Strategies, analysis, and news for FX traders

June 2013 Volume 10, No. 6

Down down under: What the Aussie and kiwi dollar sell-offs mean p. 6 Five questions facing the market p. 18 Major currencies and the LIBOR “kerfuffle” p. 24

Central bank missteps and market swings p. 12 Too late to catch the rally? p. 35

Contributors..................................................4 Global Markets Aussie and kiwi run with the bears............6
A sharp sell-off has some market watchers predicting further losses, while others look for a short-term bounce. By Currency Trader Staff

Global Economic Calendar......................... 30
Important dates for currency traders.

Events ........................................................30
Conferences, seminars, and other events.

Currency Futures Snapshot.................. 31 BarclayHedge Rankings......................... 31
Top-ranked managed money programs

On the Money Central banks screw up........................... 12
Missteps can roil markets, as shown by recent moves in Japanese stock index, interest rates and the dollar/yen pair. By Barbara Rockefeller

International Markets............................. 32
Numbers from the global forex, stock, and  interest-rate markets.

Forex Journal............................................35 Five questions facing the market............ 18
The Fed’s position, Japan’s high-stakes condition, Europe’s zero-interest proposition, and other market-shaping issues. By Marc Chandler

Trading Strategies USD/JPY lagged pattern strategy............ 20
Signals don’t have to immediately follow the conclusion of a price pattern. This strategy shows how entries that occur many several bars after a price pattern can produce competitive results. By Daniel Fernandez

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Click on the company name for a direct link to the ad in this month’s issue. Ablesys EarnForex eSignal FXCM Interactive Brokers Ninja Trader

Advanced Concepts Major currencies and the great LIBOR kerfuffle......................... 24
All major countries have engaged in currency, interest rate, and stock-market manipulation since 1999. Post-2008 LIBOR reporting problems merely injected more bad data into the equation. By Howard L. Simons

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Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag.com Managing editor: Molly Goad mgoad@currencytradermag.com Contributing editor: Howard Simons

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. q Barbara Rockefeller (www.rts-forex.com) 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), The Foreign Exchange Matrix (Harriman House, 2013), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund. q Daniel Fernandez is an active trader with a strong interest in calculus, statistics, and economics who has been focusing on the analysis of forex trading strategies, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For the past two years he has published his research and opinions on his blog “Reviewing Everything Forex,” which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://mechanicalforex. com). Fernandez is a graduate of the National University of Colombia, where he majored in chemistry, concentrating in computational chemistry. He can be reached at dfernandezp@unal.edu.co. q Marc Chandler (marc@terrak.com) is the head of global foreign exchange strategies at Brown Brothers Harriman and an associate professor at New York University’s School of Continuing and Professional Studies. 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).

Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag.com

President: Phil Dorman pdorman@currencytradermag.com Publisher, ad sales: Bob Dorman bdorman@currencytradermag.com Classified ad sales: Mark Seger seger@currencytradermag.com

Volume 10, Issue 6. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2013 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.



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Aussie and kiwi run with the bears
A sharp sell-off has some market watchers predicting further losses while others look for a short-term bounce.
FIGURE 1: AUSSIE DOLLAR The currencies Down Under were simply down last month. Both the Australian and New Zealand dollars spiraled sharply lower vs. the U.S. dollar, etching stunning declines on their daily charts (Figures 1 and 2). In the month of May, the Aussie dollar (AUD) lost more than 8% of its value against the U.S. dollar, while the New Zealand currency (NZD), or “kiwi,” fell a little more than 7%. By the end of the month, the AUD/USD pair had fallen below its June 2011 level to .9527 — its lowest level since October 2011 — while the NZD/USD was extending its losses on May 31, trading below .7950. The moves represent the currencies’ sharpest sell-offs in a year and, in the case of the AUD/ USD pair, pushed toward the lower end of the long-term consolidation dating back to 2011 (Figure 3). The moves caught the attention of traders and analysts alike. It was almost a “perfect storm” of fundamental factors coinciding to trigger the sharp collapse. “The Australian dollar, New Zealand dollar, and other commodity currencies are at their most vulnerable points since the 2008 crisis,” says Steven Englander, head of G10 FX Strategy at Citi. “They are simultaneously facing a slowdown in physical demand, price, direct investment, and portfolio investment. This is what traditionally makes commodity currencies so volatile. When it rains, it pours — on both the current account and capital account.” Australia, he adds, is also vulnerable because of a potential pullback in its housing sector.

From April 30 through May 31 the Aussie dollar dropped more than 8% vs. the U.S. dollar.
Source for all figures: TradeStation


The kiwi also fell sharply against the dollar in May, but not quite as much as the Aussie dollar.

A combination of factors opened the selling floodgates. First, there was the broad U.S. dollar rally in recent weeks, which simply pressured the “flip

side” of many major currency pairs. “We’ve seen a global base metals, and demand is not nearly as strong as it used trend of strength in the U.S. dollar across currencies — to be,” says Alvise Marino, foreign exchange strategist at basically, a period when the U.S. dollar has been stronger Credit Suisse. than the rest of the world [currencies],” says Ankit Sahni, In Australia, prices for a key commodity, iron ore, have forex strategist at Nomura. fallen 12% in the past month and 22% since the beginning The U.S. appears to be coming out of recession earlier of the year, according to Ell. “Iron ore prices have fallen than the rest of the industrialized world, which has helped 12% in the past month and 22% since the start of 2013,” she support the greenback’s rally, according to Sahni. Also, says. “Iron ore is Australia’s largest merchandise export, speculation has increased the U.S. Federal Reserve may and China is the biggest market. So when there’s weaker begin to taper its monthly asset purchases via quantitasteel demand in China, Australia really feels it.” tive easing, which currently total $85 billion in overall Credit Suisse analysts believe the current Australian monetary accommodation; traders will be monitoring Fed dollar sell-off is more structural in nature, based in part announcements and minutes closely over the next several on the mining outlook. “In January this year, we turned months for any signals of a policy shift. bearish on the Aussie, forecasting it would fall to 1.0200 Nonetheless, the U.S. dollar began strengthening again in three months and 0.9500 in 12 months,” the company in May (after a February rally and subsequent consolidawrote in a May 22 research note to clients. “Fast forward tion), partly on expectations of eventual reversal of the three months, and rather than being too bearish, it has Fed’s monetary policy accommodation. become clear to us that, if anything, we have been too Another factor weighing on the Aussie dollar was a surprise rate cut by the Reserve Bank of FIGURE 3: THE BIG RANGE Australia (RBA) on May 7. The RBA cut rates in response to a slowing economic outlook, and economists forecast additional rate reductions this year. The move clearly caught the market off guard. “The Reserve Bank of Australia cut the cash rate by 25 basis points (0.25%) at its May meeting to a record low of 2.75%,” says Katrina Ell, associate economist at Moody’s Analytics. Another factor contributing to the depreciation in both the Aussie and kiwi is a “broad-based down move in key commodities, with some softening in the China story,” according to Bob Lynch, head of G-10 FX strategy, Americas at HSBC. Australia and, to a lesser extent, New Zealand, are both commodity exporters with close trade ties to China. Slower economic growth in China transThe recent sell-off pushed the AUD/USD toward the lower end of a lates into less demand for commodity exports. consolidation dating back to 2011. “We’ve seen a massive increase in the supply of


timid. Mining investment is in the process of peaking, with a lower currency needed to rebalance growth — boosting the non-mining sector as the contribution to growth from mining fades.”

Australian economic outlook

Australia, for the past several years, has been in one of the best economic positions among industrialized nations, even escaping official recession during the 2008 global financial crisis. But recently its growth numbers have been slowing. “This year will likely mark Australia’s 22nd year of uninterrupted growth,” Ell says. “We expect the economy to grow 2.8% in 2013 after growing 3.6% in 2012.” Two factors are behind the 2013 contraction, according to Ell. “First, 2012 growth was above trend due to base effects from flooding early 2011, so 2012’s strong pace wasn’t so much about domestic strength as it was technical factors,” she says. “Also, 2013 has been hurt by some softer private and government consumption, which we should see improve over the year. The Australian economy is in a transition phase, with mining investment expected to peak later in the year, so to keep growth at trend, the non-mining, interest-sensitive sectors need to improve further. The latest rate cut will provide further stimulus for this.” Sean Callow, senior currency strategist at Westpac Institutional Bank, also cites the importance of the extent to which business investment outside mining recovers as resource investments peak. “Consumption and housing construction look to be responding to the RBA’s cutting the cash rate to 2.75%,” he says. “We expect the economy to continue to grow below trend, by around 2.5% in 2013 and 2.3% in 2014, putting the pressure on the RBA to continue to ease policy. Fiscal policy continues to be tightened, although the main wave of budget cuts is behind us.” Westpac looks for the cash rate to fall as low as 2% by first quarter 2014, Callow adds. Other analysts also expect the RBA easing cycle to continue. Marc Chandler, global head of currency strategy at Brown Brothers Harriman, expects another 25-basis-point (bp) rate cut in the third quarter and a second 25-bp cut in the fourth quarter.

Callow says. But the main driver is reconstruction from the earthquakes around Christchurch, which is estimated to have the potential to boost growth by 2.8% in 2013 and 3.6% in 2014. Housing and consumption are growing solidly — indeed, house prices are becoming almost “bubbly.” Moody’s Analytics forecasts a 2.1% GDP growth rate for New Zealand in 2013. “The drought’s toll on the economy early this year has yet to be seen, but it remains a downside risk to the outlook,” says Fred Gibson, associate economist at Moody’s. “Record-low policy rates are fueling house price growth, reducing the central bank’s scope to ease monetary settings.” The Reserve Bank of New Zealand’s official monetary policy rate currently stands at 2.5% and Moody’s Analytics expects the central bank to remain on hold throughout 2013. “Direct trade with Europe is only small, but a European slump would flow through to weaker demand from New Zealand’s largest trading partners, such as China and Australia,” Gibson says. “Recently, New Zealand shipments to China exceeded those sent to Australia. This highlights the strengthening bilateral trade relations between New Zealand and China. The growing Chinese middle class will remain a strong driver of the dairy and meat industry over the coming years.”

Currency action

New Zealand outlook

New Zealand’s economy is a bit more circumscribed than Australia’s, with a high dependence on milk and dairy exports. “The export sector should be aided by high dairy prices, offsetting lower volume from the recent drought,”

Opinions are divided about what will happen next for the Aussie and kiwi. Some analysts expect the declines to continue, while others see the potential for a corrective rally. But volatility has increased and these currencies remain vulnerable to large swings. Credit Suisse analysts hold a bearish position, expecting the AUD to fall to 0.9200 against the USD by late August and to 0.8500 in the next year. Others, however, think the currencies’ recent sell-offs set up the potential for short-term upside moves. “We think they are oversold in the short term,” says Vassili Serebriakov, forex strategist at BNP Paribas. “These currencies have weakened more than rate differentials would suggest. They are oversold and should see a correction.” Callow also sees the potential for a rebound in the Aussie dollar. “Despite the RBA’s ongoing easing bias to support a sluggish economy, AUD/USD should suffer only limited damage overall in coming months,” he says. “We do not believe the U.S. economy is yet on a strong enough

footing for the Federal Reserve to start winding back its QE program until at least [the end of] 2013. This should cap USD rallies, leaving AUD/USD around 0.9900 by [the end of] 2013, which is still historically strong. Nearer term, the Aussie should be quite volatile, but as long as the Fed and Bank of Japan easing is at full pace, it is probably a [case of buying] on dips, targeting 1.0100-1.0200 by, say, July.” Citi’s Englander expects weakness in the New Zealand dollar, but less so than in its Aussie counterpart. “The New Zealand dollar is not as exposed as Australia and its set of commodities are not falling as fast,” he says. “Moreover, we think the Reserve Bank of New Zealand will hesitate to cut, so while the New Zealand dollar will fall with the Australian dollar, it will not fall as fast.” The Australian dollar, he concludes, could be below 0.9000 before this phase plays out, while the New Zealand dollar could pull back to 0.7500.”

Waqas Adenwala, research assistant at 4Cast Inc., says the Aussie dollar is at historically high levels, and his firm expects further dips to 0.9390 in the coming weeks. “The AUD is shaping up as the big loser amongst commodity currencies, with much more room on the downside,” he says. “We will have to keep a close eye on China demand going forward.”

RBNZ intervention

The Reserve Bank of New Zealand (RBNZ) has expressed concerns about its currency’s high level and resulting negative impact on exports. Sahni notes the bank has taken steps to slow the trend, most recently in May. “The central bank intervened — it was selling kiwi, buying dollars,” he explains. “The strong currency is bad for exports and bad for the economy.” Callow adds the RBNZ has made it clear it believes the kiwi is overvalued and that it reserves the right to inter-

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FIGURE 4: AUSSIE/YEN vene. “But it — and the finance ministry — are aware that they do not have the firepower to turn the tide on NZD,” he says. “Prime Minister (John) Key is a former FX trader who knows the power of markets. The kiwi is likely to remain attractive on a range of crosses. GDP growth should accelerate and investors like its export basket’s large weighting for dairy products which will be in keen demand in China, regardless of China’s GDP,” he says. Westpac’s Callow adds his firm’s base case is for the NZD/USD pair is to find buyers on dips around 0.7900-0.8000 and is “eyeing a rebound to 0.8400-0.8500 later in the year.”
The Aussie/Japanese yen pair (AUD/JPY) recently pulled back from a high above 1.0500.

Cross rate action


In recent weeks the AUD/NZD pair traded to its lowest levels since 2009.

Callow advises watching the Australian dollar/ Japanese yen (AUD/JPY) cross (Figure 4). “In recent weeks, AUD/USD and USD/JPY have often been highly negatively correlated, with USD/JPY gains boosting broad USD confidence,” he says. “But this should break down before too long.” Speculative positioning has been a huge driver of the yen decline, Callow says, but it can’t be the main force for much longer. “Japanese investors will become vital once more. If they ramp up purchases of foreign bonds, then the AUD/JPY could shoot through 105,” he says. “If not — our base case — the risks are for a slide back to 0.96000.9700. Perhaps buying volatility is the best bet after an unusually quiet period.” Callow describes the likely action in the Aussie/ kiwi pair (AUD/NZD, Figure 5) as “lively,” and best seen as a sell on bounces to 1.2200-1.2300, looking for a fall to 1.1700-1.1800 by late 2013 as RBNZ tightening approaches. y


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Member - NYSE, FINRA, SIPC. Supporting documentation for any claims and statistical information will be provided upon request. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets. [1] Standard Account. CURRENCY TRADER • June 2013 11 05-IB13-554

On the Money ON THE MONEY

Central banks screw up
Missteps can roil markets, as shown by recent moves in the Japanese stock index, interest rates and the dollar/yen pair.

As the U.S. Memorial Day holiday was approaching, several markets each chose to have a crisis of nerves all at once. Note the third week of any month is often the most risk-laden, usually because that’s when many important economic reports are released (PMI, IFO, etc.); the U.S. non-farm payrolls release on the first Friday on each month is a key exception. This time the immediate cause of market turmoil was unclear messaging from not one, but two, major central banks. Fed chief Ben Bernanke told Congress two things the markets interpreted as contradictory — that tapering of QE could begin in the next few months and that it would be premature to begin tapering any time soon. Then Bank of Japan (BOJ) chief Haruhiko Kuroda said a rise in 10-year yields is only to be expected in light of the improving economy and rising inflation expectations, having said previously the BOJ wants yields to fall all along the yield curve. The yield on Japanese Government Bonds (JGBs) rose from 0.33% in April to 1% on May 23. Also, European Central Bank (ECB) chief Mario Draghi said he could see tangible improvements in financial conditions in the form of narrower debt spreads — only to have them widen out substantially the next day. direct result of Fed communication, the Fed failed. The logical order of his comments would be “yes, tapering, and maybe in the next few meetings, but we are wary of being premature.” By reversing the order and putting “wary” first, he created confusion that will persist at least until the next Fed policy meeting (June 18-19) and probably beyond. This was a classical error by an ivory-tower mindset. Just about any reasonably competent fund manager could have advised him on the proper order of the message components. The twin messages are not all that complicated. Bernanke affirmed the tapering process is on the drawing board. What everyone has missed is the critical word “if.” He said, “If we see continued improvement and we have confidence [that] is going to be sustained then, [in] the next few meetings we could take a step down in the pace of purchases.” The word “if” tells you a set of conditions is coming. Bernanke is admitting the Fed is data-dependent, and incoming jobs data is the key. While Bernanke didn’t name specific levels, sane and reasonable analysts estimate the Fed needs to see sustained and sustainable gains in job growth, probably more than 200,000 per month, before tapering talk gets really serious. Of secondary importance are whether inflation is “too low” or the fiscal drag too strong from a gridlocked Congress that has yet to pass a full-year budget, and the continuing resolution on the debt ceiling. It’s like an engineer drawing a beautiful bridge but warning the math has to be done to ensure it can be built without falling down the first time an 18-wheeler crosses it. Now the question is whether markets will wake up to what Bernanke really said — no tapering yet — and recover, especially equity markets. Market lore has it that stock markets “lead” the economy, but it’s easy to argue stock markets are currently divorced from real economies just about everywhere, something we can blame on central banks. In Europe particularly there was no reason for equiJune 2013 • CURRENCY TRADER

The Fed

The Fed’s position on tapering is only superficially confusing. Bernanke gave two messages in congressional testimony that QE tapering could begin in the next few meetings but the Fed is wary of doing anything prematurely. The problem for markets was that Bernanke said “wary” before he said “next few meetings.” Separately, the minutes of the last FOMC meeting indicate the members are not close to agreeing about timing, amounts, or composition. The S&P fell 0.83% on the day Bernanke botched the congressional testimony. The Fed places a high value on maintaining market stability and on clarity of communication, so when the market gets jumpy and choppy as a

The Fed pretends the stock market is independent and that it doesn’t even try to measure any market in terms of excessive price rises, so it can hardly appear to be altering policy when the market falls back.

ty indices to be putting in new highs with the Eurozone both Australia and Canada are thought to be contemplateconomy in a confirmed recession (negative growth for ing additional rate cuts. It’s a big deal for the U.S. to be two quarters). the sole major power bucking the global accommodation The global equity rout that followed the Bernanke testrend. timony may turn out to be a flash in the pan. But if not, Figure 1, which shows the rise in the Reuters 10-year repercussions could include a strong statement from yield index vs. the dollar index, seems to prove the rule the Fed that tapering is not imminent. This would be an that capital flows to rising yields, even if the dollar index implicit acknowledgement that Bernanke botched the tesrally started many months ahead of the yield rise. But timony and also a nod to the power of stock markets as a beware — rising yields do not always support the dollar. Barbara Rockefeller Currency Trader Mag June 2013 public sentiment indicator. The Fed Fig 2. Dollar Index vs. 10-Year Note Yield Index (Red) Weekly pretends the stock market is indepenFIGURE 1: DOLLAR INDEX VS. 10-YEAR NOTE YIELD INDEX (WEEKLY) dent and that it doesn’t even try to 85 38 85 measure any market in terms of exces37 84 36 sive price rises (irrationally exuberant 84 35 83 bubbles), so it can hardly appear to be 34 83 altering policy when the market falls 33 82 32 82 back. 31 81 Meanwhile, in the bond market, 30 81 29 80 the 10-year yield remains elevated in 28 80 anticipation of “tightening.” Tapering 79 27 is not tightening — the Fed will still 79 26 78 25 be buying notes and mortgage-backed 78 24 securities, and all Fed asset buying 77 23 77 22 has to be deemed “accommodative,” 76 21 but never mind. If the stock market is 76 20 75 flighty, the U.S. bond market seems to 19 75 18 have only two speeds and no nuance. 74 17 74 The rise in U.S. 10-year yields is 16 73 15 widely seen as dollar-supportive, 73 14 especially in the context of the rest of 72 13 72 the world still embracing accommoda12 l AugSepOct NovDec 2011 MarApr MayJun Jul AugSep Oct NovDec 2012 Mar Apr MayJun Jul Aug SepOct Nov Dec2013 Mar Apr May Jun Jul A tion. In early May the ECB cut rates The rise in the Reuters 10-year yield index vs. the dollar index seems to prove by 25 basis points, despite believing the rule that capital flows to rising yields, even if the dollar index rally started a rate cut would do almost nothing many months ahead of the yield rise. to boost economic activity. Japan will soon be launching its massive QE, and
CURRENCY TRADER • June 2013 13


Barbara Rockefeller Currency Trader Mag June 2013 Fig 3. Dollar Index vs. 10-Year Note Yield Index (Red) Monthly

75 70 65 60 55





105 50 100 45 95 40 35 30 25 20 15 70 10 95 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2





Rising yields don’t always support the dollar. The 10-year note yield rose between May 3, 2003 to Aug. 31, 2007 before breaking support, while the dollar index fell from July 31, 2001 to March 31, 2008.

Figure 2 shows the yield and the dollar index can go in opposite directions for a long time. The 10-year note yield (red) rose from May 3, 2003 to Aug. 31, 2007 before breaking support to the downside. At the same time, the dollar index (black) was falling from July 31, 2001 to March 31, 2008. Clearly, yield is only one factor and it might not be wise automatically to associate tapering/yield increases with an ever-rising dollar. Besides, unless employment data comes in really strong for the next three months, the bond market will get discouraged and see postponement of tapering to year-end or beyond. Yields will fall. Does that mean the dollar loses support from yield? The correlations are not strong enough to give us predictive value.

Rationalizing risk in Japan

The Japanese do not have an exact equivalent for the word “risk.” They use risuku, but it’s a borrowed word and not well understood. A natural Japanese word is kiken, which means danger, but risk doesn’t mean danger, exactly — it means only the possibility of danger. Risk in English is two-sided. You can get both favorable and unfavorable outcomes by taking risk. Risk avoidance is common sense when your definition of risk is danger. Numerous financial analysts have noted that Japanese investment managers

are exceptionally risk averse, and semantics may have something to do with it. On Thursday, May 23, 2013, the Nikkei 225 stock index fell 7.2% after having been down about 9%. The following day, the Nikkei traded in a range of 1,026 points, closing higher than the day before but still lower than the open (Figure 3). The May 23 drop was one of the largest in history. Starting from 1980, it was in fact the seventh largest, surpassed by the drop on the 2011 earthquake, the Lehman aftermath, and Black Monday (October 1987). At the same time, the dollar/yen fell from a high of 103.74 on Wednesday, May 22, the day before the Nikkei crash, to a low of 100.84 on the day of the crash, and nearly the same low the following day. Normally we think of the yen as driving the Nikkei for the perfectly logical reason that exporters benefit from a weaker yen, but this time the causal direction was the other way around. The yen rising in sync is normal on the grounds that a falling tide lowers all boats, and a drop in the Nikkei inspires risk aversion, which means flight to the home currency. The Nikkei newswire, which reported the cause of the Nikkei falling so hard was profit-taking by fast money managers and hedgers, predicted that position-adjustment would taper off rapidly, and bargain hunting would support the stock index before long. But what if the Nikkei drop leads to a complete re-evalJune 2013 • CURRENCY TRADER

Barbara Rockefeller Currency Trader Mag June 2013 Fig 1 Nikkei 225 Stock Index Moving averages (Green = 200-day, Dark Red = 100-day, Turquoise = 55- day, Red = 20-


1650 1600 1550 1500 1450 1400 1350 1300 1250 1200 1150 1100 1050 1000 950 900 850

6000 5500 5000 4500 4000 3500 3000 2500 2000 1500 22 29 5 12 November 19 26 3 10 17 December 25 7 15 21 2013 28 4 12 18 February 25 4 11 March 18 25 1 8 April 15 22 30 7 13 May 20 27 3 1 June

On May 23, 2013, the Nikkei 225 stock index fell 7.2% after having been down about 9%.

uation of “Abenomics” and, thus, to further stock market declines and yen appreciation? A large Japanese bank reports that, in the week after 25 big stock market declines since 1980, the Nikkei rallied an average of 3.8% in 75% of the cases. We need to acknowledge the current rally from November 2012 has created an extraordinary environment, and perhaps the average will not apply this time. Meanwhile, the dollar/yen pair moved lower by an average of only 0.23%, and has actually rallied in 42% of cases. Figuring out what is going on in the dollar/yen requires looking at the Nikkei and at JGBs. The Nikkei 7% drop was frightening enough, but even scarier in the context of having just hit a five-and-a-half year high of 15,942.60 earlier the same day. Before the rout, the Nikkei was up 53.4% year to date. The sell-off is most often attributed to Bernanke having caused confusion instead of tapering clarity, but not everyone buys that. Until the rout, the Nikkei had risen in 23 of 27 weeks since mid-November, when it became clear current Prime Minister Shinzo Abe would win the election. Everyone expected aggressive reform initiatives, and Abe has indeed delivered them. Surely the Nikkei collapse and accompanying rise in the yen has as much or more to do with judging the prospects for Abenomics than with the timing of Fed tapering. A key may be the excessive volatility in both the Nikkei and the yen, which may be a function of misunderstanding

risk. That’s almost certainly what’s in play in the Japanese bond market. The 10-year JGB yield has risen from 0.33% in early April to 1%, with up-down volatility the BOJ has been trying to tame by temporarily closing the bond market on two occasions and intervening by as much as ¥2 trillion on at least one day. The BOJ’s Kuroda pledged to curb volatility, saying, “Through dialogue with the market and more flexible operations, we will ensure the stability of financial and capital markets.” Normally, mention of “dialogue with the market” is chilling. It means strong-arming market players and therefore potential misallocations. The tripling of 10-year yields is contrary to the government’s plan to bring yields down all along the yield curve, and the volatility is especially worrisome because, as some analysts fear, banks will start dumping JGBs. The Financial Times reported, “According to the BOJ, a 100-basis-point increase in interest rates across all maturities would lead to mark-to-market losses equivalent to a fifth of tier one capital for regional banks, and 10 per cent for the major banks.” Rising yields are also threatening the Abenomics plan, as Prime Minister Abe said to Parliament on May 24: “Sharp increases in long-term interest rates could have a grave impact on the economy and the government’s fiscal conditions.” Another worry is that relying on the central bank to buy whenever the yield nears 1% will damage liquidity and


destabilize the bond market. This, in turn, could cause the government to retreat from the massive QE announced in April that, in turn, underpins the rising dollar/falling yen — which is, in turn, the support for the Nikkei. This is the sense in which Bernanke saying “no tapering yet” is yenrelevant. Evidently investors had a scenario of rising U.S. yields and a falling yen, and upsetting that apple cart sent the Japanese bond gang into a tizzy. Unfortunately, we still don’t really know why Japanese yields are rising. Earlier this month analysts said it was not a bad thing, if contrary to government plans, because it confirms inflation expectations are higher. After all, killing deflation is the main goal of Abenomics, so a little rise in yields is not a bad thing if inflation expectations are the cause. The problem is that yields didn’t rise only a little — they tripled, and they were volatile hour by hour and day by day, indicating a lack of stability. It was not helpful that officials, including Kuroda, seemed to be talking out of both sides of their mouths, saying rising yields are OK and then contradicting that stance, sometimes on the same day. More than one analyst said the financial leaders don’t know what they are doing. It’s more likely that they don’t understand why the market refuses to be herded. One thing we do know about Japanese government financial management is that when a decision is made to achieve a particular benchmark, that determination can be manifested in intervention. It’s like bringing out the dogs and the whip when herding by voice and horse isn’t working. That means we need to find out whether the dollar/ yen at a low of 100 is indeed a “line in the sand,” along with 10-year yields under 1% and an ongoing rise in the Nikkei. Remember, in past FX market interventions, the Ministry of Finance named “excessive volatility” as a justification. They certainly have that today. But intervention is like tornadoes and hurricanes: The conditions that form them develop a hundred times for every instance of an actual tornado or hurricane. To a certain extent, intervention now would signal a failure of the government to be effective herders without resorting to force. Voluntary participation in the plan is preferable, especially since the Abe administration (rightly) seeks to

nurture “animal spirits.” The problem, perhaps, is that to have the right amount of animal spirits, you need first to understand and be willing to embrace risk.

Mr. Draghi speaks

One thing we do know about Japanese government financial management is that when the decision is made to achieve a particular benchmark, that decision can be manifested by intervention.

If peripheral-country sovereign yields are the correct benchmark for judging the sufficiency of the Eurozone institutional infrastructure, Draghi got lucky in April and May. The Cyprus crisis fell off the front page and yields in Italy, Spain, Portugal, and Greece fell back to lows not seen in over two years. But just as Draghi was congratulating himself for the falling yields, they started to rise again. On April 23, the Italian 10-year yielded 3.89%, the lowest since October 2010, and on May 24, it was 4.16%, not enough to set your hair on fire but something to watch. Spain’s 10-year was 4.24% on April 23, the lowest since November 2010, from a record high last July of 7.69% at the height of the banking-sector crisis. By May 24, the Spanish yield had climbed to 4.43% — again, not enough to raise hackles but not the right direction for a stabilizing market, either. All it would take for yields to start rising again would be a high wind from an unforeseen direction. We should not assume event risk has fallen to zero. Bottom line, markets become interrelated and selfreinforcing under crisis conditions, and produce odd outcomes. At a guess, the U.S. yield will continue to hover in a range near 2% and not retreat back to sub-1.75%. After all, the Fed will start tapering at some point and it’s unlikely to raise QE from here — although once tapering starts, the Fed has reserved the right to raise it again if needed. The Japanese will probably get better at herding traders, and if not, they will intervene. Draghi will probably get away with naming a narrowing of spreads as evidence of central bank excellence. But on the whole, central banks need to pull up their socks and stop making mistakes. y
Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange, and the author of the new book The Foreign Exchange Matrix (Harriman House). For more information on the author, see p. 4.

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Five questions facing the market
The Fed’s position, Japan’s high-stakes condition, Europe’s zero-interest proposition and other market shaping issues
What’s the outlook for Fed policy? The dramatic market reaction on May 22 notwithstanding, Federal Reserve chief Ben Bernanke and the FOMC minutes were fairly clear. Bernanke essentially said “no” to calls from some committee members to consider scaling back on the bank’s long-term asset purchases at next month’s meeting. He argued that it’s too early, and that he and the majority of the FOMC needed several more months of data to make that determination. Also, when that happens, it’s a matter of slowing the pace of quantitative easing, not terminating it entirely. In addition, the Fed (and some economists) argue the accommodation of QE lies in the stock of long-term assets the central bank keeps off the market, not so much in the flow of purchases. FIGURE 1: U.S. DOLLAR It’s true QE will come to an end, which is partly why references to “QE-infinity” were misplaced (purposely?), confusing “indeterminate” with “permanent.” Ceasing QE operations is a delicate process — one the Fed has been engaged in twice before. The Fed’s guidance suggests it will adjust monetary policy only on the basis of economic performance. A slowing of QE and its eventual end likely means the economy is stronger. In addition, the fasterthan-expected decline in the U.S. budget deficit means new net supply also will fall. We continue to look for underlying U.S. dollar strength (Figure 1). But to the extent that some of the dollar’s recent gains are a reflection of a more hawkish reading of the Fed’s stance than is likely the case, we worry the dollar is vulnerable to disappointment. Such a dollar pullback would provide medium-term investors with a new opportunity to take on exposure.

Can Japanese officials stabilize the bond market?

To the extent some of the dollar’s recent gains reflect a more hawkish reading of the Fed’s stance than is warranted by the facts, the dollar may be vulnerable to disappointment.
Source: TradeStation

There are high political and economic stakes put at risk by both the volatility and direction of Japanee bonds. The Bank of Japan (BOJ) continues to struggle to stabilize the market. In addition to domestic sources of volatility, officials have had to cope with rising long-term global yields. Over the past month, Japan’s 10-year yield has risen 24 basis points (bp), the U.S.’s 36 bp, Germany’s 28 bp, and the UK’s 28 bp. The Abe government wants to have its cake and eat it, too: It wants to take credit for the economic recovery (and the fastest-growing economy in the G7), demonstrate its commitment to ending deflation, and keep bond yields stable and low. With earnings bolstered by the translation of foreign sales and income from foreign investment back into the weaker yen, corporations appear to be benefiting from Abenomics. But they aren’t facilitating its agenda by raising


wages and investment. BOJ officials will meet again with Japanese bond dealers in yet another attempt to prevent its operations (buying 70% of the new issuance) from destabilizing the market. After the last meeting, the BOJ made more frequent and smaller purchases. The rise of Japanese interest rates changes the cost-benefit comparisons for institutional investors. The rise in JGB yields has spurred an insurance company to indicate it would increase its allocation domestically. Japanese investors have sold about $95 billion worth of foreign stocks and bonds this year, while foreign investors have bought about $80 billion of Japanese shares.


Is the ECB going to adopt a negative deposit rate?

European Central Bank (ECB) President Mario Source: TradeStation Draghi raised this possibility at the ECB meeting earlier this month. If the goal is to help revive CPI is negative. On May 28 it reported a record low PPI of lending, especially to small and medium-sized business -5.3%, year-over-year. The 1.1% month-over-month decline and improve the transmission mechanism of monetary dwarfed the consensus estimate of -0.2%. policy, we expect a serious analysis to highlight the risks Disinflation forces are strengthening in Germany, which and downplay the likely benefits. reported a 1.4% decline in April import prices. This was That said, Draghi has surprised many observers with more than three times larger than the market expected, his boldness (unwinding both of former ECB President and warns of some downside risks to the CPI figures. Trichet’s rate hikes in his first two meetings) and abilThe euro CPI stood at 1.4% in May, up from 1.2% in ity to innovate (two Long-Term Refinancing Operations April, which was a three-year low. CPI peaked in late 2011 and the Outright Monetary Transaction program). At the near 3%. The core rate stands at 1.2%. The Fed’s favorite same time, the OMT has worked by being brandished, (but not only) inflation measure, the core PCE deflator, as opposed to being actually deployed, and the dramatic was up 1.1% from year-ago levels, near a record low. The success of that moral suasion was not lost on Draghi. The diminishing measured price pressures is recieving increasnegative deposit rate is more like the OMT than the LTRO. ing attention by Fed officials. Because of the potential disruptive effects such a policy could have, the bar to implementing it is likely high. Is the soft landing still intact for China? Unless there is further material deterioration in EuroThe question in China has morphed from, what kind area conditions, don’t expect the ECB to adopt a negative of landing to how soft a landing? Premier Li Keqiang deposit rate. acknowledged the serious challenges of achieving 7% There is asymmetrical risk around the Euro (Figure 2). growth over the next decade after a 10% pace over the preIt is more likely to sell off sharply on a move to a negative vious decade. deposit rate than rally when the ECB, as we expect, fails It’s not that the new government is more tolerant of to signal a cut in the deposit rate in the first week of June. weaker growth, but that it actually wants a more sustainMoreover, a refi rate cut is not the done deal many observ- able pace, especially if it reflects a restructuring and movers suggest. As the new staff forecasts will likely show, ing away from industries with excess capacity. An impormost of the weakness thus far was largely anticipated. tant speech over the May 25-26 weekend suggests the new

The Euro’s risk in late-May was skewed to the downside.

What are the latest inflation readings?

Some deflation emerged in the first part of the year, but pockets of deflation remain. On May 28 Japan reported its corporate service price index for April, which fell for the first time in three months. The headline rate fell 0.3% for a -0.4% year-over-year reading—twice as large a fall as expected. The core rate fell 0.4%, which was also the first decline in three months. The 0.7% year-over-year decline was the 11th consecutive. At the end of May, Japan reported a 0.7% year-over-year decline in consumer prices and a core rate, which excludes fresh food and energy, is -0.6%. Sweden is also experiencing deflation, as year-over-year

government expects to use more market pricing signals as a means to foster restructuring. China has become an increasing inefficient user of capital. Every incremental unit of investment is generating less GDP growth, and that investment is increasingly debt financed (capital from offshore, some foreign, some from Chinese sources). This explains the acceleration of reforms in the financial sector and the appreciating yuan. y

Marc Chandler is head of global foreign exchange strategies at Brown Brothers Harriman. His blog is called Marc to Market (www. marctomarket.com). For more information on the author, see p. 4.


USD/JPY lagged pattern strategy
Signals don’t have to immediately follow the conclusion of a price pattern. This strategy shows how entries that occur several bars after a price pattern can produce competitive results.

Most retail traders focus on developing setups based on data up to and including the most recently closed price bar. However, it’s incorrect to assume only setups of this type can produce good forecasting results. Signals that use “lagged” data — that is, those that do not use data from the most recent price bars — often generate historically profitable setups. Although this approach might sound counterintuitive, many times signals are independent of the immediately following price action and lead to a useful forecast only after a predetermined lag. Let’s look at a strategy that embodies this concept — a signal in the U.S. dollar/Japanese yen pair (USD/JPY) based on a lagged price pattern.

when: . a the high 33 days ago is above the open 40 days ago. b.   the low three days ago is above the close six days ago. 2.   Go short, close short, or update short trade stop-loss when: a.   the high 33 days ago is below the open 40 days ago. b. the low three days ago is below the close six days ago.  As simple formulas, these rules are: 1. G  o long, close short, or update long trade stop-loss when: a. High[33] > open[40]. b. Low[3] > close[6]. 2.  Go short, close short, or update short trade stop-loss when: a. High[33] < open[40]. b. Low[3] < close[6]. where a [0] corresponds to the most recent closed daily bar, 1 is one bar ago, 2 is two bars ago, etc. The system controls risk using an un-optimized stop-loss that is placed below (for long trades) or above (for short trades) the entry price by an amount equal to the 20-day
June 2010 2013 • CURRENCY TRADER October

The strategy
The system we’ll evaluate has two entry rules, which are reversed to exit positions. Price direction is determined from two points — one that compares the difference between a recent low and closing price, and another (much more lagged) that determines directionality by comparing a bar’s high to a previous week’s opening price. The rules for the system are: 1.   Go long, close short, or update long trade stop-loss


average true range (ATR), initially risking 2% of the available account balance on each trade. If there’s an open trade and a new signal occurs in the same direction, the stop-loss is adjusted to reflect the current price. For example, if a long trade was opened at 100.45 and the 20-day ATR value was 1.34, the stop-loss would be placed at 99.11 (100.45-1.34). If a new long signal triggered at 103.20 with an ATR of 1.20 the stop-loss would be moved to 102.00 (103.20-1.20). The system can function as either a trend-following or countertrend strategy because the absence of an immediate reaction allows the system to react to price bursts in either direction in a way that might not necessarily align with the last evident trend direction. The system also benefits from updating the stop-loss when new signals occur; this often serves as a trailing stop that allows the system to capture gains more efficiently. Figure 1 shows a sample trade from spring 2012, with the two entry rules highlighted. The system got a better entry by using a lagged pattern; entering immediately after the pattern criteria had been satisfied (if the rules were shifted such that entries were made as

The system enters positions several days after the second of the two pattern criteria (highlighted) has completed.


The different lines show the strategy’s performance hinges upon both entry rules. Also, the strategy’s performance without the stop-loss highlights the importance of its trailing effect.




Many drawdowns lasted longer than 200 days.

soon as the second rule’s pattern was completed) would have generated an instant loss.

Testing the system
The strategy was back-tested on daily USD/JPY price data from Jan. 1, 1988 to Aug. 1, 2012. A trading cost of 3 pips TABLE 1: PERFORMANCE SUMMARY
Absolute profit Avg. annual return Max. drawdown Profit factor Reward/risk ratio Win% Max. drawdown (days) Ulcer Index No. of trades Max. loss Avg. loss No. of years in test 1510% 13.27% 24.09% 1.26 1.61 44% 910 9.06 1,025 5.51% 1.62% 24

(0.03) per trade was also included, and the initial account equity was set at $100,000. A note on price data: The data used for the test had a weekly opening at 4 GMT +1/+2 hours on Monday and a weekly close at 19 GMT +1/+2 on Friday, adjusted accordingly for daylight savings time (+1 non-DST, October to March, and +2 for DST). Because we are evaluating patterns on the daily time frame, the weekly opening/closing times directly affect the open/high/low/close values of the bars used to obtain signals. Make sure you carry out proper time corrections on your data when executing the system.

Historical test results
Figure 2 shows the results (logarithmic scale) of the trading strategy (light green), along with results without a stop-loss (dark red) and the results of trading only using rule 1 (dark green) or rule 2 (blue) as entry/exit/ update signals. Together, the lines show the strategy’s performance depends on both entry rules, not just one of them. The strategy’s performance without a stop-loss also suggests its trailing effect is fundamental; without it the drawdown increased significantly (although the final profit was almost exactly the same).

The strategy had favorable reward/risk characteristics, with its primary shortcoming being lengthy drawdowns.




There were relatively frequent losing years (nine of 24), but the winning years were much larger, on average.

Table 1 shows the strategy is able to achieve good results over the course of the 24-year test period, with an average annual return of 13.27% and a maximum drawdown of 24.09%. The strategy had winning percentage of 44%, which was offset by a favorable 1.61 reward-to-risk ratio. The high total number of trades (1,025) translates into an average of approximately eight trades every 10 weeks. However, the strategy’s maximum drawdown length was quite high (almost three years), as was the Ulcer Index (9.06). Figure 3 shows why. The distribution of drawdown lengths (from a total of 29 drawdowns) shows the strategy experienced several drawdowns of more than 500 days, and even more that were longer than 200 days. Figure 4 shows the strategy had several losing years (nine) within the test period — 37.5% of all years. However, the much larger gains generated during the profitable years more than compensated for these losses. For example, consecutive minor losing years in 2006 and 2007 (-0.9% and -2.7%) were followed by 2008’s big 41.8% return.

An alternative worth considering
Although it’s intuitive to use price patterns that incorporate the most recent data, this study shows strategies that use “lagged” information don’t have an inherent disadvantage. This strategy had some conspicuous drawbacks — a high Ulcer Index and maximum drawdown length — but these deficiencies might be improved by combining lagged strategies in a system portfolio or designing lagged strategies that produce historically profitable results across multiple instruments. Remember to always analyze rules independently to assess their relative importance, and consider the use of updating stop-losses to trail profitable trades. y
Daniel Fernandez is an active trader focusing on forex strategy analysis, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For more information on the author, see p. 4.



Major currencies and the great LIBOR kerfuffle
All major countries have engaged in currency, interest rate and stock-market manipulation since 1999. Post-2008 LIBOR reporting problems merely injected more bad data into the equation.


2.5 2.4 2.3 2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 USD CAD EUR GBP AUD SEK CHF JPY

The more central banks forced their shortest interest rates toward 0% the steeper the FRR6,9 levels became.

There are times to be shocked — this, however, is not one of them. The revelations that members of the British Bankers’ Association were making up the London Interbank Offered Rate (LIBOR) as they went along were reported by The Wall Street Journal in April 2008. The effects these made-up rates and illiquidity had on currency markets were discussed here in March 2009 (see “The hidden cost of illiquidity”). The maxim, “You cannot cheat an honest man” certainly applies when members of a trade association are given the green light by the governments and regulators who have made them wards of the state, and who were more than willing to look the other way. This author has observed, with a heavy heart, how government statistics mills tend to operate without the convenience of economists, financial writers, analysts, and other worthy members of society in mind. The problem here is what early computer jocks used to call GIGO: garbage in, garbage out. If you suppress or misJune 2013 • CURRENCY TRADER

Forward Rate Ratios, Six-Nine Months


















Pre-Bear Stearns, the CAD lost when its FRR6,9 was flatter than the USD’s and it showed relatively little stock market linkage. After March 2008, the CAD lost after its stock market outperformed, with a tilt toward situations where its FRR6,9 was steeper than the USD’s.

Prior to March 2008, the EUR tended to gain when its FRR6,9 was steeper than the USD FRR6,9, following periods when U.S. equities outperformed. After March 2008, the relationship became episodic.

report enough data, or you engage in conduct that makes the veracity of those data questionable, sooner or later you will: 1) make a policy error based on bad information; or 2) lose all credibility. Financial writers arguably are facile enough to find something else to write about and sidestep the bad data; those in positions of power lack such a luxury.

Bear Stearns, bear markets

Bear Stearns was one of the first casualties of the great financial crisis of 2008 and one of the more egregious entries in the annals of the crony capitalism that followed. The firm was rescued by the Federal Reserve in a questionable extension of its bank regulation authority, as Bear Stearns was an investment bank, not a commercial bank. It was offered $2 per share by J.P. Morgan Chase on March 16, 2008; this buyout offer later was raised to $10. The extension of commercial banks’ balance sheets to rescue their foolish investment-banking cousins raised interbank credit risk considerably. The so-called TED spread, or difference between three-month LIBOR and three-month Treasury bills, rose from 78.5 basis points in mid-February 2008 to almost 204 basis points just after

Bear Stearns’ failure. Everyone wanted to get the crisis (thought to be containable at the time) behind them and get LIBOR under control by any means necessary. Banks did not want to show their risk; governments did not want those risks to be shown. When the cops and the robbers find themselves on the same side of the equation, what can go wrong? Although LIBOR blew out further in September-October 2008 and the aforementioned TED increased to more than 460 basis points in October, the real damage to LIBOR integrity occurred in March 2008. This can be demonstrated by mapping the money-market yield curves as measured by the forward-rate ratios between six and nine months (FRR6,9) for major currencies. This is the rate at which borrowing can be locked in for three months starting six months from now, divided by the nine-month rate itself. The more this ratio exceeds 1.00, the steeper the yield curve is. The more various central banks forced their very shortest interest rates toward 0%, the steeper the FRR6,9 levels became (Figure 1). The Swiss led the way with their drive to and through 0% in an effort to cap the franc at 1.20 CHF/EUR (see “The paradox of negative interest rates,”




Before March 2008, the pound had a strong bias to gain after the GBP FRR6,9 was flatter than its U.S. counterpart.The GBP alternated between bands of gain and loss as a statedependent function of the FRR6,9 differential, regardless of stock-market differentials.

Before March 2008, the pattern of three-month ahead returns demonstrated little systematic dependence on either the yield curve or asset-return differentials. Afterwards, the pattern appears as state-dependent as those for the EUR and GBP.

January 2013). Just as notable, though, is the extreme quiescence of the JPY FRR6,9: It remained essentially unchanged from the beginning of 2011 onward.

Currencies before and after

Currencies can trade off of purchasing power parity (PPP) or relative inflation, (see “A parody of purchasing power,” Currency Trader, December 2009), off of underlying physical trade flows (you are welcome to try to demonstrate this one), off of expected interest rate differentials, or off of relative asset returns. As the PPP model is laughably inaccurate and trade flows scarcely scratch the surface on observed currency movements, let’s focus on the interest rate parity model and relative asset returns. In a normal world, something we have not encountered in a few years, a country whose FRR6,9 steepens relative to the USD FRR6,9 should see its currency rise relative to the USD, unless — and this is a very important “unless” — the non-USD FRR6,9 is steepening bearishly and the prospect of higher short-term interest rates is leading capital out of the country. This last effect is why the Indian rupee was

under pressure in 2012. As most investors are trend-followers and chase performance, higher stock market returns relative to U.S. stock market returns tend to lead capital inflows and push the currency higher unless those inflows are forestalled by runaway money-printing, as in the Swiss case or in the Japanese case after November 2012. With these two preambles in mind, let’s map threemonth-ahead spot currency returns for a set of major currencies as a function of [FRR6,9Foreign - FRR6,9USD] and of the trailing relative stock market returns as measured by the MSCI index return in USD terms between the non-U.S. and U.S. markets. Maps for the January 1999 to March 2008 and post-March 2008 periods will be displayed together in the following charts. In all cases a positive three-monthahead spot currency return will be depicted with a red bubble and a negative return with a purple bubble; the diameter of the bubbles corresponds to the absolute magnitude of the currency’s return. In the case of the CAD, behavior changed significantly before and after March 2008 (Figure 2). Prior to the Bear



Before March 2008, the distribution of returns was random except for an odd cluster of very positive three-month-ahead returns for the SEK during a period of high relative Swedish stock market returns.

Three-month-ahead returns were a state-dependent function of relative stock market performance before March 2008, and random afterwards.

Stearns takeover, the CAD lost when its FRR6,9 was flatter than the USD FRR6,9 and demonstrated relatively little stock market linkage. After March 2008, the CAD lost after its stock market outperformed, and with a pronounced tilt toward situations where its FRR6,9 was steeper than the USD FRR6,9. Now let’s turn to the EUR (Figure 3). Prior to March 2008, the EUR tended to gain when its FRR6,9 was steeper than the USD FRR6,9 and with a tilt toward those periods when U.S. equities outperformed. After March 2008, the situation became quite episodic, as both currencies were buffeted about by erratic monetary policies and rolling crises. Relative stock market returns were unimportant; relative money-market yield curves moved into and out of zones of alternating future currency return. The pattern for the GBP is different still (Figure 4). Prior to March 2008 the pound had a very strong bias to gain after the GBP FRR6,9 was flatter than its U.S. counterpart. Afterwards the GBP demonstrated the same regime-dependent pattern seen for the EUR: Regardless of the stock market differentials, the GBP alternated between bands of

gain and loss as a state-dependent function of the FRR6,9 differential. The AUD also demonstrates something different. The pattern of three-month-ahead returns bears little in the way of systematic dependence on either the dimension of yield curve or asset-return differentials prior to March 2008. Afterwards, the pattern looks as state-dependent as those seen for the EUR and GBP. If we shift to the SEK, we see another and even more unique set of patterns (Figure 6). Before March 2008, the distribution of returns was random except for an odd cluster of very positive three-month-ahead returns for the SEK during a period of high relative Swedish stock market returns. This cluster occurred in the final phase of the dot-com bubble of late 1999-early 2000. The Swedish stock market returned 91.5% in USD terms between mid-October 1999 and the beginning of March 2000; if investors in Swedish equities sold at the peak — and they most likely did not — they captured gains in the krona as well. The one period after March 2008 with significant SEK weakness occurred during a period of strong relative Swedish


stock market returns. So much for the Swedish stock market driving SEK rates. The CHF, for all of its ceiling-associated drama, has been one of the least interesting currencies as a function of the two independent variables involved (Figure 7). Threemonth-ahead returns were a state-dependent function of relative stock market performance before March 2008, a turnabout from the EUR and GBP. Afterwards, the return patterns shifted to random, even dismissing the cluster of positive returns preceding the imposition of the franc ceiling in September 2011. Finally, we come to the JPY. As this country’s interest rates have been near 0% since February 1999 and its stock market has been stuck in neutral since March 2008, we should expect no visible patterns — and we are not disappointed. The JPY has moved both higher and lower since January 1999 in response to developments such as the unwinding of the yen carry trade, attempts to re-inflate, and even capital inflows associated with the 2011 earthquake and tsunami. This is a currency that defies normal analysis.



While the suppression of short-term interest rates and skullduggery in their reporting certainly changed patterns in key currencies such as the EUR, CAD and GBP after March 2008, we should not romanticize the period before. The so-called “currency wars” are nothing new: All the major countries have engaged in currency manipulation, interest rate manipulation, and even outright stock market manipulation since 1999. All the 2008 LIBOR reporting shift did was inject another element of bad data into the equation. No one knows when the era of zero interest rates will end, how it will end, and what the eventual market structure will look like when it does. What will remain constant, though, is the inability of generalized and simplified rules to describe what will drive currencies over time. Perhaps we should be grateful: Just as a messy election is the sign of a functioning democracy, a messy market is one

The currency that defies normal analysis has moved both higher and lower since January 1999 in response to a wide range of developments.

people want to trade. A set of minor currencies will be examined using the same construct next month. y
Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. For more information on the author, see p. 4.


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CURRENCY TRADER • June 2013 29

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: I nstitute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: P urchasing managers index PPI: P roducer 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.

June 1 2 3 4 5 6 19
U.S.: May ISM manufacturing report U.S.: April trade balance U.S.: Fed beige book Brazil: May PPI France: Q1 employment report UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: May employment report Brazil: May CPI Canada: May employment report Mexico: May 31 CPI LTD: June forex options; June U.S. dollar index options (ICE)

20 21 22 23

U.S.: FOMC interest-rate announcement South Africa: Q1 GDP and May CPI FDD: June forex futures; June U.S. dollar index futures (ICE) U.S.: May leading indicators Brazil: May employment report Germany: May PPI Hong Kong: Q1 GDP and May CPI Canada: May CPI

May employment report, 24 Mexico: June 15 CPI and May PPI 25 U.S.: May durable goods Q1 GDP (third) 26 U.S.: France: Q1 GDP U.S.: May personal income Germany: May employment report South Africa: May PPI UK: Q1 GDP Canada: May PPI France: May PPI Japan: May employment report and CPI

7 8 9 10

27 28

bank of Japan interest-rate 11 Japan: announcement

12 13 14 15 16 17 18

France: May CPI Germany: May CPI Japan: May PPI UK: April employment U.S.: May retail sales Australia: May employment report U.S.: May PPI Hong Kong: Q1 PPI India: May PPI

29 30 India: May CPI 31 July 1 U.S.: June ISM manufacturing report 2 3 U.S.: May trade balance 4
UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: June employment report Brazil: June CPI and PPI Canada: June employment report LTD: July forex options; June U.S. dollar index options (ICE)

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

LTD: June forex futures; June U.S. dollar index futures (ICE) U.S.: May CPI and housing starts Hong Kong: March-May employment report UK: May CPI and PPI


Event: The Trading Show Chicago Date: June 24-25 Location: Downtown Marriott, Chicago For more information: Go to www.terrapinn.com Event: The MoneyShow San Francisco Date: Aug. 15-17 Location: San Francisco Marriott Marquis For more information: Go to www.moneyshow.com Event: CBOE Risk Management Conference Date: Sept. 30 - Oct. 3 Location: Portugal For more information: Go to www.cboermceurope.com Event: The Trading Show West Coast Date: Oct. 21-22 Location: San Francisco For more information: Go to www.terrapinn.com







Vol 262.7 190.1 125.6 114.8 74.1 45.2 43.9 36.6 15.6 3.7

OI 231.5 213.1 175.7 199.2 144.8 164.1 56.3 78.1 40.0 5.9

10-day move / rank 0.57% / 50% 1.38% / 100% -2.56% / 42% -0.80% / 14% -1.88% / 50% -4.33% / 100% 0.16% / 0% -1.17% / 83% -2.85% / 50% 0.57% / 50%

20-day move / rank -0.60% / 10% -2.70% / 45% -6.45% / 95% -2.24% / 54% -2.74% / 90% -4.80% / 100% -2.58% / 51% 1.47% / 55% -6.37% / 100% -0.60% / 10%

60-day move / rank -0.10% / 0% -6.57% / 13% -6.57% / 100% 0.93% / 100% -0.54% / 13% -0.64% / 11% -1.25% / 29% 1.56% / 27% -4.29% / 100% -0.10% / 0%

Volatility ratio / rank .29 / 57% .19 / 67% .30 / 8% .21 / 53% .35 / 67% .73 / 100% .42 / 42% .25 / 43% .50 / 38% .29 / 57%

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 April 30 ranked by April 2013 return) April return 12.70% 5.37% 5.08% 3.91% 3.70% 2.88% 2.85% 2.74% 2.60% 2.31% 8.77% 3.70% 3.48% 1.96% 1.25% 1.04% 0.95% 0.82% 0.79% 0.60% 2013 YTD return 20.27% 9.74% 12.62% -0.71% 8.36% 7.18% 10.34% 11.42% 1.66% 2.12% 19.68% 8.36% 2.40% 9.44% -3.21% 8.52% 4.71% 8.13% 2.68% -0.32% $ Under mgmt. (millions) 71.6 4228 29.6 54.1 10 40.5 2442 23.7 28 138 5.1 10 2.1 1.5 3.2 1.2 2.6 1.5 2.3 6

Trading advisor 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 24FX Management Ltd Harness Investment Group (FX) Gedamo (FX Alpha) A-Venture Capital Rhicon Currency Mgmt (Sys. Curr.) Gedamo (FX One) FDO Partners (Emerging Markets) Regium Asset Mgmt (Ultra Curr) Sequoia Capital Fund Mgmt (FX) Cambridge Strategy (Asian Mrkts) SMILe Global (Mgmt FX) Rhicon Currency Mgmt (Sys. Curr.) Fornex (Foyle) Exclusive Returns (Viktory) Hartswell Capital Mgmt (Apollo) JP Global Capital Mgmt (Troika I) Capricorn Currency Mgmt (FXG10 EUR) MDC Trading Valhalla Capital Group (Int'l AB) Blue Fin Capital (Managed 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.




Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency Chinese yuan Hong Kong dollar Russian ruble Euro Swedish krona Taiwan dollar Canadian dollar Singapore dollar Swiss franc Thai baht Great Britain pound Brazilian real Indian rupee Japanese yen New Zealand dollar South African rand Australian Dollar May 28 price vs. U.S. dollar 0.161865 0.12881 0.03191 1.29342 0.150535 0.033435 0.968355 0.79246 1.03898 0.033455 1.512105 0.4885 0.017965 0.00990 0.808655 0.104115 0.96374 1-month gain/loss 0.65% 0.00% -0.22% -0.74% -1.07% -1.12% -1.56% -2.02% -2.05% -2.06% -2.29% -2.39% -2.58% -2.94% -4.64% -5.24% -6.22% 3-month gain/loss 1.75% -0.07% -2.42% -1.14% -2.91% -0.80% -0.66% -1.86% -3.22% -0.21% -0.04% -3.23% -3.21% -9.09% -1.93% -7.92% -5.63% 6-month gain/loss 1.56% -0.17% -1.05% -0.23% -0.01% -2.69% -3.86% -3.17% -3.49% 2.65% -5.68% 1.67% -0.31% -18.72% -1.65% -7.94% -7.96% 52-week high 0.161865 0.12903 0.0337 1.3639 0.159 0.0345 1.0334 0.8213 1.1017 0.0348 1.6286 0.5137 0.0194 0.0129 0.8619 0.1236 1.0578 52-week low 0.1566 0.1288 0.0291 1.2099 0.1374 0.0326 0.9601 0.7732 1.0074 0.0311 1.4892 0.4674 0.0174 0.0097 0.7518 0.104 0.9636 Previous 7 12 14 2 15 5 13 9 6 11 1 8 10 17 4 3 16

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Germany South Africa Italy UK France U.S. Switzerland India Canada Japan Brazil Hong Kong Singapore Mexico Australia Index Xetra Dax FTSE/JSE All Share FTSE MIB FTSE 100 CAC 40 S&P 500 Swiss Market BSE 30 S&P/TSX composite Nikkei 225 Bovespa Hang Seng Straits Times IPC All ordinaries May 28 8,480.87 41,917.17 17,519.80 6,762.00 4,050.56 1,660.06 8,221.20 20,160.82 12,750.50 14,311.98 56,036.00 22,924.25 3,406.08 40,764.04 4,950.60 1-month gain/loss 7.71% 7.41% 5.76% 4.71% 4.70% 4.17% 4.04% 3.99% 3.56% 3.25% 2.09% 1.52% 1.31% -2.74% -3.09% 3-month gain/loss 9.55% 5.56% 10.04% 6.31% 8.80% 9.60% 8.26% 6.89% -0.56% 23.81% -2.42% -0.42% 4.16% -7.61% -3.32% 6-month gain loss 15.49% 11.96% 13.37% 16.52% 15.23% 17.74% 21.68% 5.16% 5.03% 53.75% -0.89% 5.60% 13.09% -2.74% 10.94% 52-week high 8,557.86 41,917.17 17,897.40 6,875.60 4,072.24 1,687.18 8,411.30 20,443.60 12,904.70 15,942.60 63,473.00 23,944.70 3,464.79 46,075.00 5,229.80 52-week low 5,914.43 32,968.81 12,362.50 5,229.80 2,922.26 1,266.74 5,712.10 15,749.00 11,209.50 8,238.96 52,213.00 18,056.40 2,712.31 36,898.50 4,033.40 Previous 10 12 2 11 3 7 9 4 14 1 13 8 6 15 5



Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Currency pair Euro / Aussie $ Pound / Aussie $ Euro / Yen Euro / Real Euro / Pound Canada $ / Yen Euro / Franc Euro / Canada $ Franc / Yen Canada $ / Real Pound / Yen Pound / Franc Franc / Canada $ Yen / Real Pound / Canada $ Aussie $ / New Zeal $ New Zeal $ / Yen Aussie $ / Yen Aussie $ / Real Aussie $ / Franc Aussie $ / Canada $ Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa


May 28 1.342095 1.568995 130.675 2.64773 0.855375 97.83 1.24487 1.342095 104.97 1.98229 152.765 1.45537 1.072935 0.02026 1.56152 1.19177 81.695 97.365 1.972845 0.92758 0.99524

1-month gain/loss 5.84% 4.18% 2.29% 1.69% 1.60% 1.44% 1.36% 1.31% 0.94% 0.85% 0.70% -0.25% -0.50% -0.59% -0.75% -1.63% -1.74% -3.34% -3.92% -4.26% -4.73% 2012 51.437 71.16 84.721 49.55 64.55 37.564 238.496 10.405 43.139 6.119 58.963 -2.371 -10.654 -14.499 -5.302 -474.983 -85.532 -56.385 -66.999 Rate 0-0.25 0-0.1 0.5 0.5 1 0-0.25 2.75 2.5 8 2.5 1.875 7.5 5

3-month gain/loss 4.75% 5.91% 8.77% 2.16% -1.10% 9.29% 2.15% 4.75% 6.48% 2.65% 9.97% 3.28% -2.57% -6.07% 0.62% -3.76% 7.89% 3.83% -2.48% -2.48% -4.99% Ratio 18.602 14.201 13.397 10.454 8.349 7.139 7.013 4.945 3.732 2.326 0.989 -0.489 -0.529 -1.072 -2.704 -3.028 -3.505 -3.657 -3.683 Last change 0.5 (Dec 08) 0-0.1 (Oct 10) 0.25 (May 13) 0.5 (Mar 09) 0.25 (Sep 10) 0.25 (Aug 11) 0.25 (May 13) 0.5 (Mar 11) 0.5 (May 13) 0.25 (May 13) 0.125 (Jun 11) 0.25 (Mar 13) 0.5 (Jul 12)

6-month gain loss 8.39% 2.47% 22.73% -1.87% 5.78% 18.27% 3.38% 8.39% 18.72% -5.43% 16.03% -2.27% 0.38% -20.06% -1.89% -6.41% 20.98% 13.23% -9.47% -4.63% -4.26% 2011 65.323 62.705 55.718 41.23 81.59 37.884 224.29 2.484 26.068 12.908 119.304 -7.294 -67.408 -55.356 -6.348 -465.928 -32.773 -33.825 -52.846

52-week high 1.342095 1.6034 132.75 2.7714 0.8747 100.65 1.256 1.3607 106.96 2.1463 156.48 1.5434 1.1063 0.0262 1.6156 1.3061 85.86 105.05 2.2253 1.0328 1.0685 2013 48.408 63.057 81.794 51.212 70.116 34.723 219.208 7.546 34.604 5.481 63.494 -0.659 6.555 15.313 -4.214 -473.473 -105.967 -87.687 -64.911

52-week low 1.1614 1.4439 94.65 2.4526 0.7779 74.85 1.2004 1.2164 78.81 1.8879 119.75 1.4062 1.0128 0.0196 1.5286 1.1915 58.78 75.6 1.9342 0.9263 0.9943

Previous 7 6 2 12 15 5 14 10 4 16 1 11 13 21 9 20 3 8 18 19 17

Account balance Singapore Norway Switzerland Taiwan Province of China Netherlands Sweden Germany Ireland Korea Hong Kong SAR Japan Belgium Italy Spain Czech Republic United States United Kingdom Australia Canada 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

Source: International Monetary Fund, World Economic Outlook Database, April 2013

November 2012 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

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


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 Argentina

Q4 Q1 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q1 Q1 Q1

Release date
3/22 5/29 5/31 3/27 5/15 3/27 5/28 3/6 5/10 5/31 5/16 5/24

3.4% -5.0% 0.8% -0.3% 1.2% -0.3% 0.1% 0.6% -7.5% 3.1% 0.9% -1.6%

1-year change
2.7% 7.5% 2.8% 0.0% 0.7% 0.2% 7.6% 2.9% 2.8% 12.5% 3.5% 1.3%

Next release
6/24 8/30 8/30 6/26 8/14 6/27 8/27 6/5 8/16 8/30 8/12 8/16


Unemployment AMERICAS

Q1 April April Q4 April Nov.-Jan. April Feb.-April April Q1

Release date
5/20 5/23 5/10 3/7 5/29 5/20 5/9 5/20 5/31 4/30 5/15 5/8 5/17 5/15 5/14 5/21 5/22 4/24 5/21 5/31 5/31 5/23

7.9% 5.8% 7.2% 10.2% 5.4% 7.8% 5.5% 3.5% 4.1% 1.9%

1.0% 0.1% 0.0% 0.3% -0.2% 0.1% 0.0% 0.0% 0.0% 0.1%

1-year change
0.8% -0.2% 0.1% 0.8% 0.1% -0.4% 0.4% 0.2% -0.4% -0.1%

Next release
8/20 6/20 6/7 6/6 6/27 6/12 6/13 6/18 6/28 7/31



April April April April April April April Q1 April April April April Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date

0.7% 1.0% -0.2% -0.9% -0.5% 0.2% 0.6% 0.4% 1.0% 0.9% 0.3% -1.5%

1-year change
3.1% 6.5% 0.4% 0.6% 1.2% 2.4% 5.1% 2.5% 4.0% 10.2% -0.7% 1.5%

Next release
6/14 6/7 6/21 6/12 6/12 6/18 6/19 7/24 6/20 6/30 6/28 6/24


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

April April April April April April Q1 Q4 April April April

Release date
5/15 5/30 5/31 5/21 5/21 5/30 5/3 3/14 5/14 5/14 5/20

0.9% -0.8% 0.1% -0.2% -0.1 0.4% 0.3% 0.2% 0.5% 0.3% -2.2%

1-year change
12.9% 0.0% 0.7% 0.1% 1.1 5.4% 1.6% -1.1% 4.9% 0.0% -8.1%

Next release
6/14 6/28 6/28 6/20 6/18 6/27 8/2 6/14 6/14 6/12 6/28

As of May 31 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.




The uptrend may not be over, but this trade setup failed to pay off as expects.

Date: May 29. Entry: Long the U.S. dollar/ Japanese yen pair (USD/JPY) at 100.88. Reason for trade/setup: This paper trade was entered on analysis that indicated the dollar/yen pair had favorable odds of closing higher the week after the down-closing outside week (higher high and lower low than previous week) that concluded on May 24. While this might seem counterintuitive, the analysis showed that low-closing outside weeks were followed by rallies when the market was in an uptrend; results were more bearish if the market was in a downtrend. At this juncture, the dollar/yen was arguably overextended, but nonetheless still in an uptrend, so the position was initiated. The analysis was conducted after the close on May 24, so a limit order was set around the week’s low to enter on when the market reopened. The big run-up that began on May 27 — taking the pair to 102.51 — made it seem like the opportunity was over before the trade began, but the pair pulled back and filled the entry order on May 29. Initial stop: 100.16. Initial target: 102.47. Stop target: 103.47.

Source: TradeStation

Exit: 100.58. Profit/loss: -0.30 Outcome: After the pair mounted a decent rally (reaching 101.80) the stop was raised to 100.58. Several hours later the market took out the stop by a couple of ticks before bouncing again. This might have been frustrating if the pair hadn’t pair swung lower, nearly touching the original stop level. Because the week ending May 31 closed lower (and made a lower low), the question is whether the failed setup, and the new data, imply a short position. 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 (pre-trade) reward-risk ratios are conjectural by nature.

TRADE SUMMARY Date 5/29/13 Currency pair USD/JPY Entry price 100.88 Initial stop 100.16 Initial target 102.47 IRR 2.21 Exit 100.58 Date 5/30/13 P/L point -0.30 % -0.30% LOP 0.92 LOL -0.67 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.



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