EMERGING FX HITS ROADBLOCK P.

6
Strategies, analysis, and news for FX traders

October 2013 Volume 10, No. 10

Improve your FX trading system: How to avoid dredging p. 18

The Feds tapering dance p. 12 The Aussie dollars big break: Pattern analysis p. 16 Trend changes and risk reversals p. 22

CONTENTS

Contributors..................................................4 Global Markets Emerging FX: Time to be choosier.............6

Emerging market currencies got a rude awakening in recent weeks. Is it a buying opportunity, or evidence of a more significant shift in global money flows? By Currency Trader Staff

Advanced Concepts Going forward with reversals: The majors .............................. 22

Its not infallible, but the principle of relative anxiety expressed in a risk reversal can provide early warning of impending trend changes. By Howard L. Simons

Global Economic Calendar......................... 28

Important dates for currency traders.

On the Money What Big Picture? The Fed waver and FX market freeze ..... 12
The Feds tapering hesitation might have been economically justified, but that doesnt mean it handled the situation in a market-friendly way. By Barbara Rockefeller

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

Currency Futures Snapshot.................. 29 BarclayHedge Rankings......................... 29

Top-ranked managed money programs

Spot Check Aussie/dollar pair....................................... 16 Analyzing the Australian dollars spring-summer sell-off and rebound.
By Currency Trader Staff

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

Trading Strategies Avoiding data dredging in forex systems ...................................... 18

How do you know if your trading strategy is capitalizing on a genuine market dynamic or just lucking out? By Daniel Fernandez

Looking for an advertiser?

Click on the company name for a direct link to the ad in this months issue. Ablesys FXCM Las Vegas Traders Expo The Trading Show New York

Questions or comments?
Submit editorial queries or comments to webmaster@currencytradermag.com
2 October 2013 CURRENCY TRADER

CONTRIBUTORS

A publication of Active Trader

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

For all subscriber services:

www.currencytradermag.com 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.

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

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, No. 10. 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.

October 2013 CURRENCY TRADER

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GLOBAL MARKETS

Emerging FX: Time to be choosier

Emerging market currencies got a rude awakening in recent weeks. Is it a buying opportunity, or evidence of a more significant shift in global money flows?
BY CURRENCY TRADER STAFF

Broadly speaking, its been a brutal year for emerging market currencies. Once the darlings of the speculative carry trade, many emerging market currencies have been hit hard this year by a confluence of factors, including lower commodity prices, slowing economic growth, changing terms of trade, and last but not least, expectations the U.S. Federal Reserve would begin slowing its quantitative easing (monthly bond-buying) program. Many emerging markets began their swan dives in May when Fed Chairman Ben Bernanke suggested the so-called tapering of monthly asset purchases could begin this year. There has been a great deal of volatility across emerging FX in recent months, and some currencies began to correct in late August or early September. But substantial losses still occurred across the board in late September. Through Sept. 25 vs. the U.S. dollar, the Brazilian real had dropped 8.9%, the Indian rupee was down 13.5%, the Indonesian rupiah lost 18.9%, the Russian ruble shed 5.4%, and the Turkish lira slid 13%. After assessing the macro emerging FX picture, lets focus on a few country-specific outlooks. Moving forward, some analysts suggest emerging market FX may no longer move in sync as a major bloc. In recent years, there has been a rising tide will lift all boats mentality, with most emerging markets on board for the ride. Going forward, however, forex traders might become choosier, looking for individual emerging market nations with strong underlying fundamentals and positive current account surpluses, rather than allocating to the EM group as a whole.

Recent years

The heavy losses across many emerging market equity, fixed-income, and currency markets this year represents a sea change from the recent past. Following the 2008 Lehman Brothers implosion and global financial crisis, many emerging-market nations were less damaged by developed nations recessions. For several years post-crisis, a key theme had been the strength of emerging market economies vs. the stagnation of developed market nations, but that may be changing now. Win Thin, global head of emerging markets at Brown Brothers Harriman, says from 2010-2012, an emerging markets rally came about based on strong EM fundamentals, weak developed market fundamentals, and lots of global liquidity from the super-relaxed monetary policies and massive quantitative easing of many developed nations central banks. Money was pouring into emerging markets, he says. But starting in 2013, cracks started to appear, according to Thin. China started to slow, Brazil started to slow, and emerging markets fundamentals started to worsen, he says. The weakness in some emerging market currencies this year is in stark contrast to recent years, when EM governments concerned about the potentially too-high levels of their currencies in some cases intervened in the market to battle that appreciation. Earlier in the year, the main focus was trying to prevent their currencies from being too strong, says Clyde Wardle, senior EM FX strategist at HSBC Securities. We were seeOctober 2013 CURRENCY TRADER

FIGURE 1: EMERGING FX, U.S. YIELDS, AND EQUITIES

Some analysts point out the strong correlation between U.S. long-term interest rates, emerging market currencies, and equities in recent months.

ing ongoing intervention where central banks were buying dollars. He says the central banks of Peru, Chile, Mexico, Brazil, and Colombia had issued warnings about their currencies strength or intervened in some fashion.

Turning point

Many investors had been taking advantage of low interest rates and the carry trade to participate in emerging market plays. A critical juncture occurred in late May, when Bernanke began broadcasting the Feds intentions to begin tapering its $85 billion per month in bond purchases at some point this year a first step toward monetary policy normalization. Everything changed in May, Wardle says. We saw higher interest rates; investors became concerned. There was a wave of outflows from emerging markets back into safer havens. At the same time, there was weaker data coming out of China and commodity prices fell, which had a negative impact on Latin American countries. Also, emerging market equities fell, which was a double whammy. Typically, global equity managers dont hedge FX exposure, says Michael Woolfolk, managing director at BNY Mellon. They got burned by both equity exposure and currency exposure as the currencies declined in value. Its scorched earth right now. No one wants to enter back into EM.

September surprise

Another twist emerged in mid-September, when the

CURRENCY TRADER October 2013

Federal Reserve failed to announce the start of a tapering program, as was widely expected. The Fed cited several risk factors for the U.S. economy and noted economic conditions were not as strong as it had previously forecast they would be by this time. The Fed reiterated tapering would be data-dependent: Fed officials need to be convinced the U.S. economy is on strong enough footing to handle the start of tapering. A key factor was already rising long-term interest rates, which have a spillover impact on the housing market via higher mortgage rates. There has been a strong correlation between U.S. longterm interest rates and emerging market FX in recent months (Figure 1). If you look at a 10-year yield chart, you can see the peak was at the beginning of September, which broadly matches the recovery in EM currencies, Wardle says. The currency charts are inverse to the S&P 500. It looks like equities are something the market is keeping a close eye on. We are back in a risk-on, risk-off environment, with many EM currencies becoming more correlated to equities. There is now speculation the Fed might announce the tapering program at its December meeting, or even wait until early 2014. What does it mean for emerging market FX? Looking at the reaction in EM currencies after the September Fed surprise, Thin notes there was a little pause, then a short-lived rally that has softened ever since. The lack of Fed tapering in September was a stay of execution, Thin argues. Tapering will happen, but it has just been delayed for a few months. But there could be room for a few short-term forex plays.
7

GLOBAL MARKETS

FIGURE 2: INDIAN RUPEE

The INR rebounded after slamming to an all-time low vs. the U.S. dollar.

There looks to be plenty of upside on the previously beaten down Southeast Asian currencies, such as the Indian rupee, Thai baht, and Malaysian ringgit, along with the Indonesian rupiah, boosted by the Feds surprise decision to keep QE at full pace, says Sean Callow, senior currency strategist at Westpac Institutional Bank.

Selective trading

With the Fed expected to begin policy normalization at some point in the next few months, where does this leave emerging market FX? Basically, we are seeing a three-year rally being unwound. This is the end of the global liquidity story, Thin says. Global money managers are expected to be choosier when it comes to emerging market investments. For many emerging markets economies, some of the economic fundamentals are not as good as they were before the crisis just a few years ago, says Jay Bryson, global economist at Wells Fargo. Francisco Larios, chief developing markets economist at Decision Economics, adds, Im struggling to find really bright stars right now. A key issue is that many emerging market economies are now running current account deficits which, as Bryson explains, basically occurs when imports exceed exports. Turkey, Indonesia, Brazil, and India have all seen significant declines in their currencies, and they are all running current account deficits, he says. Wardle describes a similar situation in Latin America. Over the past two or three years, Chile had a current
8

account surplus, while this year it has a deficit, he says. Brazil has been running current account surpluses for many years, but since 2009 it has been running a deficit. For Peru this year, we expect the current account deficit to total 5% of GDP. Lower commodity prices have weakened the terms of trade and relatively tight labor markets have resulted in a significant boost in imports, which has combined to weaken the trade balance. However, Wardle notes this picture isnt entirely negative. The good news is that many of these currencies are a little weaker, and that will help with the adjustment process to reduce the current account deficit, he says.

Indias reversal of fortune

India is a prime example of an emerging market economy that not long ago held so much promise and potential but has more recently been floundering. The rupee (INR) slumped to an all-time low this year vs. the U.S. dollar, and analysts remain cautious (Figure 2). India just isnt doing as well as it was a decade ago, Bryson says. It was growing 8% to 9% year-over-year, with low inflation. Today, we are seeing growth around 4.5%. Its still better than the U.S. and Europe, but relative to a few years ago they are doing a lot worse, and with a relative high inflation rate. Moodys Analytics forecasts Indias 2013 GDP growth at 4.8% and 2014s at 5.2%. The [Indian] economy remains weak as the instability created by the weak central government continues to weigh on confidence and demand, says Glenn Levine, senior economist at the company. Business
October 2013 CURRENCY TRADER

FIGURE 3: INR/IDR

In late September, Credit Suisse put out a trade recommendation favoring the Indian rupee over the Indonesian rupiah.

investment has been hit particularly hard and barely grew across the first half of 2013. Lately, financial volatility has increased as concerns over funding Indias large current account deficit in the face of U.S. Fed tapering became more widespread. Concerns about financing the large external deficit have become more prevalent, particularly as global liquidity began to shift out of risky assets as the Fed started talking about tapering. Looking at the INRs drop now, however, Levine notes the currency looked oversold. It was a dramatic fall and looked as though it might have gone too far, given that nothing within India had fundamentally changed, he says. Markets also appear to have been lifted by the appointment of Raghuram Rajan, the widely respected economist and University of Chicago professor, as central bank governor. And, then of course, there was the U.S. Feds reversal of taper talk in mid-September. Also, in late September, the Indian central bank surprised markets with an unexpected rate hike. The Reserve Bank of India hiked official rates by 0.25% to 7.5%. Generally, higher rates are currency-supportive. The September interest rate hike was a surprise, but not a large one, Levine says. If you listen to what incoming Governor Rajan has been saying and read what he has been writing, he has repeatedly expressed his skepticism about the effectiveness of lower interest rates in stimulating the economy. He has written the expected lift to consumer borrowing and spending, for example, may be offset by the reduced interest income accruing to a countrys savers. Given the difficulty the Reserve Bank of India has
CURRENCY TRADER October 2013

had in targeting economic growth, inflation, and the external account and currency, its not altogether surprising the real economic goal was deprioritized in favor of the other two. Inflation, which has accelerated in recent months according to Levine, was a key factor behind the central banks decision to hike rates. In a clear sign of the banks shifting priorities, Rajan said in a post-meeting interview that the main focus is on building confidence in the rupee, he says. However, there remain some macro issues with the potential to hinder Indias growth. The reform process in India has stalled because of politics, Bryson says. The long-term Indian growth rate is problematic theres poor infrastructure and rigid labor laws, and they havent done anything to rectify this. Credit Suisse put out a trade recommendation (see Figure 3) favoring the Indian rupee over the Indonesian rupiah (IDR). In a Sept. 25 research note to clients, Credit Suisse analysts wrote: Indias central bank is intervening aggressively via its swap lines with Indias oil companies and, crucially, ... Rajan is working to restore the banks inflation credibility. In contrast, we judge that Bank Indonesias bias is for a gradual IDR depreciation to encourage reduction of Indonesias current account deficit.

Bigger rotation?

Other analysts warn a larger shift could be occurring, with money leaving emerging market investments amid signs
9

GLOBAL MARKETS

FIGURE 4: MEXICAN PESO

The MXN is cited by some analysts as a still moderately bullish EM currency.

industrialized nations are finally gaining a stronger economic foothold. Developed nations are picking up, Thin says. A lot of money that rotated from developed nations to emerging markets is now rotating back. Thin agrees investors now need to do their homework and be more selective when it comes to emerging market picks. We see a lot of divergence within EM, he says. The fragile five are India, Indonesia, Brazil, Turkey, and South Africa. These are the countries that are the most vulnerable in the current environment because of their high external vulnerability they have high current account deficits, high short-term debt loads, or both. Within the context of Fed tapering, countries who need to finance externally will be the most vulnerable.

The improved backdrop in Europe is helpful. Our favorite would be Hungary. We have been long the Russian ruble we still see value there. Moodys Analytics forecasts Russian GDP at 1.68% for 2013 and 3.12% for 2014. The Russian economy is performing relatively well, compared to other countries in the region namely Ukraine, Belarus, Kyrgyzstan, Tajikistan, Georgia, or Armenia and European countries, says Moodys economist Martin Janicko. This is also why the public debt of the country has so far remained at a very manageable level, unlike in other Russian economic counterparts elsewhere in Europe.

Looking ahead

Other currencies of note

Wardle points to the Mexican peso (MXN) as an emerging currency on which his firm still has a medium-term bullish bias (Figure 4). Short-term, there could be some choppy waters amid fiscal and energy reforms into year-end, but into 2014, HSBC forecasts peso strength toward 12.400. Part of that is based on the success the government has had passing a number of structural reforms, Wardle says. Larios also sees Mexico as a country to watch. Mexico may provide an upward surprise, he says. Shifting over to Europe, recent stability and improvement in the Eurozone economic outlook have been encouraging to many analysts. We do think valuations are significantly better in central Europe, Wardle says.
10

Woolfolk says his firm believes 2014 will generally be a positive year for emerging markets, but reiterates the need for investors and traders to be more selective in the absence of zero-interest-rate money to invest. The health of economies, the terms of the current account and composition of their debt will be critical factors in which emerging markets will outperform, he says. We would expect Indonesia, India, South Africa, and Turkey to lag. Those countries connected to strongly growing G7 countries could also have an edge. On the upside, Woolfolk says his firm expects Mexico, Taiwan, and Korea to do well. We think they are oversold and tied into strong growth engines, he says. Mexico is tied to the U.S. and Taiwan and Korea to China. Also, Argentina could surprise on the upside. y
October 2013 CURRENCY TRADER

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On the Money ON THE MONEY

What Big Picture? The Fed waver and FX market freeze

The Feds tapering hesitation might have been economically justified, but that doesnt mean it handled the situation in a market-friendly way.
BY BARBARA ROCKEFELLER
More uncertainty, more volatility (Currency Trader, August 2013) warned against the dollar pulling back on the slightest sign of the Fed wavering on tapering, and thats exactly what happened. At the Federal Open Market Committee (FOMC) meeting on Sept. 18-19, the Fed admitted its earlier economic forecasts were too optimistic and issued downward revisions, and Fed Chairman Ben Bernanke threw a gridlocked fiscal situation into the pool of blame. Achieving a substantial yield advantage against the other major countries anytime soon is not in the cards it may be years away. In fact, the 10-year yield topped 3% briefly in early September but dipped to around 2.7% after the Fed no-taper bombshell. The Euro/dollar pair (EUR/ USD), predictably, broke upside resistance the same day (Figure 1). But what happens next is really hard to fathom. After all, the Euro has been on a big-picture down move since December 2009 (high of 1.5141), as highlighted by the linear regression line in Figure 1.

In its formal statement, the FOMC said downside risks to the economy and the labor market are lower, but the tightening of financial conditions observed Barbara Rockefeller in recent months, if sustained, could slow the FIGURE 1:  D ESTRUCTIVE RANGE TRADING Currency Trader Mag October 2013 Figure 1: Destructive Range-Trading in EUR/USD (Weekly) pace of improvement in the economy and labor IN EUR/USD (WEEKLY) market. Besides, also considering the extent of federal fiscal retrenchment, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. Just about everyone was stunned by the Feds decision not to taper. The Fed had been priming the pump since its May meeting, and hardly anyone predicted no tapering at all, although many people had forecasted much lower amounts. The market felt betrayed and indeed it was. To postpone tapering may have been the economically correct decision, but it diminishes the authority and credibility of the Fed, whose The EUR/USD pair broke upside resistance the day the Fed dropped forward guidance is now forever downits no-taper bombshell. graded. When you announce a change as big Source: Chart Metastock; data Reuters and eSignal as ending QE and then chicken out at the last
1.53 1.52 1.51 1.50 1.49 1.48 1.47 1.46 1.45 1.44 1.43 1.42 1.41 1.40 1.39 1.38 1.37 1.36 1.35 1.34 1.33 1.32 1.31 1.30 1.29 1.28 1.27 1.26 1.25 1.24 1.23 1.22 1.21 1.20 1.19 1.18 1.17 1.16 1.15 1.14 1.13 S O N D 2010 M A M J J A S O N D 2011 M A M J J A S O N D 2012 M A M J J A S O N D 2013 M A M J J A S O N D

What the Fed said and what it means

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October 2013 CURRENCY TRADER

FIGURE 2: S&P 500 minute, there are consequences. There are two issues the economic analysis behind the decision, which no one doubts, and the communications excellence the Fed strives for. The Fed may win on the economic analysis but it failed utterly on communications strategy. Given the new, downwardly revised GDP forecasts, to have tapered while believing the economy lacked the growth to justify tapering would have been to let consistency be the hobgoblin of a small mind. But backing out always looks cowardly, even if it is entirely justified. The Fed could have announced a small taper and reversed it the next time out, or held seminars or issued white papers (or at least a few press conferences) to give fair warning ahead of time. Instead it kept quiet all August and Bernanke did not attend Like the Euro, the S&P 500 rose strongly in the days ahead of the Jackson Hole, the perfect venue for warning the Feds Sept. 18 announcement. market that tapering was in question. Source: TradeStation Bernanke delivered some really good nuggets of information, such as unemployment shrinking 0.8% over the past five years while the participation no-taper decision built in, or at least a sentiment of Whos rate contracted only 0.3%, so we need to stop blaming the afraid of the Fed? Look at charts of the Euro and S&P participation rate for everything. Baby boomer retirement 500 (Figure 2) both rising strongly in the days ahead of gets some credit for the falling participation, too. However, the Fed announcement. That implies these markets really Bernanke was using selective data and neglected to tell doubted the taper would happen or would be of a size to us by how much the participation rate would fall if every push yields to the extra-premium that would be needed to baby boomer actually retired at 65-66 instead of so many siphon funds away from equities or provide the dollar new needing to continue working. Baby boomers increasingly support. cannot retire because their savings were inadequate in the In other words, the bond boys priced in the taper and first place or their savings were destroyed in the last crash the currency market followed the yield, but thats all she and they chose to stay out of the stock market and missed wrote. The yield gained from the low of 1.6% to near 3%, the recovery. Social Security and Medicare alone put the but we werent going to get any more without something recipient at the poverty level and are hardly the free ride hefty from the Fed. It would have taken a taper of $20 bilsome politicians make it out to be. lion and promises of monthly tapers of the same size to get the yield (and dollar) any higher.

No fixed schedule

From a policy point of view, Bernankes most important statement was no fixed schedule for tapering. He repeated the Fed is, and has always been, data-dependent. The economy failed to gain as much as forecast in May and the forecasts are lowered, so postponing tapering is justified. The Fed gains respect for admitting a forecasting mistake and for being flexible, but wait a minute the market had penciled in a fairly fixed schedule, complete with an ending date. The Fed never said a word to change the idea that a schedule did or should exist. Granted, the Fed never actually announced specific dates or specific amounts in the first place, but after the first May and June announcements, the Fed did not guide the analysis and commentary. It failed to provide leadership. Bottom line, the Fed should never drop bombs on markets. The Fed can claim it was transparent and had said all along tapering could be cut back once it started, if conditions warranted, but delivering a shock is inconsistent with transparency and good communication. And heres the kicker: On a technical basis, the FX market (and the stock market) did have an embedded weak or
CURRENCY TRADER October 2013

Markets cant dictate

What can Bernanke have been thinking to say We cant let market expectations dictate our policy actions. Our policy actions have to be determined by our best assessment of whats needed for the economy. This sounds noble but the Fed is the one that determined long ago to improve communication with the markets, and to never again drop bombs like the 1994 rate hike that literally put some firms out of business. The unexpected notaper announcement violates the unwritten rule that the Fed will not shock markets and will guide and lead. Granted, guiding markets is like herding cats, but it can be done. For Bernanke to complain the Feds own guidance led to too much of a curve steepening is an admission that more nuanced guidance was needed, not that the market overreacted. Anyone who wants to herd cats should know a little something about the feline brain: Markets always overshoot. Just as Saint Greenspan lost his halo after the 2008 crash, Bernanke has now lost his Eagle Scout badge. Theres another explanation of the Feds decision it
13

ON THE MONEY

got what it asked for but then didnt like it. The FOMC statement read the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. Wait a minute. The Fed gave long advance warning of tapering and it caused a rise in yields and things like mortgage rates that are based on yields, but they went up so much that now the Fed fears its own policy worked all too well. This implies the Fed fears the market and did, indeed, cave in to taper tantrums. At best, the ivory tower boys dont really grasp the principle of buy on the rumor. Complaining that markets overreacted to the taper expectation demonstrates the Fed doesnt understand markets or how to manage trader expectations. And yet the library of Fed papers on managing expectations is huge. Many market participants came to dislike Greenspan (for lots of reasons), but its likely he would never, ever, admit he was afraid of the market.

It may well succeed, too. There is nothing to like about the U.S. and its institutions these days.

Yeah, so?

The dollar has to do twice as well as any other currency to be thought half as good.
More uncertainty, not less
One of the things the taper announcement was supposed to provide was less uncertainty. Now we have to suffer another month of taper talk (a Halloween taper). Some analysts think the wait will be even longer, like three months (the Yuletide taper). The Feds decision buys some time for emerging markets to hustle through reforms to prepare for the real taper, which will come someday. It also buys some time for opportunistic bubble investors to gain a little more from equity, emerging market, and commodity trades, although logically the inadequate growth trajectory named by the Fed must mean that corporate earnings and demand for commodities doesnt justify higher prices, at least from the U.S. economy. The sector most favored by the delay is housing, as the Fed intended. Net-net, the combination of the real reasons for no-taper (tepid economy, fiscal threat), plus the implications of the Fed communications failure, adds up to an ever-weaker dollar. At some point traders wont be able to resist taking profit on such a giant move, but at this point we wouldnt expect any pullback to have much substance unless some other surprise comes along. Focus will turn to the awful U.S. Congress and its efforts to shut down the government.
14

A week after the Fed statement and Bernanke press conference, all markets were going sideways in a vast state of disarray. Traders in all sectors are waiting for something to happen to give us a breakout move. In FX, its conceivable a consensus could build, with the help of the bond market, for tapering to begin after the Oct. 29-30 FOMC meeting or at least before year-end (the Dec. 17-18 meeting). But even if we think autumn data will be so wonderful the Fed will get back on track to taper, we need yields to go far past the recent high of 3% to get a commensurate dollar effect. As we have already seen, a yield differential of 1% over German bunds is simply not enough. Because its the U.S., because of the twin deficits, and because of 30 years of history, the dollar has to do twice as well as any other currency to be thought half as good. And realistically, the mostly likely outcome is a postponement of tapering until after Bernanke retires on Jan. 31, meaning the new Fed chairman will get the job. At this writing, it looks like Vice Chairwoman Janet Yellen will be named. Yellen has long been a special friend of the FX market, delivering the exact information it is seeking, and in plain English. But whoever gets the job needs to demonstrate, early and often, the new chairman can herd cats. So, like most traders, we are at a loss. As a refuge, we can consult the calendar to see if there are any seasonalities lying around to hang on to. At timeandtiming.com, you can look up the historical record for the euro/dollar (futures basis) during the October month. In eight of the past 12 years, it went up. In fact, the maximum up move was 12.79%. This affirms our bias to sell dollars, but note that if postponing tapering is a historic moment, we should get the high end of that range, or about 12%. And 12% from 1.3500 takes the euro to 1.5120. Yikes thats awfully close to the last highest high of 1.5141 from December 2009, when the dollar was reeling from the first effects of the financial crisis. What are we to make of the gently falling linear regression line in Figure 1? Probably thats its wrong. As a rule, shorter-term lines are more useful, anyway. And now that everyone accepts Greece will need another bailout, and Eurozone banking regulatory reform is going to take many more years, and European recovery is slow and spotty, these euro negatives are back-burnered. At least when European Central Bank chief Mario Draghi says Whatever it takes or Rates will remain low for an extremely long time, he is believed. 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.

October 2013 CURRENCY TRADER

CURRENCY TRADER October 2013

15

SPOT CHECK

Aussie/dollar pair
Analyzing the Australian dollars spring-summer sell-off and rebound.

BYCURRENCY TRADER STAFF

When the Australian dollar/U.S. dollar pair (AUD/USD) pulled back from Sept. 19 to Sept. 30 around 2.6%, high to low it might have looked like a nice little long-entry setup. Price retreated to the zone between the July highs and the August highs, the latter separating twin August lows. In other words, many traders and analysts likely looked at the AUD/USD daily chart (Figure 1) and saw the pair rebounding off a double bottom and then pulling back to (successfully) test the patterns support with the intraday upside reversal and higher close on Sept. 30. Prognosis: A rally, perhaps to around 1.0200, the pairs rough support level from February and March? Well, one subjective chart interpretation has as much value, or lack thereof, as another. Figure 2, which shows the Aussie/dollar pair on the weekly time frame, reveals the September high had already taken price well into the former-support, now-resistance zone containing several of the most prominent 2011 and 2012 lows (roughly between .9380 and .9665). FIGURE 1: SETTING UP FOR A BUY

And broadening our perspective once more to monthly data reveals the recent price action has simply been the most recent foray across a support-resistance level that dates back at least to 2009, and perhaps to 2008, depending on how liberally you want to define the zone. The AUD/USDs 15% close-to-close sell-off from April 12 to Aug. 2 was the pairs biggest decline over a comparable time span in well over four years (since January 2009) and the only one since the pair began the uptrend (in 2001) that would take it to its July 2008 high. There have been only 39 such moves over the past 40 years, and only seven (like the one that concluded on Aug. 2 of this year) that werent preceded by a move as big or bigger (i.e., part of a longer, multi-week string of qualifying 16-week periods). The early August low was also the pairs lowest point since August 2010. Other than the 2008 financial crisis, you have to go back to the 20th century to find examples of the Aussie/dollar pair making new three-year lows. So, here we have a market hitting a nearly 30-year high FIGURE 2: OR A TEST OF RESISTANCE?

Casual inspection of the daily chart might lead traders to believe the AUD/USD pair was completing a pullback at the end of September.

The weekly chart shows the Aussie/dollar pair broke below the low of its extended consolidation and then rebounded back into the former support zone, which now represents resistance.

16 16

October 2013 2010 CURRENCY TRADER

FIGURE 3: MONTHLY PERSPECTIVE in July 2011, wavering for roughly two years, making one of its biggest four-month down moves of the past 30 years and, finally, rebounding approximately 7%. Before analyzing some of the pairs price action in greater detail, its worth noting the interest rate fundamentals in play as of early October. While the Federal Reserves Sept. 18 announcement of its decision to postpone tapering delayed anticipation of higher U.S. rates by at least a few months (and actual higher rates until 2015-2016), the Reserve Bank of Australia is in a monetary loosening cycle that some analysts expect to be extended in November with a decision to cut Australias central bank lending rate by 0.25% The Aussie dollar remained relatively near the roughly 30-year high it to 2.5%. In short, U.S. rates cannot go lower and made in 2011 before selling off this spring. higher rates are inevitable; Australian rates can go either way, but lower rates currently appear more probable. The AUD/USD pair dropped around 15% from April Some initial overperformance gives way to notable under12 to Aug. 2 and then rebounded approximately 7% performance in all cases by week 8. Finally, at the 12-week from Aug. 30 to Sept. 18, but similar size and duration interval, the pair has turned conspicuously higher, with moves are difficult to come by over the past four decades. the returns for patterns 1a and 1b positive and above the Nonetheless, we modeled the spring-summer sell-off and benchmark line but those for patterns 2a and 2b still quite subsequent rebound a few different ways (with more negative and below the benchmark. relaxed parameters) to see if there were any commonalities On a final note, the AUD/USD average benchmark in the pairs subsequent behavior. Figure 4 shows what the returns are slightly negative (approximately to the same AUD/USD did after the following two sets of related patdegree that the median returns are positive). The average terns: returns for patterns 1a and 1b were notably more negative than their medians, while the averages for patterns 2a and  Pattern 1a: A 16-week, close-to-low decline of at least 2b were slightly more positive the similarity between -10% followed by a seven-week low-to-high rally of at the two sets of returns underscoring the patterns relative least 3.3% (64 instances). stability. y  Pattern 1b: A 16-week, close-to-low decline of at least -12.5% followed by a seven-week low-to-high rally of at least 5% (29 instances). FIGURE 4: MODELING THE SELL-OFF/REBOUND PATTERN  Pattern 2a: A new 25- to 27-week low followed by a six- to eight-week low-to-high rally of at least 5% (67 instances).  Pattern 2b: A new 25- to 27-week low followed by a six- to eight-week low-to-high rally of at least 5%, where the most recent weekly high is above the highs of the previous eight weeks (32 instances). The AUD/USDs weekly price action satisfied all these patterns as of the week ending Sept. 20. Figure 4 shows the pairs median close-toclose weekly returns for 1-4, 8, and 12 weeks after each pattern (colored lines), along with the AUD/USDs median returns for all 1-4, 8-, and 12-week periods (black line) in the June 7, 1974 to Sept. 27, 2013 analysis window. (The 12-week follow-up window would correspond to the pairs projected action between Sept. 27 through Dec. 13, 2013.) The post-pattern price action was mixed:

Variations of the AUD/USD pairs price action between April 12 and Sept. 20 hint at slightly higher to sideways price action for a few weeks before sliding to a relative low eight weeks out.

CURRENCY TRADER October 2013

17

TRADING STRATEGIES

Avoiding data dredging in forex systems

How do you know if your trading strategy is capitalizing on a genuine market dynamic or just lucking out?

BY DANIEL FERNANDEZ
One of the biggest concerns when building trading systems is the reliability of trading signals. Given enough time, its possible to identify many spurious relationships in a financial time series (a problem known as data dredging) that can lead to systems that fail under new market conditions. This happens because sometimes there is no causal relationship between signals and the subsequent price action, and as a result the strategys profitability in testing even over long periods is merely the result of random chance. In other words, sometimes a system can just get lucky in testing, even for a relatively long time. As a result, its imperative to be able to determine whether your trading logic has a genuine causal relationship with the currency pair youre trading, or if it is merely manifesting a spurious correlation. The good news is there are analysis techniques that can help us judge whether a given trading systems logic is causally correlated with the profit it generates.

To judge if a certain variable such as the closing price can lead to the creation of systems that can succeed under unknown market conditions (i.e., future data), its important to first understand what happens when we generate trading systems using a variable that is based on a spurious correlation to the financial time series. Well do this by generating trading strategies FIGURE 1: RANDOM PROFITABILITY using a random variable (0 to 1) in the Euro/U.S. dollar (EUR/USD) pair from Jan. 1, 1991 to Jan. 1, 2001 (the in-sample data period), and then analyze the characteristics of these results when applied to data from Jan. 1, 2001 to Aug. 8, 2012 (the out-of-sample period). Keep in mind this variable is completely random, so any relationship we think we find is actually meaningless. (All tests used Kantu, a parameter-less pricepattern creation engine discussed in previous articles.) For all tests, 500 systems were created, each of which generated at least 20 trades per year and a correlation coefficient (R2) greater than 0.9. Figure 1 shows the relationship between insample and out-of-sample profits for the strategies generated using a random variable. Its obvious that despite the complete lack of causality in the systems, there are nonetheless a few Even some systems with signals generated by a random variable that by random chance achieve significant were able to produce profitable results in both in-sample and out-oflevels of profitability in the unknown market sample periods. conditions represented by the out-of-sample data
18 October 2013 2010 CURRENCY TRADER

Pure data dredging

period. This demonstrates why validation through a successful out-of-sample test does not negate the possibility of spurious results based on data mining. Simply, the possibility always exists that good results will be produced in the out-of-sample period because of data dredging in the data mining process. Figure 2 shows the equity curve of one of these random-variable systems. It was tested on 10 years of in-sample data and then validated on 11 years of out-of-sample data but we know with absolute certainty the correlation is absolutely spurious and will lead to losses going forward. However, neither trading frequency nor any other system performance statistic can be used to identify cases of spurious correlation, because outliers that match these criteria will always exist. The good news is that these results reveal some key characteristics of systems generated from variables with no causal connection to the underlying data. First, the probability of success in out-of-sample conditions is less than 50% (in the preceding example it was 47%). This is a function of the bid-ask spread, which causes a slight negative bias. Second, the average out-ofsample result is negative. Third, the correlation between the in-sample profit and out-of-sample profit was -0.025, which indicates no correlation. Finally, total trades from the in-sample period are negatively correlated with out-of-sample profitability because the negative expectation generated by the spread causes overall results to become increasingly negative as the number of trades increases.

FIGURE 2: SPURIOUS EQUITY CURVE

Although this systems equity curve looks great (and spans in-sample and out-of-sample data), the correlation is absolutely spurious and will lead to losses in future trading.

FIGURE 3: OPENING PRICE SIGNALS

Studying normal trading variables

Because this information lets us know exactly what systems generated by spurious correlations look like, we can now evaluate whether systems generated with real, non-random trading variables are likely to be either spuriously or causally correlated with our underlying time series. Figure 3 shows the in-sample and out-ofsample profit relationship of 500 systems generated using opening price relationships in the
CURRENCY TRADER October 2013

The systems in this test, which used the EUR/USD opening price instead of a random variable, produced much stronger relationships between the in-sample and out-of-sample periods.

19

TRADING STRATEGIES

EUR/USD. In this case, the probability of being profitable in the out-of-sample period increased to 83% (from 47% in the initial experiment), while the correlation between the in-sample and out-of sample profits increased from -0.025 to 0.21. Also note the correlation between the total number of trades and the out-of-sample profit is now positive (0.18), implying we now have an expectation to be profitable as we trade more, which previously was not the case. The average of the out-of-sample results is now also positive, while it was negative in the initial experiment. Certainly these numbers could also be achieved by a random variable imagine we were just extremely lucky with our data-mining but the overall probability of this happening is less than one in a billion. As a result, we can state that price patterns generated using the opening price have a high probability of having an underlying causal relationship with the EUR/USD price series, and therefore are likely to offer some predictive edge in the future. Table 1 compares the statistics of using a random variable to generate trading systems vs. using the opening price, the closing price, or both. There is a very important difference between the results of the systems created using the random variable and those created using the close or open. This doesnt mean data mining doesnt happen with systems generated using our time series otherwise the in-sample/out-of-sample correlations would be much higher but it does mean the overall probability of this happening is lower (i.e., there is a predictive edge within our overall results), while there is no edge in systems created using a random variable. TABLE 1: RANDOM VS. REAL
Signals from Random variable Open Close Open and close OS profit 47% 83% 84% 86% Avg. OS profit $-3,925 $34,745 $37,003 $32,623

Identifying causality in your trading strategies

This type of experiment allows you to evaluate whether a certain type of trading system using a given level of complexity and a given set of variables is giving you profitable results because of a real relationship with your price series or a spurious relationship that has a high chance of resulting in losses in the future. Its clear that conducting simple out-of-sample tests is not enough: You need to establish whether several different relationships of the variables (generated systems) lead to better results in the out-of-sample period than a variable that leads purely to spurious correlations. You can change the type of system (complexity) and the types of variables used to create a strategy (indicators, fundamental data, price patterns, etc.) to determine the type of combination that generates the highest causality within a large pool of trading systems. The important thing is to base your conclusions on a series of systems generated with the same overall idea rather than the out-of-sample results of a single strategy which, as previously shown, can easily lead to data mining.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.

IS/OS profit (R) -0.025 0.21 0.13 0.16

IS total trades / OS profit (R) -0.14 0.18 0.13 0.15

Trading systems generated using the opening and closing prices displayed much different characteristics than those generated using a random variable.

20

October 2013 CURRENCY TRADER

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21

TRADING STRATEGIES ADVANCED CONCEPTS

Going forward with reversals: The majors

Its not infallible, but the principle of relative anxiety expressed in a risk reversal can provide an early warning of impending trend changes.
BYHOWARD L. SIMONS

FIGURE 1: THREE-MONTH EURO FUTURES VOLATILITY (ATM STRIKE: 1.30)

Back in the days when trading and human conversation was involved, the question inevitably arose as to why a given

was conducted over the phone

market was going up or down answered, More buyers than sellers, or its opposite, the other party often stepped in buyers than sellers.

so quickly. Whenever one party

to correct, No, more anxious This should not be a con-

troversial observation. As all a buyer/seller or borrower/

The risk reversal is the difference between the volatilities of the 25-delta call and put options.

trades must have by definition lender pair, the quantities

involved must be equal. The

22

October 2013 CURRENCY TRADER

FIGURE 2:  THE EURO AND THREE-MONTH RISK REVERSALS

willingness of the marginal buyer or seller to pay more or receive less, respectively, defines the underlying shift in trend. economic value and, hence, the ultimate direction of price Option markets allow us to take this thought process

Despite all its problems since the sovereign debt crisis, the Euro has been allowed to trade more freely than many other major currencies in recent years.

FIGURE 3:  THE CANADIAN DOLLAR AND THREE-MONTH RISK REVERSALS

one step further by allowing traders to buy the right but relative willingness of call and put option buyers to buy

not the obligation to buy or sell at a given strike price. The these rights can be measured in a risk reversal, defined

as the difference in implied volatility between call and put options of the same delta. Delta is the expected movement call option delta ranges from 0 to 1 and put option delta from -1 to 0. When the bounds of 1 and -1 are reached, the options are so deep in the money and have so little futures or cash market positions, respectively. in the options price relative to the underlying assets price;

time premium remaining they behave like long and short Figure 1 shows three-month-ahead call and put option

The Canadian currency has also traded in a two-way market and shows a relatively clean relationship to its risk reversals.

volatility for March 2013 Euro futures. The deltas for the

options decrease absolutely as price advances over the 1.30 at-the-money strike. The volatilities of options are mapped as well, with the 25-delta volatility highlighted for each. sal. The remainder of the discussion will focus on these risk reversals. The difference between these two is a 25-delta risk rever25-delta risk reversals as well as the more sedate 35-delta

FIGURE 4:  THE AUSTRALIAN DOLLAR AND THREE-MONTH RISK REVERSALS

Risk reversals and the majors

The remaining charts are based on cash markets for a set of major currencies. The returns on the currencies are presented as the common logarithm of the total carry return from the U.S. dollar into those currencies, reindexed to
The AUDs risk reversals have been more effective in their moves higher than in anticipating the AUDs downturns.

CURRENCY TRADER October 2013

23

ON THE MONEY ADVANCED CONCEPTS

FIGURE 5:  THE SWEDISH KRONA AND THREE-MONTH RISK REVERSALS

January 2006; this both approximates the return path of a tively appealing rising line depicting a stronger currency. The three-month 25- and 35-delta risk reversals are presented as well. The reversals for the Euro, British pound,

continuous currency future and allows for the more intui-

and Australian dollar, which are quoted as USD per are presented on a normal scale, while those for the Japanese yen, Swiss franc, Canadian dollar, and Swedish krona are presented on an inverse scale to maintain common visual reference. If risk reversals are to have any value in trading and

market analysis, they should lead the return series and do

The kronas carry return matched the risk reversals going into the 2010 rescue of Greece, but when Euro holders started to search for safe havens, the SEK moved higher.

so with a two-month lead-time, on average. Accordingly, the carry return series are shifted by two months on the charts below. A very consistent picture emerges: The

FIGURE 6:  THE BRITISH POUND AND THREE-MONTH RISK REVERSALS

risk reversals in general, and the more out-of-the-money 25-delta risk reversals in particular, turn in advance of the currency carry returns. The economic and market interpretation here is simple and appealing: The more

anxious party prior to an advance is the out-of-the-money call option buyer and vice versa for put option buyers in but rather measure, insurance markets such as options must reflect assessments of future risks. advance of a decline. While asset markets do not forecast

crisis, has been allowed to trade more freely than many poses of market analysis, if nothing else, the European
The British pound carry return has paralleled the risk reversals, but at a lower level.

The Euro, for all of its travails since the sovereign debt

other major currencies in recent years (Figure 2). For purCentral Banks late arrival to the global money-printing

extravaganza meant it could trade in a two-way market

24

October 2013 CURRENCY TRADER

FIGURE 7:  THE SWISS FRANC AND THREE-MONTH RISK REVERSALS

more than, say, the Japanese yen or Swiss franc.

The CHFs carry returns were low relative to the risk reversals before the financial crisis, but then jumped higher as money flowed out of the Eurozone into Switzerland.

and has a relatively clean relationship to its risk reversals (Figure 3). The Bank of Canada managed to keep a relatively independent monetary policy vis--vis the U.S., a financial linkages with its larger neighbor.

The Canadian dollar also traded in a two-way market

FIGURE 8:  THE JAPANESE YEN AND THREE-MONTH RISK REVERSALS

difficult achievement considering its strong economic and The Australian dollars relationship to its risk reversals

has been strong and, as befitting the AUDs long history of volatile price moves and domestic monetary policies,

the risk reversals have moved about violently (Figure 4).

The risk reversals have been more effective in their moves higher than they have been in anticipating the downturns in the AUD.

The carry return matched the risk reversals going into the rescue of Greece in 2010, but once Euro holders became nervous and started to search for safe havens, the SEK

The Swedish krona occupies a different niche (Figure 5).

The yen had a strong connection between its carry return and the risk reversals before the financial crisis.

moved higher. The result was a strong phase-shift higher 2010 that only started to return to normal at the start of 2013.

between the carry returns and the risk reversals after mid-

FIGURE 9:  THREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO CANADIAN DOLLAR

financial crisis (Figure 6). Here the carry return has paralof British quantitative easing convinced traders the GBP was going to be pushed lower. The next two currencies, the Swiss franc and the

The British pound has had an opposite shift since the

leled the risk reversals but at a lower level. Several rounds

Japanese yen, are simply anecdotal in their behavior. The

CURRENCY TRADER October 2013

25

ON THE MONEY ADVANCED CONCEPTS

FIGURE 10:  THREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO AUSTRALIAN DOLLAR

CHFs carry returns were low relative to the risk reversals before the financial crisis and then jumped higher as money flowed out of the Eurozone into Switzerland imposition of the franc ceiling in September 2011.

(Figure 7). The markets then shifted downward after the The yen had a strong connection between its carry return

and the risk reversals prior to the financial crisis (Figure 8). FIGURE 11:  THREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO EURO The options markets then took to believing Japan would be successful in weakening the JPY while the carry return option market started to price in the firming of the JPY associated with the unwinding of yen carry trades.

documented the failure of those policies. By May 2013 the

Prospective returns
Now lets see whether three-month-ahead returns appear to be a function of these risk reversals and of the forward rate ratio between six and nine months (FRR6,9) for the major currencies (see Major currencies and The Great

LIBOR Kerfuffle, Currency Trader, June 2013). The FRR6,9 is the rate at which borrowing can be locked in for three FIGURE 12:  THREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO BRITISH POUND months starting six months from now, divided by the ninemonth rate itself. The steeper the yield curve, the more this less than 1.00. ratio exceeds 1.00; an inverted yield curve has an FRR6,9

depicted with green bubbles, negative with red bubbles; the diameter of the bubble corresponds to the absolute

In the following charts, positive prospective returns are

magnitude of the return. The last datum used is highlightBoth the Canadian and Australian dollars have large

ed and the current environment is marked with crosshairs. positive-return clusters associated with positive and negative risk-reversal levels combined with FRR6,9 levels in

26

October 2013 CURRENCY TRADER

FIGURE 13:  THREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO JAPANESE YEN

excess of 1.00 (Figures 9 and 10). The sign reversal is an

artifact of their different quotation standards. The charts

can be interpreted as saying uptrends continue with posithe CAD and falling for the AUD. The opposite is true in an inverted yield curve environment. The Euro and British pound also have the same well-

tively sloped yield curves when risk reversals are rising for

behaved structures for positive risk reversals within a

positively sloped yield curve (Figures 11 and 12). Both also have very large clusters of positive prospective returns steep FRR6,9 and large clusters of negative prospective ed FRR6,9 levels. associated with negative risk reversals combined with a returns associated with negative risk reversals and invertThe remaining markets lack risk-reversal dependence.

FIGURE 14:  THREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO SWISS FRANC

As noted above, the JPY, CHF, and SEK all have strong

anecdotal moves associated with their yield curves, mon14, and 15). Perhaps in another time all would have had but the past decade has been anything but normal.

etary policies, and very strong capital inflows (Figures 13, the well-behaved structures of the markets noted above, We can conclude from the data here the principle of relaFIGURE 15:  THREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO SWEDISH KRONA

tive anxiety, as expressed in the relative volatility measure ing trend changes. This is not infallible, but as is the case with so many market indicators it must be interpreted

of a risk reversal, provides some early warning of impend-

rather than applied in a simple trading rule. The study will be continued next month for a set of minor currencies. y
Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. For more information on the author, see p. 4.

CURRENCY TRADER October 2013

27

GLOBAL ECONOMIC CALENDAR

CPI: Consumer price index ECB:European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. 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.

2 3 4 5 6 7 8 9 10 11

US: September ISM manufacturing report Germany: August employment report Japan: August employment report U.K.: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement US: September employment report Germany: August PPI Japan: Bank of Japan interest-rate announcement LTD: October forex options; October U.S. dollar index options (ICE)

October

17 Hong Kong: July-September 18 19 20

US: September housing starts employment report US: September leading indicators Canada: September CPI Mexico: September employment report

21 Hong Kong: September CPI 22 23

Germany: September PPI

24
US: August trade balance Brazil: September PPI Brazil: September CPI Mexico: Sept. 30 CPI and September PPI Australia: September employment report US: September PPI and retail sales Canada: September employment report Germany: September CPI Japan: September PPI

25 26 27 28 29

Australia: Q3 CPI Canada: Bank of Canada interestrate announcement Mexico: September CPI South Africa: September CPI Brazil: September employment report Mexico: Oct. 15 CPI US: September durable goods Japan: September CPI

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

12 13 14 India: September PPI

30

15 UK: September CPI and PPI 16 book

France: September CPI

31

US: September CPI and fed beige UK: September employment report

Canada: September PPI Japan: September employment report South Africa: Q3 employment report US: Q3 GDP (advance) and FOMC interest-rate announcement Germany: September employment report US: September personal income France: September PPI India: September CPI Mexico: September PPI South Africa: Sept. 31

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Event: The Trading Show New York Date: Dec. 3-4 Location: Three Sixty, New York For more information: Go to www.terrapinn.com/TSNY13ActiveTrader Event: FIA Asia Derivatives Conference Date: Dec. 3-6 Location: The St. Regis, Singapore For more information: Go to www.fiaasia.org
October 2013 CURRENCY TRADER

CURRENCY FUTURES SNAPSHOT as of Sept. 30

Market EUR/USD JPY/USD GBP/USD AUD/USD CAD/USD MXN/USD U.S. dollar index CHF/USD NZD/USD E-Mini EUR/USD

Sym EC JY BP AD CD MP DX SF NE ZE

Exch CME CME CME CME CME CME ICE CME CME CME

Vol 187.5 129.2 98.9 89.0 53.3 45.3 29.1 30.9 13.7 2.9

OI 222.6 162.4 144.2 148.0 104.9 100.9 58.8 36.2 14.4 4.2

10-day move / rank 1.42% / 27% 0.96% / 50% 1.83% / 44% 0.28% / 6% -0.02% / 0% -1.18% / 44% -1.38% / 58% 2.61% / 73% 1.95% / 19% 1.42% / 27%

20-day move / rank 2.42% / 88% -0.02% / 0% 4.41% / 100% 4.35% / 100% 2.05% / 82% 1.31% / 17% -2.21% / 82% 3.04% / 89% 6.98% / 100% 2.42% / 88%

60-day move / rank 5.41% / 100% 3.03% / 60% 8.62% / 100% 2.89% / 100% 2.67% / 96% -0.33% / 0% -4.85% / 98% 6.63% / 100% 7.79% / 95% 5.41% / 100%

Volatility ratio / rank .25 / 5% .24 / 23% .24 / 3% .19 / 63% .23 / 17% .47 / 93% .23 / 3% .34 / 23% .30 / 43% .25 / 5%

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 markets 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 todays close. 20-day move: The percentage price move from the close 20 days ago to todays close. 60-day move: The percentage price move from the close 60 days ago to todays 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 Aug. 31 ranked by August 2013 return) August return 4.25% 3.41% 1.85% 1.50% 1.37% 1.00% 0.82% 0.80% 0.77% 0.70% 4.65% 4.62% 4.21% 2.24% 1.82% 1.02% 0.45% 0.40% 0% -0.05% 2013 YTD return 11.12% 7.93% 29.09% 4.44% 4.98% 3.24% -21.97% 4.99% 6.92% 4.68% 29.50% 19.28% 45.56% -8.21% -9.53% 2.01% -4.78% 40.81% -7.18% -0.85% $ Under mgmt. (millions) 342.7 27.0 41.0 3300.0 36.9 3300.0 30.8 25.0 24.5 92.0 1.7 2.9 3.9 3.0 1.0 1.4 7.0 5.4 2.5 5.0

Trading advisor 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Civic Capital (Curr. Fund LP) Gedamo (FX Alpha) Gables Capital Mgmt (Global FX) P/E Investments (FX Aggressive) Gedamo (FX One) P/E Investments (FX Standard) Friedberg Comm. Mgmt. (Curr.) Floyd Cap'l Mgmt (Currency) ACT Currency Partner AG IPM Systematic Currency (C) Hartswell Capital Mgmt (Athena) Exclusive Returns (Viktory) Investment Capital Adv (Managed Acts) Hartswell Capital Mgmt (Apollo) MatadorFX (MFX1) MFG (Bulpred USD) Capricorn Currency Mgmt (FX Maestro) SMILe Global (Mgmt FX) V50 Capital Mgmt (FX) Quaesta Capital GmbH (vTrader FX 2XL)

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

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

CURRENCY TRADER October 2013

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INTERNATIONAL MARKETS

CURRENCIES (vs. U.S. DOLLAR)

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency Brazilian real New Zealand dollar Australian Dollar South African rand Russian ruble Indian rupee Great Britain pound Singapore dollar Canadian dollar Thai baht Swedish krona Swiss franc Taiwan dollar Euro Chinese yuan Japanese yen Hong Kong dollar Sept. 26 price vs. U.S. dollar 0.45299 0.824345 0.937115 0.101055 0.03125 0.01601 1.60262 0.796845 0.97029 0.031925 0.155915 1.09707 0.033805 1.349495 0.16273 0.01014 0.12897 1-month gain/loss 10.10% 5.65% 3.83% 3.52% 3.22% 3.02% 2.94% 1.90% 1.86% 1.70% 1.22% 1.11% 1.08% 0.84% 0.24% 0.15% 0.02% 3-month gain/loss 0.74% 6.44% 1.25% 1.52% 2.46% -4.36% 3.81% 1.33% 1.89% -1.01% 4.89% 2.60% 1.84% 2.92% 0.82% -1.02% 0.04% 6-month gain/loss -8.93% -1.31% -10.39% -6.19% -3.79% -13.20% 5.32% -0.81% -0.85% -6.54% 1.19% 3.40% 0.67% 4.08% 2.08% -4.07% 0.11% 52-week high 0.5137 0.8619 1.0568 0.1217 0.0337 0.0194 1.6286 0.8213 1.0239 0.0348 0.159 1.1017 0.0345 1.3639 0.16273 0.0129 0.129 52-week low 0.4082 0.7704 0.8893 0.0962 0.0299 0.0147 1.4877 0.7792 0.9445 0.0309 0.1464 1.0274 0.0326 1.2695 0.1577 0.0097 0.1288 Previous 16 14 11 15 10 17 1 9 12 13 5 2 7 3 6 4 8

GLOBAL STOCK INDICES

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Japan India Italy Hong Kong Brazil Singapore Australia France Germany U.S. South Africa Mexico UK Canada Switzerland
30

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

Sept. 26 14,799.12 19,893.85 17,872.50 23,125.03 53,783.00 3,194.31 5,288.20 4,186.72 8,664.10 1,698.67 44,350.31 41,327.58 6,565.60 12,841.60 8,061.40

1-month gain/loss 8.53% 7.20% 5.27% 5.09% 4.58% 3.56% 3.14% 2.94% 2.71% 2.53% 2.45% 2.25% 1.93% 0.64% 0.49%

3-month gain/loss 15.31% 7.23% 16.34% 13.70% 14.01% 2.90% 12.33% 12.36% 9.11% 5.95% 13.88% 6.50% 6.49% 7.44% 6.72%

6-month gain loss 18.66% 6.89% 15.34% 3.65% -3.39% -2.87% 6.52% 11.69% 9.96% 8.63% 10.18% -5.35% 2.60% 1.06% 3.35%

52-week high 15,942.60 20,739.70 18,142.98 23,944.70 63,473.00 3,463.79 5,292.20 4,228.00 8,770.10 1,729.86 44,453.88 46,075.00 6,875.60 12,964.90 8,411.30

52-week low 8,488.14 17448.70 14,855.79 19,426.40 44,107.00 2,931.60 4,355.90 3,341.52 6,950.53 1,343.35 35,415.07 37,034.30 5,605.60 11,759.00 6,495.90

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

October 2013 CURRENCY TRADER

NON-U.S. DOLLAR FOREX CROSS RATES

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair New Zeal $ / Yen Aussie $ / Yen Pound / Yen Aussie $ / Franc Aussie $ / Canada $ Pound / Franc Canada $ / Yen Pound / Canada $ Franc / Yen Euro / Yen Euro / Franc Franc / Canada $ Pound / Aussie $ Euro / Canada $ Aussie $ / New Zeal $ Euro / Pound Euro / Aussie $ Aussie $ / Real Canada $ / Real Euro / Real Yen / Real Symbol NZD/JPY AUD/JPY GBP/JPY AUD/CHF AUD/CAD GBP/CHF CAD/JPY GBP/CAD CHF/JPY EUR/JPY EUR/CHF CHF/CAD GBP/AUD EUR/CAD AUD/NZD EUR/GBP EUR/AUD AUD/BRL CAD/BRL EUR/BRL JPY/BRL Sept. 26 81.3 92.42 158.055 0.854205 0.96591 1.460825 95.695 1.651695 108.195 133.09 1.23009 1.130655 1.710165 1.390815 1.13678 0.84206 1.440055 2.06874 2.141975 2.979095 0.022385 1-month gain/loss 5.54% 3.69% 2.82% 2.68% 1.94% 1.80% 1.21% 1.06% 1.00% 0.72% -0.25% -0.73% -0.85% -1.00% -1.69% -2.02% -2.86% -5.70% -7.49% -8.41% -9.06% 3-month gain/loss 7.54% 2.30% 4.88% -1.31% -0.61% 1.18% 2.94% 1.88% 3.65% 3.98% 0.32% 0.69% 2.52% 1.01% -4.87% -0.86% 1.64% 0.51% 1.14% 2.16% -1.73% 6-month gain loss 2.92% -6.57% 9.82% -13.34% -9.61% 1.87% 3.38% 6.23% 7.80% 8.53% 0.67% 4.29% 17.54% 4.98% -9.21% -1.18% 16.16% -1.61% 8.86% 14.29% 5.32% 52-week high 85.86 105.05 159.32 0.9942 1.068615 1.5207 100.65 1.651695 109.15 134.47 1.256 1.1415 1.7393 1.4071 1.2793 0.8747 1.4948 2.2253 2.3271 3.2599 0.0262 52-week low 63.82 79.81 125.23 0.8218 0.9224 1.4062 79 1.5286 82.73 100.04 1.2036 1.0409 1.4439 1.2603 1.1215 0.795 1.2183 1.9633 1.8879 2.5251 0.0196 Previous 21 19 11 20 13 15 18 5 12 14 16 6 7 8 10 17 9 3 4 1 2

GLOBAL CENTRAL BANK LENDING RATES

Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate Rate 0-0.25 0-0.1 0.5 0.5 1 0-0.25 2.5 2.5 9 2.5 1.875 7.5 5 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 (Aug 13) 0.5 (Mar 11) 0.5 (Aug 13) 0.25 (May 13) 0.125 (Jun 11) 0.25 (Sep 13) 0.5 (Jul 12) March 2013 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3 2.5 7.25 2.75 1.875 7.5 5 Sept. 2012 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3.5 2.5 7.5 3 1.875 8 5
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CURRENCY TRADER October 2013

INTERNATIONAL MARKETS
GDP AMERICAS
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

Period
Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2

Release date
9/20 8/30 9/30 9/27 9/6 9/26 9/10 9/4 8/16 8/30 8/12 8/16

Change
2.6% 5.3% 0.9% 0.5% 1.6% 0.7% 0.9% 0.9% -2.4% -4.3% 0.6% 5.1%

1-year change
8.3% 3.3% 3.4% 2.0% 3.4% 1.3% 6.9% 2.5% 3.3% 10.2% 2.6% 3.8%

Next release
12/20 12/3 11/29 12/24 11/14 12/20 11/26 12/4 11/15 11/29 11/14 11/22

EUROPE AFRICA ASIA and S. PACIFIC

Unemployment AMERICAS

Period
Q2 Aug. Aug. Q2 July May-July Aug. June-Aug. July Q2

Release date
9/13 9/26 9/6 9/5 8/29 9/11 9/12 9/17 8/30 7/31 9/13 9/6 9/20 9/12 9/11 9/17 9/18 7/24 9/23 9/30 9/17 9/23

Rate
7.2% 5.3% 7.1% 10.5% 5.4% 7.7% 5.8% 3.5% 3.8% 2.1%

Change
-0.7% -0.3% -0.1% 0.1% -0.1% -0.1% 0.1% 0.0% -0.1% 0.2%

1-year change
0.0% 0.0% -0.2% 0.7% -0.3% -0.4% 0.5% 0.1% -0.5% -0.1%

Next release
11/18 10/24 10/11 12/11 10/1 10/16 10/10 10/17 10/1 10/31

EUROPE

ASIA and S. PACIFIC CPI AMERICAS

Period
Aug. Aug. Aug. Aug. Aug. Aug. Aug. Q2 Aug. Aug. Aug. Aug. Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date

Change
0.8% 20.0% 0.0% 0.2% 0.0% 0.5% 0.3% 0.4% -2.2% 0.9% 0.3% 0.8%

1-year change
10.6% 3.4% 1.1% 0.3% 1.5% 2.7% 6.4% 2.4% 4.5% 10.7% 0.9% 2.0%

Next release
10/15 10/9 10/18 10/15 10/11 10/15 10/23 10/23 10/21 10/31 10/25 10/23

EUROPE AFRICA ASIA and S. PACIFIC

PPI AMERICAS EUROPE AFRICA ASIA and S. PACIFIC

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

Period
Aug. Aug. Aug. July Aug. Aug. Q2 Q2 Aug. Aug. Aug.

Release date
9/13 9/30 9/30 8/20 9/17 9/26 8/2 9/12 9/16 9/11 9/27

Change
1.1% 0.2% 2.0% -0.1% 0.1% 0.8% 0.1% -4.3% 1.2% 0.3% 1.3%

1-year change
13.8% 1.7% 1.0% 0.5% 1.6% 6.7% 1.2% -2.4% 6.1% 2.4% -0.7%

Next release
10/15 10/29 10/31 10/4 10/15 10/31 11/1 12/12 10/14 10/11 10/29

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

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October 2013 CURRENCY TRADER