THE YEN AND JAPANESE BONDS p.

22
Strategies, analysis, and news for FX traders

November 2010 Volume 7, No. 11

QUANTITATIVE EASING:
Dollar in the balance? p. 6 Much ado about nothing? p. 12

MULTI-MOVING average trend system for currencies p. 18

SPOT CHECK: AUD/USD p. 16

DOES THE AUSSIE DOLLAR have some gas left in the tank? p. 33

CONTENTS
Contributors ...................................................... 4 Global Markets QE2: Who wins, who loses? ......................6
Find out which currencies are in the best and worst positions as the Fed renews stimulus efforts via quantitative easing. By Currency Trader Staff

Currency Futures Snapshot ................. 26 International Markets ............................ 28
Numbers from the global forex, stock, and interest-rate markets.

Events .......................................................31
Conferences, seminars, and other events.

On the Money Don’t fight the Fed ................................... 12
Quantitative easing, and its likely impact, is widely misunderstood — except when it comes to the dollar. By Barbara Rockefeller

Global Economic Calendar ........................ 32
Important dates for currency traders.

Forex Journal ...........................................33
Buying high and looking higher.

Spot Check Australian dollar/U.S. dollar .................... 16
The Aussie dollar recently pushed above a couple of notable resistance levels and is now in relatively uncharted territory. By Currency Trader Staff

Trading Strategies Multiple average trend-following ............ 18
Translating a multi-moving average technique into a mechanical forex-trading system highlights the benefits of simplicity and diversification. By Daniel Fernandez

Looking for an advertiser?
Click on the company name for a direct link to the ad in this month’s issue. dbFX

Advanced Strategies The yen and Japanese bond markets ............................ 22
The idiosyncratic yen appears slightly less exceptional when analysis adjusts for “permaexpectations” of higher interest rates in Japan. By Howard L. Simons

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Questions or comments?
Submit editorial queries or comments to webmaster@currencytradermag.com
2 November 2010 • CURRENCY TRADER

CONTRIBUTORS
q Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on
A publication of Active Trader ®

a wide range of economic and financial market issues. q Daniel Fernandez is an active trader with a strong interest in calculus, statistics, and economics who has been focusing on the analysis of forex trading strategies, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For the past two years he has published his research and opinions on his blog “Reviewing Everything Forex,” which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://fxreviews.blogspot.com). Fernandez is a graduate of the National University of Colombia, where he majored in chemistry, concentrating in computational chemistry. He can be reached at dfernandezp@unal.edu.co. q Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies (For Dummies, 2004), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund.

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

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

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

Volume 7, Issue 11. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2010 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.

4

November 2010 • CURRENCY TRADER

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GLOBAL MARKETS

QE2: Who wins, who loses?
Find out which currencies are in the best and worst positions as the Fed renews stimulus efforts via quantitative easing.
BY CURRENCY TRADER STAFF

Heading into the final months of 2010, the global economy is continuing to rebound from the financial crisis, but there’s a clear dichotomy between mature and emerging economies, with the latter leading the growth charge. This has left several major powers, including the U.S. and Japan, grappling with the challenge of finding new ways to inject even more stimulus into their growing but stillsluggish economies. The situation raises several questions for traders and investors, especially in the forex arena. Some market observers wonder why additional stimulus in the form of central bank purchases of Treasuries — so-called quantitative easing (QE) — is being implemented. Did the first round work, or not? What impact will the new round of quantitative easing (“QE2”) likely have on the U.S. and global economies? What are the risks of QE2 for the dollar? Finally, what are the other likely currency winners and losers in the next few months if QE2 occurs in the U.S.?

Unbalanced GDP growth

Analysis of global gross domestic product (GDP) rates reveals the unevenness of the economic recovery. Nomura’s late-October forecasts have 2010 global GDP coming in around 4.7 percent, with emerging-market economies leading the way at a 7.2-percent pace and developed economies trailing significantly at 2.5 percent. The BRICs (Brazil, Russia, India, and China) are expected to have the strongest growth at 8.7 percent. Nomura forecasts the global economy to slow to a 4-percent pace in 2011, with developed nations downshifting to a 1.9-percent rate. Credit Suisse forecasts global GDP growth at 4.7 percent this year and 4.3 percent in 2011. “The global economy continues to grow, but at a relatively subdued pace, especially in the advanced economies,” says Jay Bryson, global economist at Wells Fargo Securities. He says advanced economies remain weighed down by “leverage problems that need to be corrected,”
6

including personal balance-sheet issues of individual consumers. However, as they continue to save more and pay down debt, consumer spending weakens, Bryson notes — a conundrum for any economy powered in large part by consumer spending. “Debt issues take a long time to work through,” he notes. “There isn’t a magic bullet to turn this around overnight.” U.S. numbers have expanded from the financial crisis, but they are not robust. According to Credit Suisse, firstquarter GDP was 3.7 percent, second quarter was 1.7 percent, third quarter is estimated at 2.6 percent, and the fourth quarter forecast is 1.6 percent — an overall annual average growth rate of 2.8 percent for the year. Also, unemployment remains stubbornly high and inflation remains dangerously low, with some economists worried the balance could tip toward deflation. In August U.S. Federal Reserve chief Ben Bernanke first hinted the Fed would renew Treasury purchases, and reinforced the message in October. At its Nov. 2-3 meeting, the Fed announced it would purchase $600 billion of additional longer-term Treasuries by the end of the second quarter of 2011 (approximately $75 billion per month).

From QE1 to QE2

How did the global economy get to this juncture? James Pressler, associate international economist at the Northern Trust Company notes the global economy was flooded with money in late 2008 to kick-start growth. “For a brief period, it stimulated demand and sent growth rates back up,” he says. However, Pressler points out this was a temporary fix. “Let’s face it, stimulus is spiking the punch bowl,” he says. “You really want to get the party going? Dump rum in the punch bowl. And at the end of 2008 and into 2009, a lot of rum was being thrown in the global punch bowl.” But as is often the case after too much of a good thing,
November 2010 • CURRENCY TRADER

Pressler notes, we’re now suffering the after-effects. “Now, many people are saying, ‘I don’t feel so great,’” he says. Fast forward to mid-2010: The economic recovery rate in the U.S. was at a much slower pace than the Fed expected, according to David Jones, president and CEO of DMJ Advisors and former 35-year Wall Street economist. “The pace is so slow it’s unlikely to bring down the elevated unemployment rate,” he says. “The Fed is ready to respond with a carefully calibrated second round of quantitative easing.” It’s not necessarily that the first round of QE didn’t “work.” Instead, Jones says, “after a financial crisis as big as we’ve been through, financial institutions are still deleveraging. Also, consumers are still trying to reduce their balance sheets, which is a significant factor limiting the recovery.” After the Nov. 2-3 meeting, the Fed announced additional QE with the goal of “easing financial conditions and to put downward pressure on long-term interest rates,” according to Jones. However, there’s some discord within the Fed regarding the appropriateness of a second round of bond purchases, and much debate in the financial community regarding its potential impact. Bryson says simply: “I don’t know how much it will actually do.” How much of QE2 is already priced into long-term interest rates? “[10-year Treasury yields] have fallen from 2.8 percent in August to around 2.5 percent now,” Jones says. “The stock market has rallied strongly and the dollar has plummeted. One could argue the markets have largely discounted a milder version of quantitative easing.” Jones estimates the markets had currently priced in roughly $500 billion in purchases of longer-term Treasuries over a six-month period. (The first round of quantitative easing in 2008-2009 represented around $1.725 trillion.) The actual number came in around $100 billion higher. “Now that we have a much improved financial sector, we have to ask how much more bang for the buck you get from pushing long-term rates lower,” he says. Jones also wonders how the political environment feeds into the current caution in the business community regarding hiring and investment. “There’s uncertainty in the business sector, with the threat of higher taxes and uncertainty over regulation,” he says. “Given there are other factors that have caused businesses to be very cautious regarding hiring, in these circumstances a second round of quantitative easing may not have the impact the first round had.” Overall, Jones believes additional stimulus will likely have some impact, but concedes the Fed is “basically running out of ammunition in terms of easing financial conditions.”

tended consequences of renewed quantitative easing. The goal of QE is to lower long-term interest rates even further to stimulate economic action. However, there’s always risk that low rates could inflate asset price bubbles again, according to Bryson. He believes emerging-market equity and property markets, which have been performing strongly, are potential “bubble” areas. (For more on the cycle of central bank-driven bubbles and busts, see “The importance of being carried” in the January 2011 issue of Active Trader magazine, on newsstands in December.) For every economist harping about current deflation, you can likely find another who will warn the danger we may face is future inflation. “If you keep rates too low, too long, further out you could end up with high inflation in terms of goods and services,” Bryson says. Pressler adds, “Some people argue if that money gets put to work, it could cause significant imbalances and aggravate inflation.” Jones says the “biggest danger is that the Fed is perceived as monetizing Treasury debt in relation to a runaway deficit, which could eventually destabilize inflation. The lesson that the Fed learned from the 1970s is they have to keep inflation expectations stable at all costs.”

What about Japan?

The inflation argument

In addition to its known risks, there’s the issue of uninCURRENCY TRADER • November 2010

Any discussion of U.S. quantitative easing winds its way to Japan’s efforts in the same vein, and its ongoing failure to combat the country’s chronic economic stagnation. Many critics of Japan’s nearly 20-year battle with deflation say the Bank of Japan (BOJ) and Ministry of Finance simply haven’t been aggressive enough in attacking deflation. Japan has struggled with deflation for more than a decade, and growth remains sluggish. According to Credit Suisse, Japan’s first quarter GDP came in at 5 percent, but it slowed to 1.5 percent in the second quarter. The third quarter is forecast at 2 percent and the fourth quarter at -0.9 percent. Pressler’s research team believes before 2010 is over Japan could fall back into a technical recession, with two back-to-back quarters of negative GDP growth. Recently, Japan announced a fresh round of quantitative easing and began taking steps to rein in the runaway bull trend in the yen, which recently posted a 15-year high vs. the dollar (Figure 1). In September, Japanese authorities reportedly intervened in the FX markets for the first time since 2004, selling about 2.1 trillion yen. Also, in early October the BOJ cut its official overnight call rate from 0.10 percent to a range of zero to 0.10 percent, and announced it would set up a 5-trillion yen fund ($60 billion) to buy government bonds and other assets. Figure 1, however, suggests the latest QE from Japan has had little impact as the yen continues to strengthen against the dollar. “You may not see an immediate response,” says Tu Packard, senior economist at Moody’s Analytics. “This is a big struggle. Put yourself in the BOJ’s shoes — there’s only so much they can do.”
7

GLOBAL MARKETS

FIGURE 1: ANOTHER YEN MILESTONE

However, Pressler looks at the rising yen and Japan’s recent QE from a different perspective. “If anything, the FX markets treat it as a validation that the BOJ is very worried about deflation,” he explains. “They aren’t thinking this is necessarily the cure for deflation.” Pressler says for the BOJ to make a difference, it must “keep its foot on the pedal and take a firm stance. Tell the market ‘we’re going to throw yen at you until we see a reversal of this deflation situation.’” Despite his earlier comments regarding stimulus, Pressler, who has studied the Japanese situation closely, says QE2 in the U.S. “has to be done. Whether it causes a dramatic turnaround is hard to say. But it puts a floor under the economy’s woes, and that’s a good start.”

Although Japan recently began taking steps to rein in a runaway bull trend in the yen, including a renewed quantitative easing campaign and FX market intervention, the dollar/yen pair has fallen below its 1995 low.
Source for all figures: TradeStation

Market maneuvers

FIGURE 2: EURO REBOUND

After falling to its lowest level since 2006 in early June, the Euro/U.S. dollar pair jumped 19 percent 1.4158 in mid-October before consolidating. Most analysts see further gains in the pair by year-end.
8

With renewed quantitative easing coming from the U.S. Fed, the next question is how to trade it. What are the expected currency winners and losers in November and December as the market begins to deal with the impact of the new stimulus? First, market watchers agree QE is bearish for the dollar. The goal, after all, is “downward pressure on longterm rates, which makes it less attractive to invest in U.S. assets,” Jones says. Since mid-June the U.S. dollar has been in a bear trend vs. the Euro, with the EUR/USD pair jumping from $1.18 to $1.41 in mid-October (Figure 2). Few expect the dollar to significantly reverse its relative weakness in the near future. “We think the dollar will be broadly weaker against all the major currencies,” says Dan Katzive, currency strategist at Credit Suisse. Nick Bennenbroek, head of currency strategy at Wells Fargo, holds a similar outlook, pointing out that QE increases the supply of dollars. “According to the law of supply and demand, that will be bearish for the dollar,” he says. “We suspect the
November 2010 • CURRENCY TRADER

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dollar will continue to weaken after we get quantitative easing. To an extent, you can argue it’s priced into the market, but it will continue to be a negative force on the dollar. There’s always the possibility of more QE.” Bennenbroek targets additional Euro/dollar strength, taking the pair toward $1.4300-1.4500 by year-end.

More gains ahead

Other expected beneficiaries of the current scenario are mostly currencies that have already chalked up healthy gains this year. “The main winners will be commodity-based currencies like the Australia and New Zealand dollars — and Canada could probably do okay,” Bennenbroek says. Australia and New Zealand especially are in a position to benefit from favorable interest-rate differentials. While the U.S. is holding official interest rates at near zero, Australia and New Zealand are “quite likely to see interest rates move higher,” Bennenbroek explains. He forecasts medium-term gains in those currencies, with a 12-month target of 1.0600 in the Aussie/U.S. dollar pair (AUD/USD) and .8000 in the New Zealand/U.S. dollar pair (NZD/USD). Figure 3 shows a weekly chart of both pairs. Sebastien Galy, currency strategy at BNP Paribas, sees Asian currencies relative to the dollar as QE2 winners. FIGURE 3: BENEFITS DOWN UNDER “Relative to mature markets, QE2 is already priced in,” he says, adding, “$500 billion [in QE] was already priced into the Euro/dollar at $1.3850.” This, he contends, means “Asian currencies such as the Indonesia rupiah (IDR), Korean won (KRW), and Indian rupee (INR) are a safer bet on a multimonth basis.” However, he stresses that gains in these currencies vs. the dollar are more likely to be gradual rather than large, sudden moves.

catalyst for this near-term profit-taking, which could take “Euro/dollar below $1.3500 by year-end.” Although Galy expects any dollar rally to be a countertrend move in the longer downtrend, he believes it could be a fairly “brutal” correction. For example, he pegs potential for Aussie/dollar to retreat to the .8700-.8500 zone on such a move. “Everyone has the same position on,” he notes. “It will wash out in a week or two.” After this episode Galy ultimately sees a “stabilization, then recovery and back to the same risk trade.” Following the correction, he expects risky assets to outperform with a bias toward long-Asia/short-dollar trades. As always, traders need be cautious heading into yearend because of potentially less-liquid conditions in the forex world and other financial markets. “Market makers’ willingness to take risks will be reduced because they are defending their compensation going into year-end,” Galy notes. Time-honored advice includes limiting risk and protecting profits. “For the retail trader, the potential for slippage is significant,” Galy warns. “Don’t take too much risk going into year-end.” y

Upside dollar correction?

Galy thinks the U.S. dollar may be ripe for a corrective move in the short-term. “The market is poised for a correction — profit-taking type of behavior,” he says. “We’ve been trending in the shortdollar/long-risk assets since the end of August. My guess is we will see a comeback in the dollar.” He anticipates either “shock” or “disappointment in QE2” as a potential
10

The already strong Australian and New Zealand dollars are poised to benefit — over time — from continued U.S. dollar weakness. However, some analysts think the U.S. currency could experience a strong countertrend rebound before another major bear move emerges.

November 2010 • CURRENCY TRADER

CURRENCY TRADER • October 2010

11

On THE MONEY ON the Money

Don’t fight the Fed
Quantitative easing, and its likely impact, is widely misunderstood — except when it comes to the dollar.
BY BARBARA ROCKEFELLER

As the dollar started to rally in late October, a newswire ran the headline “Inflation fear drives dollar higher.” Wait a minute. Inflation fear causes currencies to fall, doesn’t it? Yes. (Be careful what you read.) So, what is really happening, and what’s likely to happen next? First, inflation. The “inflation fear” in the headline is deduced from the auction of five-year TIPS (inflation-adjusted Treasury notes), which sold at $105.50 for a $100 face value, or an initial negative return on a nominal

basis of -0.55 percent. Investors will get a positive return if inflation goes up. That investors were willing to overpay to get their hands on inflation-protected notes means they believe inflation will rise. From Fed Chairman Ben Bernanke’s point of view, this is a good thing, or at least a less-bad thing. A little fear of inflation is better than panic over deflation. Economists and market mavens can’t agree on how to measure inflation expectations. Just comparing the yield on T-notes against the same-tenor TIPS Barbara Rockefeller Currency Trader Mag Nov 2010 fails to account for the lesser liquidFigure 1 Dollar Index FIGURE 1: REACTION TO PROPOSED QE2 ity in TIPS. Even so, the breakeven MACD (-0.66432) 0.2 0.1 between the protected and unpro0.0 -0.1 tected had risen from 1.13 percent last -0.2 -0.3 -0.4 summer to about 1.78 percent in late -0.5 -0.6 -0.7 October. -0.8 -0.9 Another measure is the spread -1.0 -1.1 -1.2 between the 30-year and the 10-year, U.S. Index (77.6240, 78.2730, (DXY), daily Dollar dollar index 77.5590, 78.1490, +0.44100) 85 which stands at around 1.30 percent 85 Dollar drops on in late October, or a difference of 0.48 84 prospect of QE2 84 percent from the same-tenor five-year 83 Dark red 100-day 83 moving average concomparison. Both measures purport to 82 verges to green 200put a number on inflation expectations, 82 day moving average 81 but this is a pretty big margin of error. 81 80 Of course, you can always ask con80 sumers what inflation they expect, 79 79 and fat lot of good that does you. The 78 78 late-October Conference Board sur77 vey showed U.S. consumers expect 77 Dollar rises on talk 76 of small QE2 inflation to rise to 5 percent in one 76 75 year, from about 2 percent currently. 9 16 23 30 6 6 2 13 20 27 4 11 18 25 1 8 15 22 29 Because home prices are included in August September October November that reckoning, a high forecast may be The dollar initially fell at the prospect of a new round of quantitative easing, but wishful thinking. In any case, 5 percent then rallied in late October when it emerged the amount might be as low as is outrageously and unrealistically $200 billion. high, and suggests even greater ecoSource: Chart — Metastock; data — Reuters and eSignal nomic illiteracy than we imagined.

12

November 2010 • CURRENCY TRADER

New talk of inflation, however unrealistic, may mark the end of the deflation scare that is one of the top justifications for quantitative easing (QE). And that leads us to the second big factor pushing interest rates and currencies today. Bernanke made it clear at the Jackson Hole central bankers’ meeting in late August that a second round of QE, dubbed QE2, was on the table. Estimates of the size of this second round ranged initially from $500 billion, a number mentioned by New York Fed President William C. Dudley, to Goldman Sach’s $2-4 trillion. The very thought of another round of QE riled knee-jerk monetarists, who believe a giant increase in money supply invariably leads to inflation, all else being equal. The dollar fell on the prospect of QE2 — and then rose when it emerged in late October that the amount might be as low as $200 billion (Figure 1). But of course, all other things are not equal these days. It’s a mistake to apply the monetarists’ rule that inflation is always and everywhere a function of an increase in money supply — without also considering the velocity of money. Extra money that just sits in bank reserves (earning interest, by the way) does not promote economic activity, and thus does not create inflation. The Fisher equation, on which the monetarist rule is based, states that money supply times velocity equals production times inflation.

The velocity of money

What is velocity? The turnover rate of money in the real economy. Under fractional reserve banking, when I pay the plumber $100, he deposits the check in the bank and the bank sets aside a fraction, say 15 percent, as reserves, and lends out the remaining $85. The baker borrows the $85 to pay for butter and the dairyman deposits his check in his bank. The banks again reserves 15 percent and lends the remaining $72.30 to the carpenter, who pays his lumber bill, and so on. The resulting multiple use of the same money is named the “multiplier effect.” Some folks dislike debt so much on genFIGURE 2: M1 MONEY MULTIPLIER eral principle they fail to appreciate that the debt component of money supply is the key driver of economic growth. If we didn’t have fractional reserve banking, we wouldn’t necessarily still be driving horse-drawn buggies, but we wouldn’t have the technology-laden life we have today, either. Figure 2 shows the money multiplier from the St. Louis Fed. The multiplier always drops during a recession, but the drop in the 2008-09 recession was extraordinarily steep. The multiplier is creeping up in 2010, but is less than 1, meaning money is being “re-used” or lent out by banks at a snail’s pace. Look The multiplier always drops during a recession, but the drop in the 2008-2009 at the left-hand side of the multiplier recession was extraordinarily steep. (Shaded areas indicate U.S. recessions.) chart, when it was more than three Source: Federal Reserve Bank of St. Louis http://research.stlouisfed.org/fred2/series/MULT times higher in 1985.
CURRENCY TRADER • November 2010

We can’t blame just the banks, although paying interest on reserves is kind of silly if what the Fed really wants to do is to goose lending. The reason the multiplier is so low is that everyone, from consumers to banks, is rebuilding their balance sheets after the crisis. Consumers are reducing debt, at an annual rate of 4.4 percent in 2009 and 2.3 percent in the first half of 2010. With the housing market now tied up in knots because of the foreclosure problem, much mortgage lending is stalled. Bank lending to corporations has contracted as companies are sitting on a $1 trillion-plus pile of cash from seven quarters of good earnings and borrowing little — and those who do want to borrow are able to tap the bond market for seemingly unlimited sums at record low rates. IBM, for example, issued a $1.5 billion three-year note in August for a measly 1 percent. Junk-bond issuance is accelerating in 2010. Deleveraging was always in the cards after the financial crisis, and so it should surprise no one that lending is taking a hit from both the supply and demand side. This is one reason (and a good sone) some economists project that another round of QE is not going to do much to boost economic activity or inflation. In fact, some economists — notably Kansas City Fed Chief Thomas Hoenig — believe it would be better to let the market know “extraordinary measures” are no longer needed and that would itself boost activity. According to Hoenig, “There is simply no evidence the additional liquidity would be particularly effective in spurring new investment, accelerating consumption, or cushioning or accelerating the deleveraging that is hopefully winding down.” Hoenig is a minority of one at the Fed, however, which implies the Fed will be buying additional T-notes for the next six months and perhaps longer — unless and until the economy picks up to the Fed’s satisfaction and/or inflation does actually appear. As of late October, no one knows how much it will buy. A Wall Street Journal survey in early

13

ON THE MONEY

practically nothing, you might as well take a pass on nonyielding assets and hope for a speculative price gain. The more this approach pays off, the more people get sucked into commodity trades. Some are professionals whose managers insist on meeting combined-asset benchmarks, and some are amateurs who think they are following the “smart money.” These two constituencies are fickle, and their fickleness forms the basis for expecting burst bubbles. Hot money is exactly what it sounds like — money that can reverse direction and exit in less than 24 hours. Such hot money — money that reverses direction and exits in less than 24 hours — is under the careful watch of emerging-market ministries of finance and central banks, too. Brazil and China are just two of the emerging markets where authorities are imposing new regulations, taxes, or both to tone down hot money inflows. They have two fears: pressure on the currency to rise excessively from investor demand, and the possibility of a fast exodus if a bubble bursts. The lessons of the 1997-98 Asian crisis were well-learned by emerging-market governments, if not by investors, who always think they will be able to escape before the mud hits the fan. In Figure 3, which shows Other implications select emerging-market stock indices, Bombay, Brazil, Keeping interest rates low has ramifications in other areas, and Mexico are moving in lockstep; only the Shanghai including commodity prices. The knee-jerk reaction among Composite lags. oil, gold, and other commodity traders is that QE will Emerging-market currencies are “misaligned,” as the cause inflation, which should cause the dollar to fall, thus International Monetary Fund puts it. According to The making hard assets a refuge. But if financial assets yield Economist’s Big Mac purchasing power parity calculations, the Brazilian real is overvalued by 42 Barbara Rockefeller Currency Trader Mag Nov 2010 percent. In fact, the Euro is overvalued Figure 2 Selected Emerging 3: EMERGING-MARKET STOCK INDICES Market Stock Indices FIGURE by 29 percent and the Swiss franc by 220 more than 80 percent. Meanwhile, curBombay Sensex Orange 215 Brazil Bovespa Black 210 rencies from China, Russia, Mexico, Mexican Bolsa Blue 205 and South Korea are undervalued by 200 Shanghai Composite Green 195 20 to 40 percent. This means Mexico, 190 185 for example, has a competitive advan180 tage over Brazil. 175 170 Brazilian Finance Minister Guido 165 160 Mantega spoke of “currency wars” 155 in late September, and this was a big 150 145 topic at the G20 finance ministers’ 140 135 meeting in October. At that meeting, 130 preliminary to the head-of-state sum125 120 mit on Nov. 11-12, member countries 115 110 agreed they will “move towards more 105 market-determined exchange rate sys100 95 tems” and “refrain from competitive 90 85 devaluation of currencies.” In addition, 80 “Advanced economies, including those 75 70 with reserve currencies, will be vigilant 2007 M A M J J A S O N D 2008 M A M J J A S O N D 2009 M A M J J A S O N D 2010 M A M J J A S O N against excess volatility and disorderly movements in exchange rates. These Brazil and China are just two of the emerging markets imposing new regulations, taxes, or both to tone down hot money inflows. They have two fears: pressure actions will help mitigate the risk of on their currencies to rise excessively from investor demand, and the possibility excessive volatility in capital flows facof a fast exodus if a bubble forms and bursts. ing some emerging countries.” Source: Chart — Metastock; data — Reuters and eSignal U.S. Treasury Secretary Geithner may
x100

October showed a consensus among economists that the Fed would buy $250 billion per quarter for a total of $750 billion. The New York Fed’s Dudley said his estimate of $500 billion is equivalent to a 0.50 percent to 0.75 percent cut in the Fed funds rate. Reuters points out the Fed has to buy $30 billion per month just to reinvest early repayments from its portfolio of mortgage-backed bonds. For perspective on Goldman Sachs’ forecast of $2-4 trillion, the original announcement of QE was for $1.75 trillion. One of the Fed’s goals in engaging in another round of QE2 is to keep the long end of the yield curve low. Because financing costs for everything from mortgages to junk bonds are built off the 10-year Treasury note, and because the Fed seeks to boost activity, low rates all along the yield curve are the desired outcome. In contrast, a steepening yield curve is a sign the bond market is building in higher inflation expectations. Therefore, to say the Fed is actively seeking to create inflation is to misunderstand the Fed’s goals. The Fed wants just enough inflation to be able to say deflation has been beaten back, but not so much inflation that the yield curve steepens.

14

November 2010 • CURRENCY TRADER

have been seeking coordinated pressure on China in particular, which promised a faster pace of yuan appreciation in June but delivered only about 2 percent by late October. But the outcome is symmetrical — developed countries, including the U.S., have a responsibility not to devalue, too. In fact, just as the U.S. may be charging China with unfair trade subsidies in the form of an undervalued currency, China could charge the U.S. with an unfair trade subsidy by engaging in quantitative easing that pushes the dollar down. The Chinese commerce minister told the Financial Times the amount of dollars being issued by the U.S. is “out of control” and is leading to an “attack” of imported inflation. Good grief, everyone believes QE will lead to inflation and devaluation even though that would be true only if the velocity of money were to pick up to normal levels. It might also be true if imports were a high percentage of GDP, but in the U.S. as of August, imports were $200 billion, or only about 0.001 percent of GDP — hardly enough to have an inflationary effect. One reason for the widespread adherence to the false belief is the level of U.S. government debt. No one doubts the U.S. budget is on an unsustainable path. In the 2010 fiscal year (just ended on September 30) the deficit was $1.29 trillion, or 8.9 percent of GDP. Debt held by the public is $9.2 trillion (63 percent of GDP) and will reach $18.5 trillion (78 percent of GDP) in 10 years. By contrast, consider the EMU Stability Pact calls for debt not to exceed 60 percent of GDP, and in the 40 years from 1960 to 2000 in the U.S., debt averaged 37 percent of GDP. The UK, with debt at “only” 53.1 percent of GDP, engaged in a massive £81 billion cost-cutting campaign in October to avoid a ratings agency downgrade. The U.S. is nearing the point where rating agencies grumble and threaten downgrades. Despite having reserve currency status, the U.S. is vulnerable to a downgrade and would have to pay higher rates of return to attract the same level of foreign investment in its notes and bonds. What does this have to do with inflation? Nothing, except the perception that when a country becomes overindebted, a nifty way out is to devalue. As written many times before (see “Bucks, bonds and the new bully in town,” Currency Trader, November 2009), there is no evidence this is the intent of anyone in government, past or present. Also, if the Federal Reserve seeks to hold down interest rates across the yield curve, it would logically have a strong interest in better fiscal management, although it fears losing its prized independent status by interfering in what is essentially a political matter. Another round of quantitative easing, along with a toohigh public deficit, gives foreigners a big headache. For one thing, it does nothing to assuage fear among holders of the dollar as a reserve currency that the U.S. is not seeking to “debase” its currency. (Technically, debasing means to clip the edges of a gold or silver coin, which is hardly relevant today, but the term endures.) Again, half-seeing
CURRENCY TRADER • November 2010

monetarists are sure that creating all that money will create inflation and the U.S. intends to devalue its public debt that way. To raise money supply is also in direct contradiction to the emerging G20 consensus that every member has a responsibility to the others to take whatever steps are necessary to maintain FX market stability and not to use currency policy to promote its self-interest. The U.S. wants China to revalue the yuan faster, but China wants the U.S. to stop taking actions that devalue the dollar. This is not to say the Fed can be expected to alter its decision because of objections by other G20 members, but it can’t be entirely unmindful of the international response. In fact, the U.S. may have to make some kind of gesture at the G20 summit in Seoul on Nov. 11 to offset whatever QE action the Fed takes the week before. The days are long gone when the U.S. treasury secretary can just speak the “strong dollar, best interests” mantra and get the desired outcome.

Damned if you do...

It’s a harsh judgment, but the U.S. is failing to convince the markets it doesn’t seek inflation, in part because in the quest to stomp out deflation once and for all, the Federal Reserve is seeking a higher level of inflation. Another round of quantitative easing, even at a modest level, sends the message the U.S. economy is still in need of stimulus. Short of giving the world a lesson on the Fisher equation (during which it would have to justify paying interest on reserves), the Fed is stuck with the perception it is deliberately trying to devalue the dollar. Even Japan, which understands deflation all too well, rescheduled its own quantitative easing to the same date as the Fed policy meeting in early November in order to offset the expected dollar decline on the announcement. The old rule says “Don’t fight the Fed.” That means the Fed will engage in QE as long as it deems necessary, and will likely succeed in keeping interest rates low all along the yield curve. We can think of only one action that would offset the seeking-devaluation consensus: FX market intervention. The U.S. has not intervened in many years, having done so only twice between August 1995 and December 2006. At a guess, intervention is not on the table, despite the G20 finance ministers’ statement that advanced countries will be “vigilant against excess volatility and disorderly movements in exchange rates” in order “to help mitigate the risk of excessive volatility in capital flows facing some emerging countries.” Why should the U.S. spend cold, hard cash to help Brazil? Let Brazil impose capital controls. This makes the U.S. a bad citizen in the context of G20, wanting others to take initiative for the sake of the global economy that it won’t take itself out of perceived self-interest. For this fundamental reason, it’s difficult to see the dollar rallying anytime soon. Look at the chart of the dollar index again — it points resolutely downward. y
For information on the author, see p. 4.

15

SPOT CHECK

Australian dollar/U.S. dollar
The Aussie dollar recently pushed above a couple of notable resistance levels and is now in relatively uncharted territory.
BY CURRENCY TRADER STAFF

In October, the Australian dollar/U.S. dollar pair (AUD/USD) reached 1.000 for the first time since July 1982, capping an amazing rebound from its October 2008 low and surpassing its pre-financial crisis high from July 2008 (Figure 1). The pair rallied 22 percent from the June 4 close of .8231 (the lowest weekly close of the late-spring pullback) to the Nov. 2 intraday high of 1.0023. Since 2000, the Aussie/dollar pair has rallied 20-percent or more in a 22-week span 16 other times — but 15 of them occurred in 2009 during consecutive weeks in the middle of the market’s furious rebound from the October 2008 financial-crisis low, making it difficult to draw any meaningful conclusions from these moves. (The 16 instances, The AUD/USD pair has pushed to its highest levels in 27 years, and in which concluded the week of Feb. 6, November has posted its fifth consecutive higher monthly high. 2004, marked the top of an approxiSource: TradeStation mately 2.5-year uptrend, and were followed by a four-month downTABLE 1: CONSECUTIVE MONTHLY HIGHS swing.) Figure 2 No. higher highs 1 2 3 4 5 6 7 8 9 10 shows a weekly Occurrences 100 64 31 18 10 5 4 2 2 1 chart of AUD/ % 64% 48.4% 58.1% 55.6% 50% 80% 50% 100% 50% USD, highlighting The current run of five consecutive higher monthly highs has been equaled 10 other times since 1971, the recent run, and and exceeded 15 other times. the pair’s penetraFIGURE 1: MONTHLY AUSSIE/DOLLAR
16 November 2010 • CURRENCY TRADER

tion of the 2009-2010 and 2008 highs. After a brief consolidation, the pair pushed to a new monthly high in early November — its fifth consecutive higher monthly high. Table 1, which lists runs of higher monthly highs up to 10 months long dating back to 1971, shows such moves are relatively rare. There have been 10 other runs of five higher monthly highs (followed by a lower monthly high); only 15 runs have been longer (one 11-month run isn’t included in the table). There have been five runs of six consecutive higher monthly highs — a 50-percent drop-off. (However, the odds of continuing to a seventh consecutive monthly high were much better — four of the five six-week runs extended another week.) y For more analysis of the Aussie dollar, see “QE2: Who wins, who loses?”

FIGURE 2: WEEKLY AUSSIE/DOLLAR

The AUD/USD pair has exceeded the highs of the past two years after rallying more than 20 percent since early June. Source: TradeStation

TRADING STRATEGIES

Multiple average trend-following
Translating a multi-moving average technique into a mechanical forextrading system highlights the benefits of simplicity and diversification.
BY DANIEL FERNANDEZ

In his 1997 book Trading Tactics: An Introduction to Finding, Exploiting and Managing Profitable Share Trading Opportunities, Daryl J. Guppy discussed the application of an indicator he called the Guppy Multiple Moving Average (GMMA), which was based on using groups of moving averages to better determine trend direction and strength. The idea is to use several slow moving averages to determine long-term trend direction, coupled with a group of faster moving averages to gauge short- and mediumterm developments. The goal is to help traders spot trade opportunities by analyzing the level of interaction and separation between the different moving averages, rather than using moving average crossovers, as most moving-average FIGURE 1: MOVING AVERAGE ALIGNMENT

trading systems do. The following analysis explores the idea of using two groups of moving averages to create a simple system to follow longer-term trends.

Reviewing the indicator

To create a mechanical strategy to trade on the daily time frame, we will first establish the two groups of moving averages, as Guppy originally did: The “slow group” will consist of the 60-, 50-, 45-, 40-, 35-, and 30-day simple moving averages (SMAs) and the “fast group” will consist of the 15-, 12-, 10-, 8-, 5-, and 3-day SMAs. Figure 1 shows a chart of these averages revealing several pieces of information, including the longer-term trend direction and the presence of consolidation periods and small countertrend moves highlighted by the shorter averages. However, translating such visual impressions into a mechanical trading strategy can be difficult because of the varying relationships between the 12 different moving averages. A simple approach is to evaluate the order of the moving averages and enter trades when they are arranged in such a way that indicates trends on the long-term, intermediate, and short-term time frames are moving in the same direction.

The trading strategy
Trades are signaled when a large group of moving averages (in this case, 12) align in such a way that, in the case of long trades, the short-term averages are above the longer-term averages.
Source for all figures: MetaTrader 4

The system is a simple set of rules designed to keep you in the market only when there is a high degree of certainty regarding trend direction. Long trades are entered when on the
November 2010 • CURRENCY TRADER October 2010 • CURRENCY

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TRADING STRATEGIES

FIGURE 2: SAMPLE TRADES

high (i.e., all moving average are aligned) and get out quickly when the market reverses. To limit losses, all trades are also protected with a stop-loss of two times the 20-day average true range (ATR). Trade size is calculated dynamically based on changes in volatility and account balance (based on a standard forex “lot” size of 100,000):
The long trades were entered when the averages were in successive order with longest average on bottom and shortest on top, and exited when the averages deviated from this alignment.

Position size = (0.004 * account balance in USD) / ATR (in pips)

last closed candle all 12 moving averages align in increasing order — that is, successively shorter moving averages are above the longer averages — e.g., 3-day SMA > 5-day SMA > 8-day SMA > 10-day SMA > 12-day SMA > 15-day SMA > 30-day SMA > 35-day SMA > 40-day SMA > 45-day SMA > 50-day SMA > 60-day SMA. Similarly, short trades are entered when the averages align in descending order (3-day MA < 5-day SMA < 8-day SMA < 10-day SMA, etc.). Any open trades are closed when the SMAs lose their proper alignments on the last closed candle. Figure 2 shows three sample long signals, each one shorter-term than the preceding trade. All of them are exited before significant price reversals occur. The rules are designed to get into the market when “directionality” is TABLE 1: TEST RESULTS
EUR/USD Total profit Profit factor Avg. compounded yearly profit Maximum drawdown Number of trades Win % Average profit:loss ratio 215% 1.82 12.2% 27.2% 99 50.5 1.78 USD/CHF 91% 1.82 6.7% 20.6% 89 43.8 2.33

For example, if the current EUR/USD price is 1.3550, the 20-day ATR is 0.0150, and the account size is $10,000, the position size would be 0.26, or $26,000 ((0.004*10,000)/150), and the stop-loss value would be 1.3250 (1.3550-2 * 0.0150). The equation results in risk of roughly 8 percent per trade if the stop-loss is hit. However, it should not cause the system to reach a severe drawdown level because the majority of trades will likely be liquidated first by the relatively sensitive exit rule. The system will be tested on daily data in the Euro/U.S. dollar (EUR/USD), British pound/U.S. dollar (GBP/USD), and Swiss Franc/U.S. dollar (USD/CHF) pairs from June 1, 2000 through May 1, 2010, using an initial account size of $100,000. Trading costs of 2, 3.5, and 3.5 pips will be assessed for the EUR/USD, GBP/USD, and USD/CHF pairs, respectively. The tests will be conducted using MetaTrader 4 using data provided by GBP/USD Portfolio MetaQuotes.
79% 1.38 6% 34.2% 76 44.7 1.7 822% 1.56 26.3% 45.6% 264 47 1.78

Test results

Performance for the three-pair portfolio was better than the sum of its parts.

The system was profitable on the EUR/USD, GBP/USD, and USD/CHF pairs without any optimization or changes in logic (Table 1); the results also show the EUR/USD pair was the bestperforming pair, keeping with its performance in most other trend-following strategies. This
November 2010 • CURRENCY TRADER

20

Related reading
“Validating candlestick patterns with tick volume” By Daniel Fernandez, Currency Trader, October 2010 A “double-doji” breakout strategy gets a boost from a tickvolume filter. “Taking advantage of the Asian trading session” By Daniel Fernandez, Currency Trader, June 2010 Breaking down the range characteristics of the Asian forex session produces some surprisingly reliable trading statistics. “Using dynamic look-back periods in FX systems” By Daniel Fernandez, Currency Trader, May 2010 A robust approach to making a trading system dynamic improves profitability and shrinks drawdowns. “Trend transitions in forex” By Dave Landry, Currency Trader, October 2010 Analysis of several transitional patterns, including a similar multiple moving average approach called the “Bow Tie.”

superior performance can be attributed to the pair’s higher liquidity and more stable trend tendencies, which result in fewer whipsaws than in other pairs. The strategy produces what we would expect from a good long-term trend-following system: a relatively low trade frequency, a favorable average profit-to-loss ratio, and a winning percentage close or slightly below 50 percent. Also, Figure 3 shows the strategy manifested the extended (one to three years) drawdowns characteristic of this type of trading strategy. Another aspect of Figure 3 is that the overall portfolio’s equity curve has better characteristics than any of the individual currency pair curves. Because trends and drawdowns do not always develop at the same time in the three pairs, the composite performance is smoothed. This, in turn, increases both the total and average compounded yearly profits, while other system metrics, such as the profit-to-loss ratio and winning percentage, are a compromise of the three individual currency pairs’ results. Most importantly, the portfolio’s maximum drawdown — although larger than that of any of the individual pairs — is not what we would expect from totaling the three component drawdowns. Because the currency pairs’ profit and drawdown periods are not synchronized, the strategy is able to reduce overall risk through diversification.

applied to different currency pairs which, although they might not perform brilliantly individually, can provide much better results as a portfolio. y
For information on the author, see p. 4.

Simple, effective

The system’s performance suggests Daryl Guppy’s idea to follow trends based on the alignment of a large group of moving averages can be effectively translated into a simple trading strategy, and demonstrates that complexity is not necessary to achieve positive results when developing trend-following techniques. The simple base strategy offers much room for experimentation: trading a larger basket of currencies, optimizing the moving averages, or refining the entry and exit rules to provide a better overall mathematical expectancy. The strategy also allows traders to diversify, since it can be

FIGURE 3: EQUITY CURVES

The portfolio’s profitability was much higher than the sum of the individual currency pairs’ due to the lack of correlation between their drawdowns.

CURRENCY TRADER • November 2010

21

ADVANCED CONCEPTS TRADING STRATEGIES

The yen and Japanese bond markets
The idiosyncratic yen appears slightly less exceptional when analysis adjusts for “perma-expectations” for higher interest rates in Japan.
BY HOWARD L. SIMONS

As anyone who has traded currencies for more than five minutes can attest, the yen is very different from other currencies in its market rhythms (see “The yen stands alone,” March 2006). Other currencies represent countries in permanent trade surplus, but many of these are pegged or quasi-pegged to the dollar. Other currencies most certainly are pushed around by domestic political considerations and are caught in the bizarre grip of competitive devalu-

ation (see “No man is anisland, but the UK is” August 2010). Other currencies have imperfect links to prospective returns on assets (see “Currencies and stock index performance,” April 2008). Other currencies trade as if shortterm interest rate arbitrage does not matter, and still other currencies, most notably the U.S. dollar and Swiss franc are funding currencies for carry trades (see “The short, awful life of the dollar carry trade” and “Franc-ly my dear, I don’t give a carry,” August and September FIGURE 1: SWAP SPREADS RENORMALIZING AFTER CRISIS 2008). It seems as if only the yen combines all of these qualities to the extent a reasonable trader can conclude, “The yen’s not really a market.” Or is it? While currencies are linked more to short-term interest rates and movements than to capital markets, we should remember all capital markets are linked in a giant web and what influences a country’s bond market must have a certain The 10-year Japanese government bond yield and the 10-year swap spread had moved in parallel influence on its curfashion between the May 2003 low in yields and the onset of the financial crisis in 2007 (green rency market, too (see rectangle). The swap spread has remained static since April 2010 even as bond yields have declined. “Currency carry and
November 2010 • CURRENCY TRADER

22

FIGURE 2: JAPANESE SWAP SPREADS SINCE DEC. 16, 2008 yield-curve trading,” January 2010). Let’s take a look at the Japanese bond market and include fixed-income volatility and swap spreads in the analysis.

Swap spreads

A swap spread, as a refresher, is what a borrower who is paying a floating rate of interest on a bond will pay to fix those rates. Rising swap spreads thus indicate fear of rising interest rates, and vice-versa. The courses of 10-year Japanese government bond yields and 10-year swap spreads had moved in a parallel manner between the May 2003 low in yields and the onset of the financial crisis in 2007, marked with a green rectangle (Figure 1). Swap spreads have remained static since April 2010 even as bond yields have declined; this stable demand to fix yields can be interpreted as unease with the strength of the Japanese bond rally. While the short end of the yield curve saw fairly constant swap spreads, Swap spreads plunged far further and at the long end swap spreads plunged to negative levels and then rose faster during the height of the crisis in 2008 back toward zero. and early 2009 than 10-year JGB yields. FIGURE 3: THE TERM STRUCTURE OF INTEREST-RATE VOLATILITY Once the crisis passed after March 2009, swap spreads returned to a normal convergence path with JGBs. That observation holds for one tenor, or time to maturity, for swap spreads. If we go back to the December 16, 2008 date when the Federal Reserve first moved to near-0 percent short-term interest rates and hinted that quantitative easing would be the next step, and the Bank of Japan Although the one-year zero-coupon implied volatility in Japan (green axis) is much higher than those for longer maturities, Japan also has five-year volatility exceeding 10-year, 30-year, and restarted quantitatwo-year volatility, in that order — a jumbled structure that testifies to the confusion surrounding tive easing without the anticipated course of Japanese interest rates announcing it, how
CURRENCY TRADER • November 2010 23

ADVANCED CONCEPTS ON THE MONEY

FIGURE 4: JAPANESE YIELD CURVE NOW IN BULLISH FLATTENING

has the term structure of swap spreads advanced? The short end of the yield curve saw fairly constant swap spreads (Figure 2). It was at the long end where swap spreads plunged to negative levels and then rose back toward zero. A negative swap spread can be verbalized as, “I am so confident interest rates are not going to rise you will have to pay me to fix them.” Some traders just have a mean streak.

Fixed-income volatility

In Japan, just as in the U.S., the mad scramble to get yield, any yield, has pushed investors further out along the maturity spectrum and has forced many to assume bond duration risks they may not understand.

FIGURE 5: THE YIELD CURVE HAS STOPPED LEADING VOLATILITY

Now let’s take a look at fixed-income volatility in the Japanese market. Implied volatility readings for zerocoupon Japanese government securities are very different from their American counterparts. In the U.S., volatilities tend to decline with maturity. While the one-year zero-coupon implied volatility in Japan (marked in Figure 3 with a green axis) is much higher than those for longer maturities, Japan is witness to the odd spectacle of fiveyear volatility exceeding 10-year, thirty-year and two-year volatility, in that order. This jumbled structure stands as testimony to the confusion surrounding the expected course of Japanese interest rates.

The yield curve

While the FRR2,10 has tended to lead two-year zero-coupon volatility by 13 weeks in both the U.S. and in the Eurozone, the relationship in Japan has ceased to exist. The very steep FRR2,10 should be leading to greater hedge demand and thus higher volatility for two-year notes, but the Japanese bond options market no longer seems to care.

The one aspect of Japanese bond markets not subject to confusion in 2010 has been the bullish flattening of the yield curve (Figure 4). Note how the short end of the yield curve is lying flat against the “floor” of 0 percent like a too-long

24

November 2010 • CURRENCY TRADER

drapery hitting floor, while the long end of the yield curve has been moving lower in a classic waterfall fashion since April 2010. In Japan, just as in the U.S., the mad scramble to get yield, any yield, has pushed investors further out along the maturity spectrum and has forced many to assume bond duration risks they may not understand. We can extract one segment out of this yield curve surface, the forward rate ratio between two and ten years. This is the rate at which borrowers can lock in money for eight years starting two years from now divided by the 10-year rate itself. The more this FRR2,10 exceeds 1.00, the steeper the yield curve. While the FRR2,10 has tended to lead two-year zero-coupon volatility by 13 weeks, a calendar quarter, very directly in both the U.S. and in the Eurozone, the relationship in Japan has ceased to exist (Figure 5). The very steep FRR2,10 FIGURE 6: THE YIELD CURVE AND THE YEN

should be leading to greater hedge demand and thus higher volatility for two-year notes, but the Japanese bond options market, like the fictional Rhett Butler, no longer seems to give a damn. What we can see, however, is a far more direct relationship between the yen and the FRR2,10 in Japan. As the Japanese yield curve steepens along this key segment of the capital market line, the yen strengthens (Figure 6). This is a combination of expectations for higher long-term interest rates in Japan and for higher fixed-income volatility. Both of these elements are present in many other currencies’ evaluations, which suggests the yen is not as exceptional as it may seem if we just shift the analysis forward in maturity to reflect the “perma-expectations” for higher interest rates in Japan. y
For information on the author, see p. 4.

As the Japanese yield curve steepens along this key segment of the capital market line, the yen strengthens — a combination of expectations for higher long-term interest rates in Japan and for higher fixed-income volatility.

CURRENCY TRADER • November 2010

25

CURRENCY FUTURES SNAPSHOT as of 10/29/10
The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).

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

Sym EC JY BP AD CD SF MP DX NE ZE

Exch CME CME CME CME CME CME CME ICE CME CME

Vol 349.4 101.6 108.0 90.8 85.5 39.4 25.6 24.1 6.3 5.3

OI 192.0 133.0 83.8 133.1 106.2 52.9 125.9 34.2 26.4 5.0

10-day move / rank -0.47% / 0% 1.18% / 20% 0.23% / 0% -0.74% / 67% -0.64% / 13% -2.64% / 57% 0.75% / 22% 0.24% / 20% 1.11% / 14% -0.47% / 0%

20-day move / rank 0.84% / 0% 3.51% / 79% 1.18% / 26% 1.10% / 8% -0.05% / 0% -1.07% / 83% 1.80% / 23% -1.09% / 16% 2.50% / 33% 0.84% / 0%

60-day move / rank 5.41% / 45% 6.69% / 54% 0.86% / 9% 6.97% / 29% -0.36% / 10% 6.33% / 28% 1.73% / 33% -3.78% / 16% 4.42% / 69% 5.41% / 45%

Volatility ratio / rank .15 / 15% .13 / 18% .31 / 85% .17 / 15% .41 / 40% .26 / 93% .25 / 13% .15 / 17% .30 / 62% .15 / 15%

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts. LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to today’s close. 20-day move: The percentage price move from the close 20 days ago to today’s close. 60-day move: The percentage price move from the close 60 days ago to today’s close. The “% rank” fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.

(as of 9/30/10, ranked by September 2010 return) Top 10 currency traders managing more than $10 million Trading Advisor 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Friedberg Comm. Mgmt. (Curr.) QFS Asset Mgmt (QFS Currency) Silva Capital Mgmt (Cap. Partners) IKOS FX Fund Richmond Group (Gl. Currency) Harmonic Capital (Gl. Currency) Greenwave Capital Mgmt (GDS Alpha) Greenwave Capital Mgmt (GDS Beta) Ortus Capital Mgmt. (Currency) Millennium Global Currency (GBP) September Return 15.60% 10.62% 10.50% 9.20% 7.16% 7.12% 6.92% 5.36% 5.13% 5.11% 2010 YTD Return 56.79% 18.02% 13.20% 29.74% 1.32% 6.66% 7.56% 4.02% 21.16% 4.18% $ Under Mgmt. (Millions) 79.2 757.0 18.3 1111.0 37.0 N/A 11.0 11.0 1579.0 277.8

BarclayHedge Rankings

Top 10 currency traders managing less than $10M & more than $1M 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Vaskas Capital Mgmt (Global FX) Millennium Global Currency (USD) Rove Capital (Dresden) King's Crossing Cap'l (FX Model) Armytage AAM (Asian Currency) BEAM (FX Prop) Basu and Braun (Everest Mgd.Accts) CenturionFx Ltd Drury Capital (Currency) KMJ Capital (Currency) 6.62% 4.82% 4.02% 2.06% 1.78% 1.31% 1.13% 0.89% 0.70% 0.47% 0.18% 3.99% 9.55% -5.48% -11.59% 8.23% 10.31% 6.90% -0.19% -0.76% 3.8 2.5 2.2 7.5 3.7 1.7 1.2 6.1 3.4 7.5

Based on estimates of the composite of all accounts or the fully funded subset method. Does not reflect the performance of any single account. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. 26 October 2010 • CURRENCY November 2010 • CURRENCY TRADER

CURRENCY TRADER • November 2010

27

INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)
Rank Currency Oct. 26 price vs. U.S. dollar 1-month gain/loss 3-month gain/loss 6-month gain/loss 52-week high 52-week low Previous

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

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

0.01239 1.401485 0.993995 0.152315 0.022545 0.033535 0.75365 0.03267 0.77388 0.033035 0.144855 1.030465 0.58661 0.150205 0.981225 0.128865 1.57416

4.34% 3.87% 3.65% 3.62% 2.99% 2.90% 2.67% 2.51% 2.31% 1.93% 1.68% 1.25% 0.71% 0.71% 0.49% -0.05% -0.53%

8.40% 8.57% 10.99% 11.29% 6.60% 8.07% 3.64% 4.85% 6.05% 0.18% 7.69% 8.69% 4.06% 1.86% 1.65% 0.09% 2.07%

16.45% 4.73% 7.17% 9.38% 0.20% 7.85% 5.12% 3.08% 6.06% -3.69% 7.36% 10.55% 3.04% 2.57% -1.97% 0.03% 2.36%

0.01243 1.5144 1.033 0.1534 0.02274 0.03358 0.7641 0.03267 0.7747 0.03497 0.1478 1.0566 0.6075 0.150400 1.0068 0.129 1.6877

0.01053 1.1891 0.8069 0.1227 0.02085 0.02938 0.6561 0.03056 0.702 0.03077 0.1204 0.853 0.5076 0.146 0.9195 0.1281 1.4235

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

GLOBAL STOCK INDICES
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Mexico Hong Kong Germany South Africa Canada U.S. Italy Brazil UK France Switzerland Singapore Australia India Japan Index IPC Hang Seng Xetra Dax FTSE/JSE All Share S&P/TSX composite S&P 500 FTSE MIB Bovespa FTSE 100 CAC 40 Swiss Market Straits Times All ordinaries BSE 30 Nikkei 225 Oct. 26 35,373.39 23,601.24 6,613.80 30,133.78 12,684.68 1,185.64 21,363.52 70,740.39 5,707.30 3,852.66 6,476.60 3,162.51 4,761.50 20,221.39 9,377.38 1-month gain/loss 6.80% 5.64% 5.33% 4.06% 4.05% 3.81% 3.74% 2.80% 2.40% 2.30% 2.17% 1.58% 0.83% 0.52% -2.35% 3-month gain/loss 7.33% 13.25% 6.77% 5.74% 7.99% 6.33% 2.61% 6.47% 6.66% 5.95% 4.47% 6.59% 5.71% 12.22% -1.33% 6-month gain loss 4.74% 9.33% 4.45% 2.81% 3.29% -2.18% -6.23% 2.71% -0.81% -3.62% -4.81% 5.33% -3.09% 13.95% -16.02% 52-week high 35,429.20 23,866.90 6,668.54 30,439.46 12,710.20 1,219.80 24,059 72,140.00 5,833.70 4,088.18 6,990.70 3,220.71 5,048.60 20,854.60 11,408.20 52-week low 28,263.00 18,971.50 5,312.64 25,793.06 10,745.20 1,010.91 18,045 57,634.00 4,790.00 3,287.57 5,935.00 2,605.10 4,194.40 15,330.60 8,796.45 Previous 12 2 10 3 14 5 13 11 7 4 15 9 6 1 8

28

November 2010 • CURRENCY TRADER

NON-U.S. DOLLAR FOREX CROSS RATES
Rank Currency pair Symbol Oct. 26 1-month gain/loss 3-month gain/loss 6-month gain loss 52-week high 52-week low Previous

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

Euro / Pound Yen / Real Euro / Canada $ Aussie $ / Canada $ Euro / Real Aussie $ / Real Euro / Franc Aussie $ / Franc Aussie $ / New Zeal $ Franc / Canada $ Euro / Aussie $ Canada $ / Real Euro / Yen Aussie $ / Yen Pound / Canada $ New Zeal $ / Yen Pound / Franc Franc / Yen Canada $ / Yen Pound / Aussie $ Pound / Yen

EUR/GBP JPY/BRL EUR/CAD AUD/CAD EUR/BRL AUD/BRL EUR/CHF AUD/CHF AUD/NZD CHF/CAD EUR/AUD CAD/BRL EUR/JPY AUD/JPY GBP/CAD NZD/JPY GBP/CHF CHF/JPY CAD/JPY GBP/AUD GBP/JPY

0.89031 0.021125 1.428305 1.013015 2.3842 1.694485 1.36004 0.96461 1.31891 1.05018 1.40995 1.672715 113.095 80.225 1.604285 60.815 1.527595 83.15 79.18 1.58367 127.07

4.43% 3.63% 3.37% 3.14% 2.93% 2.91% 2.59% 2.31% 0.95% 0.76% 0.22% -0.22% -0.46% -0.67% -1.01% -1.62% -1.76% -2.98% -3.71% -4.03% -4.65%

6.37% 4.17% 6.81% 9.18% 4.12% 6.65% -0.10% 2.12% 7.10% 6.92% -2.12% -2.32% 0.15% 2.42% 0.41% -4.41% -6.11% 0.31% -6.23% -8.03% -5.78%

2.34% 13.03% 6.84% 9.32% 1.44% 4.01% -5.26% -3.05% 1.96% 12.77% -2.28% -4.86% -10.06% -7.98% 4.42% -9.76% -7.42% -5.07% -15.84% -4.49% -12.07%

0.9239 0.02127 1.5983 1.0134 2.6379 1.6982 1.5173 1.0079 1.3233 1.0657 1.6627 1.8244 138.473 88.048 1.7882 69.5279 1.7112 91.549 94.1955 1.8296 151.731

0.8065 0.01838 1.2502 0.8643 2.1772 1.4954 1.2763 0.8949 1.2088 0.8989 1.3633 1.6003 105.404 72.0981 1.4894 58.9096 1.5097 76.36 79.0966 1.58367 126.422

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

GLOBAL CENTRAL BANK LENDING RATES
Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest Rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight funding rate 3-month Swiss Libor Cash rate Cash rate Selic rate Overnight call rate Discount rate Repo rate Repurchase rate Rate 0-0.25 0 1 0.5 1 0.25 4.5 3 10.75 2 1.25 6 6.5 Last change 0.5 (Dec. 08) 0.1 (Oct. 10) 0.25 (May 09) 0.5 (March 09) 0.25 (Sept 10) 0.25 (March 09) 0.25 (May 10) 0.25 (July 10) 0.5 (July 10) 0.5 (Feb. 09) 0.25 (Feb. 09) 0.25 (Sept 10) 0.5 (Mar. 10) April-10 0-0.25 0.1 1 0.5 0.25 0.25 4.25 2.5 8.75 2 1.25 5,25 7 Oct-09 0-0.25 0.1 1 0.5 0.25 0.25 3.25 2.5 8.75 2 1.25 4.75 7

CURRENCY TRADER • November 2010

29

INTERNATIONAL MARKETS
Unemployment AMERICAS Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore Argentina Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore Period Release date Rate Change 1-year change Next release

EUROPE

Q2 Sept. Sept. Q2 Sept. May-July Sept. July-Sept. Aug. Q2
Period

8/23 10/21 10/8 9/2 10/28 9/15 10/7 10/19 10/1 7/30 9/17 9/3 8/31 8/13 8/13 9/28 8/24 9/1 8/13 8/31 8/16 8/27

7.9% 6.2% 8.0% 9.3% 6.7% 7.8% 5.1% 4.2% 5.1% 2.3%

-0.4% -0.5% -0.1% -0.2% -0.1% -0.1% -0.1% 0.0% -0.1% 0.1%
Change

-0.9% -1.5% -0.3% 0.2% -0.9% -0.1% -0.6% -1.2% -0.1% -0.9%
1-year change

11/22 11/25 11/5 12/2 11/30 11/17 11/11 11/16 11/1 10/29
Next release

ASIA and S. PACIFIC GDP AMERICAS

EUROPE AFRICA ASIA and S. PACIFIC

Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2

Release date

23.9% 1.2% 0.7% 0.7% 2.3% 1.4% -4.4% 0.9% 0.4% 19.1% 0.1% 7.8%

12.8% 9.0% 6.7% 6.7% 4.9% 5.8% -4.7% 3.2% 6.5% 8.8% 0.4% 18.8%

12/17 12/9 11/30 11/30 11/12 12/22 11/30 12/1 11/12 11/30 11/15 NLT 11/26

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

Period

Release date

Change

1-year change

Next release

EUROPE AFRICA ASIA and S. PACIFIC

Sept. Sept. Sept. Sept. Sept. Sept. Sept. Q3 Sept. Sept. Aug. Sept.
Period

10/15 10/7 10/22 10/13 10/12 10/12 10/27 10/27 10/21 10/29 10/1 10/25
Release date

0.7% 0.5% 0.2% 0.1% -0.1% 0.0% 0.1% 0.7% 0.3% 0.0% 0.3% 0.0%
Change

11.1% 4.7% 1.9% 1.6% 1.3% 1.1% 3.2% 2.8% 2.6% 9.9% -0.9% 3.7%
1-year change

11/12 11/9 11/23 11/10 11/9 11/16 11/24 1/25 11/22 11/30 11/1 11/23
Next release

PPI AMERICAS EUROPE AFRICA ASIA and S. PACIFIC

Sept. Aug. Sept. Sept. Sept. Sept. Q3 Q3 Sept. Sept. Aug.

10/15 9/29 10/28 10/20 10/8 10/28 10/25 9/13 10/14 10/14 9/29

0.9% 0.4% 0.1% 0.3% 0.3% -4.1% 1.3% 2.1% 0.2% 0.0% -0.1%

15.1% 0.6% 1.6% 3.9% 4.4% 6.8% 2.2% 5.9% 5.4% -0.1% -1.5%

11/12 10/29 11/30 11/19 11/5 11/25 1/24 12/13 11/14 11/11 10/29

As of Oct. 28, 2010 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate. 30 November 2010 • CURRENCY TRADER

ACCOUNT BALANCE
Rank Country 2009 Ratio* 2008 2010+

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

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

32.387 49.58 42.916 18.278 41.697 29.43 42.702 42.668 163.256 141.751 1.333 -24.259 -2.146 -378.434 -38.075 -6.705 -67.151 -43.693 -81.198

17.773 13.096 11.338 8.68 8.476 7.247 5.36 5.125 4.89 2.796 0.282 -1.113 -1.128 -2.68 -2.85 -3.015 -3.17 -4.395 -5.532

35.815 79.885 27.505 29.296 10.234 37.279 41.978 -5.776 245.722 157.079 -14.891 -44.063 -1.255 -668.856 6.483 -13.886 -78.874 -47.477 -155.962

44.481 68.572 42.639 18.899 50.004 26.439 44.024 26.041 200.188 166.463 2.321 -50.31 -2.358 -466.513 -44.245 -5.582 -58.272 -29.828 -71.92

Totals in billions of U.S. dollars *Account balance in percent of GDP +Estimate
Source: International Monetary Fund, World Economic Outlook Database, October 2010

EVENTS
Event: Third Annual Inside Commodities Conference Date: Nov. 4 Location: New York Stock Exchange For more information: Go to www.insidecommoditiesconference.com/br Event: Las Vegas Traders Expo Date: Nov. 17-20 Location: Caesars Palace, Las Vegas For more information: Go to www.moneyshow.com Event: The World MoneyShow Orlando 2011 Date: Feb. 9-12 Location: Gaylord Palms Resort, Orlando Show focus: Asia & Emerging Markets For more information: Go to www.moneyshow.com/twms/?scode=013104 Event: New York Traders Expo Date: Feb. 20-23 Location: Marriott Marquis Hotel, New York City For more information: Go to www.tradersexpo.com
CURRENCY TRADER • November 2010

Event: 2011 CBOE Risk Management Conference Date: Feb. 27–March 1 Location: St. Regis Monarch Beach resort, Dana Point, Calif. For more information: Go to www.cboeRMC.com Event: London Traders Expo Date: April 8-9 Location: Queen Elizabeth II Conference Centre For more information: Go to www.tradersexpo.com Event: Dallas Traders Expo Date: June 15-18 Location: Hyatt Regency Dallas at Reunion For more information: Go to www.tradersexpo.com Event: The World MoneyShow Vancouver 2011 Date: July 7-9 Location: Vancouver Convention Centre For more information: Go to www.moneyshow.com/vcms/?scode=013104

31

GLOBAL ECONOMIC CALENDAR: NOVEMBER

CPI: Consumer price index ECB: European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. FND (first notice day): Also known as first intent day, this is the first day on which a clearinghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillment of a futures contract. The clearinghouse also informs the seller. FOMC: Federal Open Market Committee GDP: Gross domestic product ISM: Institute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: Purchasing managers index PPI: Producer price index Economic release (U.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m.

1 2 3

17
U.S.: October ISM manufacturing report and FOMC interest-rate announcement

U.S.: October CPI and housing starts UK: September employment report

18 19 21 22 23 24

U.S.: October leading indicators Germany: October PPI LTD: November forex options Hong Kong: October CPI Mexico: Q3 GDP Canada: October CPI South Africa: Q3 GDP U.S.: October personal income and durable goods Mexico: Nov. 15 CPI South Africa: October CPI

4 5

UK: Bank of England interest-rate announcement U.S.: October employment report Canada: October employment report UK: October PPI ECB: Governing council interest-rate announcement LTD: November U.S. dollar index options (ICE)

6 7 8 9

25
Brazil: October CPI Germany: October CPI Mexico: Oct. 31 CPI and October PPI

Brazil: October employment report Mexico: October employment report South Africa: October PPI

10

U.S.: September trade balance Brazil: October PPI France: October CPI

26 27 28 29 30

Japan: October CPI

Canada: October PPI Canada: Q3 GDP France: October PPI Germany: October employment report India: Q3 GDP and October CPI Japan: October employment report

11

Australia: October employment report Japan: October PPI

November 2010 31 1 7 8 2 9 3 4 5 6 10 11 12 13

12 13 14 15 16

France: Q3 GDP Germany: Q3 GDP India: October PPI U.S.: October retail sales Japan: Q3 GDP U.S.: October PPI Hong Kong: August-October employment report Japan: Bank of Japan interest-rate announcement UK: October CPI

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1 2 3 4

December 1 U.S.: Fed beige book and November
ISM manufacturing report Australia: Q3 GDP

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

2 3

France: Q3 employment report U.S.: October employment report LTD: December U.S. dollar index options (ICE)

32

November 2010 • CURRENCY TRADER

FOREX TRADE JOURNAL XXXXXX

Buying high and looking higher.

TRADE
Date: Friday, Oct. 29, 2010. Entry: Long the Australian dollar/U.S. dollar (AUD/USD) at .9795.

Reason for trade/setup: With the

pair having recently surpassed its late-

Source: TradeStation

2008 high and hitting 1.0000 for the first time since 1982, it might not appear to be the best time to attempt a long trade. However, after a roughly three-week consolidation/ pullback, the pair has twice bounced off established supness looms in reaction to renewed quantitative easing by pulled back enough, or is it likely to retrace a larger porupside run? (This was a paper trade.) port around .9650, and further near-term U.S. dollar weakthe Federal Reserve. The question: Has the market already tion of the September-October rally before making another

Profit/loss: .0135. Outcome: The market made a favorable move when

trading resumed on Nov. 1, rallying to .9914 (.0017 shy of the initial profit target) and triggering an upward adjust.9830 intraday, forming an obvious chart support level a fair distance above the stop. The next day, the pair made a serious jump, blasting ment of the stop to .9802. The pair pulled back to around

through the initial target and reclaiming the 1.000 level. The stop was then raised to .9895, thus locking in .0100 profit (less commissions) on the remainder of the trade. y
Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.

Initial stop: .9654. Raise stop to breakeven on a move above .9870.

Initial target: .9930. Take partial profits and raise stop.

RESULT
Exit: .9930.

TRADE SUMMARY Date
10/29/10

Currency pair
AUD/USD

Entry price
.9795

Initial stop
.9654

Initial target
.9930

IRR
0.96

Exit
.9930

Date 11/2/10

P/L point .0135 % 1.38%

LOP .0211

LOL -.0008

Trade length 2 days

Legend – IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade).

CURRENCY TRADER • November 2010

33

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