howard Simons is president of Rosewood

Trading Inc. and a strategist for Bianco Research.
He writes and speaks frequently on a wide
A publication of Active Trader ® range of economic and financial market issues.

For all subscriber services:

www.currencytradermag.com
q Barbara Rockefeller (www.rts-forex.com) is an inter-
national economist with a focus on foreign exchange. She
Editor-in-chief: Mark Etzkorn has worked as a forecaster, trader, and consultant at Citibank

metzkorn@currencytradermag.com
and other financial institutions, and currently publishes two
daily reports on foreign exchange. Rockefeller is the author of
Technical Analysis for Dummies (For Dummies, 2004), 24/7 Trading
Managing editor: Molly Goad
Around the Clock, Around the World (John Wiley & Sons, 2000),
mgoad@currencytradermag.com
The Global Trader (John Wiley & Sons, 2001), and How to Invest
Internationally, published in Japan in 1999. A book tentatively
Contributing editor:
titled How to Trade FX is in the works. Rockefeller is on the
Howard Simons
board of directors of a large European hedge fund.

Contributing writers: q Daniel Fernandez is an active trader with

Barbara Rockefeller, Marc Chandler, a strong interest in calculus, statistics, and eco-
Chris Peters nomics who has been focusing on the analysis
of forex trading strategies, particularly algorith-

Editorial assistant and

mic trading and the mathematical evaluation of
long-term system profitability. For the past two
webmaster: Kesha Green
years he has published his research and opinions on his blog
kgreen@currencytradermag.com
“Reviewing Everything Forex,” which also includes reviews
of commercial and free trading systems and general inter-
President: Phil Dorman est articles on forex trading (http://fxreviews.blogspot.com).
pdorman@currencytradermag.com Fernandez is a graduate of the National University of Colombia,
where he majored in chemistry, concentrating in computational
Publisher, ad sales: chemistry. He can be reached at dfernandezp@unal.edu.co.
Bob Dorman
q Caspar Marney started his trading
bdorman@currencytradermag.com
career on the foreign exchange desk at HSBC in
London. He then moved to SBC (which later
Classified ad sales: Mark Seger
merged to become UBS), as head of technical
seger@currencytradermag.com
analysis. He has been a regular commentator on
financial television. He also ran a global proprie-
tary trading team and became one of the bank’s most successful
Volume 7, Issue 8. Currency Trader is published monthly by TechInfo, Inc., traders. Since then, his company has managed funds for some
161 N. Clark St., Suite 4915, Chicago, IL 60601. Copyright © 2010 TechInfo,
Inc. All rights reserved. Information in this publication may not be stored or of the world’s leading investment banks and financial institu-
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tions. He also holds a distinction in the Society of Technical
The information in Currency Trader magazine is intended for educational
purposes only. It is not meant to recommend, promote or in any way imply the
Analysts Diploma and has been their guest speaker. Further
effectiveness of any trading system, strategy or approach. Traders are advised
to do their own research and testing to determine the validity of a trading idea.
details are available at www.marneycapital.com.
Trading and investing carry a high level of risk. Past performance does not
guarantee future results.

 August 2010 • CURRENCY TRADER

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 Global Markets

The yen: A drive to 1995?

The yen’s bullishness vs. the dollar in recent years is facing roadblocks in the form of
seemingly intractable Japanese economic challenges and evolving market forces.

By Currency Trader Staff

Although a major forex theme over the past FIGURE 1: IN STRIKING DISTANCE
couple of years has been the strengthening of
the U.S. dollar (in late 2008 and again in first
half of 2010) vs. most major currencies, the
Japanese yen has been a notable exception
to this trend. From August 2008 to late July
2010, dollar/yen pair had fallen from a high of
110.65 to a low of 86.26, a 22-percent decline.
The pair dropped a little more than 30 percent
from the June 2007 high of 124.13.
Interest in the pair has increased in recent
weeks because the dollar/yen rate is now
within striking distance of its November 2009
low at 84.83, which is the only significant chart
point standing in the way of a retest of the
1995 low of 81.12 (Figure 1). The pair would
need to drop another 6 percent or so below the
June 2010 low to test that milestone.
Japan, however, represents an unusual (and
complex) economical and political story, which
adds to the challenge of determining whether The USD/JPY pair has only the November 2009 low between it and
the November 2009 low is vulnerable and if the 1995 all-time low.
the yen will retest the 1995 low later this year Source: TradeStation
or next.
of growth, forecasting a negative 1.5 percent GDP reading
Japan’s singular economic story for this year.
After its deep economic pullback in 2009 when it posted Today, any discussion of Japan must consider its ongo-
a -5.2 percent GDP reading, views are mixed on how 2010 ing battle with deflation. What was initially dubbed
will turn out for Japan. Paul Sheard, global chief economist Japan’s “Lost Decade” of economic dislocation and finan-
and head of economic research at Nomura, forecasts a 3.4- cial malaise has now stretched to 20 years and counting, as
percent GDP rate for 2010, while economists at Moody’s measured from the Nikkei stock index top in 1989.
Analytics forecast 2.9-percent annual GDP growth. “Japan slipped into deflation in the mid 1990s and has
In contrast, James Pressler, associate international econo- never really escaped from it,” Sheard says, conceding
mist at Northern Trust Co. in Chicago, expects Japan to only brief exceptions in 1997 (because of an increase in the
slip back into recession after a couple of positive quarters consumption tax) and two quarters in 2008, which experi-

 August 2010 • CURRENCY TRADER


enced modest inflation.
The most recent data doesn’t suggest anything has
changed or is likely to in the near future. The first-quarter
2010 GDP deflator declined 2.8 percent on a year-over-year
basis, while the May 2010 consumer price index reading
fell 1.6 percent year-over-year.
“The single most important fact about the economy
is that it has been deflationary for many, many years,”
Sheard says.
Nonetheless, many of Japan’s current raw economic
numbers aren’t that dismal, in the context of the times.
“In terms of GDP and employment, [Japan] is per-
forming better than the U.S. or Europe,” says Nikhilesh
Bhattacharyya, associate economist for Moody’s Analytics.
“However, this is by no means a strong recovery. Exports
and government spending have done the heavy lifting. A
deflationary cycle is holding back the domestic demand
— household and business spending remain very weak.”
That is the Japanese Achilles heel — a weak domestic
economy.
“Wages, prices, and household expenditure are all either
dropping or flat,” Bhattacharyya says. “Firms facing weak
demand and excess capacity are cutting back on invest-
ment and labor expenditure, helping to boost their profit-
ability, but hurting at the aggregate level and the economy
wide level.
Some economists say central banks have an easier time
battling inflation than deflation — that it’s easier to pull
prices down, rather than lift them up, with the mon-
etary policy tools they have at their disposal. And by all
accounts, Japan made more than its share of missteps.
“Through a series of policy errors, Japan allowed its
economy to slip into deflation and the economy has not
been mobilized in an effective way to get the economy out
of deflation,” Sheard says.
Translation: Sustained, artificially low interest rates are
not a path out of deflation. Northern Trust’s Pressler notes
that although the BOJ raised rates to .25 percent and then
briefly to .50 percent in 2006 and 2007, Japan has been
characterized by a near-zero interest rate policy for more
than a decade. With the official central bank lending rate
currently at 0.10 percent, the Bank of Japan (BOJ) has virtu-
ally no bullets left in that chamber. “What can Japan do?”
reviews some potential steps Japan could take to change
its situation.
Exports strong, domestic demand weak
Japan’s traditional economic strength has been exports
which, along with government spending programs, pro-
CURRENCY TRADER • August 2010 
What can Japan do?
With so many black clouds hovering over Japan’s econo-
my, one wonders what, if anything, could be done. Many
analysts and economists have lambasted Japan for cod-
dling deflation for so long.
Of the Japanese central bank, Nomura’s Sheard says:
“The Bank of Japan is very patient when it comes to
deflation, and it is tolerant of deflation when actually you
want the reverse. There are a lot of things the central
bank could try — for example, they could implement
quantitative easing and expand the balance sheet. That
creates excess reserves in the banking system.”
Sheard cites central banks around the globe, includ-
ing the U.S. Fed, the Bank of England and even the
European Central Bank, to a lesser degree, having taken
forceful and necessary steps to avoid Japan-style defla-
tion.
“We saw major central banks in the world take actions
in 2008-2009 to make sure their economies didn’t go
into deflation,” he says. “But the BOJ has decided not to
engage in any quantitative easing. If they wanted to do
something, they could.”
Sheard says several out-of-the-box ideas the BOJ
could pursue include “purchases of JGBs or other assets
— REIT trusts or equity trusts.”
Although acknowledging Japan’s near-zero interest-
rate level is “arguably contractionary,” Moody’s Analytics
Bhattacharyya says there’s not much more the BOJ can
do in this regard without creating major risks to growth.
The bank does have another option, though.
“Short-term rates are at zero and long-term rates are
very close to their lowest in nearly seven years,” he says.
“Yet rates are not low enough to stimulate household
and business borrowing, which continues to fall, and are
still high enough to encourage firms and households to
raise savings. The one thing the BOJ, with government
cooperation, could and should do is intervene in currency
markets to weaken the yen,” he says.
Northern Trust’s Pressler looks in another direction
when searching for solutions: “They need to allow their
economy to transition to where it is not just dependent on
exports,” he says.
duced positive economic growth numbers in recent quar-
ters. “Japan is still a very large export economy — exports
are about 40 percent of its economy,” Pressler explains.
But the country, mired in deflation and low-growth for
years, came into the 2008 global financial crisis already
behind the eight ball.
“Japan effectively was in recession when the global crisis
hit in late 2008,” Pressler says.
As the global economy ground to a halt and demand for
 Global Markets
Japan’s exports fell sharply, so did the country’s economic
growth. Pressler notes Japan’s first-quarter 2009 annual-
ized GDP reading came in at -15.8 percent.
However, export demand picked up as the global econo-
my began to recover, which helped turn Japanese GDP fig-
ures positive in late 2009 and early 2010. However, Pressler
forecasts quarter-on-quarter GDP to decline by 0.2 percent
in the second quarter of 2010 because of the country’s lack
of domestic economic firepower.
“Domestic demand has never
really kicked in,” he says. “We
believe the economy will go
back in recession in 2010.”
Sheard holds a slightly dif-
ferent view. “Japan is enjoy-
ing a cyclical recovery,” he
says. “GDP is expanding.” But
he adds, “It will probably take
many years to get back to a strong
recovery.”
Deflation will remain the pivotal issue. “The
key question is, will there be a recovery strong
enough and long-lasting enough to get the economy out of
deflation?” Sheard says. “I don’t think that’s probable. You
need to see strong domestic demand growth, and we are
not seeing that. Japan is experiencing export-led growth,
with demand coming from China. Japan is sitting next to
the fastest growing economy in the world.”
Political twists
Japan’s governmental revolving door — the country is cur-
rently on its third Prime Minister in less than three years
— has some market watchers wondering if this instability
has contributed to the lack of a strong, coordinated policy
response to deal with the economy.
The current Prime Minister, Naoto Kan, took office in
June 2010. He follows Yukio Hatoyama, who was in office
from September 2009 through June 2010. Prior to that, Taro
Aso held the Prime Minister’s office for about one year as
well.
Related reading
“How Japan lost more than a decade”
by Howard Simons (Active Trader, August, 2010).
A look at Japan’s attempt to extricate itself from its financial
problems through low interest rates, and the implications for
countries who adopted a similar approach during the 2008-
2009 financial crisis.
 August 2010 • CURRENCY TRADER
Some analysts, however, downplay that importance in
the turnover of administrations. “I don’t believe the [politi-
cal] instability has been a major contributor to the malaise
in recent years,” Bhattacharyya says. “Rather, the politi-
cal will was not there to undertake unpopular reforms.
Going forward it could be a problem with the twisted diet
(Japanese legislative branch) situation.”
Prime Minister Kan is the leader of the Democratic Party
of Japan (DPJ) and previously held the post of Finance
Minster. Kan’s predecessor Hatoyama was also from the
DPJ party, and was the trailblazer who broke the
stronghold of the Liberal Democratic Party (LDP),
which had essentially run Japan since WWII.
“The LDP has basically been in power
virtually for the entire post-war
period,” Pressler says. The DPJ, he
notes, “was a party on the sidelines
for the past 60 years. There were
a lot of expectations on the DPJ
— they made a lot of promises of
total reform.”
Expectations are still high, espe-
cially given the current Prime Minister’s
previous post. But it might not be long
before reality sets in.
“When [Kan] was Finance Minister, he was putting
pressure on the BOJ to make moves in monetary policy,”
Sheard says. “There was hope when he became Prime
Minister that he would take a stronger stance still. There
has been rhetoric, but we haven’t really seen any real
action.”
Sheard is not optimistic the new regime will take a
vastly different approach to the deflation situation that
has maintained a stranglehold on the Japanese economy.
“Unfortunately, a leopard doesn’t change its spots,” he
says. “It’s unlikely we will get a ‘Eureka’ moment when
policymakers suddenly say, ‘We get it.’ More than likely,
Japan will continue to muddle through.”
Sheard also points out the lack of political will to hake
up the economy has a very practical facet. Japan is the
home of an aging population, who tend to actually benefit
from falling prices and, as he points out, “the older people
tend to vote.”
Debt large, but not an imminent threat
In addition to deflation and ineffective government, Japan
is also plagued by a bleak fiscal house. At the end of 2009,
Japan’s $9.8 trillion debt represented 190 percent of its
GDP, according to Pressler. Compare that to Eurozone
guidelines, which require a member country’s debt to be
 FIGURE 2: RECENT YEN ACTION

below 60 percent of GDP.

Recently, there has been talk of raising the
consumption tax in Japan to help close its fis-
cal gap. However, some analysts question the
wisdom of such a move right now.
“Raising taxes now would not be a good
thing because it would be contractionary for
the economy,” Sheard says. He doesn’t think a
new tax is likely to be implemented any time
soon, with 2014 being a more likely time hori-
zon.
In Japan’s favor, however, the country’s
debt is primarily held internally — that is,
by Japanese consumers and institutions. This
is a vastly different debt situation than, for Some analysts see limited bullish potential for the yen vs. the dollar
example, the U.S., whose debt is largely held over the next several months, but few predict longer-term strength and
by foreigners. many think it’s more likely the USD/JPY pair will be stuck in a trading
“I’m not worried from a macro point of range.
view about the level of government debt,” Source: TradeStation
Sheard says. “Japan’s debt is self-financed.
Japan has a lot of leeway to get its act togeth-
er.” Yen action
Comparing Japan’s situation with the recent Greek crisis So with all this political drama, economic malaise, and low
(a note actually sounded by Kan in a speech soon after he interest rates, why has the yen been strengthening vs. the
took office), Nikhilesh Bhattacharyya wrote the following U.S. dollar (Figure 2)? There are a couple of reasons.
in a Moody’s Analytics update on July 12: “With no major First, as Japan runs a current account surplus that puts
reliance on foreign lending and a high stock of household natural upward pressure on the yen, as Japanese manufac-
and corporate savings, Japan’s situation is very different turers sell their goods abroad. That surplus is also one of
from Greece’s. This was evident in recent weeks, as the the reasons the yen still attracts “safe-haven” buying dur-
yield on a 10-year government bond moved to a seven- ing global economic and financial crises — the same effect
year low in Japan, while it hovered near a 11-year high in (but for different reasons) that pumped up the dollar dur-
Greece.” ing the 2008 meltdown. “When you see a rise in risk aver-
Also a boon for Japan is its large international reserves sion, you see the yen and Swiss franc strengthen,” says
— a little more than $1 trillion in June, making these hold- Brian Dolan, chief currency strategist at Forex.com.
ings the second-largest in the world after China’s, accord- Bhattacharyya highlights another factor supporting the
ing to Pressler. The reserve fund is a function of Japan’s yen. “Repatriation of funds by Japanese investors due to
role as a large export economy. “They are selling more than heightened uncertainty in Europe and the global stock
they buy, which means they accumulate more in [foreign] market decline,” he says.
currency,” Pressler says. Nonetheless, these factors might not be enough to keep
“If Toyota exports cars to the U.S., the consumer pays the currency strong in the longer term.
for it in dollars. But those dollars have to be converted “I think it will appreciate further in coming months, but
into yen,” Sheard explains. “There is a constant stream of begin to depreciate slowly in 2011,” Bhattacharyya says.
money coming into Japan that puts upward pressure on “Based on recent comments in the media, the BOJ may
the yen.” intervene if the dollar/yen hits 85.”
Japan also boasts a goods trade balance or surplus, In a July 21 currency update, Wells Fargo’s head of cur-
which in 2009 stood at 28.7 billion, Pressler says. If you rency strategy Nick Bennenbroek wrote: “In our view, the
add services and investment income, the trade balance yen is probably very near its peak. Both Japanese and U.S.
rises to $141.7 billion he says. interest rate expectations are stable at low levels, and the

CURRENCY TRADER • August 2010 

 Global Markets
prospects for a further compression in yields spreads (that
would contribute to further strength in the yen) appears
limited. Additionally, the threat of a Bank of Japan policy
response is increasing given the move in the dollar/yen
exchange rate. Recent media reports cite persons familiar
with Bank of Japan deliberations suggesting that, should
the dollar/yen rate remain near 85 per dollar, the central
FIGURE 3: THE YUAN AND THE YEN
The 12.3 level in the yuan/yen pair equates to roughly 83.3 in the
dollar/yen pair — approximately the November 2009 chart point.
Source: ADVFN (www.advfn.com)
FIGURE 4: THE YEN AND TWO-YEAR TREASURIES
One analyst says the difficulty for two-year yields (represented here
inversely by 2-year T-note prices, bottom) to move upward aggressively
implies a cap on yen bullishness.
Source: TradeStation
10 August 2010 • CURRENCY TRADER
bank could respond by expanding or extending its liquid-
ity operations, or increasing its regular monthly govern-
ment bond purchases.”
Dolan expects a range trade ahead. “Buy it on weakness
under 85.50/86.50, look to sell in the 88.00/90.00 area.”
However, Dolan also warns: “If we get an ugly move in
stock markets and the global recovery flounders, we could
see the dollar/yen drop. If markets take a
serious turn for the worse, all bets are off, and
we could see a washout below 85.00 amid the
safe-haven aspect [of the yen] and the high
correlation of selling on yen crosses.”
Sheard also expects mostly range trading
in the next several months. “The BOJ has no
appetite for a game-changing shift in policy,”
he says. “My forecast is that the yen moves
sideways into year-end.”
China/yen
The dollar/yen pair might not be the only
source for guidance on the fate of the yen.
Tom Fitzpatrick, chief technical strategist at
Citigroup, says he looks at China/yen (the
yuan/yen rate) rather than the dollar/yen
rate because China has become Japan’s big-
gest trading partner.
Fitzpatrick identifies the 12.3 level as the
“the line in the sand” for China/yen (Figure
3). He adds that equates to roughly 83.3 in the
dollar/yen pair — near the November 2009
chart point.
“We would have to see dollar/China three
to four percent lower from here before the
1995 low in the dollar/yen could come into
play,” he says. “I’m not convinced it will go
that low.”
Yield connection
Fitzpatrick also notes the high correlation
between U.S. two-year Treasury yields and
the dollar/yen of late (Figure 4). “We suspect
it will be difficult to see two-year yields move
upward aggressively,” he says, implying lim-
ited bullish potential for the yen vs. the dollar.
Overall, Fitzpatrick believes both upside
and downside for dollar/yen is limited. “It
is a high bar for it to go up aggressively,” he
says. “I see it trapped more in a range trade
for months to come, between 83.50 and up
into the low 90s.” ›
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 On The
On the Money
Money

A season of FX
discontent
The opposing viewpoints of the Fed and the ECB represent a
serious issue that will have a huge effect on the dollar and the
Euro. And Asian nations appear to be placing their bets.

By Barbara Rockefeller

The FX market is suffering from the discontent that arises
when standard analysis fails to deliver in the usual ways.
We used to expect gold to be inversely correlated with the
dollar, but since the Greek sovereign-debt crisis started in
December 2009, gold has been linked more strongly to the
Euro. We used to be able to count on bond vigilantes rant-
ing about bloated central-bank balance sheets and too-low
interest rates feeding inflation, but instead we have disin-
flation and a risk of outright deflation.
The old ways of looking at market prices may have been
shallow, but in practice, “stockbroker economics” was
good enough to serve as a guide to successful FX trading.
But now we have lost our usual compasses.
There are two big themes worrying FX market partici-
pants today. The first is the issue of which central bank
is right, the U.S Federal Reserve or the European Central
Bank (ECB)? The Fed is primarily worried about persistent
low growth and deflation, with fiscal deficits a secondary
priority. The ECB, however, puts fiscal sustainability first
and charges the Fed with using “oversimplified” analysis
to justify prolonging stimulus. This is a serious and prob-
ably insoluble issue that will get resolved only by history,
but meanwhile it will have a huge effect on the FX market.
The second theme is the strange and unstable relation-
ships among asset classes. If global growth is slowing, why
is oil rising? If the U.S. economy (especially the consumer)
is deleveraging, why is the stock market rising? How can
you reconcile a decelerating economy that has no inflation
with rising gold prices?
The issue of which central bank is right can’t be decided
by theory. The Fed is taking the Keynesian stance that a
shortage of demand is behind recessionary conditions, and
the cure is to goose demand. The ECB is taking the stance
that business and economic cycles are influenced (but not
determined) by monetary policy, and confidence — busi-
nesses and consumer — is more important. What business-
es and consumers want is stability and non-inflationary
conditions. ECB chief Jean-Claude Trichet says the time for
spending cuts and tax increases is right now. Any addi-
tional growth to be had from prolonged stimulus would
be fleeting; fiscal consolidation is a necessity to maintain
confidence. Besides, if Europe were to prolong stimulus,
it would empty its arsenal of weapons necessary to fight
another recession.
This issue can’t be resolved here and now, but let’s note
the U.S. differs from Europe in a few important ways.
On the national spirit front, consider the Coast Guard
unit in charge of the BP oil-spill cleanup in the Gulf has
received 120,000 proposals in about 90 days. Only some
350 were deemed worthy of further research and fewer
than 50 were actually tested, but 120,000 is a truly impres-
sive number. At a guess, no equivalent disaster in Europe
has ever inspired such a massive public-spirited volun-
tary response, despite Europe having a clearer and more
refined social contract. This is the can-do American spirit,
and it’s a wonderful thing.
On the aggregate behavioral economics front, Americans
reacted differently from Europeans as the crisis unfolded.
Americans pulled back hard while Europeans did so to a
much lesser degree. In the U.S., the financial crisis trig-
gered the “new normal,” or consumer deleveraging. We
still have plenty of evidence of unbridled materialism and
over-indebtedness (witness the popularity of iPads and
Kindles), but consumer debt has contracted since the hous-
ing crisis hit. Consumer credit was $2.3 trillion in 2005 and
rose to $2.51 trillion by March 2009 — but it fell to $2.4
trillion by May 2010. Also in 2005, the savings rate was
-0.5 percent, which was the first negative number since
the Depression (1932-33), but in 2009 the rate had risen to
1.9 percent. These may seem like small changes, but in a
country the size of the U.S., the ripple impact is very big
indeed.

12 August 2010 • CURRENCY TRADER

 Figure 1: Baltic Dry Index
1250
1200
1150
1100
1050
The housing market reflects the new 1000
prudent mentality, too, with the inven- 950
900
tory of unsold homes likely rising to an 850
unprecedented 10-month supply this 800
750
summer, and prices expected to fall a total 700
of about 30 percent (to 2006 levels) by the 650
600
end of the year. 550
Businesses see this consumer behavior, 500
450
and even if they are selling industry-to- 400
industry and not directly to the consumer, 350
300
they are scared to invest in new plants 250
and equipments. Non-bank corporations 200
150
in the U.S. are sitting on $1.8 billion in 100
surplus cash. Instead of the consumer or 50

corporate sector taking on debt, it’s the x10

2004 2005 2006 2007 2008 2009 2010

government, with the U.S. deficit at $1.42
trillion in 2009, up nearly $1 trillion from The Baltic Dry Index, which measures international shipping rates and is often
2008, and representing more than 12 per- used as a proxy for world growth, does not paint a pretty picture.
cent of GDP. The government forecasts a
decline in the deficit in 2010, but plenty of stands ready to act if necessary. Unfortunately, in a practi-
perfectly sane people project deficits and a rising debt-to- cal sense, the bank’s toolbox is nearly empty. The Fed funds
GDP ratio far into the future as economic behavior shifts to rate is already only 0.25 percent, the 2-year note yields only
the “new normal.” a little more than 0.5, and the 10-year note is yielding less
Deleveraging applies to banks, too, which are reluctant than 3 percent. One of the few tools left to the Fed is direct
to lend. According to the Fed, in May 2010 bank lending lending to businesses, something the Fed is legally entitled
contracted 8 percent annually, despite the lowest interest to do but has not done since the Depression.
rates in a generation and government programs designed The U.S. has not been in this economic position since the
to goose bank lending. As a result of lower activity in every 1930s. We understand many of the policy mistakes made
sector, unemployment remains stubbornly high (near 10 then, such as trade protectionism and a too-early focus on
percent) while inflation can barely be seen (less than 2 per- budget balancing, but that doesn’t mean the Fed or any
cent in June 2010). other band of economic experts knows what to do next.
In contrast, Europeans view deleveraging as another
point on a continuum, not something deserving of the The dollar dilemma
phrase “the new normal.” And central bank policymakers Now we come to what this means for the dollar. There are
continue to speak of standard monetary matters and fear of two possible interpretations. The first is that aside from
inflation as though the financial crisis did not have a long- China and some other Asian countries, the developed
term and lasting deflationary effect. In the UK, for example, world is going to hell in a hand basket. The Baltic Dry
one central bank policymaker has repeatedly drawn head- Index, which measures international shipping rates, is often
lines for wanting to hike interest rates because of impend- used as a proxy for world growth (Figure 1). The index also
ing inflationary pressure that must arise from the expan- reflects the very slow changes in supply and demand for
sion of money supply last year. In contrast, in the U.S. some actual ships, so it falls short as a global growth proxy, but
analysts fret about the U.S. entering a Japanese-style “lost never mind — it’s dramatic enough. The policy implica-
decade,” which in Japan has actually been almost three tion of contracting world growth is that every developed
decades, characterized chiefly by deflation, ultra-low inter- country needs to devalue its currency as fast as possible to
est rates, and giant government deficits. exploit an export boom and take up domestic slack.
Instead of debating when the Fed will start its exit plan This, of course, is literally impossible — everyone can’t
— raising interest rates and selling off the trove of assets devalue at once. Besides, there are other complications.
it acquired during the bailout — we are debating a second Trade is already constrained by tariffs and subsidies. Some
monetary policy stimulus. In his most recent congressional countries, notably Japan but also increasingly the U.S., are
testimony in late July, Fed chief Ben Bernanke said the Fed funding currencies for the carry trade: borrow in Japan or

CURRENCY TRADER • August 2010 13

 On the money
the U.S. at nearly zero percent and buy, say, a Brazilian or
Indonesian note for 5 percent.
The other interpretation is the dollar should be the safe
haven for international investors. The U.S. has free, stable,
liquid, and fairly honest and transparent markets with
plenty of variety. It’s a no-brainer — sacrifice yield for
capital preservation.
In the past few years, the dollar has served in both these
functions, carry-trade funding currency and safe haven,
sometimes both on the same day. The tension is intolerable
and the volatility is both confusing and destructive.
While Western traders are
focused on potential European
sovereign failure and selling Euro
rallies, Asian sovereigns are busy
buying Euro dips.
The Euro side of the coin
Set against the dollar is the Euro. The EMU, facing a crisis
of confidence in the viability of its banks as well as its sov-
ereign debt, cobbled together a bailout plan for both banks
and sovereigns that leans heavily on the International
Monetary Fund (IMF). It will issue notes from a joint entity
to which every member will pledge repayment funds, and
will seek a triple-A rating from the ratings agencies. It is
stress-testing 91 banks, of which only a handful will fail
and require recapitalization, whether by the private market
or governments.
Greece will probably default, but that day keeps getting
pushed out in time. Meanwhile, several countries under
the microscope (including Greece, Portugal, Ireland and
Spain) were able to sell notes into the private market in
June and July. Bid-to-offer demand was high, so we can’t
point to behind-the-scenes arm-twisting. The hunger for
yield was authentic.
That’s the key — authentic hunger. Investors would
rather have a iffy 26-week note from Portugal at 1.947 per-
cent than a rock-solid six-month note from U.S. at 0.18 per-
cent. Who wouldn’t rather have nearly $10,000 in interest
earnings on $1 million than less than $1000? It’s raw rela-
tive return on a decent bet — that Portugal won’t default
on anything in six months, and even if it does default on
the 10-year note, the six-month note won’t be affected or
14 August 2010 • CURRENCY TRADER
won’t lose as much as the 1.8-percent breakeven. Until the
U.S. is back in the game of competitive interest rates, the
underlying tone for the dollar has to be a weak one.
Until a European sovereign really does default, that is.
Then the dollar becomes the safe haven, but even then the
dollar-based investor making the bet on Portugal might
get bailed out by the rest of the EMU. And if the Euro has
trended upward during the holding period, a dollar-based
investor could still make a net gain on the currency that
more than offsets the temporary loss of yield. For some-
one who intends to hold to maturity, it’s a very good bet
indeed. No doubt this is part of the reasoning of Asian
sovereigns, including China, that have added European
sovereign debt (including some of the PIIGS) since the
beginning of the year.
China’s spending spree
China bought as much as €400 million of 10-year Spanish
bonds in early July, having bid for as much as €1 billion.
Asian investors made up 14 percent of the Spanish issue
(compared to 5 percent in January), and China accounts
for about half of demand from Asian investors. Of China’s
record $2.4543 trillion in reserves at the end of June,
approximately 20 percent are thought to be Euro-denomi-
nated.
That Asian sovereigns such as China are buying
European bonds during a sovereign bond crisis sends quite a
message — China has confidence Europe will bail out its
fellow sovereigns — not a sure thing, or the return would
be lower, but it’s a good bet. It also means Asian buyers
have a big incentive to keep the Euro from falling too far, if
not actively nudging it upward. While Western traders are
focused on potential failure and selling Euro rallies, Asian
sovereigns are busy buying Euro dips. On at least one
occasion, European multinational corporations, perhaps
prodded by the ECB, primed the pump. (Sometimes Asian
sovereigns are selling Euro rallies, too. Does this mean
they are trying to “manage” the exchange rate? Possibly.)
Meanwhile, the very same Asian sovereigns hold greater
amounts of dollar-denominated U.S. debt. Why would
they seek to support the Euro and not the dollar? The
answer probably lies in the mindset toward each invest-
ment. Chinese officials have said they are “stuck” with the
dollar. It’s the only currency that has markets big enough
and liquid enough to serve its purposes. Investing in
European sovereign paper, however, can be done if the
raw return is worth it. It’s a bit like keeping your retire-
ment savings in a CD but being willing to allocate “play
money” to equities or Las Vegas. Behavioral finance will
someday (soon) give us loftier terms to name these differ-
ent behaviors, but even without academic names, we know
these behaviors exist.
At what point might Asian sovereigns Figure 2: Euro/Dollar Weekly with 52-Week Moving Avg.
throw in the towel? Somewhere in the Euro (1.29290, 1.30280, 1.27320, 1.28860, -0.00370)
1.75
back of their heads, there is a loss num- 1.70
ber that reaches the intolerable. Figure 2 1.65

projects the year-end 2010 range for the 1.60

Euro/dollar pair (EUR/USD) at $1.0963 1.55

on the downside and $1.4467 on the 1.50

upside. The average price year-to-date 1.45

1.40
is about 1.3550. Depending on the entry 1.35
level at the time of the purchase of a sov- 1.30

ereign bond, a rate of, say, 1.2500 may be 1.25

tolerable and a rate of 1.4500 would be 1.20

very nice. But we can’t say 1.1000 would 1.15

be fatal — it’s still inside the projected 1.10

range and thus within the realm of the

1.05

1.00
probable. 0.95
We don’t know what charts Asian sov- 0.90

ereigns look at, but we can be sure they 0.85

look at charts. That they were buying 0.80

European sovereign debt during a sover- 97 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

eign debt crisis and during a pronounced Asian nations that have been buying European debt seem prepared to
Euro downtrend says something about weather a fairly significant decline in the already depressed Euro.
their long-term mentality. It’s also pos-
sible there are other trade-offs behind the
scenes, such as preferential trade deals or Figure 3: CRB Index, Oil, and S&P 500
some foreign policy benefit. Perhaps just
62.410,
165 266.860, 261.530, 266.860, +5.32999), S&P 500 (1,072.14, 1,097.50, 1,072.14, 1,093.67, +24.0801), LIGHT CRUDE Continuous (76.4300, 79.4200, 76.1600, 79.30
490
160
showing some independence to the U.S., 155
100.0%
480
470

perceived as a bully, is a goal. 150

460
450

We mustn’t neglect the identity of Euro 145

440
430
bulls during a Euro downtrend. 140 420
410
On the intermarket front, confusion 135
400

reigns. On a day-to-day basis stock mar- 130 390

380
125
ket gyrations are tending to lead oil and 120
61.8% 370
360
commodities, although the S&P managed 115
350
340
a nearly 62-percent retracement of its cri-
50.0%
110 330

sis-induced losses, while oil regained only

320
105
310
38.2%

50 percent, and the CRB index not quite 100 300

290
95
38 percent (Figure 3). The relationship is 90
280
270
pretty weak on these grounds. If oil is a 85
23.6%
260
250
big determining factor for the dollar and 80 240

oil is being led by equities, we should get 75

230
220

a high correlation of the dollar index and 70

0.0%
210
200
the S&P 500 (Figure 4). Can you see it?
65
190
60 180
It appears as if the S&P led the dollar up
x10

2004 2005 2006 2007 2008 2009 2010

in 2007-2008, albeit with a six-month lag,

and again in 2009-2010 with a four-month
lag. On the whole, though, to consider the
S&P a leading indicator for the dollar is
Stock-market gyrations are tending to lead oil (green) and commodities
(orange), although the S&P’s rebound (black) from its crisis-induced losses
has been much more substantial than that of oil or the CRB commodity index.

CURRENCY TRADER • August 2010 15

 On the money

pretty risky. shows compares the two. There are huge discrepancies, as
Conventional wisdom holds that the stock market leads in 1998-2000 when stocks rallied but the index fell, and in
the economy — i.e., that it foreshadows recession and 2004-2005, when stocks did it again but the index crashed
recovery. The Baltic Dry Index plays a similar role. Figure 5 — twice. The correlation looks stronger in more recent
times, although in 2007 stocks fell a good
seven months ahead of the Baltic Dry
Figure 4: Dollar Index vs. S&P 500
Index, and in 2009-2010 the stock index
Dollar Index (82.7120, 83.4510, 82.5610, 83.3930, +0.64600), S&P 500 (1,072.14, 1,097.50, 1,072.14, 1,093.67, +24.0801)
lagged the Baltic. How can both embody
600 94
650 93

700 92
valid economic forecasts? They can’t, and
750
91 they don’t.
Instead of looking for the easy way to
90
800
89
850 88 evaluate FX market trends with a quick
900 87

86
glance at some other security, we have to
950

1000
85 do the work of teasing out exactly who
1050
84
is buying and who is selling, whether
83
1100 82
their actions make sense given the laws
1150 81 of probability, and following the one sure
thing in finance — that a higher return
1200 80

79
1250
78 almost always wins, except under excep-
1300

1350
77

76
tional circumstances.
1400 75

1450
74
May the best policy win
73
1500
72
This is not to say the big Euro downtrend
1550
71 will end any time soon. We do have
1600
exceptional circumstances. The “new nor-
70

69
A S O N D 2006 A M J J 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 2009 M A M J J A S O N D 2010M A M J J A mal” in the U.S. bodes ill for U.S. growth,
Overall, there is little evidence the S&P (red) functions as a leading indicator oil prices, stock prices, and the prospect of
for the dollar (black). Treasury yields rising any time soon. The
U.S. is the world’s biggest economy and
Figure 5: Baltic Dry Index vs. S&P 500 events in the U.S. have a domino effect
165 BALTIC DRY INDEX (1,781.00, 1,781.00, 1,781.00, 1,781.00, +20.0000), S&P 500 (1,072.14, 1,097.50, 1,072.14, 1,093.67, +24.0801)
125
worldwide. The safe-haven motivation
160 120 to hold dollars is not going away. But the
155 115
110
Euro downtrend is at great risk of ending
150
105 if additional market participants buy the
145

140
100
story the Asian sovereigns are evidently
95
135 90 buying — ­­­that fiscal consolidation and
130 85
inflation control will restore confidence
80
125
75
and promote both growth and a higher
120
70 Euro.
115
We might even say the European
65

110 60

105
55 policy stance contains a currency policy
100
50
45
and the U.S. policy stance does not, and
95
40 some traders will be attracted to that
90 35
aspect alone. You might think this leads
85 30
25 to stalemate and a prolonged period
80

75
20
of range-trading, but it’s more likely to
15
70 10
lead to alternating upside and downside
65 5 breakouts that will be very confusing and
difficult to trade, implying that positions
0
60
x10 x100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
should be reduced. And decreased vol-
There are huge discrepancies between the S&P 500 (red) and the Baltic Dry ume means increased volatility.›
Index (black).
For information on the author, see p. 4.

16 August 2010 • CURRENCY TRADER

CURRENCY TRADER • August 2010 17
 TRADING strategies

Asian pattern,
European trade
A reliable pattern in the Asian session sets a trade for the European session.

By Daniel Fernandez

Reliable patterns are difficult to come by in the markets,
and capitalizing on them in real trading can be a challenge
in itself. Also, the first and most-obvious application of a
trading idea might not turn out to be the best.
“Taking advantage of the Asian trading session”
(Currency Trader, June, 2010) showed the average high-
low range and open-to-close moves of three currency
pairs during the Asian forex session were highly stable
when adjusted for volatility. Although these price moves
varied significantly over time when measured on an abso-
lute-pip basis, they proved to be quite consistently sized
when normalized by the 14-day average true range (ATR).
“Adjusting for volatility” explains how the Asian-session
price action was normalized.
Table 1 compares the Asian session’s absolute high-
low ranges and open-to-close moves (top) to the ATR-
adjusted values (bottom). The standard deviations of the
ATR-adjusted values of are much lower than the absolute
figures. For example, the standard deviations for the vola-
tility adjusted ranges represent only 6 to 7 percent of the
average-range values vs. approximately 45 to 50 percent
for the comparable absolute-pip ranges. Also, the ATR-
adjusted averages and standard deviations for the ranges
and open-to-close moves were almost identical for all
three currency pairs, indicating that taking volatility into
account makes it possible to identify a fundamental aspect
of market behavior that provides a more reliable tool for
predicting Asian-session currency movement.
This information could be used to exploit the predict-
ability of the Asian-session range. For example, if the
EUR/ USD reaches its highest ATR-adjusted range read-
ing, you might enter a trade that targets a closing price
based on the average open-to-close move.

Adjusting for volatility Table 1: IDENTIFYING A CONSISTENT

CHARACTERISTIC
The process for volatility adjusting the Asian-session
price action in the article “Taking advantage of the Asian Absolute pips:
trading session” consisted of dividing the high-low ranges Avg. Avg.
range (StD) open-close (StD)
and open-to-close moves by the average true range, as
follows: EUR/USD 60 28 30 15
EUR/CHF 38 17 17 9
1. Calculate the 14-day ATR at the beginning of each
Asian trading session (i.e., each day). EUR/GBP 28 14 12 8
2. The range and absolute movement values for each As percentage of 14-day ATR:
Asian session are calculated in pips.
3. The values from step 2 are divided by the 14-day ATR EUR/USD 45 3 22 3
calculated at the beginning of each corresponding ses- EUR/CHF 48 3 21 3
sion.
EUR/GBP 45 3 19 2
In the original analysis, all the ATR-adjusted values from The currency pairs’ moves were quite inconsistent
step 3 were averaged for given six-month periods to when measured on an absolute basis (top), but they
allow comparisons between different time periods. proved to be much more stable when adjusted for
volatility (bottom).

18 Month 2010 • CURRENCY TRADER

August
 Deutsche Bank
dbfx.com/CT
The analysis that follows illustrates a trading approach
developed around this information that tested profitably
both in the original 2006-2010 period and in an additional
six-year period in the Euro/U.S. dollar pair (EUR/USD).
However, it adds an important change: It operates outside
the Asian forex trading session

Challenges of the Asian session

The most logical application for a trading system based on
predictable range and open-close moves for the Asian ses-
sion would be to enter trades during that period, attempt-
ing to capture either the predicted average range or close,
as previously described. Unfortunately, the low volatility
and liquidity of the Asian session make it difficult to accu-
rately test such an approach, and suggest it might not be
practical in real trading.
First, the profit-target values would likely be very low
because the strategy would be attempting to capture
moves in the neighborhood of 10 to 20 percent of the 14-
day ATR. These amounts can be as small as 4 to 10 pips
during (typical) non-volatile market conditions.
Second, the bid-ask spread tends to widen during the
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Asian session. This, in turn, makes testing less accurate and access
because the variations within the spread can be signifi-
cant. Low liquidity also makes slippage, which can only Deutsche Bank’s
be estimated in a test, a much more important factor.
Finally, the Asian session’s low liquidity also increases
consistent, competitive
the significance of “broker dependency” — i.e., the dif- pricing, 24 hours a day.
ferences between the price quotes/feeds of different forex
brokers. A strategy might test very differently on one
broker’s data than another. dbFX’s margin trading platform
Together, these factors decrease simulation accuracy also offers up to 100:1 leverage
and can lead to significant overestimations of profitabil-
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and the peace of mind knowing
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Such a system would “look back” at the Asian session and Deutsche Bank.
decide a certain course of action because the predictability
of the Asian session sets up a trade with a positive statisti-
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there appears to be a significant tendency for price to
subsequently trend (during the European session) in the
opposite direction of the Asian session. This is especially
true when the move from the previous Asian session’s
close and the current Asian session’s close is in the same
direction as the current Asian intra-session movement.
These tendencies lay the foundation for a system that
uses the definition of an average Asian session — identi-
fied in the previous analysis — to profit from the subse-
quent moves during the forex trading day. The system
enters a long trade when:
The above information has been approved and/or communicated by Deutsche Bank AG London
1. The Asian session’s net movement (open – close) is in accordance with appropriate local legislation and regulation. Deutsche Bank AG London is
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CURRENCY TRADER • August 2010 19 take steps to ensure that you understand and have made an independent assessment of the
appropriateness of the product.
 TRADING strategies

2. The close of today’s Asian ses- 3. The Asian session’s net move- are based on visual observations and
sion is below the close of yester- ment is between 20 and 30 per- no optimizations were performed.)
day’s Asian session; cent of the 14-day ATR. Figure 1 shows a sample trade.

Table 2: P
 ERFORMANCE Similarly, short trades are
SUMMARY entered when:
Test period: 1/12000-1/10/2000
Initial account equity $100,000 1. The Asian session’s net move-
ment is positive;
Net profit $122,870
2. The close of today’s Asian
Net profit 122.87% session is above the close of
Profit factor 1.56 yesterday’s Asian session;
No. of trades 328 3. The Asian session’s net move-
ment is between 20 and 30 per-
Win % 55%
cent of the 14-day ATR.
Profit/loss ratio 1.3
Annual compound profit 8.34% The strategy uses a profit target
Maximum drawdown 13.83% of 1.5 times the 14-day ATR; the
stop-loss is half the 14-day ATR.
The system had a modest winning Because a strong move is expected
percentage, but winning trades were during the next trading session, the
large enough, and losers small enough,
system closes all open positions
to generate a significant profit over time.
after 10 hours. (All the trade criteria
FIGURE 1: A SHORT TRADE
Position sizing
To equalize risk across trades, trade
size is adjusted according to account
balance and volatility. Approximately
1.5 percent of the account equity
is risked per position, assuming a
100,000-unit standard forex lot size.
The formula is:
Trade size = 0.003 * Account
Balance (in USD) / ATR (in pips)
For example, if the 14-day ATR is
80 pips, the account size is $100,000,
and a long trade is triggered at 1.4250,
the trade parameters would be:
Lot size = (0.003*100,000)/80 =
3.75 lots, or $375,000;
Stop-loss = (1.4250
– 0.0080)*0.5 = 1.4210 (40-
pip stop loss, half of the
ATR);
Profit target = (1.4250 +
0.0080)*1.5 = 1.4370 (120-
pip profit target, 1.5 times
the ATR)

The system was tested on

hourly EUR/USD data from
Jan. 1, 2000 to Jan 1, 2010,
assessing trading costs of
two pips per position.

System performance
Overall the system produced
good results, reaching a new
equity high every year from
2000 to 2009, as shown in
Figure 2. One of the most
important things about the
system is that even though
it was built on assumptions
taken from 2006-2010 data,
Trades are entered based on the current Asian session’s open-to-close move as a it was also profitable dur-
percentage of the 14-day ATR, the direction of the market since the previous day’s Asian
ing the previous six years,
close, and the direction of the market during the current Asian session.
Source: Metatrader
suggesting the trade prem-
ise, based on the volatility

20 August 2010 • CURRENCY TRADER

adjusted Asian-session price action, represents a per- Related reading
sistent property of the market.
Daniel Fernandez articles: Other articles:
The system produced a 8.34-percent average com-
pounded annual profit, a 13.83-percent maximum
“Taking advantage of the “Breakout timing”
drawdown, and a 1.3 profit-to-loss ratio, which was Asian trading session” Currency Trader, July 2009
smaller than the aimed-for 3:1 ratio because the Currency Trader, June 2010 Are particular times of the day,
10-hour exit rule cut short many profitable trades. Analyzing the often-over- month, or year better than
However, because this rule also prevented many looked Asian trading ses- others for trading certain strat-
trades that were initially profitable from turning into sion points to a novel way of egies or currencies? These
losers, removing it had a detrimental effect on the exploiting forex market inef- tests indicate some momen-
system. (Because the 10-hour value was arbitrary, it’s ficiencies. tum signals might have better
certainly possible better results could be achieved odds of success depending on
with smaller or larger cut-offs.) “Adaptive FX money man- the time of month they occur.
agement”
The system took 328 trades and posted a 55-per-
Currency Trader, November “Time-zone trading in the
cent winning percentage. The fact that successful
2009 Euro”
trades are typically the result of favorable sharp This article shows how a Currency Trader, June 2007
moves (while losing trades are not) is primarily a money-management system Intraday trends in forex often
result of winning trades achieving a far larger rela- that adjusts trade size based begin when the markets shift
tive profit when the 10-hour cutoff time is reached, on market volatility can trans- from one regional trading cen-
something that is also reflected in the favorable form an unprofitable forex ter to another. Historical test-
(above 1.00) profit-to-loss ratio. Overall, the system trading strategy into a profit- ing uncovers several promis-
did a great job of cutting loses short and letting prof- able approach. ing price moves in the Euro
its run. currency futures.
“Using dynamic look-back
periods in FX systems”
Just a few minutes each day
Currency Trader, May 2010
One of the system’s best characteristics is that you
A robust approach to mak-
can trade it simply by checking the market at the ing a trading system dynamic
end of each Asian session. A simple calculation of improves profitability and
the session’s open-close difference, a look at the pre- shrinks drawdowns.
vious day’s Asian session, and a comparison to the
14-day ATR are all the infor-
mation necessary to enter a FIGURE 2: EQUITY CURVE (2000-2010)
trade. Another advantage
is that you can set the stop-
loss and target orders, and
then simply exit the trade 10
hours later if neither is hit,
giving you the peace of mind
to know that you will never
be in the market too long,
and you’ll always know the
trade outcome at the end of
the day.
The system might also be
applicable to other currency
pairs, including the EUR/
GBP, EUR/CHF, USD/CHF,
GBP/USD, and GBP/CHF
which, like the EUR/USD,
have non-volatile Asian ses-
The system had a modest drawdown and a respectable upward slope to its equity curve,
sions.›
with one especially notable run-up between late 2006 and early 2008.
For information on the author, see Source: Metatrader
p. 4.

CURRENCY TRADER • August 2010 21

 TRADING strategies

Time-adjusted
range and volume
By adjusting intraday volume and range data to the time of day, the “Marney Indicators”
help highlight a market’s unique characteristics and trade opportunities.

By Caspar Marney

“Exploiting currencies with time and volume” (Currency
Trader, December 2009) discussed the commonality of cur-
rency markets — how the actual volume throughout a 24-
hour trading day correlates significantly to average hourly
ranges, and most importantly, how those patterns are very
predictable, exhibiting a significant degree of “stationarity”
(Figure 1).
Although identifying the optimal times of day to trade is
extremely valuable, real-time analysis of a market is poten-
tially invaluable. Unfortunately, because the forex market
is so fragmented it is almost impossible to get an accurate
real-time measure of all the volume occurring at any given
moment. However, historical analysis shows there is a
very high correlation between the number of price updates
(“tick updates”) per unit of time and the volume traded
per unit of time.
Figure 1: VOLUME (%) analysis by currency pair
Despite the wide range of currency pairs and native trading sessions, volume
profiles are very similar.
Tick updates are easily quantified and can be plotted
in real time, and because many forex data vendors now
capture tick updates, currency volume can be plotted in
real time by using tick updates as a proxy. Although most
tick update databases date back only to the recent past
(making any statistically meaningful analysis difficult),
Zurich-based Olsen Data (www.olsendata.com) has been
capturing tick updates since 1986, making their database
an invaluable research tool.
The two indicators that will be described here — the
Marney Volume Indicator (MVI) and the Marney Range
Indicator (MRI) — are designed to determine the unique
volume and range profiles of individual currency mar-
kets in real time. They will be illustrated using this data,
imported into the MultiCharts analysis platform.
Providing context
for volume and range
The MVI and MRI time-adjust aver-
age volume and true range data,
respectively, throughout the day. The
indicators take each hour of the day
(for example, 8:00 to 9:00 a.m.) and
then calculate the average volume or
true range for that hour over the past
n days. This gives you a measurement
of whether the current volume or
range is larger or smaller than is typi-
cal for that specific time period.
The MVI and MRI are shown in the
following charts using hourly price
data and tick-volume proxy updates,
but they can also be plotted using
higher-frequency data or actual vol-
ume, if available.

22 August 2010 • CURRENCY TRADER

 FIGURE 2: VOLume and RANGE VS. MVI AND MRI IN AUD/JPY

Figure 2 compares 24-period simple

moving averages (SMAs) of the
hourly range and volume data (top)
to 24-period MVI and MRI (bottom)
in the Australian dollar/Japanese
yen (AUD/JPY) pair. The histogram
bars represent the hourly volumes
and ranges, with the blue bars repre-
senting up hours and red bars down
hours. The MVI and MRI (with the
range expressed as a percent of the
closing price) illustrate how stable the
relationship between time, volume
and range are over time. The indica-
tors show the three peaks in both
range and volume that coincide with
the opening of the Asian, European The top panel shows 24-period SMAs of the hourly range and volume data.
and London and, finally, the U.S. The bottom half shows the 24-period MVI and MRI. The AUD/JPY pair has the
forex sessions. The yellow, vertical expected volume and range peaks during the Asian sessions, but its largest
hourly ranges and volumes occur during the London afternoon session.
dashed lines mark session breaks at
10 p.m. (the New York close); both
FIGURE 3: MVI AND MRI APPLIED TO USD/CAD
indicators tend to peak occur around
3 p.m. London time.
Because the indicators are plot-
ted in real-time they allow you to
see whether the current volume
and range are above or below their
expected levels at any given time of
day. The indicators can be used sev-
eral ways to exploit a market’s unique
“pulse.”
The AUD/JPY pair in Figure 2, for
example, has pronounced peaks in
volume and range during the Asian
sessions, which is to be expected.
Perhaps less intuitively, the pair dis-
plays its largest ranges and volumes
during the London afternoon ses-
sion, even though neither currency is
USD/CAD shows little activity during the Asian session, displaying a much
native to that time period.
more significant volume increase when U.S. and Canadian markets open.
In contrast, in Figure 3 the U.S. dol-

CURRENCY TRADER • August 2010 23

 On the money

Table 1: Test Settings
Indicator look-back period:
Currency pair:
Test period:
Time frame:
Initial account size:
Trade size:
Trading costs:
FIGURE 4: TRADE SIGNALS
Trades are entered when volume and range are above the 24-day MVI and
MRI, and price breaks out above or below the 24-hour high/low.
FIGURE 5: FILTERING TRADES
lar/Canadian dollar (USDCAD) pair shows little activity
24 days during the Asian session, displaying a much more signifi-
AUD/JPY cant increase in volume when the U.S. and Canadian mar-
March 2000-March 2010
Hourly kets open.
¥62,000,000 Click here to download code for the MVI and MRI, and
100,000 for information about analysis programs that include the
0.02 points per round turn
indicators.
Trading with the indicators
“Exploiting currencies with time and vol-
ume” showed how the largest ranges and
volumes occurred in the London after-
noon session, and how that characteristic
could be profitably exploited by trading in
the direction of a new high or low for the
day. However, if we were to look at trades
only during periods of above-average vol-
ume and range, there would hardly ever
be any trades executed outside of those
hours. For example, a significant move
accompanied by above-average volume
and range using the MVI and MRI at,
say, 2 a.m. would unlikely indicate above
average volume and range if only an SMA
was used.
Time-adjusting the range and volume
makes it possible to determine whether
these are above average for any given
time of day. Let’s define a simple trading
strategy to test whether this theory has
value in trading:

If both range and volume are above the

current MVI and MRI levels:
1. buy if the market makes a new 24-
hour high;
2. sell if the market makes a new 24-
hour low.

A trailing stop was used to exit trades:

All long trades were exited when price
made a 24-hour low, and all short trades
The MVI and MRI (bottom) version of the system traded less frequently than
were exited when price made a 24-hour
the SMA version (top), avoiding many losing trades.
high. Figure 4 shows several trade signals

24 August 2010 • CURRENCY TRADER

in the AUD/JPY pair; Table 1 lists the test settings. Confirming SUE and PEAD
Almost any breakout during the London afternoon ses- The MVI and MRI also complement existing research on
sion will trigger a signal when using standard SMAs of the Standardized Unexpected Earnings (SUE) effect: If a
range and volume as triggers, since that period usually has company’s earnings are within expectations by a small
above-average ranges and volumes. Figure 5 shows how continued on p. 37
the MVI and MRI (bottom) avoided many losing trades
triggered by using the standard SMAs (top). Conversely, Table 2: PERFORMANCE COMPARISON
hardly any breakouts during the Asian session would MVI/MRI SMA
No. of trades: 813 1333
trigger trade entries when using simple moving averages Winning percentage: 43.17% 37.28
because that session tends to have much lower than aver- Max. drawdown: 15.96% 16.82%
age ranges and volumes. Again, the MVI and MRI ensure Net profit: ¥5,555,980 ¥4,591,880
Return on capital: 89.61% 74.06%
trade entries are triggered only if the volume and range are Profit factor: 1.23 1.19
above average for the specific time of day. Figure 6 com- Average winning trade: ¥ 6,834 ¥ 3,445
pares the strategy’s equity curve using SMAs (top) vs. the The MVI/MRI strategy was more profitable (on
MVI and MRI (bottom), while Table 2 compares some key fewer trades), and had a higher winning percentage
performance statistics. and profit factor.
If the presence of above-average ranges and volumes
for a given time of day are significant, it is worthwhile to FIGURE 6: EQUITY CURVES
consider if performance is related to the degree to which a
reading exceeds the average. Figure 7 shows the results of
taking signals when the range and volume exceed the MVI
and MRI by a certain multiple (from 1 to 2, tested in incre-
ments of 0.1). The higher the multiple, the higher the profit
factor (gross profit/gross loss).

Using the indicators in

volume and range analysis
The MVI and MRI are also useful for discretionary trad-
ing. There is already a huge body of work on volume and
range analysis. To summarize though, there are four main
principles:

1. Bullish volume: Increasing volume in an uptrend.

2. Bearish volume: Increasing volume in a downtrend.
3. Bullish range: Increasing range in an uptrend.
4. Bearish range: Increasing range in a downtrend.

Combinations of these signals can be equally significant.

For example, a market making a new high on decreasing
volume or range can indicate the move will not be sus-
tained.
Accordingly, knowing what the likely ranges and vol-
umes are going to be by applying the MVI and MRI can
provide an additional edge. You can measure not only
whether the volume and range are higher than average,
but whether they are higher than average for a specific The SMA version of the strategy (top) had a more volatile
(and less profitable) equity curve than the version using
time of day, and whether they are likely to increase or
the MVI and MRI (bottom).
decrease.

CURRENCY TRADER • August 2010 25

 TRADING strategies
Advanced strategies

No man is an island,
but the UK is
Attempts to solve economic woes with excess money, rising government
debt, and an artificially weak currency threaten the welfare of the global
community no less than the high tariffs of the Great Depression.

BY Howard L. Simons

One of the advantages of being an island is no matter how ever-expanding public sectors. The very significant differ-
badly you mismanage your affairs you can be viewed as ence that the UK has remained a center for global financial
a natural geopolitical entity. This has worked well for the markets while Japan has retained its famous insularity has
Japanese in recent decades and seems to be working for not mattered on the policy front.
the United Kingdom now. We will ignore for the sake of A second difference lies in the trade responses to neigh-
argument divided islands such as New Guinea, Hispaniola boring continental giants. Viewed through a long historical
and Ireland. lens, Japan never really owned the slot of the major Asian
Both the British and the Japanese have been pushing economic power — it simply rented it while China spent
their luck with economic policies in recent years, particu- the 20th century in various stages of unhappiness. High-
larly their dual attempts to paper over collapsed financial cost Japan really cannot compete with low-cost China,
sectors with low interest rates, quantitative easing, and regardless of any level of the yen relative to the yuan, and
they wisely have chosen not to play
this game even though they fear yen
Figure 1: UK Forward Rates Fell To Still-High Levels strength.
The British, on the other hand, have
spoken openly about devaluing the
pound competitively against the Euro;
by late 2009 Bank of England (BOE)
Governor Mervyn King was so bereft of
actual intellectual ideas he decided to
pursue this course. (Perhaps he should
have been called “Helicopter Merv.”)
The whole affair quickly turned into a
tragicomic race to the bottom in 2010.
On the surface, this is lunacy regard-
less of the ultimate disposition of the
Euro. The Eurozone is the UK’s major
trading partner and major source of
imported consumer goods. Each down-
tick in the pound makes British con-
The gap between the forward rate and the three-month rate six months out sumers poorer by weakening the GBP’s
shot higher during the 2008 financial crisis and peaked during the March 2009 claim on imported goods and services.
decision by the Bank of England to engage in quantitative easing. By April 2010 Let’s take a look at this policy of delib-
the gap had stopped shrinking and currently rests at a level far above any prior erate self-impoverishment and see how
to 2009. well it has served the British.

26 August 2010 • CURRENCY TRADER

Unexpectedly low FIGURE 2: Interest Rate Expectations, GBP And EUR
interest rates
First, let’s map the shock of British
monetary policy in 2009. We can do
this by comparing the forward rate
between six and nine months (the rate
at which we can lock in borrowing for
three months starting six months from
now) to the actual three-month rate six
months later (represented by the three-
month GBP LIBOR rate). Even though
the role of a market is to measure and
not to forecast, the forward rate does
tell us where the market’s traded expec-
tations were. Figure 1 shows the gap
between the forward rate and the three-
month rate led six months shot higher
during the financial crisis of 2008 and
As the British money machine cranked into high gear in 2008, the GBP FRR6,9
reached a peak during the March 2009 kept gaining on its EUR counterpart and the GBP kept weakening against the
decision by the BOE to ease quantita- EUR.
tively. The gap stopped shrinking by
April 2010 and currently rests at levels
far greater than anything prior to 2009. Figure 3: Interest Rate Expectations, USD And GBP
The rational expectations hypoth-
esis says only unexpected changes in
monetary policy can impact output and
employment, while expected changes
affect only forward inflation. In addi-
tion, the first surprise is the only real
surprise. If the same move blindsides
the market a second time, that’s the
market’s fault. Thus, we can interpret
the narrowing gap between expected
and actual three-month rates in late
2009 and early 2010 as diminishing
returns on monetary policy. We can dub
it the “Cole Porter” market in honor of
the composer’s following ditty:

In olden days a glimpse of stocking

was looked on as something shocking
Now heaven knows The British FRR6,9 dwarfed the American FRR6,9 throughout the 2008-2009
anything goes. period as the American FRR6,9 kept making new steepness records, but the
GBP never weakened as much against the dollar as it did against the Euro.
Currency impact Since U.S. monetary policy was virtually unchanged throughout the 2009-2010
Now let’s map the currency cross-rate period in question, this was not a case of the dollar getting stronger so much as
expressed as EUR per GBP (EUR/GBP) both the pound and the Euro getting weaker.
against the relative steepness of the two
money market curves. These will be overrated virtue for central bankers. Unsurprisingly, the
measured, as usual, by the forward rate ratios from six to GBP kept weakening against the EUR. The opposite only
nine months (FRR6,9). The more this ratio exceeds 1.00, the occurred on a much smaller scale when the GBP FRR6,9
steeper the yield curve. started to flatten relative to its European counterpart in
As the British money machine cranked into high gear in 2010. It’s as if the rest of the world really did not want to
2008, the GBP FRR6,9 kept gaining on its EUR counterpart have much to do with either currency.
(Figure 2). This was all the more remarkable considering This sad truth is visible when we compare and contrast
the EUR FRR6,9 was itself moving to record steepness. this with an identical chart for the British and American
Restated, the European Central Bank was out of control, markets (Figure 3). Here, too, the British FRR6,9 dwarfed
but the BOE was more out of control. Sobriety is a vastly the American FRR6,9 all through the 2008-2009 period, and

CURRENCY TRADER • August 2010 27

 On the money
advanced strategies

the American FRR6,9 kept making new steepness records

was not a case of the dollar getting stronger so much as
throughout this period. The GBP never weakened as much
both the pound and the Euro getting weaker.
against the dollar as it did against the Euro. However, once
The volatility of three-month GBP forwards for a EUR
the USD FRR6,9 began its relative flattening in 2010, both
holder jumped as the pound weakened against the Euro
the pound and the Euro fell against the dollar. As U.S.
in 2009, and remained high during 2010 (Figure 4). While
monetary policy remained virtually unchanged throughout
much of this jump was part of the global financial crisis
the 2009-2010 period in question, we have to conclude this
and would have occurred regardless, much of it reflected
a sentiment that the British would come
to their senses and stop the London
Figure 4: The GBP/EUR Cross Rate And Its Volatility printing presses. Like the dinner guest
who bet President Coolidge would say
more than three words, “they lost.”
This is corroborated by mapping the
volatility of three-month USD forwards
for a GBP holder against the USD per
GBP rate (Figure 5). Once again volatil-
ity spiked during the financial crisis of
2008 and again with the European sov-
ereign credit crisis of 2010, but if there
were volatility measures for shopping
carts, they would have jumped as well
during these periods. But notice how
volatility remained high well into late
2009 as traders feared, with reason, a
deliberate weakening of the pound back
down winter 2008-2009 levels.

Stocks as a currency trade

The volatility of three-month GBP forwards for a EUR holder jumped as the Now let’s conclude by asking whether
pound weakened vs. the Euro in 2009, remaining high during 2010. the British stock market has benefited
from artificially low interest rates and a
Figure 5: The USD/GBP Rate And Its Volatility weaker pound. We can map the relative
performance of the UK equity market
relative to that of the Eurozone since
the January 1999 advent of the Euro
using the MSCI total return indices
expressed in USD.
Once the Euro hit the end of the
“mattress trade” in mid-2002 — the
point at which legacy cash was no lon-
ger being sold for dollars, marked with
a green line in Figure 6 — the UK stock
market underperformed its Eurozone
counterpart until the future of the Euro
itself came into question by early 2010.
Regardless of the direction of the GBP/
EUR cross-rate or whether either side
of the currency trade was engaged in
competitive devaluation, no forward-
looking competitive advantage for the
Volatility spiked during the financial crisis of 2008 and again with the European UK vis-à-vis the Eurozone is visible in
sovereign credit crisis of 2010. But volatility remained high well into late 2009 the data.
as traders feared a deliberate weakening of the pound back below winter 2008- The directional argument is corrobo-
2009 levels. rated by switching to the American

28 August 2010 • CURRENCY TRADER

comparison. Here the UK market out- Figure 6: UK/Eurozone Performance Linked To GBP/EUR
performed the U.S. market into 2008 as
the GBP gained on the USD (Figure 7).
The relationship subsequently reversed.
It is clear, though, the British market
did not suffer vis-à-vis the American
market during the long period of
pound strength, nor did it gain on a rel-
ative basis once the pound weakened.
If anything, the 2009-2010 relationship
appears more pro-cyclical: A stronger
GBP leads to British outperformance
and vice-versa. Those who argue other-
wise and accept the protectionist argu-
ment that a weaker currency leads to an
increase in the expected profitability of
a nation’s businesses need to consider
the actual data.

Bad neighbors Once European legacy currencies were no longer being sold for dollars in mid-
Finally, we need to consider competi- 2002 (green line), the UK stock market underperformed its Eurozone counterpart
tive devaluation in the historic context until the future of the Euro came into question in early 2010. No forward-looking
of 1930s-style “beggar-thy-neigh- competitive advantage for the UK vis-à-vis the Eurozone is visible in the data.
bor” protectionism. The attempts by
Japan, China, the U.S., the UK and
Switzerland to solve financial crises and Figure 7: UK/U.S. Performance Linked To GBP/USD Rate
economic downturns by papering the
problems over with excess money, ris-
ing government debt and an artificially
weak currency threaten the welfare of
the global community no less than did
the high tariffs of the Great Depression.
Anyone who thinks they have a magic
bullet in making their exports cheaper
must answer the question, “Yes, but
to whom are you going to export?”
As John Donne noted, “No man is an
Island, entire of itself; every man in
a piece of the Continent, a part of the
main…”
No country in an interdependent
world is an island, either, and it is high
time they recognize this and end exper-
iments such as the recent and failed
British attempt at competitive devalua- The UK market outperformed the U.S. market into 2008 as the GBP gained
tion. › on the USD. The relationship reversed thereafter. However, the British market
did not suffer vis-à-vis the American market during the long period of pound
For information on the author, see p. 4.
strength, nor did it gain on a relative basis once the pound weakened.

CURRENCY TRADER • August 2010 29

 Currency futures snapshot as of 7/28/10

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the
legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).

10-day 20-day 60-day Volatility

Market Sym Exch Vol OI
move / rank move / rank move / rank ratio / rank

EUR/USD EC CME 291.8 223.9 1.96% / 28% 6.26% / 100% -1.78% / 0% .13 / 8%
JPY/USD JY CME 125.6 117.0 0.90% / 30% 1.15% / 22% 8.20% / 95% .17 / 2%
AUD/USD AD CME 101.1 67.3 1.35% / 29% 5.17% / 93% -3.83% / 38% .34 / 23%
GBP/USD BP CME 106.3 124.0 2.18% / 56% 3.32% / 65% 2.14% / 100% .44 / 90%
CAD/USD CD CME 83.6 82.8 0.39% / 22% 2.81% / 84% -0.90% / 15% .40 / 18%
CHF/USD SF CME 37.7 48.2 -0.33% / 50% 2.07% / 7% 2.49% / 81% .15 / 27%
MXN/USD MP CME 20.3 63.6 0.35% / 20% 1.72% / 71% -3.77% / 70% .31 / 30%
U.S. dollar index DX ICE 18.0 26.9 -1.54% / 25% -4.60% / 90% -2.24% / 100% .15 / 8%
NZD/USD NE CME 7.3 14.2 1.97% / 33% 3.50% / 62% 0.58% / 27% .55 / 40%
E-Mini EUR/USD ZE CME 3.9 3.0 1.96% / 28% 6.26% / 100% -1.78% / 0% .13 / 8%
Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is
based on pit-traded contracts.

LEGEND: BarclayHedge Rankings for June 2010

Volume: 30-day average daily volume, in
thousands. Top 10 currency traders managing more than $10 million
OI: 30-day open interest, in thousands. as of 6/30/10, ranked by June 2010 return
10-day move: The percentage price move
$ Under
from the close 10 days ago to today’s close. June 2010 YTD
20-day move: The percentage price move Trading Advisor Mgmt.
Return Return
from the close 20 days ago to today’s close. (Millions)
60-day move: The percentage price move 1. Friedberg Comm. Mgmt. (Curr.) 8.61% 44.90% 85.3
from the close 60 days ago to today’s close.
2. 24FX Management Ltd 7.80% 25.60% 28.2
The “% rank” fields for each time window
(10-day moves, 20-day moves, etc.) show 3. Ortus Capital Mgmt. (Currency) 6.47% 9.15% 1355.0
the percentile rank of the most recent move 4. Dacharan Capital (High Exposure) 5.84% 50.81% 100.0
to a certain number of the previous moves of
5. First Quadrant (Managed Currency) 3.21% 15.05% 512.0
the same size and in the same direction. For
example, the % rank for the 10-day move 6. Excalibur Absolute Return Fund 2.63% 5.39% 44.0
shows how the most recent 10-day move 7. QFS Asset Mgmt (QFS Currency) 1.99% -1.48% 634.0
compares to the past twenty 10-day moves; 8. Hathersage (Long Term Currency) 1.97% 8.30% 525.0
for the 20-day move, it shows how the most
recent 20-day move compares to the past 9. Harmonic Capital (Gl. Currency) 1.52% 1.01% N/A
sixty 20-day moves; for the 60-day move, 10. MIGFX Inc (Retail) 1.34% 26.14% 13.0
it shows how the most recent 60-day move
Top 10 currency traders managing less than $10M & more than $1M
compares to the past one-hundred-twenty
60-day moves. A reading of 100% means
as of 6/30/10, ranked by June 2010 return
the current reading is larger than all the past 1. D2W Capital Mgmt (Radical Wealth) 9.80% 63.25% 1.2
readings, while a reading of 0% means the 2. BEAM (FX Prop) 1.16% 3.14% 1.7
current reading is smaller than the previous
readings. 3. M2 Global Mgmt (2.5X) 0.64% 4.20% 2.5
Volatility ratio/% rank: The ratio is the short- 4. Capricorn Advisory Mgmt (FXG10) 0.54% 4.36% 9.2
term volatility (10-day standard deviation 5. KMJ Capital (Currency) 0.46% 0.55% 1.2
of prices) divided by the long-term volatility
(100-day standard deviation of prices). The
6. Greenwave Capital Mgmt (GDS Beta) 0.44% -3.29% 8.0
% rank is the percentile rank of the volatility 7. Marek D. Chelkowski (Forex) 0.10% 0.09% 4.9
ratio over the past 60 days. 8. Blue Fin Capital (Managed Currency) 0.05% 3.35% 3.4
9. Drury Capital (Currency) 0.04% 0.76% 3.4
10. Trident Asset Mgmt. (Gl. Currency) 0.02% 0.62% 7.0
Based on estimates of the composite of all accounts or the fully funded subset method.
Does not reflect the performance of any single account.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

CURRENCY TRADER • August 2010 30

 international markets

CURRENCIES (vs. U.S. DOLLAR)

July 27
1-month 3-month 6-month 52-week 52-week
Rank Currency price vs. Previous
gain/loss gain/loss gain/loss high low
U.S. dollar
1 Swedish krona 0.136755 5.90% -1.87% -0.39% 0.148 0.1227 8
2 Euro 1.294745 4.67% -2.95% -8.21% 1.5144 1.1891 17
3 Swiss franc 0.95196 3.90% 2.38% -0.67% 1.0087 0.853 2
4 South African rand 0.1355 3.30% -0.28% 2.96% 0.1389 0.1204 6
5 Australian Dollar 0.89858 2.83% -3.18% -0.18% 0.9405 0.8069 3
6 Great Britain pound 1.5483 2.81% 0.18% -4.36% 1.7042 1.4235 4
7 Japanese yen 0.011475 2.41% 8.05% 3.15% 0.01179 0.01023 10
8 New Zealand dollar 0.73081 2.37% 1.29% 2.97% 0.7635 0.6475 1
9 Russian ruble 0.03302 2.20% -3.93% 0.14% 0.03497 0.03029 16
10 Singapore dollar 0.73343 1.71% 0.33% 2.86% 0.7355 0.688 9
11 Thai baht 0.031045 0.55% -0.02% 2.51% 0.03157 0.02891 14
12 Brazilian real 0.56478 0.47% -1.20% 3.49% 0.5882 0.5076 5
13 Taiwan dollar 0.03116 0.34% -2.43% -0.13% 0.03201 0.03022 15
14 Chinese yuan 0.1475 0.18% 0.71% 0.69% 0.14760 0.1458 12
15 Hong Kong dollar 0.128755 0.14% -0.04% 0.07% 0.129 0.1281 13
16 Canadian dollar 0.96688 0.10% -3.34% 2.56% 1.0068 0.8987 7
17 Indian rupee 0.02128 -1.07% -5.65% -1.09% 0.02263 0.02018 11

global Central Bank lending RATES

Country Interest Rate Rate Last change Jan-10 Jul-09
United States Fed funds rate 0-0.25 0.5 (Dec. 08) 0-0.25 0-0.25
Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.1 0.1
Eurozone Refi rate 1 0.25 (May 09) 1 1
England Repo rate 0.5 0.5 (March 09) 0.5 0.5
Canada Overnight funding rate 0.5 0.25 (June 10) 0.25 0.25
Switzerland 3-month Swiss Libor 0.25 0.25 (March 09) 0.25 0.25
Australia Cash rate 4.5 0.25 (May 10) 3.75 3
New Zealand Cash rate 2.75 0.25 (June 10) 2.5 2.5
Brazil Selic rate 9.5 0.75 (April 10) 8.75 8.75
Korea Overnight call rate 2 0.5 (Feb. 09) 2 2
Taiwan Discount rate 1.25 0.25 (Feb. 09) 1.25 1.25
India Repo rate 5.75 0.25 (July 10) 4.75 4.75
South Africa Repurchase rate 6.5 0.5 (Mar. 10) 7 7.5

GLOBAL STOCK INDICES

1-month 3-month 6-month 52-week 52-week
Country Index July 27 Previous
gain/loss gain/loss gain loss high low
1 UK FTSE 100 5,365.70 5.80% -4.24% 2.84% 5,833.70 4,512.10 13
2 Italy FTSE MIB 21,158.08 5.10% -3.99% -3.82% 24,559 18,045 4
3 South Africa FTSE/JSE All Share 28,461.48 4.29% -0.22% 6.19% 29,565.10 23,931.64 9
4 Brazil Bovespa 66,674.00 3.81% 0.25% 2.47% 71,989.00 53,256.00 2
5 Singapore Straits Times 2,979.38 3.81% -0.41% 10.09% 3,037.97 2,521.36 5
6 U.S. S&P 500 1,113.84 3.65% -5.90% 1.49% 1,219.80 968.65 15
7 France CAC 40 3,666.40 2.52% -4.64% -2.48% 4,088.18 3,287.57 8
8 Australia All ordinaries 4,513.90 2.36% -8.13% -3.34% 5,048.60 4,142.20 10
9 India BSE 30 18,077.61 1.71% 2.19% 10.97% 18,237.60 14,684.50 1
10 Hong Kong Hang Seng 20,973.39 1.19% -1.36% 4.69% 23,099.60 18,971.50 3
11 Canada S&P/TSX composite 11,716.69 0.95% -3.54% 3.28% 12,321.80 10,384.60 14
12 Germany Xetra Dax 6,207.31 0.81% 0.78% 10.00% 6,341.52 5,158.60 6
13 Mexico IPC 32,695.31 0.39% 0.05% 6.81% 34,223.90 26,449.20 7
14 Switzerland Swiss Market 6,275.20 -0.57% -5.88% -3.06% 6,990.70 5,749.70 11
15 Japan Nikkei 225 9,496.85 -2.03% -15.30% -7.37% 11,408.20 9,076.41 12

32 August 2010 • CURRENCY TRADER

 non-u.s. dollar forex cross rates

1-month 3-month 6-month 52-week 52-week

Rank Currency pair Symbol July 27 Previous
gain/loss gain/loss gain loss high low

1 Euro / Canada $ EUR/CAD 1.3391 4.57% 0.40% -10.50% 1.6041 1.2502 16

2 Euro / Real EUR/BRL 2.292485 4.18% -1.78% -11.30% 2.7412 2.1772 19
3 Franc / Canada $ CHF/CAD 0.984585 3.80% 5.93% -3.15% 1.0629 0.8989 4
4 Aussie $ / Canada $ AUD/CAD 0.92936 2.73% 0.17% -2.67% 0.9895 0.8643 5
5 Pound / Canada $ GBP/CAD 1.60134 2.71% 3.65% -6.75% 1.8213 1.4894 7
6 Aussie $ / Real AUD/BRL 1.591025 2.34% -2.01% -3.54% 1.6978 1.4954 8
7 Euro / Yen EUR/JPY 112.84 2.25% -10.15% -11.01% 138.715 107.29 14
8 Yen / Real JPY/BRL 0.020305 1.83% 9.25% -0.39% 0.02127 0.01838 17
9 Euro / Aussie $ EUR/AUD 1.440865 1.80% 0.23% -8.05% 1.7408 1.377 20
10 Euro / Pound EUR/GBP 0.836235 1.73% -3.13% -4.02% 0.9411 0.8065 18
11 Franc / Yen CHF/JPY 82.97 1.62% -5.20% -3.70% 91.549 76.36 2
12 Euro / Franc EUR/CHF 1.360075 0.61% -5.21% -7.59% 1.5363 1.3092 21
13 Aussie $ / Yen AUD/JPY 78.34 0.47% -10.34% -3.19% 88.048 46.508 3
14 Aussie $ / New Zeal $ AUD/NZD 1.229545 0.42% -4.42% -3.06% 1.3233 1.1931 11
15 Pound / Yen GBP/JPY 134.95 0.39% -7.22% -7.27% 163.057 127.065 6
16 New Zeal $ / Yen NZD/JPY 63.69 0.00% -6.22% -0.16% 69.5573 59.5878 1
17 Pound / Aussie $ GBP/AUD 1.72306 -0.01% 3.47% -4.19% 2.0151 1.6328 12
18 Canada $ / Real CAD/BRL 1.711965 -0.38% -2.17% -0.90% 1.8244 1.6003 15
19 Aussie $ / Franc AUD/CHF 0.94391 -1.03% -5.44% 0.50% 1.0079 0.877 10
20 Pound / Franc GBP/CHF 1.62647 -1.20% -2.15% -3.71% 1.809 1.5778 13
21 Canada $ / Yen CAD/JPY 84.27 -2.23% -10.51% -0.56% 94.1955 81.1143 9

Account balance
Rank Country 2008 Ratio* 2007 2009+
1 Singapore 36.188 19.222 47.311 33.838
2 Norway 83.825 18.59 54.678 52.901 Totals in billions of U.S.
3 Hong Kong SAR 29.296 13.618 25.529 23.373 dollars
4 Sweden 37.279 7.783 39.054 25.781 *Account balance
as percent of GDP
5 Germany 245.722 6.69 253.756 160.627
+Estimate
6 Taiwan Province of China 25.122 6.239 32.975 42.572 Source: International
7 Netherlands 41.978 4.787 67.589 41.652 Monetary Fund, World
8 Japan 157.079 3.214 210.967 141.656 Economic Outlook
9 Switzerland 11.947 2.388 43.531 43.102 Database, April 2010.
10 Canada 7.606 0.507 14.53 -36.132
11 Korea -5.776 -0.62 5.876 42.668
12 United Kingdom -40.725 -1.517 -75.483 -28.838
13 Belgium -12.855 -2.539 9.956 -1.254
14 Czech Republic -6.669 -3.086 -5.483 -1.942
15 Italy -78.874 -3.418 -51.691 -71.27
16 Australia -46.683 -4.406 -57.552 -40.941
17 United States -706.068 -4.889 -726.572 -417.999
18 Ireland -13.886 -5.189 -13.876 -6.705
19 Spain -153.665 -9.592 -144.435 -74.136

global bond RATES

Rank Country Rate July 27 1 month 3 months 6 months High Low Previous
1 U.S. 10-year T-note 122.34 0.69% 3.98% 3.98% 123.5 114.78 1
2 Japan Government Bond 141.82 0.57% 1.67% 1.55% 143.28 137.11 3
3 UK Short sterling 99.22 0.06% -0.03% -0.15% 99.52 98.94 5
4 Australia 10-year bonds 94.73 0.00% 0.55% 0.21% 94.99 94.09 4
5 Germany BUND 127.69 -1.00% 2.45% 3.69% 129.93 119.85 2

CURRENCY TRADER • August 2010 33

 International Markets

Unemployment Period Release date Rate Change 1-year change Next release
Argentina Q1 5/21 8.3% -0.1% -0.1% 8/23
AMERICAS Brazil June 7/22 7.0% -0.5% -1.1% 8/26
Canada June 7/9 7.9% -0.2% -0.7% 8/6
France Q1 6/3 9.5% 0.0% 0.8% 9/2
EUROPE Germany June 7/29 7.0% 0.0% -0.7% 8/31
UK March-June 7/14 7.8% -0.1% 0.3% 8/11
Australia June 7/8 5.2% 0.0% -0.6% 8/12
Hong Kong April-June 7/20 4.6% 0.0% -0.8% 8/17
ASIA and
S. PACIFIC
Japan June 7/30 5.3% 0.1% 0.0% 8/27
Singapore Q2 7/30 2.3% 0.1% -0.9% 10/29
Singapore Q1 4/30 2.2% -0.1% -0.1% 7/30
GDP Period Release date Change 1-year change Next release
Argentina Q1 6/18 -0.6% 14.8% 9/17
AMERICAS Brazil Q1 6/8 -2.7% 15.2% 9/3
Canada Q1 5/31 2.5% 5.6% 8/31
France Q1 5/12 0.4% 0.7% 8/13
EUROPE Germany Q1 5/12 0.6% 3.2% 8/13
UK Q1 7/12 2.1% 2.7% 8/6
AFRICA S. Africa Q1 5/24 2.2% -4.7% 8/24
Australia Q1 6/2 0.6% 2.7% 9/1
Hong Kong Q1 5/14 -6.5% 9.2% 8/13
ASIA and India Q1 5/31 19.1% 12.2% 8/31
S.PACIFIC
Japan Q1 5/20 1.2% 4.9% 8/16
Singapore Q1 5/21 4.1% 15.5% NLT 8/27

CPI Period Release date Change 1-year change Next release

Argentina June 7/14 0.8% 11.0% 8/13
AMERICAS Brazil June 7/7 0.0% 4.8% 8/6
Canada June 7/23 -0.1% 1.0% 8/20
France June 7/13 0.0% 1.5% 8/13
EUROPE Germany June 7/9 0.1% 0.9% 8/10
UK June 7/13 0.1% 3.2% 8/17
AFRICA S. Africa June 7/28 0.0% 4.2% 8/25
Australia Q2 7/28 0.6% 3.1% 10/27
Hong Kong June 7/22 0.3% 2.8% 8/20
ASIA and
India June 7/30 1.2% 12.4% 8/31
S.PACIFIC
Japan June 7/30 0.0% -0.7% 8/27
Singapore June 7/23 -1.0% 2.7% 8/23

PPI Period Release date Change 1-year change Next release

Argentina May 6/11 1.0% 15.2% 9/3
AMERICAS Brazil June 7/7 -0.4% 5.5% 8/6
Canada June 7/29 -0.9% 0.2% 8/30
France June 7/29 0.1% 3.4% 9/30
EUROPE Germany June 7/20 0.6% 1.7% 8/19
UK June 7/9 -0.3% 5.1% 8/6
AFRICA S. Africa June 7/29 3.4% 9.4% 8/26
Australia Q2 7/26 0.3% 1.0% 10/25
Hong Kong Q2 6/14 1.7% 4.0% 9/13
ASIA and
S. PACIFIC
India June 7/14 0.7% 10.6% 8/16
Japan June 7/12 -0.4% 0.5% 8/11
Singapore June 7/29 -1.2% 1.7% 8/27
As of July, 30 2010 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

34 August 2010 • CURRENCY TRADER

 Global economic calendar: August
August 19 U.S.: July leading indicators
CPI: Consumer price index
ECB: European Central Bank
1 Germany: July PPI
FDD (first delivery day): The first 2 U.S.: July ISM manufacturing report 20 Canada: July CPI
day on which delivery of a com-
modity in fulfillment of a futures 3 U.S.: June personal income Hong Kong: July CPI
contract can take place. 4 21
FND (first notice day): Also
known as first intent day, this is 5 Brazil: July PPI 22 
the first day on which a clear-
inghouse can give notice to a
UK: Bank of England interest-rate 23 
buyer of a futures contract that it announcement 24 Mexico: Aug. 15 CPI
intends to deliver a commodity in
fulfillment of a futures contract. ECB: Governing council interest-rate South Africa: Q2 GDP
The clearinghouse also informs
the seller. announcement 25 U.S.: July durable goods
FOMC: Federal Open Market 6 U.S.: July employment report Mexico: Q2 GDP and July employ-
Committee
GDP: Gross domestic product
Brazil: July CPI ment report
ISM: Institute for supply Canada: July employment report South Africa: July CPI
management
LTD (last trading day): The final
UK: July PPI 26 Brazil: July employment report
day trading can take place in a 7 South Africa: PPI
futures or options contract.
PMI: Purchasing managers index 8 27 Japan: July employment report and
PPI: Producer price index 9 Mexico: July 31 CPI and July PPI CPI
Economic Release 10 U.S.: FOMC interest-rate announce- 28
release (U.S.) time (ET)
GDP 8:30 a.m. ment 29 
CPI 8:30 a.m. Germany: July CPI 30 U.S.: July personal income
ECI 8:30 a.m.
PPI 8:30 a.m. Japan: Bank of Japan interest-rate Canada: July PPI
ISM 10:00 a.m. announcement 31 Canada: Q2 GDP
Unemployment 8:30 a.m.
Personal income 8:30 a.m. 11 U.S.: June trade balance Germany: July employment report
Durable goods 8:30 a.m.
Japan: July PPI
Retail sales 8:30 a.m.
Trade balance 8:30 a.m. UK: June employment report September
Leading indicators 10:00 a.m.
12 Australia: July employment report 1 U.S.: August ISM manufacturing
13 U.S.: July CPI and retail sales index

August 2010 France: Q2 GDP and July CPI Australia: Q2 GDP

1 2 3 4 5 6 7 Germany: Q2 GDP 2 France: Q2 employment report
8 9 10 11 12 13 14 Hong Kong: Q2 GDP ECB: Governing council interest-rate
15 16 17 18 19 20 21
14  announcement
22 23 24 25 26 27 28
29 30 31­ 1 2 3 4
15  3 U.S.: August employment report
16 India: July PPI Brazil: Q2 GDP
Japan: Q2 GDP 4
17 U.S.: July PPI and housing starts 5
The information on this page is
subject to change. Currency Hong Kong: May-July employment 6 
Trader is not responsible for
report
the accuracy of calendar dates
beyond press time. UK: July CPI
18

CURRENCY TRADER • August 2010 35

 Events
Event: The CBOE Options Intensive
Dates: Aug. 26, Oct. 21
Location: Chicago
For more information: Go to www.cboe.com and click
on Education > Seminars
Event: Fifth annual free Paris Trading Show
Date: Sept. 17-18
Location: Paris
For more information: www.salonAT.com
Event: Security Traders Association 77th annual
conference and business meeting
Date: Sept. 22-25
Location: Washington D.C.
For more information: www.securitytraders.org
Event: CBOE Real Trading with Dan Sheridan
Date: Sept. 23
Location: Chicago
For more information: Go to www.cboe.com and click
on Education > Seminars
Event: The Forex, Futures & ETFs Expo Las Vegas 2010
Date: Sept. 23-25
Location: Caesars Palace, Las Vegas
For more information: Go to www.moneyshow.com
Event: SEC Customer Protection Rule one-day seminar
Date: Sept. 29
Location: Bayards, New York City
For more information: www.fmwonline.com
Event: The Third Kuwait Traders Expo
Date: Oct. 13-14
Location: J.W. Marriott, Kuwait City
For more information: www.metradersexpo.com
Event: The First Qatar Traders Expo
Date: Oct. 17-18
Location: J.W. Marriott, Qatar
For more information: www.metradersexpo.com
Event: CME Group’s Global Financial Leadership
Conference
Date: Oct. 18-20
Location: Ritz-Carlton Beach Resort, Naples, Fla.
For more information: www.gflc.com
Event: FXstreet.com International Traders Conference
Date: Oct. 20-22
Location: Barcelona, Spain
For more information: www.traders-conference.com
36 August 2010 • CURRENCY TRADER
Event: 2010 Sydney Trading & Investing
Seminars & Expo
Date: Oct. 29-30
Location: Sydney
For more information:
www.tradingandinvestingexpo.com.au
Event: Las Vegas Traders Expo
Date: Nov. 17-20
Location: Caesars Palace, Las Vegas
For more information: Go to www.moneyshow.com
Key Concepts
Carry trades involve buying (or lending) a currency
with a high interest rate and selling (or borrowing) a cur-
rency with a low interest rate. Traders looking to “earn
carry” will buy a high-yielding currency while simultane-
ously selling a low-yielding currency.
PIIGS: Portugal, Ireland, Italy, Greece, and Spain.
Quantitative easing is a tool a central bank uses to
attempt to stimulate the economy when cutting inter-
est rates is not feasible — such as when rates are already
at or near zero. Through quantitative easing, the central
bank purchases assets (e.g., treasuries, mortgages, securi-
ties) from financial institutions to pump money into the
financial system. Quantitative easing is often referred to as
“printing money.” Critics contend the practice runs a high
risk of creating high inflation, among other drawbacks.
True range (TR): A measure of price movement or vol-
atility that accounts for the gaps that occur between price
bars. This calculation provides a more accurate reflection
of the size of a price move over a given period than the
standard range calculation, which is simply the high of a
price bar minus the low of a price bar. The true range cal-
culation was developed by Welles Wilder and discussed
in his book New Concepts in Technical Trading Systems
(Trend Research, 1978).
True range can be calculated on any time frame or price
bar — five-minute, hourly, daily, weekly, etc. The following
discussion uses daily price bars for simplicity. True range
is the greatest (absolute) distance of the following:
1. Today’s high and today’s low.
2. Today’s high and yesterday’s close.
3. Today’s low and yesterday’s close.
Average true range (ATR) is simply a moving average
of the true range over a certain time period. For example,
the five-day ATR would be the average of the true range
calculations over the last five days.›
 Trading Strategies cont. from p. 25

deviation, then little market impact is expected; the larger average using the MVI and MRI provides a much more
the deviation from expectations, the larger the likely meaningful analysis of the market.
impact on the market. Though conceived as a way of quantifying the unique
Similarly, Post Earnings Announcement Drift (PEAD) behavior of currency markets, these indicators and the
research involves the tendency of a market to continue principles behind them can be applied to any market, and
to move for a certain amount of time after an unexpected also to other indicators, such as volatility. ›
announcement — disproving efficient market theory. For information on the author, see p. 4.
Although both these theories are primarily
concerned with equities, they also apply to other FIGURE 7: PROFIT FACTOR MULTIPLES
markets, including currencies, and we can also
highlight both of these exploitable effects using
the MVI and MRI: We can determine how big
an impact any event or economic announcement
has on the market by analyzing it relative to the
expected volume and range.
The following example illustrates a recent
example of both the SUE and PEAD effects. On
March 30, 2010 UK GDP growth was announced
for the final quarter of 2009. The estimate was
+0.3 percent, up from the +0.1 percent initial
estimate. The actual number came in at +0.4 per-
cent. As Figure 8 shows, this was positive for the
British pound, with both the range and volume
increasing above the average expected values
for that time of day, demonstrating an equiva-
lent of the SUE effect. The Euro/British pound
The higher the multiple of the MVI and MRI, the higher the profit
(EUR/GBP) pair then continued lower through- factor (gross profit/gross loss).
out the day (pound strengthening), dem-
onstrating the subsequent effect of PEAD FIGURE 8: MVI AND MRI APPLIED TO EUR/GBP
on the price action. An early indication
the market would trend lower was given
by the higher-than-average volume and
range values for that time of day.

Market context
While all currency pairs show a degree
of commonality, with the highest ranges
and volume occurring during the London
afternoon, each also has a unique, predict-
able, profile. Plotting these profiles using
the MVI and MRI helps identify when
volume and ranges are likely to increase
or decrease during the day, providing a
useful additional indicator for volume
and range analysis. Both the range and volume increased above the average expected values for
Standard volume and range analysis that time of day, demonstrating an equivalent of the SUE effect. The EUR/
tends to use simple moving averages, GBP pair continued to drop throughout the day (reflecting pound strength),
which lag the market. Time-adjusting the demonstrating the subsequent effect of PEAD on the price action.

CURRENCY TRADER • Month

August2010
2010 37
37