Currency Trends: Spot Check: Forex Watch 2009 The Euro

Strategies, analysis, and news for FX traders
January 2009
Volume 6, No. 1
FOREX WATCH 2009 p. 8 CURRENCY TRENDS:

THE EURO: The majors p. 26
Back in the saddle SPOT CHECK:
or just a bounce? p. 14 Dollar vs. Euro
INSIDE-DAY FADE: relative performance p. 32
Simple setup proves FED CUTS
resilient p. 20 and the fate of
the buck p. 38
CONTENTS
Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Trading Strategies

Inside-day setups . . . . . . . . . . . . . . . . . . .20
Inside days present interesting setup
Global Markets opportunities in the Euro/U.S. dollar pair —
2009: Around the world if you pay attention to the details.
in four currencies . . . . . . . . . . . . . . . . . . . .8 By Chris Peters
What does the new year hold for currency
traders after 2008’s turmoil? Here are few Advanced Strategies
ideas to keep on your radar. Let the trend be your friend:
By Currency Trader Staff The majors . . . . . . . . . . . . . . . . . . . . . . .26
If currencies trend so much, why do trend
On the Money followers usually have such blah performance?
This and other questions are answered in
The Euro: Prosperity or perdition? . . . . .14
this study of currency trends.
The belief the Euro sell-off has ended may
be based on some false assumptions about By Howard L. Simons
how the U.S. and Europe are handling the
economic crisis.
By Barbara Rockefeller
continued on p. 4
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CONTENTS
Spot Check
Euro relative performance . . . . . . . . . . . .32
The Euro/U.S. dollar pair crashed hard in
October, but opinions vary on whether this
was a dollar story or a Euro story. Analyzing
the Euro’s performance vs. other currencies
sheds light on the situation.
By Currency Trader Staff New Products & Services . . . . . . . . . . . . .40
International Markets . . . . . . . . . . . . . .34 Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Numbers from the global forex, stock, Conferences, seminars, and other events.
and interest-rate markets.
Global Economic Calendar . . . . . . . . . . . .41
Forex News Important dates for currency traders.
Rate cuts fuel deflation fears . . . . . . . . . .38
Inflation continued to drop as the Fed cut Key concepts . . . . . . . . . . . . . . . . . . . . . . .42
its target lending rate to a historic low in
December, amplifying the dollar’s Forex Journal . . . . . . . . . . . . . . . . . . . . .43
mid-month drop against major currencies. Long or short the Euro?
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CONTRIBUTORS
CONTRIBUTORS
A publication of Active Trader ®
For all subscriber services:

www.currencytradermag.com
Editor-in-chief: Mark Etzkorn
metzkorn@currencytradermag.com
Managing editor: Molly Goad

mgoad@currencytradermag.com
Associate editor: Chris Peters

cpeters@currencytradermag.com
Contributing writers:
Howard Simons,
Barbara Rockefeller, Marc Chandler
Editorial assistant and

Webmaster: Kesha Green Howard Simons is president of
kgreen@currencytradermag.com
Rosewood Trading Inc. and a strategist for
Art director: Laura Coyle Bianco Research. He writes and speaks fre-
lcoyle@currencytradermag.com
quently on a wide range of economic and
President: Phil Dorman
financial market issues.
pdorman@currencytradermag.com
Publisher,
Ad sales East Coast and Midwest:
Barbara Rockefeller (http://www.rts-forex.com)
Bob Dorman is an international economist with a focus on foreign
bdorman@currencytradermag.com
exchange. She has worked as a forecaster, trader, and con-
Ad sales sultant at Citibank and other financial institutions, and
West Coast and Southwest only:
Allison Chee currently publishes two daily reports on foreign
achee@currencytradermag.com
exchange. Rockefeller is the author of Technical Analysis for
Classified ad sales: Mark Seger Dummies (For Dummies, 2004), 24/7 Trading Around the
seger@currencytradermag.com
Clock, Around the World (John Wiley & Sons, 2000), The
Global Trader (John Wiley & Sons, 2001), and How to Invest
Volume 6, Issue 1. Currency Trader is published monthly by TechInfo, Inc., Internationally, published in Japan in 1999. A book tenta-
161 N. Clark Street, Suite 4915, Chicago, IL 60601. Copyright © 2009
TechInfo, Inc. All rights reserved. Information in this publication may not be
stored or reproduced in any form without written permission from the publisher. tively titled How to Trade FX is in the works. Rockefeller is
The information in Currency Trader magazine is intended for educational pur-
poses only. It is not meant to recommend, promote or in any way imply the on the board of directors of a large European hedge fund.
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.

GLOBAL MARKETS
2009: Around the world in four currencies

There are opportunities in the forex market as currencies realign after the fall 2008
market dislocation, but traders should tread carefully.
BY CURRENCY TRADER STAFF
A
FIGURE 1 — EURO RETRENCHMENT mid the storm of financial and eco-
nomic crises that dominated the year,
After the yen, the U.S. dollar jumped the most during the late-2008
many traders were happy to close the
market crisis.
door on 2008. Last year’s action in the
foreign exchange market was volatile, with fall and
winter action driven by massive risk aversion and
global position liquidation.
The Japanese yen came out on top of the 2008
carnage, chalking up a 23-percent gain vs. the dol-
lar. The main factor propelling the yen was a mas-
sive exit out of carry trades, which sparked double-
digit losses in many of the high-yielding currencies
that were the on the long side of this popular trade.
The Australian dollar (AUD) dropped 21 percent
vs. the dollar through Dec. 30, the New Zealand
dollar (NZD) declined 25 percent, the Brazilian real
plunged 24 percent, the Mexican peso sank 22 per-
cent and the South African rand (ZAR) plummeted
27 percent.
The British pound (GBP), which posted a dismal
27.3 percent drop vs. the U.S. dollar as of Dec. 30,
Source: TradeStation was the weakest of the most liquid currencies,
according to John Rothfield, senior currency ana-
lyst at Bank of America. He says Britain’s paper
FIGURE 2 — EURO/DOLLAR
suffered especially because its economy is so reliant
on the financial and housing sectors.
The dollar might struggle vs. the Euro, at least early in 2009. The most positive performers, Rothfield adds,
were the low-yielding currencies pointing to the
yen and the Swiss franc, which gained 7 percent vs.
the dollar.
Dollar action
The U.S. dollar was the second-biggest beneficiary
of the economic crisis, as funds flooded into the
buck as a safe haven (Figure 1). The U.S. dollar
ended the year with a modest 4.8-percent gain vs.
the Euro, as August through November saw a
sharp reversal of the bear market action that has
dominated the greenback since 2002. The
Euro/dollar (EUR/USD) plunged to $1.23 in
November from the 1.6000 July high (Figure 2) — a
38.2-percent retracement of the 2002-2008 bear mar-
ket for the U.S. dollar.
Into year-end, however, the U.S. dollar gave back
some its gains, as the immediate financial panic
Source: TradeStation
subsided and the U.S. made a historic shift to a

near-zero interest rate policy: On Dec. 16,
the U.S. Federal Reserve slashed the Fed
funds rate to a range from zero to 0.25 basis
points, which detracts from the dollar from
an interest-rate differential perspective.
The Euro/dollar had climbed back above
1.4000 by year-end.
Rothfield says U.S. fundamentals aren’t
particularly good. He chalks up a large por-
tion of the massive fall rally in the dollar to
“unusual market conditions and a huge
shortage of the dollar globally,” which trig-
gered safe-haven buying in the greenback
and U.S. Treasuries.
“We think in the early part of the year —
through the spring — the U.S. dollar will
struggle under the weight of U.S. quantita-
tive easing,” he says.
Euro/pound and the ECB vs. BOE

Outside the dollar arena, forex traders are
focusing squarely on Euro/pound
(EUR/GBP). The pair rocketed 18 percent
in December, surging to around 0.9800 on
Dec. 29 (Figure 3). The Euro has never trad-
ed at parity (1.00) with the pound, but the
fundamental outlook for the UK is bleak.
“I think when traders come back to work
in the new year they will push the momen-
tum to test parity,” Ideaglobal analyst
Kevin Chau says.
“We see that parity is an objective for
market players,” says Michael Woolfolk,
senior currency strategist at the Bank of
New York Mellon. “Market sentiment is
long Euro and short pound with an eye on
an important psychological level.”
Expected central bank action and inter-
est-rate differentials are playing a part in
the recent trend.
“The European Central Bank [ECB] is
going to drag its feet on cutting interest
rates, while the Bank of England [BOE]
takes continued aggressive action,”
Woolfolk says.
The BOE is scheduled to meet on Jan. 8
and the market widely anticipates it will
cut rates, which currently stand at 2 percent
(expectations range from 0.5 to 1-percent).
The ECB is also expected to slash rates, but
at a more muted pace, at its Jan. 15 meeting.
The ECB’s current repo rate is 2.5 percent.
Analysts forecast a cut ranging from 0.25 to
0.50 percent.
ECB President Jean-Claude Trichet has
been on the record with cautious state-
continued on p. 10
CURRENCY TRADER • January 2009 9

GLOBAL MARKETS continued
FIGURE 3 — EURO/POUND
ments that suggest muted interest-rate easing. With a weak UK economic picture, the EUR/GBP pair could make a
run to 1.000 and beyond.
“The ECB has built a tremendous amount of mar-
ket credibility by not shocking the market,”
Woolfolk says.
In addition to interest-rate differentials, growth
differentials also favor a continuation of the recent
Euro/pound trend. Bank of New York Mellon is
forecasting a 2-percent decline for UK 2009 gross
domestic product (GDP) vs. a 1-percent decline for
the Eurozone.
“The recession has not hit central Europe as
acutely as it has hit the UK,” Woolfolk says.
Woolfolk, for one, sees the potential for the
uptrend to extend beyond the parity level into the
new year “until the ECB signals that it is prepared to
adopt a zero interest-rate policy along with the U.S.
and UK,” he says.
Finally, Woolfolk says recent trade data is also
bullish for the Euro vs. the pound.
“The trade figures in the Eurozone are relatively Source: TradeStation
stable and balanced, vs. a large trade deficit in the
UK,” he says.
FIGURE 4 — AUSSIE/CANADA
He says October 2008 data showed an EU trade
surplus of €900 million vs. a deficit of £3.9 billion for Economic fundamentals in favor of the land down under make the
the UK. Aussie/Canada pair a market to watch in coming months.
On the downside, Woolfolk cites .9250 as key sup-
port.
“If we were to close below that level, it would take
out this bullish uptrend,” he says.
Woolfolk does warn of the potential for “buy the
rumor, sell the fact” action around the early January
BOE meeting and says traders “may get in early and
take profits if the BOE does what they are expect-
ing.”
But once the Euro/pound conquers the parity
level in the weeks ahead, Woolfolk predicts forex
traders will continue eyeing round numbers at
1.0100 and then 1.0200.
Woolfolk advises traders to watch for indications
the ECB is considering a zero interest-rate policy,
which could prompt significant profit-taking.
Aussie/Canada
Another cross with potential for movement is the Source: TradeStation
Australian dollar/Canadian dollar (AUD/CAD)
pair, according to Brian Dolan, chief currency strate- scheduled to meet next on Feb. 3. Further rate cuts are
gist at Forex.com. The pair was trading around 0.8500 at expected, with Dolan forecasting a bottom to the RBA eas-
year-end (Figure 4), and Dolan sees a possible move to ing cycle around 3.25-3.00 percent, which would still favor
0.9500 or parity. the Aussie dollar over the Canadian currency.
Dolan believes a number of factors including interest-rate Dolan also interprets a more bullish commodity-export
differentials, commodity exports, and regional growth picture for Australia.
opportunities are tipping in favor of Australia in the new “Both are considered commodity currencies, but the big
year. difference is that Canada is oil reliant and I expect oil prices
The Bank of Canada’s (BOC) lending rate currently stands to remain weak,” he says.
at 1.5 percent; a 0.50-percent cut is expected at the Jan. 20 Australia is the world’s leading coal exporter and Dolan
meeting. That compares to the 4.25-percent rate target cur- saw continued massive demand for coal from China.
rently held by the Reserve Bank of Australia (RBA), which is continued on p. 12

GLOBAL MARKETS continued FIGURE 5 — AUSSIE/U.S. DOLLAR
Some analysts believe the Australian dollar’s sell-off was overdone
and the currency is poised to rebound.
“There is regional support for Australian com-
modity output,” he says.
Canada, Dolan notes, is closely tied with the U.S.,
which is in the midst of a recession, while Australia
is close in proximity to the Asian region.
“Generally speaking, the Asian region seems to be
faring best out of all the regions globally, which will
support Australia,” Dolan says.
Dolan thinks the .8250 to .8400 zone is a good buy-
ing area for Aussie/Canada.
“Try to pick it up if we get some weakness near
term,” he says.
Dolan says the strategy would be negated on a
drop below .8000 if that were to occur. On the
upside, he sees .9500-1.000 as an objective.
Outright Aussie play

Bob Sinche, head of global currency strategy at Bank
of America, likes the Australian dollar on an out- Source: TradeStation
right basis, calling it currently an “out of favor” cur-
rency. carry trade unwinding (Figure 5).
“We think on a relative basis, the Australian dollar is still “It had an enormous correction,” Sinche says. “The sell-
pretty well positioned for the new year,” he says. “It has suf- off has been excessive. If it regained just half of that decline
fered a lot in the second half of [2008].” we could get up to .7900, which would be more than a 15-
Sinche notes the Australian dollar sank 27.5 percent vs. percent move from current levels [around .6900].”
the U.S. dollar in the second half of the year vs. a 9.5 percent
gain in the first half. South African rand
“[The Australian dollar] went from being one of the top- Marc Chandler, global head of FX strategy at Brown
performing currencies to one of the worst-performing cur- Brothers Harriman, sees potential in the long dollar/short
rencies,” he continues. “It is viewed as a risk currency and rand play. At year-end, the USD/ZAR pair was trading
part of its performance will depend on risk appetite in the around 9.36 (Figure 6). Chandler thinks the cross could
new year.” return to the 11.00 level in the first half of 2009.
But he notes Australia’s recent remarkable turnaround in “People seem reluctant to invest in high flying currency
its trade balance from deficit to surplus is a bullish factor. markets,” Chandler says. “South Africa is the poster child
Looking ahead, Sinche agrees with Dolan in that as a for high risk in emerging markets, and countries that are
major commodity exporter of coal and iron ore, Australia is most prone to crises will be avoided.”
well positioned geographically from long-term growth in Chandler says the expected contraction in the global econ-
China. omy in 2009 would keep commodity prices under pressure,
The Aussie/dollar scored a high at .9850 in July 2008 and which will also weigh bearishly on the South African econ-
subsequently sank to .6000 in late October, amid massive omy.
FIGURE 6 — DOLLAR/RAND
Playing it safe
As an emerging-market poster child, South Africa and its currency, the rand, There may be opportunity, but forex
could be under pressure in 2009. traders should be cautious in the new year
as volatile conditions could reemerge at
any time.
“People are looking for singles as
opposed to doubles and home runs in the
early part of the year because of the uncer-
tainty on the global front,” Rothfield says.
“People had been very defensive in the
fourth quarter of the year and had to sell
good stuff to offset losses in other areas.
We will get some further unwind of the
extreme risk aversion and see a temporary
return of risk appetite and search for
Source: ADVFN (http://www.advfn.com)
yields.”

ON THE MONEY
The Euro:
Prosperity or perdition?
The cold, hard realities of the current market may force the European Central Bank
to alter its course, with important ramifications for the Euro.
BY BARBARA ROCKEFELLER
T he consensus forecast today for the Euro/dollar

(EUR/USD) is a move up to 1.5000 and proba-
bly higher—perhaps a test of the July 2008 high
above 1.6000. But this forecast is based on few facts and
questionable assumptions.
assumptions. But in a crisis situation such as today’s, not
even “facts” are reliable and just about every assumption
should be looked at with suspicious eyes.
These are the times we question whether what we think
we know is true, and wonder whether what we don’t know
All forecasts entail creating a scenario for the most likely is going to jump up and bite us on the nose. This is true of
outcome. Sometimes it’s all too easy to convince yourself a fundamentals and technicals alike.
scenario is highly likely given certain facts and reasonable Figure 1 shows the EUR/USD on a weekly basis. The
Euro uptrend from the 2000
low to the 2008 high is clear.
FIGURE 1 — BACK TO NORMAL
The precipitous drop starting
After the precipitous drop that started in October 2008 the EUR/USD is moving back in October 2008 is equally
inside its normal channel. clear. In retrospect, the gov-
ernment allowing Lehman to
fail on Sept. 15 was the trigger
for the Euro’s fall, which was
really the dollar’s rise. Fear
and greed were replaced by
fear and more fear, and the
dollar became a safe haven.
Now that the shock of the
Lehman failure is fading, the
Euro/dollar price is returning
inside its “normal” channel.
This is the basis, in part, of
forecasts calling for the Euro
to continue rising and for the
price to meet 1.5000 around
year-end and test the old July
high of 1.6038 at some time
during 2009.
Rethinking assumptions
Source: data — eSignal and Reuters Online; charts — MetaStock
This scenario might seem rea-

FIGURE 2 — SETTING UP A TEST
If the Euro fails to surpass the previous intermediate high, it could test the low of 1.1815
from November 2005.
sonable, but it’s not. It

assumes the Lehman Collapse
Shock did not have a perma-
nent effect on the primary
trend. Once a trend is broken,
we need to consider all factors
anew. Notice the red support
line connecting lows was bro-
ken along with the linear
regression channel line.
Okay, so let’s assume the
Lehman Shock started some-
thing fresh but it’s just not
evident yet (Figure 2).
Support and resistance get
broken all the time and it
doesn’t necessarily mean a
move is over, but we can feel
continued on p. 16 Source: data — eSignal and Reuters Online; charts — MetaStock
ON THE MONEY continued
FIGURE 3 — ALTERNATE SCENARIO
An alternate scenario posits the recent EUR/USD high as an as-yet-untested breakout

above the upper boundary of a new downtrend channel.
comfortable making such an
assertion only if price now
surpasses the previous inter-
mediate high (upper horizon-
tal gold line) at 1.4867, a level
that occurred right after the
Lehman Shock. If the Euro
fails to match and surpass that
level, it might test the previ-
ous low (bottom horizontal
gold line) at 1.1815 from
November 2005. In other
words, there may be a new
probable range forming.
We can try to measure the
new range by drawing a new
trend channel (Figure 3). In
this scenario, the recent
EUR/USD high is a breakout,
as yet untested, above the
upper boundary of a new
downtrend channel. Let’s say
the Euro falls by 50 percent of
FIGURE 4 — IMAGINARY TREND CHANNEL the original down move, or to
about 1.3650. That would put
A hypothetical 45-degree downtrend channel projects the possibility of the EUR/USD pair
challenging the October 2008 low, or even a run below 1.2000 by this time next year. it back at the channel top and,
as we know, a 50-percent
move is an important bench-
mark. Together with the fail-
ure to test and surpass the old
intermediate high, it might
mean the down-sloping chan-
nel is the right one.
The problem with this
channel is it’s a work in
progress — and it’s too steep.
So let’s invent a new more
probable trendline channel at
about a 45 degree angle,
which is the slope of the up
move from 2006 to the high in
2008 (Figure 4). It’s fairly
crazy to construct linear
regression channels out of
thin air, but let’s add another
assumption: high volatility
and choppiness characterize
the first phase of a crisis, and

FIGURE 5 — BIG PICTURE FIBONACCI RETRACEMENT
A 62-percent retracement of the move from 0.8229 in October 2000 to 1.6038

in July 2008 would put price at 1.1214.
as players become familiar with the

new environment, increasingly stable
prices will emerge. In fact, currencies
sometimes have prolonged periods of
sideways price action with little or no
trend. This makes a trendline’s slope
less steep.
If this scenario is true and useful,
the EUR/USD pair could not only
challenge the October 2008 low
around 1.2329, but also make a run
below 1.2000 by this time next year—
perhaps as far as 1.1000. In fact, 1.1214
is a 62-percent retracement of the big-
picture move from the low of 0.8229
in October 2000 to the high in July
2008 at 1.6038, as shown in Figure 5.
Fibonacci numbers are an unfounded
superstition, but enough traders like
continued on p. 18 Source: data — eSignal and Reuters Online; charts — MetaStock
ON THE MONEY continued
them that we ignore them at our peril. Now that the Fed has effectively cut to Evidently the ECB is not impressed
If the imaginary trend channel is the zero, the Bank of Japan has cut to near- by French wholesale inflation falling
correct scenario, why would the price ly zero, and the Bank of England is from 4.3 percent year-over-year in
development proceed that way? For widely expected to follow suit in early October to 1.9 percent in November, or
once we have an easy answer. The January, the ECB is the only major cen- other indicators of severe contraction.
European Central Bank (ECB) has tral bank that is out of line. The yield The German Kiel Institute says
been in denial, stating that inflation is differential favors the Euro right now, German GDP will fall 2.7 percent in
still a worry and they need to see more with the overnight repo rate at 2.5 per- 2009, to be followed by a pathetic 0.3
data before they can cut rates further. cent. percent in 2010. One ECB policy mem-
Other Barbara Rockefeller articles:

“The six Ds of depression” “What’s really driving the dollar?”
Currency Trader, December 2008. Currency Trader, April 2008.
The buck has gotten a bounce from the Signs of a potential turnaround in the buck can be found in
recent financial panic, but the longer-term an unexpected place.
picture isn’t quite as bullish.
“Why is the yen trending higher?”
“Euro and dollar at parity?” Currency Trader, March 2008.
Currency Trader, November 2008. The yen’s rise seems to defy logic. Find out what’s behind it.
A few short months ago the world was contemplating Euro
“Fundamentals lead the charts”
$2. Now, the talk is all about Euro $1. What are the odds it
Currency Trader, February 2008.
will happen?
The recent global market turmoil and banking crises have
“Crisis of confidence” the financial world on edge, but their impact on the dollar
Currency Trader, October 2008. might not be what most people expect.
As Wall Street and Washington prove themselves equally
“A fistful of dollars, a bundle of contradictions”
inept, the dollar suffers.
Currency Trader, December 2007.
“The dollar-oil connection” The U.S. currency must resolve several paradoxes to
Currency Trader, September 2008. emerge from its funk. One overlooked positive of the current
As oil broke, so did the Euro/dollar pair. What can we learn situation may offer the depressed buck a way out of its bind.
from analyzing bursting bubbles?
“The road to 1.5”
“Horizontal patterns in foreign exchange” Currency Trader, November 2007.
Currency Trader, August 2008. The dollar appears to be under siege, but perhaps the
The Euro’s price action lends itself well to dissection with situation isn’t as grim as popularly believed.
the Darvas Box.
“Helicopter Ben and the Japanese yen”
“Are the summer doldrums here?” Currency Trader, October 2007.
Currency Trader, July 2008. The American and Japanese economies, and the fate of the
If market myth is true, the season will bring a sideways confounding yen.
market. But the myth warrants some analysis.
“The dollar’s ‘sub-prime’ future”
“Manias and crashes: Where will oil lead the dollar?” Currency Trader, September 2007.
Currency Trader, June 2008. The fallout from the U.S. housing and mortgage meltdown
Although some analysts argue a falling dollar is helping to may be far from over, and how things unfold will have a big
push up oil prices, it might be the other way around. The impact on the forex market.
question is, when will the bubble-go-round stop?
“The rising yen — here we go again”
“Is the Euro going to the moon?” Currency Trader, August 2007.
Currency Trader, May 2008. The yen has been on the rise vs. the dollar. Find out if it’s a
A look at the Euro’s recent gravity-defying performance. reversal or just a correction.
You can purchase and download past articles at http://store.activetradermag.com.

ber said in December it would be logi- Finally, we all know by now that recovery and talk swirls around
cal for the bank to cut rates once it sees monetary policy alone cannot carry regarding when the Fed should start
inflation expectations dropping under the weight of fixing a Great raising rates to offset all that inflation-
2 percent. Depression II. That’s why the Fed fol- inducing new money supply.
But the ECB is not entirely asleep at lowed the Bank of Japan and instituted In short, an ECB being out of sync
the switch. On Dec. 19 the ECB acted a policy of “quantitative easing,” with the Fed has only a temporary
to remove some of the carry-trade which in practice means buying just Euro-favorable effect. Financial crisis
charm of the Euro and halt a flood of about any assets not on life-support has already morphed into an econom-
incoming deposits from the dollar and from the banks and giving them cash. ic crisis, and the ECB lacks sufficient
the British pound by cutting the offi- So far the banks are hoarding cash and tools to deal with it.
cial deposit rate by 50 basis points to 1 refusing to lend it out, but Fed chair- To be fair, it’s not certain the U.S.
percent below the key repo rate of 2.5 man Ben Bernanke has hope the banks action will suffice to pull the country
percent, and raising the lending rate will eventually find the confidence to out of Great Depression II. But sitting
by 50 basis points to 1 percent above start lending again. on your hands and letting the generals
the key rate. This created a wider rate The ECB has already bought much fight the last war (inflation) sure won’t
spread “corridor.” It still leaves the in the way of unconventional collater- do it, either.
Euro with a rate advantage for alized assets, ballooning its balance
deposits, but a much smaller one, and sheet by roughly a third, but it does For information on the author see p. 6.
it has the side effect of raising the cost not have the ability to mandate stimu-
of borrowing for European firms. lative fiscal policies. Together the EU
You’d think that’s the last thing a cen- countries will be spending €200 bil-
tral bank would want to do in the cur- lion, but this is independent of the
rent economic environment, although ECB. Europe lacks pan-EU fiscal insti-
it has the bonus of raising bank prof- tutions to boost every nation across the
itability. board. The collaboration of the U.S.
The effect of the Dec. 19 announce- Fed and the U.S. Treasury, together
ment was immediate and huge — the with an activist Executive, hold out
Euro swooned more than 500 points in more recovery hope than Europe can
a few hours. We must expect the same dream of — probably a total of $2 or
response if and when the ECB cuts the even $3 trillion. In fact, we might say
repo rate itself, possibly at its Jan. 8 the one thing the ECB lacks above all
policy meeting. The market expects else is President-elect Barack Obama,
the ECB to ultimately cut rates to 0.50 although French President Nicolas
percent, a total of 200 basis points. If Sarkozy has the same “whatever it
the ECB were to cut by 25-bp incre- takes” stance.
ments, it would have many months to
go to get to 0-0.25 percent, like the Fed. Advantage, dollar?
In fact, it would take to Sept 2010. Last fall some clever analyst came up
This seems improbable on the face with the “FIFO” scenario — the U.S.
of it. The ECB may be stubborn but it was the first in to financial institution
also values its reputation as a respon- crisis and recession, so it would also be
sive institution, even if it values more the first out. Judging from the robust-
highly its reputation for inflation- ness of the U.S. government response,
fighting. So let’s assume the ECB cuts this is probably a good bet. June could
by 50-bp increments, getting to 0.025 arrive with the ECB still cutting rates
percent or 0.50 percent by June. The and European governments squab-
expectation of these cuts is Euro-nega- bling over additional fiscal stimulus
tive. while the U.S. begins to show signs of

TRADING STRATEGIES
Inside-day setups
Fading the direction of inside days in the Euro/U.S. dollar pair shows promise,
but trend direction makes a big difference in the results.
T he November and December 2008 issues of

Currency Trader featured articles examining the
short-term behavior of major currency pairs
after inside days.
The original analysis covered seven currency pairs: U.S.
— were more often than not followed by bullish price
action during the analysis period, but there was another,
more interesting, tendency that appeared tradable in some
situations: Inside days were often followed by “inverted”
price action relative to the inside day’s close. Inside days
dollar/Canadian dollar (USD/CAD), Euro/U.S. dollar that closed higher preceded short-term down moves, and
(EUR/USD), British pound/U.S. dollar (GBP/USD), U.S. vice versa.
dollar/Japanese yen (USD/JPY), U.S. dollar/Swiss franc The following analysis shows how specific inside-day
(USD/CHF), Australian dollar/U.S. dollar (AUD/USD), signals reflecting these tendencies performed over a 10-year
and New Zealand dollar/U.S. dollar (NZD/USD). The period and offers insight on how to construct useful trade
results showed inside days — overall, in all currency pairs setups. The signals are applied to the EUR/USD pair
because previous testing
showed the basic pattern
TABLE 1 — FADING UP- AND DOWN-CLOSING INSIDE DAYS
tendencies were more con-
With the addition of a very simple filter, taking trades in the opposite direction of an inside sistent and profitable in
day’s close proved to be profitable on both the long and short sides of the market. Better this market.
performance in different categories is highlighted.
The first pattern
All trades Long trades Short trades The first pattern tests the
no filter filter no filter filter no filter filter two-day move following
Net profit $11,647 $28,369 $13,799 $17,406 -$2,152 $10,963 inside days that close high-
Profit factor 1.11 1.6 1.28 1.76 0.96 1.45 er or lower than the previ-
Number of trades 340 168 178 92 162 76 ous day’s close. The trade
Winning percentage 45.29% 54.76% 46.63% 54.35% 43.83% 55.26% rules for long trades are:
Avg. trade net profit $34 $169 $78 $189 -$13 $144
Enter long at today’s close
Avg. winning trade $790 $823 $767 $809 $817 $840
if:
Avg. losing trade -$591 -$623 -$525 -$548 -$661 -$715 1. Today’s low is above
Avg. win/avg. loss 1.34 1.32 1.46 1.47 1.24 1.17 yesterday’s low.
Longest winning streak 9 7 5 4 7 5 2. Today’s high is below
Longest losing streak 9 5 9 5 7 5 yesterday’s high.
3. Today’s close is below
Total commission $6,800 $3,360 $3,560 $1,840 $3,240 $1,520 yesterday’s close.
Return on initial capital 46.59% 113.48% Exit position at the close
two days after entry.
% time in market (exposure) 21.69% 11.42%
Longest flat period 57 days 127 days As formulas, these rules
are:
Max. drawdown -$18,052 -$6,190 -$12,762 -$4,958 -$16,616 -$4,750
% of initial capital -72.21% -24.76% -51.05% -19.83% -66.46% -19.00% 1. If High < High[1];
Net profit as % of drawdown 64.52% 458.30% 108.13% 351.09% -12.95% 230.80% 2. Low > Low[1];
3. If Close < Close[1]

Strategy code
The following TradeStation code is for the long-side version of the second entry
signal. The code allows for customization of the strength or weakness of the day’s
The rules for short trades are: close (closethresh) and the look-back period for the trend filter (trendlength).
Enter short at today’s close if: inputs: trendlength(40), closethresh(.35);

1. Today’s low is above
yesterday’s low. if High < High[1] and
2. Today’s high is below Low > Low[1] and
yesterday’s high. (Close-Low)/(High-Low) <= closethresh and
3. Today’s close is above close > close[trendlength] then
yesterday’s close. Buy this bar on close;
Exit position at the close two days
after entry.
All trades were exited on the close

two days after entry because initial
pattern testing showed the early risk-
adjusted return was highest on that
day: Further gains were probable with
longer holding periods, but risk
increased at a slightly faster pace.
The setup was tested on daily data
in the EUR/USD pair from Dec. 31,
1998 to Dec. 30, 2008. A nominal initial
account value of $25,000 was used
and $10 was assessed per trade for
commission and slippage.
Also, to see whether a trend filter
might improve performance, the pat-
tern was tested taking long trades
only when the inside day’s close was
above the close 40 days ago and tak-
ing short trades only when the close
was below the close 40 days ago. This
rule was not optimized in any way —
40 days was simply a representative
intermediate-term look-back period.
1. Execute long trade signals only

if today’s close is above the
close 40 days ago
(Close > Close[40]).
2. Execute short trade signals only
if today’s close is below the
close 40 days ago
(Close < Close[40]).
The signals were tested with the fil-

ter because preliminary analysis indi-
cated performance could be enhanced
by accounting for trend direction —
an important factor, considering the
uptrend that has dominated the
EUR/USD pair for much of its exis-
tence.
Table 1 compares the results of the
signals with and without the filter.
The no-filter results were profitable
continued on p. 22

TRADING STRATEGIES continued
FIGURE 1 — INSIDE OUT

These signals go long when an inside day closes in the lower portion of the
day's range and go short when an inside day closes in the upper portion of
the range. overall, thanks to the long trades;
short trades actually lost money.
Adding the filter made a dramatic dif-
ference: Despite cutting the number
of trades in half, profitability more
than doubled, the maximum draw-
down was reduced by nearly two-
thirds, short trades became profitable,
and the overall winning percentage
increased by nearly 10 percentage
points.
The results were profitable, but
only mildly so. But they support the
earlier analysis that suggested there
was potential in fading the direction
of an inside day’s close in the
EUR/USD pair — as long as the trade
is not fading the prevailing intermedi-
ate-term market direction.
Now let’s look at a parallel setup
that defines up-closing and down-
closing days a bit differently.
The second
TABLE 2 — FADING STRONG- AND WEAK-CLOSING INSIDE DAYS pattern
This signal is based on
The basic (unfiltered) version of this pattern performed much better than the first pattern and, again, whether the inside bar
the filter enhanced most performance measures. closes high or low rela-
All trades Long trades Short trades tive to the day’s range,
no filter filter no filter filter no filter filter
rather than above or
below the previous
Net profit $22,905.00 $24,718.00 $12,643.00 $13,546.00 $10,262.00 $11,172.00
day’s close. A close in
Profit factor 1.31 1.87 1.34 2.03 1.29 1.74 the upper 35 percent of
Number of trades 254 112 130 56 124 56 the day’s range quali-
Winning percentage 49.61% 59.82% 47.69% 58.93% 51.61% 60.71% fies as a strong close
and triggers a short
Avg. trade net profit $90.18 $220.70 $97.25 $241.89 $82.76 $199.50 trade, while a close in
Avg. winning trade $762.33 $791.39 $803.23 $809.33 $722.72 $773.97 the lower 35 percent of
Avg. losing trade -$571.48 -$629.00 -$546.43 -$572.26 -$599.87 -$688.32
the day’s range quali-
fies as a weak close and
Avg. win/avg. loss 1.33 1.26 1.47 1.41 1.2 1.12
triggers a long trade.
Longest winning streak 7 9 6 5 9 8 The rules are:
Longest losing streak 10 5 6 4 9 3
Enter long on today’s
Total commission $5,080.00 $2,240.00 $2,600.00 $1,120.00 $2,480.00 $1,120.00 close if:
Return on initial capital 91.62% 98.87% 1. If today’s high is
% time in market (exposure) 15.68% 7.87% below yesterday’s
Longest flat period 81 Days 146 Days high.
2. If today’s low is
above yesterday’s
Max. drawdown -$8,430.00 -$5,000.00 -$7,291.00 -$4,115.00 -$6,900.00 -$4,570.00 low.
% of initial capital 33.72% 20.00% 29.16% 16.46% 27.60% 18.28% 3. If today’s close is in
Net profit as % of drawdown 271.71% 494.36% 173.41% 329.19% 148.72% 244.46% the bottom 35
Source: TradeStation percent of the day’s
range.

analysis window: Dec. 28, 1998 through Dec. 28, 2001; Dec.
As formulas, these rules are: 29, 2001 through Dec. 29, 2004; Dec. 30, 2004 through Dec.
29, 2008. In terms of the number of trades and winning per-
1. If High < High[1]; centage, the results were fairly consistent from period to
2. Low > Low[1]; period, with the exception of the negative return for long
3. (Close-Low)/(High-Low) continued on p. 24
<= .35;
The rules are inverted for short

trades. Figure 1 shows some recent
signals.
The setup was tested on daily data
in the EUR/USD pair from Dec. 28,
1998 to Dec. 29, 2008, with the same
account size and trade fees as the first
test. Again, trades were exited after
two days and the pattern was tested
with and without the 40-day trend fil-
ter.
Table 2 shows the results. The pat-
tern’s unfiltered results are better than
the first pattern’s, and in almost every
aspect, the filter version again per-
formed better, especially on a risk-
adjusted basis. The filter cut the num-
ber of trades in half (and halved com-
missions and market exposure) while
net profit increased slightly. Also, the
balance between the maximum num-
ber of consecutive winning trades and
the maximum number of consecutive
losing trades tilted toward the latter
without the filter; the longest winning
streak far outpaced the longest losing
streak with the filter.
In short, the pattern’s basic tenden-
cies appear to be enhanced when long
signals are traded when the market is
up and short signals are traded when
the market is down. Other methods of
identifying the trend or immediate
trade context have the potential to
produce better results than the rudi-
mentary rule used in this test.
One interesting detail in both pat-
terns’ tests is the filtered versions pro-
duced slightly larger average losing
trades than the unfiltered versions.
But the filtered versions’ much higher
winning percentages and slightly
larger winning trade values more
than made up for this deficit.
Table 3 compares a few key statis-
tics for the filtered version of the sec-
ond setup in different portions of the

TRADING STRATEGIES continued
TABLE 3 — PERIOD COMPARISON

Results were relatively consistent from period to period.
All trades Long trades Short trades

12/98- 12/01- 12/04- 12/98- 12/01- 12/04- 2/98- 12/01- 12/04-
Period 12/01 12/04 12/08 12/01 12/04 12/08 112/01 12/04 12/08
Net profit $2,500.00 $12,270.00 $11,318.00 ($1,430.00) $9,350.00 $6,196.00 $3,930.00 $2,920.00 $5,122.00
Profit factor 1.2 3.16 2.36 0.58 3.73 2.08 1.45 2.3 2.99
Number of trades 37 30 41 7 23 25 30 7 16
Winning % 54.05% 60.00% 65.85% 42.86% 60.87% 64.00% 56.67% 57.14% 68.75%
Longest winning streak 9 5 5 2 5 5 8 3 5
Longest losing streak 5 3 3 3 3 3 3 2 2
TABLE 4 — COMBINED SIGNALS
trades from the December 1998 – Combining the signals produced a higher net profit, but most of the reward/risk
December 2001 window. measures were not as good as the second pattern’s statistics.
Short trades outperformed long
All trades Long trades Short trades
trades — in terms of consistency and Net profit $51,427.50 $29,292.50 $22,135.00
reliability, not net profit — in two of
Profit factor 1.69 1.84 1.56
the three periods. This is a good thing,
Number of trades 280 148 132
as it indicates the setup is not merely
Winning percentage 55.71% 54.05% 57.58%
hitching a ride on the back of the
EUR/USD’s upside bias during the
majority of the analysis period. Also, Avg. trade net profit $183.67 $197.92 $167.69
the table makes clear the most recent Avg. winning trade $805.38 $800.67 $810.33
four-year period (December 2004 – Avg. losing trade -$598.48 -$511.19 -$704.46
December 2008) was not the best peri- Avg. win/avg. loss 1.35 1.57 1.15
od for the setup, although it was very Longest winning streak 10 7 8
positive. Longest losing streak 9 9 7
For such a simple, robust setup, the
results aren’t bad, and there’s plenty Total commission $5,600.00 $2,960.00 $2,640.00
of room to extract more value from Return on initial capital 205.71%
the pattern. First, losses were not con- % time in market (exposure) 12.11%
trolled — all trades were exited after Longest flat period 99 Days
two days, win or lose. Testing indicat-
ed additional profit potential existed Max. drawdown -$8,960.00 -$8,230.00 -$9,140.00
beyond this time horizon, but the % of initial capital 35.84% 32.92% 36.56%
probabilities of success decreased as Net profit as % of drawdown 573.97% 355.92% 242.18%
time passed — i.e., winning percent-
ages and reward-risk ratios declined, Source: TradeStation
although they remained favorable.
However, taking partial profits at the
Related reading
two-day point (or at a price level cor-
responding to a high-probability prof- “Inside days in the major currency pairs”
it target in the first days of the trade) Currency Trader, November 2008.
and protecting the remainder of the Analysis of inside days that occur after short-term price thrusts.
position with a stop-loss could allow
for additional profits with minimal “Inside days: Part 2”
risk. Currency Trader, December 2008.
Table 4 shows the results of com- This follow-up study digs deeper into inside days and focuses on the U.S.
bining the two filtered versions of the dollar/Canadian dollar and the Euro/U.S. dollar pairs.
patterns. The results are — pre-
dictably — something of a compro- You can purchase and download past articles at http://store.activetradermag.com.
mise.

ADVANCED STRATEGIES
Let the trend be your friend: The majors

Analyzing trends in the majors suggests winning trend followers must be quick
on their feet to reap their rewards.
BY HOWARD L. SIMONS
TABLE 1 — MAJOR CURRENCIES' SUMMARY TREND STATISTICS
C
Two supposedly commodity-linked currencies stand out: The Canadian urrencies long have enjoyed a rep-
dollar has spent the most time trending since 1999, and the Aussie utation for trending, and with
dollar has had the least excess volatility. good fundamental reasons. Not
Percent in Average absolute Average excess only do currencies reflect long-
term national policies and tendencies that are
trending state trend oscillator volatility
slow, if not impossible, to change (really, should
EUR 60.2% 0.1702 0.0751
we expect Switzerland and Argentina to be con-
CHF 61.0% 0.1659 0.0281
fused at any point?), they reflect relative mone-
JPY 64.0% 0.1639 0.0547 tary policies that also tend to persist.
GBP 65.2% 0.1717 0.0867 Two cases in point: The U.S. dollar strength-
AUD 67.6% 0.1672 0.0190 ened for almost five years in the first half of the
CAD 67.9% 0.1545 0.0474 1980s after Paul Volcker instituted his policy of
high interest rates. The greenback fell just as
spectacularly, and for an even longer period of
FIGURE 1 — AUSTRALIAN DOLLAR time, after May 2002 under the weight of a
During the AUD’s pronounced uptrends, the trend oscillator not only deliberate policy by the Federal Reserve to solve
turned negative but occasionally fell into oversold territory. all economic problems with easy credit.
We can throw darts at a world map, start nar-
rating the history of the country hit, and arrive
at pretty much the same conclusion: Currencies
are capable of posting massive long-term
trends. And as any position trader understands
intuitively, almost any trading system or set of
indicators works in a trend. Markets make indi-
cators work, not vice-versa.
Two questions arise, then. First, if this is the
case then why do self-described trend-followers
in currencies tend to have such mediocre per-
formance (see “Why currency traders should be
humbler,” May 2007 or “Currencies and com-
mitments,” June 2008)? Second, which curren-
cies are in fact trendiest?
The first question will be dismissed curtly
with this bit of doggerel: “The trend is your
friend, except for the bend in the end.”
Everyone can see the same trend, the trade gets
crowded, and then it reverses in an execution
vacuum capable of vaporizing — in a matter of
hours — weeks of hard-won gains. Such is the
life of a trend-follower.
The second question will be addressed for a
set of six major currencies: the Canadian and
Australian dollars (CAD and AUD), the
Japanese yen (JPY), the Swiss franc (CHF), the

FIGURE 2 — CANADIAN DOLLAR
Once the CAD’s bull run began, excess volatility dropped during
nearly all periods of positive trend.
British pound (GBP), and the Euro (EUR). We

will visit a set of minor currencies next month.
Trendiness
Trends are like Supreme Court Justice Potter
Stewart’s famous definition of obscenity (“I
know it when I see it”). If a market is moving in
a straight line with few retracements, we all can
spot the trend. But defining it is difficult. Two
accepted methods of defining when a market
has serial correlation of returns, or a lower-
than-expected number of day-to-day sign
changes in returns, are the Durbin-Watson and
Wald-Wolfowitz tests, which indicate the mar-
kets are close to being random in distribution.
This is visually counterintuitive, but just as hik-
ers get lost when they stop trusting their com-
passes, traders can get lost when their lying
Almost any trading system

or set of indicators works in a
FIGURE 3 — BRITISH POUND
trend. Markets make indicators The GBP’s excess volatility tends to surge much higher above 0.00
than it falls below it, and it also has the highest average level of any
work, not vice-versa. of the major currencies.
eyes get in the way of reality.

Other venerated technical indicators of
trendiness, such as Welles Wilder’s directional
movement index (DMI) and its associated aver-
age directional movement index (ADX) do a
good job confirming when you are in a trend,
but they tend to be slow to capture excessive
movements and abrupt but significant trend
changes. Moreover, the commonly used 14-day
DMI period is a parameterized time period.
(Not that this does not work: I learned a good
deal of technical analysis from a bombast who
insisted on measuring every indicator against a
simple 14-day moving average, and who took
great glee when one complex tool after another
failed to pass the test. There is a powerful lesson
here.)
The trend oscillator

For consistency, we will return to the measure
used in June 2008, the adaptive moving average
(AMA) system. An optimal trend speed is
derived by the number of days between 4 and
continued on p. 28

ADVANCED STRATEGIES continued
lator (red bars) only for trending days. The

FIGURE 4 — JAPANESE YEN
stronger the volatility-adjusted trend, the fur-
Moves in the trend oscillator above 0.40 and below -0.40 have tended ther away from zero the trend oscillator will be.
to produce fairly symmetric, mean-reverting responses in the JPY. In general, trend oscillator readings greater than
0.40 or less than -0.40, marked on the trend
charts with grey lines, indicate a market is
becoming overbought or oversold, respectively.
The bottom charts in each figure depict the
excess volatility (green bars) of each market for
those days when the market is in a trending
state. Excess volatility is the ratio of the implied
volatility for three-month non-deliverable for-
wards to the high-low-close volatility. (In a
small twist from past practice, we subtracted
1.00 from this ratio to depict it more intuitively
as an oscillator around zero.) Excess volatility
indicates the market is uncomfortable with the
existing trend and is buying insurance in the
form of options against its reversal. The more
negative this measure is, the more the market is
comfortable with the trend, and vice-versa.
Ranking the majors

First, let’s take a look at the summary rankings
in Table 1. The Canadian dollar (see “Remember
the forgotten currency,” February 2006) has
spent the most time in a trending state since the
Jan. 4, 1999 advent of the Euro. The Australian
dollar (see “What’s down with the Australian
dollar?” March 2008) has the lowest average
excess volatility. Both are considered to be com-
29 that minimizes the function: modity-linked currencies (see “Of commodities and curren-
cies,” July 2006).
The AUD had two rather lengthy uptrends, one between
summer 2001 and spring 2004 and another from fall 2006
Where Vol is the N-day high/low/close volatility, defined through July 2008, at which point it broke sharply (Figure
as: 1).
What is surprising is how often during its rather pro-
nounced uptrends the oscillator not only turned negative
but several times fell into oversold conditions. Visual
inspection turns up nothing unusual in any of these down-
drafts; in each and every case they were sharp and short-
where H, L, and C are high, low, and close, respectively. lived sell-offs within a broad uptrend. While some could
(and indeed will) argue these represent buying opportuni-
Once the MA is calculated, the trend is defined as the ties, they also represent real loss of equity for those with
volatility-adjusted oscillator around this central tendency. long positions.
In the construction of the index, the trend’s “zero point” The excess volatility chart (bottom) is more interesting in
occurs when price and AMA are equal: many ways. During the first broad uptrend, excess volatili-
ty remained high as the AUD had been under severe down-
ward pressure in the late 1990s. The situation reversed dur-
ing the second uptrend — the currency market was very
comfortable with a long AUD position. Excess volatility col-
Values of N in excess of 20 define a trending market, lapsed during the sell-off in September-October 2008, which
while those less than 11 define a sideways market and those indicated the actual severity of the AUD’s move was left
from 11 through 20 define markets in transition. uninsured by options traders.
Figures 1-6 depict the daily high-low range for each of the The Canadian dollar (Figure 2) is the market most cur-
six major currencies over all days, but show the trend oscil- rency traders would assume was the trendiest. The CAD

FIGURE 5 — SWISS FRANC
The Swiss franc’s reputation for long-running, pronounced trends
changed after the advent of the Euro and the realignment of global
had a long and powerful uptrend between the currency trading into dollar bloc and Euro blocs.
beginning of 2003 and the end of 2007, but as
was the case with the AUD, it had a large num-
ber of short-lived bona fide downturns. A trend-
following trader could — and by evidence did
— get knocked out of long positions numerous
times during this trend. The CAD, like the
AUD, broke sharply during the September-
October 2008 credit crunch. Its break was swift
and severe enough to be done without any
trend reversals.
The excess volatility chart tells the real story,
though. It remained quite high for the CAD
during the tail end of its long bear market
(extending through 2001), but once its bull run
began, excess volatility dropped during nearly
all periods of positive trend. Also like the AUD,
its excess volatility fell sharply in the
September-October 2008 sell-off.
There must be something about speaking
English that is related to currency trends, as the
third trendiest currency amongst the majors is
the British pound (Figure 3). This is a little sur-
prising given the GBP’s primary trade is not
against the USD but rather against the Euro.
And visually the price chart is far noisier than
that of either the AUD or the CAD. But let’s
remember that point about hikers and their
compasses and accept the data for what it is. wanted to do with the yen, which was to repurchase what it
The most interesting aspect of the British pound here is, had borrowed, and proceeded to do so without further ado.
like the Canadian dollar, how high the excess volatility was The Swiss franc (see “The Swiss franc’s commodity con-
in 1999-2002 and then how it switched to a pattern where nection,” October 2008) used to, along with the old
volatility spikes tended to mark tops in price. A data-min- Deutsche mark, have a reputation for long-running, pro-
ing trading system designer (which may be a redundancy) nounced trends. This changed after the advent of the Euro
could back-fit a trading system to sell the GBP on these and the realignment of global currency trading into two
volatility spikes. In addition, the GBP’s excess volatility is broad currency blocs — the dollar bloc and the Euro bloc
both highly asymmetric — it tends to surge much higher (see “The dollar index and ‘firm’ exchange rates,”
over 0.00 than it falls below it — and has the highest aver- December 2005).
age level of any of the major currencies by far. Even so, the CHF remained in a broad uptrend against
Few of us would expect the Japanese yen (Figure 4) to the USD from mid-2001 until the September-October 2008
rank very high on any measure of trendiness, and we are credit crunch (Figure 5). This is evidenced by a very large
not disappointed in that regard. The JPY has remained in a number of overbought spikes on the trend oscillator against
fairly narrow trading range since 1999, but within that but one oversold spike in mid-2005. Also, the CHF
range we have seen several substantial trending moves tied appeared to be very comfortable within its uptrend judging
to global financial crises and developments in the yen carry by its low excess volatility measure after the Swiss National
trade (see “A closer look at the carry trade,” July 2007). Bank ceased cutting its LIBOR target rate in mid-2003. And
Moves in the trend oscillator outside of ±0.40 tend to pro- like other currencies, its excess volatility broke after
duce mean-reverting responses, and as befits a long-term September 2008 as the USD strengthened.
trading range, these moves have been fairly symmetric. We finally come to the least trendy currency amongst the
The excess volatility measure for the JPY was quite high majors: the Euro. Even though it spent the first two-and-a-
in 2000-2001 as the Bank of Japan contemplated quantitative half years of its history declining against the dollar and the
easing, which at the time was regarded as improbable. Once next six years rallying — before breaking severely during
they went to the policy, excess volatility fell and remained the September-October 2008 credit crunch — it has had suf-
in a narrow range until the credit crunch emerged in mid- ficient backing and filling to spend almost 40 percent of its
2007. When traders unwound yen carry trades in response, life outside of a trending state. As the deepest and most liq-
excess volatility fell and remained low except for a brief uid currency market in the world, the Euro tends to get very
period in early September 2008. The market knew what it continued on p. 30

ADVANCED STRATEGIES continued FIGURE 6 — EURO
Because it tends to get very crowded at the end of a trend, the Euro
crowded at the end of a trend and reverses sud- can reverse suddenly (which is why trend-followers in currencies have
denly. This explains why trend-followers in cur- such a poor track record). The excess volatility spikes since 2003
rencies have such a poor track record. have signaled when these reversals are coming.
The excess volatility spikes since 2003 have
provided clear signs as to when these reversals
are coming. The market senses it has moved to an
extreme, but instead of reducing trend positions,
it seems content to buy option protection. We can
revisit the one article on trading psychology
that’s ever been written as to why this is: Greed
overtakes fear when a trend gets strong.
If you’re going to follow trends,

be quick about it
If there is one conclusion we can take away from
this study on the majors and their trends, it is the
winners must be those who exit too soon. This
was Bernard Baruch’s famous maxim, pre-deci-
malization — that he was willing to let the other
fellow have the first eighth and the last eighth.
This is more important than ever now that we
are in a world of one gigantic trade, with a small
number of large players, the dollar-Euro, and a
set of various managed floats and pegs around
this central rate. Next month we will visit sever-
al minor currencies to see whether this lesson
holds there, as well.
For information on the author see p. 6.
Related reading: Other Howard Simons articles

“The rupee and emerging markets” “Getting carried away with the kiwi”
Currency Trader, December 2008. Currency Trader, July 2008.
Analysis suggests India’s status as a global economic power What’s driving the New Zealand dollar, and how long is it likely to
is no accident. last?
“Nordic currency confusion” “Currencies and stock index performance”
Currency Trader, November 2008. Currency Trader, April 2008.
Get a handle on the dynamics of the Northern European Find out how stock indices relate to the performance of their
currencies. currencies.
“The Swiss franc’s commodity connection” “What’s down with the Australian dollar?”
Currency Trader, October 2008. Currency Trader, March 2008.
How can the Swiss currency be, of all things, a commodity Traders have many assumptions about the nature of the Australian
currency? dollar, but only one of these preconceptions appears to have any
impact on the currency.
“Franc-ly, my dear, I don’t give a carry”
Currency Trader, September 2008. “Currencies and U.S. stock-sector returns”
Investigating the Swiss franc carry trade, and what might Currency Trader, January 2008.
change its dynamics. This exhaustive analysis challenges some common assumptions
about the relationship between currency moves and stocks.
“The short, awful life of the dollar carry trade”
Currency Trader, August 2008. “Interest-rate shocks and currency moves”
The implications of the weak-dollar policy and the dollar’s roles as a Currency Trader, October 2007.
funding currency. Short-term interest rates are typically cited as the prime catalyst of
currency moves. This study puts that idea to the test.
“Currencies and commitments”
Currency Trader, June 2008. “Howard Simons: Advanced Currency Concepts, Vol. 1”
Find out what COT data conveys about forex price action. A discounted collection that includes many of the articles listed here.
You can purchase and download past articles at http://store.activetradermag.com

SPOT CHECK
Euro relative performance

The Euro story is really the dollar story…or maybe the yen story.
T
o some observers, the Euro’s sharp decline vs. historic global economic crisis that drove money into the
the dollar from July through November was a U.S. dollar as a safe haven.
sea change — the end of the Euro’s bull run — Figure 1 is a daily chart of the EUR/USD pair. After
despite the fact the move was triggered by a reaching a closing high of 1.5990 on April 22, the pair
moved mostly sideways before the mid-
July breakdown (it eclipsed 1.600 intra-
TABLE 1 — EURO VS. THE DOLLAR: ANALYZING THE OTHER PLAYERS day on three occasions during this peri-
In the depths of the 2008 financial panic, the Euro lost significant ground vs. od). The pair had shed more than 22 per-
the U.S. dollar. However, it mostly gained ground vs. other major currencies cent by the time it closed at 1.2453 on
(except the yen): Through Dec. 17, it had double-digit gains vs. the other Nov. 20 — a sell-off that might seem dra-
majors (ex-yen) — not too far behind the dollar’s performance. matic were it not for the fact that the Euro
lost nearly 30 percent vs. the Japanese
Apr. 22-Nov. 20 Nov. 20-Dec. 17 Apr. 22-Dec. 17 yen (JPY) during the same period (Figure
Euro/dollar -22.12% 15.80% -9.82% 2).
Table 1 compares the percentage
moves in the Euro and the U.S. dollar vs.
Euro vs. yen -29.03% 8.42% -23.05%
the other major currencies (yen, British
Euro vs. pound 5.50% 9.75% 15.78% pound, Swiss franc, Canadian dollar,
Euro/Swiss -4.92% 1.34% -3.65% Australian dollar, and New Zealand dol-
Euro vs. Canada 0.17% 7.56% 7.74% lar) during the EUR/USD’s April-
November down move and subsequent
Euro vs. Aussie 20.34% 0.56% 21.02%
November-December rebound.
Euro vs. kiwi 18.98% 1.96% 21.31% The overarching and intertwined
Average: 1.84% 4.93% 6.53% themes during the fall financial panic
were liquidation and repatriation: money
Median: 2.84% 4.76% 11.76%
Avg. (ex-yen) 8.01% 4.23% 12.44%
Med. (ex-yen) 5.50% 1.96% 15.78% “Euro story” has really
Dollar vs. yen -9.04% -6.92% -15.33% been the “Dollar story,” or
Pound vs. dollar 26.19% -5.47% 22.15%
Dollar vs. Swiss 22.08% -12.49% 6.84%
even the “Dollar/yen” story.
Dollar vs. Canada 28.63% -8.12% 18.19%
managers and investors got out of all
Dollar vs. Aussie 35.34% -15.19% 25.51%
kinds of assets and reverted money to
Dollar vs. kiwi 34.58% -13.55% 25.71% home-country currencies. The Japanese
Average: 22.96% -10.29% 13.84% yen — a short-side favorite in forex carry
trades because of Japan’s perennial low-
Median: 27.41% -10.30% 20.17%
interest-rate environment — was boosted
Avg. (ex-yen) 29.36% -10.97% 19.68% dramatically. Not only did the yen sky-
Med. (ex-yen) 28.63% -12.49% 22.15% rocket vs. the Euro, it was also the only
major currency the buck lost ground

FIGURE 1 — EURO/DOLLAR SEESAW
The EUR/USD pair collapsed as money flooded into the “safe-haven”
dollar during the fall financial panic, then rebounded sharply in late
November.
against between April 20 and

Nov. 20 (-9.04).
Further inspection of Table 1 suggests the
“Euro story” has really been the “Dollar story,”
or even the “Dollar/yen” story: The Euro was
battered much more vs. the yen than the green-
back, and the EUR/USD pair’s specific decline
was driven by a singular economic event.
In fact, the Euro gained ground against the
Australian dollar, New Zealand dollar, and
British pound, held its own against the
Canadian dollar, and dropped moderately vs.
the Swissie. These gains overall did not com-
pare to the U.S. dollar’s huge surges against
these currencies, but they do highlight the
unique dynamic that was pitting the Euro vs.
the dollar in a battle it could not win.
The EUR/USD pair rebounded to the tune of
nearly 16 percent from Nov. 20 to Dec. 17 on a
closing basis, cutting the Euro’s total loss since Source: TradeStation
April 22 to a little less than 10 percent.
Also, during this November-
FIGURE 2 — THE YEN WILD CARD
December rally, the Euro gained
ground vs. all the other major curren- The EUR/JPY (top) and USD/JPY pairs both dropped as money managers
cies while the U.S. dollar gave back short the yen had to cover their positions. The Euro lost nearly 30 percent vs.
much more (a median loss of 10.30 per- the yen between April and November, while the dollar — which was itself
cent). hurtling to the upside vs. most currencies — lost 9.04 percent.
Overall, the Euro and the U.S. dollar
are not too far apart when assessing
the entire April 22 to Dec. 17 period,
especially when the yen wild card is
removed from the picture. The Euro
gained an average 12.44 percent vs. the
five remaining currencies (median
15.78), while the dollar gained an aver-
age 19.68 percent (median 22.15 per-
cent).
In short, the performance under-
scores the EUR/USD move is about
the dollar more than the Euro. But it
raises the question of the importance
of European Central Bank (ECB) inter-
est-rate policy as the new year begins.
The ECB has lagged other central
banks in cutting interest rates in the
face of the global economic slowdown.
If it is forced to compensate, it could
put a lid on the Euro’s strong rebound
vs. the dollar, even if the dollar’s safe-
haven pop is over and done with.

INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)
Current
price vs. 1-month 3-month 6-month 52-week 52-week Previous
Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank
1 Swiss franc 0.93593 13.26% 4.85% -4.60% 1.0375 0.813 15
2 Euro 1.39782 10.39% -0.80% -11.35% 1.6038 1.2329 5
3 Australian dollar 0.70465 8.99% -11.33% -26.30% 0.9849 0.6005 3
4 New Zealand dollar 0.58127 7.74% -13.62% -23.53% 0.8214 0.519 16
5 South African rand 0.10538 7.02% -12.95% -17.12% 0.1489 0.0841 1
6 Singapore dollar 0.69863 6.40% 0.24% -4.93% 0.7434 0.6512 10
7 Swedish krona 0.12921 6.15% -10.69% -22.56% 0.1718 0.1152 13
8 Japanese yen 0.01103 4.35% 16.94% 16.78% 0.01148 0.00891 12
9 Thai baht 0.02923 3.25% -1.52% -3.08% 0.03396 0.0262 9
10 Indian rupee 0.02037 2.16% -3.73% -11.74% 0.03974 0.01843 2
11 Canadian dollar 0.81999 1.75% -12.99% -16.41% 1.0297 0.768 4
12 Taiwanese dollar 0.03044 1.57% -2.44% -7.48% 0.03335 0.02969 6
13 Chinese yuan 0.14677 0.87% 0.32% 0.49% 0.14677 0.1367 7
14 Hong Kong dollar 0.12904 0.02% 0.23% 0.62% 0.12904 0.1279 8
15 Brazilian real 0.42653 -0.26% -18.25% -31.62% 0.6414 0.3751 14
16 British pound 1.46317 -3.51% -17.78% -26.62% 2.0397 1.4351 17
17 Russian ruble 0.03431 -4.05% -11.96% -19.55% 0.04334 0.03267 11
As of Jan. 2 *based on one-month gain/loss
ACCOUNT BALANCE
Rank Country 2007 Ratio* 2006 2008+ Rank Country 2007 Ratio* 2006 2008+
1 Singapore 41.395 27 36.288 42.208 13 Mexico -6.368 -0.7 -2.425 -10.588
2 Switzerland 65.534 15.8 58.708 64.106 14 France -39.363 -1.6 -27.712 -48.885
3 China 379.162 11.7 249.866 453.146 15 India -23.131 -2.1 -9.503 -32.301
4 Hong Kong 22.796 11.2 20.586 20.456 16 UK -96.687 -3.5 -77.236 -105.144
5 Netherlands 55.891 7.4 8.6 6.7 17 Australia -50.816 -5.7 -41.49 -52.988
6 Taiwan 25.402 6.8 24.661 28.365 18 U.S. -784.341 -5.7 -811.483 -788.293
7 Sweden 25.903 6 27.707 25.584 19 South Africa -18.495 -6.7 -16.608 -19.237
8 Russia 72.543 5.9 95.322 49.181 20 Spain -138.916 -9.8 -106.399 -154.849
9 Germany 175.371 5.4 147.134 174.137 Totals in billions of U.S. dollars
10 Japan 195.904 4.5 170.437 195.145 *Account balance in percent of GDP +Estimate
11 Canada 25.603 1.8 20.792 17.909 Source: International Monetary Fund,
12 Brazil 10.253 0.8 13.276 4.299 World Economic Outlook Database, October 2008

NON-U.S. DOLLAR FOREX CROSS RATES
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol Jan. 2 gain/loss gain/loss gain/loss high low Previous
1 Franc / Pound CHF/GBP 0.64025 17.46% 27.61% 30.11% 0.661 0.4434 9
2 Aussie $ / Pound AUD/GBP 0.48224 13.07% 7.96% 0.56% 0.4895 0.3786 1
3 Franc / Canada $ CHF/CAD 1.14413 11.50% 20.75% 14.36% 1.1583 0.8796 18
4 Franc / Yen CHF/JPY 85.05881 8.78% -10.14% -18.12% 105.071 74.698 13
5 Aussie $ / Canada $ AUD/CAD 0.86141 7.30% 2.12% -11.65% 0.9833 0.7568 10
6 Euro / Yen EUR/JPY 126.772 5.80% -15.16% -24.07% 169.958 113.614 6
7 Canada $ / Pound CAD/GBP 0.56117 5.56% 5.93% 14.05% 0.5663 0.4874 2
8 Aussie $ / Yen AUD/JPY 63.84087 4.36% -24.24% -36.94% 104.448 55.1876 4
9 Franc / Euro CHF/EUR 0.66983 2.62% 5.74% 7.66% 0.6992 0.6038 17
10 Aussie $ / Euro AUD/EUR 0.50347 -1.40% -10.73% -16.98% 0.6278 0.4725 8
11 Real / Canada $ BRL/CAD 0.52142 -1.81% -5.85% -18.02% 0.6719 0.4726 16
12 Canada $ / Yen CAD/JPY 74.39076 -2.45% -25.57% -28.39% 112.316 71.9892 5
13 Real / Pound BRL/GBP 0.2919 3.47% -0.47% -6.70% 0.339 0.2441 7
14 Aussie $ / Franc AUD/CHF 0.75374 -3.70% -15.36% -22.67% 1.0095 0.712 3
15 Real / Yen BRL/JPY 38.69557 -4.38% -30.06% -41.41% 69.3981 36.0109 12
16 Pound / Yen GBP/JPY 132.729 -7.51% -29.66% -37.14% 222.668 129.816 14
17 Canada $ / Euro CAD/EUR 0.58704 -7.78% -12.24% -5.64% 0.6907 0.5799 11
18 Real / Aussie $ BRL/AUD 0.60659 -8.36% -7.64% -7.04% 0.7391 0.5991 19
19 Real / Euro BRL/EUR 0.30536 -9.60% -17.54% -22.81% 0.4197 0.2941 15
20 Pound / Euro GBP/EUR 1.04714 -12.57% -17.09% -17.20% 1.3618 1.0195 20
GLOBAL STOCK INDICES
1-month 3-month 6-month 52-week 52-week
Rank Country Index Jan. 2 gain/loss gain/loss gain/loss high low Previous
1 Mexico IPC 23,250.96 17.42% -3.23% -18.93% 32,292.90 16,480.00 10
2 Brazil Bovespa 40,244.00 14.98% -12.79% -34.14% 73,920.00 29,435.00 13
3 India BSE 30 9,958.22 13.95% -20.50% -27.12% 21,206.80 7,697.39 12
4 Japan Nikkei 225 8,859.56 12.66% -20.58% -33.32% 15,156.70 6,994.90 15
5 Hong Kong Hang Seng 15,042.81 12.21% -17.40% -30.69% 27,637.60 10,676.30 14
6 Singapore Straits Times 1,829.71 11.62% -22.59% -37.04% 3,437.79 1,473.77 11
7 UK FTSE 100 4,561.80 10.65% -6.33% -15.93% 6,534.70 3,665.20 2
8 South Africa FTSE/JSE All Share 21,764.90 10.40% -3.53% -25.73% 33,323.89 17,814.42 3
9 U.S. S&P 500 931.80 9.78% -16.38% -26.14% 1,444.01 741.02 6
10 Germany Xetra Dax 4,973.07 9.74% -12.15% -21.13% 7,923.44 4,014.60 9
11 Canada S&P/TSX composite 8,987.70 7.92% -17.55% -35.96% 15,154.80 7,647.11 8
12 France CAC 40 3,349.69 6.24% -15.48% -22.04% 5,567.09 2,838.50 5
13 Italy MIBTel 15,096.00 1.01% -21.54% -32.62% 29,143.00 14,029.00 7
14 Switzerland Swiss Market 5,533.60 -0.07% -17.79% -19.14% 8,385.40 5,034.40 1
15 Australia All ordinaries 3,201.50 -7.83% -32.94% -38.57% 6,421.20 3,201.50 4
GLOBAL SHORT-TERM INTEREST RATES
Country Interest rate Rate (%) Last change July 08 Jan. 08
U.S. Fed funds rate 0-0.25 0.5 (Dec. 08) 2 3
Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.5 0.5
Eurozone Refi rate 2.5 0.75 (Dec. 08) 4.25 4
UK Repo rate 2 1.00 (Dec. 08) 5 5.5
Canada Overnight funding rate 1.5 0.75 (Dec. 08) 3 4
Switzerland 3-month Swiss Libor 0.5 0.5 (Dec. 08) 2.75 2.75
Australia Cash rate 4.25 1.00 (Dec. 08) 7.25 6.75
New Zealand Cash rate 5 1.50 (Dec. 08) 8 8.25
Brazil Selic rate 13.75 0.75 (Sept. 08) 13 11.25
Korea Overnight call rate 3 1.00 (Dec. 08) 5 5
Taiwan Discount rate 2 0.75 (Dec. 08) 3.625 3.375
India Repo rate 5.5 1.00 (Jan. 09) 9 7.75
South Africa Repurchase rate 11.5 0.5 (Dec. 08) 12 11
GLOBAL BOND RATES
Rank Country Rate Jan. 2 1-month 3-month 6-month High Low Previous
1 Germany BUND 125.28 1.47% 8.26% 13.76% 125.56 109.65 1
2 UK Short sterling 98.28 1.42% 3.99% 4.60% 98.32 93.595 5
3 U.S. 10-year T-note 124.3 1.24% 7.62% 8.83% 128.65 111.15 2
4 Australia 10-year bonds 96.04 0.40% 1.47% 2.79% 96.05 93.18 4
5 Japan Government Bond 139.75 -0.15% 1.67% 3.85% 141.9 132.09 3

INTERNATIONAL MARKETS continued
Gross Domestic Product*

Release 1-year Next Release 1-year Next
Period date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Q3 12/18 -5.1% 19.1% 3/18 S. Africa Q3 11/25 4.1% 15.5% 2/24
Brazil Q3 12/9 1.8% 6.8% 3/10
Canada Q3 12/1 1.2% 6.3% 3/2 ASIA AND SOUTH PACIFIC
EUROPE Australia Q3 12/3 0.1% 1.9% 3/4
France Q3 11/14 0.5% 2.6% 2/13 Hong Kong Q3 11/14 6.3% 3.8% 2/25
Germany Q3 11/13 0.0% 2.2% 2/13 India Q3 11/28 1.2% 18.7% 2/27
UK Q3 12/23 -0.3% 2.3% 3/27 Japan Q3 11/17 -0.5% -2.1% NLT 2/17
Singapore Q3 11/21 0.9% 1.7% NLT 2/27
* Final estimates, at current prices, seasonally adjusted
Unemployment
Period date Rate Change change release Period date Rate Change change release
AMERICAS
Argentina Q3 12/22 7.8% -0.2% -0.3% 2/25 ASIA AND SOUTH PACIFIC
Brazil Nov. 12/19 7.6% 0.1% -0.6% 1/22 Australia Nov. 12/6 4.3% 0.0% 0.1% 1/15
Canada Nov. 12/5 6.3% 0.1% 0.4% 1/9 Hong Kong Sept.-Nov 12/18 3.8% 0.3% 0.2% 1/19
EUROPE Japan Nov. 12/26 3.9% 0.2% 0.1% 1/30
France Q3 12/4 7.7% 0.1% -0.5% 3/5 Singapore Q3 10/31 2.2% 0.0% 0.5% 1/30
Germany Oct. 11/27 7.1% 0.0% -1.0% 1/7
UK Aug.-Oct. 12/17 6.0% 0.2% 0.7% 1/21
CPI
AMERICAS AFRICA
Argentina Nov. 12/10 0.4% 7.9% 1/13 S. Africa Nov. 12/17 0.1% 11.8% 1/28
Brazil Nov. 12/5 0.4% 6.4% 1/9
Canada Nov. 12/19 -0.3% 2.0% 1/23 ASIA AND SOUTH PACIFIC
France Nov. 12/16 -0.5% 1.6% 1/14 Hong Kong Nov. 12/22 1.8% 3.1% 1/22
Germany Nov. 12/17 -0.5% 1.4% 1/15 India Nov. 12/31 0.0% 10.4% 1/30
UK Nov. 12/16 -0.1% 4.1% 1/20 Japan Nov. 12/26 -0.9% 1.0% 1/30
Singapore Nov. 12/23 -0.3% 5.5% 1/23
PPI
AMERICAS AFRICA
Argentina Nov. 12/10 -0.3% 9.8% 1/13 S. Africa Nov. 12/18 -1.3% 12.6% 1/29
Brazil Nov. 12/8 -0.2% 12.9% 1/7
Canada Oct. 11/28 -12.5% -0.2% 1/6 ASIA AND SOUTH PACIFIC
France Nov. 12/22 -1.9% 1.6% 1/30 Hong Kong Q3 12/12 -1.2% 5.5% 3/13
Germany Nov. 12/19 -1.5% 5.3% 1/21 India Nov. 12/12 -1.8% 8.6% 1/9
UK Nov. 12/8 -0.7% 5.1% 1/9 Japan Nov. 12/10 -1.9% 2.8% 1/15
Singapore Nov. 12/30 -10.2% -12.8% 1/30
LEGEND:
Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
As of Dec. 31

ads0908 7/15/08 1:28 PM Page 39
FOREX NEWS
Rate cuts fuel deflation fears

The Fed lowered its target rate to a historic low as consumer prices plummet — along with the U.S. dollar.
T he Fed cut its target federal

funds rate on Dec. 16 to a range
from 0 percent to 0.25 percent.
decline in energy prices. In November
alone the BLS’s energy index fell 17
percent, capping four months of
ing. This drops consumption, which
drops employment,” Trevisani says.
Companies try to combat muted
“They’re acknowledging reality,” decreases and doubling the October consumption by lowering prices and
says Joseph Trevisani, chief market drop. The next-largest declines employing fewer workers.
analyst for New Jersey-based forex occurred in transportation, which fell Unemployment in turn perpetuates
broker FX Solutions. “Everybody 9.8 percent in November, and housing, less consumption, further fueling the
knows the effective rate has been there which fell 0.1 percent.
for some time.” Nonetheless, the November CPI was
The historic low came at a time 1.1 percent higher than the November FIGURE 1 — USD/JPY
when inflation was decreasing at 2007 reading. However, the 12-month
USD fell to a 13-year low vs. JPY
record levels, bringing on new worries change in July was at 5.6 percent, when the day after the Fed cut rates to
about the risk of deflation. November crude oil prices were at their peak. its lowest level ever.
Consumer Price Index (CPI) data, also Looking beyond the energy factor,
released on Dec. 16, showed a 1.7-per- Trevisani says the real type of deflation
cent drop. This drop was preceded by a the Fed should be fearful of is the
1.0-percent drop in October. “feedback loop.”
The Bureau of Labor Statistics (BLS) “Prices fall and then people expect
attributes much of this drop to the them to fall so they hold off purchas-
Managed money: Barclay Trading Group’s

currency trader rankings for November 2008
Top 10 currency traders managing more than $10 million
as of Nov. 30, ranked by November 2008 return.
2008 $ Under
Rank Trading November YTD mgmt.
advisor return return (millions)
1. Auriel Currency 2X Fund 5.76% -15.56% 433.1 Source: eSignal
2. Plimsoll Capital (Headwind) 5.30% 15.14% 22.1
3. Goldman Sachs (Fund. Currency) 4.65% 20.67% 310.0
FIGURE 2 — EUR/USD
4. John W. Henry & Co. (Int'l. FX) 4.17% 76.09% 29.1
5. Sunrise Cap'l Partners (Currency Fund) 2.57% 16.35% 29.2 The Euro rose significantly against
6. Hathersage (Long Term Currency) 2.50% 8.99% 362.1 the dollar in the days surrounding
7. Geo Economic Mgmt. System Ltd 2.29% 16.37% 43.1 the December Fed rate cut.
8. Spot Forex Mgmt. (Geneva) 2.12% 9.97% 12.0
9. Capricorn Advisory Mgmt (fxST Aggres.) 2.05% 5.88% 62.0
10. arsago Premium Currencies 1.84% 2.57% 181.2
Top 10 currency traders managing less than $10 million and more than
$1 million as of Nov. 30, ranked by November 2008 return.
1. Wallwood Consultants (Forex) 13.66% -42.66% 2.0
2. Spot Forex Mgmt. (Lausanne) 8.83% 46.81% 4.0
3. Spot Forex Mgmt. (Zurich) 4.36% 21.64% 6.5
4. Zone Cap'l FX Managed Account 4.18% 16.35% 1.2
5. Aspect Capital (Gl. Currency) 3.10% -4.26% 5.0
6. Swing Capital (FX) 2.03% 25.68% 6.5
7. Capricorn Advisory Mgmt (fxMT Growth) 1.62% 4.65% 1.0
8. Ketch Capital Management (Tack Fund) 1.54% 0.25% 4.0
9. Coe Capital Advisors (FX) 1.02% 5.53% 4.3
10. Quiddity (FX) 0.92% -6.99% 7.0
Source: BarclayHedge (http://www.barclayhedge.com). Based on estimates of the composite of all
accounts or the fully funded subset method. Does not reflect the performance of any single account. Source: eSignal
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s
as of Jan. 2 liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.
Market Symbol Exchange Volume OI 10-day move/% rank 20-day move/% rank 60-day move/% rank Volatility ratio/rank
Eurocurrency EC CME 153.0 124.9 -3.42% / 100% 9.27% / 62% 1.25% / 63% .16 / 43%
Japanese yen JY CME 77.2 112.1 -4.58% / 100% 1.02% / 3% 9.60% / 37% .14 / 0%
British pound BP CME 54.4 85.9 -6.44% / 100% -1.86% / 6% -17.45% / 78% .13 / 8%
Swiss franc SF CME 27.8 30.6 -0.29% / 0% 12.54% / 71% 5.05% / 82% .37 / 77%
Canadian dollar CD CME 26.1 60.1 -1.24% / 50% 3.87% / 67% -9.16% / 49% .08 / 0%
Australian dollar AD CME 23.5 47.2 1.55% / 16% 10.03% / 83% -1.24% / 2% .16 / 58%
Mexican peso MP CME 4.2 26.7 -4.30% / 92% -2.50% / 27% -12.17% / 27% .14 / 48%
U.S. dollar index DX ICE 4.1 23.3 2.72% / 100% -4.32% / 43% 1.77% / 12% .09 / 0%
New Zealand dollar NE CME 1.2 14.0 -0.80% / 50% 10.43% / 100% -7.24% / 16% .12 / 2%
E-Mini eurocurrency ZE CME 2.4 1.8 -3.42% / 100% 9.27% / 62% 1.25% / 50% .16 / 43%
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: previous moves of the same size and in the same volatility (10-day standard deviation of prices) divided
Volume: 30-day average daily volume, in thousands. direction. For example, the % rank for 10-day move by the long-term volatility (100-day standard deviation
shows how the most recent 10-day move compares to of prices). The % rank is the percentile rank of the
OI: 30-day open interest, in thousands.
the past twenty 10-day moves; for the 20-day move, volatility ratio over the past 60 days.
10-day move: The percentage price move from the
the % rank field shows how the most recent 20-day
close 10 days ago to today’s close. This information is for educational purposes only.
move compares to the past sixty 20-day moves; for
20-day move: The percentage price move from the the 60-day move, the % rank field shows how the Currency Trader provides this data in good faith, but
close 20 days ago to today’s close. most recent 60-day move compares to the past one- assumes no responsibility for the use of this infor-
60-day move: The percentage price move from the hundred-twenty 60-day moves. A reading of 100% mation. Currency Trader does not recommend buy-
ing or selling any market, nor does it solicit orders to
close 60 days ago to today’s close. means the current reading is larger than all the past
buy or sell any market. There is a high level of risk
The “% rank” fields for each time window (10-day readings, while a reading of 0% means the current
in trading, especially for traders who use leverage.
moves, 20-day moves, etc.) show the percentile rank reading is lower than the previous readings. The reader assumes all responsibility for his or her
of the most recent move to a certain number of the Volatility ratio/% rank: The ratio is the short-term actions in the market.
downward spiral. its five-year zero-rate policy in 2006.

“But for the moment, I don’t see that December capped a year in which the
happening,” he says. U.S. dollar/Japanese yen (USD/JPY)
fell 19 percent, the pair’s largest annu-
A down dollar al drop in more than 20 years.
Both the Euro and the Japanese yen The Euro (Figure 2) gained 10.7 per-
rallied for five straight days surround- cent against the dollar during the
ing the Fed rate cut. From Dec. 11 same time period, rallying 10 percent
through Dec. 17 the U.S. dollar (Figure in December, the Euro/U.S. dollar’s
1) fell 5.9 percent against the yen, hit- (EUR/USD) largest monthly gain in 30
ting a 13-year low on Dec. 17. years. The December gain occurred
On Dec. 19 the Bank of Japan low- after the Euro lost more than 20 per-
ered its interest rate to 0.1 percent, its cent against the dollar from July
lowest point since the country ended through November.
Outrageous predictions
O n Dec. 17, London-based Saxo

Bank released their annual
“outrageous claims” for the year
attempts to deal with the economic
troubles of its member states.
Saxo also predicts 2009 could see
ahead, an attempt to predict rare but the first Asian currencies pegged to
high-impact events that could occur in the Chinese yuan, and that Asian eco-
the year to come. nomies will “look toward China to
Among the predictions for 2009 find new trade partners and scale
were that the EUR/USD pair could down their hitherto U.S.-centric
fall to 0.95 and then go as high as 1.30 agenda.”
as the European Central Bank

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search engine and results displays that include additional its services. The agreement covers a broad range of OTC
performance parameters. APS discovers trading systems data generated from ICAP’s interdealer broker activities
based on price patterns that fulfill user-defined perform- and will be used to assist in the valuation of complex struc-
ance statistics and risk/reward parameters by searching tured products. Prism Valuation provides transparent valu-
historical data. Technical traders can use APS to develop ations for complex OTC derivatives and structured prod-
and analyze stock, futures, and forex trading systems based ucts including interest rates, forex, inflation, equities, cred-
on price patterns. APS generates code for implementing the it, commodities, and hybrids.
price patterns it discovers in other popular programs, such
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as Metastock, Tradestation, Wealth-Lab, and TeleChart.
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es and are not endorsements or recommendations from the Active Trader
ICAP, an interdealer broker, and Prism Valuation, a Magazine Group. E-mail press releases to editorial@currencytradermag.com.
provider of mark-to-market and valuations services, final- Publication is not guaranteed.
EVENTS
Event: The World Money Show Event: Second Annual Conference on Institutional
Date: Feb. 4-7 Location: Orlando Options Trading
Date: March 17-19 Location: Hong Kong Date: March 10
Date: May 11-14 Location: Las Vegas Location: New York City
For more information: Go to For more information: http://www.fmwonline.com
http://www.moneyshow.com and click on “Events”
Event: Live Trading Software and Trading Expos
Event: International Trader’s Expo Date: April 5-7 Location: Miami
Date: Feb. 21-24 Date: June 7-9 Location: Houston
Location: New York, New York For more information: http://livetradingexpo.com
For more information: http://www.tradersexpo.com
Event: The 15th Forbes Cruise for Investors
Event: Securities Operations World 2009 Date: June 2-14
Date: Feb. 24 Location: Lisbon to Venice
Location: New York City For more information: Go to
For more information: http://www.fmwonline.com http://www.moneyshow.com and click on “Events”
Event: 25th Annual Risk Management Conference Event: International Trader’s Expo
Date: March 8-10 Date: June 3-6
Location: The Ritz-Carlton, Laguna Niguel, Location: Los Angeles
Dana Point, Calif. For more information: http://www.tradersexpo.com
For more information: http://www.cboermc.com

GLOBAL ECONOMIC CALENDAR JANUARY/FEBRUARY
Legend
LTD (last trading day): The final January 21 Brazil: Central Bank of Brazil monetary
day trading can take place in a
futures or options contract. policy announcement
1
FDD (first delivery day): The Germany: December PPI
first day on which delivery of a 2 U.S.: December ISM report UK: Sept.-Nov. employment report
commodity in fulfillment of a
futures contract can take place. 3 22 U.S.: December housing starts
FND (first notice day): Also Brazil: December employment report
known as first intent day, this is 4
Japan: Bank of Japan monetary
the first day on which a clearing-
house can give notice to a buyer
5 policy announcement
of a futures contract that it Hong Kong: December CPI
intends to deliver a commodity in
6 U.S.: December ISM non-manufacturing
report and FOMC minutes Mexico: Jan. 15 CPI
fulfillment of a futures contract.
The clearinghouse also informs Canada: November PPI
the seller.
23 Canada: December CPI
CPI: Consumer price index 7 Brazil: December PPI 24

ECB: European Central Bank Germany: November employment report
FOMC: Federal Open Market 25
Committee 8 Mexico: Dec. 31 CPI and December PPI
26 U.S.: December leading indicators
GDP: Gross domestic product
9 U.S.: December employment report
ISM: Institute for supply
Brazil: December CPI
27 Australia: Q4 PPI
management
PMI: Purchasing managers Canada: December employment report 28 Australia: Q4 CPI
index India: December PPI South Africa: December CPI
PPI: Producer price index UK: December PPI
LTD: January currency options (CME);
29 U.S.: FOMC monetary policy statement
Economic Release time
and December durable goods
release (U.S.) (ET) U.S. Dollar Index futures (ICE)
GDP 8:30 a.m. Canada: December PPI
CPI 8:30 a.m. 10 Germany: December employment report
ECI 8:30 a.m. South Africa: December PPI
PPI 8:30 a.m. 11
ISM 10:00 a.m.
12 30 U.S.: Q4 GDP (adv.) and ECI
Unemployment 8:30 a.m. France: December PPI
Personal income 8:30 a.m. 13 U.S.: November trade balance India: December CPI
Durable goods 8:30 a.m.
Retail sales 8:30 a.m. 14 U.S.: December retail sales Japan: December employment report
Trade balance 8:30 a.m. France: December CPI and CPI
Leading indicators 10 a.m.
15 U.S.: December PPI 31
January 2009 Australia: December employment report
28 29 30 31 1 2 3 ECB: Monetary policy announcement
Germany: December CPI
February
4 5 6 7 8 9 10
11 12 13 14 15 16 1 7 Japan: December PPI 1
18 19 20 21 22 23 2 4 16 U.S.: December CPI 2 U.S.: December personal income
25 26 27 28 29 30 31 Mexico: Bank of Mexico monetary policy
announcement
3 Australia: Reserve Bank of Australia
monetary policy announcement
FEBRUARY 2009 17
1 2 3 4 5 6 7 4 U.S.: January ISM report
8 9 10 11 12 13 14 18
5
15 16 17 18 19 20 21 19 Hong Kong: Oct.-Dec. employment
22 23 24 25 26 27 28 report
6 U.S.: January employment report
Brazil: January CPI
Mexico: December employment report
Canada: January employment report
20 Canada: Bank of Canada monetary UK: January PPI
The information on this page is
subject to change. Currency policy announcement LTD: February currency options (CME);
Trader is not responsible for UK: December CPI February U.S. Dollar Index futures
the accuracy of calendar dates
beyond press time.
January 2009 • CURRENCY TRADER 41
KEY CONCEPTS
Average and median: The mean (or average) of a set of The squared differences are used (instead of just the dif-
values is the sum of the values divided by the number of ferences) because some differences are negative (for points
values in the set. If a set consists of 10 numbers, add them below the line) and others are positive (for points above the
and divide by 10 to get the mean. line). Squaring all the differences creates all-positive values
A statistical weakness of the mean is that it can be dis- and allows you to calculate a formula for the straight line.
torted by exceptionally large or small values. For example, The “best-fit” line is the line for which the sum of the
the mean of 1, 2, 3, 4, 5, 6, 7, and 200 is 28.5 (228/8). Take squared differences between each price and the straight line
away 200, and the mean of the remaining seven numbers is are minimized.
4, which is much more representative of the numbers in this
set than 28.5. The formula for a straight line (y) is:
The median can help gauge how representative a mean y = a + b*t where,
really is. The median of a data set is its middle value (when t = time
the set has an odd number of elements) or the mean of the a = the initial value of the line when “t” is equal to zero
middle two elements (when the set has an even number of (sometimes called the “intercept” value — i.e., the
elements). The median is less susceptible than the mean to point at which the line intercepts the vertical y-axis)
distortion from extreme, non-representative values. The or the point at which a specific line begins
median of 1, 2, 3, 4, 5, 6, 7, and 200 is 4.5 ((4+5)/2), which is b = the slope of the line, which is the rate at which the
much more in line with the majority of numbers in the set. line rises or falls (e.g., 0.75 points per day).
Carry trades involve buying (or lending) a currency When fitting a straight line to N data points, the “best-fit”
with a high interest rate and selling (or borrowing) a cur- coefficients a and b can be solved for by:
rency with a low interest rate. Traders looking to “earn
N N
carry” will buy a high-yielding currency while simultane- a = [2(2N+1)/N(N-1)] ∑p(t) + [6/(N(N-1)] ∑t*p(t)
t=1 t=1
ously selling a low-yielding currency.
N N
Inside bar: A price bar with a lower high and higher low b = [12/N(N2 –1)] ∑t*p(t) - [6/N(N-1)]∑p(t)
t=1 t=1
than the preceding bar. By definition, an inside bar repre-
sents a volatility contraction from the preceding bar. where,
p(t) = the price at point t
Linear regression (“best-fit”) line: A way to calcu- N = the number of prices we are using to calculate the
late a straight line that best fits a set of data (such as closing coefficients.
prices over a certain period) — that is, a line that most accu-
rately reflects the slope, or trend, of the data. Volatility: The level of price movement in a market.
A regression line is calculated using the “least squares” Historical (“statistical”) volatility measures the price fluctu-
method, which refers to finding the minimum squared (x*x, ations (usually calculated as the standard deviation of clos-
or x 2) differences between price points and a straight line. ing prices) over a certain time period — e.g., the past 20
For example, if two closing prices are 2 and 3 points away days. Implied volatility is the current market estimate of
(the distance being calculated vertically) from a straight future volatility as reflected in the level of option premi-
line, the squared differences between the points and the line ums. The higher the implied volatility, the higher the option
are 4 and 9, respectively. premium.

FOREX TRADE JOURNAL
One big loser wipes out two winners.

TRADE
Date: Nov. 25, Nov. 26, and Dec. 11, 2008.
Entry: Short the Euro/U.S. dollar pair

(EUR/USD) at 1.2954, 1.3064, and 1.3022.
Reason(s) for trade/setup: These signals were

the most recent results of the strategy based on the
setup described in “Short-term momentum signals
in the Euro” (Currency Trader, May 2008), “Euro
momentum system, interrupted” (Currency Trader,
June 2008), and “Euro momentum signal,
tweaked” (Currency Trader, July 2008). The system
goes short when a short-term momentum calcula-
tion is strong relative to a bullish longer-term
momentum calculation. In this case, the 10-day
momentum indicator (ranging from -1.00 to +1.00)
had to be greater than or equal to 0.80 while the 62- Source: TradeStation
day momentum was below -0.6.
Note: These signals were not actually executed
in the market, so the results are shown for the following better-than-estimated price, thanks to the relatively big
parameters: a 0.0240-point profit target (a representative down move and low close on that day.
value found in testing) and a move above the high of the The third trade wiped out the accumulated profit — and
entry bar as the stop-loss. In both cases, the exits are execut- then some — as the Euro began what turned out to be a very
ed on the close of the bar that the condition is triggered on. strong upside reaction that peaked in mid-December.
While the approach of exiting on the close helped per-
Initial stop: A close above the high of the entry bar, esti- formance on the winning trades, it was disastrous in the case
mated as 1.3081 (for the first two entries) and 1.3406 (for the of the losing trade.
third entry) in the Trade Summary table. Despite the two profitable trades, these results underscore
a previously discussed weakness: The signals often come
Initial target: The first close 0.0240 or more below the early and executing trades based on the opens and closes of
entry price (estimated as 1.2754, 1.2864, and 1.2822 in the the bars (rather than specific intrabar price levels) can put
table). trades at a disadvantage. Past trades based on these signals
from previous Trade Journals have used discretion to count-
er these problems. Further research should be conducted to
RESULT see if these modifications can be applied systematically for
future use.
Exit: 1.2689 (first trade and second trades); 1.3721 (third Also, like any signal of this type, the system is vulnerable
trade). to bad signals when a market transitions from uptrend to
downtrend, or makes an outsized move in either direction.
Profit/loss: +0.0265 (first trade); +0.0375 (second trade);
Note: Initial trade targets are typically based on things such as the histor-
-0.0699 (third trade).
ical performance of a price pattern or a trading system signal. However,
because individual trades are dictated by immediate circumstances, price
Trade executed according to plan? Yes. targets are flexible and are often used as points at which to liquidate a por-
tion of a trade to reduce exposure. As a result, initial (pre-trade) reward-
Outcome: The first two trades were exited on Nov. 28 at a risk ratios are conjectural by nature.
TRADE SUMMARY
Date Contract Entry Initial Initial IRR Exit Date P/L LOP LOL Trade
stop target length
11/25/08 EUR/USD 1.2954 1.3081 1.2754 1.18 1.2689 11/28/08 +0.0265 (2%) 0.0393 -0.0126 3 days
11/26/08 1.3064 1.3081 1.2864 11.76 1.2689 11/28/08 +0.0375 (2.9%) 0.0503 -0.0006 2 days
12/11/08 1.3022 1.3406 1.2822 0.52 1.3721 12/15/08 -0.0699 (-5.4%) — -0.0699 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).

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Currency Trends: Spot Check: Forex Watch 2009 The Euro

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Strategies, analysis, and news for FX traders

FOREX WATCH 2009 p. 8 CURRENCY TRENDS:

Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Trading Strategies

2 January 2009 • CURRENCY TRADER

International Markets . . . . . . . . . . . . . .34 Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Have a question about something you’ve seen in

Looking for an advertiser?

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4 January 2009 • CURRENCY TRADER

A publication of Active Trader ®

For all subscriber services:

Managing editor: Molly Goad

Associate editor: Chris Peters

Editorial assistant and

6 January 2009 • CURRENCY TRADER

2009: Around the world in four currencies

8 January 2009 • CURRENCY TRADER

Euro/pound and the ECB vs. BOE

CURRENCY TRADER • January 2009 9

10 January 2009 • CURRENCY TRADER

Outright Aussie play

12 January 2009 • CURRENCY TRADER

T he consensus forecast today for the Euro/dollar

14 January 2009 • CURRENCY TRADER

sonable, but it’s not. It

FIGURE 3 — ALTERNATE SCENARIO

An alternate scenario posits the recent EUR/USD high as an as-yet-untested breakout

16 January 2009 • CURRENCY TRADER

A 62-percent retracement of the move from 0.8229 in October 2000 to 1.6038

as players become familiar with the

Other Barbara Rockefeller articles:

You can purchase and download past articles at http://store.activetradermag.com.

18 January 2009 • CURRENCY TRADER

CURRENCY TRADER • January 2009 19

BY CURRENCY TRADER STAFF

T he November and December 2008 issues of

20 January 2009 • CURRENCY TRADER

Enter short at today’s close if: inputs: trendlength(40), closethresh(.35);

All trades were exited on the close

1. Execute long trade signals only

The signals were tested with the fil-

CURRENCY TRADER • January 2009 21

FIGURE 1 — INSIDE OUT

22 January 2009 • CURRENCY TRADER

The rules are inverted for short

CURRENCY TRADER • January 2009 23

TABLE 3 — PERIOD COMPARISON

All trades Long trades Short trades

TABLE 4 — COMBINED SIGNALS

24 January 2009 • CURRENCY TRADER

Let the trend be your friend: The majors

TABLE 1 — MAJOR CURRENCIES' SUMMARY TREND STATISTICS

26 January 2009 • CURRENCY TRADER

British pound (GBP), and the Euro (EUR). We

Almost any trading system

eyes get in the way of reality.

The trend oscillator

CURRENCY TRADER • January 2009 27

lator (red bars) only for trending days. The

Ranking the majors

28 January 2009 • CURRENCY TRADER

CURRENCY TRADER • January 2009 29