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FOREWORD • PAGE 3 Blomberg By Robert Bierman

WELCOME • PAGE 4 By Torben Kaaber and Charlotte Kan

CHAPTER I • PAGE 5

CHAPTER II • PAGE 8

CHAPTER III • PAGE 11

CHAPTER IV • PAGE 14

CHAPTER V • PAGE 17

CHAPTER VI • PAGE 20

Gold: just another currency?
Ole Hansen

The Euro in crisis
Steen Jakobsen

The Dollar & the FED
John Hardy

Yuan Diplomacy
Nick Beecroft

Currency Wars
Rakesh Shah

10 Rules for pratical trading strategies
Rakesh Shah To optimise your trading experience on our awardwinning trading platform, Head of Saxo FX Academy, Rakesh Shah presents its key functionality in the platform as well as his 10 golden rules for practical applications in trading.

Investors are still looking for an alternative to money, as the risk of debasement has never been greater, notes Ole Hansen, Head of Commodity Strategy at Saxo Bank. Does this make gold the hottest currency today? Is gold really ‘money’? It is the question central bankers wish they never had to answer…

To correct the imbalances the monetary union has created, a profound restructuring of the system is the only option. Europeans need to either embrace a mandate for change, or face the ‘slow death’ of japanisation, argues Steen Jakobsen, Saxo Bank’s chief economist.

The Federal Reserve’s aggressive quantitative easing programme since the onset of the financial crisis in 2008 has been the chief driver in weakening the US Dollar. However, despite the late 2012 launch of an open-ended QE3 and the Fed’s best efforts to ‘kill it’, there are encouraging signs for the greenback, argues John Hardy, Head of FX Strategy at Saxo Capital Markets.

How long will it take before the Renminbi replaces the Dollar as the world’s first reserve currency? Years, decades - or centuries? Nick Beecroft, Chairman of Saxo Capital Markets stresses that the Chinese are a patient nation and also warns that the supertanker of Chinese RMB appreciation could change direction in heavy seas.

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Is there a financial timebomb hiding in the financial markets? Currency wars, far from helping the nations involved in competitive devaluation, may actually damage rather than boost global trade says Rakesh Shah, Head of Saxo FX Academy. Find out how to benefit from this situation in this chapter.

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This e-book is one of the products of that collaboration. stories in the top ten most read range from Lance Armstrong’s troubles to senior executive changes at Citigroup. the state of unemployment in the U. foreign exchange is a topic at the top of the agenda. Saxo and Bloomberg LINK have convened the world’s leading financial minds for DISCUSSION and DEBATE. The best minds at Saxo Capital Markets have brought forward their best thoughts on the FX markets and shared them with you in this publication. The debate will continue in live form as the #FXdebates produced by Bloomberg LINK and Saxo Capital Markets convene in-person in 2013.S. dinner conversation where never before discussed and topics for debate when financial leaders gather. and the price of Oil. for instance. and we thank you for joining it alongside us.FOREWORD In a world with few economic certainties. With the status of the world’s biggest currencies up for discussion. What’s interesting is to look longer term.” That headline ran November 30. currencies have become a key indicator as to who is winning in the global economy. The FX debate will continue for long into the future. the most-read story on the Bloomberg Terminal was headlined “Central Banks Cut Cost of Borrowing Dollars to Ease Crisis.” Bloomberg LINK and Saxo Capital Markets have teamed up in an effort to give focus to key issues that recur in debates amongst serious participants in the foreign exchange markets. We know you will find the contents to be thoughtprovoking and useful as you consider how you will play in the FX markets. the Yuan and the Dollar have become headlines beyond the financial news. Take the past month. News on the Bloomberg Terminal covers an astounding range of topics. In the 12 months preceding October 2012. 2011 as the world sought to find ways to ease the impact of the Euro crisis. Robert Bierman about saXo E-booK Join the Saxo #FxdebateS share the ebook 3 . Lately. The Euro. Fast forward nearly a year later and the mostread story of September 2012 was “Fed Undertakes QE3 with $40 Billion MBS Purchases per Month. regardless of the primary purpose of the gathering. There will be more to come as our collaborators at Saxo Bank continue to build this library of valuable insight. in October 2012. invariably gold attracts interest as an option.

or does it have an alternative motive . but also a myriad of opportunities for forex traders. but also investors’ ability to anticipate. innovate and allocate.” he argues. “Macro has failed miserably. and you may be right. Do you agree? You may not. to revive moribund economies policy makers and central bankers are resorting to the biggest form of denial of all: quantitative easing .to kill the Dollar’s value? What about the Renminbi? Is China determined to take over the Dollar’s role as the world’s reserve currency . we like to look at the bigger picture and think outside the box.WELCOME! Torben Kaaber CEO OF SAXO CAPITAL MARKETS Charlotte Kan EDITOR AT SAXO CAPITAL MARKETS The global economic slowdown and the Eurozone debt crisis have tested not just the world leaders and their people.and if it does when? Find out what our experts think. share your views and join the #FXdebates. At Saxo. Is the Eurozone crisis a major concern – or a great opportunity for FX traders? As the second most traded currency globally. Will ‘QE Infinity’ fail to revive the US economy. We invite you to join the debate and share your views with us. Our chief economist Steen Jakobsen thinks we are stuck in a vicious circle of protest and denial. 10 rules for pratical trading strategies Join the Saxo #FxdebateS share the ebook 4 . At Saxo Capital Markets. Our Saxo eBook aims at challenging your views and help you become more creative in your trading. and needs to be replaced by micro. we believe that the development of the Euro crisis and tough economic times will present huge challenges. the future of the Euro and the single currency project will heavily impact FX markets.or in the words of Saxo’s Head of FX Strategy John Hardy “extend and pretend”. The possible collapse of the single market and its consequences on the global economy have forced forex players to be creative and examine various investment scenarios. and the best way out of the crisis is a radical restructuring of the Eurozone. All over the planet.

where he was in charge of the trade execution team. just another currency? Investors are still looking for an alternative to money Ole Hansen HEAD OF COMMODITY STRATEGY Ole Sloth Hansen is a specialist in all traded Futures.CHAPTER I Gold. with over 20 years experience both on the buy and sell side. He previously worked for 15 years in London. most recently for a multi-asset futures and forex Hedge fund. Ole joined Saxo Bank in 2008 and is today part of the Trading Advisory Team analysing a diversified range of products from fixed income to commodities. FOLLOW THIS TRADER gold: just another currency? Join the Saxo #FxdebateS share the ebook 5 .

1900 1950 1980 TODAY gold: just another currency? Join the Saxo #FxdebateS share the ebook 6 ..5 loaves of bread in 1900 buys only 3/4 of a loaf today. The Golden Constant: The English and American Experience 1560-2000. MA: Edward Elgar Publishing Ltd. Cheltenham. Reproduced with permission.. UK and Northampton. 1560-2012 An ounce of gold has repeatedly bought a mid-range outfit of clothing throughout the ages 16th C.. . 18th C. the US dollar that bought 14.. gold’s purchasing power has maintained a broadly constant level. Jastram and Jill Leyland (2009). 1850 * Data from: Roy W.SHARE THIS INFOgRAPHIC Since the 16th Century. * THE VALUE OF GOLD. 21th C.AND THAT OF THE DOLLAR 1850-2012 On the other hand.

hoarding gold seems to have become the Middle Kingdom’s priority as the favourite means to store wealth. its physical and functional characteristics set it apart from the rest of commodities. and nothing else.” says Ole Hansen.The Gold Standard Revered throughout the ages as a symbol of prosperity. Is gold a currency. which has little or no difference in composition or quality regardless of the place of production While certain attributes of gold match the description of a commodity. not a commodity like the others COMMODITY A basic economic good used in commerce. Central banks and governments all over the world still hold large gold reserves. China is on track to overtake India this year as the world’s top consumer of gold. Ole Hansen believes gold will retain its role as a safe haven in financial markets. Central banks hold gold because it is a “form of reserves”. Ron Paul sharply concluded: “Some people still think it’s money. inflation worries. which value changes over time (see our infographic). € WORLD’S LARGEST RESERVE ASSETS Gold Euro $ US Dollar Trading Perspective Will gold continue its multi-year rally higher in 2013 following the pause in 2012? gold against the US Dollar. Unlike other commodities. “The reason people hold gold is as a protection against what we call tail risks. “The allure of gold. the average price of an ounce of gold over long periods of time tends to buy you the same thing. Finally. but what it does . thereby further boosting gold’s status as an alternative to money. a sharp Dollar appreciation.” Bernanke said. Roy Jastram demonstrated that despite important short-term fluctuations.or neither? Gold. and the diversity of its uses makes it unique. When you wake up in the morning. List of instruments available to trade Gold GOLD INDEX gold CFD on Future candlestick chart (Daily) with Dual Simple Moving Average and Fibonacci also applied. unlike currencies like the Dollar. they are also controversial. with electronic. Over the past years. gold’s production is more geographically diverse .” What the American financier meant is that gold works as a medium of exchange. its supply is limited. but the question certainly makes them break into a sweat. whether gold can really be considered a currency asset. “The only choice to hedge risks is to hold hard currency . A break below the current floor at 1. after US Dollar and Eurodenominated assets. JP Morgan declared to the US Congress: “gold is money.” With general distrust of government and central banks’ policies. until the Bretton Woods agreement of fixed exchange rates was signed in 1944. Fastforward 100 years and gold looks very much the same: it still shines. The golden Constant*. gold is the currency de rigueur. “Paper money eventually returns to its intrinsic value . He went on to awkwardly explain that gold is an “asset”. it’s a precious metal”. scarcity. This is a trend that is expected to continue. gold is an increasingly important financial asset. THE TRADING STATISTICS FOR GOLD 2012 High: 1797 2012 Low: 1526 Key Support: 1738 Key Resistance: 1797 Placement in 2012 high to low Fibonacci range: Inside the 76. gold is a scarce. gold holds its value. Ron Paul thinks the US and global monetary systems should be totally reformed because fiat currencies do not lead to “honest trade” as they are not backed by physical assets. 2012 Trading spot Gold gold: just another currency? Join the Saxo #FxdebateS share the ebook 7 . with the world economy hitting the doldrums. Head of Commodity Strategy at Saxo Bank. with central banks continuing to diversify their currency reserves away from the Dollar. Will gold save the world. Ancient Egyptians believed gold was a piece of flesh from the Sun god. could all have a negative impact on gold. gold is mostly used in jewelry – 42% of the global demand in the second quarter of 2012. 1 MEDIUM OF EXCHANGE 2 UNIT OF ACCOUNT 3 ALTERNATIVE STORE OF VALUE No asset is safe now Zhang Jianhua People’s Bank of China For the Chinese. but will it last? Here we ask Ole Hansen. enduring. it is an alternative currency in a world where nothing is perceived to be safe anymore. as Ron Paul seems to believe? So what is gold? Central bankers may differ. and a “longterm tradition”. 1913 In 1913. the three classical functions of ‘money’. before being interrupted again by Ron Paul with the question: “Do you think gold is money?” Looking increasingly uneasy. This diversity leads to less geopolitical and climate risks.” he says. On July 13 2011. Bernanke answered that he did indeed pay attention to the price of gold. a commodity. gold is actually the world’s third largest reserve asset. medical and dental applications. Bear Case The investment space becomes too crowded. After a long pause.4 to 100 zone Dead Cross or Golden Cross: golden cross on 18 Sep. The role of gold in the financial markets.” noted French philosopher Voltaire back in 1729. which has maintained its popularity throughout centuries as a store of wealth. Bernanke answered: “no. dense and malleable metal.according to the World gold Council the top three producers in 2011 were China (13%).580. “The combined amount of gold now used to back Exchange Traded Products has risen to a level only exceeded by the national reserves of two countries (USA and germany). a daily chart including Simple Moving Average. such as a mid-range outfit. financial investors looking for alternatives.and who holds most of it. Head of Commodity Strategy at Saxo Bank. Investors are still looking for an alternative to money as the risk of debasement has never been greater. a unit of account and an alternative store of value. especially in the darkest of times. but that it reflects several things . marking the end of the gold standard.” said the People’s Bank of China’s official Zhang Jianhua late last year. On the other hand.like global uncertainty. Bull Case Negative real interest rates. do you care about the price of gold?” Clearly puzzled. quantitative easing. USE OF GOLD IN 2012 TOP 3 GOLD PRODUCERS IN 2011 42 % Other China 13% Medical Australia 9% Dental Electronics Jewellery 2 SOURCE: WORLD GOLD COUNCIL 1 USA 8% 3 SOURCE: WORLD GOLD COUNCIL Gold is money and nothing else JP Morgan. The Dollar during these last three years has devalued almost 50%. both . are not only difficult to define. It is also used in the industry. really bad outcomes.” Fearing that the Fed’s monetary policy will lead inexorably to the death of the Dollar. its nature and value. gold has been the reserve asset that has backed fiat currencies in financial economic systems worldwide. WHY GOLD IS MONEY? BECAUSE IT CAN WORK AS: Looking forward. is no less valid today despite some recent hesitancy following a decade of strong gains. the Republican confronted Fed Chairman Ben Bernanke with the question: “The price of gold today is $1. during a Congressional hearing before the House Financial Services Committee. really. A passionate advocate of the necessity to revert back to the gold standard is US Congressman Ron Paul. central bank buying will continue to add support and could see it potentially reach upwards of 2. a bout of extreme risk aversion and moving from risk on/off to growth on. Less poetically. gold investments through Exchange Traded Funds already reached a new record with almost 300 tons added over the last year. gold has regained its appeal as a safe-haven asset. used both as a store of wealth and a risk diversifier. Even though gold is not money it is nevertheless increasingly being accepted as an alternative to cash by major clearing houses as collateral for trading futures. The thing about gold is that it does not matter so much what it is. and it can act as a hedge both against inflation and deflation.gold. thanks to its natural beauty. but perhaps more accurately. Australia (9%) and the US (8%). according to Bernanke. stocks and interest rate products. from 700 BC when gold coins were first manufactured on a large scale in Lydia (a region of Turkey). “No asset is safe now. In his seminal book on the purchasing power of gold throughout the centuries. as it helps preserve national wealth and protects against economic instability.080 USD/oz.zero. and durability. Already the world’s top producer.525 could signal the end of the current bull run and trigger a much deeper correction. the World gold Council said. and therefore lower volatility relative to other commodities – another unique attribute. gold isn’t just another currency.

FX and Options at Christiania (now Nordea) in New York before joining UBS in New York in 1999 as Executive Director of the global Proprietary Trading group. FOLLOW THIS TRADER the euro in crisis Join the Saxo #FxdebateS share the ebook 8 . In 1997 he became global Head of Trading. He started his career at Citibank N. from where he moved to Hafnia Merchant Bank as Director. he joined Chase Manhattan in London as VP. Head of Scandinavian Sales. In 1992. London. In 1995-1997 he worked as a Proprietary Trader and Head of Flow Desk at Swiss Bank Corp. and then the Chase Manhattan Proprietary Trading group. Steen has over 20 years of experience within the fields of proprietary trading and alternative investment. Copenhagen..A. Head of Sales and Options.CHAPTER II The Euro in crisis The cycle between denial and protest is destined to last for a while Steen Jakobsen CHIEF ECONOMIST Steen Jakobsen was appointed as Chief Economist in March 2011.

570 1.507 1.100 100 .826 103% 229% 81% 82.5% 355 215 165% SOURCE: EUROSTAT the euro in crisis Join the Saxo #FxdebateS share the ebook 9 .200 > 200 debt (€ bn) GDP (€ bn) debt GDP 13.745 2.797 10.088 2.SHARE THIS INFOgRAPHIC PUBLIC DEBT VS GDP Public Debt / GDP (%) < 80 ( 2011 DATA ) 80 .174 12.904 4.

For Saxo Bank’s chief economist. the Eurozone may bounce back only once its leaders and inhabitants end up in such a desperate situation that they realise the only way out is through radical and real change. the Eurozone debt crisis has paralysed equity and debt markets and little progress has been made towards a resolution . Steen Jakobsen believes that so far. this could also trigger the final phase of the three-phase crisis model. The idea that it’s merely a question of germany paying is not only naïve. This outcome is a vicious circle: every time central banks turn on the printing press. markets would re-test their 2009 lows and there will be a deep rooted discontentment with politics and the banking system.that will remove the cheque book from the central planners and create a tangible goal-line the voters can react to.” Steen Jakobsen says. and policy makers in their desperation throw even more cash at the problem by using the unconventional monetary toolbox . “We have done this for so long that the impact will be more negative and the upside when doing more QE and long-term refinancing operation will be shorter and less potent.whilst breaking treaty laws. The region is the planet’s second biggest economic powerhouse. massive fiscal deficits.8 to 76. “The Meeting of the Cardinals will be the only orderly solution dictated by rational and practical solutions.” says Steen Jakobsen. which could even lead to social unrest and worse. No one in their right mind believes lower interest rates will solve anything.4 zone Dead Cross or Golden Cross: Dead cross 3 Oct 2011 Trading the Euro the euro in crisis Join the Saxo #FxdebateS share the ebook 10 . Before Crisis started Today Meeting of the Cardinals A theme already introduced in Saxo Bank’s ‘Outrageous Predictions for 2012’ is that the Eurozone debt crisis will only end when there is a ‘Meeting of the Cardinals’ (MoC): a gathering of key EU players once the crisis reaches a critical phase. Bull case The main macro input on Europe is now the german election (September 2013) and the total apathy left behind by the discussion on fiscal multipliers from the IMF has left the central planners ‘rudderless on the open sea of debt crisis’. A greek exit may sound like a frightening scenario. but the entire world economy.Restructure the Eurozone? From the time it erupted in 2009. and negative real-rates. Bear case In germany.greece is clearly in open violation of all measures and Spain is following the same path as its structural deficit increases month by month Do not forget or underestimate the degree to which the crisis has finally arrived at the door steps of the rich north. “Inside the mandate for change there is a V-shaped recovery when reforms are initiated from the low point. The disposable income of the middle classes and the lower income classes is massively down – firstly because there is increased taxation. the ’denial’ phase. the Euro and the Eurozone need to be redefined.5% of gDP . “Employees today take home less than 43. THE TRADING STATISTICS FOR EURO CURRENCY VS USD 2012 High: 1. the MoC is the best solution as it will lead to several years of prosperity amid better debt-toequity. the region’s leaders and their citizens in a state of limbo.down from more than 50% before the crisis started so essentially we have a world record low in terms of what the employees take home. giving greece more time will only make things worse . Northcote Parkinson Like economic crises in the past. And we can all forget the silly notion that the ECB is the only solution to this debt crisis. as better days fail to materialise. but we have been doing this for so long and we are out of time. change can make the difference. So the corporates and their owners have record-high earnings and incomes.3484 2012 Low: 1. Under this scenario. and indirect taxes through the social benefits contribution across all of Europe. giving them more rope to hang themselves via extendand-pretend measures is not the path forward. List of instruments available to trade the Euro EURO INDEX EURUSD 4hour bar chart. as protecting domestic growth and jobs in germany. The reason Europe is going up in flames economically is the lack of accountability on behalf of policy makers and politicians. If politicians do make significant progress in this area. however the problem is that corporates have record-high profits. Then. However. Steen Jakobsen argues. This will quickly change the dynamics. Social tension arises. whether permanently or temporarily. Doom and gloom Conclusion: the system must fail O M ACR O M IC R “The magnitude of this debt crisis is far larger than the market realises. The MoC scenario will likely lead to a shortterm negative market reaction and a deep one-to-three year recession. having yet to arrive at a mandate for change. For him the monetary experiment has simply not worked and there is only one solution: the system must fail. Here. the EU banking and sovereign debt crisis follows a three-phase model: 1 DENIAL 2 € PROTEST ‘EXTEND AND PRETEND’ 3 ‘MANDATE FOR CHANGE’ Fiscal stimulus Social tension Governments replaced by the opposition Use of unconventional monetary tools Taxes increase Workers’ income carries on shrinking Cut with the past Reforms are initiated V-shaped recovery In the first stage of the crisis. Furthermore. a new party will add a degree of uncertainty for the Euro. There is complete denial of the scope of the problem. WORKER’S INCOME AS A PROPORTION OF GDP 50 % 43 5% . the only way we get a ‘mandate for change’ is if we reach the depth of the crisis. The forest fire of deleveraging that cleans the slate”.3074 Placement in 2012 high to low Fibonacci range: Inside the 61.2806 Key Resistance: 1. people’s purchasing power dwindles. workers’ income carries on shrinking and tension builds up.” Steen Jakobsen concludes. Just in the way alcoholics or drug-users have to reach rock-bottom before they can find the will to recover and overcome their addiction. probably even counterproductive. the guinea pig will most likely be greece. They cannot and they should not. and in fact is so big that there is no real solution as imagined by either side of the north-south divide. he says. The only way to do this is to institute maximum structural deficits of say 1 pct of gDP . most likely in a german model where the European Court of Justice becomes the highestranking authority. The real problems remain unaddressed. the EU has remained embedded in the first and second phases of the crisis. If there is a complete impasse. “The cycle between denial and protest is destined for a while longer. For investors. Some countries need to leave the Euro. Yet what is at stake is not just the future of the single market. more realistic future expectations. It may seem unpalatable.” Steen Jakobsen notes. This will force Club Med to the table and make them accept further loss of sovereignty on fiscal and monetary policy. resulting in a dramatic restructuring of Europe. but also impossible. voters punish the incumbent governments by replacing them with the opposition – who in their turn ‘extend and pretend’. Re-election of the same party ensures a smooth transition of current plans. The market clearly knows that to deal with solvency someone needs to take a loss – not get more debt”. the only immediate path left will be a ‘Destruction of Capital’ in the good old Joseph Schumpeter sense. “We can’t solve this by taking short-cuts to a banking union when there is no political or fiscal union. We need to make politicians accountable. The Euro is also the second reserve currency globally. Steen Jakobsen argues. We are trained and educated to think there is always a solution to a problem. but to correct the imbalances the monetary union has created. but profoundly restructuring the Eurozone may be less painful than the ‘slow death’ of Japanisation with deflation.2040 Key Support: 1.leaving investors. Delay is the deadliest form of denial C. Netherlands and Denmark before anything else will become the top priority and increase the risk of irreconcilable differences and decrease the will to move in the direction of a full transfer union. You can argue that it is fair enough because there is low growth. policy makers and central bankers use fiscal stimulus and easing as if the issue was merely cyclical. and a public sector under control”. There is a V-shaped recovery when reforms are initiated from the low point “This is the concept that there are no good solutions to this crisis. leaving Europe ever more at odds with itself. Here Saxo’s chief economist considers the different outcomes for the Euro debt crisis and what to consider when trading the single currency. Trading Perspective Monthly EURUSD price chart (since 1972) showing Dual Simple Moving Average. and the wage earners have record-low earnings.” he argues. an upheaval of the system may be the only option.

the press and sales traders. John has developed an extensive following among Saxo Bank’s clients. John started at Saxo Bank in 2002. A graduate of the University of Texas at Austin.CHAPTER III The Dollar & the Fed QE won’t break the buck John Hardy HEAD OF FX STRATEGY John J. com. As author of the popular FX Update and FX Monthly columns on Tradingfloor. FOLLOW THIS TRADER The DOLLAR & The feD Join the Saxo #FxdebateS share the ebook 11 . Hardy is Head of FX Strategy for Saxo Bank.

4% 0.43 $ tn US SOCIAL SECURITY Official holders of US Debt The Federal Reserve is the second single largest holder of US debt after the US Social Security Fund and thus holds more US debt than China”.92 2.txt The DOLLAR & The feD Join the Saxo #FxdebateS share the ebook .62 2.9% 0.58 trillion DOMESTIC FOREIGN 0.3% 12. 2.9% IRELAND NORWAY 6.8% GERMANY $600 bn $100 billion in government-sponsored enterprises + up to $500 billion in mortgage-backed securities.07 17.4% FRANCE HONG KONG 0.1% 12 SOURCES: Federal Reserve Board of Governors Flow of Funds http://www.84 3.gov/cgi-bin/investheld.7% CARIBBEAN TAIWAN OTHERS 20 20 20 20 20 20 1. $600 bn $600 billion in longer-term Treasury securities purchased by June 2011.gov/resource-center/data-chart-center/tic/Documents/mfh. the third largest holder of US debt.5% SWITZERLAND 08 09 10 11 12 13 CHINA QE1 QE2 QE3 7.9% 0.treasury.92 OTHER NON INTRAGOVERNMENTAL HOLDINGS 1.6% SINGAPORE 0. 1% 0.5% RUSSIA 1.24 2.ssa.36 1.SHARE THIS INFOgRAPHIC OR DEBT MONETISATION? Federal Reserve’s Balance sheet [annual average in $ trillions] The Fed's balance sheet has almost tripled since 2008.95 Yield on US 10-year Treasuries 4.2% LUXEMBOURG UK 1% 0.1% OTHER INTRAGOVERNMENTAL HOLDINGS 3. At the same time. $40 bn / month + $40 billion a month in mortgage-backed securities + reinvestment of principal = increase of longer-term assets by about $85 billion a month.25 2. government borrowing costs have hit new lows.9% BELGIUM 0.4% THAILAND 0.7% 13.3% JAPAN 1.05 26% 1.5% 0. 2.cgi http://www.2% OIL EXPORTERS BRAZIL FEDERAL RESERVE HOLDINGS 10.82 $15.

” On the other hand. and stable prices. It also their respective credit cycles. They could link repatriation tax breaks with all kinds of other incentives as well. Worst of all.25 2012 Low: 78. or many smaller economies. John Hardy points out.60 Placement in 2012 high to low Fibonacci range: Inside the 23. and via negative real interest rates (little or no yield on investments while inflation continues to eat away at purchasing power) punishes responsible savers. the Fed has endless ammunition. for damaging it rather than supporting it. QE2 $600 BILLION QE3 QE perpetuates the debt John Hardy The perils of Quantitative Easing Printing money is currently the Federal Reserve’s weapon of Another peril of the Fed’s QE is that. it bails out debtors who made bad decisions in the past.continuous Dollar Index 4 hour bar chart from July-October 2012.” he says. The country is facing its slowest pace of growth in almost three decades and all other economic indicators suggest sluggishness near term.” John Hardy points out. actually the US credit and housing bubble was by 2007-08. especially germany. and if doesn’t weaken much more against the US Dollar. However QE not only does little to “When the Fed does QE it is printing US Dollars. never to be repaid. argues John Hardy. John Hardy warns that it is important for the US to bring down the costs of its healthcare system. monetary policy makers have become addicted to the money-printing machine. despite the late 2012 launch of an open-ended QE3. The ‘hot money’ in China is now rapidly flowing out of. “Higher commodity prices can become far larger for their respective economies than often further suppress demand in the economy. Bear case The US is four years beyond the bursting of its bubble and has a very weak currency while the Australian bubble has just begun to burst and the Aussie is a very strong currency. allows a profligate government to continue to run huge structural deficits and avoid needed structural reforms.QE won’t break the buck The Federal Reserve’s aggressive quantitative easing programme (QE) since the onset of the financial crisis in 2008 has been the chief driver in weakening the US Dollar. 3 4 “HIA” (HOMELAND INVESTMENT ACT) Another potential support for the Dollar would be a second round of HIA. 2 “DEMOGRAPHICS” US demographics meanwhile are in far better shape than Japan’s or most of Europe’s. the greenback will not get much weaker. the ‘old’ business model needs re-inventing with a shift to domestic consumption. more debt as it suppresses interest rates. and that’s the With QE. Here we look at how the balance of positives outweigh negatives for the Dollar. Bull case Risks to the AUDUSD bearish case exist. this reduces the overall cost of energy consumption for the country. but they should keep the Dollar from weakening against most of the other major currencies. THE TRADING STATISTICS FOR THE DOLLAR INDEX 2012 High: 84. the AUDUSD could remain resilient and even rally anew before weakening longer term. making it which has yet to deleverage. So QE has aggravated bubbles everywhere into commodity prices and to foreign shores where it from Brazil to Canada to Sweden – bubbles that have is not always welcome. If the market sours on the US due to the impending fiscal cliff and due to the Fed’s promise of open-ended quantitative easing. 1 “SHALE GAS REVOLUTION” New methods of extracting formerly unreachable natural gas have led to a huge increase in production capacity on US soil. the country is likely to eventually try to seek a repeat of its past currency devaluation. as natural gas is very expensive to liquefy and transport if sources cannot be reached by pipelines. What do the fundamentals tell us about the continuation of this trend and how does the US interest rate policy affect commodity currencies around the globe? Australian Dollar/US Dollar (Spot) Weekly Candlestick chart with Dual Simple Moving Average applied. these countries will also have to deal with their respective credit bubbles. such as: “RESHORING” INITIATIVE Bringing manufacturing jobs back to the domestic market as production in the US for certain types of goods is becoming far more competitive than in the past.” John Hardy sums up. especially the Australian Dollar. cheaper and cheaper to service the debt. It perpetuates the US Dollar is the world’s most important reserve the constant blowing of asset bubbles.31 Key Resistance: 78. it actually are transmitted to the global financial markets when delays the economy’s necessary adjustments. China is clearly entering a long transition period that must take it away from its long-standing reliance on infrastructure building and production capacity expansion”. US economy positives Relative to other major economies. “The country is also suffering from a postpeak credit cycle that was aggravated by extensive private lending networks. With global growth fundamentals limping along and potentially remaining poor and corporate earnings outlooks pointing south. So eventually.22 Key Support: 80.725 TRILLION SOURCE: FEDERAL RESERVE However. a shrinking interest rate advantage. Trading Perspective We are looking at the AUD /USD cross in this example as this is one of the currency pairs with a high interest rate differential against the USD. which in 2005 allowed US corporations to repatriate foreign profits without paying tax. risk appetite could retrench and the US Dollar’s safe haven status will see it appreciate against most currencies. As for China. encouraging competition and deepening financial markets. 2012 Trading the Dollar the dollar & the fed Join the Saxo #FxdebateS share the ebook 13 . which is at risk due to its own over-valuation. the Bank of Japan. it has been forced upon the whole world. example. we’ll have the EU breakup scenario moving rapidly forward. where the number of workers supporting each pensioner is plummeting as the population ages. In addition it has seen big moves in the last 2 years. rather than into the country. as the US government will need to look for new ways to stimulate the economy without adding to the fiscal burden. and the market has overplayed commodity economies and their currencies to the upside. “Under this programme. Head of FX Strategy at Saxo Capital Markets. “Meanwhile in China. Maybe there are more ‘US economy positives’ than ‘US Dollar positives’ “Maybe there are more ‘US economy positives’ than ‘US Dollar positives’. and China’s difficult transition period.2 zone Dead Cross or Golden Cross: Dead cross on 11 Oct.” John Hardy notes. the Bank of England are all engaged in QE programmes of their own.” Saxo Capital Markets’s Head of FX Strategy argues. has a better chance at strengthening than one and high unemployment because it must always get might think. easily half a trillion Dollars of foreign profits could be repatriated. the US Dollar could remain weak as the world decides that the US is not the place to invest.6 to 38. the US looks in a better place. creating a healthcare system. in a global choice to defend its dual mandate: maximum employment economy. if key Australian commodity prices remain well supported by a world of profligate money-printing central banks and if China unleashes new stimulus measures to mark its impending leadership transition. there are encouraging trends intrinsic to the US economy. and thereby which are in varying phases of feeling out the tops of letting it grow endlessly. Also. The Dollar still looks better than most other currencies regardless of the fact that QE is an abomination and is not the right prescription for the economy. List of instruments available to trade the USD DOLLAR INDEX DXc1 – NYBOT US Dollar Index . forcing liquidity currency. The Euro also faces serious issues. “QE degree of deleveraging in its economy – at least in the is ‘extend and pretend’ – it not only perpetuates the banking sector if not in public finances – and is far better presence of too much debt in the system but creates positioned for growth going forward than either Europe. in addition to the mal-investments made by the big Chinese banks. This is because the ‘Bernanke Fed’ is not the only central bank using and abusing QE: all over the world. The demographic picture is also rather concerning due to the long-standing one child policy. The ECB. This in turn means US natural gas prices are now a fraction of the cost of what they are elsewhere. and why the US currency may rise “despite the Fed’s best efforts to ‘kill it’ with QE”. NOVEMBER 2008 MARCH 2009 NOVEMBER 2010 JUNE 2011 TODAY ? QE1 $1. but its power beginning of the story for why the US Dollar. relatively becomes less and less effective to fight low growth speaking. The US has already achieved a significant bigger and bigger in order to have the same effect. John Hardy argues. There are many adjustments that need to take place in the world. Still. As natural gas can also be used for electricity generation. which address the structural problems of the economy.

Nick publishes comments and analysis on global macro-economic and political developments and their implications for the financial markets. including in-depth examination of Central Bank thinking and tactics.CHAPTER IV Yuan Diplomacy The supertanker of Renminbi appreciation can change direction Nick Beecroft Senior Market Analyst Nick Beecroft has over 30 years of international trading experience within the financial industry. with a special focus on Forex. g7 interest rates and bond markets. FOLLOW THIS TRADER yuan diplomacy Join the Saxo #FxdebateS share the ebook 14 .

1450 0.400 $bn FOREIGN CURRENCY RESERVES $10 bn .1400 0.1500 0.1300 0.100 .700 .999 Bn yuan diplomacy Join the Saxo #FxdebateS share the ebook 15 .500 .800 .SHARE THIS INFOgRAPHIC BEGGAR THY NEIGHBOUR CURRENT ACCOUNT BALANCE CHINA VS USA ($ Million) BILATERAL TRADE IMBALANCE YUAN / DOLLAR EXCHANGE RATE 3.240 400 300 200 200 0.1550 0.1350 0.200 .600 .1200 51 100 0 .121 US EXPORTS Bn $69.1250 0.300 .1600 0.900 2005 2006 2007 2008 2009 2010 2011 SOURCES: US Census Bureau (2012) / IMF (2011) / Bloomberg (2012) CHINA IMPORTS $273.

China is currently facing its slowest pace of growth in almost three decades. Chinese authorities became concerned about the deterioration of world trade and the consequences of a stronger Renminbi. the Renminbi internationalisation journey is likely to take longer than most people expect. Hong Kong in 2009 was followed by Taiwan recently. any temptation by the Chinese authorities to permanently stop the Yuan’s appreciation “could potentially have disastrous consequences”. unlike the West. A cliché intended to show that China. Now the new politburo is in place. The Chinese government and the POBC are therefore treading carefully. The Smoot-Hawley Act in the Thirties introduced trade tariffs which are thought to have lengthened and exacerbated the Depression. This becomes self-fulfilling as the two things that move the currency are trade-related flows – and they have become not so favourable for the Yuan now because of the reduction in the surplus – and speculative flows. leading to carefully-controlled and gradual Yuan appreciation . Ultimately.27 Key Resistance: 6. is a patient. spending cuts and tax increases will be automatically triggered to the tune of $600 billion. Bear case Spain and Italy are next. A grexit may be seen as containable and politically desirable in germany. It was massively popular to speculate that the currency would strengthen. very long time. far-sighted nation. and what.27 Key Support: 6. “The alleged unfair weakness of the Yuan against other major currencies like the Dollar has led to simmering tensions between the United States and China over the last 10 years. the government is introducing the so-called “RMB Cross Border Trade Settlement Pilot Scheme” to satellite nations in the region to develop an offshore market for the Renminbi. there are rumours of a property collapse. explains that the reputation of the Chinese as a cautious and wise nation may be deserved. but also the stock market. we don’t throw good money after bad. will it lead to? Nick Beecroft. and therefore the driving engine for global growth: the ability of the European leaders to fix the Eurozone crisis. inducing ‘trade wars’ as other countries retaliated and global trade suffered massively. Since the crisis struck in 2008.Gradually allowing the Renminbi to become an internationally-traded currency is the long. However. or banks going bust. is more austerity than any European ‘Club Med’ country is willing to enact).S.I – EU Stocks 50 index and China ETF: FXC: xlon iShares FTSE/Xinhua China 25 tracker. All the way down. It is not only a long. the next crossroads China will encounter in its Yuan liberalisation odyssey will be the outcome of the Eurozone crisis and of course. Treasury so far has abstained from labeling China a ‘currency manipulator’ – obviously fearing this could cause a huge diplomatic incident.” Nick Beecroft believes. putting Euro project into question. Singapore is on the cards. says Nick Beecroft. Chart: Relative correlation of the Chinese market and the European equity market growth in 2012.” Internationalisation of the Renminbi: a step-by-step strategy Both the government and the PBOC have stated that the internationalisation of the Renminbi and foreign exchange reforms are necessary to move to a market economy and better reflect China’s weight in the world’s global economy. No resolution to the US fiscal cliff issue.6 zone Dead Cross or Golden Cross: golden Cross on the 14th of July (very close to a possible dead cross) WisdomTree Dreyfus Chinese Yuan Fund (NYSE) – Daily Chart (CFD) starting June 2011 THE TRADING STATISTICS FOR THE CYB 2012 High: 25.the PBOC allows only a certain amount of movement per day – many observers expected a oneway Yuan appreciation movement for many years.4 and 100 zone Dead Cross or Golden Cross: Dead cross on the 20 Dec. However.03 Key Support: 25. First. by the way. this was lost in translation. In its semi-annual report on the foreign exchange market. 2011(very close to a possible golden cross) Trading Yuan in the FX Market yuan diplomacy Join the Saxo #FxdebateS share the ebook 16 . Short term changes in the CFD: Stoxx50E. And in the long-term? “It’s too early to say. Traders who expect the ‘redback’ to become the world’s new reserve currency soon should take notice of the old Chinese proverb: “Man who waits for roast duck to fly into mouth must wait very. So. at least amenable. EuroStoxx50 CFD daily chart with IShares FTSE/Xinhua China 25 also applied. with the double-objective of not harming their exports further and keeping their top trading partner if not happy.36 Placement in 2012 high to low Fibonacci range: Inside the 0 to 23. and the outcome of the fiscal deficit cliff in the US. Although. It will have real implications for the economy.S. Urged by its trading partners to appreciate its currency. They put a halt to its appreciation in the middle of 2008 and became confident enough only during 2010 to allow it to strengthen again. notes Nick Beecroft. “The pilot scheme has been rather successful: from nothing in 2009. List of instruments available to trade the Renminbi YUAN INDEX US Dollar/Chinese Renminbi daily (staircase)chart. “This would have certainly been repeating the errors of the 1930s in another form. if it subsequently enables Angela to say to her electorate “Look. the U.29 Key Resistance: 25. But where. quoting Zhou Enlai. Does this sum up China’s monetary policy? YUAN/DOLLAR RATE SOURCE: BLOOMBERG Trading Perspective Two main factors will influence the China growth story. but also a complex process involving the relaxation of China’s monetary policy and the creation of a more flexible exchange rate. London also hopes to have its role to clear transactions in the ‘redback’.” notes Nick Beecroft. now you could say after a virtually-unchanged year that’s not front-andcentre for a lot of hedge funds.39 2012 Low: 6. the performance of the Chinese economy. Spain and Italy”. step-by-step strategy. helping Chinese and global growth to keep on track. to test the water. liberalising the use of the Renminbi in international trade and cross-border investment is a slow. Its current account surplus has diminished rapidly . A balancing act However. Presidential election campaigns. However. tricky journey the People’s Bank of China (PBOC) has embarked on.5% of total banking deposits. to 2% this year. China took steps in that direction by ending the Renminbi peg to the greenback. and often rises up the policy agenda during U. You now see we can be tough. that move in the Dollar-Yuan rate was self-fulfilling: it drew more and more people into that speculation.” Nick Beecroft says. As so often happens in the dialogue between China and the West.49 2012 Low: 25. That supertanker could change direction completely if China fell off a cliff. if there’s no prospect of success. he says. The belief has grown this year that this is not a one-way bet anymore.” says Nick Beecroft. it now seems that Enlai confused the French Revolution with the 1968 riots in Paris a few years earlier. offshore Renminbi deposits in Hong Kong are now said to account for 9. Bull case A short-term solution will assist in the stabilisation of growth in the Eurozone. or approximately 3.49 Placement in 2012 high to low Fibonacci range: Inside the 76. THE TRADING STATISTICS FOR THE CHINESE YUAN 2012 High: 6. “Since the fixed peg to the Dollar officially ended in July 2005. trust me when I ask for more money for Portugal. one of China’s former Premiers in response to a question he was asked in the 1970s about the consequences of the 1789 French Revolution. as we have seen again in 2012”.7 percent of gDP (this. Chairman of Saxo Capital Markets Ltd. Nick Beecroft warns.from 10% of gDP in 2007.” Nick Beecroft points out. Then you could start seeing capital flight if they had an open current account and that’s why they don’t – they take these very gradual steps. 10 % 2 2007 % Today CURRENT ACCOUNT SURPLUS AS A PERCENTAGE OF GDP SOURCE:IMF Too soon to say “The supertanker of Chinese Renminbi appreciation has slowed to a crawl and even reversed a little during 2012. If no major new deal is struck.

FOLLOW THIS TRADER currency wars Join the Saxo #FxdebateS share the ebook 17 . He frequently presents seminars aimed at high frequency professional traders. In January 2012.CHAPTER V Currency Wars Is there a financial time bomb hiding in the FX market? Rakesh Shah HEAD OF FX ACADEMY AT SAXO CAPITAL MARKETS UK Rakesh has over 17 years’ experience in leveraged trading in London and New York. Rakesh joined Saxo Capital Markets as Head of FX Academy where he brings his unique expertise in pragmatic trading strategies to Saxo’s customers. having worked for several global investment banks.

3 0.IS MONETARY EASING A HOSTILE ACT? YUAN / DOLLAR MEXICAN PESO / DOLLAR 99.0697 86. 9 748 0.4931 80.0853 SHARE THIS INFOgRAPHIC EURO INDEX (BoE Calculated Effective Exchange Rates) DOLLAR INDEX (BoE Calculated Effective Exchange Rates) BRAZILIAN REAL / DOLLAR 0.7 0.4 91.4 0.5578 0.0759 BANXICO 4.0097 0.1289 94.6 0.4393 82.25 CENTRAL BANK ECB FED 0.1574 87.75% 0.0959 0.3 0.7 93.1 88.4 0.5% PBOC 6% BACE N SOURCE: BLOOMBERG 10/12 % 7.6045 0.25% INTEREST RATE (%) 2007 2008 currency wars 2009 2010 Join the Saxo #FxdebateS 2011 share the ebook 2012 18 .

in front of an on-coming bus. With the ability to print an infinite number of Francs. Brazilian Real. who have less buying power with their currency for the foreign imports they love so much. 2012.” Rakesh Shah argues. The power players When participating in the currency battle.20 level. shaping and changing the landscape for generations to come. Japan Thailand and Malaysia from the Far East. where one day. those Brazilian Reals are depreciating away in value as it takes more reals to buy the same loaf of bread or bag of rice. Recent data suggests that the Chinese central bank will once again change its stance on the pace of devaluation in the Dollar-Renminbi rate. there is no free lunch. Is there a financial time bomb hiding in the foreign exchange market? Rakesh Shah. Commodity-rich exporters are natural beneficiaries with their high levels of exports and many gulf States in the Middle East meet these criteria. so please don’t buy any US currency as your yield will be extremely low. foreign investment continues which helps keep domestic inflation in check as the country produces more of its own goods and services and relies less on costly imports. Switzerland: a special case A major issue on the minds of FX traders worldwide is the Swiss intervention in the Euro/ Swiss Franc market after the Swiss National Bank (SNB) stepped in to prevent the currency falling below the 1. an oil exporter. Just like in any other war. But as with everything in financial markets.the fate of great Britain being closely intertwined with that of the Eurozone .” he warns. in the global growth race.followed by the Yen. Even the world’s juggernaut. :00 00 The Battle Scene “The primary tools for fighting currency wars are interest rates. List of instruments available to trade the exotics EXOTICS INDEX USD/Mexican Peso (Spot) Daily candlestick chart with Dual Simple Moving Average and Fibonacci retracements applied. as so many players are commodity driven. tied together with the British Pound . loan and debt agreements to manage current account surpluses. led to higher growth rates. we will have to redraw the entire global currency domination map. It does play an important part in the domestic policy even if it is not explicitly discussed. even if it is already at a limited pace.” “Other global FX power players include the Euro. allowing Brazil to be somewhat more flexible with economic policies. as well as the Canadian Dollar and a host of minor and exotic currencies. the danger lies in exceptional events. Swiss Franc. the SNB is in a strong position to defend against the appreciation of its currency. The country has relied on using currency controls and fiscal policy on imports and exports in the last few years to stem speculation in the Brazilian Real. Euro/Norwegian Krone (Spot) monthly candlestick chart with line applied to indicate trend direction. China. no one knows where the water will hit first and what will be the long-term impact.43 Placement in 2012 high to low Fibonacci range: Inside the 0 to 23.” Since the second quarter of 2012. If we cut directly to the central battlefield in the currency wars. you may risk a total wipe-out if you’re on the wrong side. “Further afield we just have to think of oil rich countries to complete the list.the unleashing of a tidal wave of money into an economy with the promise that it will all be gathered back one day to pay back the debt.66 Key Resistance: 13. Find out which political establishments have the ability to manage their fiscal and monetary policies well enough to keep growth on track and at the same time keep goods and services relatively cheap for exporting. “The US announced unlimited QE3 and this set a new paradigm in the war. which has devalued by an average of over 10% between Q2 and Q3. super unlimited? They are basically saying ‘expect rates to be at rock bottom for a long time. FX trader and head of Saxo FX academy raises this hypothesis. traders should analyse each currency in order to evaluate which one has the firepower to win the war. The 21st century has created a global economy where hyper liquidity allows the transfer of financial assets from one zone to another on an unprecedented scale. Brazil has achieved some success in influencing its currency. How long this will continue will depend on the demand and pricing of oil and the ability of the government accrue current account surpluses against domestic costs and expenditure. a new financial weapon is created: quantitative easing . the devaluation of the Dollar to help the country’s trade deficit has a real impact on the growth and job situation. although the exchange rate may be the same as it was four months ago. in respect to the health of the economy. including Dual Simple Moving Average and Fibonacci Retracements.” Conclusion In real terms even if the currency is not devalued. The country’s banking system was not hit as hard during the subprime lending scandals. THE TRADING STATISTICS FOR USD MXN 2012 High: 14. when interest rates hit rock bottom and taxes can no longer rise. “When strong confidence in a country’s economy is maintained. Therefore. In this context a classic currency war is brewing. Historically. Knowledge of this information is the first step in forming an FX strategy. if commodity demand slows down. At the top of this group we can place Singapore. For each currency we must assess the ability of the domestic economy to withstand inflationary pressures that lower interest rates bring. has run into challenges with sustaining growth without letting inflation run wild. Superpowers flex muscles for the control of these assets through the setting of interest rates. we can see the currency has consistently trended strongly against the Euro in the last few years. Rakesh points out. What comes after unlimited. Australian Dollar. there will likely be more volatility and large-scale shifts in currency values. Except just like a tsunami.A classic currency war is brewing Wars play their part in history. the first step is identifying who the power players are. the ‘weapons of mass devaluation’ used to drive currencies lower in the pursuit of competitive advantage. “In some ways this creates an unnatural barrier where the currency does not move beyond a certain point. expect little change in US short-term rates over the next few years. for any major economy in the competing currency battle. Letting go of some of these strings in the past has caused some predictable volatility in the currency. with most countries eagerly anticipating moves from the United States and the Eurozone. The Thai Baht also exhibited some nice technical patterns. Rakesh Shah says. “However. One must learn the moral of the story: don’t run in front of buses without knowing the risks. in any short term situation. in real terms with inflation. Here we can see how the Thai Baht appreciated in the last four months during the same period in which the Dollar devalued against the Euro. have been both fiscal and monetary stimuli. For traders. Euro/Swiss Franc (Spot) Weekly candlestick chart displaying Central Bank intervention in EURCHF during 2012. Next. guido Mantega in 2010. There is the story of the old man that runs across the road to pick up pennies he dropped.” Rakesh Shah notes. Looking at Norway. the true test lies in the effects of inflation and whether the currency retains its purchasing power. China has been the elephant in the battle. “Brazil has had a roller coaster ride with its currency over the last decade. he says. if we use an example of Brazil.6 range Dead Cross or Golden Cross: Dead cross on 29 Aug 2012 Trading in the Currency War CurrenCy wars Join the Saxo #FxdebateS share the ebook 19 . Lowering interest rates can have an unwanted side effect of letting inflation rise. the dangerous by-products of a near-zero interest rate environment.” US Dollar/Thai Baht (Spot) Weekly chart including Dual Simple Moving Average and Fibonacci Retracement. Rakesh Shah believes. It is therefore important to track every movement seen on a relative basis when major economic announcements are made. The hole dug by quantitative easing may be so deep. We have seen this in the past when george Soros battled against the Bank of England that was trying to keep the sterling in the ERM on Black Wednesday (16th September 1992) and in this case he won. Renminbi. Brazil is an example. US Dollar/Chinese Renminbi (Spot) Daily chart. Let’s see why. Betting a central bank has deep enough pockets to always win.” Weapons of mass devaluation Historically. Sadly the net losers in currency war for Brazil are its own people. ‘the short term trend is your friend’ has been an important adage here. does not always work out for a trader. Well-positioned Nations “Measuring the degree of strength in currency power in the battle involves calculating the growth of foreign currency reserves and the growth of the current account surplus for each country.54 Key Support: 12.” Rakesh Shah notes. For many traders this creates a unique situation each week where the currency range is clearly held at the lower level by the SNB. What can seem like a logical situation in terms of risk and reward can get very messy when strategies go wrong. So in the long-term. Financial markets are no exception.” Trading perspective Current Market Scenarios In the medium term. even though economic factors and relative pricing in other currency pairs would suggest a lower exchange rate. that it may never be possible to rise back up to the surface again. Some countries have advantages. Based on this. to alert the world to the dangers of competitive devaluation. Brazil The ‘currency wars’ term was coined by Brazil’s Finance Minister. USA vs China “In the US. spurred by devaluation and inflation.59 2012 Low: 12.” Rakesh Shah explains. he adds. This combined with the rise in commodity prices. especially within so-called commodity economies. both sides will suffer grave losses if the economic policies in the fight tip the whole world into a massive slowdown and with another major recession for everyone.

following the trends and managing the risk Rakesh Shah 10 rules for pratical trading strategies Join the Saxo #FxdebateS CHAPTER VI share the ebook 20 .10 Rules for practical trading strategies Trading the markets.

Practice on a demo account to get any new strategy under your belt and then run a test portfolio to make sure you.2850). after a period of tight consolidation. ranging from bad timing (getting in a long time after your entry signal occurred). Don’t be fooled into thinking that the trade dynamics on both days will be the same.Trading the markets. It is important to remember that all decisions must be your own. Currency markets tend to spend time either in consolidation zones before breaking out or in trending zones (where they are making either new lows or highs to define a new range). get busy analysing and using demo account for trading new ideas as soon as is possible to build up your trading experience. Keeping up to date is easier with an analysis dashboard (picture 1). Sometimes finding inspiration for trading ideas is challenging. Factor into this. You can deploy your strategy immediately.000. stop and exit points. and specialist streams for specific currency pairs (picture 2). you will need to adjust your trading analysis to take into account all the new data. Assisted analysis is available.” about our platforms Join the Saxo #FxdebateS share the ebook 21 . the quicker you move up the learning curve. Rakesh’s 10 Rules for practical trading application: 1. Map out all the outcomes from given situations to allow you to execute faster. Regular tutorials are available at the educational section. but instead of using standard deviation to set bands. Keep an eye on the trading calendar. then you will still need to check (i. ESTABLISH THE DIFFERENCES IN THE TRADING CYCLE “Take the time to learn what works and what does not when trying something new. Don’t get caught out by trading inbetween the two concepts. spend some to figure out all the “what ifs” before you put the trade on.e. It does not matter if you are a Fernando Alonso or a Jeremy Clarkson.g. don’t wait for the price to move back into the range. How do you practically manage that? Will you wait and manually enter the trade by setting up a price alert by email or on the system. Practice analysing markets and check your analysis agrees with other traders. Recalculate your strategy entry. (This will be covered in more detail in some upcoming events. you want to be on the next move higher?). ESTABLISH YOUR ‘WHAT IF CRITERIA’ TO MATCH THE TRADING OPPORTUNITIES “Master your techniques and your reaction to the market. EUR/USD can be trading at 1. I see traders that have not mastered their tools and strategy. practice makes perfect.” Picture 1: Trader Dashboard Picture 2: Expert dashboard for instant analysis. 6. The delta hedge is automatically calculated and presented in a dealing ticket for execution (see picture 2)” Picture 2 Picture 1 8.30000 (OCO Buy Limit Order from 1.28000) 9. so are available 24 hours a day.e. To do this use an OCO order: ‘One cancels other’ “ 7. books and tutorials). The maximum you can lose is the premium paid. The platform is your vehicle for getting in and out of the markets.000 Euro/US Dollar. before turning and then beginning a new leg higher (i. 3. Why? The markets are dynamic. ENSURE VOLATILITY MATCHES EXPECTED RETURNS ON YOUR STRATEGY “Here is a specific technique and strategy for managing risk in a strongly trending market. Take a fresh look at the market and decide if this is the place you want to put on a fresh trade again.” Euro/US Dollar (Spot) hourly chart including applied trend lines. the “technical analysis tool” will give you a number of levels and support and resistance lines. Or will you use the platform to do the hard work for you by automating part of the process? The choice is yours and one potential method is to use the platform to set up 2 mutually exclusive trades. 4. wait for the breakout to happen or wait to buy at the support level. What are the implications of central bank intervention in your market. Keltner Channels use Average True Range above and below an exponential moving average. each day presents a new set of opportunities and every situation needs to be evaluated in the perspective of the bigger picture within which it sits.” 2. See the chart to see how ranges are formed at horizontal levels or in channels. you are a market bull and your view is that. as a person with a unique and individual trading style. AUTOMATED STRATEGY EVALUATION AND INPUT “Become an expert with your platform and the analysis available. One of the first steps I like to look at. you should consider to cut your losses immediately. To do this you need to understand volatility and the time value and how these will impact the price of the option. such as the non-farm payrolls? What happens when the numbers are just marginally different to consensus estimates? Having a second view from which to confirm your ideas is invaluable. this is one of the most useful tools for the experienced trader. getting experience in trading takes time and knowledge. Having clarity on what you are doing will help when managing outcomes. any viewpoint that you have and when they expect to happen. shown on Options Board (including further information such as the greeks). One method of capturing volatility in the forex market is to use forex options. to bad risk management (trading in amounts that are either too big or too small for your account). If you are a systematic trader. There are a number of strategies that can be deployed here. Keeping up to date with so much news is a challenge and Trading Floor can support you to do that with concise and incisive analysis in the key topics that are affecting the market both short and long term.g. creating confusion when decision need to be made quickly. The TradeMaker facility allows you to investigate a strategy to see if it suits your trading style and risk. E. have filters) that ensure the risk.” Trade Maker: Idea generator: EURJPY trade based on technical and market momentum. when formulating an FX options strategy. MAXIMISE RISK TO REWARD WITH OPTIONS “The important point to note here is that long options or ‘fully paid up front options’ allow you to fix your risk at the outset of the trade.000. Treat it as a fresh trade. What if the market opens up strongly up or down? What if the market trades sideways for longer than expected? What if there is a surprise news announcement? Trading needs to be relaxed and the secret to this is getting prepared for all the possible outcomes upfront. other cross currencies in the case of the Euro). non farm payrolls etc. Next you must consider how far you expect a currency pair to run on breaking a key support or resistance level. You have two choices. but you are not sure if this will happen now or the market will move to the bottom of the range first. exit targets and volatility still match your strategy. AUTOMATING FILTERS FOR HIGHER QUALITY STRATEGY COMPOSITION “Nothing beats market experience. e. For this very reason.30 on Monday and on Wednesday at the same key support or resistance level. have the personality to manage the complete trading cycle without any hesitation or conflict. By taking a fresh look. And also getting live mark to market prices will help you to keep on top of the profit and loss position in your overall portfolio. Having the ability to execute them directly over a platform help to make trading them practical. if you never get out of first gear. If you trade a vanilla call (see picture 1) or put. DEPLOY MARKET RISK TO WORK IN YOUR FAVOUR IN TERMS OF VOLATILITY WITH FIXED STOP LOSSES IN TRADING “Trading volatility in the forex markets is possible using an online platform. AUTOMATE DOUBLE OUTCOME STRATEGIES WITH ADVANCED ORDERS “What happens if you are in the middle of a consolidation range and are forecasting on the market moving higher. FOR THOSE MOVING FROM EQUITIES TO FOREX. Discipline is built upon practice and in the world of trading. There are a thousand different errors a trader can make. Switching between 2 strategies just causes confusion in most cases. If you are a discretionary trader. using a predefined program to plot them on charts. it may become clear that this is not the best entry point for your strategy. you can place a delta hedge immediately after the trade. they can be very useful for traders that have trouble managing risk on a trade-by-trade level. To do this. If you want to see the technical levels for any currency or equity market. These are similar to Bollinger Bands. Analysis of the subtle differences on how different currency pairs behave with volatility and the liquidity available at different times of the day will pay a factor in your decision-making. They are electronically created. you will be missing out on all the power of driving a car. Learn all the functionality and tricks that the platform gives you to get an edge. 10. How have you traded key strategic numbers.” 1.g. “ Saxo Tecnical Analysis tool. the more action you take. To help you see more clearly zones a useful technique is to use Keltner Channels. Euro/US Dollar 1. Winning the race is that much harder. economic factors and related instrument prices (e. REFERENCE TECHNICAL LEVELS WITH MORE THAN ONE SOURCE TO IMPROVE YOUR ANALYSIS “The way to do this is condiser using a demo account and run a check on whether you practice what you plan. 5. Vanilla Options trade (Strike 1. following the trends and managing the risks FX Trader and Head of Saxo Academy Rakesh Shah looks at strategies and the practicality of trading the currency markets.000 Buy Stop Order at 1. RECYCLE CAPITAL AS QUICKLY AS IS POSSIBLE TO ENSURE A HIGHER ROI IN POSITIVE EXPECTANCY ENVIRONMENTS “If you are ‘trading a range’ and the market moves outside of the range. But far too often. is to understand the practicalities of traded market and the dynamics of the instrument that will affect the strategy.

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