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Strategies, analysis, and news for FX traders

December 2012 Volume 9, No. 12

God Save The Queen (and Her currency): British pound searches for a catalyst p. 6 Dollar/yen pullback setup p. 29 Don’t be fooled by “currency wars” p. 14 Dissecting the dollar index/Aussie dollar relationship p. 20 Figuring out what matters in FX right now p. 10


Contributors .................................................4 Global Markets British pound has potential near-term edge over Euro ............................................6
The UK currency isn’t poised to make a huge move either way, but it has more potential upside vs. the Euro than the U.S. dollar. By Currency Trader Staff

Currency Futures Snapshot ................. 25 Managed Money Review ....................... 25
Top-ranked managed money programs

International Markets ............................ 26
Numbers from the global forex, stock, and interest-rate markets.

On the Money What matters? .......................................... 10
To understand what’s important in the forex market, start with what isn’t. By Barbara Rockefeller

Forex Journal ...........................................29
Pullback sets up long entry in hot dollar/yen pair.

The misdirection of currency wars ........ 14
Distracting rhetoric obscures the real dynamics of global capital flows and currency valuations. By Marc Chandler

Spot Check Dollar/yen makes another swing ............ 16
But is it the real thing? By Currency Trader Staff

Looking for an advertiser?
Click on the company name for a direct link to the ad in this month’s issue. Ablesys eSignal FXCM New York Traders Expo NinjaTrader

Advanced Concepts Spreading the dollar index and Australian dollar ............................... 20
Trading the U.S. dollar against the Australian dollar is different than trading the dollar index’s components against the AUD. By Howard L. Simons

Global Economic Calendar ........................ 24
Important dates for currency traders.

Questions or comments?
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2 December 2012 • CURRENCY TRADER

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A publication of Active Trader ®

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

For all subscriber services: q Marc Chandler ( is the head of global foreign exchange strategies at Brown Brothers Harriman and an associate professor at New York University’s School of Continuing and Professional Studies. Chandler has spent more than 20 years analyzing, writing, and speaking about global capital markets. He is the author of Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange (Bloomberg Press, 2009).

Editor-in-chief: Mark Etzkorn Managing editor: Molly Goad Contributing editor: Howard Simons

Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green

q Barbara Rockefeller ( is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), How to Invest Internationally, published in Japan in 1999, and The Foreign Exchange Matrix (Harriman House, January 2013). Rockefeller is on the board of directors of a large European hedge fund.

President: Phil Dorman Publisher, ad sales: Bob Dorman Classified ad sales: Mark Seger

Volume 9, Issue 12. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2012 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.


December 2012 • CURRENCY TRADER


British pound has potential near-term edge over Euro
The UK currency isn’t poised to make a huge move either way, but it has more potential upside vs. the Euro than the U.S. dollar.


While the financial world fixates on the U.S. fiscal-cliff crisis and never-ending Eurozone sovereign-debt crisis, the UK continues to trudge along rather quietly and its economy is finally beginning to show modest signs of improvement. The last several years in the UK have been tough in the wake of massive fiscal austerity implemented by the British government, with GDP growth basically unchanged in 2012. “They’ve had a very sluggish recovery,” says Jay Bryson, global economist at Wells Fargo. “Whereas the U.S. is above precrisis levels, the UK is still 3% below. Up until the third quarter, GDP was roughly unchanged over the past two years. They’ve been completely stagnant.” However, there are some signs that the worst could be over — and that could be bullish in the months ahead for the British pound (GBP), especially vs. the Euro (EUR).

the services and manufacturing purchasing managers’ indexes deteriorated in October.” However, Bowler adds the Purchasing Managers Index (PMI) for the services sector — which accounts for around 75% of the UK economy — remains in expansionary territory (“expansionary” is a reading over 50), which she says suggests the sector will soon recover the output lost since 2008. “The construction PMI also moved into expansionary territory in October,” she says. “As such, modest but well-below-potential growth is anticipated in the fourth quarter.” Bowler pegs 2012 GDP at -0.1%, the same pace cited by Webster.

Lucky 13?

Double dip

Technically, the UK economy retreated back into recession — defined as back-to-back quarters of negative GDP — at the beginning of 2012. Stephen Webster, director of UK-based economic consultancy Top Econ, notes the country registered consecutive quarters of negative growth (-0.3% in Q1 after -0.4% in Q4 2011). “This was followed by -0.4% in the second quarter [this year], owing largely to the impact of an extra bank holiday in June on the occasion of the Queen’s Diamond Jubilee,” he says. Britain’s third-quarter GDP posted a 1% gain. However, economists point out this positive figure was inflated by several unique factors, including the summer Olympics, and is unlikely to be sustained. “Given relatively strong third quarter growth, some pare-back is anticipated for the final quarter of 2012,” says Melanie Bowler, economist at Moody’s Analytics. “Both

For 2013, however, growth forecasts are edging marginally higher. “The good news is they are not in recession, the bad news is they still have a ways to go,” Bryson notes. He forecasts the UK’s 2013 GDP at 1.6%. Webster also has a positive, although slightly more modest, GDP outlook. “I’m looking for UK 2013 GDP growth to turn out around 1.2%,” he says. “The European Commission is forecasting 0.9% and the Bank of England 1.2%. Recession in 2013 is unlikely, but persistent weakness in global growth is a clear downside risk.” Meanwhile, Bowler forecasts the UK economy to expand by around 1.2% in 2013. “But overall GDP is not expected to surpass its 2008 level until late 2014,” she says. “Furthermore, the risks remain firmly weighted to the downside. The lingering crisis in the Eurozone, with which the UK has strong financial and trade ties, remains the key concern, but a new recession in the U.S. would also weigh on the UK.”

Headwinds remain

Britain still faces significant challenges, though. Fifty per December 2012 • CURRENCY TRADER

FIGURE 1: DOLLAR/POUND cent of UK exports head to the Eurozone and forecasts for a mild recession in the Eurozone in 2013 should continue to weigh on UK growth prospects. Consumer spending and sentiment are far from turbo-charged, Bowler notes. “The outlook for the country’s retailers remains subdued,” she says. “Consumer confidence is still well below its longterm average, weighing on discretionary spending. A number of high-profile retailers have fallen into administration this year, and more are possible. Austerity will remain the key drag on UK households through 2013.” Also, inflation has been moderately troublesome, edging just above the Bank of England’s (BOE) official 2% target rate recently. The UK’s Consumer Price Index The GBP/USD pair pulled back after challenging the late-April high in September. (CPI) rose by 0.1% month-over-month in October, lifting the headline inflation rate to a five-month high of 2.7%, according to outsider,” he says. “It probably makes it a little less likely Webster. the BOE will extend QE programs.” “Domestic gas and electricity prices [are expected to Bowler sees it differently. “The choice of Carney should add] around 0.4 percentage points to CPI inflation by early lift confidence in the UK banking system, but it is unlikely 2013,” Webster says. “There is very little the BOE can do to alter the direction of British monetary policy, which we about it, and other prices in the economy, including wages, expect to remain expansionary through late 2014,” she would need to be correspondingly lower in order to says. “The BOC’s Carney has a good, clean track record, achieve the 2% inflation target. Overall then inflation is not which the BOE will be hoping to take advantage of.” expected to return to target until around second or third Some market watchers say whether additional monetary quarter 2014.” policy accommodation or more quantitative easing will occur could simply depend on economic performance in Central bank shake-up coming months. “You could potentially see more quantitaIn a surprise announcement in late November, Bank of tive easing. It’s a close call at 55% odds of no more QE and Canada Governor Mark Carney was tapped to replace 45% odds of more QE,” Bryson says. outgoing BOE governor Mervyn King. Although this The UK’s asset-purchase program remained unchanged transition won’t take place until July 2013, speculation on at £375 billion in November, according to Bowler. “The what this could mean for BOE monetary policy has run BOE restarted purchases in October 2011 after ending them rampant. in early 2010,” she says. “Central bankers last increased the As is the case in the U.S., there has been some criticism fund by £50 billion in July.” and questioning of the effectiveness of quantitative easing Monetary policy action will be key in the coming months in the UK, especially because lending to businesses and if the BOE ends its QE programs ahead of the Fed or the individuals has remained sluggish. ECB; that could be a bullish factor for the pound on the “With the government’s hands tied to austerity — more crosses. fiscal tightening measures are expected to be announced in the government’s annual autumn statement — the Bank Pound positioning of England is being relied upon to bolster the economy,” The pound/dollar pair (GBP/USD) has been declining Bowler says. “Interest rates have been on hold at the modestly since the mid-September peak around $1.63 record low of 0.5% since March 2009 and are expected (Figure 1). The high represents strong resistance, having to remain steady well into 2014. One monetary policy turned back the early-2012 rally around the same level. committee member voted to increase asset purchases However, the main driver of the mid-September to midin November, and further purchases or the use of new November pullback was primarily a U.S. dollar rally. unconventional monetary policy tools cannot be ruled out, “There was a better overall performance for the U.S. especially if the economy fails to continue to expand as dollar over the period, while the pound began to lose expected or if it is subject to a shock.” ground as the fundamental UK data proved disappointGreg Anderson, North American head of FX strategy at ing,” Webster says. “The inability of the UK government to Citigroup, thinks Carney’s appointment might nudge the reduce debt also put a question mark over the durability of BOE in another direction. “It’s a fresh set of eyes from an the UK’s AAA rating, and limited attractiveness of poundCURRENCY TRADER • December 2012 7



based assets.” Price action in the U.S. dollar, which could be volatile into the final weeks of the year because of fiscal-cliff uncertainty, will be the key factor driving the pound/ dollar pair. Webster holds a cautious view. “The confirmation of third-quarter UK GDP growth at 1% should help support the pound, and with no obvious deal in sight on the fiscal cliff, I expect GBP/USD will be underpinned in the near term,” he says. “However, once the U.S. gets its fiscal act together, I see [the dollar] better placed than most for growth next year, and the pound could lose ground again — and quite sharply so, at least initially if the AAA rating is removed. Traders interested in isolating the pound’s dynamics should favor the EUR/ Moody’s has promised a review early in GBP pair over the GBP/USD pair. 2013.” Meanwhile, BNP Paribas analysts have a strong bullish view, which targets a move in pound/doldollar,” he says. lar toward $1.68 by the end of the first quarter 2013 and as Ultimately, trajectory of the pound/dollar pair is in large high as $1.74 by the second quarter. However, the fundapart predicated by the direction of the U.S. dollar, whereas mental factors of this forecast primarily come down to dol- the Euro/pound (EUR/GBP) represents a purer growthlar weakness, as opposed to pound strength. differential play between the UK and the Eurozone (Figure “We have a fairly aggressive view for the Fed,” says 2). Some analysts make the case that the pound could have Vassili Serebriakov, FX strategist at BNP Paribas. “We a growth-differential edge vs. the Euro. Since late July, the believe the Fed will continue easing policy through QE3.” Euro/pound pair has been rallying, but its upside progWhile the Fed is currently embarking on the program of ress stalled in late November below the late-October peak $40 billion in monthly purchases of mortgage-backed secu- around .8165. rities it announced in September, BNP Paribas expects the “We generally expect to see the pound appreciate slowly program to expand. against the Euro as the UK economy does better than the “Operation Twist ends in December,” Serebriakov says. Eurozone,” Anderson says. “That is where they sell around $45 billion in short-term Serebriakov sees a similar UK edge. “The cyclical posisecurities and buy longer-term securities. That’s balancetion of the UK economy appears slightly more advantasheet neutral. We think they will roll that into outright pur- geous to the Eurozone’s,” he says. “The economic underchases of Treasuries of $45 billion starting in January. Right performance of the Eurozone and the European debt now they are expanding the balance sheet by $40 billion, crisis will not be fully solved. For investors looking to but that would bring it to $85 billion [per month].” put money into Europe, the UK remains a more attractive If the Fed were to enact that shift it, would be “dollar option because the UK is not associated with the extreme negative and we think the dollar will weaken across the fiscal risks of the Eurozone.” board,” Serebriakov says. In the months ahead, BNP Paribas forecasts the pound to HSBC offers a more tepid outlook. “We see the pound outperform the Euro, with a fourth-quarter 2012 target at at $1.60 at the end of the year and at $1.62 by the end 79.00 for the Euro/pound, a 78.00 target for the end of Q1 of March,” says Bob Lynch, head of G-10 FX strategy 2013, and a 76.00 target for the end of the second quarter. Americas HSBC. “From a pound perspective, we see issues with the UK and the U.S. and really don’t have the Volatility pickup? pound/dollar exchange rate moving a great deal.” Heading into the final month of 2012, Lynch notes that historical volatilities for many currencies are at fairly low Euro/pound levels. However, several risk factors could heat up action Forex traders interested in trading a more specifically in the near term, some foreseeable and others that might UK outlook might prefer the cross rates. “If you want to emerge unexpectedly. isolate the UK story, the Euro/pound is a better guide,” “There’s the U.S. fiscal backdrop and the threat of a Serebriakov says. temporary disruption to the Eurozone financial system,” Anderson agrees. “Seventy percent of the move in he says. “If and when something upsets the apple cart, it pound/dollar [in September-November] was really Euro/ often is something you didn’t flag ahead of time.” y
8 December 2012 • CURRENCY TRADER

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CURRENCY TRADER • December 2012

On THE MONEY ON the Money

What matters?
To understand what’s important in the forex market, start with what isn’t.


The factors that matter in FX are ever-changing. Even old themes get recycled in slightly different ways, as the mix of factors differs over time — e.g., raising the U.S. debt ceiling will be different this time from what it was in 1995. Looking ahead to 2013, can we say what matters to the FX market? We can start with what does not matter. Greece doesn’t matter. As the Eurogroup held three meetings on the delayed tranche of the second Greek bailout disbursement, the Euro rallied. A rally in the midst of a financial crisis means the crisis is one-sided — it’s a crisis for Greece, just not for anyone else. Greece doesn’t matter to the FX market’s perception of the Euro because it’s a small economy and no one actually believes Greece will accept reform and come out of the crisis with a well-functioning economy. Its citizens do not accept the fact that they need to pay taxes; the state can’t privatize assets, chiefly real estate, because it doesn’t have an accounting of titled properties. We’ve had a long time to get used to Greek problems. Catastrophe in Greece is already priced in. There’s nothing worse about Greece that can come along and harm the Euro. Even a “Grexit” would not be Euro-negative. (A Greek exit from the Eurozone would, in fact, be Eurofavorable.) Spain doesn’t matter, either. Spain has the fourth-largest Eurozone economy and faces some severe challenges, including a possible Catalan referendum on secession and a banking sector bailout delayed by however long it will take to get the European Central Bank (ECB)-managed Eurozone bank supervisor in place. Technically, it will exist as of year-end, but officials say it will be six to 18 months before Spain can expect any cash. Still, despite near-begging by ECB chief Mario Draghi, Spain seems determined to postpone asking for a sovereign bailout. As Spain’s Prime Minister Mariano Rajoy says, as long as bond yields are tame, Spain gets to rack up the cost savings. And as

November rolled to an end, the bond gang was supporting the viability of the delay. The 10-year yield was about 5.7% compared to 7.75% at the July peak. The Madrid IBEX is performing about the same as the Paris CAC. And big-picture macro doesn’t matter. The Eurozone is officially in recession, with Q3 GDP down 0.1% after a 0.2% contraction in Q2. The International Monetary Fund (IMF) predicts an 80% probability of Eurozone recession in 2013. The European Commission says 2012 growth will be 0.4% and cut its Eurozone growth forecast to 0.1% in 2013 (from 1% in May). German growth was cut in half to 0.8% from 1.7%. France will contract by 1.4%. S&P cut Spain’s rating two notches to triple-B-minus, one step above junk; Moody’s cut France’s rating by one notch to Aa1, leaving Finland as the only Eurozone country with a triple-A rating. The Economist named France the “time-bomb at the heart of Europe” on labor market rigidity and loss of competitiveness. In a nutshell, the equity and FX markets get jittery from time to time as each new chapter of the Eurozone train wreck comes to light, but since July the Euro has been resilient (Figure 1). From the low at 1.2043 on July 24 the Euro rallied to 1.3172 in mid-September, and by late November, it was rallying again after a dip. The upside breakout in September carried the Euro above resistance at the top of the standard error channel, and the Euro has barely glanced back. If we hand-draw support and resistance lines, we can easily see the Euro surpassing the September high at 1.3172 and reaching, perhaps, 1.3500 by year-end. (As a happy coincidence, 1.3500 is near the 50% retracement of the down move from May 2011 to July 2012. As we know, a 50% retracement has magic properties in some traders’ imagination.)

Crisis, perception, and reality

How can the chart be so divorced from any reasonable interpretation of Eurozone conditions? There are two posDecember 2012 • CURRENCY TRADER


The equity and FX markets tend to get unsettled as each new chapter of the Eurozone train wreck unfolds, but the Euro has been resilient since July.
Source: Chart — Metastock; data — Reuters and eSignal

sible answers, and they depend on time frame. On the shorter time frame (weeks and months), a Euro upside breakout is justified because a lot of terrible things happened and the world didn’t end. With each new “crisis,” the power to influence the Euro was diluted. When crisis becomes routine, its very concept and experience is devalued. Traders become weary and jaded; it takes ever-bigger crises to get their attention. This is not to say all crises are created equal. For example, if and when confidence in Spanish brinkmanship with the ECB is lost and Spanish 10-year yields again top 7.5%, you can expect the Euro to be punished with a large drop. And savvy traders are planning against this day. According to the CFTC’s Commitments of Traders (COT) report, as of Nov. 13 speculative accounts were net short Euro futures by 83,646 contracts, up from 67,141 the week before. The record Euro short is 214,418 contracts, from June 5, 2012. This gives us a clue that over the longer time frame — say, to March-June 2013 — the market expects the Euro won’t be able to resist the drag of recession that may bring with it an ECB rate cut, ratings agency downgrades, possible bank failures, probable Grexit, and heaven only knows what else. Fundamentals and institutional factors can be shrugged off in the short run, but in the long run, surely these things add up and do matter. The warning here is the old saw from Keynes: The life of a market is only a series of short runs, and in the long run, we’re all dead.
CURRENCY TRADER • December 2012

The Euro and the U.S.

The problem arises when we ask, against what currency will the Euro fall as these negatives develop? The Japanese yen is already on one of its periodic bouts of weakening (see “Deciphering the yen,” Currency Trader, November 2012). The Euro/pound chart looks a lot like the Euro/dollar chart. Maybe the Euro will fall against all of them. So let’s consider the U.S., since the Euro/dollar is the industry benchmark. First, there’s the so-called fiscal cliff. If the tax and spending changes go forward as designed, the U.S. faces recession, rising unemployment, and a return to a falling stock market. The S&P 500 fell 9% from mid-September to mid-November, with one of the “reasons” given as expected higher taxes on dividends and capital gains, so players were cashing in early. Nobody knows if this is an accurate description of investor sentiment, although it’s fun to note the presidential election was Nov. 6 and most of the down move was done by then. Therefore, the drop has to be attributed to stock market players correctly expecting the president to be re-elected, and that’s more than most analysts can swallow. Instead, we might look to actual stock market factors, such as earnings. As of late November, the debate about the fiscal cliff was all over the map, with many confident some deal, however suboptimal, will get done, and an equal number saying the fiscal cliff is not so steep, anyway. It will take months for contractionary effects to occur, and by then a new pic11


ture will have formed. It’s possible the fiscal cliff doesn’t matter, either. It’s a problem and not a crisis. Despite protestations from Fed Chairman Ben Bernanke that the Fed cannot manage all economic problems and it’s Congress’ job to fix the fiscal cliff (which was Bernanke’s phrase, by the way), markets are still reliant on central banks to save them. And Bernanke delivered. On Nov. 20, he told the Economic Club of New York, “We will continue to do our best to add monetary-policy support to the recovery…[W]hat the Federal Reserve can do and will do is continue its stated policy, which is to do additional asset purchases, buy MBS, and take whatever actions are appropriate to try to ensure that the outlook for labor markets improves in a sustained way and a substantial way.” Bernanke called for a not-too-aggressive long-run deficitreduction plan that would reduce business uncertainty. He said, “Even as fiscal policy makers address the urgent issue of longer-run fiscal sustainability, they should not ignore a second key objective: to avoid unnecessarily adding to the headwinds that are already holding back the economic recovery.” With Bernanke’s caveats, his statement is on a par with Draghi’s “whatever it takes” comment introducing Outright Monetary Operations last summer, whereby the ECB will buy sovereign paper. Although two central banks are announcing “whatever it takes,” it means two different things. In the U.S., the buyer of government paper (the Fed) is a close cousin to the issuer (the Treasury). Both are part of the executive branch of the government and their interests are the same. Particularly, they have no ability to affect fiscal policy except as scolds. This is not the case in Europe, where the ECB may become a buyer of sovereign paper but it’s not related to the issuers of such, and will assert the power to demand fiscal conditions (hence Spain’s reluctance). Thus, the ECB has a stake in those whose paper it is buying being able to repay, and repayment depends on fiscal austerity. Promoting growth is secondary. In contrast, the Fed and Treasury are not worried about the government’s ability to repay — the government can just print more money. Maybe this will create inflation down the road or maybe it won’t, but the key point is fiscal austerity isn’t an ingredient. Without opening the can of worms that is the Keynesian stimulus policy debate, note that Keynesian stimulus is the only policy that has ever worked, although the sample size is too small and the social science of economics is hardly scientific enough to judge. In the end, it is likely the U.S. will resume growth, however subpar, and Europe will remain mired in recession. Here we have growth vs. fiscal restraint, the most important divergence. The Eurozone was literally built on the requirement of debt and deficits not exceeding a certain ratio of GDP. This is the source of the underlying magic of the Euro — controlling sovereign debt is the gold standard of government management. That the Eurozone is

not actually accomplishing the goal seems not to matter as much as the statement, written in stone, that it is the goal. In contrast, the U.S. doesn’t have any such rules. In practice, it may not matter. Investors continue to buy U.S. government paper whatever the ratings and whatever the fiscal outlook. This is the “exorbitant privilege” of the reserve currency issuer — it is spared, so far, the rise in risk premium that normally accompanies a fiscal mess. In other words, the U.S. is getting away with failing to adopt a fiscal standard. “Getting away with it” means lower financing costs but it comes, ironically, at the expense of the dollar. Finally, there’s violence and potentially a war in the Middle East. The Gaza cease-fire reduced the strain on oil prices, but nobody imagines other problems will not arise — such as the direction Egyptian leader Mohamed Morsi is going. Egypt is a net importer of crude oil, but it controls the Suez Canal and the Suez-Mediterranean Pipeline (SUMED). The canal moves 800,000 barrels per day of crude oil and 1.4 million barrels per day of petroleum products, while the SUMED pipeline averages 1.7 million barrels per day. This is Mediterranean Europe’s oil supply, and yet it is the dollar that falls when oil prices rise on fear of war. At some point, however, an outbreak of hostilities in the Middle East benefits the dollar as the safe haven. In the conflict between growth vs. fiscal restraint, the U.S. chooses growth and Europe chooses fiscal restraint. So far, the resulting European recession has not scared everybody, although the COT report indicates this is the main bias. As long as the U.S. avoids outright recession, U.S. conditions make the world safe for risk appetite, and that includes short-term plays favoring the Euro. Perversely, if the U.S. were to fall off the fiscal cliff entirely, it would be dollar-favorable, not because the U.S. is adopting Europe’s gold standard, but because of the sheer messiness of gridlock, something S&P named in downgrading the U.S. sovereign rating last year. Still, at this point a fiscal cliff fix is likely, and it will require knowing that outcome to be able to generate growth forecasts. Longer term, U.S. growth over European growth and U.S. leadership in the Middle East should favor the dollar. Spain doesn’t matter until it does, and nobody today can name the catalyst that would send sovereign debt rates back to 7.5%. The U.S. fiscal cliff doesn’t matter until it does, when rates fly up or a rating agency says so. The problem is that a switch in sentiment needs a trigger, and short of a shooting war it’s hard to see what that will be, given traders are so blasé about bad economic and institutional developments in Europe. It’s hard to know today what’s a “real” crisis, but we’ll know it when we get it, because the proof will be a rising dollar. y For information on the author, see p. 4.
December 2012 • CURRENCY TRADER

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The misdirection of currency wars
Distracting rhetoric obscures the real dynamics of global capital flows and currency valuations.
Misdirection is a standard ploy of magicians and politicians. A feint of some type distracts the audience from the real movement or purpose. “Currency war,” which has become the title of countless books, articles, and conferences, is such a misdirection. Some officials, notably Brazilian Finance Minister Guido Mantega, have been leading the charge that by pursuing unorthodox monetary policy, the U.S. has sparked powerful forces that destabilize the emerging-market economies through capital flows, driving their currencies sharply higher. It is indisputable that international capital movement is volatile, and the accommodative monetary policy in the U.S. and other developed economies has shifted interestrate differentials more in favor of emerging markets. Further, this shift has likely spurred private capital flows. However, capital inflows into the emerging markets are driven by a number of factors, not just interest-rate differentials. Consider, for example, that growth differentials and higher returns on investments have also been attracting inflows, especially in recent years. The general investment climate is shaped in part by the risk appetite of investors. The risk-on, risk-off matrix has shifted in recent years, not as much by the pursuit of U.S. monetary policy as by the shifting response to the European debt crisis. In a recent speech, Federal Reserve Chairman Ben Bernanke cited research by the International Monetary Fund (IMF) and others that the monetary policies of the advanced economies were not the dominant drivers of private savings into emerging markets. He went further and noted that capital flows into emerging markets have slowed considerably over the past couple of years, and even the U.S., Europe, and Japan continued to ease monetary policy. If the cry of “currency war” is a misdirection, what exactly is it trying to distract us from? Many emerging market countries want currency valuations that economists argue are below fair value. They do so to promote exports
14 14

and bypass domestic structural obstacles to growth. Undervalued currencies in and of themselves may attract foreign capital flows anticipating currency appreciation. Moreover, purposefully weak currency strategies often leave developing countries more vulnerable to inflation, and more sensitive to the monetary policies of other countries.

Currency flexibility

The U.S., through numerous administrations, and in various declarations of the Group of Seven industrial nations, has consistently advocated greater currency flexibility. Such flexibility would allow greater independence in the conduct of monetary policy and offer greater insulation from external developments. This, of course, applies not only to Brazil, but also to China, the world’s second-largest economy. A more flexible currency regime would help officials refocus their economy from one driven by external demand to one led by domestic consumption. It would allow the Chinese people to enjoy a greater share of their country’s economic success and prowess. Brazil’s finance minister claimed the U.S. was being selfish in pursuing monetary policy without taking into account the impact of such a policy on other countries. Yet, the real selfishness and beggar-thy-neighbor policies are not the easing of the U.S. and other advanced economies, but the reluctance of many emerging countries to allow their currencies to appreciate in the face of stronger growth, capital inflows, and larger reserve positions.

Monetary policy

Even if there are costs for developing countries as a result of the easy monetary policy of the advanced economies, there are also benefits. Part of the reason the economies of many developing countries have slowed is their exports to the U.S. and Europe have decreased as those economies have decelerated. Easier monetary policy, which has taken on an unorthoDecember 2012 • CURRENCY TRADER October 2010 • CURRENCY

dox characteristic given that policy rates are near zero, is meant to help fuel a recovery in aggregate demand. Stronger U.S. and European growth would stimulate trade, as well as underpin growth in emerging markets. Aggressive monetary policy in the face of weak domestic economies is not the equivalent of a currency war. On the contrary, the fact that some developing economies insist on having undervalued currencies is a more directly recognizable shot in a currency war. Such policies can be associated with costs, such as greater sensitivity to inflation and limits on the independence of their own monetary policies. There are various drivers of capital flows to emerging markets, and those capital flows do not appear to be correlated with U.S. or European monetary policies. It is interesting to note that for the better part of the past four months, as the Federal Reserve pursued QE3+, the European Central Bank announced its Outright Market Transactions, and the Bank of Japan expanded its asset purchase program in both September and October, the Brazilian real (BRL) has been largely flat. The dollar is largely confined to a 2.00-2.05 trading range (Figure 1). Investors recognize there are a number of emerging-market countries, such as Mexico, Poland, Turkey, and South Africa, that have embraced currency flexibility to a greater extent. They have increased the capacity of their capital markets to absorb inflows, as well as a greater part of their domestic savings.

The currency requires special authority to be used within China itself. Outside of Chinese trade with Hong Kong, most of Chinese trade continues to be conducted in U.S. dollars. There has been some diversification of reserves away from the dollar and Euro in recent years. However, it has not gone to the Chinese renminbi, but to the Australian and Canadian dollars. The kind of transparency and flexibility that an international currency requires still seems beyond the ken of Chinese officials.

More rhetoric than politics

Currency wars then, in either expression, seem to be more in the realm of rhetoric than politics. There has been a long and sustained push from the developed countries to get emerging markets to embrace more flexible currency regimes. The adoption of unorthodox monetary policy by the U.S., Europe, and Japan may, on the margins, increase such pressure, but few have capitulated. Instead, they have developed a host of other tools, such as macro-prudential policies (administrative measures such as Brazil taxing foreign purchases of stocks and bonds, or Taiwan prohibiting foreign investment in shortterm instruments such as T-bills), to blunt the impact. China may one day provide the world’s key currency, but that day is not in sight, and the role of the dollar as the numéraire continues. y

U.S. dollar and Chinese renminbi

For information on the author, see p. 4. There is another dimension to debate about currency wars. Many observers argue the U.S. dollar is in an inexorable decline and it will be increasingly supplanted by the Chinese renminbi. On FIGURE 1: DOLLAR/REAL the other hand, China is not above deflecting criticism of its rigid currency regime by criticizing the international monetary regime and the role of the dollar. The internationalization of the Chinese renminbi has been more bluster than substance. The role of the renminbi in the world economy remains minor. The numerous swap lines that China arranged with many developing countries, which captured the imagination of many critics of the U.S., have not been used. Few countries have chosen to add the renminbi to their reserves. The “Dim Sum market,” the offshore renminbi market in Hong Kong, a special administrative region of China, The U.S. dollar/Brazilian real (USD/BRL) pair has been mostly flat in recent is dominated by Chinese state-owned months as the Fed pursued QE3+, the European Central Bank announced companies, banks, and property comits Outright Market Transactions, and the Bank of Japan expanded its asset panies. Renminbi in Hong Kong is purchase program. not fungible with renminbi onshore.
CURRENCY TRADER • December 2012 15


Dollar/yen makes another swing
But is it the real thing?

For more than a generation, calling a bottom in the dollar/yen pair (USD/JPY) has been akin to the search for extraterrestrial intelligence — looking for something that should exist in theory but turns out to be remarkably elusive in reality. Witness the huge spike low in March 2011: Not only did this intramonth breakdown and recovery take the USD/JPY nearly 6% below the previous month’s low, it shot well below the long-standing 1995 bottom that had just been penetrated five months earlier. Nonetheless, the pair eclipsed this low a few months later, in August, September, and October (Figure 1). There have been a few two- to four-year bull moves in

the dollar/yen since the beginning of the floating-rate era (the most recent being the roughly 23% upswing from the beginning of 2005 to mid-2007), but as Figure 2 shows, the long-term history of the pair reveals these rallies to be little more than respites in a long, downward slog that has seen the dollar’s value relative to the yen shrink to approximately 25% of what it was in 1975. But as of the end of November, the USD/JPY rate was more than a year removed from its record low of 75.57 set in October 2011. Having sold off nearly 40% from its June 2007 peak and making repeated record lows in the latter half of 2011, this year’s consolidation — and eventual upturn — marked the longest the dollar/yen has gone without making a new 12-month low FIGURE 1: A RARE BUMP in more than five years. In fact, the pair’s seemingly modest twomonth run concluding in November — two consecutive months of higher monthly highs and closes following a six-month low (September) — is a feat the pair has accomplished only 13 previous times since 1975 (the most recent and previous three instances marked with arrows in Figure 1). And although that’s a small sample upon which to base projections, the majority of these points have been followed by further (although not necessarily extended) gains in the dollar/yen pair. Although only a fool would claim the bottom is finally in, it’s worthwhile to consider It might be hard to believe, but the dollar/yen has rarely established whether the current rally is just another fluke, two consecutive months with higher highs and higher closes after a or if it has the potential to follow through, at six-month (or longer) low, as it did in November. least for a while.
Source for all charts: TradeStation


December 2012 • CURRENCY TRADER October 2010 • CURRENCY


Weekly perspective

Figure 3’s weekly chart highlights the fact that although the dollar/yen has managed to establish higher lows this year, it faces near-term resistance as it approaches the 84.00-85.00 zone, which encompasses the March 2012 and April 2010 highs as well as the November 2009 low. A move above the March 2012 high of 84.17 would constitute a new 52-week high for the pair, a milestone that has in the past been associated with, at best, modest short-term gains. Since 1975, after an initial 52-week new high (measured in terms of the high price, not the weekly closing price), the dollar/yen has made an average of two more consecutive higher weekly highs (i.e., two more higher weekly highs after the initial new 52-week high); the median number of additional weekly highs was one. The longest stretch of consecutive higher weekly highs after 52-week highs was nine, which occurred in October-November 2005. But the most common occurrence after a new 52-week high was a lower weekly high. (However, many times a new 52-week high was followed by one or two weeks with lower highs, at which point price turned upward again to establish additional 52-week highs.) Table 1 compares the average and median 12-week price moves after initial new 52-week highs to all 12-week dollar/yen price moves from January 1974 through November 2012. The moves are measured both in terms of closing prices (the close of the week of the 52-week high

The dollar/yen’s long-term history is one of selling interrupted by sporadic bull moves.


The dollar/yen faces resistance as it attempts to establish a new 52-week high for the first time since 2007.

CURRENCY TRADER • December 2012



12-week +/- after 52-week high Avg. Med. -0.07% 0.43% All 12-week +/-0.60% -0.40% 12-week LUM after 52-week high 3.90% 3.35% All 12-week LUMs 3.36% 2.51%

Price action was modestly more bullish after new 52-week highs, but there was a great deal of variability.

to the close 12 weeks later) and the largest up move (LUM, the move from the close of the week of the 52-week high to the highest high of the next 12 weeks). Although the average 12-week close-to-close move after a new 52-week high was -0.07%, the median change was a gain of 0.43%, which suggests the more representative outcome was a modest gain, while a smaller number of negative moves skewed the average figure lower. The average and median price changes for all 12-week periods in the analysis period were

both negative (-0.60 and -0.40%, respectively). The LUM comparison also shows a modest bullish edge after new 52-week highs.

Figure 4’s daily chart shows, despite a solid rally in October that took the pair to its highest levels in six months, the dollar/yen’s real fireworks occurred mostly during a two-week period last month, when price jumped 4.8 percent from the Nov. 9 low to the Nov. 22 high of 82.83. FIGURE 4: DAILY DOLLAR/YEN After a multi-day pullback (which set up the trade described in this month’s Forex Trade Journal), the pair turned sharply higher again the last day of the month. The looming resistance/target of the March high appears at the left side of the chart. At the beginning of December the dollar/ yen pair was certainly overheated, and history shows long-term dollar/yen rallies have been mostly few and far between. If recent history is a guide, the most likely intermediate outcome would be for the pair to continue to wallow in a trading range near its lows. In the short term, the prospect of a challenge to resistance and the establishment of a 52-week high (despite a likely correction at that juncture) might provide some upside trading opportuAfter a solid rally in October, the dollar/yen exploded to the upside in nities. y November.
December 2012 • CURRENCY TRADER

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Spreading the dollar index and Australian dollar
Trading the U.S. dollar against the Australian dollar is different than trading the dollar index’s components against the AUD.

One of the enduring puzzles of markets in general and exchange-traded markets in particular is the combination of the first-mover and network effects: For every major market category, one network node or exchange dominates, and the first product to claim that node essentially claims it forever. This combination goes a long way toward

explaining why successful assaults on a competitor’s established contracts tend to have survival rates only slightly greater than those of kamikaze pilots and car-bomb drivers; at least the latter two categories have the excuse of having failure as their established objective. Such is the case with the venerable dollar index (DXY), something we dealt with seven long years ago (see “The Dollar FIGURE 1: EXCESS CARRY RETURNS FOR DOLLAR INDEX Index and ‘Firm’ Exchange COMPONENTS INTO AUD (UNWEIGHTED) Rates,” December 2005). It has frozen the world of 1973 in time with the sole exception of consolidating the various European currencies into the singular currency of the euro; you are free to express your own opinion on the wisdom of that latter move. While the composition of the DXY is open to criticism, and arguments exist as to why the Swedish krona is included while the currencies of important trading partners such as Mexico, Brazil and China are not, the DXY has established itself as the dollar index to trade if you must trade a dollar index. Perhaps it is the index’s constancy of Borrowing any of the DXY components and lending them into the AUD has produced composition we should credit; excess carry returns over time. unlike those stock indices whose
December 2012 • CURRENCY TRADER


210 200 190 180 170 160 150

January 4, 1999 = 100

140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

weights change with rebalancing and corporate actions, the 57.6% weight of the euro is one of the few things we can count on to remain fixed. Moreover, while an argument can be made for a trade-weighted index, such as that maintained by the Federal Reserve, the central bank is not in the licensing business and has to remain above the fray. The conclusion reached in July 2011’s Weighting For Correlation remains: You do not want to be in the index management business.
















The weighted-sum of excess carry returns into the AUD depicts a long-running bull market for the Australian dollar.

215 205 Weighted Excess Carry Return, DXY : AUD Jan. 4, 1999 = 100 195 185 175 165 155 145 135 125 115 105 Oct-04 May-03 Mar-01 Sep-99 Nov-01 Aug-02 Apr-06 Sep-07 Aug-10 Jan-99 Jun-00 Jan-04 Jun-08 Feb-09 Dec-06 Nov-09 Jan-12 Oct-12 Apr-11 Jul-05 95
DXY : AUD AUD Spot AD Futures

Enter the Aussie


If the DXY and DXY futures are a fact of life, should you look to trade individual currencies against them instead of just the greenback itself? Let’s return to a structure introduced a year ago (see “Decomposing The Dollar Index,” December 2011) of looking at the dollar index as the weighted sum of its components. First, let’s look at the excess carry returns of the six DXY components into the AUD on an unweighted basis since the EUR’s January 1999 inception (Figure 1). Now let’s apply the weights to these excess carry returns and sum them up visually in a short DXY-component/long AUD trade (Figure 2).
CURRENCY TRADER • December 2012

1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 AUD Spot & Front-Month Futures

The Australian dollar and its futures are based on the USD carry, not the carry from the DXY components.







245 235 225 Weighted Excess Carry Return, USD : AUD Jan. 4, 1999 = 100 215 205 195 185 175 165 155 145 135 125 115 105 95 85 May-03 Sep-99 Mar-01 Aug-02 Jan-99 Jun-00 Jan-04 Nov-01 75 r2 = 0.89   r2 = 0.29  
USD : AUD Rel. Perf.

400% 375% 350% 325% 300% 275% 250% 225% 200% 175% 150% 125% 100% Jan-12 Oct-12 75% Relative Performance, Australia Vs. U.S. Jan. 4, 1999 = 100%






Dominance of interest rates






Relative total returns of the Australian stock market mapped vis-à-vis the U.S. stock market shows a marked deterioration in the quality of fit before and after the Lehman bankruptcy; the r2 or percentage of variance explained fell from 0.89 to 0.29.

25,000 20,000 15,000 90,000 10,000 5,000 0 -5,000 60,000 -10,000 -15,000 -20,000 50,000 80,000
AD Res AD Val AD Fit


Model Residuals: AUD Future = f(DXY) Future


















Converting the DXY and AUD futures into contract values and constructing a simple model of the AUD future being a function of the DXY future, we see a marked change in behavior after September 2008.







A similar difference in behavior can be observed if we replace the weighted sum of the DXY components’ excess carry returns into the AUD with the simple excess carry return from borrowing the USD and lending into the AUD (Figure 3). We can see how all three AUD measures converged after the events of September 2008, marked with a vertical line on Figures 3-5, unfolded and the drive toward zero percent interest rates began. That event reduced non-interest rate factors between the USD and AUD, such as prospective asset returns, to insignificance. Indeed, if we map the relative total returns of the Australian stock market vis-à-vis the U.S. stock market, we see a marked deterioration in the quality of fit before and after the Lehman bankruptcy; the r2 or percentage of variance explained fell from 0.89 to 0.29 (Figure 4).
December 2012 • CURRENCY TRADER

AUD Futures & Fitted Values, $Thousand


Observations Probability

40% 35% 30% Normal Probability Density

Skew: 0.613  

Number Of Observations


25% 20% 15% 10% 5%



















Model Residuals

The distribution is extremely flat and skewed toward positive values.

A simple model

If we convert the DXY and AUD futures into contract values and construct a simple model of the AUD future being a function of the DXY future, we see a marked change in behavior after the September 2008 Lehman Brothers bankruptcy; the probability the relationship before and after this event was different approaches 100% (Figure 5). Please note how the model’s residuals, or the difference between the actual and fitted values of AUD futures, balloon in variance after September 2008. If the AUD futures were a direct and stable function of the DXY futures, we should see a normal distribution, the familiar bell-shaped curve, in the residuals. We do not: The distribution is
CURRENCY TRADER • December 2012

extremely flat and skewed toward positive values (Figure 6). This confirms the AUD is capable of putting in sustained uptrends against the DXY with the sort of abrupt and violent retracements characteristic of a trending market. One day interest rates will rise over the 0% level they have been pinned to since the 2008 financial crisis. When that day arrives, we will see the carry trade from the DXY’s components into the AUD diverge from the straight AUD futures and create a robust and trending trade. y For information on the author, see p. 4.





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

December 1 2 3 4 5 18
Canada: Bank of Canada interestrate announcement Australia: Q3 GDP Australia: November employment report Brazil: November PPI France: Q3 employment report UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: November employment report Brazil: November CPI Canada: November employment report Mexico: November PPI and Nov. 30 CPI LTD: December forex options; December U.S. dollar index options (ICE)






8 9 10 11

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


13 14 15 16 17

U.S.: FOMC interest-rate announcement France: November CPI Germany: November CPI Japan: November PPI South Africa: November CPI UK: November employment report U.S.: November PPI and retail sales Hong Kong: Q3 PPI South Africa: November PPI U.S.: November CPI India: November PPI

22 23 24 U.S.: November durable goods 25 26 27 France: November PPI 28

Hong Kong: September-November employment report UK: November CPI and PPI FND: December U.S. dollar index futures (ICE) U.S.: November housing starts FDD: December forex futures; December U.S. dollar index futures (ICE) U.S.: Q3 GDP (third) and November leading indicators Germany: November PPI Hong Kong: Q3 GDP and November CPI Japan: Bank of Japan interest-rate announcement U.S.: November personal income Brazil: November employment report Canada: November CPI Mexico: November employment report and Dec. 15 CPI UK: Q3 GDP

29 30 31 India: November CPI January 1 2 3 4

France: Q3 GDP Japan: November employment report and CPI

Germany: November employment report Canada: December employment report and November PPI

LTD: December forex futures; December U.S. dollar index futures (ICE)


December 2012 • CURRENCY TRADER

Market EUR/USD AUD/USD JPY/USD GBP/USD CAD/USD MXN/USD CHF/USD U.S. dollar index NZD/USD E-Mini EUR/USD Sym EC AD JY BP CD MP SF DX NE ZE Exch CME CME CME CME CME CME CME ICE CME CME Vol 235.5 106.9 99.3 91.7 70.0 33.5 27.3 19.1 15.1 3.4 OI 222.3 177.8 159.9 158.2 166.3 185.6 41.5 38.2 31.2 6.3 10-day move / rank 1.77% / 67% 0.63% / 59% -2.40% / 69% 1.17% / 100% 1.12% / 100% 2.66% / 100% 1.74% / 43% -1.14% / 100% 1.62% / 90% 1.77% / 67% 20-day move / rank 0.07% / 2% 0.77% / 35% -2.89% / 92% -0.55% / 43% 0.86% / 44% 1.48% / 59% 0.32% / 15% 0.09% / 3% 0.28% / 11% 0.07% / 2% 60-day move / rank 2.98% / 40% 2.35% / 36% -4.52% / 94% 0.84% / 10% -0.18% / 7% 1.28% / 21% 2.99% / 46% -1.02% / 19% 3.42% / 53% 2.98% / 40% Volatility ratio / rank .30 / 72% .50 / 100% .37 / 17% .32 / 78% .30 / 73% .50 / 95% .34 / 83% .29 / 82% .53 / 88% .30 / 72%

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each 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-byside electronic contracts (where applicable). LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to today’s close. 20-day move: The percentage price move from the close 20 days ago to today’s close. 60-day move: The percentage price move from the close 60 days ago to today’s close. The “% rank” fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.

BarclayHedge Rankings: Top 10 currency traders managing more than $10 million
(as of Oct. 31 ranked by October 2012 return) October return 4.23% 4.03% 2.10% 1.85% 1.74% 1.70% 1.61% 1.58% 1.36% 1.13% 6.20% 2.72% 1.42% 1.13% 0.89% 0.58% 0.43% 0.40% 0.38% 0% 2012 YTD return 11.63% 11.91% 76.38% -0.20% 2.84% -5.49% 23.96% -18.69% 11.18% -3.91% 27.07% 20.89% 12.21% 9.92% 7.98% -1.30% 0.92% -11.25% -2.44% -18.08% $ Under mgmt. (millions) 24.2 87.5 24.6 41 53.7 729.1 45 23.9 14 86 5.1 3.4 1.2 1.5 2.6 1.7 1.6 2.7 9.4 3.7

Trading advisor 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Regium Asset Mgmt (Ultra Curr) Sharpe+Signa (Currency) CenturionFx Ltd (6X) DynexCorp Ltd. (Currency) A-Venture Capital Premium Currency (Currencies) MIGFX Inc (Retail) Friedberg Comm. Mgmt. (Curr.) Capricorn Currency Mgmt (FXG10 CHF) IPM Systematic Currency (C) JarrattDavis (Managed FX) Hartswell Capital Mgmt (Apollo) MFG (Bulpred USD) Valhalla Capital Group (Int'l AB) Capricorn Curr Mgmt(FXG10 EUR) MatadorFX (MFX1) Four Capital (FX) Delman SA (Algopedia FX Harmony USD) TMS (Arktos GCS II) V50 Capital Mgmt (FX)

Top 10 currency traders managing less than $10M & more than $1M

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

CURRENCY TRADER • December 2012



Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency Russian ruble Australian Dollar Swiss franc Taiwan dollar Canadian dollar Swedish krona Chinese yuan Hong Kong dollar Thai baht Euro New Zealand dollar Singapore dollar Great Britain pound South African rand Japanese yen Brazilian real Indian rupee Nov. 29 price vs. U.S. dollar 0.03214 1.045295 1.073695 0.034315 1.00597 0.149655 0.15927 0.12903 0.03256 1.292405 0.821425 0.817635 1.600495 0.11307 0.01221 0.479145 0.01798 1-month gain/loss 0.89% 0.77% 0.36% 0.32% 0.30% 0.22% 0.09% 0.00% -0.02% -0.11% -0.16% -0.19% -0.61% -2.27% -2.75% -2.89% -3.33% 3-month gain/loss 2.78% 0.80% 2.96% 2.82% -0.50% -1.37% 0.94% 0.08% 1.81% 3.19% 1.81% 2.47% 1.33% -4.79% -4.08% -2.38% 0.11% 6-month gain/loss 2.88% 6.12% 2.70% 1.63% 3.08% 6.95% 0.87% 0.16% 2.81% 2.83% 7.88% 4.35% 2.00% -5.78% -3.02% -4.91% -0.03% 52-week high 0.0345 1.0808 1.1154 0.0345 1.0334 0.153 0.1595 0.12903 0.0329 1.3461 0.8415 0.8213 1.6261 0.1338 0.0131 0.586 0.0203 52-week low 0.0291 0.9681 1.0074 0.032 0.9601 0.1374 0.1559 0.1283 0.031 1.2099 0.7504 0.764 1.5308 0.1116 0.0119 0.4761 0.0174 Previous 11 10 4 5 14 15 1 7 2 6 9 3 12 17 16 8 13

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Japan France Italy Switzerland India Germany South Africa Hong Kong UK Brazil Mexico Singapore U.S. Australia Canada

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

Nov. 29 9,400.88 3,568.88 15,888.00 6,828.50 19,170.91 7,400.96 37,909.31 21,922.89 5,870.30 57,853.00 42,090.69 3,045.90 1,415.95 4,490.10 12,202.80

1-month gain/loss 5.28% 4.69% 3.51% 3.44% 2.87% 2.75% 2.48% 1.91% 1.30% 1.18% 0.65% 0.54% 0.27% -0.21% -0.89%

3-month gain/loss 3.65% 4.54% 6.32% 6.33% 9.61% 5.57% 6.08% 10.79% 2.21% 0.84% 5.47% 0.14% 0.39% 2.48% 1.61%

6-month gain loss 8.59% 15.70% 21.22% 15.45% 16.62% 15.70% 13.36% 15.05% 8.89% 5.89% 10.40% 8.71% 6.27% 7.72% 5.11%

52-week high 10,255.20 3,600.48 17,133.40 6,848.20 19,372.70 7,478.53 37,909.31 22,149.70 5,989.10 68,970.00 42,751.00 3,110.86 1,474.51 4,602.50 12,740.50

52-week low 8,238.96 2,922.26 12,362.50 5,691.70 15,135.90 5,637.53 31,646.77 17,821.50 5,229.80 52,213.00 35,567.30 2,606.52 1,202.37 4,033.40 11.280.60

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

December 2012 • CURRENCY TRADER

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair Aussie $ / Real Aussie $ / Yen Canada $ / Real Franc / Yen Canada $ / Yen Euro / Real Euro / Yen New Zeal $ / Yen Pound / Yen Aussie $ / New Zeal $ Euro / Pound Aussie $ / Canada $ Aussie $ / Franc Yen / Real Franc / Canada $ Euro / Canada $ Euro / Franc Euro / Aussie $ Pound / Canada $ Pound / Franc Pound / Aussie $ Symbol AUD/BRL AUD/JPY CAD/BRL CHF/JPY CAD/JPY EUR/BRL EUR/JPY NZD/JPY GBP/JPY AUD/NZD EUR/GBP AUD/CAD AUD/CHF JPY/BRL CHF/CAD EUR/CAD EUR/CHF EUR/AUD GBP/CAD GBP/CHF GBP/AUD Nov. 29 2.181595 85.615 2.09952 87.94 82.395 2.697325 105.86 67.28 131.09 1.2725 0.807505 1.03909 0.97355 0.025485 1.06732 1.284735 1.20371 1.236405 1.591 1.49061 1.53114 1-month gain/loss 3.77% 3.63% 3.28% 3.21% 3.14% 2.86% 2.73% 2.66% 2.21% 0.94% 0.49% 0.47% 0.41% 0.16% 0.06% -0.40% -0.48% -0.87% -0.91% -0.97% -1.38% 3-month gain/loss 3.25% 5.06% 1.92% 7.31% 3.71% 5.70% 7.56% 6.13% 5.62% -1.00% 1.84% 1.30% -2.09% -1.72% 3.47% 3.70% 0.23% 2.37% 1.83% -1.59% 0.52% 6-month gain loss 11.60% 9.40% 8.41% 5.86% 6.27% 8.14% 6.01% 11.22% 5.15% -1.63% 0.81% 2.95% 3.34% 2.04% -0.38% -0.25% 0.13% -3.10% -1.06% -0.68% -3.89% 52-week high 2.1829 88.31 2.1047 91.90 84.49 2.7071 110.83 68.81 132.81 1.3229 0.859 1.0755 1.0328 0.0262 1.1217 1.3822 1.2406 1.3487 1.6162 1.5434 1.6123 52-week low 1.8187 75.6 1.7067 78.81 74.74 2.2481 94.65 58.52 117.58 1.2436 0.7779 0.9951 0.9133 0.021 1.0128 1.2164 1.2003 1.1614 1.5515 1.4199 1.4637 Previous 17 4 20 1 8 13 2 3 5 16 9 11 18 21 6 7 14 10 12 19 15

Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate Rate 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3.25 2.5 7.25 2.75 1.875 8 5 Last change 0.5 (Dec 08) 0-0.1 (Oct 10) 0.25 (July 12) 0.5 (March 09) 0.25 (Sept 10) 0.25 (Aug 11) 0.25 (Oct 12) 0.5 (March 11) 0.25 (Oct 12) 0.25 (Oct 12) 0.125 (June 11) 0.5 (Apr 12) 0.5 (July 12) May 2012 0-0.25 0-0.1 1 0.5 1 0-0.25 3.75 2.5 8.5 3.25 1.875 8 5.5 Nov. 2011 0-0.25 0-0.1 1.25 0.5 1 0-0.25 4.5 2.5 11 3.25 1.875 8.5 5.5

CURRENCY TRADER • December 2012

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

Q2 Q3 Q3 Q2 Q3 Q2 Q2 Q2 Q3 Q3 Q3 Q3

Release date
9/21 11/30 11/30 9/28 11/15 9/27 9/11 9/5 11/16 11/30 11/12 11/23

21.2% -0.3% 0.9% 0.0% 0.6% 1.0% 1.2% 1.0% 6.5% 3.4% -0.9% -0.4%

1-year change
15.0% 4.9% 2.9% 0.5% 1.8% 2.2% 8.3% 3.2% 1.3% 12.0% -3.6% 0.3%

Next release
12/21 2/29 2/29 12/28 2/14 12/21 12/6 12/5 2/27 2/28 2/14 2/22


Unemployment AMERICAS

Q3 Oct. Oct. Q2 Oct. July-Sept. Oct. Aug.-Oct. Oct. Q3

Release date
11/19 11/22 11/2 9/6 11/2 11/14 11/8 11/19 11/30 10/31

7.6% 5.3% 7.4% 9.7% 5.3% 7.8% 5.4% 3.4% 4.2% 1.9%

0.4% -0.1% 0.0% 0.1% 0.2% -0.2% 0.0% 0.1% 0.0% -0.1%

1-year change
0.4% -0.5% 0.0% 0.6% 0.1% -0.4% 0.2% 0.1% -0.2% -0.1%

Next release
2/19 12/21 12/7 12/11 1/3 12/12 12/6 12/18 12/28 1/31



Argentina Oct. Oct. Oct. Oct. Oct. Oct. Oct. Q3 Oct. Oct. Oct. Oct. Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date
11/14 11/7 11/7 11/14 11/23 11/13 11/21 10/24 11/22 11/30 11/30 11/23

0.9% 0.6% 0.2% 0.2% 0.0% 0.6% 2.0% 1.4% 3.0% 0.9% 0.0% -0.2%

1-year change
10.2% 4.4% 1.2% 1.2% 2.0% 2.7% 8.0% 2.0% 3.8% 10.3% -0.4% 4.0%

Next release
12/14 12/7 12/20 12/12 12/12 12/18 12/12 1/23 12/20 12/31 12/28 12/24



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

Oct. Oct. Oct. Oct. Oct. Oct. Q3 Q2 Oct. Oct. Oct.

Release date
11/29 11/29 11/30 11/20 11/13 1/29 11/2 9/13 11/14 11/12 11/29

1.0% -0.1% 0.6% 0.0% 0.1% 0.6% 0.6% 1.5% 0.2% -0.4% -0.9%

1-year change
12.9% -0.2% 12.9% 1.5% 2.5% 5.2% 1.1% -0.7% 7.5% -0.5% -2.1%

Next release
12/14 1/4 12/27 12/20 12/18 12/13 2/1 12/13 12/14 12/28 12/28

As of Nov. 30 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.


December 2012 • CURRENCY TRADER

Pullback sets up a long entry in the hot dollar/yen pair.
Initial stop: 81.55, which is a little below the pullback low. Initial target: 83.12, which is just above the whole number price above the Nov. 22 high. Second target: 83.91, which is a little below the March high.

Date: Nov. 29, 2012. Entry: Long the U.S. dollar/Japanese yen pair (USD/JPY) at 82.06. Reason for trade/setup: This entry was based on the bullish analysis implications featured in Spot Check, as well as specific analysis of the four-day pullback that followed the Nov. 22 high. With intermediate-term bullishness setting up a challenge of resistance between 84.00 and 85.00 and analysis indicating favorable odds of modest upside follow-through after the pullback pattern, it was an opportune time to go long. A slight pullback hit the entry level in the after hours of the Nov. 29 trading session.

Exit: Trade still open as of Nov. 30. Profit/loss: +0.44, marked to market at 82.50 around 2:10 p.m. ET on Nov. 30. Outcome: Price jumped sharply on Nov. 30, coming up just nine ticks below the Nov. 22 high before pulling back a bit to close more toward the middle of the day’s range. The first few trading days of December should determine whether the pair has enough momentum to reach the first target before pulling back again. y
Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pretrade) reward-risk ratios are conjectural by nature.

Source: TradeStation TRADE SUMMARY Date

Currency pair

Entry price

Initial stop

Initial target




P/L point
0.44 0.54%




Trade length
1 day

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

CURRENCY TRADER • December 2012