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BRITISH POUND: REAL RALLY OR JUST ANOTHER SWING? P.

6
Strategies, analysis, and news for FX traders

November 2013 Volume 10, No. 11

Risk reversal in the minor currencies p. 20

Trading the EUR/CHF floor p. 16

The Fed waiting game and FX action p. 12

Aussie dollar update p. 32

CONTENTS

Contributors..................................................4 Global Markets British pound bumps up against barriers......................................6


Its been a good run, but analysts warn not to expect too much more from the pound vs. the dollar. By Currency Trader Staff

Currency Futures Snapshot.................. 27 BarclayHedge Rankings......................... 27


Top-ranked managed money programs

International Markets............................. 28
Numbers from the global forex, stock, and  interest-rate markets.

On the Money Three times and out ................................. 12


Navigating the tapering delay and other market minefields. By Barbara Rockefeller

Forex Journal............................................32
Waiting for an Aussie rebound to go short.

Trading Strategies Profiting from the EUR/CHF floor ........... 16


Its a high-risk trade, but the SNBs Euro/Swiss floor presents a unique opportunity. By Daniel Fernandez

Looking for an advertiser?


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

Advanced Concepts Going forward with reversals: The minors................................................ 20


Smaller and less-developed currency option markets appear to have cleaner relationships to their carry returns vs. the USD than do major currencies. By Howard L. Simons

Global Economic Calendar...................... 26


Important dates for currency traders.

Events ....................................................... 26
Conferences, seminars, and other events.

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

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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. 11. 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.

November 2013 CURRENCY TRADER

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GLOBAL MARKETS

British pound bumps up against barriers


Its been a good run, but analysts warn not to expect too much more from the pound vs. the dollar.
BY CURRENCY TRADER STAFF

Over the past four months, the British pound has rocketed higher vs. the U.S. dollar, nearly reaching the level of the dollar/pound (GBP/USD) pairs 2012-2013 highs around 1.6300-1.6400 (Figure 1). A bevy of better-than-expected UK economic data has underpinned the rally, which has pushed the GBP/USD 9.5% higher from early July into late October. Whether the pound can continue to gain will depend on whether the improvement in the UK economy is an aberration or a trend that is likely to continue. Another element is FIGURE 1: THE RECENT RALLY

the role the Bank of England (BOE) will play in the months ahead. Also, it is important to keep in mind that, as robust as the recent rally has been, the pound is still within the longer-term trading range that has persisted for the better part of four years (Figure 2).

A bright patch in stormy skies

The pound staged a strong rally vs. the dollar in recent months.
Source: TradeStation

The UK economy has generally limped along since the 2008 financial crisis and subsequent recession, posting lackluster gross domestic product numbers, in part because of the fiscal austerity measures imposed by the government, and also because of Britains close trade ties to a struggling Eurozone. The UK boasted a 3.4% GDP growth rate in 2007, but its been all downhill since then. In 2008, the rate came in at -0.8%, which was followed by an even deeper 5.2% contraction in 2009. In 2010 the economy posted a modest recovery with a tepid-but-positive 1.7% GDP reading, followed by 1.1% in 2011 and a marginal 0.2% in 2012. Nomura estimates 2013 GDP growth to come in at 1.3%. However, recent months contained several stronger-than-expected economic data releases. The UK has been firing on all cylinders, says Vassili Serebriakov, currency strategist at BNP Paribas. Weve seen a significant pickup in growth since the second quarter. According to Wells Fargo, Britains preliminary Q3 GDP estimate met consensus expectations with a 0.8% reading, which translates to 3.2% annualized rate. Observing this was the third consecutive quarter of positive GDP
November 2013 CURRENCY TRADER

FIGURE 2: LONGER-TERM RANGE

The pound/dollar has been in an extended trading range for the past few years.
Source: TradeStation

growth, Wells Fargo analysts noted the possibility the United Kingdom may be entering into a self-sustaining recovery. Wells Fargo global economist Jay Bryson says the UK consumer has been a key factor in the recent rebound. He explains that, similar to the U.S., consumer spending drives roughly two-thirds of the UK economy. Like in the U.S., consumers balance sheets in the UK got beat up in the Great Recession, he says. Their balance sheets are starting to improve. Consumers are starting to feel better about the housing market, which has helped consumer confidence. We have seen the personal savings rate trend lower over the last year, which gives them the extra wherewithal to spend. The UKs economic improvement has been fairly broadbased. Melanie Bowler, economist at Moodys Analytics, says the good news has been spread across a wide range of economic data. The closely watched purchasing managers indexes (services, manufacturing, and construction) are at multi-year highs, indicating expansion, she says. Current account data shows improving external demand. Meanwhile, domestic demand is also improving, and consumer confidence is at a six-year high. Bowler notes the boost to household sentiment has been fueled by several factors, including evidence the economy is on an increasingly solid recovery path, a strong pickup in house prices, record low borrowing costs, and the pledge by the Bank of England to hold interest rates steady until 2016. The housing surge has been a boon to the economy as a whole, but it also has its dark side. The recent surge in house prices has been identified as a driver of construction and consumer spending, says Stephen Webster, director of TopEcon. However, rising home prices have some econCURRENCY TRADER November 2013

omists warning about a possible housing bubble.

Unemployment and interest rates

In the meantime, the BOE, now headed up by former Bank of Canada head Mark Carney, has initiated forward guidance similar to that used by the U.S. Federal Reserve. In August the BOE announced it plans to maintain its lending rate at 0.5% until unemployment falls to 7%, unless inflation expectations exceed 2.5%. The BOE doesnt expect the unemployment rate to drop to the 7% level until 2016 (the most recent number came in at 7.7%). The UK faces some stubborn issues on the labor front, and few seem to expect a sharp decline in unemployment. Both long-term and youth unemployment are higher than a year earlier, and wage growth remains particularly weak, Moodys Bowler says. The public sector is still shedding jobs, and welfare benefits and pension reforms could push up the unemployment rate as more people move back into the labor force and inactivity rates decline. She says her firm doesnt expect the unemployment rate to hit its threshold before the end of 2015. Webster notes the UKs 7.7% jobless unemployment rate is still high relative to, say, Germany at 6.9%, although its nowhere near the 12% Eurozone number, which includes Greece at 27.6% and Spain at 26.2%. Some analysts anticipate a rate hike sometime in 2015. Bryson says his firm anticipates a hike in mid-2015, while Charles St-Arnaud, executive director, foreign exchange research and economics at Nomura, has an even more optimistic outlook, based on a sooner-than-expected move to 7% unemployment. We see that in late 2014 or early 2015, which will allow the BOE to start hiking in early 2015, he says. In general, most market participants have moved their expectations for the first rate hike from 2016 to 2015.
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GLOBAL MARKETS

FIGURE 3: EURO/POUND

The pound may be at a disadvantage to the Euro in coming months.


Source: TradeStation

Overall, Kevin Chau, FX strategist at Ideaglobal, says it will be important for currency traders to pay attention to what BOE chief Carney has to say about the economy. The BOE is taking a pretty cautious approach vs. what the market is pricing in, he says.

shoot closer to 77%, he says.

Currency action

The deficit

More so than many other nations, the UK attempted to deal with its high levels of debt and deficit through a program of relative fiscal austerity. Has it been worth it? They have not hit their deficit numbers because the economy has been weaker, so you end up with less tax revenues and a higher deficit, Wells Fargos Bryson says. Bowler says data from Eurostat shows that last year the UK had the sixth-worst budget deficit out of the 28 European Union countries. Only Spain, along with bailedout countries Ireland, Greece, Portugal, and Cyprus, had worse, she says. The deficit is forecast to come in at 6.8% of GDP this year, and debt will continue to rise. Bowler adds fiscal tightening will be the norm in the UK for at least another three years. With households bearing the brunt of austerity, prolonged fiscal tightening risks hindering continued strong economic growth, she says. Following earlier steps such as a VAT hike to 20% in 2011, the welfare benefit system is being broadly reformed, with a cap on household benefits. Treasury estimates suggest those with incomes in the bottom quintile will be hit hardest by benefit changes, while those in the top quintile bear the burden of tax hikes. Webster says the total public debt was 1.21 trillion in September, or 75.9% GDP. It is currently seen hitting 79.2% GDP by the end of 2013, but is on course to under8

The pound/dollar pair climbed from a low around 1.4810 in early July to a high around 1.6260 in early and late October. You went from one extreme, where everyone was very pessimistic and bearish, to more positive views on the currency, Nomuras St-Arnaud says. And he warns all or most of the good news might already be priced into the market, limiting further upside potential. I think we could probably go to 1.6500 in coming months, but it will be harder to go much higher, St-Arnaud says. Chau pegs an upside target and resistance zone around 1.6350. Serebriakov agrees further upside from late-October levels could be limited. Short-term, it could extend the rally vs. the dollar by a few more percentage points, but then there will be a correction, he says. The markets have heightened expectations for UK data. More likely than not they will be disappointed. It will probably test 1.63001.6400, but by the first quarter it will fall back below 1.600 as the markets begin to expect Fed tapering. One risk facing the UK is its close ties to the U.S. Analysts are still trying to gauge how much the October U.S. government shutdown actually cost the economy. The UKs strong trade and financial linkages with the U.S. leave it exposed to problems there, Bowler explains. Around 15% of UK goods exports and a fifth of services exports are destined for the U.S., and stronger pound makes UK exports less competitive. Demand for UK exports would take a knock should the partial government
November 2013 CURRENCY TRADER

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GLOBAL MARKETS

FIGURE 4: POUND/KRONA

Some analysts see the potential for the pound to gain ground vs. the Swedish krona.
Source: www.advfn.com

shutdown hit U.S. growth. Bowler adds additional strong gains in the pound are unlikely, given U.S. fiscal worries have been pushed into 2014. The UK economy could also disappoint in the fourth quarter if the U.S. economy has slowed substantially because of the government shutdown, she says. The Euro/pound cross (EUR/GBP) has been trending higher since early October, as the Euro strengthened given U.S. dollar weakness in the wake of the Feds September decision to delay tapering its monthly asset purchases (Figure 3). Near-term, the overall picture for the British pound looks a little less positive, Webster says. At the time of the high, EUR/GBP was down at levels not seen since the middle of January, where it provided a feeding frenzy for UK importers who looked upon an opportunity to buy Euro at a rate of 1.20. It has not been anywhere close since. Nevertheless, given the chances of any Fed tapering are now being pushed out into the first quarter 2014 or even later, the U.S. dollar should remain soft and GBP/USD will probably hold in the 1.60-1.63 area until at least second quarter, when the long-anticipated U.S. dollar rally could eventually get under way. Webster adds the EUR/GBP is unlikely to return to the near-.8800 highs of earlier this year. With EUR/USD seemingly set on a run at 1.40, we expect the downside is limited, he says. We can expect to see EUR/GBP at least pay a visit to the .8600-.8650 area before the end of the year.
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Some analysts say growth differentials could favor the pound over the Euro heading into 2014. BNP Paribas forecasts a 2.6% GDP pace for the UK in 2014 vs. a 1.1% pace for the Eurozone. BNPs Serebriakov says the Euro/ pound cross has traded between approximately .8400 to .8700 since February. Its a wide range, but its been going up and down within that range, he says. We still see the Euro/pound falling below .8000 next year. Our sense is the Euro is overvalued. The strength in the Euro will impact ECB rhetoric. There is a distinct possibility of a further rate cut by the ECB. Inflation is below target, and the currency is very strong. So, they should be easing policy to offset that. Looking at sterling on other crosses, St-Arnaud says his firm has been recommending a long pound/Swedish krona (GBP/SEK) trade (Figure 4). We like sterling and we dont really like the Swedish krona, he says. [The Swedish] economy is probably slowing in coming quarters. The GBP/SEK cross was trading around 10.20 in late October and St-Arnaud sees the potential for a move toward 10.60-10.80 over the next quarter or two. He notes growth in Sweden is slowing because consumers cant increase their borrowing. Because consumption is such a big part of the economy, that will slow growth, St-Arnaud says. Its a relative play. Generally, we should see Swedish economic growth underperform over the next few quarters and on the flip side, the UK economy is getting better. y

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On the Money ON THE MONEY

Three times and out


Navigating the tapering delay and other market minefields.
BY BARBARA ROCKEFELLER

The Federal Reserves delay in removing accommodation reducing the amount of its monthly purchases of Treasuries and mortgage-backed securities, aka tapering is more important than the U.S. government shutdown and coming within a whisker of sovereign default, at least to the FX market. Students of financial history are appalled. Surely the brush with death of U.S. hegemony is a big deal. The U.S. nearly went into technical default the inability to pay interest and principal despite being the richest country on the planet. The full faith and credit of the U.S. governBarbara Rockefeller

ment, standing behind U.S. bonds as the risk-free benchmark, became something else: partial faith and credit. The French complained during the 1970s about the U.S. exorbitant privilege, meaning lower interest costs, because all other nations must hold dollars whether they like it or not. As Harvard economic historian Kenneth Rogoff tweeted about potential default, this is no way of doing business if U.S. wants to remain reserve currency. Its not just a matter of reputation; the lower interest rates the US can command because of the dollars reserve currency status are worth more than $100 billion annually to Currency Trader Magazine November 2013 the public and private sectors. Figure 1. Dollar Index and Key Events However, as the government shutFIGURE 1: DOLLAR INDEX AND KEY EVENTS down played out from Oct. 1 to Oct. 85.0 17, including the refusal by a political minority to raise the debt ceiling, the 84.5 Minutes of June FOMC Seem Dovish dollar did not fall. In fact, it went up, 84.0 from the Oct. 3 low of 79.75 to the Oct. 16 high of 80.75 (Figure 1). Thats not 83.5 much, but its enough to get FX ana83.0 lysts musing that the dollars resilience 82.5 must reflect confidence that, of course, a deal would get done and, of course, 82.0 September FOMC the U.S. would not default. Announces 81.5 No Taper To a certain extent, this amounts Bad Payrolls 81.0 to other politically dysfunctional Affirms countries (think Italy) accepting that No Taper 80.5 political theater is just play-acting and shouldnt concern grown-up financial 80.0 professionals. In fact, the greatest disGovernment Shutdown 79.5 and Potential Default pleasure was voiced by China (and 79.0 it was a Chinese ratings agency that downgraded the U.S.), which allows 24 1 8 15 22 29 5 12 19 26 2 9 16 23 30 7 14 21 28 4 July August September October Novem no political discord at all. This short-sighted point of view is The U.S. dollar actually gained ground during the government shutdown. Source: Chart Metastock; data Reuters and eSignal allowed chiefly because the governNovember 2013 CURRENCY TRADER

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Barbara Rockefeller Currency Trader Mag November 2013 Figure 2: Reuters 10-Year Yield Index

FIGURE 2: REUTERS 10-YEAR YIELD INDEX


31.0 30.5 30.0 29.5 29.0 28.5 28.0 27.5 27.0 26.5 26.0 25.5 25.0 24.5 24.0 23.5 23.0 22.5 22.0 21.5 21.0 20.5 20.0 19.5 19.0 18.5 18.0 17.5 17.0 16.5 16.0 1 19 25 4 11 18 25 1 8 ary March April 15 22 29 6 May 13 20 28 3 10 17 24 1 8 June July 15 22 29 5 12 19 26 3 9 16 23 30 7 14 21 28 4 11 18 August September October November 15.5

50% Retracement

Tapering delay has weighed on the U.S. 10-year yield.

ment shutdown and potential default were not dollar negatives. Equity markets continued to rally, and gold didnt go up as looming default would imply it should have.

Dollar down

Instead, delaying tapering is dollar negative. The dollar rout that started on July 10 was a result of interpretation of the June 18-19 FOMC minutes as dovish. Fed Chief Ben Bernanke stressed that tapering is not tightening, saying, Highly accommodative monetary policy for the foreseeable future is whats needed in the U.S. economy. And about half the FOMC members wanted to delay tapering until the jobs picture is more secure. Many of us mistakenly thought the central point was that actual tightening was not on the table, not that tapering might be delayed. To be fair, around the same time in July the Euro was benefiting from the perception the peripheral debt problem was a thing of the past. The word Grexit disappeared from the press, and in a bit of poetic license, Cyprus declared its version of the Euro was already devalued, and the country had de facto left the Eurozone. As of July 11 the Spanish 10-year yield had fallen to 4.83%, from 7.69% in July the year before (its 4.10% now). It looked like the bleeding body of the Eurozone had dragged itself out of the water and was no longer surrounded by hungry sharks. The dollar index took another hit with the Sept. 18-19 FOMC announcement that tapering would be postponed, and another hit on the bad September payrolls report released on Oct. 22 (only 148,000 new jobs vs. 180,000 forecast). The Euro/dollar rate (EUR/USD) rose 119 points in five hours (from 1.3673 at 8 a.m. ET on Oct. 22 to 1.3792 by

just after 1 p.m.) not a record but an unmistakable message reinforcing the September incident. Its three times and out. OK, we get the message U.S. economic conditions are not good enough to backstop tapering, and they will likely continue to be subpar for several months, especially if the compromise that reopened the government and raised the debt ceiling is replayed in coming months, as seems all too likely. S&P ratings estimated the 16-day government shutdown cost the economy $24 billion, plus a blow to business and consumer confidence, as well as the reputation of the U.S. The response to the payrolls report is a message to the world, and the U.S. government: Screw around with expectations and we will pound you into the ground. From May to the Sept. 18-19 FOMC meeting, the market on the whole believed the Fed would announce tapering at its September meeting. Tapering is far more than removing stimulus (of diminishing and questionable value, anyway) it is removing market interference. Each time tapering appeared further away, the dollar sold off. It takes some fresh thinking to wrap our heads around default brinkmanship inspiring almost no alarm, but tapering postponement driving the dollar down. Tapering postponement is now expected to last until the Dec. 16-17 FOMC meeting at the earliest, and March is probably a more realistic start date. The Fed needs to see job growth closer to 200,000 and by the December meeting, we will have had three months of fresh payroll numbers. The probability is low payrolls will be good enough to justify tapering, especially because Octobers data will be dirty because of the shutdown (public sector employees considered

CURRENCY TRADER November 2013

13

ON THE MONEY
Barbara Rockefeller Currency Trader Mag November 2013 Figure 3: S&P Stock Index vs. the Euro (Gteen)

FIGURE 3: S&P STOCK INDEX (BLACK) VS. THE EURO (GREEN)


1.385 1.380 1.375 1.370 1.365 1.360 1.355 1.350 1.345 1.340 1.335 1.330 1.325 1.320 1.315 1.310 1.305 1.300 1.295 1.290 1.285 1.280 1.275 1.270 5 4 11 18 25 1 8 March April 15 22 29 6 13 20 27 3 10 17 24 1 8 May June July 15 22 29 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 November August September October 1780 1770 1760 1750 1740 1730 1720 1710 1700 1690 1680 1670 1660 1650 1640 1630 1620 1610 1600 1590 1580 1570 1560 1550 1540 1530 1520 1510 1500 1490 1480

The two markets that handled the no-taper caper most bullishly were equities and the Euro.

employed in the business survey but unemployed in the household survey, for example).

An uncertain future

Meanwhile, Congress is supposed to come up with a compromise budget by Dec. 13 and a new debt ceiling plan by Feb. 7, and the probability of another shutdown and default is not zero. Depending on these outcomes, this Fed could be on hold until June 2014 or later. To traders, June is awfully far away. With each tapering delay, the 10-year yield slips back a little more. Figure 2 shows the Reuters 10-year yield index bottomed on May 1 at 1.61% and peaked at 2.98% on Sept. 5, ahead of the September FOMC meeting. As of Oct. 23 it had fallen to 2.49% on the postponement story. Notice the bond market believed in tapering even though S&P index and Euro/ dollar traders did not. If the yield corrects approximately 50%, it will fall to 2.31%, only a little above the 200-day moving average value of 2.25%. The effect on the dollar is more than the dollar slavishly following yields. You cant be the issuer of the worlds reserve currency and the risk-free asset benchmark if you are messing with pricing. And no matter what else you think about quantitative easing, its government interference in a market in this case, the worlds biggest market. By repressing the true market price of government notes and bonds, QE pushes investors into riskier assets, like corporate bonds, foreign bonds, commodities, and stocks. When QE is combined with the threat of default, the risk-free asset against which to compare everything else
14

is contaminated. Nobody knows how to price anything when the risk-free rate is so messy. Are corporate bonds overpriced or fairly priced? For example, on Oct. 24 the Bloomberg U.S. corporate bond index stood at 3.11%, or 61 basis points over U.S. Treasuries. The European investment-grade bond index was yielding more than 100 points less at 2.08%, with the global investment-grade index in the middle at 2.58%. Its tempting to imagine those departing the no longer risk-free U.S. Treasury market could go to U.S. corporates (and get a little extra return while they are at it), or European investment-grade corporates, while sacrificing only about 50 basis points. With the U.S. T-note at 2.50% and the global investment grade at 2.58%, how much lower does the U.S. note have to go before global corporates look like a nice compromise? Its not hard to imagine a trickle of reallocations away from the Treasury market swelling into a river if the default story is not killed dead in its tracks. Most investment managers, especially reserve and sovereign fund managers, are stuck with government issues, but that is not written in stone. Instead of diversifying out of the dollar per se, managers could diversify out of it by diverting funds to U.S. corporates. Although that keeps dollar investment flat, the meaning behind such a reallocation is clear the standing of the U.S. as hegemon in reduced. This is the loss of the metaphorical American empire not with a bang, but with a whimper.

Equities and gold

As for other alternatives to Treasuries, the stock market watched the tapering saga with as much interest as the
November 2013 CURRENCY TRADER

Barbara Rockefeller Currency Trader Mag November 2013 Figure 4: Gold Futures

FIGURE 4: GOLD FUTURES


1850 1800 1750 1700 1650 1600 1550 1500 1450 1400 1350 1300 1250 1200 1150 75000 70000 65000 60000 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 x10

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uly

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The near-default of the U.S. presumably would have boosted gold, but the metal declined before and during the October government shutdown.

bond and FX markets. And equity traders had an extra factor they could keep buying even as tapering seemed likely because, after all, the Fed wouldnt taper unless economic recovery was pretty good, and thus earnings would be pretty good, too. Buying equities during this period was a no-brainer. Now that the economy looks more flimsy than we thought, equity traders can still justify higher prices on the grounds that tapering is going to come someday, come hell or high water. Tapering will drive re-allocators into stocks. Bottom line, the U.S. stock market has grown by more than $4 trillion so far this year, according to Bloomberg, with the S&P up about 23% and probably dueling with 2003 (up 26.4%) as the best year ever (Figure 3). The two parties that managed to navigate the no-taper caper correctly were equity and Euro/dollar traders. Gold is a great mystery. Youd think the near-default of the U.S. would provide a big boost to gold, supposedly the safe port in a sovereign storm. But fear over default never got big enough to overcome a string of factors that included another diatribe by Warren Buffett against gold, George Soros announcing his cutting of positions, and the monstrous losses by John Paulsons PFR Gold Fund, which dropped more than 60%. The gold gang is awash in whispers of market manipulation by governments that literally do not want gold prices rising because that would be proof that confidence in government is shaky. In Figure 4 the big drop in price (and volume) came on April 15, as the Cypriot central bank was widely expected to sell gold reserves. This rumor started a rout in gold that
CURRENCY TRADER November 2013

took the market down 9.35%, the biggest one-day drop in 30 years. Panic gold selling bled into other securities, including oil and equities, although they recovered while gold did not. In fact, gold fell during the two weeks of the U.S. government shutdown in October, exactly the opposite of what you would expect. To be fair, inflation is not a worry in the U.S. or Europe, which may account for gold being at the same price it was in late 2010. As Warren Buffet likes to say, he would rather own a stock that has a dividend. Longer run, however, unless the U.S. cleans up its act politically and eschews default in a convincing way, gold must be the beneficiary of fear-buying on top of accumulation by reserve holders who now see the dollar in a dimmer light. Having said that, gold is not for personal savings because it has no intrinsic return, and it is not a good investment. According to the National Bureau of Economic Research, from 1836 to 2011, gold earned only an average 1.1% per year. Treasury bonds yielded 2.9% and equities earned 7.4%. But never mind. Whether gold bottoms here or at a lower level, at some point we can count on gold to behave as conventional analysis says it should as a safe haven in a world where government debt is above the 90% level in the reserve currency issuer. 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.

15

TRADING STRATEGIES

Profiting from the EUR/CHF floor


Its a high-risk trade, but the SNBs Euro/Swiss floor presents a unique opportunity.
BY DANIEL FERNANDEZ
In 2011, as economic pressure on Swiss exports increased with the rapid valuation of the Swiss franc vs. the Euro, the Swiss National Bank (SNB) decided to create a floor for the Euro/Swiss franc exchange rate (EUR/CHF) at 1.20, pledging to use all tools at its disposal to prevent any moves below this level. The market tested the SNBs commitment through most of 2012, with the EUR/CHF pair trading in a tight range just above this level (Figure 1). After this test the pair started to trade gradually higher and many speculators realFIGURE 1: WEEKLY EURO/SWISS ized the SNB had created a very good opportunity to profit from moves in the EUR/CHF above the 1.20 floor. Lets look at how we can potentially take advantage of this market phenomenon, but also examine some of the risks involved.

Infinite support: Trusting the SNB

Because the SNB is capable of providing extremely large amounts of liquidity it has the power to issue as many francs as necessary the 1.20 floor is effectively unbreakable as long as there is the political will to sustain it. This creates an arbitrage opportunity: Because we know the EUR/CHF rate cant go below 1.20, any long positions we take in the pair will be safe as long as we place a stop order below the 1.20 level. Essentially, we can treat the SNB floor as infinite support the market cannot break. As long as this reality remains in place, we can profit if we buy the EUR/CHF pair close to the floor and sell it when it rallies off of it.

The trading scenario

The SNB established 1.20 floor during the period contained by the blue rectangle. The floor was tested in 2012 (red rectangle), and has since presented a trading opportunity (green rectangle).

A key component of taking advantage of this situation is, the closer we trade to the 1.20 support level, the more leveraged our positions can be. For example, if the EUR/CHF rate is at 1.2300, we could take a trade risking a margin call on a move to 1.1950 (using a 50-pip safety margin below the floor), in which case we would need
November October 2013 2010 CURRENCY TRADER

16

FIGURE 2:  EUR/SWISS to account for a 450-pip loss. However, with an entry price of 1.2200 the ORDER BOOK stop-loss amount would be only 350 pips, which means we could use a larger position size and could potentially reap larger profits if the EUR/ CHF rallies. As the EUR/CHF moves higher, new longs become less attractive because the potential amount of time you might spend in a drawdown (the space between the entry price and the 1.20 floor) increases and your potential gain decreases (because you need to trade a smaller-sized position). The advantage of this scenario is maximized when we use the highest possible leverage at times when price reaches natural support levels. Many speculators, large and small, have learned about this trading opportunity, which has created an artificially strong support level that has effectively prevented price from dropping to the 1.20 floor. As a result, the SNB has not had to intervene directly in the market since 2012. Figure 2 shows the Oanda order book, which is a fair representation of average speculator positioning. It allows us to see price levels at which large numbers of buy limit orders are supporting the EUR/CHF pair. On Oct. 23, 2013, the order book showed a strong accumulation of buy limits at 1.22, meaning we could set buy limit orders above this level (e.g., between 1.2250 and 1.2300) and expect the additional limit orders Oandas EUR/CHF order book to support us that is, because price is unlikely to breach this strong from Oct. 23, 2013 shows a large support, we can enter positions above it instead of waiting for a potenaccumulation of buy limit orders around 1.22. tial drop to a lower level that, while representing a better opportunity, Source: oanda.com may not readily materialize. Other support points, such as the test of the most recent days low, can offer good entry points for long trades. FIGURE 3: EURO/SWISS WEEKLY SUPPORT AND RESISTANCE Interestingly, the order book reveals many traders are following the same strategy, as evidenced by the large number of sell stop orders below 1.20 a sign of long strategies assuming infinite support by the SNB at 1.20. Because were only entering one trade at a time, deciding when to exit is important as it directly affects the number of price swings we can take advantage of. Trades can be exited at weekly resistance lines (Figure 3) or, alternately, a position can be taken out by a retracement by setting a trailing stop when price moves 100 to 200 pips in your favor. The first scenario will allow you to cash in and take a new position at a new test of support. The second option will allow you to take advantage of large swings that sometimes occur, Weekly support (red) and resistance (green) levels can be used to such as the ones in January and May 2013. enter and exit trades. Another option is to distribute risk across
CURRENCY TRADER November 2013 17

TRADING STRATEGIES

FIGURE 4: STAGGERED TRADING APPROACH

This trading approach enters four separate long trades and exits 15 pips above the highest entry price.

multiple positions. Figure 4 shows an example of a strategy that separates risk into a maximum of four trades, all of which use a profit target of 15 pips above the highest entry price. To start, a trade is opened that risks 25% (a stop-loss order at 1.1950) and has a profit target of 15 pips; if price moves down a quarter of the distance to 1.2000, a second trade is entered (also risking 25%) with the same profit target as the first. If price declines further, two additional positions are opened in the same manner, resulting in four open positions with risk of a margin call at 1.1950. If price reaches the profit target, a new long position is entered and the process begins again. This strategy would have generated a profit of 110% in 2013 through Oct. 23. However, discretionary strategies based on support and resistance, as mentioned previously, could have produced better results.

This means its also wise to avoid entering positions when the EUR/CHF is above 1.24, because in this case your potential for extended drawdown periods below your entry price becomes larger.

The big risk: Infinite isnt really forever

Extended drawdowns

A strategy traded in this manner might suffer from extended drawdowns, which can become longer the further away you are from the floor when opening your positions. As a result you may incur significant interest fees if your broker charges you a negative overnight interest rate for holding a EUR/CHF long position. Accordingly, it is advisable to only use this strategy if your broker gives you a positive interest rate on EUR/ CHF longs; otherwise your capital could become significantly eroded if the EUR/CHF becomes trapped in a tight range below your entry for a significant period of time.
18

This trade has an important caveat: Buying the EUR/CHF pair close to the SNB floor and risking a margin call below 1.1950 is a high-risk setup it obviously carries the risk of losing all or most of your capital if the SNB doesnt enforce its policy or changes it. Although the SNB will probably hold the floor while interest rates remain low, it is worth mentioning that inflation in Switzerland (particularly in real estate) as well as a potential unsustainable accumulation of foreign exchange reserves stemming from defending the floor might pressure the SNB to change its strategy. (Swiss National Bank dilemma too much of a good thing, by Michael D. McDonnell offers further analysis on this topic.) Even if the SNB simply lowered the floor from 1.20 to, say, 1.18 it would result in heavy losses for traders using this type of strategy. The approach should be traded in an account where risk of total loss is acceptable. Meanwhile, the strategy is highly rewarding because it is supported by the current market conditions. 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.
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Going forward with reversals: The minors


Smaller and less-developed currency option markets appear to have cleaner relationships to their carry returns vs. the USD than do major currencies.
BYHOWARD L. SIMONS

FIGURE 1: T  HE BRAZILIAN REAL AND THREEMONTH RISK-REVERSALS


2.36 Log10 USD Carry Return Into BRL, Jan. 4, 2006 = 2.00 Led Two Months 2.32 2.28 2.24 2.20 2.16 2.12 2.08 2.04 2.00 0% 2% Three-Month Risk Reversals, Inverse Scale 4% 6% 8% 10% 12% 14% 16%
Carry 3-Mo 25 3-Mo 35

18% 20% Apr-13 Sep-13 22%

FIGURE 2: T  HE MEXICAN PESO AND THREEMONTH RISK-REVERSALS


2.08 Log10 USD Carry Return Into MXN, Jan. 4, 2006 = 2.00 Led Two Months 2.06 2.04 2.02 2.00 1.98 1.96 1.94 1.92 1.90 1.88 10.0% 12.5% 15.0%
Carry 3-Mo 25 3-Mo 35

-2.5% 0.0% Three-Month Risk Reversals, Inverse Scale 2.5% 5.0% 7.5%

17.5% 20.0%

Last months examination of risk reversals and their relationship to major currencies (Going forward with reversals: The Majors, Currency Trader, October 2013) showed the relative demand for price insurance between currency options call and put wings provided early warnings of turning points for those currencies. Now lets repeat the exercise for a set of minor currencies that includes the Brazilian real (BRL), Indian rupee (INR), South African rand (ZAR), Turkish lira (TRY), Thai baht (THB), Mexican peso (MXN), and Taiwan dollar (TWD). As a refresher, the relative willingness of call and put option buyers to buy their respective contracts 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 in the options price relative to the underlying assets price; 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 time premium remaining they behave like long and short futures or cash-market positions, respectively. Two risk reversals will be used in the following discussion, the 25-delta and 35-delta risk reversals. Because the 25-delta options are further out of the money and are more levered, they tend to convey more information about relative anxiety and therefore are more useful for analysis.
November 2013 CURRENCY TRADER

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FIGURE 3: T  HE INDIAN RUPEE AND THREE-MONTH RISK-REVERSALS


2.14 Log10 USD Carry Return Into INR, Jan. 4, 2006 = 2.00 Led Two Months 2.12 2.10 2.08 2.06 2.04 2.02 2.00 1.98
Carry 3-Mo 25 3-Mo 35

-3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Oct-11 Apr-12 Oct-12 May-09 May-10 Apr-13 Sep-13 Jan-06 Jun-06 Jun-07 Dec-07 Dec-06 Jun-08 Nov-08 Nov-09 Nov-10 Apr-11 16% Three-Month Risk Reversals, Inverse Scale

Risk reversals and the minors

The data in Figures 1-7 are based on cash markets for the set of minor 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 January 2006; this both approximates the return path of a continuous currency futures contract and allows for the more intuitively appealing rising line depicting a stronger currency. The three-month 25- and 35-delta risk reversals are presented as well. All these reversals are depicted on an inverse scale because a call option on a larger number of units per USD conveys a weaker, not a stronger, underlying asset. If risk reversals are to have any value in trading and market analysis, they should lead the return series and they do so with a two-month average lead time. Accordingly, the carry return series are shifted by two months in the following charts. The outstanding feature for the Brazilian real (Figure 1) is the steady-state nature of the risk reversals with two exceptions, the 2008 financial crisis and the 2011 confluence of the U.S. debt ceiling and European sovereign-debt situations, when they correctly expanded prior to the currencys rebound. Regardless of the long periods of BRL appreciation prior to 2011 or its downturn since then, the risk reversals tend to be weakly bullish. In Figure 2, the Mexican pesos risk reversals look somewhat similar to the BRLs: a general steady state punctuated by two bullish expansions, one during the 2008 financial crisis and one during the 2011 U.S. and European debt situations. The Indian rupees chart (Figure 3) has a similar asymmetry, with a similar steady-state bias toward weak appreciation for the carry return into the INR as seen for the BRL. Because the INR, like the BRL, had a long period of appreciation between the 2008 financial crisis and mid2011 followed by a downward-pointing trading range, the stickiness of the option market is puzzling. As in the case of the BRL, the two major upturns in the risk reversals correctly called impending bottoms in the currency.
CURRENCY TRADER November 2013

FIGURE 4: T  HE SOUTH AFRICAN RAND AND THREE-MONTH RISK-REVERSALS


2.120 Log10 USD Carry Return Into ZAR, Jan. 4, 2006 = 2.00 Led Two Months 2.095 2.070 2.045 2.020 1.995 1.970 1.945 1.920 1.895 1.870 1.845 1.820 1.795 Jan-06 Jun-06 1.770
Carry 3-Mo 25 3-Mo 35

1% 2% Three-Month Risk Reversals, Inverse Scale 3% 4% 5% 6% 7% 8% 9% 10% 11%

Oct-11

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FIGURE 5: T  HE TURKISH LIRA AND THREE-MONTH RISK-REVERSALS


2.22 Log10 USD Carry Return Into TRY, Jan. 4, 2006 = 2.00 Led Two Months 2.20 2.18 2.16 2.14 2.12 2.10 2.08 2.06 2.04 2.02 2.00 1.98 1.96 1.94 1.92 May-09 Jan-06 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Nov-08 Nov-09 1.90
Carry 3-Mo 25 3-Mo 35

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0% 1% Three-Month Risk Reversals, Inverse Scale 2% 3% 4% 5% 6% 7% 8% 9% 10% Oct-11 Oct-12 Apr-11 Apr-12 Apr-13 11%

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21

ON THE MONEY ADVANCED CONCEPTS

FIGURE 6: T  HE THAI BAHT AND THREE-MONTH RISK-REVERSALS


2.17 Log10 USD Carry Return Into THB, Jan. 4, 2006 = 2.00 Led Two Months 2.15 2.13 2.11 2.09 2.07 2.05 2.03 2.01
Carry 3-Mo 25 3-Mo 35

-1.0% -0.5% Three-Month Risk Reversals, Inverse Scale 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Apr-13 Sep-13 4.5%

FIGURE 7: T  HE TAIWAN DOLLAR AND THREEMONTH RISK-REVERSALS


2.03 Log10 USD Carry Return Into TWD, Jan. 4, 2006 = 2.00 Led Two Months 2.02 2.01 2.00 1.99 1.98 1.97 1.96 1.95 1.94 1.93 -2.0% -1.5% Three-Month Risk Reversals, Inverse Scale -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
Carry 3-Mo 25 3-Mo 35

2.5% 3.0% Oct-12 May-09 Nov-09 May-10 Apr-12 Apr-13 Apr-11 Oct-11 Sep-13 Dec-07 Jun-08 Nov-08 Nov-10 3.5%

FIGURE 8: T  HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO BRAZILIAN REAL

Lest you think the BRL and INR define a pattern for the minor currencies, consider the South African rand (Figure 4). Here the risk reversals swing about frequently and in both directions. The 25-delta risk reversal was a late to the rebound from the 2008-2009 low, but it anticipated the other shifts in the ZAR reasonably well. The Turkish liras risk reversals, especially the 35-delta risk reversal, have anticipated moves in the TRY both higher and lower since mid-2007 (Figure 5). This relatively tight correlation is surprising given the dominance of the interest rate spread as opposed to the spot rate change in the TRYs carry return (see Turkish Lira and eternal crossroads, July 2012). The Thai bahts risk reversals expanded once, during the 2008 financial crisis, and have hovered at low positive levels otherwise (Figure 6). This has been an accurate assessment of the carry returns into the THB; the currencys carry return has oscillated within a small trading range since late 2010. The Taiwan dollars risk reversals shifted into an increasingly bullish phase throughout 2011 before the carry into the TWD turned lower and then remained bullish through the currencys subsequent rebound (Figure 7). This picture may seem boring, but what should be so boring about an indicator being correct most of the time?

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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 minor currencies (see Minor currencies less affected by The Great LIBOR Kerfuffle, July 2013). The FRR6,9 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 steeper the yield curve, the more this ratio exceeds 1.00; an inverted yield curve has an FRR6,9 less than 1.00.
22 November 2013 CURRENCY TRADER

FIGURE 9: T  HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO MEXICAN PESO

In Figures 8-14, positive prospective returns are depicted with green bubbles, negative with red bubbles; the diameter of a bubble corresponds to the absolute magnitude of the return. The last datum used, the end of April 2013, is highlighted and the end-July 2013 environment is marked with a crosshair. The most striking feature about the BRL chart is its cluster of negative prospective returns in the upper-right corner of the map where risk reversals are low and the FRR6,9 is increasingly positive (Figure 8). This is equivalent to saying the market expects a more expansive Brazilian monetary policy to result in a weaker BRL, and it adjusts its insurance trade accordingly. The picture for the Mexican peso looks very different (Figure 9). Here the dominant feature is a cluster of positive prospective returns with the 25-delta risk reversal between 2% and 12%; all other observations with the risk reversal either higher or lower are negative. This is an extraordinarily reliable, albeit data-mined pattern. The pattern for the Indian rupee has been too mixed to be useful (Figure 10). Here, there are alternating bands of positive and negative prospective returns across the observed range of risk reversals. The South African rand has a much neater and therefore much more useful division (Figure 11). Here nearly all of the observations involving a 25-delta risk reversal greater than 5% and a flat-to-inverted yield curve have positive prospective returns, and vice versa. To echo the comment made for the BRL in reverse, the market associates an inverted yield curve with gains in the ZAR and it prices relative insurance costs accordingly. The Turkish lira has a different pattern (Figure 12). Here the major cluster of negative prospective returns is concentrated in the lower-right corner of the map where the 25-delta risk reversal is less than 5% and where the FRR6,9 is less than 1.08; positive prospective returns are clustered in the upper-left corner.
CURRENCY TRADER November 2013

FIGURE 10: T  HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO INDIAN RUPEE

FIGURE 11: T  HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO S. AFRICAN RAND

23

ON THE MONEY ADVANCED CONCEPTS

FIGURE 12: T  HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO TURKISH LIRA

FIGURE 13: T  HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO THAI BAHT

FIGURE 14: T  HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO TAIWAN DOLLAR

The prospective return map for the Thai baht shows a greater dependence on the FRR6,9 than on the risk reversal, but the two measures combine to form a region dominated by positive prospective returns over the superimposed line and negative prospective returns below the line (Figure 13). The Taiwan dollar has an even more extreme division along the FRR6,9-risk reversal combination, but here the superimposed line runs from the upper-left to the lowerright quadrant (Figure 14). Here the negative prospective returns are associated with higher risk reversal levels combined with flatter yield curves. The overall conclusion for the minor currencies is surprising to the extent the smaller and less-developed option markets on them seem to have cleaner relationships to their carry returns against the USD than was the case for the major currencies. A likely explanation here is the majors have been affected more by various programs of quantitative easing and sovereign debt constraints than have the minors and therefore are reacting to anecdotal impulses as opposed to basic market factors. In addition, the conclusion stated for the majors last month applies here: What we can conclude from the data above is the principle of relative anxiety expressed in the relative volatility measure of a risk reversal does provide some early warning of impending trend changes. This is not infallible, but as is the case with so many market indicators, it must be interpreted rather than applied in a simple trading rule. y
Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. For more information on the author, see p. 4.

24

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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.

1 2 3 4 5 6

U.S.: October ISM manufacturing index Australia: Q3 PPI

November

17

18 employment report 19 U.S.: Q3 ECI

Hong Kong: August-October

20 Germany: October PPI

U.S.: October retail sales South Africa: October CPI U.S.: October leading indicators Brazil: October employment report Hong Kong: October CPI Japan: Bank of Japan interest-rate announcement Mexico: Q3 GDP Canada: October CPI Mexico: Nov. 15 CPI

8 9 10 11

Brazil: October PPI Australia: October employment report Brazil: October CPI Mexico: Oct. 31 CPI and October PPI UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: October employment report Canada: October employment report LTD: November forex options; November U.S. dollar index options (ICE)

21

22

23 24 25 Mexico: October employment report 26 starts 27 28


U.S.: Q3 GDP and October housing South Africa: Q3 GDP U.S.: October personal income and durable goods Canada: October PPI Germany: October employment report South Africa: October PPI Canada: Q3 GDP France: October PPI India: Q3 GDP and October CPI Japan: October employment report and CPI

12 UK: October CPI and PPI 13 UK: October employment report 14 15 16


Japan: October PPI

Germany: October CPI

29 30 31 1 2 3

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

U.S.: September trade balance and October PPI France: October CPI Germany: Q3 GDP India: October PPI Japan: Q3 GDP U.S.: October CPI

December
U.S.: October ISM manufacturing index Brazil: Q3 GDP

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November 2013 CURRENCY TRADER

26

CURRENCY FUTURES SNAPSHOT as of Oct. 30


Market EUR/USD JPY/USD GBP/USD AUD/USD CAD/USD MXN/USD CHF/USD U.S. dollar index NZD/USD E-Mini EUR/USD Sym EC JY BP AD CD MP SF DX NE ZE Exch CME CME CME CME CME CME CME ICE CME CME Vol 166.2 113.8 89.5 71.6 46.4 34.8 29.9 20.1 11.9 3.1 OI 262.2 163.1 174.4 123.4 111.5 113.8 47.3 52.9 23.1 4.6 10-day move / rank 1.43% / 67% 0.16% / 8% 0.45% / 36% -0.83% / 67% -1.41% / 100% -0.16% / 14% 1.50% / 62% -1.11% / 69% -2.39% / 100% 1.43% / 67% 20-day move / rank 1.05% / 31% -1.23% / 48% -1.24% / 100% 1.04% / 22% -1.34% / 73% 1.78% / 58% 0.28% / 2% -0.72% / 15% -0.91% / 42% 1.05% / 31% 60-day move / rank 3.16% / 58% -0.95% / 19% 4.30% / 67% 5.32% / 81% -1.08% / 40% -1.91% / 21% 2.90% / 43% -2.43% / 43% 3.93% / 15% 3.16% / 58% Volatility ratio / rank .23 / 23% .29 / 18% .17 / 0% .36 / 92% .76 / 100% .23 / 23% .26 / 22% .31 / 43% .45 / 80% .23 / 23%

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 09/30/13, ranked by September 2013 return) September return 10.05% 7.65% 3.10% 2.82% 2.58% 2.29% 1.78% 1.76% 1.66% 1.60% 7.25% 2.70% 0.81% 0.62% 0.42% 0.11% 0.00% -0.10% -0.13% -0.13% 2013 YTD return 33.00% -9.72% 3.97% -24.83% 2.19% 28.13% 13.10% -12.39% 9.72% 1.99% -2.48% 33.00% 2.83% -6.96% -1.69% 7.73% -7.18% -0.95% 0.32% -0.37% $ Under mgmt. (millions) 40.6 1126.0 454.0 1003.0 62.7 108.2 347.8 614.0 28.6 12.0 1.0 1.7 1.4 1.5 3.0 1.5 2.5 6.5 1.0 4.0

Trading advisor 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 CenturionFx Ltd (6X) Harmonic Capital (Gl. Currency) Alder Cap'l (Alder Global 20) Ortus Capital Mgmt. (Currency Aggr) INSCH Capital Mgmt (Kintillo X3) 24FX Management Ltd Civic Capital (Curr. Fund LP) FX Concepts (GCP) Gedamo (FX Alpha) Alder Cap'l (Alder Global 10) Gloranis GmbH (Forex Private 1) Hartswell Capital Mgmt (Athena) MFG (Bulpred USD) BEAM (FX Prop) Blue Fin Capital (Managed FX) MDC Trading V50 Capital Mgmt (FX) Quaesta Capital GmbH Four Capital (FX) Fjord Capital Mgmt. (Sherpa FX)

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

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

CURRENCY TRADER November 2013

27

INTERNATIONAL MARKETS

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

Currency vs. the U.S. dollar Brazilian real Indian rupee Australian Dollar Euro Singapore dollar Swedish krona Russian ruble Swiss franc Thai baht Taiwan dollar Japanese yen Chinese yuan Hong Kong dollar South African rand New Zealand dollar Great Britain pound Canadian dollar

Oct. 30 price vs. U.S. dollar 0.458585 0.01633 0.95106 1.37711 0.80696 0.15712 0.03126 1.114835 0.032195 0.034005 0.01023 0.163235 0.128975 0.099135 0.826725 1.60867 0.95727

1-month gain/loss 3.02% 2.64% 2.08% 1.84% 1.39% 1.09% 1.07% 1.00% 0.88% 0.55% 0.54% 0.29% 0.01% 0.00% -0.11% -0.33% -1.35%

3-month gain/loss 3.54% -2.97% 2.93% 3.74% 2.15% 1.66% 2.54% 3.59% 0.33% 1.77% 0.20% 0.79% 0.05% -2.91% 2.52% 4.64% -1.69%

6-month gain/loss -8.25% -11.63% -7.88% 5.34% -0.37% 2.86% -2.69% 4.76% -5.77% 0.38% 0.10% 1.45% 0.11% -10.31% -3.12% 3.73% -2.88%

52-week high 0.5137 0.0188 1.0568 1.3802 0.8207 0.159 0.0337 1.1213 0.0348 0.0345 0.0126 0.1633 0.129 0.118 0.8619 1.6286 1.0166

52-week low 0.4082 0.0147 0.8893 1.2695 0.7792 0.1464 0.0299 1.0274 0.0309 0.0326 0.0097 0.1583 0.1288 0.0962 0.7704 1.4877 0.9445

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

GLOBAL STOCK INDICES


Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
28

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

Oct. 30 19,166.90 21,033.97 13,455.30 6,777.70 1,763.31 9,010.27 5,425.40 45,611.91 54,173.00 4,274.11 8,228.40 41,050.09 3,230.44 23,304.02 14,502.35

1-month gain/loss 9.93% 8.54% 5.22% 4.88% 4.86% 4.84% 3.98% 3.59% 3.51% 3.15% 2.57% 2.15% 1.98% 1.94% 0.32%

3-month gain/loss 15.86% 8.71% 6.94% 3.15% 4.59% 8.94% 7.94% 11.27% 11.55% 7.21% 5.35% 2.02% -0.46% 6.15% 4.56%

6-month gain loss 14.31% 7.84% 8.02% 5.41% 10.37% 13.86% 4.97% 17.75% -3.11% 10.82% 4.08% -2.87% -4.09% 2.49% 4.63%

52-week high 19,501.18 21,086.59 13,471.06 6,875.60 1,775.52 9,070.17 5,453.10 45,611.91 63,473.00 4,309.92 8,411.30 46,075.00 3,464.79 23,944.70 15,942.60

52-week low 14,855.80 17448.70 11,759.00 5,605.60 1,343.35 6,950.53 4,355.90 36,818.76 44,107.00 3,341.52 6,508.50 37,034.30 2,931.60 19,426.40 8,619.45

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

Italy India Canada UK U.S. Germany Australia South Africa Brazil France Switzerland Mexico Singapore Hong Kong Japan

November 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 Aussie $ / Canada $ Euro / Canada $ Franc / Canada $ Aussie $ / New Zeal $ Euro / Pound Aussie $ / Yen Euro / Yen Aussie $ / Franc Pound / Canada $ Euro / Franc Franc / Yen Euro / Aussie $ New Zeal $ / Yen Pound / Yen Aussie $ / Real Euro / Real Pound / Franc Canada $ / Yen Pound / Aussie $ Yen / Real Canada $ / Real Symbol AUD/CAD EUR/CAD CHF/CAD AUD/NZD EUR/GBP AUD/JPY EUR/JPY AUD/CHF GBP/CAD EUR/CHF CHF/JPY EUR/AUD NZD/JPY GBP/JPY AUD/BRL EUR/BRL GBP/CHF CAD/JPY GBP/AUD JPY/BRL CAD/BRL Oct. 30 0.99352 1.438585 1.1646 1.150375 0.85605 92.99 134.65 0.8531 1.68048 1.235245 109.005 1.44798 80.83 157.29 2.073915 3.002975 1.44296 93.595 1.691445 0.022305 2.08745 1-month gain/loss 3.48% 3.23% 2.38% 2.21% 2.18% 1.58% 1.34% 1.07% 1.04% 0.83% 0.50% -0.24% -0.60% -0.81% -0.92% -1.15% -1.31% -1.83% -2.36% -2.45% -4.25% 3-month gain/loss 4.70% 5.52% 5.37% 0.40% -0.85% 2.78% 3.60% -0.64% 6.43% 0.14% 3.44% 0.79% 2.37% 4.49% -0.60% 0.19% 1.00% -1.83% 1.66% -3.27% -5.05% 6-month gain loss -5.15% 8.46% 7.86% -4.92% 1.55% -7.94% 5.27% -12.06% 6.80% 0.55% 4.69% 14.34% -3.18% 3.66% 0.40% 14.80% -0.98% -2.94% 12.61% 9.04% 5.85% 52-week high 1.0685 1.4412 1.169 1.2793 0.8747 105.05 134.73 0.9942 1.6895 1.256 109.20 1.4948 85.86 159.32 2.2253 3.2599 1.511 100.65 1.7393 0.0259 2.3271 52-week low 0.9224 1.2705 1.0523 1.1215 0.798 82.47 100.81 0.8218 1.5286 1.2036 83.68 1.2183 64.67 126.08 1.9633 2.5251 1.4062 79.33 1.4439 0.0196 1.8879 Previous 5 14 12 15 16 2 10 4 8 11 9 17 1 3 18 20 6 7 13 21 19

CURRENCY TRADER November 2013

29

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

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 Sep. Sep. Q2 Sep. June-Aug. Sep. July-Sept. Sep. Q2

Release date
9/13 10/24 10/11 9/5 10/1 10/16 10/10 10/17 10/1 7/31

Rate
7.2% 5.4% 6.9% 10.5% 5.1% 7.7% 5.7% 3.3% 4.0% 2.1%

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

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

Next release
11/18 11/21 11/8 12/11 11/28 11/13 11/7 11/18 11/29 10/31

EUROPE

ASIA and S. PACIFIC CPI

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

Release date
10/15 10/9 10/18 10/15 10/11 10/15 10/23 10/23 10/21 9/30 10/25 10/23

Change
0.8% 0.4% 0.2% -0.2% 0.0% 0.4% 0.2% 1.2% 0.4% 0.9% 0.3% 0.2%

1-year change
10.5% 5.9% 1.1% 0.9% 1.4% 2.7% 1.6% 2.2% 4.6% 10.7% 1.1% 1.6%

Next release
11/15 11/7 11/22 11/14 11/12 11/12 11/25 1/22 11/21 10/31 11/29 11/25

AMERICAS

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
Sep. Sep. Aug. Sep. Sep. Aug. Q2 Q2 Sep. Sep. Sep.

Release date
10/15 10/29 9/30 10/4 10/15 9/26 8/2 9/12 10/14 10/11 10/29

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

1-year change
13.8% 1.0% 1.0% -0.5% 1.2% 6.7% 1.2% -2.4% 6.5% 2.3% -1.5%

Next release
11/14 11/28 10/31 11/20 11/12 10/31 11/1 12/12 11/14 11/13 11/29

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

30

November 2013 CURRENCY TRADER

ACCOUNT BALANCE
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Account balance Singapore Norway Switzerland Taiwan Province of China Netherlands Germany Sweden Ireland Korea Hong Kong SAR Japan Italy Spain Belgium Czech Republic United States Canada Australia United Kingdom 2012 51.437 70.817 70.756 49.923 77.839 238.493 31.306 9.325 43.139 7.156 60.446 -14.881 -14.821 -7.754 -4.727 -440.417 -62.266 -56.901 -93.866 Ratio 18.602 14.174 11.21 10.529 10.098 6.954 5.977 4.422 3.819 2.718 1.014 -0.739 -1.12 -1.602 -2.416 -2.711 -3.418 -3.691 -3.79 2011 65.323 62.705 59.082 41.23 84.86 224.29 34.188 2.786 26.068 12.908 119.304 -67.152 -55.356 -5.87 -6.112 -457.726 -48.98 -34.089 -36.041 2013+ 53.071 60.773 68.101 48.606 86.993 214.596 31.326 5.117 55.195 6.299 61.064 -0.225 19.445 -3.552 -3.505 -451.458 -57.092 -50.34 -69.096

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

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 9.5 2.5 1.875 7.75 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 (Oct 13) 0.25 (May 13) 0.125 (Jun 11) 0.25 (Oct 13) 0.5 (Jul 12) April 2013 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3 2.5 7.5 2.75 1.875 7.5 5 Oct. 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

CURRENCY TRADER November 2013

31

FOREXTRADE JOURNAL

Waiting for an Aussie rebound to go short.


TRADE
Date: N/A. Entry: No trade; anticipated short of the Australian dollar/U.S. dollar pair (AUD/USD) around .9570. Reason for trade/setup: The October Spot Check outlined the Aussie/dollar pairs performance after intermediate declines (e.g., 16 weeks, -10%) followed by smaller rebounds (e.g., seven weeks, +3.3% ), such as the pair had formed as of Sept. 20. Figure 1 shows the AUD/USDs historical performance after different variations of this pattern, along with its trajectory (bright green line) from Sept. 20 through Oct. 29. Although the article noted the Aussie/dollar pair tended to move sideways to slightly higher for a few weeks before sliding to a relative low after eight weeks, the AUD/USD rate staged a nearly 3% rally in the first four weeks after Sept. 20 before reversing during the week ending Oct. 25 and dropping sharply over the next few days. Did the Aussie/dollars upside overshoot in October negate the patterns longer-term bearish implications? Perhaps. Modeling the pairs weekly price action as of Oct. 29 offers another perspective about its potential trajectory. Figure 2 shows the pairs average and median weekly moves in the 12 weeks after the following conditions: 1.  Last weeks high was above the highest high of the preceding eight weeks. 2.  This weeks close is below the lows of the previous two weeks. 3. This weeks low is below last weeks low. After these patterns, the pair has underperformed its benchmark one- to 12-week performance (Overall lines) and declined to a relative low after five weeks. Note: This analysis, which was conducted on Oct. 29, would not be relevant to the current market unless the AUD/USD rate made a lower weekly close on Nov. 1. The weakness implied both by the previous analysis (which projected a relative low in the week ending Nov. 8) and the new pattern call for a short position. However, given the pairs rapid descent after its Oct. 22 high, no position had been entered as of Oct. 30; a shortentry limit was planned for around .9570, which represented a rebound to the pairs most recent intraday congestion and breakdown point. Initial stop: .9689 Initial target: .9295

FIGURE 1

FIGURE 2

32

November 2013 CURRENCY TRADER

FIGURE 3

RESULT
Exit: N/A Profit/loss: N/A Outcome: As of Oct. 30, the AUD/USDs weakness had mostly continued, and no trade had been signaled. Some amount of upside follow-through should be expected if the pair rallies to the entry point, so the stop level has been set a little above the Oct. 24 high; the target represents a decline to the implied support around the early-October low/late-July high. 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 N/A Currency pair AUD/USD Entry price .9570 Initial stop .9689 Initial target .9295 IRR 2.31 Exit N/A Date N/A P/L point N/A % N/A LOP N/A LOL N/A Trade length N/A

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

CURRENCY TRADER October November 2013 2010

33 33