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CENTRAL BANK

SE ASON
H E ATS UP

TREND TRADING

TRADER MAGAZINE

MADE SIMPLE

US

INTEREST
RATE HIKE

OPTIONS

ST R AT E GY

COT &

VO LUM E
PROFILE

STRATEGY

YEN

MIDYE AR

REVIEW

JULY - SEPTEMEBER 2015

yuan
growing
global

THE GROWING GLOBAL ROLE OF THE RENMINBI, AND


CHINAS GROWTH PATH TO INTERNATIONALIZATION

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CONTENTs

THE GROWING GLOBAL ROLE OF


THE RENMINBI

FX

48

An analysis of the liberalization of the Chinese currency


and its impact on the global financial markets

REVOLUTIONIZE THE
WAY YOU TRADE

28
07 EDITORS NOTE
YUAN SPECIAL REPORT
6 0 Chinas Growth Path to
Internationalization: fundamental
analysis and Yuan trading recommendations
42 A Supranational Reserve Currency:
The solution to reach global stability and
avoid conflicts of interest
58 Interview with Yi Gang, State
Administration of Foreign Exchange
Director
GLOBAL MARKET WATCH
12 Whats in store for investors in the
second half of 2015? A look at the major
issues which will create volatility on the
market
MONETARY POLICIES
18 Central Bank Season Heats Up. How
to interpret Central Banks decisions to
find major directions and trends for weeks,
months, and even years

Use the COT report


and Volume Profile to
see the market from a
different angle

26
US INTEREST RATE HIKE: A
MATTER OF WHEN, NOT IF
What the next three months hold for
the US dollar

FUNDAMENTAL ANALYSIS
34 Mexico wants to attract more investors:
Implications for the USDMXN

ASK THE COACH

CURRENCY WATCH:
24 Japanese Yen: Breather continues

BOOK REVIEW

OPTIONS STRATEGY
64 FX Options, an elephant in the room:
How to generate returns from anomalies
and biases in the FX option market
TECHNICAL ANALYSIS
70 Trend Trading Made Simple: A
trading method which uses the basics of
technical analysis combined with price
projections
TRADING PSYCHOLOGY
36 How to eliminate emotions from trading
by gauging the emotions surrounding the
market and applying some consistent rules
73 Seven trading affirmations to transform
your trading success. Discusses the
positive, battle-tested trading affirmations
based on the habits of successful traders

15 How to identify and control


overtrading?
68 FX Option Peformance, by Jessica James,
Jonathan Fullwood and Peter Billington
TECHNICAL REPORTS:
76 Trends and Targets:
Majors US Dollar Rate/Major Cross Rates
Selected Asian FX Rates/FX Emerging
Markets
76 Featured Markets:
USD/JPY, EUR/SEK,
EUR/CZK, NZD/USD
80 CONFERENCES & SEMINARS
INTERNATIONAL DATA
81 FX Spot Monitor
82 Central Bank Rates
83 Economic Data - FX Poll
84 Markets View
85 ECONOMIC CALENDAR

FX TRADER MAGAZINE July - September 3

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EDITORs note

FX

Challenges in sight for the FX market


As we enter the second half of the
year, market experts expect a period
of intense volatility, shaped by the
development of the Greece situation
and its capacity to remain in the
Eurozone, and the anticipated US
interest rate hike.
In this edition we also focus on
the increasingly important role of
the Yuan. Whether the Chinese
currency will become a strong global
reserve currency is still debated on
the market, and at this stage, the
renminbi internationalization is
neither challenging the role of the
US dollar nor changing the world
monetary system. However the final
decision about the inclusion of the
renminbi in the SDR currency basket
could have a strong impact on the
foreign exchange market.
Global media coverage often
appears to interpret the Yuan
internationalisation as a challenge
to the Dollar, but this tends to
distort the original goal of Chinas
monetary policy leaders, who view the
internationalization of the currency as
an objective need for a highly open
real economy.
Dai Xianglong, former chairman
of Chinas National Social Security
Fund (NSSF) and former president
of IFF, backs the idea of the
internationalization of the renminbi

and the benefits it could bring


explaining that, originally China did
not intend to attempt to improve the
international monetary system, and
explains that the internationalization
of the Chinese currency could well
promote the improvement of the
global system because it could make
currencies more stable in more and

the world needs to be prepared for a


system where the Dollar, Euro and
Renminbi will all be consequential
international and reserve currencies.
In this edition, Justin Lin, former
Chief Economist at the World
Bank, proposes the creation of a
supranational reserve currency, as
a solution to reach global stability
and avoid conflicts of interest. And
in an interview with Yi Gang, the State
Administration of Foreign Exchange
director discusses five changes in Chinas
foreign exchange management as well
as the long-term value of the renminbi.

This issue also includes an interesting


approach to FX Options trading,
explained by Jessica James, who
proposes a strategy based on anomalies
and biases in the FX option market.
Sam Barry shows you how to use the
more countries, which is beneficial for COT report and Volume Profile to
the free convertibility of the renminbi. see the market from a different angle
and revolutionize the way you trade.
At the present time there seems to be no Efthivoulos Grigoriou explains how
timetable for this internationalization to eliminate emotions from trading by
project, no specific schedule in place gauging the emotions surrounding the
to realize the full convertibility of market and applying some consistent
the renminbi. The objective of China rules. And Razvan Mihai describes a
is to promote and speed up the trend trading method which uses the
internationalization of its currency basics of technical analysis combined
step by step, according to its economic with price projections.
conditions and financial status.
Enjoy this edition.
For Barry Eichengreen, professor of
Emmanuelle Festa Bianchet
economics at University of California,
FX TRADER MAGAZINE July - September 7

FX

CONTRIBUTORS

Angus Campbell is Senior Analyst


at FxPro and has over twelve years
experience working in the City analysing
and commentating on financial
markets. He has made regular television
appearances on Bloomberg, CNBC
Europe, Reuters TV, CNN, BBC and Sky
News. Prior to joining FxPro in July 2013
Angus spent five years as Head of Market
Analysis at London Capital Group.
www.fxpro.co.uk/
Chris Pulver is a 6-year Forex trading
veteran and expert analyst for Market
Traders Institutes Analyst on Demand. As
a full-time trader focused on consistently
conservative trading methods that
provide high percentage wins on a
regular basis, this Ferris State University
graduate dedicates his time to teaching
traders the art of harnessing limitless
trading opportunities with limited
capital. A meticulous trade planner
passionate about fundamental and
technical analytical alignment, and a
PGA certified instructor and coach,
Pulver helps traders of all skill levels
find their personal action plans for longterm trading success to give them the
freedom they need to lead lives they love.
www.markettraders.com
Efthivoulos Grigoriou is Head of
Global Research and Analysis at JFD
Brokers. He is a leading Strategist and
investment specialist applying global
micro macro approach to investing in
G10 currencies. Efthivoulos is a highly
rated analyst in FX and US Equities; well
versed in commodities and alternative
assets. Efthivoulos has great expertise in
analysis of global economies and markets
with a particular focus on the United
States and Europe. Prior to joining JFD
Brokers, he was a technical analyst at a

8 FX TRADER MAGAZINE July - September 2015

number of well-known securities firms.


www.jfdbrokers.com
Jarratt Davis is a self-taught trader who
has been ranked among the worlds top
traders between 2008 and 2013 by the
Barclay Currency Trading Index. Today
he trades professionally through an
FCA regulated investment company in
London and he is a regular commentator
for international financial press. He also
devotes his time to sharing his personal
strategies with traders looking to
hone their skills. He is also the author
of How to Trade a Currency Fund.
www.jarrattdavis.com
Jessica James is Co-Head of the
FX Quantitative Solutions team at
Commerzbank in London. She joined
Commerzbank from Citigroup where
she held a number of FX roles, latterly
as Global Head of the Quantitative
Investor Solutions Group. She is a
Managing Editor for the Journal of
Quantitative Finance and is a Visiting
Professor at Cass Business School. She
is a Fellow of the Institute of Physics and
has been a member of their governing
body and of their Industry and Business
Board. Jessica is co-author of FX Option
Performance: An Analysis of the Value
Delivered by FX Options since the start
of the Market.
Jonathan Fullwood is a director
in FX Quantitative Solutions at
Commerzbank in London. Since
joining Commerzbank in 2002 he has
also worked in fixed income research and
portfolio strategy roles and was awarded
a CFA charter in 2007. Jonathan is is
co-author of FX Option Performance:
An Analysis of the Value Delivered by
continue on page 10

Publisher & Chief Editor :


Emmanuelle Festa Bianchet
editor@fxtradermagazine.com
Editorial support:
Ivan Karlukovski
Stefan Pashaliyski
Webmaster:
Hristo Katzarski
webmaster@fxtradermagazine.com
Graphic design:
Preslav Dobrev
For advertising, contact:
ad@fxtradermagazine.com

www.fxtradermagazine.com
Trading carries a high level of risk, and may not be
suitable for all investors. The objective of FX Trader
Magazine is to give readers the tools, training and
information which will help them be better prepared to
trade on the foreign exchange. However, any analysis,
news, research, strategy, or other information contained
on this magazine is provided as general market
information and does not constitute investment advice.
FX Trader Magazine, will not accept liability for any
loss or damage, including without limitation to, any loss
of profit, which may arise directly or indirectly from use
of or reliance on such information.

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FX

CONTRIBUTORS

continue from page 8


FX Options since the start of the Market.
Keith Raphael, worked as VicePresident and Chief Technical Market
Analyst at Chase Manhattan Bank
in New York City until 1993, serving
top corporations, fund managers,
investment banks, and spot traders
of the world. Surveys by Greenwich
Associates and Euromoney, consisting
of 400 corporations and investment
banks worldwide, ranked his Chart
Service number one in 1992 and
1993. Keith has been seen on CNBC,
in the New York Times and Wall
Street Journal. He is the President of
Crosscurrents Investment Advisory.
www.crosscurrentsinvestments.com
Li Cui is a well-rounded economist.
A former Senior Economist at the
IMF she currently works as Managing
Director for China Macro Research at
Goldman Sachs Hong Kong. She has
focused on greater China economic
research since 2005, and led China
macro research in various roles since
2008. Her research has been frequently
quoted in policy publications, market
reports, and media. Li has also built
extensive networks in financial markets,
policy institutions, and academia, both
in China and overseas.
Razvan Mihai is both an experienced
technical analist and trader. He is certified
as CFTe by IFTA. He worked for one
of the top five European brokerage
houses, and was Head of Research and
Content Manager for Investazor.com.
He currently works as Analysis Director
for a new international brokerage house
which will be officially launched in 2015.

10 FX TRADER MAGAZINE July - September 2015

ZURICH PRIME
Rob Colville has trained thousands of
private investors around the globe. He
founded The Lazy Trader to teach his
simple and honest approach to trading
and investing. Rob is member of the
Society of Technical Analysts (STA)
and regularly writes for FX Street, Forex
Peace Army and FX Trader Magazine.
Rob also works as a Business Mentor
for The Princes Trust in London where
he coaches budding entrepreneurs from
disadvantaged backgrounds on how they
can build and develop their own business.
www.thelazytrader.com
Sam Barry is the CEO of Littlefish
FX, who are seeking to democratise the
foreign exchange market by providing
educational
materials,
analytical
tools, trading systems and alternative
investments based on order flow
concepts and strategies (traditionally the
preserve of large financial institutions).
Learn more about this, and sign up for
their Forex course including marketleading indicators, at LittlefishFX.com.
Samuel Tay is the founder of Grentone
Capital Management Ltd. He has more
than a decade of experience trading
and managing global financial market
investments. He worked a proprietary
trader, investment banker, investment
manager, market maker, dealer, and
speaker for several global institutions.
Samuel made appearances in Chinese
financial media, and spoke for several
global financial institutions. He adopts
a top-down approach investment
strategy, with the use of fundamental
analysis to discover intrinsic values. He
also uses Elliott Wave Theory, Intermarket Analysis, Sentiment Indicators,
continue on page 11

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CONTRIBUTORS

Howwe made

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Seasonality, and Market Flows for
making
opportunistic
investing
assessments. www.grentone.com
Steve Jarvis has provided technical
analysis to FX professionals since 1988.
Steve is chief analyst for InterpreTA,
Tradermades
technical
analysis
service. Steve has a strong experience
in providing professional traders with
daily & intra-day technical analysis
commentaries with live annotated
charts, covering a wide range of
major US Dollar and Cross-rates,
including Eastern European and
Asian rates, plus key Commodities.
www.tradermade.com

FX

www.fxtradermagazine.com
For iPad & iPhone editions
click here
For Android editions
click here
For Kindle editions
click here
For PDF downloads
click here

Steve Ward is the owner of High


Performance Global and provides
coaching and training programs for
top tier trading institutions, as well
as retail traders. He was consultant
performance coach to BBC2s Million
Dollar Traders and co-managed a team
of 40 professional proprietary traders
in London. He is an approved trainer
at the London Stock Exchange. He is
the author of 7 Professional Coaching
Lessons and High Performance
Trading as well as Trader Mind.
www.highperformanceglobal.com
Yann Quelenn is a Market Analyst at
Swissquote Bank with strong technical
and financial background. Previously,
he worked as FX Trader at Banque
Prive Edmond de Rothschild and as
Portfolio Manager at Polaris Investment
in Luxembourg. Yann has a Master
in Quantitative Finance and Risk
Management from Universit Bocconi,
Italy. www.swissquote.ch/

FX TRADER MAGAZINE July - September 11

FX

GLOBAL MARKET WATCH


by Angus Campbell

Whats in Store for Investors


in the Second Half of 2015?

As we head towards the end of the


first half of 2015 investors seem to
be approaching the second half with
a distinct degree of caution and
trepidation. When stock markets have
recorded the sort of mixed and in
some cases meagre to negative returns
for a six month period, one has to ask
the question as to whether there is any
meaningful investor appetite left to lift
equities higher. At the same time FX
markets have had a very turbulent first
half, which looks set to continue in the
months ahead when looking at what

12 FX TRADER MAGAZINE July - September 2015

the economic and political calendar


has in store.
When looking back briefly at the first
half we can rest assured that it was not
in the slightest bit short of impactful
events. The year started with a bang as
equity market volatility remained high
after spiking towards the end of 2014,
leading to large oscillations in global
indices and FX market volatility sky
rocketed after the Black Swan event that
was the Swiss National Banks removal
of its currency ceiling against the euro.

Since then, apart from a pullback in


February, FX volatility has remained
at heightened levels due to not only
considerable geopolitical uncertainty,
but economic uncertainty as well,
whereas equity market volatility has
fallen from the highs of earlier in
the year.
In respect to returns, as mentioned these
are very mixed so far for 2015. UK and
US national benchmarks are as good
as flat, European benchmarks positive
due to the impetus from the European

GLOBAL MARKET WATCH

FX

Central Banks quantitative easing Reserves approach to raising interest voted in on an anti-austerity ticket, so
program and more recently renewed rates from their all-time historical this is just one of the high hurdles needed to
optimism of a deal for Greece, although low. Both have been hotly debated be overcome. Ultimately though a deal
their impressive gains have dwindled throughout the year intensifying as we would be a short-term fix that only buys
somewhat in the second quarter, Indian reach breaking point.
Greece a few more months time before
stocks are largely negative and the only
we will see the problem resurface.
real standout is the Shanghai Composite Lets look at the Greece issue first as by Without some sort of debt restructuring
seeing over a 40% gain so far. In the the time this article is published the a bailout resolution will mean prolonging
FX world the
of what is widely
dollar has added
being
accepted
to the impressive
as inevitable and
returns it made
in the eyes of
in the latter part
many investors
of 2014, with
when Greece does
the dollar index
finally leave the
up over 5% year
euro, such a breakto date and the
up further down
majority of those
the line should be
gains coming at
more manageable.
the expense of the
A default and
yen and euro. Its
resultant Grexit
not just the dollar
will cause much
that has benefitted
short-term pain,
from
euro
but is potentially
weakness
with
better in the long
sterling up 8%
run for Greece and
against the single
its creditors as now
currency and the
contagion risk is
Two major issues cast a long shadow over
pound has held its
less than it was
the
rest
of
this
year:
the
ongoing
Greece
own against the
three years ago.
mighty US dollar,
The only problem
saga, and the Federal Reserves approach
up just over 1%
with the latter
to raising interest rates
year to date.
scenario, which
is the reason why
Whilst the first
there has been
half shows a very mixed picture when it country will probably have been thrown so much time and resource vested in
comes to returns across asset classes, it yet another lifeline by the EU and other negotiations, is that it means an end to
suggests bifurcation amongst investors creditors in the form of 7.2 billion to a single currency project that was never
and indicates a wide ranging concern shore up the countrys finances through supposed to fail and if its alright for
about what the second half has in store. the summer. Investors have been one member to see an end to austerity
There are two major issues casting a long showing relief with equity markets whilst having their outstanding debts
shadow over the rest of this year with bouncing, but even if a deal is agreed, written off, then other members such
the first being the ongoing Greece saga it then has to be ratified by the Greek as Spain, Portugal, Ireland and even
and the second being the US Federal parliament who have of course been Italy will be asking why isnt it the same
FX TRADER MAGAZINE July - September 13

FX

GLOBAL MARKET WATCH

for them. Either way the financial


markets are becoming more and more
accepting of whatever the outcome of
these negotiations, the main reason
why they are seen by so many as being
inconsequential is because a Grexit
remains firmly on
the cards.

moves this year or in 2016, investors,


businesses and consumers have been
used to ultra-low interest rates for
years and are nervous about monetary
tightening.
The Federal Reserve
is significant because any rising of

considerably since then, the trend


could easily continue as this time these
economies not only have to deal with
the prospect of more expensive debt,
they have to do so at a time when many
countries across the globe are seeing
growth stall. This
combination
has the potential
to make their
currencies
depreciate even
further
against
the
dollar,
making their debt
problems worse.

As if this wasnt
enough
of
a
headache
for
investors theres
the other issue
of having to
deal with the
com mencement
Ultimately, the
of central bank
world is going
m o n e t a r y
to find interest
tightening.
rate hikes hard to
Whilst a few
stomach as weve
central
banks
been used to near
around the globe
zero rates in many
continue to ease
major developed
monetary policy,
economies
for
for example earlier
Investors,
businesses
and
consumers
almost
seven
in the year the
years.
At
least
European Central
have been used to ultra-low interest rates
we can be safe
Bank introduced
for
years
and
are
nervous
about
monetary
to assume that
its long awaited
tightening
when rate hikes
quantitative easing
do come, they
program and more
are likely to be
recently the Bank
of Korea, Reserve Bank of Australia interest rates has ramifications beyond gradual rather than precipitous,
and Reserve Bank of New Zealand cut the shores of the US, in particular with the tightening cycle for the
their interest rates, the Federal Reserve emerging markets as it makes their Fed expected to peak around 3.00%
and Bank of England are getting debt, much of it dollar denominated, towards the end of 2017. But this may
twitchy trigger fingers to commence more expensive. We saw the potential not be enough to put investors minds
hiking.
of an emerging market rout back in at rest during the remainder of 2015.
2013 when the Fed commenced the
Whilst we are still some way off those tapering of its quantitative easing
Angus Campbell
first rate rises with question marks and even though most emerging
Senior Analyst
over whether even the Federal Reserve market currencies have depreciated
FxPro

14 FX TRADER MAGAZINE July - September 2015

ASK THE COACH


Hello, I live in Kenya and I have been
trading for about a year or so, I have a
very big problem with over trading. Please
can you kindly advise me, thank you.
Ken J.

Steve Ward
Traders Coach
answers your questions

Overtrading is a common problem particularly


for shorter time frame traders and it can
arise for many different reasons, so without
knowing your particular trading context
that is what you trade, how you trade, your

FX

your variance from this value this could be


the number of trades made or your trading
volume for example. Of course there may be
situations when a higher trading frequency
is to be accepted e.g. when the markets are
particularly busy and are giving more trading
opportunities than the norm in these cases
with effective evaluation you will be aware of
this through your market conditions analysis
so you will actually be assess your trading
levels against market conditions to create a

Overtrading can arise for many different reasons.


One of the first aspects to be aware of is when you
are overtrading, and when you are not overtrading.

Write to
FXTraderMagazine
Ask your question
to our professional
traders coach by
sending an email to
askthecoach@
fxtradermagazine.com

trading strategy, your motivations, personal


styles and your trading and personal history
I have provided a few explanations behind why
traders overtrade and some possible solutions,
and I hope that in amongst these you will find
a solution for yourself.
One of the first aspects to be aware of is
when you are overtrading, and when you are
not overtrading. It is unlikely that you are
overtrading all of the time so it is useful to
identify times when you are not overtrading
and to see what clues there are as to what is
happening in these situations can you be
like this more of the time? By identifying
the times when you are not overtrading
and doing more of what you do in these
situations you can also reduce the amount of
times when you are overtrading.
To identify when you are overtrading you
will need to have some kind of baseline
measure to work from so you can assess

more robust measure.


Here are some reasons as to why traders and
you may be overtrading and some possible
solutions;
Gambling and excitement this is occurs
when the trader is trading the markets for
the feelings of excitement and fun rather
than for profit much the same as most
people who play in the casino. If your goal is
purely to have fun and to create excitement
then you also need to accept the fact that
overtrading is likely and profitability in the
long run is unlikely. If you want profitability
from your trading then you need to make a
shift in your motives and goals away from fun
and excitement towards a more professional
and structured approach with trading
profitability as your desired outcome.
Lack of a clear trading strategy here the
trader has no defined strategy and therefore

FX TRADER MAGAZINE July - September 15

FX ASK THE COACH


there are no parameters to determine
when to trade or not so any given price
movement or market move provides
the temptation to trade. Traders in this
situation are very prone to chasing the
markets and often find that as they
go long the market comes off and as
they go short the market rallies. It feels
as if the market is out to get them.
Does that sound familiar? The most
important area that you can focus on is
to work on developing a trading strategy
which clearly defines what a trading
opportunity is whether that be based
on price action, fundamentals, technical
analysis, or a combination. This will help
you to become more selective with your
trading.
Boredom in quiet market conditions,
when the trader is spending large
amounts of time at the screen there
will be times when there are little or no
trading opportunities and feelings of
boredom can arise. This is a natural part
of trading, and is much like the stakeout
scenario that the police and special forces
operatives encounter, where you are
waiting and poised for action. However
these situations present the trader with
the challenge of being patient and staying
out of the market. For some traders this
can be very difficult particularly those
who are new to trading, those who are
gamblers/trading for excitement, those
who are over enthusiastic or those who
need to make money. I have provided
more details on these below. A really
important question to ask yourself is
Am I trading to relieve boredom or to
make money?
You need to make money this is one of

16 FX TRADER MAGAZINE July - September 2015

the worst situations to trade in. It is a


strong and powerful state but also not
conducive to good trading as your whole
decision making focus is on making
money and not on trading your strategy
and the two are not always the same.
Assessing your financial needs and your
trading performance is very important.
Anything that you can do to relieve the
necessity to have to make money will be
a great step forward for you.
Enthusiasm newer traders like
yourself are blessed with enthusiasm.
Traders who are entering new markets
are using new trading methodologies
are also prone to over enthusiasm and
a willingness to get involved. Whilst
this enthusiasm is undoubtedly positive
there is also the dark side to consider
of being over enthusiastic and looking
for any opportunity to trade. Maintain
your enthusiasm but re-direct it towards
developing your ability to trade your
strategy when trades appear and to
develop the discipline required to stick
to your strategy. If you have to trade
consider doing it on the simulator/demo
account where the costs are obviously
considerably lower. Also consider using
your enthusiasm to do any reading or
development work that may be required
or any other trading specific tasks.
Lack of patience traders who lack
patience will overtrade as they will
be taking opportunities that are not
a part of their trading strategy and so
will by nature be taking more trades
than is necessary. Practise patience,
look for opportunities to sit and watch
the markets, make time to simply
view and not do, maybe try practising

ASK THE COACH


mindfulness to help you to identify
and work with overcoming the urge
to relieve the feeling of impatience.
Learning to be patient is a great skill to
develop as a trader, so do not see not
trading as time wasted but rather as
time well spent in developing the skill
of patience.
In revenge where traders have lost
money through
a trading loss,
a mistake or
fat finger etc
there is often
an urge to get
my
money
back. Whilst
the intention
of
such
a
behaviour/
t h o u g h t
is
positive
the
ensuing
behaviour
is
often
not.
Traders
who
chase
losses
will be skewed towards taking any
potential trade that could make money,
regardless of whether it is a strategy
trade or not as the mental framework,
the goal as such is now to make money
and not to trade the strategy. Where
you have had a big loss or lost a large
amount of money through a series of
trades you may wish to incorporate
a ritual to take a time out. This time
out allows you time to readdress your
trading state and to refocus but also and
importantly breaks the behavioural
pattern of lose money feel angry
get money back. The time out causes

a break in the behavioural pattern


and enables you to refocus using
breathing and relaxation techniques
or taking a slow walk can all help to
diffuse the emotions that are running
through the system at this time at
reduce the impact of revenge trading.
Fatigue when you are tired, either
physically or mentally, your brain

lacks the energy to function fully,


and on low fuel one impact on your
performance will be a lower level of
self-control. Self-control, not trading,
requires you to apply the brakes in
your brain to stop you trading and this
takes fuel. When you are tired and fuel
is low your self-control will also be low,
and overtrading will be more likely.
The two keys to optimising brain
functioning at an energy level are rest
and glucose (from eating). Make sure,
as far as you can, that when you are
trading you are rested and have fuelled
up.

FX

Focus focusing on not overtrading


can be counter-productive as one of
my clients found out be continually
thinking about not overtrading you
are of course by nature thinking
about overtrading, and you are also
creating an internal resistance try to
not think about a white bear. When
I asked my client what he would be
doing if he was not over trading he
answered that he
would be being
patient
and
selective focus
on that instead
I said. He made
a
considerable
difference
by
simply
shifting
his focus to the
positive outcome
that he wanted
rather than what
he was trying to
avoid.
So there are a few
reasons
behind
why traders overtrade and some
possible solutions for helping you
to overcome them. Consider which
might be the most appropriate for
your situation, give them a try and
let me know how it goes.

Steve Ward
If you would like a trading
per formance or psycholog y
question answe red by Steve
please send it to askthecoach@
fxtradermagazine.com

FX TRADER MAGAZINE July - September 17

FX MONETARY POLICIES
by Chris Pulver

Central Bank Season Heats Up


Understanding monetary policy market moves

When you hear Central Bank uttered


in the financial world, what is the first
word or phrase that comes to mind? If
you have been living under a rock then
perhaps the term renders no familiarity
and carries no influence on your trading.
But for the vast majority of traders and
investors, the Central Banks of the world
have been responsible for and provided
some of the most controversial market
movements in the past seven years, with
a trend (no pun intended) that looks very
likely to continue.

18 FX TRADER MAGAZINE July - September 2015

Lets take a trip down memory lane


and review some of the BIG decisions
that shaped the Forex Market and
global monetary policy. These
decisions led to what many experts
have coined the currency wars where
a countrys central bank adjusts
monetary policy in some capacity
with the intentions of stimulating
a countrys lending, borrowing,
spending, growth, etc. Notable
central bank decisions include the
following -

US Federal Reserve (Figure 1)


November 2008 - Federal Reserve
unveils $800 billion plan to stimulate
borrowing and spending
March 2009 - Federal Reserve buys $300
billion in long-term Treasury bonds QE1
November 2010 - Federal Reserve buys
$600 billion in additional bonds - QE2
September 2011 - Federal Reserve cuts
interest rate on consumer loans with
$400 billion dept-swap

MONETARY POLICIES

Figure 1 - US Federal Reserve QE programs relative to the Dow Jones Industrial Average (DJIA)

June 2012 - Federal Reserve extends


Operation Twist
September 2012 - Federal Reserve
launches QE3 by buying mortgage
securities
June 2013 - Federal Reserve discusses
scaling back in purchases - Taper Talk
April 2014 - October 2014 - Federal
Reserve tapers stimulus from $85
billion to $0
Bank of Japan
April 2012 - Bank of Japan announces an
aggressive asset purchase program by $10
trillion yen
April 2013 - Bank of Japan announces an
open-ended asset purchase program
October 2014 - Bank of Japan announces
expansion to asset purchases in the wake
of US Fed taper

The list is much, much longer and there


is no preferential treatment with the
mentionable, but they are a few of
the most significant central bank
decisions in recent years. This years
Swiss National Bank fiasco was more
or less the Black Swan of the Forex
Market with a move that most traders
would agree was something neverbefore-seen and most likely never to
be seen again.
The SNB was openly committed to
defending the 1.2000 exchange rate
through December 2014 after an
intervention back in August 2011.
The SNB was so committed in fact it

FX

was willing to venture into negative


interest rate territory to stay ahead
of the fundamentally weak euro. The
SNB ventured into negative interest
rate territory in December 2014
with a cut from 0% to -.25%. SNB
speeches and press releases assured
the markets and traders that the
SNB would consider intervention if
anything unsavory hit the markets
and threatened the 1.2000 peg.
Weeks later, in a relatively unassuming
Libor Rate Decision the SNB
announced a rate cut (cutting rates 50
bps to -.75 which technically should
weaken the CHF) but the not-so subtle
kicker being the 1.2000 floor was
removed - within a matter of seconds the
CHF moved nearly 2,000 points and
appreciated on the move (Figure 2). This
anomaly crippled traders, brokers, and
permanently tarnished the reputation
of Central Banks worldwide. Yet, here
we are in 2015 and the year has already
witnessed more Central Bank actions
with plenty more on the horizon.

European Central Bank


March 2008 - ECB announces LongTerm Refinancing Operation (LTRO)
May 2010 - ECB Securities Marketing
Programme (SMP) initiated
March 2011 - ECB creates refinancing
program and bond-buying program
May 2014 - ECB discusses QE program
March 2015 - ECB initiates QE program
through September 2016

Figure 2 - EURCHF Price with 1.2000 floor protected and removed

FX TRADER MAGAZINE July - September 19

FX MONETARY POLICIES
Since January 2015, over 20 central
banks have participated in changes
to monetary policy with the majority
being rate cuts - see for yourself at
http://www.cbrates.com/decisions.
htm. Summer 2015 will play host to
additional central bank decisions with
the US Federal Reserve and RBNZ
as some of the
more noteworthy.
The US Fed is
contemplating a
raise in interest
rates for the first
time in six years
while the RBNZ
is contemplating
a cut in interest
rates after a period
of
tightening
and
increasing
throughout 2014.

term trader. Traders may feel duped into


trading a news announcement where
price does the opposite of what the news
suggests. Traders may also try to trade in
the direction of a central bank decision
but be months behind the true power
move that comes after ones patience
and capital has worn thin.

publish reports, press conferences,


and statements monthly. It may seem
dull and mundane, but if traders are
looking for obvious keywords and
phrases that reflect the banks stance
on monetary policy and the economy,
they are able to ascertain the potential
guidance necessary to identify the
banks
longterm
wishes
and
direction.
In short, is the
central
bank
optimistic
( t e r m e d
hawkish),
on
the
economic
outlook or is it
sluggish (termed
dovish), on the
economy?
Are
they willing to
cut interest rates
or looking to
increase
rates?
Whatever
the
stance may be, the
tone and dialogue
is
usually
The important component to profiting
consistent
in
from these macro market moves is
the central bank
releases and hints
to understand the underlying tone
at the eventual
established in advance
movement of the
markets.

What does this


all mean? As a
trader, it means
that frankly, were
at the mercy of
the central banks
and their decision
making.
The
topic of monetary
policy is discussed
regularly and an
immediate rate
cut or increase
does not necessarily equate to an
instant follow through in the Forex
Market. Central banks usually create a
tone in the market months before price
begins to catch up with the big picture typically this does not bode well for the
patience or lack thereof for the shorter-

20 FX TRADER MAGAZINE July - September 2015

The important component to actually


trading and profiting from these
macro market moves is to understand
the underlying tone established in
advance. This practice may actually
require reading the scintillating
literature of the central banks as they

Lets put this idea into perspective.


The European Central Banks
(ECB) Mario Draghi was discussing
restructuring the LTRO program,
mentions QE, and consistently uses
phrases like whatever it takes to save
and preserve the euro. Rate cuts had

MONETARY POLICIES

Figure 3 - EURUSD price action behavior in the wake of ECB Monetary Policy

taken place but the decline of the euro


was not immediate (May 2013 cut from
.75 to .50, November 2013 cut from .50
to .25). The EURUSD rally could not be
stopped until an ECB Press Conference
in May 2014 faked a move through
1.4000 (topping at 1.3992) and moved
reversely to bearish for the remainder of
the week and pretty much to present day.
Rate cuts continued in June 2014 and
September 2014 (.25 to .15 and .15 to .05
respectively) as the euro continued its
rapid depreciation.
While traders were watching Eurozone
headlines of contagion (Greece default,
Spain/Italy/Portugal in trouble), end of
the euro, bailouts, etc. price action of the
EURUSD was not entirely correlated
until months later. Once the correlation
matched up and the rubber hit the road
so to speak, the selloff in the EURUSD
was incredibly one-directional (Figure
3). Perhaps this was the perfect storm
of institutions convinced that selling
the euro and buying dollars was the

best play and the selloff momentum


substantially increased but today the talk
of the EURUSD target is parity (1.00
exchange) while the current price is in
the 1.0800 to 1.0900 area.
Another timely example is the
Reserve Bank of New Zealand
(RBNZ). The NZD strength has been
unprecedented despite mixed signals and
communication from a central bank that
has been tightening monetary policy
and increasing rates since 2014. A brief
interest history of the RBNZ and interest
rates reflect a rate cut from 3.00% to
2.5% in March 2009. The 2.5% Official
Cash Rate (OCR) remained steady until
March 2014. At this time, policy began
to shift in a dramatic fashion when
the RBNZ took action with four rate
increases in 5 months (March 2014 2.5%
to 2.75%, April 2014 2.75% to 3.00%,
June 2014 3.00% to 3.25%, and July
2014 3.25% to 3.5%).
The current OCR is 3.5% but it is being

FX

questioned as the tone of the RBNZ


has been consistently dovish noting
an unsustainably high exchange rate
and a desired lower rate. The RBNZs
preference for a weaker currency was so
convincing that traders discovered the
RBNZ sold NZD in the open market in
August 2014 and April 2015 to provide
some added evidence to its case and see
further NZD weakness. However, rate
decision action by the RBNZ hasnt
been taken since July 2014. The RBNZ
has achieved some of the desired targets
for weakness by intervening and selling
NZD and talking about the desired
direction, but no actual adjustment in
monetary policy has been made. With
a June 2015 cash rate decision and press
conference quickly approaching, this is
potentially being priced in or the market
may press the NZD to further weakness.
The NZD as a whole has been a relatively
tricky currency to trade due to the
OCR and the yield it offers against in
major counterparts. It is true the NZD
has weakened significantly against the
greenback (August 2014 - Present) as
the USD rally was one of the largest and
most stubborn movements the Forex
Market has witnessed in years (Figure 4).
However, despite the weakness against
the USD, the NZD appreciated against
its counterparts testing or making new
historic highs/lows. The EURNZD and
AUDNZD created fresh new historic
lows as the pairs hit 1.3900 and 1.0020
respectively. It took months for the
NZD weakness to catch up, yet again
showing the lag in central bank rhetoric
and price correlation - but it did indeed
catch up and April was a significantly
weak month for the NZD against other

FX TRADER MAGAZINE July - September 21

FX MONETARY POLICIES
market picture. If traders understand
that a certain central bank is constantly
mentioning and reiterating the desire
for a weaker currency, the central bank
will most likely get it in some fashion.

Figure 4 - NZDUSD price and RBNZ Central Bank actions

its counterparts. The EURNZD rallied


from 1.3900 to 1.5400 (1500 points),
the AUDNZD rallied from 1.0020
to 1.0880 (860 points), the GBPNZD
rallied from 1.9400 to 2.1480 (2000+
points and breaking a 3 year high above
the 2.10 handle).
Technically, the NZD is positioned for
more weakness. Combining this with
an upcoming rate decision traders
will anxiously await the green light
from the RBNZ for further weakness.
As always, there are no guarantees
that the technicals will match the
fundamentals and in light of the
extreme NZD weakness from April
there may be a hesitation if the RBNZ
does not take action and match the
expectations of the market sentiment.
Technical levels to watch with the
NZDUSD as the primary barometer
include 7000 and 6700. Prices
falling to these levels would most
likely correspond to higher highs
on EURNZD, GBPNZD, and

22 FX TRADER MAGAZINE July - September 2015

AUDNZD. For the Forex Market to


be excited about a falling high-yield
currency, there is usually a high degree
of volatility to support the movement,
hence the NZD becoming so weak
so quickly in April and potentially
continuing through the summer
depending on the RBNZs actions in
June.
Are we having fun yet? This article
is going to turn readers into central
bank experts, right? Surely traders
wish they had a Central Bank
Hotline and as the final minutes
approach prior to a rate decision or
press conference, we receive a courtesy
call to properly prepare us for the
upcoming movements to be positioned
correctly as the markets movers and
shakers take action in colossal fashion.
Until this happens, the art of reading
and interpretation will have to suffice.
For the most part, the central bank
releases are not worthy of the NY Times
Bestseller list, but they are helpful in
providing clues to the shape of the big

As you have read and observed, the


price action is not immediate, but
traders should not be surprised when
the fundamental outlook, technical
landscape, and central bank rhetoric
merge into a consistently powerful
move in the financial markets. This
macro picture outlook can help you
with finding major direction and trends
for weeks, months, and even years (e.g.
Japanese Yen from 2012 - Present).
Although trading the news can be
an incredibly difficult task for the
intraday trader, the trader planning
on the macro level and allowing the
fundamentals and technicals to
connect will help place you on the
proper side of the big move. Ask any
traders who were buying EURJPY,
GBPJPY, USDJPY in early 2012
or selling EURUSD, GBPUSD,
AUDUSD, NZDUSD in late 2014
and certainly they would agree that
it was an enjoyable and profitable
ride. These moves just take time to
set up. Successful trading is routinely
about planning, preparation, and risk
management. Giving a little extra love
to the central banks messages and
desires may help your macro outlooks
and provide some incredibly lucrative
moves in the very near future.

Chris Pulver
Expert analyst
Market Traders Institute

BUILDING ROBUST FX TRADING SYSTEMS


by Caspar Marney

Learn how to:


Find a good historical data source
Identify an edge
Exploit the Volume profile
Know your currencies
Use price updates as proxy
for traded volumes
Trade using Marney Volume and
Range indicators - disclosed formulas
Download Marneys
PDF eBook here
Download the iPad/iPhone
version here
Download the Android
Mobile version here
Download the Kindle
version here

The author, Caspar Marney, manages assets for some of the worlds leading investment banks and
financial institutions. He predicted the huge Yen move of 1998 on live television, a move larger than the
Pounds exit from the ERM on Black Wednesday. Caspar started his trading career as a spot currency
trader and technical analyst with HSBC in London and moved to SBC Warburg, later UBS, as Global Head
of Technical Analysis for FX and precious metals, where he became one of the banks most successful
proprietary traders. He is a regular commentator on financial news channels, a visiting University
lecturer, a frequent guest speaker at trading events as well as regular contributor to trading publications.

FX

CURRENCY WATCH
by Keith Raphael

The Ja pa nese Yen


Mid year Up date

Breather Continues

$JPY Long-term Bullish Outlook complete


Sideways Consolidation or Developing Top?
In our second annual long-term U.S.
Dollar Outlook from January 2015,
we continued to stress, and have now
completed, our bullish three year, longterm outlook of a rally from 96.80 to
118.80 for January 2015, as well as
120.70 for March 2015. Since achieving
these goals, we have continued to forecast
a medium-term consolidation [112.30
124.15] through August 2015. The
price data from the last six months has
not altered the view of the Japanese Yen
against the U.S. Dollar as much as it has
versus other key currencies.
The rally to the 124.15 top of the
medium-term consolidation view
has begun to produce weak multiple
24 FX TRADER MAGAZINE July - September 2015

divergences and waning, bullish,


medium-term
momentum.
The
combination is a further confirmation
that we will see the forecast correction to
115.55, now out to October from June
2015, in a further consolidation view
[115.55 124.15] into November 2015.
Although we do not expect a deeper
decline than 115.55 through the balance
of 2015, we have completed the rally in
both the medium-term and long term
outlook into early 2016. Only a monthly
close back above 125.85 (producing
a further rally to 135.20 strong longterm resistance over four months) or
now a monthly close back below 115.55
(confirming not only the long-term top

but also producing a decline to retest


107.80 over two months ) would alter
our consolidation view for the next six
months.
Unlike the U.S. Dollar versus the Japanese
Yen [$JPY], the British Pound versus
the Japanese Yen [GBPJPY] is just now
reaching its medium-term objective. The
GBPJPY is about two months behind
the structure of the $JPY. The long-term
technicals and momentum have already
begun to erode. We are forecasting
a further rally to only 200.60 strong
long-term resistance through August
2015 before lower to retest 174.90 in
December 2015 in a developing mediumterm consolidation through early next

CURRENCY WATCH

FX

year [174.90 200.60]. Only a monthly


close above 200.60 (resulting in a rally to
215.90 strong long-term resistance over
three months) or a monthly close back
below 174.90 (completing a top and
producing a decline to 162.90 over two
months) would alter our waning bullish
medium-term and long-term outlooks.

Chart 1: U.S. Dollar versus Japanese Yen Monthly Chart

Chart 2: British Pound versus Japanese Yen Monthly Chart

Chart 3: Euro versus Japanese Yen Monthly Chart

The final currency pair of particular


significance to FX traders is the Euro
versus the Japanese Yen [EURJPY]. The
peak in EURJPY occurred five to six
months before either $JPY or GBPJPY,
of course aggravated by the strong decline
in the EUR$. In our January long-term
annual outlook in FX Trader magazine,
we forecast that the medium-term top
was completed at 148.10, and forecast a
subsequent medium-term consolidation
[134.15 149.25 into August 2015.
In light of this strong decline from the
peak at 149.80 in December 2014 to
126.10 in April 2015, there is now a
neutral/bearish medium-term and longterm technical aspect developing. We
are forecasting a weak retest of 144.70
through August 2015 before a decline
to retest126.20 in December 2015 in
a broad, neutral/bearish medium-term
outlook through the first quarter of
2016. Only a monthly close back above
145.15 would delay the forecast decline
and yield a retest of 149.70 over the
subsequent two months. Even under this
circumstance, we believe that the longterm top is complete in EURJPY, and
a retest of 149.70 would be only a longterm double top commencing a deeper
long-term decline to 118.85 over a 12
month period.

Keith Raphael
President
Crosscurrents Investment Advisory
FX TRADER MAGAZINE July - September 25

FX

FUNDAMENTAL ANALYSIS
by Jarratt Davis

US interest rate hike:


a matter of when, not if

The issue that has preoccupied the


currency market more than anything
else this year aside perhaps from the
Greek debt issue is when the worlds
largest single-country economy will
raise interest rates. Its the same for
the majority of Forex traders who are
monitoring the long-term strength of
the US dollar. At this moment in time,
there seems to be a consensus amongst
economists and commentators that
an interest rate rise is not a question
of if, but when.
The US Federal Reserve Bank has not
increased the Fed Funds Target Rate
since June 2006. Exactly when they
will do so depends on the health of the
economy, as reflected by the data. The
26 FX TRADER MAGAZINE July - September 2015

Fed have said they wont begin lifting


their benchmark federal funds rate
from near zero until they see more
improvement in the labour market and
are confident inflation will rise toward
their 2% target.
Data is king, not speculation
The Fed are data dependent, and the
last two months of data has been, on
the whole, positive. Quarter one data
was poor overall and the Fed attributed
this to transitory factors in their April
statement. Thus far they have been
proven correct; data has improved and
of note was the Core Consumer Price
Index readings for April which came
in better than expected, showing an

increase of 0.3% for the month. Since


that positive reading we have seen the
CPI readings for May, which showed
core inflation rose only 0.1% for the
month, slightly missing estimates.
Nevertheless, in annualised terms
the last two months of core readings
amounts to a core inflation rate of 2.4%,
which is actually above the Feds
target of 2%.
Inflation has been the weakest link for
all major economies this year, since the
massive drop in oil prices, and the US
has been no exception. Its within the
context of low inflation that the positive
Core CPI readings for April become so
important. The core reading of 0.3%
m/m is the highest since January 2013.

FUNDAMENTAL ANALYSIS

An annual core CPI reading of 1.7% may


suggest that inflation is on its way back to 2%

Although the most recent readings


for May have dropped back down to
0.1%, this may still be the start of an
upward trend. Annual core inflation is
at 1.7%, which is only 0.3% below the
Feds target. In normal times the target
inflation rate would refer to the total
CPI however given the considerable
drop in oil prices, the Fed are more
focussed on core readings. The Fed have
stated: Core inflation measures that
leave out items with volatile prices can
be useful in assessing inflation trends.
An annual core CPI reading of 1.7%,
up from 1.6% at the start of 2015, may
suggest that inflation is on its way back
to 2%, as the Fed requires.
Throughout 2014 the employment
situation
was
healthy
and
unemployment gradually dropped
to where it now is at 5.5%, slightly
up from the prior month where it
hit 5.4%, which was the lowest since
2008. However it is also wage growth

that the Fed want to see increase. The


recent reading, for May, showed average
earnings better than expected at 0.3%,
up from 0.1% in April. This rise sends
a strong signal about improvements in
the labour market that the Fed have
said they are monitoring to inform
their rate decision.
When will we see interest rates rise?
Below is a list of upcoming Fed rate
meetings this year and their associated
rate hike probability as per CME
Group Interest Rate Contracts. The
numbers show the probability of any rate
increase at that particular meeting, not
necessarily the first rate hike; it includes
the probability of subsequent rate hikes.
July 29: 0%
September 17: 17%
October 29: 34%
December 16: 57%
January 27: 72%

FX

The recent FOMC statement was


upbeat and signaled that the Fed
recognises the increase in economic
activity since the first quarter. They
noted a decrease in labour market slack
and an expansion in the economy.
However their projections for the Fed
Funds Rate for the end of 2016 and
2017 were lowered, along with growth
forecasts for those periods.
This saw the dollar sold off aggressively,
however it does little to change to
fundamental picture. Any forecast for
a period of the time that is 18 or 30
months into the future is going to be
a loose estimate at best. It will be the
inflation data over coming months
for both prices and wages that
provides the most accurate estimate of
the futures rate path. Yellen reiterated
repeatedly at the press conference on
June 17 that the Fed has not made any
decisions on when to raise rates and
that they remain data dependent.
If Fed members themselves have
not yet decided when they will raise
rates then we must look to the data.
If upcoming data continues to trend
higher, this may cause some individual
Fed members to consider a rate increase
at the September meeting, despite the
market currently pricing only a 17%
chance of it. In essence, all US-related
data released over the coming weeks
is vitally important to inform the
market about when the first rate hike
will occur.

Jarratt Davis
FX trader, Funds Manager and Mentor
Author of
How to Trade a Currency Fund
FX TRADER MAGAZINE July - September 27

FX TRADING METHOD
by Sam Barr y

Revolutionize the way you trade


using the COT report and Volume Profile
to view the market from a different angle

Having spent years in the markets


myself sometimes it is very easy to forget,
when looking at a chart, the amount of
information the market is trying to give
you in this simple snapshot.
For most of us now, we will be using
some form of Candlestick or Open,
High, Low, Close bar. They are in
essence the same thing but very often
when looking at these charts or even a
ticker, it is all too easy to forget what the
market is actually portraying and the
sheer volume of information that single
chart is attempting to convey.
But before we go head long into some of
these interesting insights, lets take but
28 FX TRADER MAGAZINE July - September 2015

a minute to re-calculate and re-position


what our charts are saying to us. So how
do we get to a candlestick chart in the
first place?
BACK TO BASICS:
THE CONCEPT OF PRICE
Dont worry I dont intend to bore with
the basics of supply and demand, but
the concept of a price being accepted
and formulated in an over the counter
market such as FX means that in an
order book across the globe, a buyer and
a seller was matched and filled at that
price.
Realistically, given how fragmented

the market is, it typically means a large


institutional liquidity provider got
matched across multiple orders and
filled his one order with lots of other
orders from either clients directly or a
broker, who in turn matched his order
and spread to a client order. It is in
essence organised chaos.
Instantly now we are starting to get
a view of what that price means,
and this brings us to our first
interesting point.
What my team and I do is we look
at underlying order books in the
markets to determine potential and
current trends. We then use these to

TRADING METHOD

FX

MULTI TIMEFRAME ANALYSIS


First, lets look at multi-timeframe
analysis.
The first example is pretty obvious and
so I wont show it in any great detail.
Most traders we talk to tend to focus
on one timeframe, and this is instantly
both a good discipline and a fatal flaw.

Chart 1: EUR/USD 30 min chart

trade algorithmically. The reality is


we dont actually do much of this,
the computer systems we design and
develop do; but the concept is one
that can be applied to even the most
simplistic of charts.
What is fascinating about this
process and the journey we have
taken is presenting a new picture

of the market in a slightly different


way to get a completely different
picture.
I shall start with some very basic
examples. My point and conclusion
to this article (if you dont mind a
spoiler or two) is the simple power
of taking a step back and reviewing
the market from a different angle.

I hope for most of you reading this that


you are already familiar with the concept
of trend trading, and that capturing
trends is statistically one of the most
profitable ways to trade. So assuming
we are applying our techniques to trend
trading, the simple act of reviewing the
same currency or underlying asset on
different timeframes allows us to build up
a much bigger picture of the overall trend.
Now thats great, and 95% of you will
be familiar with that. But the reason
this works is fundamental to the way
the market is built. Your large airline
or oil company for instance doesnt
intraday trade the EURUSD for
hedging purposes, it uses much longer
timeframe positions and different
market structures for this.
So if you know where the big orders
are playing that will likely swamp any
market they operate in then playing on
the side of these is already moving the
market in your favour.
Lets work through an example on
everyones favourite; EURUSD.

Chart 2: EUR/USD 240 min chart

Without looking below, what are


your current thoughts? Down trend,
up trend?
FX TRADER MAGAZINE July - September 29

FX TRADING METHOD
THE COT (COMMITMENT OF
TRADERS) REPORT
Now lets explore what happens
when we actually consider plotting
some information about the
underlying orders alongside our
longer timeframes.

Chart 3: EUR/USD Daily chart

For a very basic example lets take


recent EURUSD moves. Although
each chart is displaying the same
underlying price information the
sheer scale of the chart instantly
creates a different picture and set
of possibilities.
Lets start at the bottom and move
up through the timeframes. For
this I am picking a good example
in a major trending market. This is
really to highlight the point, that
just zooming out on the charts can
give you a very different picture in
the market.
Which brings me to my next point;
which is that potentially what I have
done here is fill your mind with
doubts on what trade you were in.
Well in part thats not a bad thing,
as you are challenging your own
internal safety net on placing bad
trades; but it can also lead to the
inability to pull the trigger, as the
picture will never be perfectly clear.

30 FX TRADER MAGAZINE July - September 2015

Used well though, multi timeframe


analysis and reviewing multiple
timeframes can in fact result
in increasing the probability of
your trades playing out, using
the strong prevailing trends as
determined by larger order flows
to help take advantage of smaller
intraday or lower timeframe
trends.

Chart 4: EUR/USD Daily COT report

Here I am going to take the COT


Report. Most of you will be familiar
with this report as it spans decades
in trading terms and has been used
by some of the most famous traders,
and for good reason; like many before
we can easily show that statistically,
even though the data is delayed (it
is Tuesdays order book snap shot
delivered on Friday), simply following
the order book has in the past been,
longer-term, consistently profitable.
If I over lay the current orders from
large liquidity providers onto our
higher timeframe charts we start to
get an instant picture of where the
market wants to go.

TRADING METHOD

FX

MARKET PROFILE
Many of you may use these charts or
a version of these charts already. But
lets take a market profile of what is
happening to create our price chart.
Fundamentally all this is doing is
showing you the scale of the orders
filled to create each price point we hit.
Before we look at the charts, lets just
consider what that means.

Chart 5: EUR/USD Daily - Volume Profile

This one act of overlaying order book


information (note charts below show
when data is released not reported,
i.e. the Friday when it is released) has
instantly transformed my normal
candlestick chart and my multiple
timeframes into a tool that has instantly
more value to me. All I did to achieve
this was overlay some extremely basic
information about how price was
formed at that time; after all this is
simply the orders that played out in
the market.

The two additional indicators below


(COT Index and COT Strength) show
potential translations of the Net Position
considering additional information on
Order Book relative to its past.
Now lets start to take it down a level
and lets play a very basic picture of
what is happening at each price level to
form that price.

Although easy to plot and understand,


essentially we are saying we will know
for every price point hit today, the
scale of how many orders were out
there in order to get that price point to
my chart on my computer.
Instantly this shows us key levels in
the market, the large spikes are where
orders played out the most, using
previous time periods / bars we can
get very accurate levels for the next
period or bar.

At the bottom of my chart all I want


you to consider is the concept of
follow the Green line. This is in
essence following the position of major
financial institutions or taking up the
same view as what large corporates are
expecting the market to do (note not
the same side as Corporates as they
operate hedging positions, so opposite
to what they are expecting).
The top indicator is the very basic of
the COT report, the Net Positioning.

Chart 6: EUR/USD Daily Volume Profile

FX TRADER MAGAZINE July - September 31

FX TRADING METHOD
This includes two simplified looks at how
orders are working on lower timeframes
and the COT chart as previously
described at the bottom. Instead of
presenting a lot of information we are
however simply colouring areas to give
us a view of whether the pressure is to the
upside or to the downside in the market.
If we then use our Volume Profile
on intraday basis we can then build
strategies for getting more efficient entry
and exit prices.
FINDING THE INFO:
ONLY HALF THE BATTLE

Chart 7

Areas built on a large number of orders


means there was significant interaction at
those levels, the key spikes typically show
all the major levels people have orders at
in the market.
The largest spike gives a real clue to where
the market might go in the next period or
bar; for instance if the largest amount of
orders were below where we closed then
buyers won over sellers and we are in a
uptrend on the day; if sellers beat buyers
and the largest majority of orders sit above
the close price then we are in a down trend.
It turns out overlaying this and some
extremely basic strategies can generate
a great deal of numerous profitable
strategies that can be tested to be pretty
reliable in both short and longer term
trends on a backwards basis; given they are
fundamentally built on the principles of
the market it is very easy to conclude that
there is a statistically significant chance
they will continue to prove profitable
Take a more detailed look at Chart 6 and

32 FX TRADER MAGAZINE July - September 2015

consider how the market closed in relation


to the largest spikes of the previous bar.
Closing below the major orders suggests
pressure to the downside or a market in a
down trend, therefore understanding this
basic information can allow you to build
an effective strategy simply by using that
as your bias for the next period.

The joy of this is that all of this


information is readily available on
your trading platform already. Most
of this information is free and you can
pull it yourself. The Commitment of
Traders report for instance is here:
http://www.cftc.gov/marketreports/
commitmentsoftraders/index.htm

What happens if we take these concepts


and simplify them down to some real
basics?

The challenge is that most of the people


you are trading with and against simply
dont know this information exists or
how powerful it is. Or crucially, if they
do have it they fail to take the next
step of translating it into a picture that
provides the trader with all the necessary
information as quickly as possible in an
easily digestible manner.

The following is an example of a really


simplified version of what we do on our
more advanced algorithmic systems but
it gives a lovely example.
If we take the overall trend using multi
time frame analysis then overlay some basic
order book information. If we use this to
look for key spots where they align then
simplify the picture; after the key to this
is to build the best possible picture in the
simplest form.
We can present something like this.

Now imagine what you can do when


you really start to play with this data
to pull out information. Thats where it
becomes really exciting.
Sam Barry
CEO
Littlefish FX

How to Trade a Currency Fund


By Jarratt Davis

Learn how to:


Trade Professionally
Build Credibility
Find Funds
Trade at an Institutional Level
Face Fund Trading Psychology
Create a Step-by-Step plan
Live your Dream
Download Jarratt Davis
PDF eBook here
Download the iPad/
iPhone version here
Download the Android
Mobile version here
Download the Kindle
version here

Jarratt Davis has been ranked among the best performing FX traders between 2008 and 2012 by Barclay Currency
Traders Index. In this book, Jattatt shares his journey from Forex novice to a fully fledged Forex Fund trader.
After establishing his career in 2006 and mastering the art of FX trading by teaching himself techniques
online, Jarratt became one of the few self-taught traders to reach an institutional level. He traded on
behalf of companies and funds in Hong Kong and London, pumping trades worth up to $10 Million a
time on a daily basis, and today he is regularly ranked within the top 10 performing currency traders.
Today, Jarratt and his team train investors, traders and industry professionals. Jarratt Davis is also
regularly featured on Bloomberg TV, FX Trader magazine, Currency Trader magazine and FXStreet.com.

FX

FUNDAMENTAL ANALYSIS
by Yann Quelenn

Mexico wants to attract more investors


Implications for the USD/MXN

We are currently bearish on the


Mexico peso due to fundamental
reasons. Mexico is one the
wealthiest countr y in terms of
oil resources and natural gas
in the world. It is ranked 18th
in terms of reser ves and relies
significant on revenues for
GDP growth. Yet, lack of steady
investments prevents those vast
reser ves to deliver their full
output potential.

34 FX TRADER MAGAZINE July - September 2015

Petroleos Mexicanos (Pemex), the


state-owned energy company, has a
monopoly on the local crude market
limiting competitive investments.
Over the last two decades, Pemex
has been unable to maintain or
even increase production to meet
growing demand. With revenues
steadily decreasing, its inability to
exploit higher oil prices weighed on
the countrys GDP. In addition, the
lack of capital for upkeep meant

infrastructure are
antiquated
(adding to production issues)
and create more midstream issues
which makes the oil transportation
challenging.
NORTH AMERICAN
TRADE AGREEMENT

FREE

In 1994, Mexico, aware of those


critical issues entered into the
North American Free Trade

FUNDAMENTAL ANALYSIS
Agreement in order to boost
investment and consequently
growth.
Investments
have
marginally supported oil and gas
production. Yet, it appeared that
those investments have not been
entirely sufficient to reverse the
decrease of oil
production over
the last ten
years.
While demand
and price for oil
remained high,
exports
have
decreased and
for this reason.
Ironically,
Mexico had to
import
even
more
natural
gas from the
United States
in order to
support its oil
and electricity
production.

BANXICO AND THE ENERGY


MARKET
The energy market is a key
sector for Mexico. Alongside the
significant investments, Banxico
is also willing to lend a helping

FX

as growth has historically been


very volatile. It is also important
to add that Mexico will not leave
inf lation going up if Federal
Reser ve pushes rates higher.
Indeed, we think that Banxico
will copy the United States
rate policy to
maintain this
balance. The
Central Bank
is for now on a
patient stance.

As a result of
those facts, we
remain bearish
on the M X N
as oil foreign
investments
are still of a
concern
and
low oil price is
set to continue
as
OPEC
decided to keep
production
Ironically, Mexico had to import more
l e v e l
unchanged and
natural gas from the United States in
The
market
therefore
to
order to support its oil and electricity
reality is now
oversupply the
production
pushing Mexico
market.
We
to liberalize its
target the pair
energ y markets,
U S D M X N
in
particular
infrastructure hand by utilizing monetary policy to reach 16.00 within the next
investments are highly requested. tools. For the time being, its policy three months against a backdrop
New reforms will take place rate remains unchanged at 3.00%, of US recover y.
allowing
foreign
private keeping policy accommodating.
Yann Quelenn
companies to drill Mexican oil
Market Analyst
and above all bring investments The stable inf lation below 3%
Swissquote
Bank
to the sector.
leaves room for further easing

FX TRADER MAGAZINE July - September 35

FX

TRADING PSYCHOLOGY
by Efthivoulos Grigoriou

How To Eliminate Emotions from Trading

In this article, the author unveils his personal trading approach, which he built during his professional trading
career, and which allows to remove the emotional part of trading by gauging the emotions surrounding the market
or a specific instrument, and by applying some consistent rules.

Psychology plays a significant role in


trading as it does in a game of poker,
or even in athletics, such as tennis or
football. Mastering the psychology
of trading is one of the most difficult
elements of learning how to trade on
the market.
Besides gaining the basic knowledge of
the market structure and the ability to
understand how the economic machine
works, the idea of trading, in the
end, is to avoid losing. The ability to
control your emotions and maintain
discipline is the most important
skill you should develop. A trader

36 FX TRADER MAGAZINE July - September 2015

must learn to contend with market


challenges of individuals and the
crowd psychology in order to progress
from a novice to an expert.
If you want to make profits when
investing in different asset classes,
such as currencies, indices, equities,
commodities, or bonds, you have to
understand that trading is primarily
a game of psychology. Only the
toughest players survive. The real edge
separating professional traders (those
who make a living from trading) from
failed traders is clearly their mental
approach to the market.

What You Need To Become a


Successful Trader
Consistent practice and focus are required
to become great at nearly anything,
including trading. This practice requires
patience, discipline, determination, and
most importantly, the ability to control
your emotions. The number one question
I receive constantly from traders is: How
do I become a professional trader?
The reality of the situation is that only
10% of traders can make a living at it,
and only 5% of traders make a lot money.
Sure, everyone makes a winning trade

TRADING PSYCHOLOGY

FX

thinking, experience, discipline, instinct,


and skill are essential, especially in the
trading world. So our emotions must be
kept under control.
Trading Is the Study of Mass
Behaviour

Figure 1: The Cycle of Market Emotions

occasionally, but in the long term, their


portfolios and their accounts remain
about the same or even dwindle down
to nothing. There are all sorts of reasons
for this, such as bad timing, poor risk
and money management, lack of trading
discipline, unrealistic expectations, such
as the expectation to get-rich-quick, and a
lack of knowledge.
Im sure weve all been here before - you
make a trade and end up in a winning one.
Before you realize it, you are in a winning
streak. At this point, you feel like you have
mastered trading and you could overcome
any market condition. Therefore,
continuing your winning streak.

Source JFD Brokers

hope that it will turn in your favor but


it didnt, and you close the trade in a
huge loss.

The market is the result of collective


human behaviour. It is a perfect and
measurable representation of collective
optimism or fear. The movement of the
market is the movement of the mass
psychology. Many traders lose money
because they fail to realize that looking at
a chart of the market is like looking at the
collective psychology of its participants.
For this reason, professional traders
place a heavy emphasis on studying price
action and volume relationships, which
help guiding them in their trading. And
here comes the Golden Rule of Trading:
Trend is your friend, so trade with the
trend. In other words, do not fight the
market, just go with it.

At this point, you become angry and


frustrated and you want your money back.
Thus, we come back to the cycle of market
emotions, which explains the relationship
between our feelings and our judgments.
Figure 1 is a visual representation of the 11 Eliminating the Emotional Part
stages of the cycle of market emotions.
Is the Key to Success
Trading Is Not a Hobby

Since trading is a business, we should


treat it as a serious business venture, not
a hobby. Therefore, we must separate it
from our personal lives. The world of
This is completely understandable, as it trading has very little room for emotions.
is a natural human emotion to express a There is only room for calculated, wellpositive reaction after a win. But weve all planned decisions. Our emotions have
been on the other side as well. When you a tendency to skew the decision-making
enter into a trade that doesnt work out the process, and far too often, they generate
way you wanted, and eventually after the poor decisions that lead to losses. Success
market bottomed for a few times and or failure in the business world can bring
you have remained in the trade with a out the best and worst emotions. Clear

With that being said, Id like to discuss


the emotional part of trading, which in
my opinion is the key to becoming a more
refined trader; the first step to success in
trading. To achieve this success, you need
to learn how to control your emotions, or
how to eliminate them.
If you manage to understand human
psychology and what motivates buying
and selling decisions, you will be able
to position yourself ahead of the action.
This way you can anticipate profitable
trade setups.
FX TRADER MAGAZINE July - September 37

FX

TRADING PSYCHOLOGY

The four emotions that traders suffer from


most often are fear, hope, greed, and regret.
You need to suppress these emotions to
be successful. Letting emotions control
trading decisions is the biggest mistake
any trader can make. Experiencing many
consecutive losses
is
emotionally
difficult to handle
and can test a
traders endurance
and resilience.

telling the audience that controlling your


emotions and having discipline in your
trading are essential elements of success but no one tells you how to achieve this
emotional control and personal discipline
while trading on the market.

emotions when I dealt with the market.


As I have mentioned in previous articles,
price is king! I have had more consecutive
winning trades since I started paying
closer attention to price action.
How to
Eliminate
Emotions
from Trading

When analysing
the market, the
Fear and greed, or
first thing to do
trying to beat the
from a technical
market, can lead
perspective
is
to cutting winning
to identify the
trades short and
market
trend
letting losing trades
and
determine
run out of control.
the support and
Remember,
the
resistance
levels.
true battle is not
How do we do
between you and
that? By drawing
the market, but
trend lines. How
in learning how
exactly these lines
to control your
are drawn will be
own
emotional
discussed in another
impulses.
article, since it
The world of trading has very little room
is a complicated
for
emotions.
There
is
only
room
for
Dont forget, its
subject. Ive had
very important to
the opportunity to
calculated, well-planned decisions
understand that all
meet some traders
instruments price
who draw trend
action is completely dependent on the When I think back on my early trading lines just with one glance at the market.
emotional reactions of the various market career, I remember the times when This is not the approved method and, if
participants. Without emotions, prices I continuously changed my trading you have this habit, youd better get rid of
would sit flat, since people are the main technique in order to achieve the best it. Why? Because you must have some strict
catalysts for market moves.
results. But no matter what technical rules and these rules will make your trade
indicator or trading system I used, I easier and free from emotions. Generally,
Price Is King!
always yielded the same result: losses. It rules demolish emotions and emotions
did not matter what I did, I had to fix demolish our trading accounts. Therefore,
I have read a lot of books and attended the real problem, and that was in my less emotions mean more opportunities
a lot of seminars, all of which ended by mind. Therefore, I had to control my for better results.

38 FX TRADER MAGAZINE July - September 2015

TRADING PSYCHOLOGY
This brings us to my theory, which I
discovered through my own trading
experience. The theory is that by gauging
the emotions surrounding the market or
a specific instrument, and by having some
consistent rules, you can control and even
eliminate your emotions when trading.
Trend lines that
serve to identify the
market trend and
determine support
and resistance levels
are the primary
tool I use to gauge
the
emotions
surrounding an
instrument or the
market overall.

I am going to explain what support and


resistance levels are, and I will show you
the basics of how I find these levels on a
chart. This unique approach shows you
which prices are apt to stall or rebound
before they change at all, and which
ones are most valid. This is really a very

FX

battle between the buyers (bulls)


and the sellers (bears). The continual
battle between the bulls and the bears,
which takes place near the support
and resistance levels, is what makes the
market a fascinating study of the basic
laws of supply and demand.
Many traders look
at these levels
to gauge entry
and exit points
for their trades.
These levels can
be drawn by
using technical
analysis tools, like
rising and falling
trend lines, or by
applying
more
advanced method,
such as Fibonacci
Retracement
(ratios).

But the secret


comes down to
the support and
resistance levels,
which are the keys
to understanding
which trends or
A support level
lines are most
is formed when
Looking at a chart of the market is like
valid. These are
the price tends
looking at the collective psychology of its
based on the
to find support,
participants
traders emotions,
preventing
since support and
the price from
resistance levels are
declining further.
largely shaped by those emotions.
unique approach, which is why I like it, This means that the price is more likely
as it involves NO emotion, just reaction. to bounce off this level rather than
Therefore, I identify the participants in
break through it. However, once the
the market by drawing a trend line, on Support
and
Resistance price has broken his level, it is likely to
that particular instrument which could Levels
continue dropping until it finds the
be a stock or a forex currency pair at any
next support level.
given moment. Then I determine when Support and resistance levels are largely
the next level of market participants shaped by traders emotions and this is A resistance level is the opposite of a
will buy or sell, based on the validity of where the forces of supply and demand support level. Its when the price tends
the trend lines, including support and meet. Support and resistance levels to find resistance, preventing the price
resistance lines.
are where you really see the ongoing from rising further. This means that the

FX TRADER MAGAZINE July - September 39

FX

TRADING PSYCHOLOGY
timeframe rather than a daily one.
Psychological levels occur when prices
end in multiple 0s. Traders tend to
be drawn to these psychological price
levels for several reasons. One is that
these prices have been important in the
past and traders know they are likely to
be important again. If a level worked
in the past, as a support or resistance,
the trader may assume that it will
provide solid support or resistance
again in the near future, like 1.2000
in EUR/USD, 1.7000 in GBP/USD
and 175.00 in GBP/JPY.

Figure 2: EUR/USD 1-H chart

Source JFD Brokers

price is more likely to bounce off this


level than break through it. However,
once the price has broken this level, it is
likely that it will continue rising until it
finds the next resistance level.

apply the technical analysis method on


a specific instrument by determining
the markets overall direction, using a
trend line. From then on, I identify the
psychological support and resistance
levels of an instrument (i.e. GBP/JPY)
Trading Approach
in conjunction with tops, lows, or
inside swings. To do this, I use a higher
In my trading approach, I first start to timeframe, for example, a weekly

Then I switch to a lower timeframe,


such as a daily timeframe, and I
identify the support and resistance
levels from that specific timeframe. If
the support and resistance levels taken
from the weekly timeframe coincide
with the daily ones, I determine that
those are strong and significant levels,
and set them as targets. These levels
may attract more attention and create
more anticipation among the traders.
Now that I have set my target levels,
I switch to a lower timeframe, such
as 4-hours, and I identify the rest of
the support and resistance levels. If
some of these levels coincide with
the ones from the higher timeframes,
they also become significant and I
will use them as targets for my shortterm approach. I use the support
and resistance levels taken from the
higher timeframes as targets and
exit points for my medium-term
approach.

Figure 3: GBP/JPY Weekly chart

40 FX TRADER MAGAZINE July - September 2015

Source JFD Brokers

Then, I have the option to switch to

TRADING PSYCHOLOGY

FX

Conclusion

Figure 4: GBP/JPY Daily chart

a lower timeframe and identify the


remaining support and resistance
levels, which I will use to determine
my entry points as well as my stop
loss points.

Source JFD Brokers

on a weekly or yearly chart.

Finally, I get a confirmation for the


most significant levels in conjunction
with a 100-period SMA, as well as
a 200-period SMA, from the 4-hour
I also find that timeframes are very chart going up to the weekly chart.
important to my trading because Both of the moving averages act
what often appears to be a major as a confirmation of these levels,
support area on a daily chart might which make them more valid if they
be nothing more than a correction coincide with any of these levels.

Figure 4: GBP/JPY 4-H chart

Source JFD Brokers

Trading is like war. You are battling


some very smart, experienced and
very well capitalized opponents.
To be successful, you need to
have an edge, because psychology
plays a major role in all forms of
trading. For this reason, you need
to consistently keep your emotions
under control. This can be a tough
task when money is involved,
but it can be accomplished by
establishing and focusing on these
set plans and rules of action.
If you consistently follow your
rules without breaking them,
you could eliminate emotions in
trading. And if you achieve that, it
can help you improve your trading
decisions and, thus, trading will
become an art!
Back in 2005, when I was studying
in the United States, I had the
opportunity to meet with a
professional trader. I remember
that the last thing he said to me
before I left the States was, the
most important way I grew as a
trader was by learning to control my
emotions. Control and eliminating
your emotions in trading correlates
strongly with success. It took me
five years to build my confidence
and find a way to control and, in
the end, eliminate emotions in
trading.

Efthivoulos Grigoriou
Head of Global Research and Analysis
JFD Brokers

FX TRADER MAGAZINE July - September 41

FX

MACROECONOMICS
by Justin Lin

A Supranational Reserve Currency


The solution to reach global stability
and avoid conflicts of interest

Former chief economist at the World Bank, Justin Lin, explains


why US, not Asian, policies caused the financial crisis, and
analyses how to fix endemic global imbalances
The hypothesis most frequently
cited as the cause of the global crisis
centers on imbalances in the global
economic and monetary system. In
particular, large surplus countries
caused tectonic market distortions
by using their foreign reserves
to purchase US Treasury bills.

42 FX TRADER MAGAZINE July - September 2015

These purchases of government


securities depressed interest rates
in the US, which in turn sparked
a debt-fuelled spending spree
by the countrys consumers that
ultimately resulted in housing and
other bubbles in the US. Once the
bubble finally burst, the US faced a

major financial crisis that resulted


in an economic crisis that rippled
across the world. Potentially, this
hypothesis is plausible. But what
caused the large surpluses in China
and other Asian countries? There
are three commonly accepted
theories.

MACROECONOMICS

The first one was the East Asian


economies adopted an exportorientated strategy and, as a
result of their exports, acquired
large trade surpluses. The second
common hypothesis is that East
Asian economies learned a lesson
in the 1998 crisis. They understood
that if they did not have large
enough foreign exchange reserves,
their countries
could
once
more be subject
to speculative
attacks. So for
s el f-i n s u ra nce ,
they
started
to accumulate
reserves
by
exporting more.
The third, and
most
widely
a c c e p t e d ,
hypothesis
is
that imbalances
were the result
of East Asian
economies - and
China, in particular - manipulating
their foreign exchange rates.
Again, these hypotheses appear
plausible, but do they stand up to an
examination of the facts? Looking
at the export-driven development
hypothesis, we know that East Asian
economies had adopted exportdriven growth strategies since the
1950s and 1960s. For China, it
started later, in the 1970s. Yet we
know that before 2000, trade was

basically balanced in East Asian


economies, and some economies
- such as South Korea - actually
ran a trade deficit. So this kind of
export-orientated strategy does not
necessarily lead to huge surpluses
and most east Asian economies did
not have large trade surpluses until
about 2000. It seems illogical to
attribute a strategy that has been in

FX

have any particular motivation for


accumulating reserves as a means
for self-insurance. Since the yen
is an officially sanctioned reserve
currency, Japan would not need to
stockpile foreign reserves against
some form of speculative attack,
yet its foreign reserves also grew.

use for more than half a century to


explain what happened in just the
last 10 years.

The final hypothesis, that East


Asian economies
manipulated
their exchange
rates to increase
their
exports,
also
looks
inconsistent.
Thats because
the
trade
surpluses
of
other competing
economies
should
have
been reduced.
But the fact is
that almost all
other countries
competing with
East Asian economies also increased
their trade surpluses and reserves.
So there is an inconsistency.

In the second hypothesis, all the


East Asian economies increased
their trade surpluses a lot and
ramped up their reserves. But we
also observed some other countries,
such as Japan and Germany,
substantially
increasing
their
trade surpluses during the same
period of time. But they did not

The value of Chinese currency,


in particular, has been the target
of discussion in the past decade
as the cause of global imbalances.
This issue was first raised in 2002.
The accusation was that China
was manipulating its currency to
increase its export competitiveness.
But the fact remains that in 2003,

FX TRADER MAGAZINE July - September 43

FX

MACROECONOMICS

Chinas trade surplus was smaller


than its surpluses in 1997 and 1998.
In 1997 and 1998, during the East
Asian financial crisis, China did
not devalue its currency despite the
devaluations of currencies of many
of its neighbours - indeed, at that
time, everyone said the Chinese
currency was overvalued.
If in 19971998, Chinas
currency
was
overvalued, then
its trade surplus
should have been
smaller
than
in 2003-2004.
But actually, in
2003-2004, the
trade
surplus
in China was
smaller
than
in 1997-1998.
So it seems
impossible for
the
Chinese
currency to have
been undervalued in 2003 and
2004. Moreover, the Chinese trade
surplus did not become particularly
large until 2005. And between
2005 and 2006, the Renminbi
appreciated by about 20% against
the dollar. However, even this
appreciation did not result in a
decrease in Chinas trade surplus
with the US. At the same time,
many developing countries were
competing with China, but their
trade surpluses did not decline -

44 FX TRADER MAGAZINE July - September 2015

and again their accumulation of


reserve also continued to increase.
All the hypotheses point to East
Asian economies as the cause of
global imbalances and the global
crisis. However, the issue of global
imbalance also manifests itself in
the trade deficit in the US. But
this deficit has been falling. The

US trade deficit with East Asian


economies as a percentage of its
total trade deficit declined from
51% in the 1990s down to about
38% in 2007. This implies that the
East Asian contribution to global
imbalances declined instead of
increased. Therefore, some kind of
alternative hypothesis is in need to
explain the trade deficit in the US.
A principal reason for the growth in
Chinas trade surplus with the US

was the relocation of production


from East Asian economies to
China and the transfer of the
trade surpluses from other East
Asia economies to China. In 2001,
China ran a huge trade deficit with
other East Asian economies. So we
need to have a new hypothesis that
can be consistent with the evidence.
And I believe the only hypothesis
that can be
consistent
with evidence
is that global
imbalances and
the global crisis
were triggered
by the current
internationa l
m o n e t a r y
system that uses
the dollar as a
global reserve
combined with
some
policy
mistakes in the
US.
We know that in the 1980s there
was a trend towards financial
deregulation in the US that allowed
financial institutions to operate
with high levels of leverage that
resulted in an increase in liquidity.
Secondly, in 2001, when the US
was hit by the burst of the dotcom
bubble, the US Federal Reserve
deployed very loose monetary
policy to help the financial system
to recover. The combination of low
interest rates and high leverage

MACROECONOMICS

created excessive liquidity in


the US monetar y system. This
excessive liquidity first aided a
bubble to form in the housing
market and equity market in the
US. It also
created
huge
wealth effects
that
fuelled
household
consumption.
The
US
became a huge
consumer and
saved less.

FX

to
capital-goods-exporting
countries, such as Japan and
Germany, also running large trade
surpluses. Because of the boom
in demand in both developing
cou nt r ie s
and
some
high-income
countries, the
demand
for
commodities
increased,
causing
a
commodity
price
boom
after 2000. A ll
the countries,
except
for
the
US,
accumulated
r e s e r v e s
because
of
trade surpluses
and
capital
Global imbalances and the global crisis
inf lows, which
they
used
were triggered by the current international
to
purchase
monetary system that uses the dollar as a
assets in the
US to earn a
global reserve, combined with some policy
return for their
mistakes in the US
reser ves.

At the same
time, the US
government,
because of the
Afghanistan
and Iraq wars,
also
ran
a
deficit. By that
time,
China
produced many
of the goods
exported
to
the US market,
resulting
in
China running
a large trade
surplus
with
the US because of the high levels
of consumption by the latter
countr y. This excess of liquidity
and low interest rates also
encouraged speculative outf low.
So in 2000, total capital outf low
from the US to developing
countries was $200 billion,

but this fig ure swelled to $1.2


trillion by 2007. Large capital
inf lows to developing countries
certainly supported the housing
bubbles and investment booms

in developing countries, which


caused overheating in some
economies.
With high levels of liquidity
supporting
investment,
the
demand for capital goods
increased a lot. That contributed

The hypothesis
stated at the start of this article
only characterises the reserve f lows
from the acquisitive countries back
to the US. In fact, those reserves
were first created in the US. So
how can we prevent a similar
crisis again? From my analysis, the
situation only occurs because the

FX TRADER MAGAZINE July - September 45

FX

MACROECONOMICS

dollar is the worlds dominant


reserve currency - otherwise it
would be impossible for the US to
run a large current account deficit
for such a long time. It was the
dollars reser ve
currency status
c o m b i n e d
with financial
deregulation in
the 1980s and
1990s, plus the
Federal Reserves
low
interest
rate policy in
the
2000s,
that caused the
bubble and trade
deficit in the US.

propose an alternative: to have a


supranational reserve currency,
which I call paper gold, which
could avoid this conf lict of
interest.

avoid the trouble observed in the


southern European countries, as
every nation would use paper gold
as its reserve currency while also
issuing its own national currency.
In the case of
crisis, reser ve
c u r r e n c y
appreciation
can be used
as a way to
create a scope
for structural
reform.

Could people
accept it? That
depends
on
many factors.
But if we opt for
If
we
want
multiple reserve
to prevent a
currencies,
similar situation
and
if
all
recurring,
we
the
multiple
need to address
reserve currency
the conflict of The SDR is a basket of national currencies, countries
have
interests associated so it will not address the root cause of certain
kinds
with
using
a
of
structural
the
crisis
that
is,
the
conflict
between
national currency
p r o b l e m s
as a global reserve
domestically, the
national interest and global interest
currency.
Many
system is likely to
parties believe the
remain unstable,
International Monetary Funds P-gold would have the advantage which is a lose-lose situation for
special drawing rights (SDR) can of gold, but as it would be fiat reserve currency and non-reserve
be a reserve or can be a way to money there could also be an currency countries.
solve the issue. But the SDR is a increase in the supply of this
Justin Lin
basket of national currencies, so it reserve according to certain fixed
Former Chief Economist at the
will not address the root cause of rules, such as the k-percent or
World Bank
the crisis - that is, the conf lict Taylor rules. To me, the needs are
Leading adviser to the Chinese
between national interest and growth in the global economy and
government
global interest. For this reason, I international trade. It would also

46 FX TRADER MAGAZINE July - September 2015

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FX

MACROECONOMICS
The world needs to be
prepared for a system
where the dollar,
euro and yuan will
all be consequential
international
and
reserve currencies

MACROECONOMICS
Capital account
l ibera l isation
will accelerate
this
year,
making
the
renminbi more
freely usable

FX

Progress
of
capital
account
liberalisation
and further renminbi
i nter n at iona l i z at ion
will have a deep impact
on the global financial
markets

by Li Cui

The growing global role of the Renminbi

The international use of the renminbi


has risen dramatically in the past
five years. The renminbi is now the
second most used currency in trade
finance and the fifth most-traded
payment currency, according to
Swift. The offshore renminbi market
has also sprouted, with renminbi

48 FX TRADER MAGAZINE July - September 2015

clearing centres emerging in Australia,


Germany, Hong Kong, Singapore
and the UK, among others, along
with trillions of yuan of bilateral
currency swap arrangements between
the Peoples Bank of China (PBOC)
and foreign central banks to provide
liquidity support when needed. To

observers, the growth of the renminbis


international role, along with Chinas
global investment, epitomises the
countrys expanding global ambition,
against the backdrop of its fast
economic expansion and the further
integration of its economy into the
global system.

MACROECONOMICS
The shortcomings and vulnerabilities
of the current global financial system,
the rising outreach of Chinese trade
and investment, and the progress of
Chinas financial and capital account
reforms,
have
all shaped the
renminbis steady
rise on the global
stage.

FX

allows, since its international debt


does not face the pressure of a selloff and squeeze by investors, as in
the case of non-reserve currency
countries. Such an exorbitant

The dollars role in the international


monetary system has been under
continuous debate since it replaced
sterling as the reserve currency more
than 70 years ago. While the dollar
has
facilitated
the
liquidity
of the global
financial markets,
provid ing
anchors
for
A
multi-pillar
countries during
internationa l
periods of macro
m o n e t a r y
stabilisation, the
system with the
downside of the
renminbi as a
system has also
reserve currency,
been prominent
supported by a
at times. The
more open capital
US balance of
account and a
payments crisis
wider
floating
in the late 1960s
currency,
will
resulted in the
deliver benefits to
collapse of the
both the global
Bretton Woods
The dominant role of the dollar means
financial order
mechanism
as
that the US effectively acts as a
and better growth
the dollar dedomestically.
pegged from gold.
global central bank
In the decade
before the global
financial crisis,
SHORTCOMINGS OF THE
privilege - as Valry Giscard US fiscal and external deficits rose
GLOBAL MONETARY
dEstaing, then the French minister substantially, leading to concerns
SYSTEM
of finance, noted in the 1960s - could about global balance of payments
give the reserve currency country an imbalances. However, the demand by
A global financial system that uses a enormous advantage in its economic foreign companies and governments
single fiat money as its reserve currency growth and management. In for dollars helped to keep the US
faces an acute problem of discipline. The addition, the dominant role of the interest rate low, enabling it to fund
rest of the world relies on the reserve dollar means that the US effectively large current account deficits while
currency for transactional and savings acts as a global central bank, and US fuelling domestic asset bubbles (such as
purposes, generating huge demand for monetary policy has great influence real estate). A report from the United
the designated reserve currency. This over international liquidity and Nations Conference on Trade and
allows the reserve currency country economic conditions in other parts Development (UNCTAD) attributed
to spend more than its export revenue of the world.
the build-up of global imbalances

FX TRADER MAGAZINE July - September 49

FX

MACROECONOMICS

and global financial crisis in 2008 to


the inadequacy of the international
monetary system, a view shared
by Justin Lin (see his article A
Supranational Reserve Currency on p. 42)

comments at the IFF AGM in 2014,


under the system of a single reserve
currency, the role of the reserve
currency as a medium of exchange
could come into conflict with its role
as a store of value, as the demand for
the former could reduce the incentive
for keeping up with the latter. This

this development - as net creditors in


the global financial system, they have
a proportionally larger share of US
government debt and are vulnerable
to big valuation losses on these
holdings. The current global financial
governance is in need of substantial
reforms.

An ultra-loose monetary policy in


reserve currency countries since the
global financial
crisis,
with
The issue of
the sole focus
a new global
on
domestic
reserve
system
e c o n o m i c
has
attracted
objectives,
has
much attention
depressed global
in recent years,
interest
rates
and
different
while
driving
options
have
capital
flows
been proposed.
to
emerging
One approach is
markets.
For
to use a notional
instance, a recent
currency, such as
study by the Bank
by extending the
for International
special drawing
Settlements
rights (SDR) of
(BIS,
2014)
the International
finds that the
M o n e t a r y
unconventional
Fund
(IMF).
US
monetary
The SDR is an
At present, the SDR comprises a basket
policy
spills
internationa l
over to Asia
reserve
asset,
of four currencies which does not match
mainly through
created by the
the shift in global trade and investment in
low
domestic
IMF in 1969
bond yields and
to
supplement
recent years
rapid growth of
its
member
domestic bank
countries
credit, by compromising national subjects the world financial system to official reserves under the Bretton
control over long-term rates that are the whims of the monetary policy of Woods system. At present, the SDR
key determinants of economic activity. the reserve currency country. A more comprises a basket of four currencies
The expected reversal of this process diversified international monetary of developed nations: the dollar, euro,
in the coming year will likely imply a system, by introducing competition sterling and yen. Such a composition
bumpy ride for the rest of the world.
into the system, would likely help to does not match the shift in global
ensure the store of value of reserves. trade and investment in recent years
As summarised by Kim Jun Il, deputy Emerging
market
governments, where the importance of emerging
governor of the Bank of Korea, in his therefore, are particularly keen to see markets is rising rapidly.
50 FX TRADER MAGAZINE July - September 2015

MACROECONOMICS
In 2009, PBOC governor Zhou
Xiaochuan proposed that the
currency basket of the SDR should be
expanded to include emerging market
currencies such as the renminbi, to
make its currency composition more
representative of the reality of global
economic power.
This year, the IMF
will undertake its
five-yearly
SDR
review,
where
the
possibility
of including the
renminbi will be
assessed.

its long history - has remained a small


share of global reserve assets (around
4%), with its use mostly confined to
the official sector. There remain very
limited private market activities in
SDR. Moreover, the creation of a
global currency such as the SDR will

FX

multiple currencies would introduce


competition and some discipline into
the international monetary system.

The new system would be a departure


from the current dollar-centric
international monetary system. At
present,
the
dollar remains
a
dominant
reserve currency.
A lthough
its share has
d e c l i n e d
somewhat since
the introduction
of the euro,
A positive
the dollar still
assessment would
accounts
for
be a strong vote for
about 62% of
and powerful sign
global reserves
of the renminbis
(compared with
internationa l
more than 70%
status, but the
in the early
The
recent
crisis
in
Europe
may
have
thrown
outcome remains
2000s), 87% of
highly uncertain,
global foreign
the currencys prospects into uncertainty
given the IMF
e xcha ng e
criterion of the
transactions,
freedom of use of currency.
likely meet strong resistance from and 81% of international trade
current reserve currency countries settlement.
It is not the case, however, that a such as the US.
notional SDR - even if expanded Although the use of the euro has
would be ready to replace the dollar IS THE RENMINBI SUITABLE
become more prominent since the
as the international reserve currency. AS THE THIRD RESERVE
adoption of the common currency
By design, the SDR does not have CURRENCY?
(accounting for 23% of global reserves,
the backing of taxation and/or
compared with less than 15% before
commodities of national currencies. An alternative approach where the adoption), its further expansion on
According to the IMF, the SDR is an international financial system the global stage could be challenged by
neither a currency, nor a claim on the comprises multiple reserve currencies two factors. First, the government debt
IMF. Rather, its a potential claim on is likely to be more promising. Each market in Europe is segmented and the
the freely usable currencies of IMF of these reserve currencies would respective national government debt
members. In addition, it does not have be backed by its respective national markets are shallow. Since there is not
enough liquidity. The SDR - despite economy, and the coexistence of a single euro government debt market,

FX TRADER MAGAZINE July - September 51

FX

MACROECONOMICS

none of the individual government


debt markets come close to the size of
the US Treasury market.
Second, the recent crisis may have
thrown the currencys prospects into
uncertainty. The eurozone economy
is still struggling with a prolonged
recession. Both the corporate sector
and the financial sectors are still
going through restructuring since the
global financial crisis. Several euro area
countries now have very large deficits
and debts, raising questions about the
sustainability of their public finances.
In addition, debt crises in individual
countries - in particular, Greece have raised concerns about the very
survival of the currency. The prospect
of the euro playing a significantly
larger international role in the coming
decade is likely to be constrained by
the uncertainty associated with these
debates.
Could the renminbi be a suitable
candidate for the third major reserve
currency? Historically, countries with
a large economy and trade combined
with a stable macro environment tend
to see a comparable rise in the global
role of their currencies. In the view
of Barry Eichengreen, professor of
economics at University of California,
the world needs to be prepared for
a system where the dollar, euro and
renminbi will all be consequential
international and reserve currencies.
The
multi-polar
international
monetary system is needed to reflect
a more multi-polar world economy.
In his view, after World War II, when
the US accounted for the majority of
industrial production of the non-Soviet
52 FX TRADER MAGAZINE July - September 2015

The world needs to be prepared for a


system where the dollar, euro and renminbi
will all be consequential international and
reserve currencies
Barry Eichengreen, professor of economics at University of California

world, it made sense that the dollar was


the principal unit in which exporters
and importers invoiced and settled
their trade, in which international
loans were extended, and in which
central banks held their reserves. But
this situation makes less sense today,
as the US accounts for just 20% of the
combined output of countries engaged
in international transactions.
Indeed, ever since the relaxation in
2009 of the self-imposed constraints
on the use of the renminbi in trade
settlement, the share of Chinas
currency in global trade has rapidly
grown, driven by the real needs of

merchants to manage exchange rate


risks in trade transactions. While the
initial policy focus was to encourage
the denomination and settlement
of bilateral trade transactions in
renminbi, the government started
to actively promote the use of the
renminbi in investment transactions to
spearhead capital account reforms. The
latter includes the recent expansion of
renminbi-denominated cross-border
portfolio investment, the increase of
renminbi-denominated bonds in the
offshore market and the rise of outward
direct investment in renminbi.
To support the international use

MACROECONOMICS

FX

of the renminbi, the government


has also developed related financial
infrastructure and expanded currency
swap arrangements with central banks
across the globe to provide liquidity
support in offshore renminbi markets.
The private sector has embraced
these liberalisation measures, and
transaction volumes have increased
strongly from a low base.
CONDITIONS FOR
INTERNATIONALISATION
SHAPING UP
There are still several important
shortcomings
inhibiting
the
renminbis global status.
First, as the Chinese financial
system remains bank-dominant, the
bond market is still comparatively
small. The size and liquidity of
Chinas debt market currently lags
behind those of existing reserve
currency economies.
In particular, the total debt
outstanding in China stands at
around $5 trillion (versus $25
trillion for the US and $9 trillion
of Japanese bonds). The Chinese
governments bond debt is around
$3.3 trillion, compared with more
than $12 trillion of US government
debt. The turnover ratio is relatively
low, as well. In China, the turnover
ratio is about 1, compared with 14.2
in the US, pointing to low liquidity
in the market (Prasad, 2014). A
global reserve currency will need to
be supported by a large and liquid
bond market so that global investors

The Chinese financial system remains


bank-dominant, and the bond market is
still comparatively small
can invest and maintain the value of
their assets.
Second, the exchange rate exhibits
limited flexibility under the
managed float regime. Both the
daily central parity rate of the
renminbi against the US dollar and
the daily trading range around the
central parity are controlled by the
government.
And third, cross-border capital
flows still face various restrictions.
It should be noted, however, that the
de jure measure of capital account
openness
likely
significantly
overstates the restrictiveness of the
system, as incremental reforms over

the years have greatly increased


the mobility of the cross-border
flows. Cross-border bank flows
are particularly large, with their
size (relative to Chinese GDP) on
par with open economies such as
Australia, according to the IMF.
Current account transactions including trade and services - have
also been used as channels for
disguised capital f lows at times.
Despite these challenges, recent
incremental efforts to liberalise
the Chinese currency have resulted
in the rapid increase in its use as
an international currency.
First, the bond market has grown

FX TRADER MAGAZINE July - September 53

FX

MACROECONOMICS

rapidly to become the third largest


in the world. The development
of the bond market also suits
domestic objectives, as it reduces
the reliance on the banking system
for
financial
intermediation,
while improving
the role of direct
financing,
to
better manage
the system risks.
The
gradual
opening-up of
the
domestic
bond
market
to
foreign
investors could
see
liquidity
rise.

Finally, incremental steps have


continued to be taken to liberalise
cross-border capital f lows. In the
last few years, the government
has relaxed cross-border security

The government also established


the Shanghai Free Trade Zone
(SHFTZ), where more liberal
policies on financial flows have
been introduced, in the hope of
replicating the
policies at a later
stage in the rest
of the country.
In
February
2015, the PBOC
allowed
more
freedom
for
companies
in
the
SHFTZ
to
borrow
from
abroad.
The
recent
launch of the
Shanghai-Hong
Kong Connect
programme,
Second,
the
which permits
exchange rate
direct
equity
regime has also
trading between
seen
steady
Recent incremental efforts to liberalise
the
Shanghai
reforms.
The
the
Chinese
currency
have
resulted
in
the
and Hong Kong
government
stock exchanges,
widened
the
rapid increase in its use as an international
has also set the
daily
trading
currency
stage for broader
band
twice
libera lisation
in the past
of
portfolio
two
years,
expanding the permitted daily investment,
including
by flows for individual investors (see
range from +/-0.5% to +/-2% expanding the existing channels appendix).
around central parity. As US of institutional investors through
interest rates start to rise and the Qualified Foreign Institutional CAPITAL ACCOUNT
the dollar strengthens, upward Investor (QFII) and Qualified REFORMS
pressure on the renminbi has Domestic Institutional Investor
receded, with the currency coming (QDII) schemes, and introducing Capital account reforms have
under some downward pressure new channels of renminbi-QFII. gathered momentum under the new
against the dollar. The two-way Renminbi-denominated
bonds leadership in China, and the partys
f lexibility is welcome - and indeed have been issued in more offshore Third Plenary in November 2014
essential for the currency to move centres, including recently in the pledged to accelerate the pace of
capital account reforms towards
towards its reserve currency status. UK.
54 FX TRADER MAGAZINE July - September 2015

MACROECONOMICS

FX

full currency convertibility. There There are, however, active debates on domestic financial restructuring
are a few compelling arguments in how renminbi internationalisation before liberalising capital flows.
favour of capital account reforms and the associated liberalisation of The main question facing Chinese
over time. First, capital account capital flows should be positioned officials is whether the speed of
liberalisation is likely to help in the financial reform agenda the external opening-up is too fast
improve allocative efficiency and is (it should be emphasised that the compared with domestic reforms.
in line with the
The
standard
g o v e r n m e n t s
dilemma is the
view
that
impossible
the
market
trinity, where
should play a
an open capital
decisive role in
account, coupled
the
economy.
with the limited
A l t h o u g h
flexibility of the
China does not
currency, makes
rely on global
it difficult to
funding
for
control domestic
growth (unlike
monetary policy
other emerging
i nd ep end enc e .
To
some
m a r k e t
observers,
countries, where
d o m e s t i c
the
funding
r e f o r m s
gap was the
such as bank
primary reason
restructuring
for opening up
and state-owned
internationally),
In a recent speech, PBOC governor Zhou
enterprise
high domestic
indicated that capital account liberalisation
reforms should
s a v i n g s
precede capital
are
largely
will accelerate this year, making the
a c c o u n t
concentrated in
renminbi more freely usable
opening-up, so
domestic assets
that the system
(deposits
and
is
sufficiently
real estate) with
limited diversification. Second, debate is largely on how, rather than resilient to deal with volatile
international
capital
flows
operationally, as trade size grows, it whether, to liberalise).
that have caused crises in other
is difficult to maintain watertight
controls on capital f lows. And Chinas
approach
has
been emerging markets (Yu Yongding).
third, from the governmental unorthodox, as the Chinese Others, however, believe that it is
perspective, the liberalisation of government
pushed
capital feasible that reforms be conducted
capital f lows could also be used as account reforms and domestic iteratively without the pitfalls
a catalyst for institutional reforms, financial reforms iteratively and suffered by other emerging market
mirroring the success of trade simultaneously, in contrast to the peers because: the Chinese economy
liberalisation two decades ago.
textbook advice of completing is large, and is not just a price

FX TRADER MAGAZINE July - September 55

FX

MACROECONOMICS

taker in international finance; and


there remain many policy tools
through macro-prudence to reduce
the vulnerability of its domestic
institutions.
There are practical considerations
in favour of accelerating the pace of
reforms, as well.
First, capital controls have become
quite porous, making capital
account opening-up a de facto
choice. For instance, despite controls
in portfolio (equity and debt) flows,
banks intermediated flows are high
and volatile. In fact, as a share of
GDP, gross bank intermediated
flows are on a par with more open
economies such as Australia and the
US (IMF). In addition, trade flows
are often shed as a disguised vehicle
for cross-border capital transactions.

The strength of the external balance sheet


and recovery in the global economy/US
rates make for an opportune time for
faster liberalisation
for the renminbi to be part of the
SDR). He emphasised that, in light
of the experiences after the global
financial crisis, Chinas capital account
reforms will adopt an approach of
liberalisation with management,
whereby macro-prudential measures
will be used to ensure financial stability
after the capital account becomes
convertible.

Second, the strength of the external


balance sheet and recovery in the
global economy/US rates make
for an opportune time for faster
liberalisation. The current account
surplus and large foreign-exchange
reserves provide cushions for largerthan-expected capital outflows. And
a pick-up in global rates and recovery
in the developed markets should allow
capital inflow pressures to diminish in RECENT PROGRESS
coming years, reducing the pressure
of one-way capital flows on domestic Owing to these liberalisation
interest rates and monetary conditions. measures, the international use of
the renminbi has steadily risen,
In a recent speech, PBOC governor as can be seen from several key
Zhou indicated that capital account developments:
liberalisation will accelerate this
year, making the renminbi more The amount of cross-border
freely usable (thereby paving the way renminbi settlements in the first nine
56 FX TRADER MAGAZINE July - September 2015

months of 2014 reached 4.8 trillion


yuan, an increase from the 4.6 trillion
yuan total in 2013. According to the
Bank of Chinas global survey, about
87% of domestic firms and 69% of
offshore firms plan to use the renminbi
in their future cross-border trade
settlements.
The third-party use of the currency
for payment purposes - an important
measure of the international role of
the currency - has increased from a
low base. According to a survey by
the Bank of China of 3,000 domestic
enterprises conducting cross-border
renminbi business, 41% of their
overseas
subsidiaries
conducted
renminbi transactions with third
parties in 2014, compared with 10% in
2013.

MACROECONOMICS

FX

outward investment by Chinese


corporations and the countrys
government.
Such investment allows enterprises
to benefit from the lower cost
of production in neighbouring
countries (particularly in Southeast Asia). For the government, such
investment - for instance, through
the recently launched One belt, one
road initiative - helps to strengthen
the regional trade and economic
links.

The steady progress of capital account


liberalisation
and
further
renminbi
internationalization will have a profound
impact on the landscape of the global
financial markets
The offshore issuance of renminbi
bonds by Chinese banks and
corporations has been strong. The
first offshore renminbi bond was
issued in 2007. In 2014, gross
issuance of offshore renminbi
bonds and certificates of deposits
hit a record high of 564 billion yuan
(rising by 47% from the previous
year). In October 2014, the British
government
issued
renminbidenominated debt - the first foreign
government bonds denominated in
renminbi.

1.8 trillion yuan worth of deposits,


272 billion yuan of certificates
of deposit and 672 billion yuan
of bonds, according to Standard
Chartered Bank. Notably, offshore
renminbi loan growth is expected to
accelerate as more cross-border loan
programmes start, paving the way
for more rapid offshore banking and
monetary expansion through the
multiplier effect.

While the initial momentum of


the renminbis international rise is
reflected in its strong trade links,
The offshore renminbi market further growth of the international
has expanded. At the end of 2014, renminbi market will likely be
offshore renminbi assets exceeded bolstered by increasing cross-border
2.7 trillion yuan, which included capital flows, and in particular

The steady progress of capital


account liberalisation and further
renminbi internationalisation, as we
expect, will have a profound impact
on the landscape of the global
financial markets. According to
estimates by US financial institution
Goldman Sachs, assuming China
reaches full convertibility by 2020,
portfolio inflows and outflows
could reach 5-7% of GDP each way,
compared with less than 1% of GDP
at present. Total portfolio flows
could rise to between $1.5 trillion
and $2 trillion in the next five years.
The annual renminbi cross-border
trade could increase to between $2
trillion and $3 trillion in the next
few years, or 10-15% of global trade.
The renminbi bond market could
rise to $20 trillion (15% of the world
bond market) with liberalisation in
the coming decade.
Li Cui
Managing Director
China Macro Research
Goldman Sachs

FX TRADER MAGAZINE July - September 57

FX

INTERVIEW

Yi Gang,
State Administration of Foreign
Exchange director, discusses five
changes in Chinas foreign exchange
management as well as the long-term
value of the renminbi
INTERVIEW
What progress has been made in
deepening reform, streamlining and
decentralising administration, and
promoting free trade investment?
What are the next steps?
We have stressed five changes in
our foreign exchange management
philosophy that are vital for the
development of our long-term
administrative framework. The move
from an approval-based approach
to a monitoring-based approach,
the switch from pre-regulation to
management in the aftermath of
an issue, and also the change from
behaviour-based management to
subject-based supervision - whether it
is a financial institution or a company,
we will supervise it and it will be
responsible for its conduct. Fourthly,
we switched from an assumption
of guilty until proven innocent
to a philosophy of innocent until
proven guilty and finally from using
a positive list of approved activities/

58 FX TRADER MAGAZINE July - September 2015

parties to a negative list of restricted


activities/parties.
The five transitions have been in
practice for a few years and we have
already seen the effects.
Firstly,
trade
and
investment
facilitation has improved. We have
abandoned the system of mandatory
foreign exchange settlement and sales,
and comprehensively reformed the
verification system for forex payments
(imports) and forex receipts (exports),
completely cancelling the verification
and approval previously needed for
each transaction. This reform has largely
benefited enterprises. Our research
indicates the average time for settling a
transaction used to be 20 minutes, and
it is now less than 10 minutes.
Meanwhile, we have greatly simplified
the foreign exchange administration
for trade servicing, shortening the
receipt and payment time from 20

minutes per transaction to five minutes


per transaction, so enterprises have
enjoyed increased convenience and
lower transportation costs. We have
also made progress in capital accounts.
Through streamlining administration
and delegating power to lower levels,
particularly simplifying foreign debt,
direct investment and overseas direct
investment, we have steadily promoted
the convertibility of capital accounts.
Thirdly, we have considerably reduced
administration approvals. In the
recent few years, we have cut this by
about 70%, which helps improve the
competitiveness of Chinese enterprises
and financial institutions.
Lastly, I should emphasise that while we
have streamlined approval procedures,
we have still needed to strengthen
supervision because of all kinds of
uncertainties, including liquidity
risks associated with cross-border
capital flows that still exist in volatile
global financial markets. Therefore,

INTERVIEW

while promoting facilitation, we must


pay great attention to risks. We must
strengthen supervision to prevent
systemic problems. At the same
time, we will continue to streamline
administration and delegate power to
lower levels and further increase the
competitiveness
of
Chinese
enterprises and
economy.

capital is flowing out and currencies


are depreciating considerably. The
renminbi remains the most stable and
strongest currency among all the Brics
nations (Brazil, Russia, India, China
and South Africa). We should assess
the trend of renminbi exchange rates

What do
you make of
the recent
depreciation of
the renminbi?
A
countrys
foreign exchange
rate is one of the
main instruments
measuring
the
overall soundness
of its economy
and its finances.
In 2014, the euro
and yen fell by
more than 10%
against the US
dollar, while the
renminbi declined
by 2%. This means the real effective
exchange rate and nominal effective
exchange rate of the renminbi has
increased compared with the euro, the
yen and a basket of global currencies.
If the US dollar is the strongest
currency, it is fair to say that the
renminbi is the second-strongest
one. In many developing countries,

FX

and reasonable equilibrium.


What is the long-term trend for the
renminbi?
Firstly, the prospects for Chinese
economic growth still look good.
Although
the
past high speed
of growth is
lowering
and
b e c o m i n g
medium-hig h,
the growth speed
is still relatively
high compared
with the majority
of the world.
Secondly,
the
Chinese current
account surplus
is
still
big.
Exports exceed
imports, which
is
extremely
important
for
the stability of
the fundamentals
of the foreign
exchange market.

comprehensively against a basket of


global currencies, rather than against
the dollar alone.
From the perspective of the
international balance of payments,
economic growth rates and the
degree of renminbi globalisation,
Chinas exchange rate absolutely has
the basis of a fundamental stability

Thirdly, renminbi globalisation


has accelerated. The world has a
demand for the currency in areas
such as trade, overseas investment
and capital allocation.
Foreign
capital management companies
and individuals are willing to hold
renminbi bonds, stocks and other
assets.

FX TRADER MAGAZINE July - September 59

FX

FUNDAMENTAL ANALYSIS
A slowing economy
with a soaring stock
market witnessing
the Sell in May and
Go Away adage

China is getting close


to allowing the Yuan
to be exchanged
without limits on
any amount

Trading
positions
depend on whether
the renminbi will be
included in the SDR
currency basket

by Samuel Tay

The Yuan, and Chinas Growth Path to Internationalization

The Slowdown of Chinas which currently stands as the


worlds 2nd largest economy,
Economy
even though a slowdown is seen
Believe it or not, the stock in Chinas economy, with the 1st
markets of the worlds emerging quarter growth of 2015 seeing its
economies are closely bound worst growth since 1992, apart
to economic growth of China, from 2009. Analysts are expecting

60 FX TRADER MAGAZINE July - September 2015

to see growth around 7% this


year being the slowest pace in a
quarter of a century. The growth
yardstick was measured in terms
of lower commodity prices, lower
rail freight f lows, and lower
electricity consumption.

FUNDAMENTAL ANALYSIS

FX

A Soaring
Market

Stock f u nd i ng or i njec tions ,


most
entrepreneu rs
or e x i st i ng bu si ne ss
Chinas
domestic ow ners a re i nspi re d to
stock market however st a r t a vent u re . Fi xe d
moved north, while a s set i nve st ment g re w
data showed that the at it s slowe st i n ne a rly
economy headed south. 15 yea rs i n May 2 015 ,
m i s si ng
e x pe c tations
even
as
growth
in retail
There
were
many
factors that gave rise sa les and factor y output
stea d ied .
to the bull market:

Figure 1.

Sourse: Thomson Reuthers Datastream

Figure 2.

Sourse: Thomson Reuthers Datastream

Figure 3.

Sourse: CEIC, Natioanl Bureau of Statistics

- Fourth, despite the fact


that the property market
ha s
been
lack luster
a f ter the government
took mea sures to curb
over-specu lation, there
was some recover y seen
- Second, fiscal stimulus i n May.
and
government
expenditure
that - Fi f t h , most a f f luent
a re
yet
sustain
specific i nve stors
government-supported aware of how to invest
industries and inspire of f shore .
banks to lend to
businesses rose to 2 .6% - Si x t h , it i s more of a
in May 2015, slowing socia l bul l market than
sharply from a 33.2% a ny t h i ng el se . R i sksharp rise in April t a k i ng a nd b ei ng on
2015, and making the equal ground with peers
first five months of on We Chat (Ch i nas
2015 seeing a 11.1% rise version of Facebook) are
in fiscal expenditures just one of the common
tra it s of how socia l ly
from a year ago.
compet it ive a t y pica l
- Third, other than Ch i ne se ca n b e come ,
industries that could inspired by friends to
attract
government join the bul l run.
- First, per capita
savings
to
stock
market was relatively
low comparable to
many major developed
economies.

FX TRADER MAGAZINE July - September 61

FX

FUNDAMENTAL ANALYSIS

asset pledged relending , an


extension of the PSL operation,
(Pledged
Supplementar y
Lending) which analysts expect
to target smaller firms in time
to come.
Are we seeing the well known
trading adage Sell in May
and Go Away happen in the
Chinese stock market? Fig ure
4 shows it clearly. At the time
of writing this article, the stock
market fell by 13% between
14th and 19th June, thus wiping
out 9 trillion Yuan.

Figure 4.

The countr y is getting close


to allowing their domestic
currency, the Yuan, to be
exchanged without limits on
any amount. China is expecting
the Yuan to be included in the
basket of currencies represented
in
the
Special
Drawing
R ights (SDR) issued by the
International Monetar y Fund.
Having the SDR status would
also mean that central banks
could start adding the Yuan
to their reser ves, thus adding
more liquidity into the Chinese
stocks and bonds markets.

Figure 5. Weekly USD/CNH

- Finally, availability of credit,


monetar y easing has lowered
short, but not long term yields,
due to cuts in interest rates
and bank reser ve requirements.
The fall in short-term rates has

62 FX TRADER MAGAZINE July - September 2015

thus fuelled stock speculation,


as banks remain reluctant to
lend to the real economy. This
however should change, as the
central bank has also said it will
expand a pilot scheme on credit

How about currency


markets?
The currency market seems
cautious over the development
of the SDR , as this could bring

FUNDAMENTAL ANALYSIS

FX

cycle its currently relatively


weak economy.

Figure 6. Monthly USD/CNH

new demand for the currency


offshore from central banks
globally. The market also fears
that there could be a widened

use of loose monetar y policy


tools, and expanded stimulus
packages that the Chinese may
use to support and counter

The chart on Fig ure 6 shows


that the currency is looking
for new grounds to move
on, and this longer-term
direction is mainly going to be
inspired by a change in market
fundamentals. Although it
could move within a trading
range, the currency action will
be shaped by the necessity to
stay competitive on the export
market and the effect of an
expanded circulation overseas.
At this juncture, I personally
feel that the PBOC is managing
its monetar y and expansionar y
fiscal policies well, as they do
in fact have a deep buffer of
resource. Its current growth
path could remind, in some
ways, how Singapore grew to
become a developed nation.
In the short term, 6.1850 seems
to be a good support to look at
for buyers, without any change
in the SDR status. If the SDR
status is confirmed, prepare
for gradual streng th in the
currency, as central banks across
the globe are likely to welcome
more Chinese Yuan into their
countries.

Figure 7. USD/CNH (Daily)

Samuel Tay
Founder
Grentone Capital Management

FX TRADER MAGAZINE July - September 63

FX

OPTIONS STRATEGY
by Jessica James and Jonathan Fullwood

FX Options: the elephant in the room


How to generate significant returns from
anomalies and biases in the FX option market

Premium vs Payout
The phrase the elephant in the room is
usually used to refer to a fact which is
glaringly obvious once pointed out, but
to which people have been oblivious for
some time. There is an elephant in the
FX options room.
FX options are a huge market.
The latest Bank of International
Settlements survey in 2013 found that
there was over 300 billion USD worth
of flow every trading day. Spreads are
tiny and liquidity is large. So how can
1

there possibly be any systematic bias


or predictable pattern which has not
already been traded away?
And yet, there is. If one were presented
with a financial instrument which on
average pays back only half of what
it cost, one would call it either a bad
deal (if bought) or an opportunity (if
sold). Or if one were presented with
an insurance contract which on average
paid back 50% more than its premium,
it would be highly desirable to buy, but
not good to sell. This situation is exactly
what we find with some FX options.

Note that these are puts and calls on the exchange rate, ie, on the base currency

64 FX TRADER MAGAZINE July - September 2015

Let us take a look at the data. Below, in


Figure 1 and Figure 2, we have plotted
the average payout to FX put and
call options1, divided by the average
premium, throughout history since the
start of the market. The 34 most liquid
currencies were used. The options were
the most liquid type, At-the-MoneyForward puts and calls. Additionally,
we included trading costs.
If options were perfectly fairly priced, we
would expect to see that all of these data
points hovered at about 100%. If, more
realistically, we expect trading desks to

OPTIONS STRATEGY

Figure 1: Payout-to-premium ratio for ATMF call options

Source: Bloomberg and Commerzbank

FX

whether option protection was a good


idea. But only in the very largest global
companies will there be the expertise to
perform the historical analysis; while the
results would be of interest, its unlikely
that they would be known or discovered.
In contrast, a dynamic trader (for
example on an option trading desk) will
typically have many option positions
and may trade day-to-day if not intraday
in order to maximise the returns on a
portfolio. They tend to think in terms
of how much can be made from the risk
management of an option. The resulting
payoff-to-premium ratio for a contract
is not of interest. Thus while an option
desk would have the expertise to decide
whether there is a systematic difference
between premium and payoff, they
would not have any interest in doing so.

It is, to put it mildly, odd that there is


so little effort made to analyse historical
data, particularly when there is huge
make a profit, we might anticipate that tenor. Puts by contrast return 130% for and careful effort put into the initial
they would all be a little less than 100%. the same tenor! This is not a small effect; valuation of derivative contracts. If
it is an enormous anomaly which has gone the post-trade performance of different
But that is not what we see at all.
completely unnoticed up until now. This contract types had been considered to
Both puts and calls start off, in the 1 really is the elephant in the room.
be important from the start, then there
week tenor, as might be anticipated.
would have been regular evaluation of
The payout for both is on average Historical data analysis
the situation and it would have been
slightly above 80% of the premium.
understood a long time ago. As it is,
Thus they are both slightly expensive; How has it not previously been realised popular products, with billions of flow
in theory one could generate returns that there is this significant effect? Very dollars spent on them each day, have
simply, because nobody has made the been unknown entities when it comes to
by selling these short dated options.
very considerable effort that it took to calculating their average payback. This
This seems reasonable; we know that some collect and clean the data, and perform is not clever. Financial institutions are
hedge funds use short dated option selling the historical back tests2. There are two not the only culprits. Academia, usually
strategies (though its a high risk trade). main types of FX option user, which we so focussed on data, has neglected the
But as we look at longer tenors, the story can refer to as static traders (hedgers) fact that historical data are of poor
gets very strange. Calls, which pay out for and dynamic traders (investors). A static quality and patchy. Study after study
appreciation of the base currency, become trader or hedger, such as a corporate on financial markets is done on tiny
very poor value, returning on average only treasurer, would be interested in the datasets with poor quality control, and
about 50% to their owners in the 3 year ratio of premium to payout, to judge nobody appears to complain.
Figure 2: Payout-to-premium ratio for ATMF put options

Source: Bloomberg and Commerzbank

This is the research which underlies the book we have recently completed, published by Wiley, called FX Option Performance.
FX TRADER MAGAZINE July - September 65

FX

OPTIONS STRATEGY
of the cost of the forwards, once more
including premium and bid-offer costs.
Additionally, in case the cheaper option
hedges provided poor protective qualities,
we examined the hedge cash flows in the
worst ever depreciation periods for the
EM currencies. In the vast majority of
cases, the option hedges provided similar
protection, to about 90% of the level
provided by the forward contracts. While
remaining vastly cheaper, they still deliver
value during high risk times.

Figure 3: Average cash flow for 3 month hedges of positive EM FX exposure

Source: Bloomberg and Commerzbank

Now is the perfect time for the


financial world to review this situation.
Increased scrutiny and regulation mean
that global markets have an urgent need
to increase fairness and transparency,
and to be seen to be doing so. We are
overdue a change of attitude.
Hedging with options
Some of this historical data analysis
has yielded fascinating results with
important implication for hedgers. In
figure 3, we show the average results of
hedging various Emerging Markets FX
exposures. In this case the exposure to
the EM currency is positive, ie, the risk
is from depreciation of the EM currency.
Because the forward rate always locks
in a degree of depreciation which rarely
actually occurs, these hedges are costly.
On average, the quarterly forward hedges
cost 6% of the notional amount per year;
a very large expense. But, the difference
between forward and option hedges is
unambiguous even including the full
premium and bid-offer costs, the options
cost on average is just over half of the
66 FX TRADER MAGAZINE July - September 2015

forward cost. Twenty out of the twentyfive currency pairs tested have the option
cost as less than the forward cost, and the
five exceptions have smaller data sets. In
the past at least, options have delivered
far cheaper hedges. We repeated the
backtest using 25-delta out-of-the money
long call option positions. We found
that the supposedly more exotic OTM
options are actually cheaper hedges
again than both the ATMF options
and the long forward contracts. In this
case they are on average about one third

Thus a look at the historical data reveals


that at least some hedging strategies can be
revolutionised by the appropriate choice
of contract. It is not the case that options
are a universal panacea; if the exposure
were negative (for example if there was a
future liability in the EM currency) then
forwards would have been a better choice.
How about a trading strategy?
If there are anomalies and biases in the
FX option market, it is natural to wonder
whether they may be used to generate
returns. Investors like hedge funds,
pension funds and insurance companies

Figure 4: Cumulative returns in % notional amount for 1W call selling in USDJPY

Source: Bloomberg and Commerzbank

OPTIONS STRATEGY
would be keen to know whether this is an
area which could yield diversified alpha
in a world of ultra-low yields.
Above in Figure 4 we show the
returns to a systematic straddle selling
strategy in USDJPY. The puts and
the calls offset each other elegantly
and the result is a surprisingly smooth
and profitable series. However, this
includes only premium and payout
the marked-to-market variation would
have added considerable volatility. But
nevertheless, it is clear that even this
very simple strategy holds potential, and
there are likely to be more to discover.
Where did the elephant come
from?
Can we discover where these very
significant anomalies originate?
Lets take a look at the payoff to a
Spot rate at
inception

simple ATMF put or call FX option.

payout to the long forward contract.


This is the contract which would
There are a number of features to be used to hedge depreciation risk.
the fairly complex diagram shown Now we see why it loses money in
on Figure 5 and it is worth going Figure 3; if we end up in the grey
through them carefully.
area (which on average we do) then it
delivers a loss
(1) Grey area surrounding spot rate at (6) The straight dashed line is the
the start of the deal. This represents payout to the short forward contract.
where spot at expiry is most likely to This on average makes money and is
be. FX rates do not on average move the return to the carry trade
to the forward rate; the long term (7) The long call payout line (solid
existence of the carry trade proves this line) we can see that the likely
(2) The solid normal distribution result in the grey area is loss of the
line represents the distribution of the premium. But this loss is less than
spot throughout the life of the deal
the forward loss, as indeed is shown
(3) The dashed vertical line is the in Figure 3.
forward rate
(8) The long put payout line (dashed
(4) The dashed normal distribution line) we can see that this may make
is the implied future distribution of money, as was found in Figure 2. As
rates at expiry given by the option the tenor of the deals gets longer, the
volatility and the forward rate
forward rate gets further from spot,
(5) The straight solid line is the so puts become progressively better
value, and calls progressively worse,
explaining the effects seen in Figure
Forward rate
1 and Figure 2 very neatly.

Short forward payoff

Long put
payoff

Long forward payoff

Long
call payoff

Premium cost
of ATMF option
Most likely range
for spot at expiry

FX

Carry cost
of forward

Direction of increasing rate

Figure 5: Payoff to FX options and forward contracts

So in fact, once the data is assembled,


it is clear that the failure of the spot
rate to evolve to the forward as the
contract progresses is the cause of
the anomalies we found in the data.
While this fact has been known for
some time it is the origin of the
profitable FX carry trade it was
not previously realised that it had
this significant impact on FX option
value. There were even some clues
that the elephant was there.

Jessica James & Jonathan Fullwood


co-authors of
FX Option Performance: An Analysis
of the Value Delivered by FX Options
since the start of the Market
FX TRADER MAGAZINE July - September 67

FX

BOOK REVIEW

FX Option Performance
An Analysis of the Value Delivered by FX
Options since the start of the Market

This practical guide to options trading, which


examines how FX Options performed in
different markets, will show you where to find
value and how to better hedge FX exposures.
by Jessica James,
Jonathan Fullwood
and Peter Billington
Published by Wiley, May 2015

On average, do options result in profit, loss, or breaking even?


How can corporations more cost-effectively hedge their exposure to
emerging markets? Are cheap out-of-the-money options worth it?

FX Option Performance provides


the information that investors
and traders need to be more
effective in the forex options
market, by providing detailed,

68 FX TRADER MAGAZINE July - September 2015

specific guidance on structures,


performance, rate fluctuation
and trading strategies.
The daily turnover in FX options

is an estimated U.S. $ 207


billion, but many fundamental
facts about this huge and liquid
market are generally unknown.
This recently published book

BOOK REVIEW

FX

An examination of the historical


payoffs for the most popular and
liquidly traded options
A look at which options
are overvalued and which are
undervalued
Surprising, generally unpublished
facts about emerging markets
A review of systemic option trading
strategies, what works and what
doesnt

is unique in offering both a


practical guide to option trading
alongside a historical look
at how options performed in
different markets, with a view to
help investors and hedgers alike
make better and more informed
decisions.

FX Option Performance begins


with a quick and practical
introduction to the FX option
market. It provides specific
advice
about
structures,
performance, rate fluctuation,
and trading strategies and also
includes:

Not overly technical, the book is an


accessible resource for anyone with an
interest in options trading, showing
readers where to look for value, and
helping corporations hedge their FX
exposures.
Where to find it?
Paperback version click here.

About the Authors


Jessica James is Co-Head of the FX Quantitative Solutions team at Commerzbank in London. She joined
Commerzbank from Citigroup where she held a number of FX roles, latterly as Global Head of the Quantitative
Investor Solutions Group. She is a Managing Editor for the Journal of Quantitative Finance and is a Visiting
Professor at Cass Business School. She is a Fellow of the Institute of Physics and has been a member of their
governing body and of their Industry and Business Board.
Jonathan Fullwood is a director in FX Quantitative Solutions at Commerzbank in London. Since joining Commerzbank in 2002 he has also worked in fixed income research and portfolio strategy roles and was awarded
a CFA charter in 2007.
Peter Billington is Global Head of FX Options at Commerzbank in London trading a wide range of currencies
and FX products. He joined Commerzbank from Dresdner in 2008 where he was trading Metals (Precious and
Base). Prior to this he spent 10 years trading FX Options in various financial centres - London, New York and
Singapore.

FX TRADER MAGAZINE July - September 69

FX

TECHNICAL ANALYSIS
by Razvan Mihai

Trend Trading Made Simple


A very simple strategy based
on the definition of the trend

Heres a short story that you will find


very familiar. Around 7 years ago
when I first had the chance to learn
something about Forex Trading, the
first lesson I got to learn was: Trend
is your friend! Which means that it is
best to trade in the same direction of
the main trend. Have you ever heard
about it?
This first lesson was actually the
milestone of everything that followed.
Everybody was saying that the best

70 FX TRADER MAGAZINE July - September 2015

strategy, to become profitable, is to


trade with the trend. So I started
learning about ways how to enter a
trade in the direction of the main
trend. I learnt about Price Patterns,
Candlestick Patterns, Harmonic
Patterns,
Fibonacci,
Technical
Indicators, Pitch Fork, Gann, Elliott
Waves and many other things that I
found on the internet and books.
After a while I found out that there is a
good and a bad thing about this lesson.

The good thing is that it is very easy to do


it, the bad thing nobody tells you how!
There are tens or maybe hundreds
of ways that could help entering a
trade in the direction of the main
trend. Combinations of the theories
I mentioned earlier, complex
strategies
and
mathematical
probabilities which could help
you enter a trade in the direction
of the trend, but I will show you a
very simple strategy, based on the
definition of the trend.

TECHNICAL ANALYSIS
The father of modern technical
analysis, Charles H. Dow, said in his
studies that the market is moving
in trends and that there are two
main directions: up and down. The
sideways moves were lines which
were part of a rising or descending
trend.

Step 2. Draw a trend line on the


first correction of the new trend.
Breaking and closing above this

FX

trend line can be considered a


trading signal (Buy on rising trends
and Sell on falling trends). You can

What is an uptrend? The simplest way


to identify an uptrend is by looking for
Higher Lows and Higher Highs. Once
a higher low was drawn, followed by a
higher high, we can presume that an
uptrend has just started.
What is a down trend? A down
trend can be defined as a succession
of Lower Lows and Lower Highs.
When a lower low followed by a lower
high are drawn, we can presume that
a down trend has just started.
In the image below (chart 1), you will
observe how a down trend is changed
to an uptrend and vice versa on the
EURUSD, 60 minute chart. The
best thing about this method is that
it can be applicable to any instrument
and any time frame.

Chart 1

Chart 2

Because we now have an idea about


what a trend is, let me tell you which
is the core idea of this trend following
strategy.
TREND TRADING STEP BY
STEP
Step 1. Keep an eye on the current
trend, until a reversal pattern
emerges. Like shown in the picture
below (chart 2).

Chart 3

FX TRADER MAGAZINE July - September 71

FX

TECHNICAL ANALYSIS
parameters based on the traded
instrument, time frame and risk
appetite.
Let us get back to the exit points.
After the confirmation of the setup
and entering the trade a good Stop
Loss can be set under the last higher
low. A break below this one would
increase the probability of a reversal.

Chart 4

choose to wait for the candle to close


above/below the trend line and enter
the trade, or trade at the breakout.
I would recommend to wait for the
close, because false breakouts may
occur and diminish the probability
of entering a profitable trade.
It is very important to practice
writing on charts so that in time
it will become easy to spot these
reversal patterns.
FIND A GOOD EXIT POINT
This strateg y is very simple to
apply, but incomplete at this
point. For a good strateg y to

Chart 5

72 FX TRADER MAGAZINE July - September 2015

become even better we would


need to find good exit points.
These points should always
take into consideration your
own investment risk and money
management system.
For example : if your money
management system says to have
a risk of 1 and a profit target of
3 and the strateg y, exit points
offers only a risk of 1 and a
profit target of 2, you shouldnt
enter this position. This is a
theoretical example. The money
management system should be
established after testing the
strateg y and optimizing the

From my experience with this strategy,


a good take profit would be the 127
extension of the last impulse if the
correction did not go below 50% of
the last impulse. Depending on the
time frame, I would suggest to set the
take profit around 5 pips lower than
the maximum target. This way it will
increase the probability for the price
to hit your level.
This is one of the easiest strategy
I ever tested, but also one of the
most effective. Using the basics of
technical analysis, combined with
price projections for getting out of
the trades, proved to bring me very
good results in the past years.
If you would like to try this strategy,
my recommendation would be to
test it before you trade real money.
One strategy can bring different
results from one trader to another.
The strategy works with probabilities,
but it doesnt include one of the
most important variables human
emotions. Try this strategy on demo
accounts, optimize it for your own
personality and after that make the
next step.

Razvan Mihai

TRADING PSYCHOLOGY

FX

by Rob Colville

Seven trading affirmations


to transform your trading success

Whether you already use them, or not,


positive affirmations have been proven
to work in many different areas of life.
Currency trading is no exception to this!
Whether a trader, life coach or guru
who is top of their field, those who use
affirmations regularly will tend to have
one thing in common; they use them to
help manifest their goals and bring about
lasting, positive change to both their
professional and private lives.
In this article, we will discuss
some positive, battle-tested trading
affirmations which are based on the
habits of successful traders.

But firstly, what is an affirmation?


Many affirmations are positively
constructed phrases or goals that are
repeated, often daily, with the ulterior
motive of hardwiring the subconscious
mind in order to help to construct our
life experience.
Affirmations can be applied to many
different situations. Whether it is
romance, confidence, achieving a greater
level or success, or achieving improved
health, you may be pleasantly surprised
with how easy it can be to come up
with your own in order to quash past,
potentially damaging believes and

patterns of self-sabotage that may have


hindered you previously in achieving
your goals.
Here are seven trading affirmations
that you can immediately take away
and use yourself in order to improve
your game in financial markets trading.
You may wish to tweak them and add
your own. Affirmations are, after all,
very particular to the individual and
their own references.
Repeat the following trading affirmations
every morning and see for yourself how
they can inspire lasting, positive change.
FX TRADER MAGAZINE July - September 73

FX

TRADING PSYCHOLOGY

Affirmation 1:

Affirmation 3:

Affirmation 4:

Im a profitable trader

I will plan the trade and trade the plan

This broad-brushed statement sets


the tone for what follows, it should
be your first and most important
affirmation. Even if youre not yet
showing a consistently positive
book, month after month, say it.
Do not fall into
the temptation
of using this
statement
in
the future tense
as
you
will
essentially
be
prolonging the
outcome
by
nudging it that
little bit into the
future every time
you say it.

Stay true to your strategy! After all,


successful strategies have been specifically
designed to determine your rules for
entry, management and exit. They are
effective filters which will prevent you
from jumping into the market for no

I will take full responsibility for my


trading
Ever found yourself blaming anything
and everyone for a losing trade? Dont!
Ultimately, you are the master of your
own destiny.

If you trade a set-up


which contradict
your rules for
entry and it loses
money who is
to blame? You
made the decision
to place it. On
the flip side of the
coin, if you traded
a set-up which
did not conform
to your strategys
rules for entry, and
Affirmation 2:
you made money,
you may not want
My
trading
to believe it but it
Using affirmations regularly can help
strategy is one I
is still a bad trade!
you
manifest
your
goals
and
bring
about
have full belief
You may have
in
made money from
lasting, positive change to your life
it, but through
Only use this
breaking
your
affirmation if your chosen strategy other reason than for the sake of being own rules for entry, you have reinforced
is both proven in profitability and in a trade. Only trade when your rules to your subconscious mind that
gels with your personality. Whether for entry are met and celebrate the breaking your rules can be profitable
youre an intra-day sniper or an end- times when there are no valid trade (even though, in the long run, it is not).
of-day set-and-forget trader, do not set-ups that meet your rules as an
apply this affirmation to a strategy opportunity to preserve your capital Affirmation 5:
where you may have initially got and stay out of the market. Accept that
lucky on your first trade with an markets can do anything at anytime I keep the trade risk low no matter
and have been unsuccessful since and that no strategy can win the whole how good the trade looks
(this is known as confirmation time. Placing a trade based solely on
bias - a common pitfall for may gut feeling is not a valid reason to be Any strategys success is determined
rookies)
in the market.
over time the more valid set-ups

74 FX TRADER MAGAZINE July - September 2015

TRADING PSYCHOLOGY
traded using that strategy will yield
a more representative overview of its
effectiveness.
In order for your trading results
catalogued in your trade journal to be
as scientific as possible, its imperative
to keep the risk
on any trade as a
constant variable,
no matter how
good the set-up
may look at first
glance.
Keeping the risk
low for every trade
placed is a must.
There is nothing
more chilling than
watching a losing
trade bleed your
account to death,
especially
when
you know that the
loss would have
only been minimal
had you risked 1%
of your accounts
value...rather than
10%!

your journey to becoming a consistently


profitable trader. Be realistic in your
expectations from trading and accept
that small percentage gains made on
your trading account over the long
term in a conservative fashion are far
more achievable than fast wealth.

FX

While it may be easier said than done,


it is crucial to master the art of letting
go. Providing the trade set-up conforms
to your strategys rules for entry, and
you have kept the risk to a minimum,
simply place the order with your
broker and walk away. Providing your
set-up have a
positive reward/
risk profile, then
you can set-andforget, safe in
the knowledge
that if the trade
does go in your
favour then you
are set to make
potentially a lot
more than if the
loss sustained
goes against you.

All
too
frequently, the
rookie trader
falls into the
Trading is an art that cannot be
deadly trap of
s e l f- s a b o t a g e
mastered overnight. A skill that can be
by
watching
accomplished after years of dedication.
the
progress
of their trades
Just like a university degree.
currently
in
play. This often
Remember,
becomes
an
financial markets
are a very different kind of animal Trading is an art that cannot simply emotionally exhausting experience
where anything can happen at anytime... be mastered overnight but, rather, a as every flicker between both
sometimes for no real rhyme or reason. life skill that can be accomplished after positive and negative balances on
years of dedication and hard graft...just their broker profit and loss account
is often the cause of a veritable
Affirmation 6:
like a university degree.
emotional rollercoaster!
My ambitions in trading are for long Affirmation 7:
term gain as opposed to a quick buck
Rob Colville
I will not become emotionally attached
Founder
Managing expectations will be key in to the outcome of any trade set-up
TheLazyTrader.com

FX TRADER MAGAZINE July - September 75

FX TECHNICAL REPORT

CURRENCY OUTLOOK
MAJOR US DOLLAR RATES - FEATURED MARKET USD/JPY
USD/JPY has moved steadily higher since
completing a 2 year Head & Shoulders base at
the end of 2012 when resistance around 84.1685.53 was cleared. Losses from the 2007 lower
top at 124.14 have since been fully retraced, the
recent push above 124.14 having also penetrated
the 25 year downtrend connecting the 1990 &
1998 peaks at 160.26 & 147.61. Furthermore,
the 12, 60 & 120 month (1, 5 & 10 year) moving
averages are all rising. As yet, there are no

immediate signs of an end to streng th and with


price action contained within a bullish channel
we see scope for an initial move to attack the
76.4% retrace of the 1998-2011 decline at
130.55, with the possibility of a move towards
the 140-142.50 region (top of bull channel /
longer-term bear channel) over the coming 6-9
months. Look for an initial dip to now leave
a higher low at a maximum of 105.31-105.44
in the event of a reversal under 115.63-115.87.

MAJOR TRENDS AND TARGETS FOR US DOLLAR MAJORS


As at 15 Jun 15

Current level

Major trend

Major targets

Trend change level

EUR/USD

1.1230

Down

0.9700 / 0.8232

1.2875

GBP/USD

1.5500

1.4234 / 1.3500

1.6366

USD/JPY

123.60

Down
Up

USD/CHF

0.9310

USD/CAD

1.2355

Up

AUD/USD

.7730

Down

76 FX TRADER MAGAZINE July - September 2015

130.55 / 137.50

Flat

105.31
.8701 / 1.0238

1.3063 / 1.3464

1.1074

.7208 / .7017

.9404

TECHNICAL REPORT FX
MAJOR CROSS-RATES FEATURED MARKET EUR/SEK
EU R / S E K p e a ke d a t 1 1 . 7 8 4 2 i n Ma r c h 2 0 0 9 ,
a n e w a l l- ti m e tr a d e d h i g h . A p r o l o n g e d
decline
followed,
e v ent ua l l y
reaching
8 . 1 7 7 3 i n Au g u s t 2 0 1 2 , b e f o r e tr a c i n g o ut
a mu l ti -m o nth d o u b l e b o t t o m a t 8 . 1 7 7 3 /
8 . 2 5 6 1 , c o m p l e t e d i n Jun e 2 0 1 3 b y th e b r e a k
a b o v e 8 . 7 9 3 7 . G a i n s a c c e l er a t e d t o a p e a k
o f 9 . 7 1 5 1 i n D e c em b e r 2 0 1 4 , a h e a d o f th e
l a t e s t s e tb a c k . A p o s s i b l e y e a r - l o n g h e a d
& s h o u l d e r s t o p i s b e i n g tr a c e d o ut a b o v e

a 9 . 0 5 6 8 - 9 . 0 6 7 9 n e c k- l i n e , w i th th e r i s k
s e en f o r a r e v er s a l t o wa r d s s up p o r t - t urn e dr e s i s ta n c e a t 8 . 7 0 1 3 - 8 . 7 9 3 7 o v er c o m i n g
m o nth s . We s e e s c o p e f o r a h i g h er l o w t o
th e n d e v e l o p , s e t ti n g up a f r e s h r e c o v er y
p ha s e t o wa r d s s up p o r t - t urn e d-r e s i s ta n c e
a r o un d 9 . 9 7 3 3 - 1 0 . 0 3 7 4 a n d p o s s i b l y f o rm er
s up p o r t a t 1 0 . 3 8 4 4 , a h e a d o f a s u b 1 0 . 5 3 6 8
l o w e r t o p e v ent ua l l y b e i n g l e f t f o r a r e t urn
t o un d e r l y i n g w e a kn e s s .

MAJOR TRENDS AND TARGETS FOR MAJOR CROSS-RATES


As at 15 Jun 15

Current level

Major trend

Major targets

Trend change level

EUR/GBP

.7235

Down

.6702 / .6537

.8062

GBP/JPY

191.65

Up

199.89 / 215.85

168.08

EUR/JPY

138.60

Flat

149.73 / 159.60

126.11

EUR/CHF

1.0525

Down

1.0071 / 0.8599

1.2033

EUR/NOK

8.7340

Up

9.3002 / 9.8687

8.3146

EUR/SEK

9.2015

Up

9.7151 / 9.9808

8.7013

FX TRADER MAGAZINE July - September 77

FX TECHNICAL REPORT
FX EMERGING MARKETS FEATURED RATE EUR/CZK
EUR/CZK was in a 9 year downtrend from the March
1999 peak at 38.705, this reached as low as 22.925 in
July 2008, ahead of a strong recovery which retraced
between 38.2% & 50% of the entire decline to reach
29.671 in February 2009, before heading lower. The
majority of the 22.925-29.671 recovery was retraced,
eventually leaving a higher low at 23.934 in January
2011, ahead of a renewed recovery phase. A base
pattern was completed in late 2013 by the break above

26.106-26.189, reaching 28.489 in January 2015, ahead


of the latest correction lower. MACD is unwinding
from overbought, but its primary signals remain bullish
and successfully leaving a higher low now above 25.485,
ideally by former resistance at 26.109-26.189, may
set up a renewed advance towards the February 2009
recovery peak at 29.671, possibly 30.815-30.924 (50%
/ 76.4% Retraces of previous declines from 38.705 &
33.395) over the next 9-12 months

MAJOR TRENDS AND TARGETS FOR FX MERGING MARKETS


As at 15 Jun 15

Current level

Major trend

Major targets

Trend change level

EUR/CZK

27.270

Up

29.671 / 30.815

25.485

EUR/HUF

313.00

Up

349.93 / 374.81

295.73

EUR/PLN

4.1575

Up

4.2236 / 4.2525

4.1074

EUR/RON

4.4900

Flat

4.2913 / 4.5697

USD/ILS

3.8390

Flat

3.4014 / 4/0978

USD/RUB

54.70

Up

78.39 / 100.00

36.782

USD/TRL

2.7375

Up

3.1335 / 3.5000

2.1905

13.098 / 13.856

USD/ZAR

12.415

Up

EUR/RUR

61.50

Flat

EUR/ZAR

13.950

Up

78 FX TRADER MAGAZINE July - September 2015

10.828
52.40 / 70.20

15.489 / 16.788

12.653

TECHNICAL REPORT FX
SELECTED ASIAN FX RATES FEATURED MARKET NZD/USD
NZD/USD completed a 3 year top pattern in January
when the 2013, 2012 and late 2011 lows at .7685, .7461
& .7373 were lost. A retracement of close to 50% of
the 2009-2011 .4901-.8840 advance has so far occurred,
with the 10 year moving average having been lost and a
dead-cross of the 1 & 5 year moving averages also now
evident. With MACD back into negative territory for
the first time in 5 years, we see the risk of a continued
retreat over coming months, with the 2010 / 2007 lows
at .6565-.6649 the next key target area and possibly as
far as .5831-.5930 (76.4% retrace of .4901-.8840 / 2006
low) further out, where potentially a key long-term

higher low could develop above the 2009 one at .4901,


setting up the start of a renewed advance. Successfully
regaining support-turned-resistance around .7685.7742 is needed to delay the anticipated fresh multimonth decline and instead set up a return towards the
.8052-.8541 region, our ideal maximum for a corrective
bounce, where a sub .8833-.8840 lower top could then
develop.
Steve Jarvis
Chief Analyst
Tradermade

MAJOR TRENDS AND TARGETS FOR FX EMERGING MARKETS


As at 16 Jun 15

Current level

Major trend

Major targets

Trend change level

.6565 & .5831

.8541

1.4244 / 1.4732

1.2830

NZD/USD

.6985

Down

USD/SGD

1.3460

Up

USD/MYR

3.7515

Up

3.8283 / 4.0000

3.5333

USD/THB

33.700

Up

34.459 / 36.280

31.750

AUD/CAD

.9555

Flat

AUD/NZD

1.1085

Down

.9781 / .9000

.9398 / 1.0065
1.1302

EUR/AUD

1.4540

Down

1.3189 / 1.2221

1.5331

EUR/NZD

1.6125

Down

1.2667 / 1.0594

1.6437

FX TRADER MAGAZINE July - September 79

FX

conferences & seminars

Event & Dates

Location & Venue

Type

Description

BigData & Analytics,


1-3 July 2015

Novotel London West,


London, UK

Conference

Explore how best to transform your


data into valuable insight

RiskHedge New York,


8 July 2015

Metropolitan Club,
NYC, USA

Conference

Discussions on hedge fund challenges

2nd Lagos Forex Expo,


13-14 August 2015

Lagos, Nigeria

Expo

FX Week USA,
14 July 2015

Midtown Hotel,
NYC, USA

Conference

Event for FX industry leaders to discuss


the most pressing questions facing the
market

Conference

Focus on the application of Sentiment


Analysis to the respective models of
trading

Behavioral Models & Sentiment


Millenium Hotel,
Analysis Applied To Finance,
London, UK
15-16 July 2015
MoneyShow San Francisco,
16-18 July 2015

Marriot Marquis Hotel,


San Francisco, USA

Finance Magnates Tokyo Summit, Mandarin Oriental Hotel,


Tokyo, Japan
29 July 2015

Expo

Conference

Leading FX event in Nigeria

Trading expo in San Francisco


Panels, influential industry speakers,
exhibitions and networking opportunities
Comprehensive training course on
international treasury and cash
management

International Treasury &


Cash Management Training,
3-14 August 2015

London, UK

B2B Forex Forum,


27-28 August, 2015

Radisson Lazurnaya Hotel,


Sochi, Russia

Conference

Leading event for forex professionals

FX Week Asia,
10 September 2015

Singapore

Conference

Platform for FX professionals to discuss


strategies and technologies in FX trading

2015 China Forex Expo,


11-13 September 2015

Shanghai Mart,
Shanghai, China

Middle East Banking


Innovation Summit,
14-15 September 2015

The Palm Resort&Spa,


Dubai, UAE

The All Stars of Options Trading,


New York, USA
15-16 September 2015
Derivative Operations,
28-29 September 2015

Raddison Blue Hotel,


London, UK

Finance & Investment


Central & East Europe,
29 September 2015

Raddison Blue Centrum


Hotel, Warsaw, Poland

80 FX TRADER MAGAZINE July - September 2015

Training
course

Expo

A three-day event for traders,


investors, affiliates, IBs and brokers

Conference

Discussions on the latest trends in


banking innovation

Conference

Event dedicated to options trading

Training
course
Conference

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INTERNATIONAL DATA

FX

FX SPOT MONITOR
Country

Flag

USD Spot

Last vs USD

% Ch 3M

% Ch 12M

12mth High

12mth Low

Eurozone

EUR=

1.1169

1.8%

-17.9%

1.3691

1.0493

UK

GBP=

1.5729

5.7%

-7.5%

1.7163

1.4629

Japan

JPY=

123.94

3.7%

21.4%

125.61

101.15

Switzerland

CHF=

0.9341

-2.7%

4.4%

1.02

0.86

Australia

AUD=

0.7732

-1.4%

-17.6%

0.9496

0.7589

Canada

CAD=

1.2324

-1.5%

14.6%

1.2788

1.0631

New Zealand

NZD=

0.6847

-10.0%

-21.3%

0.882

0.6847

Sweden

SEK=

8.259

-2.7%

23.1%

8.8211

6.6822

Norway

NOK=

7.8233

-0.2%

27.9%

8.31

6.111

Iceland

ISK=

132.26

-2.0%

16.3%

140.18

112.43

Israel

ILS=

3.7558

-4.7%

9.2%

4.0452

3.4007

South Africa

ZAR=

12.167

2.7%

14.3%

12.5755

10.5035

Egypt

EGP=

7.625

-0.1%

6.6%

7.63

7.15

Saudi Arabia

SAR=

3.7498

0.0%

0.0%

3.7595

3.7465

Czech Rep.

CZK=

24.334

-2.4%

20.8%

25.985

20.037

Poland

PLN=

3.724

0.0%

21.7%

3.948

3.0212

Hungary

HUF=

277.07

1.7%

23.4%

290.95

224.48

Russia

RUB=

53.78

-6.2%

56.1%

69.0825

33.7115

Turkey

TRY=

2.6779

3.6%

25.2%

2.7509

2.0859

China

CNY=

6.2066

-0.1%

-0.3%

6.2741

6.1107

Hong Kong

HKD=

7.752

0.0%

0.0%

7.7706

7.7495

Singapore

SGD=

1.3407

-2.2%

7.4%

1.3924

1.2362

Taiwan

TWD=

30.877

-1.1%

3.0%

31.995

29.839

India

INR=

63.5968

1.9%

5.7%

64.1557

59.6875

South Korea

KRW=

1105.73

0.4%

8.3%

1137.12

1008.8

Thailand

THB=

33.76

3.9%

4.0%

33.9

31.74

Malaysia

MYR=

3.7376

2.0%

16.0%

3.766

3.1465

Indonesia

IDR=

13250

2.1%

10.7%

13374

11495

Philippines

PHP=

45.084

0.8%

2.8%

45.27

43.2

Mexico

MXN=

15.3963

2.7%

18.6%

15.7035

12.9119

Brazil

BRL=

3.0748

-3.9%

38.0%

3.2915

2.1934

Chile

CLP=

632.9

2.0%

13.9%

640.79

548.14

Venezuela

VEB=

2150

0.0%

0.0%

2150

2150

Colombia

COP=

2550.53

0.4%

35.5%

2685.5

1837.5

Levels Date: 23-Jun-15

Source: Thomson Reuters

FX TRADER MAGAZINE July - September 81

FX

INTERNATIONAL DATA

CENTRAL BANKS
Country

Flag

Central Bank

Rate Name

Actual

Previous

USA

FED

Fed funds

-0.25

-0.25

Eurozone

ECB

Refi

2.00

2.00

UK

BOE

Bank Repo

0.75

0.75

Japan

BOJ

O/N Call

3.25

3.50

Switzerland

SNB

3 mth Libor

-0.25

-0.25

Australia

RBA

Cash

1.00

1.25

Canada

BOC

O/N Funding

5.75

5.25

New Zealand

RBNZ

Cash

0.1

0.10

Sweden

Riksbank

Repo

5.75

5.75

Norway

Norges Bank

Depo

9.75

9.75

Iceland

CBI

Policy

0.05

0.05

Israel

BOI

Short Term Lending

1.50

1.50

South Africa

Reserve Bank

Repurchase

1.5

1.65

Egypt

CBE

O/N Depo

8.25

8.25

Czech Rep.

CNB

2 Week Repo

7.5

7.50

Poland

NBP

28 Day Intervention

6.00

6.56

Hungary

MNB

2 Week Depo

1.50

1.50

Russia

CBR

Refinancing

7.25

7.50

Turkey

TCMB

O/N Borrowing

1.49

1.49

China

PBC

1 Year Lending

1.75

1.75

Taiwan

CBC

Discount

7.50

7.50

India

RBI

Repo

4.00

4.00

South Korea

BOK

O/N Call

3.00

3.00

Thailand

BOT

Repo

13.75

13.25

Indonesia

BI

BI

3.0

3.00

Philippines

BSP

Repo

4.0

4.00

Mexico

BDM

Target

3.00

3.00

Brazil

BCB

Selic

12.75

12.25

Chile

CBC

MPR

3.00

3.00

Levels Date: 23-Jun-15

82 FX TRADER MAGAZINE July - September 2015

Source: Thomson Reuters

INTERNATIONAL DATA

FX

ECONOMIC DATA
GDP

CPI

Industrial Production

Unemployment

y-o-y

y-o-y

y-o-y

level

USA

2.39

0.0

-0.2

5.5

Eurozone

1.0

0.3

0.1

11.1

UK

2.4

0.1

0.4

5.5

Japan

0.6

0.3

1.2

3.3

Switzerland

1.1

-1.2

NA

3.3

Australia

2.3

1.3

NA

6.0

Canada

-0.6

0.9

NA

6.8

New Zealand (participation)

2.6

0.1

NA

69.6

Sweden

2.5

0.1

2.0

8.0

Norway

0.2

2.1

-2.9

2.7

South Africa

2.1

4.6

-2.00

26.4

Czech Rep.

4.2

0.7

4.3

6.4

Poland

3.6

-0.90

2.8

10.8

Hungary

3.6

0.5

6.30

7.6

Russia

-4.2

0.4

5.50

5.6

China

1.2

6.1

NA

India

7.3

NA

4.1

NA

Mexico

2.5

0.12

1.10

4.31

Brazil

-1.6

0.74

-7.60

6.40

Levels Date: 23-Jun-15

Source: Thomson Reuters

FX POLL
3 Month

Days since Poll

Poll Median

Poll Min

Poll Max

Poll Mean

Std Deviation

Spot@Poll Date

EurUsd

19

1.070

1.000

1.1600

1.0697

0.0410

1.1237

GbpUsd

19

1.510

1.400

1.6300

1.5089

0.0465

1.5364

AudUsd

19

0.750

0.680

0.8400

0.7586

0.0277

0.7687

UsdJpy

19

124.00

118.00

129.00

123.66

2.4800

123.90

UsdChf

19

0.970

0.910

1.0600

0.9798

0.0411

0.9333

UsdCad

19

1.250

1.170

1.3100

1.2503

0.0343

1.2502

EurJpy

19

131.99

123.42

149.64

132.16

5.2900

139.70

EurChf

19

1.0500

0.980

1.1000

1.0455

0.0254

1.0490

EurGbp

19

0.7092

0.6667

0.7616

0.7085

0.0175

0.7310

GbpJpy

19

186.92

168.94

207.69

186.58

6.7300

191.06

1 Year

Days since Poll

Poll Median

Poll Min

Poll Max

Poll Mean

Std Deviation

Spot@Poll Date

EurUsd

19

1.0400

0.9200

1.1900

1.0477

0.0670

1.1237

GbpUsd

19

1.5100

1.2900

1.6700

1.507

0.0826

1.5364

AudUsd

19

0.7313

0.6500

0.8700

0.7391

0.0466

0.7687

UsdJpy

19

127.00

118.00

135.00

126.86

3.7100

123.90

UsdChf

19

1.0200

0.8800

1.2200

1.0244

0.0631

0.9333

UsdCad

19

1.2500

1.1000

1.39

1.2519

0.0576

1.2502

EurJpy

19

132.45

114.68

153.51

132.48

7.7500

139.70

EurChf

19

1.0800

0.9500

1.1500

1.0686

0.0485

1.0490

EurGbp

19

0.6929

0.6259

0.7984

0.6946

0.0335

0.7310

GbpJpy

19

190.39

163.83

216.48

191.14

11.5000

191.06

Levels Date:

23-Jun-15

Source: Thomson Reuters


FX TRADER MAGAZINE July - September 83

FX

INTERNATIONAL DATA

MARKETS VIEW
Stock Indices

Last

% Ch 6M

% Ch 12M

Commodities
Gold

Last

% Ch 6M

% Ch 12M

1175.51

0%

-11%

MSCI World

1797.81

4%

3%

Silver

15.81

1%

-24%

Dow Jones Ind.

18144.07

1%

7%

Brent DTD

60.21

3%

-47%

WTI

61

11%

-43%

S&P 500

2230.512

12%

32%

Nasdaq 100

4548.74

6%

20%

Eurostoxx 50

3629.58

15%

11%

Bonds

UK FTSE 100

6856.87

4%

1%

5Y Euro

Last

% Ch 6M

% Ch 12M

0.148

147%

-62%

Dax

11539.46

17%

16%

10Y Euro

0.867

44%

-35%

Cac 40

5058.31

19%

12%

10Y US Treasury

2.409

12%

-8%

FT MIB

23591.11

24%

9%

30Y US Treasury

3.201

17%

-7%

Swiss SMI

9131.02

1%

6%

10Y UK Gilt

2.111

15%

-23%

Nikkei 225

20868.03

18%

36%

10Y CH Govt Bond

0.169

-53%

-76%

Australia AORD

5672.744

5%

4%

HK Hang Seng

27404.97

17%

20%

Money Markets

Last

% Ch 6M

% Ch 12M

Shanghai Comp.

4690.0836

50%

132%

US 6M Depo

0.4438

25%

36%

Singapore StraitT.

3354.96

1%

3%

EUR 6M Depo

0.0480

-73%

-84%

India BSE30

27916.86

1%

12%

GBP 6M Depo

0.7284

7%

4%

Brazil Bovespa

53772.43

7%

-1%

CHF 6M Depo

-0.7230

4255%

-1133%

965.06

19%

-30%

JPY 6M Depo

0.1364

-6%

Russia RTSI
Levels Date: 23-Jun-15

-22%
Source: Thomson Reuters

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84 FX TRADER MAGAZINE July - September 2015

Economic Calendar

FX

JULY, AUGUST, SEPTEMBER 2015


GMT Time

8:30am

July

Wed 1

Thu 2

Fri 3

Mon 6

Tue 7

Wed 8

Thu 9

Fri 10

Tue 14

Wed 15

GBP

Average Earnings Index 3m/y

1:00am

CNY

Manufacturing PMI

8:30am

GBP

Claimant Count Change

1:30am

AUD

Building Approvals m/m

12:30pm

CAD

Manufacturing Sales m/m

1:45am

CNY

HSBC Final Manufacturing PMI

12:30pm

USD

PPI m/m

2:00pm

CAD

BOC Monetary Policy Report

2:00pm

CAD

BOC Rate Statement

8:30am

GBP

Manufacturing PMI

12:15pm

USD

ADP Non-Farm Employment Change

Wed 15

2:00pm

USD

ISM Manufacturing PMI

2:00pm

CAD

Overnight Rate

Tentative

NZD

GDT Price Index

Tentative

NZD

GDT Price Index

12:30pm

USD

Non-Farm Employment Change

3:15pm

CAD

BOC Press Conference

12:30pm

USD

Unemployment Claims

11:45am

EUR

Minimum Bid Rate

12:30pm

USD

Unemployment Rate

1:30am

AUD

Retail Sales m/m

1:30am

AUD

Trade Balance

8:30am

GBP

Services PMI

2:00pm

CAD

Ivey PMI

12:30pm

Thu 16

Fri 17

12:30pm

EUR

ECB Press Conference

12:30pm

USD

Unemployment Claims

2:00pm

USD

Philly Fed Manufacturing Index

12:30pm

CAD

Core CPI m/m

USD

Building Permits

2:00pm

USD

ISM Non-Manufacturing PMI

12:30pm

USD

CPI m/m

10:00pm

NZD

NZIER Business Confidence

12:30pm

USD

Core CPI m/m

1:30am

AUD

NAB Business Confidence

2:00pm

USD

Prelim UoM Consumer Sentiment

4:30am

AUD

Cash Rate

1:45am

CNY

HSBC Flash Manufacturing PMI

4:30am

AUD

RBA Rate Statement

7:00am

EUR

French Flash Manufacturing PMI

8:30am

GBP

Construction PMI

7:30am

EUR

German Flash Manufacturing PMI

8:30am

GBP

Manufacturing Production m/m

12:30pm

CAD

Wholesale Sales m/m

12:30pm

CAD

Trade Balance

1:30am

AUD

Monetary Policy Meeting Minutes

12:30pm

USD

Trade Balance

8:00am

EUR

German Ifo Business Climate

12:30pm

CAD

Building Permits m/m

1:30am

AUD

CPI q/q

12:30pm

GBP

Annual Budget Release

6:00pm

USD

FOMC Meeting Minutes

1:30am

AUD

Employment Change

1:30am

AUD

Unemployment Rate

1:30am

CNY

CPI y/y

Tentative

CNY

Trade Balance

11:00am

GBP

Official Bank Rate

Mon 20

Tue 21

Wed 22

Thu 23

8:30am

GBP

MPC Official Bank Rate Votes

9:00pm

NZD

Official Cash Rate

9:00pm

NZD

RBNZ Rate Statement

1:00am

NZD

ANZ Business Confidence

Tentative

JPY

Monetary Policy Statement

Tentative

JPY

BOJ Press Conference

8:30am

GBP

Retail Sales m/m

Tentative

GBP

MPC Rate Statement

12:30pm

CAD

Core Retail Sales m/m

12:30pm

USD

Unemployment Claims

12:30pm

USD

Unemployment Claims

12:30pm

CAD

Employment Change

12:30pm

CAD

Unemployment Rate

8:30am

GBP

CPI y/y

9:00am

EUR

German ZEW Economic Sentiment

12:30pm

USD

Core Retail Sales m/m

12:30pm

USD

Retail Sales m/m

10:45pm

NZD

CPI q/q

2:00am

CNY

GDP q/y

2:00am

CNY

Industrial Production y/y

Mon 27
Tue 28
Wed 29

Thu 30

12:30pm

USD

Core Durable Goods Orders m/m

10:45pm

NZD

Trade Balance

8:30am

GBP

Prelim GDP q/q

2:00pm

USD

CB Consumer Confidence

6:00pm

USD

FOMC Statement

6:00pm

USD

Federal Funds Rate

1:30am

AUD

Building Approvals m/m

12:30pm

USD

Advance GDP q/q

12:30pm

USD

Unemployment Claims

FX TRADER MAGAZINE July - September 85

FX

Fri 31

Economic Calendar

1:30am

AUD

12:30pm

CAD

PPI q/q
GDP m/m
August

Sat 1
Mon 3

Tue 4

Wed 5

Thu 6

Fri 7

Sun 9
Tue 11

Wed 12

1:00am

CNY

9:30am
Wed 12

Manufacturing PMI

1:45am

CNY

HSBC Final Manufacturing PMI

8:30am

GBP

Manufacturing PMI

Thu 13

ISM Manufacturing PMI

GBP

BOE Gov Carney Speaks

9:30am

GBP

BOE Inflation Report

10:45pm

NZD

Retail Sales q/q

11:50pm

JPY

Prelim GDP q/q

12:30pm

USD

Core Retail Sales m/m

12:30pm

USD

Retail Sales m/m

12:30pm

USD

Unemployment Claims

6:00am

EUR

German Prelim GDP q/q

12:30pm

CAD

Manufacturing Sales m/m

12:30pm

USD

PPI m/m

2:00pm

USD

1:30am

AUD

Retail Sales m/m

1:30am

AUD

Trade Balance

4:30am

AUD

Cash Rate

4:30am

AUD

RBA Rate Statement

2:00pm

USD

Prelim UoM Consumer Sentiment

2:00pm

CAD

Ivey PMI

1:30am

AUD

Monetary Policy Meeting Minutes

Tentative

NZD

GDT Price Index

10:45pm

NZD

Employment Change q/q

10:45pm

NZD

Unemployment Rate

8:30am

GBP

12:15pm

Fri 14

8:30am

GBP

CPI y/y

12:30pm

USD

Building Permits

Tentative

NZD

GDT Price Index

Services PMI

3:00am

NZD

Inflation Expectations q/q

USD

ADP Non-Farm Employment Change

8:30am

GBP

MPC Official Bank Rate Votes

12:30pm

CAD

Trade Balance

12:30pm

USD

CPI m/m

12:30pm

USD

Trade Balance

USD

Core CPI m/m

2:00pm

USD

ISM Non-Manufacturing PMI

6:00pm

USD

FOMC Meeting Minutes

1:30am

AUD

Employment Change

1:45am

CNY

HSBC Flash Manufacturing PMI

1:30am

AUD

Unemployment Rate

Tentative

JPY

Monetary Policy Statement

8:30am

GBP

Manufacturing Production m/m

Tentative

JPY

BOJ Press Conference

11:00am

GBP

Official Bank Rate

7:00am

EUR

French Flash Manufacturing PMI

Tentative

GBP

MPC Rate Statement

7:30am

EUR

German Flash Manufacturing PMI

12:30pm

USD

Unemployment Claims

8:30am

GBP

Retail Sales m/m

1:30am

AUD

RBA Monetary Policy Statement

12:30pm

CAD

Wholesale Sales m/m

Tentative

CNY

Trade Balance

12:30pm

USD

Unemployment Claims

8:30am

GBP

Construction PMI

2:00pm

USD

Philly Fed Manufacturing Index

12:30pm

CAD

Building Permits m/m

12:30pm

CAD

Employment Change

12:30pm

CAD

Unemployment Rate

12:30pm

USD

Non-Farm Employment Change

12:30pm

USD

Unemployment Rate

1:30am

CNY

CPI y/y

1:30am

AUD

5:30am

CNY

9:00am

EUR

German ZEW Economic Sentiment

8:30am

GBP

Average Earnings Index 3m/y

8:30am

GBP

Claimant Count Change

Tue 18

Wed 19

Thu 20

12:30pm

CAD

Core CPI m/m

12:30pm

CAD

Core Retail Sales m/m

Mon 24

8:00am

EUR

German Ifo Business Climate

Tue 25

2:00pm

USD

CB Consumer Confidence

12:30pm

USD

Core Durable Goods Orders m/m

10:45pm

NZD

Trade Balance

NAB Business Confidence

1:30am

AUD

Private Capital Expenditure q/q

Industrial Production y/y

8:30am

GBP

Second Estimate GDP q/q

12:30pm

USD

Prelim GDP q/q

12:30pm

USD

Unemployment Claims

1:00am

NZD

ANZ Business Confidence

86 FX TRADER MAGAZINE July - September 2015

Fri 21

Wed 26

Thu 27

Mon 31

Economic Calendar
September
1:00am

Tue 1

Thu 3

Fri 4

Mon 7

Tue 8

Wed 9

Fri 11

PPI m/m

USD

Prelim UoM Consumer Sentiment

HSBC Final Manufacturing PMI

1:30am

AUD

Monetary Policy Meeting Minutes

Cash Rate

9:00am

EUR

German ZEW Economic Sentiment

12:30pm

USD

Core Retail Sales m/m

12:30pm

USD

Retail Sales m/m

Tentative

NZD

GDT Price Index

8:30am

GBP

CPI y/y

12:30pm

CAD

Manufacturing Sales m/m

12:30pm

USD

CPI m/m
Core CPI m/m

1:45am

CNY

4:30am

AUD

4:30am

AUD

RBA Rate Statement

8:30am

GBP

Manufacturing PMI

12:30pm

CAD

GDP m/m

2:00pm

USD

ISM Manufacturing PMI

NZD

GDT Price Index

1:30am

AUD

Building Approvals m/m

Fri 11

Tue 15

Wed 16

AUD

GDP q/q

12:30pm

USD

12:15pm

USD

ADP Non-Farm Employment Change

10:45pm

NZD

GDP q/q

1:30am

AUD

Retail Sales m/m

7:30am

CHF

Libor Rate

1:30am

AUD

Trade Balance

7:30am

CHF

SNB Monetary Policy Assessment

8:30am

GBP

Services PMI

8:30am

GBP

Average Earnings Index 3m/y

11:45am

EUR

Minimum Bid Rate

8:30am

GBP

Claimant Count Change

12:30pm

CAD

Trade Balance

12:30pm

USD

Building Permits

12:30pm

EUR

ECB Press Conference

12:30pm

USD

Unemployment Claims

12:30pm

USD

Trade Balance

2:00pm

USD

Philly Fed Manufacturing Index

12:30pm

USD

Unemployment Claims

6:00pm

USD

FOMC Economic Projections

2:00pm

CAD

Ivey PMI

6:00pm

USD

FOMC Statement

2:00pm

USD

ISM Non-Manufacturing PMI

6:00pm

USD

Federal Funds Rate

12:30pm

CAD

Employment Change

6:30pm

USD

FOMC Press Conference

12:30pm

CAD

Unemployment Rate

8:30am

GBP

Retail Sales m/m

12:30pm

USD

Non-Farm Employment Change

12:30pm

USD

Unemployment Rate

Thu 17

Fri 18
Mon 21

12:30pm

CAD

Core CPI m/m

12:30pm

CAD

Wholesale Sales m/m

1:45am

CNY

HSBC Flash Manufacturing PMI

7:00am

EUR

French Flash Manufacturing PMI

7:30am

EUR

German Flash Manufacturing PMI

Tentative

JPY

Monetary Policy Statement

Tentative

JPY

BOJ Press Conference

8:00am

EUR

German Ifo Business Climate

GBP

MPC Official Bank Rate Votes

8:30am

GBP

Construction PMI

1:30am

AUD

NAB Business Confidence

Tentative

CNY

Trade Balance

8:30am

GBP

Manufacturing Production m/m

9:00am

GBP

Inflation Report Hearings

1:30am

CNY

CPI y/y

12:30pm

CAD

Building Permits m/m

8:30am

2:00pm

CAD

BOC Rate Statement

12:30pm

2:00pm

CAD

Overnight Rate

9:15am

EUR

Targeted LTRO

9:00pm
9:00pm

NZD
NZD

Official Cash Rate


RBNZ Press Conference

12:30pm

USD

Core Durable Goods Orders m/m

12:30pm

USD

Unemployment Claims

9:00pm

NZD

RBNZ Rate Statement

Fri 25

12:30pm

USD

Final GDP q/q

1:30am

AUD

Employment Change

Mon 28

9:45pm

NZD

Trade Balance

AUD

Unemployment Rate

Tue 29

1:30am
Thu 10

USD

2:00pm

Manufacturing PMI

1:30am
Wed 2

12:30pm

CNY

Tentative

FX

11:00am

GBP

Tue 22

Wed 23

Thu 24

Official Bank Rate

Tentative

GBP

MPC Rate Statement

12:30pm

USD

Unemployment Claims

5:30am

CNY

Industrial Production y/y

Wed 30

CAD

Core Retail Sales m/m

2:00pm

USD

CB Consumer Confidence

12:00am

NZD

ANZ Business Confidence

8:30am

GBP

Current Account

12:15pm

USD

ADP Non-Farm Employment Change

12:30pm

CAD

GDP m/m

FX TRADER MAGAZINE July - September 87

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