Strategies, analysis, and news for FX traders

July 2011 Volume 8, No. 7

The reality of interest rates and forex p. 12

Loonie tunes: North America’s strongest dollar p. 6 Dissecting the Bloomberg currency indices p. 24

Scaling the AUD’s lofty heights p. 16 Trading algorithmic support & resistance with Widner Bands p. 20

Contributors .................................................4 Global Markets Is the U.S. dragging down Canada? .........6
The Canadian currency is North America’s strongest dollar, but its fate is closely tied to the fortunes of its neighbor to the south. By Currency Trader Staff

Global Economic Calendar ........................ 28
Important dates for currency traders.

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

Currency Futures Snapshot ................. 29 International Markets ............................ 30
Numbers from the global forex, stock, and interest-rate markets.

On the Money The dirty little secret of big-picture macro in FX ........................... 12
The unreal reality of real return and currency movement. By Barbara Rockefeller

Forex Journal ...........................................33
A false breakout trade in the Aussie dollar.

Spot Check Aussie dollar ............................................ 16
The Aussie dollar has been on a remarkable run against its U.S. cousin. Does it have any gas left in the tank? By Currency Trader Staff

Trading Strategies Algorithmic support and resistance: Trading Widner oscillators in FX ............ 20
A technique developed for stock trading is tested on a basket of currencies. By Daniel Fernandez

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

Advanced Concepts Weighting for correlation ........................ 24
The Bloomberg currency indices can provide a mental anchor for assessing strength and weakness, but don’t expect them to become dominant trading or hedging vehicles. By Howard L. Simons

Questions or comments?
Submit editorial queries or comments to

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

economic and financial market issues.

For all subscriber services: q Barbara Rockefeller ( is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund.
Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green

Editor-in-chief: Mark Etzkorn Managing editor: Molly Goad Contributing editor: Howard Simons

q Daniel Fernandez is an active trader with a strong interest in calculus, statistics, and economics who has been focusing on the analysis of forex trading strategies, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For the past two years he has published his research and opinions on his blog “Reviewing Everything Forex,” which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://mechanicalforex. com). Fernandez is a graduate of the National University of Colombia, where he majored in chemistry, concentrating in computational chemistry. He can be reached at

President: Phil Dorman Publisher, ad sales: Bob Dorman Classified ad sales: Mark Seger

Volume 8, Issue 7. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2011 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.



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Is the U.S. dragging down Canada?
The Canadian dollar is North America’s strongest currency, but its fate is closely tied to the fortunes of its neighbor to the south.

Prior to the 2008-2009 global economic crisis and recession, the Canadian dollar (CAD) had been strengthening vs. its U.S. counterpart for years, with the USD/CAD pair falling from about $1.61 in early 2002 to a spike to .9000 in November 2007 (Figure 1). The rush to safety during the global financial crisis saw a massive unwinding of longCanada positions, propelling dollar/Canada back into the

$1.30 range. However, since May 2009 the Canadian dollar has reasserted its overall strengthening trend, and the pair nearly tested its pre-global recession lows in April-May 2011. Overall, Canada boasts a better structural fiscal situation than the U.S., and the central bank has already hiked rates post-global crisis, while the U.S. Fed has remained on hold. “The economy is performing quite soundly,” says Nick Bennenbroek, FIGURE 1: MONTHLY DOLLAR/CANADA head of currency strategy at Wells Fargo. “We are seeing steady employment increases on a month-by-month basis.” Canada also enjoys support, both economically and on the FX front, as a major global commodity exporter. However, that dynamic has also turned the Canadian dollar (the “loonie” in FX parlance) into a risk-type of asset, similar to the other major “commodity currencies” such as the Brazilian real and the Australian dollar. However, while Canadian fundamentals are generally bullish, the country’s economy is inextricably linked to its southern neighbor, and The question is whether the recent bounce marks a significant bottom or is just slower-than-expected growth forecasts a pause in the USD/CAD long-term downtrend. for the U.S. could translate into weakSource for all charts: TradeStation


er growth for Canada. After hitting its lowest post-crisis low in early May 2011 at .9400, the U.S. dollar took the lead and the pair bounced toward .9900 (Figure 2). What’s behind the turnaround in the dollar/Canada trend? Is it just a temporary correction, or did the early-May low mark a significant bottom? How does the economic forecast look for Canada heading into the second half, and what’s ahead for Canadian monetary policy?

Hopkins describes the slowdown in the U.S. as “explainable.” Among other factors, he cites the oil shock, which saw crude oil prices surge to nearly $115 per barrel in early May, and Eurozone sovereign-debt uncertainty, which has sparked jitters across global markets.

The numbers

Downward revisions

Some economists have downwardly revised their 2011 gross domestic product (GDP) forecasts for Canada in the wake of the unexpected renewed weakness in the U.S. economy. Pointing to previous GDP forecasts of 3.7 percent for Canada, Moody’s Analytics senior economist Mark Hopkins says his expectations for growth this year are now around 3 percent. “We’ve revised it downward as the FIGURE 2: DAILY DOLLAR/CANADA weakness in the U.S. is coming out,” he says. “About three-quarters of Canadian exports go to the U.S.” Jonathan Basile, economist at Credit Suisse notes, “Everyone is really concerned about what happens when the Fed is done [with quantitative easing.] With U.S. unemployment at 9 percent, the economy isn’t going to get much help from the Fed. U.S. concerns affect Canada because we are Canada’s biggest trading partner.” It is, Basile explains, the classic economic ripple effect. “We’ve had a strong global picture for exports, but when you have signs that manufacturing is slowing and the star player got hurt, what’s the rest of The USD/CAD turned around in May after two years of nearly one-way (down) the team going to do?” he says. “The trading. U.S. is on the injured reserve list.”

Strong growth numbers emerged from Canada in early 2011. Fourth-quarter 2010 GDP came in at 3.3 percent and first quarter 2011 at 3.9 percent, according to Hopkins. “A lot of that was the pickup in exports, manufacturing, and sustained commodity exports,” he says. Basile forecasts a 2.9-percent Canadian GDP rate for Q2, but he notes the risk is for a lower reading. Overall, Basile expects a 3.1-percent GDP pace this year, following 2010’s 3.2-percent pace. “We saw a strong start to 2011, but the mid part of the



year may show more volatility,” he says. “There is a general sense of slowdown permeating the financial markets. The Japanese earthquake has had its impact on the global supply chain, particularly manufacturing and autos, which affects Canada.”

BOC policy outlook

Most analysts expect the Bank of Canada (BOC) to hike rates in the second half of the year, which could translate into support for the Canadian dollar vs. the greenback. The BOC is set to meet next on July 19, but the consensus is for the bank to hold rates steady at that meeting. During the recession the BOC dropped its overnight lending rate to 0.25 percent, but in September 2010 hiked rates back up to 1 percent. While that level has held steady since then, analysts are looking for another increase. “The central bank will raise rates in the second half of the year,” Bennenbroek says. “Inflation has risen closer to the central bank target, which is why we think the BOC

will hike.” The April consumer price index (CPI) showed inflation rising to 3.3 percent, while the 12-month rate of change of core CPI (ex-food and energy) stood at 1.6 percent, according to Hopkins. Basile expects the BOC to begin hiking rates again at its September meeting, bringing the overnight rate to 1.25 percent, with additional hikes in the second half to end the year at 1.75 percent. However, he notes that “the markets have already priced out moves.” Hopkins gave 50-50 odds the BOC would hikes rates in September by .25 percent, and he expects the official rate to rise to 1.50 percent by year-end. “I think we [could] start to see more inflation passing into the core,” he says.

Currency action

What, specifically, sparked the dollar/Canada turnaround in early May? Look no further than the factors that have disrupted financial markets as a whole in recent months. “The weaker Canadian dollar has a lot to do with the European debt crisis and equity market weakness,” Bennenbroek says. “It is a growthsensitive currency, or risk currency, and anything that makes market participants more nervous will impact it.” Sebastien Galy, currency strategist at Societe Generale, voices a similar observation. “USD/CAD has moved higher in line with fears of a global slowdown,” he says. “Commodities came under pressure, while past increases in oil prices have left many U.S. consumers in a vulnerable situation. Canada, with exposure to both oil and the U.S. economy, suffered consequently from this — though admittedly, it was quite a moderate move given the risks.”


Sean Callow, senior currency strategist at Westpac Institutional Bank, adds: “USD/CAD has been choppy in recent weeks, struggling to set a fresh direction as it is torn between the weight on the U.S. dollar from poor U.S. data, and a lack of compelling reasons to buy CAD given pressure on global commodities and growth momentum, the Bank of Canada’s neutral near-term outlook and, of course, the fact that bad news on the U.S. economy is also bad news for Canada’s [export sector].” For Callow, it all adds up to a relatively flat outlook. “The next month or so we are neutral USD/CAD, with a target of .9800, but would prefer to sell into rallies because global growth is likely to pick up somewhat during the third quarter, supporting commodity prices and [the Canadian dollar],” he says.

The Canadian dollar tends to benefit from rising oil prices, because it is an oil-exporting nation, while falling oil prices tend to be loonie negative.

Was the early May low at .9400 a significant bottom? “The May 2 low is there to stay for a while, as it will take the global and U.S. economy recovering sufficiently to break such a level,” Galy says. “Continued stress in European peripherals should come back to haunt this currency pair. Furthermore, the market has not yet adapted to the lower level of potential growth in G10 economies, and to some extent the degree to which the Fed can stay dovish. We target the .9300 level by year end; that is a slow downside, with an Risk on, risk off asymmetric risk of spikes.” The Canadian dollar has been tradTD Securities chief FX ing more like a risk asset in recent strategist Shaun Osborne sees months, sensitive to bouts of global lessening momentum on a risk aversion. Brian Dolan, chief shorter-term horizon: “The currency strategist at, medium- to long-term downsays the May-June rally is a functrend in USD/CAD appears tion of a recent “risk-off” environto be trying to reverse,” ment. he notes. “The rebound in “When the U.S. numbers come USD/CAD in May was sufin bad, people feel more risk averficient enough to break the sion and move into the dollar, — Jonathan Basile, economist at Credit Suisse back of the two-year trend Treasuries, and other safe havens resistance from the 1.3000 like the Swiss franc and yen,” he area reached in late 2008 and says. “They dump commodity curearly 2009. So far, however, rencies like Aussie, Canada, and the kiwi (New Zealand). If the recovery has been relatively limited, and the lack of U.S. data comes in good, the dollar goes down.” topside progress is starting to suggest the recovery may There might be more of the same on the horizon, accord- be stalling.” ing to some analysts. “I’m still in the risk-aversion camp,” Osborne thinks there’s room for the USD/CAD pair to Callow says. “I don’t think people have fully priced in the retest 1.0000 in the coming weeks, “but the market’s strugslowdown we are likely to see in the second half.” gle to sustain gains above .9800 the past couple of weeks Dolan believes crude oil is still an important factor. serves as a warning that the rebound may be running out “If crude falls below $90-91, it will indicate further eroof momentum.” sion and weakness in global demand, and that could ratchHowever, he notes a sustained push through 1.0000 et dollar/Canada higher,” he says. should lead the market to believe a deeper rebound —

A good bottom?

“There is a general sense of slowdown permeating the financial markets. The Japanese earthquake has had its impact on the global supply chain, particularly manufacturing and autos, which affects Canada.”




back into the 1.0000-1.0800 range that prevailed from late 2009 through early 2011 — is achievable. “Par looks to be pivotal,” Osborne says. “Above par should see an extension toward 1.0800-1.0900 (retracement resistance and the old range highs) late this year or early next year. Failure to extend through par in July-August probably means we remain in a .9400/1.0000 range for a while longer.”

Canadian cross rates

Some analysts say looking to play the Canadian dollar on the crosses — vs. the Japanese yen or Australian dollar — may offer superior trading opportunities than the USD/ CAD pair. “The better play might be long CAD crosses such as CAD/JPY and CAD/AUD, or as we say Down Under, short AUD/CAD,” Callow says. “With a benchmark rate of just 1 percent and a comparatively healthy banking and housing sector, FIGURE 3: CANADIAN CROSSES the Bank of Canada has plenty of tightening ahead of it, certainly more than we will see in Japan or Australia — the latter already running moderately contractionary monetary policy. Markets are priced for only one 25-basis point BOC hike by February 2012. The risks on this are clearly skewed to faster tightening on improvement in Canadian, and particularly U.S., growth in coming weeks and months.” Callow notes the CAD/AUD pair tested .9500 in June (around 1.0555 in Figure 3, which shows the AUD/CAD rate), the lowest level since 2004, and should recover to .9800 on any signs of life in the U.S. economy. “If the U.S. outlook brightens to Some analysts believe trading the Canadian dollar vs. the Aussie dollar (top) the extent we expect later in the third and Japanese yen (bottom) offer better trade opportunities than trading it quarter, CAD could return to parity against the U.S. dollar. with AUD,” he says. “The RBA (Reserve

Bank of Australia) is unlikely to tighten before November 2011 and even if it does, further moves are very doubtful.” “Long CAD/JPY is built on a similar premise,” Callow says. “If markets are currently too pessimistic on global growth, but instead it proves to be ‘darkest before the dawn,’ then CAD/JPY could easily rally to 86.00-87.00, with the BOJ (Bank of Japan) retaining super-loose monetary policy and Japan’s recovery from the earthquake and tsunami proving to be sluggish.” Galy points to the Aussie/CAD cross as one to watch. “We like AUD/CAD as a somewhat safer bet within the commodity block,” he says. “If you presume sentiment is too negative on Asia, you like AUD, and if you presume the U.S. dollar will stay under pressure while the global economy is moving too slowly for another super spike in oil, CAD should relatively underperform targeting 1.0600 from 1.0347.” y




On THE MONEY ON the Money

The dirty little secret of big-picture macro in FX
The unreal reality of real return and currency movement.
What are the big picture macro factors in FX? Nearly everyone will list interest rates first, followed by inflation, then GDP growth, and finally the trade or current account balance. But a hard look at the data reveals a dirty little secret of FX — interest rates are not that reliable. Part of the problem is defining which interest rate we should be talking about, and another part lies in measuring the “real” (after-inflation) rate. But even if we could get perfect data, suspicion lingers: the top macro factor is just not that good. In FX it’s an unhappy fact of life the factors that push and pull currency prices are maddeningly inconsistent — or rather, traders are inconsistent in their treatment of the variables. When sentiment is unfriendly toward a currency, a tepid bit of data will be interpreted as negative and positive data may be ignored altogether. Sometimes traders care about Factor A and make trades based on that factor alone, but then it falls out of favor and Factor B becomes the vogue. It doesn’t help at all that inconsistent, unreliable, and often spurious correlations with other assets (such as oil) are used as overriding factors regardless of what relative interest rates and other macro variables are suggesting. Traders’ inconsistent treatment of the big-picture macro factors that should influence FX rates is probably the biggest grievance newcomers experience. The stock of a company whose sales and income just surprised to the upside by 50 percent will always get a price boost. An equivalent rule for FX can’t be formulated. For example, it might be automatically assumed that a country with accelerating growth will experience a rise in inflation and thus an impending rate hike, so the currency is a buy. But apart from comparison with other countries’ conditions, three exogenous factors can throw a monkey wrench into this analysis: 1. The technical picture may argue against a further rise (e.g., the currency has already reached a previous intermediate high, another resistance line, or a Fibonacci number, and traders have already reached

their position limit). 2. Another asset class assumed to be highly correlated is not confirming the expected FX move. 3. The institutional environment — for example, a government pressuring the central bank ahead of an election — argues against the logical conclusion (the rate hike). A good example is the Australian dollar (AUD). In June, growth was high and the government was predisposed to additional rate hikes. But fear of a global slowdown dampened commodity prices and the AUD fell against all other major currencies despite the valid growth and inflation scenario. Moreover, the AUD/USD was toppy — straining and failing to match the May high. In short, even when the key variables can be sorted into a model of what should be driving FX prices, we must also account for interference from the technicals, from unstable and unreliable correlations with other asset classes, and from institutions, mostly national governments but sometimes supranational institutions such as the OECD, IMF, OPEC, and G7 or blocs within those groups (e.g., the BRICs, who spoke of a “currency war” at the G20 summit in September 2010). The word “interference” implies noise, but these intrusions into the economist’s model are more than noise — they shape interpretation of the data itself. It’s one thing to read inflation in Germany is 3 percent and quite another to hear it’s 2 percent in Mexico. We immediately know 3 percent in Germany is too high and 2 percent in Mexico is unusually low, and thus the policy responses will be very different — a case of the institutional environment influencing data interpretation. In the economist’s perfect world, where all other things are equal, accelerating growth does indeed (usually) lead to inflation, and rising inflation does indeed (usually) lead to higher interest rates and a higher currency. But consider a case where the model is fatally flawed. Japan often reports stunningly high growth in the first

quarter of the calendar year (the fourth quarter of its fiscal (after-inflation) yield. Subtracting inflation reveals more year, which ends March 31). The Japanese yen doesn’t rise discrepancies, especially in 2009, when the real return after the GDP release because everyone knows Japan is in reached 5.66 percent in July but the dollar reached a new a decades-long deflationary recession. Barbara Rockefeller Currency Trader Mag July 2011 Exceptional growth in a single quarter Fig 1. US 10-Year Note Yield Index vs. EUR/USD Daily Basis FIGURE 1: U.S. 10-YEAR NOTE YIELD INDEX (BLACK) VS. EUR/USD EUR/USD is Green will not suffice to prod the Bank of (INVERTED SCALE, GREEN) Japan into higher rates. Besides, many 41.5 1.53 41.0 traders will have already bought yen 40.5 1.52 40.0 1.51 going into the end of the first calendar 39.5 1.50 39.0 1.49 quarter on the myth of yen repatria38.5 1.48 38.0 1.47 tion, and the yen has likely already 37.5 1.46 37.0 36.5 1.45 reached the end of its technical tether. 36.0 1.44

Global investing rule 2

The first rule of investing is to preserve capital. The second rule is, the only reason to venture outside the homecountry market is to get a higher real after-tax return than you can get at home. If the return is not higher, after inflation and after tax, there is no valid financial reason to take the currency risk. There might be a non-financial reason, such as fear of expropriation or punitive taxation (see rule 1), but in the end, the real yield differential is the whole enchilada. Today we have to add portfolio diversification as a reason to accept a lesser return, but the investor still sorts and prioritizes on the basis of real return. Ah, but which return — monthly? The overnight rates that command our acute attention to central bank policy statements? Two-year notes? Ten-year notes? As a general observation, the 10-year relative real yield is the baseline case. The dollar often waxes and wanes along with the 10-year note yield, as shown in Figure 1, which compares the Reuters 10-year T-note yield index to the Euro/dollar. Sometimes there is a lag of a week or two, but over this time period the correlation looks pretty good. The logic is sensible, too: Yields fall when buyers flood into the safe-haven U.S. Treasury market, either as the classic alternative to a stock market decline or because of some other event that increases risk aversion. The longer time frame works, too, as indicated by the equally convincing monthly comparison in Figure 2. But wait a minute. The yield shown here is the notional yield, not the real

1.92 1.91 1.90 1.89 1.88 1.87 1.86 1.85 1.84 1.83 1.82 1.81 1.80 1.79 1.78 1.77 1.76 1.75 1.43 1.74 1.42 1.73 1.72 1.41 1.71 1.70 1.40 1.69 1.39 1.68 1.67 1.38 1.66 1.37 1.65 1.64 1.36 1.63 1.62 1.35 1.61 1.34 1.60 1.59 1.33 1.58 1.32 1.57 1.56 1.31 1.55 1.54 1.30 1.53 1.29 1.52 1.51 1.28 1.50 1.27 1.49 1.48 1.26 1.47 1.46 1.25 1.45 1.24 1.44 1.43 1.23 1.42 1.22 1.41 1.40 1.21 1.39 1.38 1.20 1.37 1.19 1.36 1.35 1.18 1.34 1.17 1.33 1.32 1.16 1.31

2.6 2.5 2.4 2.3 2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 35.5 0.9 35.0 0.8 0.7 34.5 0.6 34.0 0.5 33.5 0.4 0.3 33.0 0.2 32.5 0.1 0.0 32.0 -0.1 31.5 -0.2 31.0 -0.3 -0.4 30.5 -0.5 30.0 -0.6 29.5 -0.7 -0.8 29.0 -0.9 28.5 -1.0 28.0 -1.1 -1.2 27.5 -1.3 27.0 -1.4 26.5 -1.5 -1.6 26.0 -1.7 25.5 -1.8 25.0 -1.9 -2.0 24.5 -2.1 24.0 -2.2 23.5 -2.3 -2.4 23.0 -2.5 22.5 -2.6 -2.7 22.0 -2.8 21.5 -2.9 21.0 -3.0 -3.1 20.5 -3.2 -3.3 2009FebruaryA S O N May JuneM J J AAugust D 1994M A M J J A S O N D 1995M A M J AprilSMay D 1996M A M August O N D 1997M A M J J A S O February AApril J A S June J April D 1993M A July S O N SeptemberNovember 2010 February J A O N June July J J A SeptemberNovember 2011 N D 1998M M J May O N D 1 1992A M J J S

Relative Real Yield Germany/US (1.32000, 1.32000, 1.32000, 1.32000, -0.29000), USD/DEM (1.67110, 1.67110, 1.67110, 1.67110, -0.00320)

Sometimes there is a lag of a week or two, but over this time period the correlation between the 10-year T-note yield index and the Euro/dollar (EUR/USD) rate is evident.
Source: Chart — Metastock; data — Reuters and eSignal

1.92 7.5 1.91 Relative Real Yield Germany/US (1.32000, 1.32000, 1.32000, 1.32000, -0.29000), USD/DEM (1.67110, 1.67110, 1.67110, 1.67110, -0.00320) 1.90 1.89 1.88 1.87 1.86 7.0 1.85 1.84 1.83 1.82 1.81 6.5 1.80 1.79 1.78 1.77 1.76 6.0 1.75 1.74 1.73 1.72 1.71 1.70 5.5 1.69 1.68 1.67 1.66 1.65 5.0 1.64 1.63 1.62 1.61 1.60 1.59 4.5 1.58 1.57 1.56 1.55 1.54 4.0 1.53 1.52 1.51 1.50 1.49 1.48 3.5 1.47 1.46 1.45 1.44 1.43 3.0 1.42 1.41 1.40 1.39 1.38 1.37 2.5 1.36 1.35 1.34 1.33 1.32 2.0 1.31 1994 1992A M J J A S 1996 D 1993M A M J 1998 S O N D 1994M A M J J A 2001 N D 1995M A M J J A S O2004 1996M2005 J J A S O N D2007 1995 O N 1997 J A 1999 2000 S O 2002 2003 N D A M 2006 1997M A M J J A S 2009 D 1998M A M J J A S O N2012 2008 O N 2010 2011 D 1 2.5 85 2.4 2.3 2.2 2.0 1.9 1.8 1.5 1.4 1.3 1.1 1.0 0.9 0.7 0.6 0.5 0.3 0.2 0.1 2.6 2.1 80

Barbara Rockefeller Currency Trader Mag July 2011 Fig 2. US 10-Year Note Yield Index vs. EUR/USD Monthly Basis (Eur inverted scale)—Euro is Green

1.7 75 1.6

70 1.2 65 0.8 60 0.4 55 0.0

-0.1 -0.2 -0.3 -0.4 50 -0.5 -0.6 -0.7 -0.8 45 -0.9 -1.0 -1.1 -1.2 40 -1.3 -1.4 -1.5 -1.6 35 -1.7 -1.8 -1.9 -2.0 30 -2.1 -2.2 -2.3 -2.4 25 -2.5 -2.6 -2.7 -2.8 20 -2.9 -3.0 -3.1 -3.2 15 -3.3

A longer-term comparison of the 10-year T-note yield and the dollar also shows a high degree of correlation.



1.90 1.89 1.88 5.5 1.87 1.86 1.85 1.84 5.0 1.83 1.82 1.81 1.80 4.5 1.79 1.78 1.77 4.0 1.76 1.75 1.74 1.73 3.5 1.72 1.71 1.70 1.69 3.0 1.68 1.67 1.66 2.5 1.65 1.64 1.63 1.62 2.0 1.61 1.60 1.59 1.5 1.58 1.57 1.56 1.55 1.0 1.54 1.53 1.52 1.51 0.5 1.50 1.49 1.48 0.0 1.47 1.46 1.45 1.44 0.5 1.43 1.42 1.41 1.0 1.40 1.39 1.38 1.37 1.5 1.36 1.35 1.34 1.33 2.0 1.32 1.31 1.91 6.0 1.92 Relative Real Yield Germany/US (1.32000, 1.32000, 1.32000, 1.32000, -0.29000), USD/DEM (1.67110, 1.67110, 1.67110, 1.67110, -0.00320)

Barbara Rockefeller Currency Trader Mag July 2011 Fig 3 Real US 10-Year Yield (Dots) vs. EUR/USD Monthly Basis (Eur inverted scale)

0.80 2.4 0.85 2.1
1.8 0.90 2.0 1.9 1.7 1.6 1.5 1.3 1.2 2.3 2.2

2.6 2.5

0.95 1.4 1.00 1.1

1.0 0.9 0.8 1.05 0.7 0.6 0.5 1.10 0.4 0.3 0.2 1.15 0.1 0.0 -0.1 -0.2 1.20 -0.3 -0.4 -0.5 1.25 -0.6 -0.7 -0.8 1.30 -0.9 -1.0 -1.1 -1.2 1.35 -1.3 -1.4 -1.5 1.40 -1.6 -1.7 -1.8 1.45 -1.9 -2.0 -2.1 -2.2 1.50 -2.3 -2.4 -2.5 1.55 -2.6 -2.7 -2.8 1.60 -2.9 -3.0 -3.1 -3.2 -3.3 1992A M J J O ND A S O 1994M J J N D A M S O J A MJ A S 1995 1996 A S 1997 1993M A M J J 1999 N D 2000 A M2001A S O20021995M2003J J A2004N D 1996M A M J2006 S O N D 1997M A2008 J A S O N D 1998M A M J J2011 O N D 1 1998 2005 2007 2009 2010 201

Subtracting inflation reveals discrepancies in the T-note yield/dollar correlation, especially in 2009.

1.89 .60 1.88 1.87 1.86 .55 1.85 1.84 1.83 1.82 .50 1.81 1.80 1.79 .45 1.78 1.77 1.76 1.75 .40 1.74 1.73 1.72 .35 1.71 1.70 1.69 1.68 .30 1.67 1.66 1.65 .25 1.64 1.63 1.62 1.61 .20 1.60 1.59 1.58 .15 1.57 1.56 1.55 1.54 .10 1.53 1.52 1.51 .05 1.50 1.49 1.48 .00 1.47 1.46 1.45 1.44 .95 1.43 1.42 1.41 .90 1.40 1.39 1.38 1.37 .85 1.36 1.35 1.34 .80 1.33 1.32 1.31 1.92 1.91 1.90 Relative Real Yield Germany/US (1.32000, 1.32000, 1.32000, 1.32000, -0.29000), USD/DEM (1.67110, 1.67110, 1.67110, 1.67110, -0.00320) 2.5 6.0 2.2 5.5 1.9 5.0 1.8 2.1 2.0 1.7 1.6 1.4 1.3 1.1 1.0 0.8 0.7 0.5 0.4 2.4 2.3 2.6

Barbara Rockefeller Currency Trader Mag July 2011 Fig 4 Real 10-Year Bund Yield vs. EUR/USD Monthly Basis

4.5 1.5 4.0 1.2 3.5 0.9
0.6 3.0 0.3 2.5

The real rate of return in Germany is represented by the 10-year Bund yield minus inflation.

1992A M J J 1995 1996

A S 1997 1993M A M J J 1999 N D 2000 A M2001 S O20021995M2003J J A2004N D 1996M A M J2006 S O N D 1997M A M J J A S O N D 1998M A M J J A S O N D 1 O ND A S O 1994M J J A N D A M S O J A 1998 2005 2007 2008 2009 2010 2011 201

0.2 0.1 0.0 2.0 -0.1 -0.2 -0.3 1.5 -0.4 -0.5 -0.6 1.0 -0.7 -0.8 -0.9 0.5 -1.0 -1.1 -1.2 -1.3 0.0 -1.4 -1.5 -1.6 -0.5 -1.7 -1.8 -1.9 -1.0 -2.0 -2.1 -2.2 -1.5 -2.3 -2.4 -2.5 -2.0 -2.6 -2.7 -2.8 -2.5 -2.9 -3.0 -3.1 -3.2 -3.0 -3.3

intermediate low and fell to near the level of the previous July when the real return was -1.59 percent (Figure 3). You could argue 2008 and 2009 represented a special case, but that defeats the purpose of having a big picture investing rule. It gets worse when you widen the data to include the real rate of return in Germany (10-year Bund yield minus inflation). Figure 4 shows the real return against the euro/dollar exchange rate. If the real return is the top macro factor, you’d expect the return and the Euro price to move in the same direction, but they do not. In fact, the real return has gone from 3 percent at the beginning of 2010 to -2.3 percent at the end of May 2011, while the Euro continued to rise. How can it be that a currency goes higher as its real rate of return is falling? Note, however, that Germany has had an advantage in relative real return since the inception of the Euro in 1999 (Figure 5). But when we compare the relative real yield advantage to the actual EUR/USD rate, the drop in the German advantage in 2007 was not matched by a drop in the Euro — in fact, the Euro rose, as it did when the German advantage went negative in 2009 (Figure 6). These charts do not bear out the thesis that the relative real rate of return is determinative. The U.S. 10-year yield does better on its own, with no after-inflation adjustment and no comparison to the Bund. Although “expected inflation” would be a better variable than actual inflation (and there are some fancy leading and lagging tricks that could be applied to get a better fit), traders don’t even

Barbara Rockefeller Currency Trader Mag July 2011 Fig 6 Real Yield Advantage Germany over US (monthly)

have easy access to the real return today, let alone an advanced indicator like expected real return. In fact, it took many, many hours to accumulate the data to construct these charts. Traders may check the 10-year yields in the daily newspaper and have inflation rates and inflation trends memorized, but they do not actually look at the relative real return for the simple reason that no one prepares it and makes it easy to consult. In recent years, risk appetite and risk aversion have been important drivers of 10-year yields and currencies alike, but not in an equal way. The European Central Bank (ECB) has led us to believe it will be hiking interest rates at its July meeting while it is assumed the Fed will sit on its hands for many more months after the conclusion of QE2 at the end of June. You might expect the German yield curve to move up all along the yield curve and perhaps to steepen as well, giving the Euro its usual real-return advantage. But it ain’t necessarily so. If traders think expected inflation in Germany is on the decline while at the same time the Fed is behind the curve (and thus the U.S. yield curve will steepen), the dollar is the currency that should benefit. But will the dollar rise on such an outlook? If relative real return is so weak a factor in determining exchange rates, you shouldn’t count on it. The Euro has proven it can thrive even on a negative relative real return and in the face of massive sovereign risk. And yet, based on these charts, if U.S. 10-year yields rise for whatever reason, we must expect the dollar to tag along in close sympathy, whatever is happening on the inflation front in either country. y
For information on the author, see p. 4.

1.92 1.91 1.90 1.89 1.88 1.87 1.86 1.85 1.84 1.83 1.82 1.81 1.80 1.79 1.78 1.77 1.76 1.75 1.74 1.73 1.72 1.71 1.70 1.69 1.68 1.67 1.66 1.65 1.64 1.63 1.62 1.61 1.60 1.59 1.58 1.57 1.56 1.55 1.54 1.53 1.52 1.51 1.50 1.49 1.48 1.47 1.46 1.45 1.44 1.43 1.42 1.41 1.40 1.39 1.38 1.37 1.36 1.35 1.34 1.33 1.32 1.31 Relative Real Yield Germany/US (1.32000, 1.32000, 1.32000, 1.32000, -0.29000), USD/DEM (1.67110, 1.67110, 1.67110, 1.67110, -0.00320) 2.3 2.2 2.1 2.0 1.9 2.5 1.8 1.7 1.6 1.5 1.4 2.0 1.3 1.2 1.1 1.0 0.9 0.8 1.5 0.7 0.6 0.5 0.4 0.3 1.0 0.2 0.1 0.0 -0.1 -0.2 -0.3 0.5 -0.4 -0.5 -0.6 -0.7 -0.8 0.0 -0.9 -1.0 -1.1 -1.2 -1.3 -1.4 -0.5 -1.5 -1.6 -1.7 -1.8 -1.9 -1.0 -2.0 -2.1 -2.2 -2.3 -2.4 -2.5 -1.5 -2.6 -2.7 -2.8 -2.9 -3.0 -2.0 -3.1 -3.2 -3.3 2001 2002 2003 2005 2008 2009 1992A M2000 S O N D 1993M A M J J A S O N D 1994M A M J J A2004N D 1995M A M J J A S 2006 1996M A2007J A S O N D 1997M A M J J A S O N D 2010 A M J J2011 O N D 1 J J A S O ON D MJ 1998M A S 2.4 3.0 2.6 2.5

Germany has had an advantage in relative real return since the 1999 inception of the Euro.


2.3 2.2 2.1 2.0 1.9 2.5 1.8 1.84 1.83 1.7 1.82 1.6 .50 1.81 1.5 1.80 1.4 1.79 1.3 2.0 .45 1.78 1.2 1.77 1.1 1.76 1.0 .40 1.75 0.9 1.74 0.8 1.5 1.73 0.7 1.72 .35 0.6 1.71 0.5 1.70 0.4 1.69 0.3 .30 1.68 1.0 0.2 1.67 0.1 1.66 0.0 1.65 .25 -0.1 1.64 -0.2 1.63 -0.3 1.62 0.5 .20 -0.4 1.61 -0.5 1.60 1.59 -0.6 1.58 -0.7 .15 1.57 -0.8 0.0 1.56 -0.9 1.55 -1.0 .10 1.54 -1.1 1.53 -1.2 1.52 -1.3 1.51 .05 -1.4 -0.5 1.50 -1.5 1.49 -1.6 1.48 -1.7 .00 1.47 -1.8 1.46 -1.9 1.45 -1.0 -2.0 1.44 0.95 -2.1 1.43 -2.2 1.42 -2.3 1.41 0.90 -2.4 1.40 -2.5 1.39 -1.5 -2.6 1.38 -2.7 1.37 0.85 1.36 -2.8 1.35 -2.9 1.34 -3.0 0.80 -2.0 1.33 -3.1 1.32 -3.2 1.31 -3.3 1995 M J J A S O N D 1993M A M J J 1999 N D 2000 A M 2001 S O 2002 1997 1998 2005 2007 2008 2009 2010 1992A 1996 A S O 1994M J J A N D 1995M2003 J A2004N D 1996M A M J2006 S O N D 1997M A M J J A S O N D 1998M A M J 2011 O N 201 A MJ S O J A J A S D 1.89 .60 1.86 .55 1.85 1.88 1.87 1.92 1.91 1.90 Relative Real Yield Germany/US (1.32000, 1.32000, 1.32000, 1.32000, -0.29000), USD/DEM (1.67110, 1.67110, 1.67110, 1.67110, -0.00320) 2.4 3.0 2.6 2.5

Barbara Rockefeller Currency Trader Mag July 2011 Fig 7 Real Yield Advantage Germany over US vs. EUR/USd (monthly) Euro is Green

The decline in the German real yield advantage was not matched by a drop in the Euro in 2007 or 2009.




Aussie dollar
The Aussie dollar has been on a remarkable run against its U.S. cousin. Does it have any gas left in the tank?

In late June, the Australian dollar/U.S. dollar pair (AUD/USD) was trading near the lower end of a nearly two-month triangular consolidation after hitting 1.1000 on May 2 — its highest level since 1982 (Figure 1). The high capped an almost one-year, 36.5-percent rally off the May 2010 low of .8067 — an exclamation point on the pair’s 83-percent rebound from its October 2008 financial-collapse low of .6007. Just two years after that low, AUD/USD had reclaimed its precollapse high and tagged 1.0000 for the first time in 29 years as the post-panic equity market rally and economic rebound reversed the 2008-2009 flight into the U.S. dollar. Figure 2 shows how the upward burst that drove the pair to 1.1000 occurred only after a lengthy consolidation between October 2010 and March 2011, during which the Aussie/dollar rate swung above and below parity. At the midpoint of the year, there is one overriding fundamental factor to consider: Will the conclusion (at the end of June) of the Federal Reserve’s second round of quantitative easing (“QE2”) remove downward pressure on the U.S. currency and set the stage for a more accelerated AUD/USD down move? Or will the end of the program have little or no effect, as some analysts argue? A secondary fundamental factor is whether the Reserve Bank of Australia’s expected interest-rate hike in August is already priced into the market, and if additional increases are likely through the end of the year. These considerations aside, analysis of recent price action suggests the recent contraction is in line with historical precedent, while the outlook for additional Aussie dollar weakness is
16 July 2011 • CURRENCY TRADER

mixed (although pullback to test 1.0000 or at least the top of the October-March range appears in the works).


Weekly perspective

Figure 2 shows the week ending May 6 was an outside week (a bar with a higher high and lower low) and in this case, a week that closed below the previous week’s close. It also capped a seven-week rally during which each weekly high was above the high of the week two weeks earlier. Table 1 shows the AUD/USD pair’s median close-toclose moves for each of the six weeks after seven pattern variations based on these characteristics: 1. Outside bar (week) with a lower close (OB w/LC). 2. OB w/ LC that is also above the high of the previous 12 bars (HH12-OB w/LC). 3. Seven consecutive weekly highs that are higher than the highs two weeks earlier (7HH-2). 4. 7HH-2 with the final bar having a lower close (7HH-2 w/LC). 5. 7HH-2 with the final bar closing below the close two bars earlier (7HH-2 w/LC2). 6. 7HH-2 with the final bar closing below the closes of two preceding bars (7HH-2 w/DLC). 7. 7HH-2 with the final bar closing below the close of either of the two preceding bars (7HH-2 w/ LC1or2). Patterns were analyzed back to 1977. The table also shows the number of instances of each pattern, which

The AUD/USD pair has moved lower since early May, breaking out of the bottom of a consolidation pattern on June 27.


May began with an outside week that closed lower, capping a seven-week rally.



ranges from 59. Figure 3 shows the patterns’ performance graphically. After some bullish moves in the initial two

weeks, most of the pattern variations (especially the final three in Table 1) indicate weaker price action in weeks 4-6. However, the patterns with the most instances tend to be more bullish, FIGURE 3: WEEKLY PATTERN PERFORMANCE while those with the least tend to be most bearish. Overall, though, even the patterns followed by bullish price action underperformed the market by the end of the six-week review period. The reason so many pattern variations were included was precisely because of how few formations were available for historical comparison. (That there were only 13 outside weeks with lower closes that also had higher highs than the preceding 12 weeks in 34 years is somewhat remarkable — an indication of the rarified air the AUD/USD had entered in early May.) As of June 28, the pair had Most of the patterns variations were followed by negative performance in weeks dropped more than .0500 from the 4-6, and all underperformed the market’s bullish baseline performance after six May high. weeks

No. instances OB w/LC HH12-OB w/LC 7HH-2 7HH-2 w/LC 7HH-2 w/LC2 7HH-2 w/DLC 7HH-2 w/LC1or2 Market median 27 13 59 21 17 16 15 1 0.0010 0.0021 0.0030 0.0044 0.0009 0.0037 0.0009 0.0025 2 0.0035 0.0001 0.0024 0.0098 0.0027 0.0053 0.0027 0.0043 3 0.0079 -0.0056 0.0079 0.0019 0.0010 -0.0021 -0.0051 0.0061 4 0.0024 -0.0042 0.0064 0.0024 -0.0011 -0.0004 -0.0011 0.0069 5 -0.0019 -0.0126 0.0012 -0.0036 -0.0083 -0.0060 -0.0126 0.0072 6 0.0063 -0.0080 0.0067 0.0067 -0.0080 -0.0069 -0.0080 0.0090

Analysis of related patterns based on low-closing outside weeks or seven-week rallies gives mixed signals, although most patterns indicate weakness in weeks 4-6 and underperformance of the market in general.

18 18

October 2010 • CURRENCY TRADER July 2011 • CURRENCY

A quick look at some monthly patterns

Figure 4 shows a monthly chart of the Aussie/U.S. dollar pair. Besides highlighting the pair’s overall uptrend over the past decade, it also shows the following pattern: A large high-to-high jump from March to April, followed by a slightly higher monthly high and lower close in May. The March-April high-to-high move was more than 5 percent — something that’s only occurred 13 other times since 1971. Adding additional (but still very broad) criteria to model the price action between March and June — e.g., a close high in the range of the month with the 5-percent higher high folFIGURE 4: MONTHLY AUSSIE DOLLAR lowed by a month with a low close — wiped out almost all previous instances. Loosening the pattern criteria to require: an only 2-percent high-to-high gain along with a monthly close in the upper half of the month’s range (April) followed by a month with a higher high that closes lower than the previous month and in the bottom half of the month’s range (May); or an only 2.5-percent high-to-high gain along with a monthly close in the upper half of the month’s range (April) followed by a month that closes lower than the previous month and in the bottom half of the month’s range (May) produced the results shown in Table 2. Although only producing a scant 14 and 18 The pair, which jumped more than 5 percent high-to-high from March to April, examples, respectively, the post-patmade a slightly higher high in May before closing lower that month. tern performance was mostly negative for the next six months (pattern 1 much more so TABLE 2: MONTHLY PATTERNS than pattern 2). Month (instances) 1 2 3 4 5 6 With the Aussie dollar Pattern 1 14 -0.0008 -0.0047 -0.0110 -0.0024 -0.0069 -0.0229 already (at the beginning of July) nearly two Pattern 2 18 0.00425 0.0035 -0.0115 0.0037 -0.0033 -0.0174

months past the May high, the question is whether the existing down move has already fulfilled most or all of the mild bearish implications of the patterns reviewed here. The most liberal reading of the stats would suggest there’s more room on the downside (a view likely held by most chart watchers observing the recent downside breakout and looking for a challenge of parity — see the Forex Trade Journal), but shifts in the fundamentals (additional Aussie rate hikes or a QE2 campaign that ends with a whimper rather than bang) will upend that prognosis. y



Algorithmic support and resistance: Trading Widner oscillators in FX
A technique developed for stock trading is tested on a basket of currencies.

The algorithmic determination of support and resistance has always been a key issue in mechanical trading. Support and resistance are generated as a consequence of traders being influenced by past price movements, generating supply and demand regions based on both technical and psychological factors that influence the way a market moves. Because support and resistance levels are so fundamental to market behavior, it is important to determine them in an objective way. Many techniques are based on subjective definitions of support and resistance, such as those based on visual chart inspection. The following approach explores a mechanical strategy based on the Widner support and resistance oscillators, which will be tested on a basket of currency pairs.

can be viewed and copied by clicking here. Because the WSO and WRO were originally designed to trade the stock market, it is worthwhile to address the question of whether or not they can be used to develop a profitable multi-instrument strategy for FX trading. The following approach is similar to the one originally proposed by Widner, which was intended to capture longterm trends on the daily time frame using different WSO/ WRO averages to gauge how price has been reacting to support and resistance levels at different time intervals.

Developing a forex strategy

Widner’s oscillators

Dr. Mel Widner’s oscillators, the Widner Resistance Oscillator (WRO) and the Widner Support Oscillator (WSO), are designed to detect and trade support and resistance levels in a mechanical fashion. The indicators begin by objectively defining support and resistance as follows: If the highest high (lowest low) four bars ago is the highest (lowest) price of the most recent nine bars, that price becomes a resistance (support) level. The indicators then measures how many of the most recent six resistance (support) levels the current closing price is below (above). The oscillators apply a scoring system that gives values of 100 when price is above all six levels and zero when price is below all six levels. When the indicators are at intermediate levels (e.g., 40-60) there is no meaningful interpretation, other than price is between both extremes. For users interested in understanding the indicator in more detail, a MetaTrader 4 version of the indicator

The idea behind the system is to buy when price has remained above most support levels for a long time and above all resistance levels in the short term, with the opposite being the case for short trades. The system uses fourand 50-period moving averages (MA) of the WSO/WRO oscillators, per Widner’s original settings. Long trades are entered when the 50-period WSO MA is above 95 percent and the four-period WRO MA is above 90 percent on the most recent closed bar. Conversely, a short trade is triggered when the 50-period WRO MA is below 5 percent and the four-period WSO MA is below 10 percent. Long trades are exited when the WRO is below 5 percent, while short trades are closed when the WSO is above 95 percent, which ensures trades are closed when there is an indication price has been moving against the short-term trend. The system also places a stop-loss two times the 14-day average true range (ATR) from the entry, and the per-trade risk is designed to yield an average risk of 2 percent per trade using the following equation: Trade size = (0.01 * account balance) / (ATR * contract size)
July 2011 • CURRENCY October 2010 • CURRENCY TRADER

Figure 1 shows a sample trade from 2010 on the Euro/ vary dramatically from one to the next. The EUR/USD and U.S. dollar pair (EUR/USD). In this case a position was NZD/USD pairs had high returns while the USD/CHF entered at 1.3622 as the WSO average reached 95 percent and GBP/USD posted only marginal gains, trading around while the WRO average was above 90 percent. Because the breakeven through most of the test period. Profitable pairs 14-day ATR was 0.0150, a stop-loss was set at 1.3472 and were generally characterized by extended trends without (assuming an account size of $100,000) the trade size was strong short-term retracements, while those with the worst 0.67 [(0.01*100,000)/(0.0150*100,000)]. Notice how the posi- results tended to suffer significant retracements shortly tion was closed when there was significant evidence price after the strategy detected the establishment of a long-term was breaking below short-term resistance levels; the trade was exited when FIGURE 1: TRADE EXAMPLE the four-period WRO MA dropped below 10 percent. (In all charts the top indicator is the 50-period WSO/WRO MA and the bottom one is the fourperiod oscillator. The reddish indicator is always WSO and the green indicator is the WRO.)

Strategy results

This system was evaluated on daily data from June 2000 to March 2011 using the MetaTrader 4 platform. The strategy was tested on a basket of five currency pairs: the Euro/U.S. dollar (EUR/USD), British pound/U.S. dollar (GBP/USD), Australian dollar/U.S. dollar (AUD/USD), New Zealand dollar/U.S. dollar (NZD/USD) and the U.S. dollar/Swiss Franc (USD/CHF). Table 1 shows the strategy was profitable on all pairs, although results

A long trade was entered at 1.3622 when the WSO average (red) reached 95 percent while the WRO average (green) was above 90 percent.

EUR/USD Total return Avg. annual profit Max. drawdown Win % Profit/loss ratio Profit factor Ulcer Index No. of trades Trade cost*
*Pips per trade

GBP/USD 7% 0.69% 13.88% 39% 1.88 1.19 7.26 31 4

AUD/USD 26% 2.11% 16.90% 43% 2.3 1.76 7.43 30 5

NZD/USD 51% 3.82% 8.88% 42% 3.4 2.4 3.82 29 8

USD/CHF 9% 0.80% 11.08% 38% 2.18 1.33 5.62 29 4

Portfolio 185% 9.22% 30% 42% 2.4 1.8 9.61 147 -

29% 2.19% 5.30% 53% 2.01 2.32 2.57 28 2

The system was profitable on all the currency pairs in the portfolio, but some had greater returns than others.




trend (through the 50-period WSO/WRO MA). Figure 2 shows the equity curve for the entire portfolio. The system as a whole exhibits the typical profile of a long-term trend-following system, with sharp bursts of gains followed by more extended drawdown periods. FIGURE 2: PORTFOLIO EQUITY CURVE

The strategy’s long-short trading characteristics were markedly asymmetric: Short trades had a much lower winning percentage (e.g., only 28 percent of short positions were profitable vs. 45 percent of long positions in the NZD/USD), although this was offset by a larger profit-toloss ratio. Generally, short positions are less frequently followed by down moves, but these moves are much stronger when they do occur, while long trades are more likely to be profitable but to a lesser degree because of the slower pace of the moves. This is an outgrowth of the macroeconomic factors that trigger sharp USD rallies (usually risk aversion), while bearish USD moves are generally much more long-term and subtle (for example, those resulting from AUD or NZD carry trades vs. the USD). Figure 3 highlights the important strengths and weaknesses of the WSO/WRO strategy. Although the strategy is exceedingly good at exploiting trend moves that lack large retracements, it is often fooled by slow-moving market conditions, where trading ranges can cause the oscillators to determine very tight support and resistance levels. As a result, it might be a good idea to include a volatility breakout tool to this strategy so trades can only be opened when there is already significant short-term momentum in favor of the strategy. The statistical characteristics in Table 1 also suggest the strategy falls into the classic trend-following category — extended drawdowns (sometimes longer that 1,500 days) are prevalent, while the moves that bring most of the profits are scarce but extremely efficient. The low winning percentage, high profit-to-loss ratio, and high Ulcer Index (9.61) suggest the strategy would be difficult to trade psychologically. However with an average

Pluses and minuses

The equity growth is characterized by bursts of gains and lengthier drawdown periods.


The strategy does a great job of exploiting trends that lack large retracements, but it is often fooled by slow-moving market conditions that result in tight support and resistance levels.



compounded annual profit of 9.22 percent and a maximum drawdown of 30 percent, the system does achieve better results as a portfolio. Figure 4 details the system’s yearly returns on a portfolio basis. The strategy had three years of losses, but it functioned as a good hedge against stock performance, as the year of the financial crisis (2008) was its secondmost profitable year.

A successful initial test

The system had three losing years, but the second-best year was 2008. The tests indicate that Widner’s WSO/ WRO ideas are applicable to forex, generating a portfolio result that, while not spectacular, system. was profitable without any optimization. However, you Certainly many modifications to improve the strategy, should consider this to be very preliminary work regardsuch as optimizations of the MA trigger-level thresholds or ing the potential of these indicators, as the objective here the introduction of supplemental signals (i.e., a volatility was merely to show the applicability of this concept in cur- breakout filter) are possible. y rency trading and not to develop the best possible trading For information on the author, see p. 4.




Weighting for correlation
The Bloomberg currency indices can provide a mental anchor for assessing strength and weakness, but don’t expect them to become dominant trading or hedging vehicles.

Truly famous last words are hard to come by; the bestremembered often are those unintentionally ironic or just downright silly. Consider, for example, the purported last words of Alfred Graf von Schlieffen, developer of the eponymous plan put into action by Imperial Germany at the opening of World War I: “Remember to keep the right flank strong.” His successor, Helmuth von Moltke failed to heed the advice and the rest is quite literally history. Or those of Pancho Villa: “Don’t let it end like this. Tell them I said something.” Here is a set of famous last words you are unlikely to hear even from their creator: “Don’t get into the business of index management.” What was initially a good marketing tool by Charles Dow and Edward Jones to sell their

Wall Street Journal, a simple shorthand for answering the question “How did the market do today?” has morphed into a monstrosity of hundreds of thousands of little benchmarks sprawled across equities, fixed-income, currencies, commodities, real estate, and all manner of nontraditional (translation: This is a bright orange tree frog— do not get near it) investments.

The demand for indices is, however, as insatiable as the incontinence of suppliers, and so the search for the perfect (or at least serviceable) currency index continues (see “The index approach to currency risk management,” April 2006). The venerable dollar index (see “What drives the dollar index?” January 2006) occupies a great deal of mind space amongst FIGURE 1: WEIGHTS IN BLOOMBERG CORRELATION INDICES traders, but none of the attempts to create a duplicate index for the Euro (see “The Euro index: The dollar index meets its match,” May 2006) have taken hold. In the case of currencies, just as with commodities, there is little agreement regarding what should be the driving factor in assembling an index; at least stock indices have gravitated toward market- and price-weighting schemes. Should a currency index be based on trade flows, financial flows, trading liquidity, or some other measure? Should they include major and minor currencies or currencies pegged directly to, say, the U.S. dollar, or allowed only to fluctuate in a narrow One of the surprises of long-term history of the index weights is its relatively band? Should the weights of the cursmall fluctuations. The Euro’s weight has increased, and is the largest single rencies be fixed, as has been the case component in compiling each of the currency indices. for the dollar index since inception, or should they be rebalanced? If so, on

Currency indexation


what basis? = 100 on a daily basis, the charts in this section use weekly The quants at Bloomberg addressed these questions and data and therefore are set to Jan. 3, 1975 = 100.) First, let’s developed a set of correlation-weighted indices (BCWI) look at the three Northern European currencies, the GBP, for a group of 10 major currencies. These include the NOK and SEK (Figure 2). The SEK has been the most perU.S., Australian, Canadian and New Zealand dollars, the sistently weak over time and the GBP has been the most Japanese yen, the Euro, the Swiss franc, the British pound, volatile within a broad range. The NOK has trended sidethe Norwegian krone and the Swedish krona. The indices ways since the mid-1980s. are based on statistical measures designed to maximize the The two currencies with the strongest gains over time degree of variance explained for each currency. The exact have been the JPY and CHF (Figure 3). This is an interestmethodology is available on Bloomberg and will not be rep- ing duo, as both currencies have had a reputation over licated here. In a marked departure from all other currency the past 15 years as low-interest funding currencies for indices, the weights used for each currency are updated carry trades. Indeed, it is this use that explains much of daily. The actual indices published are the cumulative profit and loss, ignorFIGURE 2: ERRATIC DECLINE OF N. EUROPEAN CURRENCIES ing interest, starting in January 1975. The long-term history of the weights involved contains a few surprises, not the least of which is the relatively small fluctuations over more than 35 years (Figure 1). The weight of the Euro has increased and is the largest single component in compiling each of the currency indices; and while this may be expected given the long bouts of USD weakness over the period and the number of major currencies in the Euro bloc, the high weights for the GBP, CHF, SEK and NOK give the BCWI scheme a very Eurocentric flavor. So much for the rise of the BRIC nations, the importance of the Mexican peso to the U.S., or the wide The SEK has been the most persistently weak over time and the GBP has swath of East Asian currencies: None been the most volatile within a broad range. The NOK has trended sideways are considered in the BCWI family. since the mid-1980s. In fairness, the Chinese yuan has not traded freely and was a very minor FIGURE 3: YEN AND SWISS FRANC MOST PERSISTENT GAINERS currency until the 1990s, the Russian ruble was the currency of a country that went out of business in 1991 before its present incarnation, and the Brazilian real was not introduced until 1994. Remember, do not get into the business of index management: These are the sorts of issues that will make your life miserable on the good days. Other surprises include the CAD’s greater weight than the USD and the gradual diminution of the JPY. In addition, the NZD has a greater weight than the AUD even though Australia is linked far more closely to the millennial success of the Pacific Basin than New Zealand.

The history of the indices

Now let’s get to the more interesting aspect — the rise and fall of the 10 different BCWI over time. (As an aside, while the BCWI are set to Jan. 2, 1975

The two currencies with the strongest gains over time have been the JPY and CHF, both of which have a reputation over the past 15 years as low-interest funding currencies for carry trades.




The BCWI shows the U.S.-Canada exchange rate has gone nowhere for a very long period of time. Similarly, the NZD and AUD both turned lower in the 1980s and never recaptured their losses.


Although USD line looks familiar, retaining the massive rally in the early 1980s, the EUR chart doesn’t capture the large bilateral swings of the Euro (and its predecessors) against the dollar over time.

the action in the JPY, especially: The rest of the world gets overly short the yen to fund investment elsewhere and then has to engage in massive bouts of short-covering each time a financial crisis leads to a shedding of risk. Also, both Japan and Switzerland tend to have significant “must-do” activity in their currencies. The persistent trade surpluses Japan runs means its customers have to buy yen to pay their Japanese suppliers, and the safehaven inflow (polite version) of funds from various Middle Eastern and former Soviet Union commodity exporters into Switzerland periodically puts upward pressure on the CHF. Now let’s turn to the three nonU.S. dollars, the CAD, AUD and NZD (Figure 4). While the bilateral exchange rate between the U.S. and Canada has moved in favor of the CAD in recent years, this is something of an illusion according to the BCWI. According to this measure, the rate has gone nowhere for a very long period of time. The same illusion applies to the NZD and AUD; both currencies turned lower in the 1980s and never recaptured the losses. This certainly seems like news to anyone who has watched the rise and fall of the Australian dollar, especially, over the years. Now we can look at the Big Two, the USD and EUR (Figure 5). The USD chart looks rather familiar; its largest feature remains its massive rally in the early 1980s, one that was mirrored between 1997 and 2002 in the BCWI. The EUR chart simply fails to capture the large bilateral swings of the Euro and its predecessors against the dollar over time. The BCWI version of the Euro looks, well, boring.


Comparison against other indices

Now let’s compare the BCWI for the USD and EUR against other common indices for both currencies on a monthly basis. For the dollar, FIGURE 6: THREE DIFFERENT DOLLAR INDICES we will compare the BCWI against the dollar index and the Federal Reserve’s trade-weighted dollar index (Figure 6). Along with the dollar index, the BCWI overstates the greenback’s strength against the Federal Reserve index in the early 1980s, and against both other indices in 2001-2002. The construction of the BCWI treats downturns in Europe as major gains in the dollar regardless of the trade weights employed in the Federal Reserve methodology. In the Euro case, we can compare the BCWI to the Euro index and to the simplest of many European Effective Exchange Rates calculated by the European Central Bank, the 12-country index (they have a 41-country index; The BCWI treats downturns in Europe as major gains in the dollar, regardless of is that a bureaucracy out of control, the trade weights used in the Federal Reserve’s dollar-index methodology. or what?). The EER-12 index is backcalculated to April 1981 and the Euro index to January 2001 (do not go into FIGURE 7: THREE DIFFERENT DOLLAR INDICES index management). In Figure 7, the BCWI overstates the Euro’s strength against both indices in 2001-2003 and overstated the Euro’s weakness in the first half of 2010.

ing or hedging vehicles. Let’s hope those are not destined to become famous last words. y For information on the author, see p. 4.

A currency anchor

In the end, the BCWI offers an interesting and very rigorous methodology for measuring a currency against a set of counterparts. These indices can provide a mental anchor for assessing strength and weakness, but because bilateral trade arrangements are based overwhelmingly in single-currency terms (and as interest-rate arbitrage against a basket whose weights change every day by design is a bit challenging), we probably should not expect these indices to become dominant tradCURRENCY TRADER • July 2011

The BCWI overstates the Euro’s strength against the other two indices in 20012003, and overstated the Euro’s weakness in the first half of 2010.


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

July 1 2 3 4 5 6
U.S.: June ISM manufacturing report Japan: May unemployment report and CPI

20 South Africa: June CPI 21 Hong Kong: June CPI 22 23 24 25 Australia: Q2 PPI 26 27 beige book 28
U.S.: June leading indicators Mexico: June unemployment report Canada: June CPI

Germany: June PPI

Canada: May PPI


8 9 10 11 12 13 14 15 16 17 18 19

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

U.S.: June durable goods and fed Australia: Q2 CPI Germany: June unemployment report South Africa: June PPI U.S.: Q2 Employment cost index Canada: June PPI India: June CPI Japan: June unemployment report and CPI South Africa: Q2 unemployment report France: June PPI


U.S.: May trade balance France: June CPI Germany: June CPI Japan: June PPI and Bank of Japan interest-rate announcement UK: June CPI UK: June unemployment report U.S.: June PPI and retail sales India: June PPI U.S.: June CPI

August 1 2 3 4
U.S.: July ISM manufacturing report U.S.: June personal income UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: July unemployment report Brazil: July CPI Canada: July unemployment report Japan: Bank of Japan interest-rate announcement UK: July PPI LTD: August forex options; August U.S. dollar index (ICE)

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

U.S.: June housing starts Canada: Bank of Canada interestrate announcement Hong Kong: Q2 unemployment report

Event: Sixth Annual Free Paris Trading Show Date: Sept. 16-17 Location: Paris, France For more information: Go to Event: The World MoneyShow Vancouver 2011 Date: Sept. 19-21 Location: Vancouver Convention Centre For more information: Go to

Event: The Futures & Forex Expo Las Vegas Date: Sept. 22-24 Location: Caesars Palace, Las Vegas For more information: Go to Event: International Traders Expo Date: Nov. 16-19 Location: Caesars Palace, Las Vegas For more information: Go to

Market EUR/USD AUD/USD GBP/USD JPY/USD CAD/USD CHF/USD MXN/USD U.S. dollar index NZD/USD E-Mini EUR/USD Sym EC AD BP JY CD SF MP DX NE ZE Exch CME CME CME CME CME CME CME ICE CME CME Vol 323.2 114.8 114.1 105.4 86.2 42.8 34.4 31.4 9.2 6.0 OI 218.1 105.5 98.2 94.0 96.9 59.3 118.1 52.1 29.5 5.2 10-day move / rank 1.85% / 40% 1.41% / 86% -0.75% / 8% 0.05% / 8% 1.11% / 100% 2.22% / 43% 1.72% / 100% -1.31% / 44% 2.35% / 25% 1.85% / 40% 20-day move / rank 0.17% / 8% -0.69% / 23% -1.96% / 85% 0.03% / 3% 0.24% / 7% 0.98% / 19% -1.40% / 54% 0.46% / 17% 0.07% / 0% 0.17% / 8% 60-day move / rank 1.38% / 9% 2.90% / 41% -0.46% / 23% 3.94% / 96% -0.38% / 35% 10.68% / 92% 0.69% / 4% -1.36% / 14% 7.13% / 77% 1.38% / 9% Volatility ratio / rank .29 / 45% .24 / 30% .56 / 80% .27 / 20% .54 / 98% .17 / 22% .38 / 78% .33 / 55% .20 / 13% .29 / 45%

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable). LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to today’s close. 20-day move: The percentage price move from the close 20 days ago to today’s close. 60-day move: The percentage price move from the close 60 days ago to today’s close. The “% rank” fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.

BarclayHedge Rankings: Top 10 currency traders managing more than $10 million
(as of May 31 ranked by May 2011 return) May return 7.23% 3.81% 3.17% 1.57% 1.42% 1.34% 1.20% 1.00% 0.92% 0.89% 9.51% 7.47% 6.70% 5.58% 5.34% 3.35% 3.02% 2.19% 1.21% 1.01% 2011 YTD return 32.84% 6.98% -2.77% 6.10% 16.40% 8.27% 1.76% 4.89% -1.67% -0.02% 15.70% 14.74% 9.95% 15.25% -1.99% 10.53% -4.62% 11.28% 17.61% 4.44% $ Under mgmt. (millions) 54.6 19.0 25.7 50.0 147.2 14.1 360.0 14.0 13.0 11.2 1.2 1.4 2.3 1.9 8.0 3.0 3.2 2.0 1.7 3.0

Trading advisor 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 24FX Management Ltd ACT Currency Partner AG Vortex FX AG (VFMA) Olsen (Olsen Invest - AF) Metro Forex Inc Gedamo (FX Alpha) Rhicon Currency Mgmt (Strategic) Capricorn Currency Mgmt (FXG10 CHF) Anello Asset Mgmt (Isis FX) CenturionFx Ltd Adantia (FX Aggressive) Sagacity (HedgeFX100) Iron Fortress FX Mgmt Valhalla Capital Group (Int'l AB) CenturionFx Ltd (6X) Wealth Builder FX Group (Low Risk) Vaskas Capital Mgmt (Global FX) Basu and Braun (Everest) Halion Capital (Conservative) Capricorn Currency Mgmt (FXG10 USD)

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

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



Rank Currency 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Swedish krona Great Britain pound Canadian dollar Thai baht Australian Dollar Indian rupee Hong Kong dollar Russian ruble Taiwan dollar Chinese yuan Euro Singapore dollar New Zealand dollar Brazilian real South African rand Japanese yen Swiss franc June 27 price vs. U.S. dollar 0.153455 1.59589 1.011705 0.03257 1.048995 0.02192 0.128365 0.03538 0.034615 0.154465 1.418905 0.807455 0.811355 0.62304 0.14493 0.01243 1.200255 1-month gain/loss 3.43% 2.29% 1.06% 0.97% 0.92% 0.48% 0.09% -0.01% -0.16% -0.28% -0.34% -0.48% -0.56% -1.29% -1.39% -1.53% -4.19% 3-month gain/loss 1.31% 1.76% 0.25% -0.48% 3.19% -0.25% 0.14% 0.06% 1.72% 1.04% 0.38% 1.34% 7.09% 1.98% -2.14% -0.41% 5.79% 6-month gain/loss 8.75% 5.74% 3.10% -0.77% 5.47% 0.34% -0.02% 7.82% 2.34% 2.09% 7.77% 4.46% 7.76% 4.58% -3.73% 1.45% 10.58% 52-week high 0.1662 1.6702 1.0576 0.0338 1.0966 0.0227 0.129 0.0366 0.0351 0.1546 1.4842 0.8175 0.8245 0.6384 0.1518 0.0127 1.200255 52-week low 0.1281 1.4999 0.94 0.0304 0.8384 0.021 0.1282 0.0314 0.031 0.1466 1.2206 0.715 0.6849 0.5441 0.1284 0.0112 0.9157 Previous 14 8 13 11 10 9 6 12 5 3 15 7 2 16 17 4 1

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Switzerland Italy Canada Australia Brazil Hong Kong South Africa France U.S. UK Singapore Germany Mexico Japan India Index Swiss Market FTSE MIB S&P/TSX composite All ordinaries Bovespa Hang Seng FTSE/JSE All Share CAC 40 S&P 500 FTSE 100 Straits Times Xetra Dax IPC Nikkei 225 BSE 30 June 27 5,990.80 19,297.11 12,966.49 4,513.80 61,217.00 22,041.77 30,897.05 3,796.55 1,280.10 5,722.30 3,048.28 7,107.90 35,601.73 9,578.31 18,412.41 1-month gain/loss 8.32% 7.95% 6.41% 5.46% 5.03% 4.88% 4.81% 4.07% 3.98% 3.79% 2.86% 0.78% 0.61% -0.59% -0.79% 3-month gain/loss 2.05% -5.36% -0.68% -1.48% -4.31% 0.22% 3.21% -0.65% 1.60% 0.58% 2.56% 3.24% -2.58% 0.46% -3.57% 6-month gain loss -1.20% 1.55% 2.59% -2.28% -5.17% 1.24% 1.16% 2.30% 5.85% -0.96% -0.75% 2.76% -6.07% -8.05% -8.80% 52-week high 6,739.10 23,273.80 14,329.50 5,069.50 73,103.00 24,988.60 32,778.12 4,169.87 1,370.58 6,105.80 3,313.61 7,600.41 38,876.80 10,891.60 21,108.60 52-week low 5,935.00 18,807.20 11,065.50 4,213.00 60,056.00 19,777.80 26,009.23 3,321.35 1,010.91 4,790.00 2,770.12 5,809.37 30,542.50 8,227.63 17,295.60 Previous 1 15 2 13 10 11 3 9 6 7 4 12 8 5 14



Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair Pound / Franc Aussie $ / Franc Euro / Franc Pound / Yen Canada $ / Yen Aussie $ / Yen Canada $ / Real Aussie $ / Real Aussie $ / New Zeal $ Pound / Aussie $ Pound / Canada $ Euro / Yen New Zeal $ / Yen Euro / Real Aussie $ / Canada $ Yen / Real Euro / Aussie $ Euro / Canada $ Euro / Pound Franc / Yen Franc / Canada $ Symbol GBP/CHF AUD/CHF EUR/CHF GBP/JPY CAD/JPY AUD/JPY CAD/BRL AUD/BRL AUD/NZD GBP/AUD GBP/CAD EUR/JPY NZD/JPY EUR/BRL AUD/CAD JPY/BRL EUR/AUD EUR/CAD EUR/GBP CHF/JPY CHF/CAD June 27 1.330265 0.873975 1.18294 128.35 81.39 84.365 1.62379 1.68364 1.29166 1.521355 1.577425 114.13 65.27 2.277345 1.036855 0.01995 1.35273 1.40249 0.88914 96.485 1.18637 1-month gain/loss 6.71% 5.34% 3.95% 3.90% 2.62% 2.51% 2.38% 2.25% 1.59% 1.35% 1.22% 1.22% 0.97% 0.97% -0.13% -0.23% -1.26% -1.38% -2.57% -2.63% -5.19% 3-month gain/loss -3.81% -2.46% -5.11% 2.17% 0.66% 3.61% -1.69% 1.19% -3.64% -1.38% 1.50% 0.79% 7.51% -1.57% 2.93% -2.33% -2.72% 0.13% -1.36% 6.22% 5.52% 6-month gain loss -4.37% -4.62% -2.54% 4.22% 1.62% 3.92% -1.41% 0.85% -2.24% 0.25% 2.56% 6.22% 6.20% 3.05% 2.30% -2.97% 2.22% 4.53% 1.91% 8.98% 7.26% 52-week high 1.6642 0.9818 1.3858 139.19 88.95 89.46 1.725 1.7515 1.3746 1.8042 1.6412 122.63 66.89 2.3842 1.0513 0.0212 1.4911 1.4316 0.8995 96.485 1.18637 52-week low 1.3292 0.8729 1.1823 126.1 78.75 73.69 1.589 1.4528 1.2174 1.5158 1.5396 106.43 56.86 2.1671 0.8911 0.0186 1.2947 1.276 0.8098 80.72 0.9474 Previous 16 18 21 13 19 11 7 3 15 9 4 20 8 10 5 2 14 12 17 6 1

Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest Rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate Rate 0-0.25 0-0.1 1.25 0.5 1 0.25 4.75 2.5 12.25 3 1.875 7.25 5.5 Last change 0.5 (Dec. 08) 0.1 (Oct. 10) 0.25 (April 11) 0.5 (March 09) 0.25 (Sept 10) 0.25 (March 09) 0.25 (Nov 10) 0.5 (March 11) 0.25 (June 11) 0.25 (March 11) 0.125 (June 11) 0.5 (May 11) 0.5 (Nov.10) Dec-10 0-0.25 0.1 1 0.5 1 0.25 4.75 3 10.75 2.5 1.625 6.25 5.5 Jun-10 0-0.25 0.1 1 0.5 0.5 0.25 4.5 2.5 9.5 2 1.25 5.25 6.5



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

Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1

Release date
6/17 6/3 5/30 6/29 5/13 6/28 5/31 6/1 5/13 5/31 5/19 5/27

-5.2% 1.3% 2.1% 0.9% 1.7% 1.7% 2.9% -0.2% -4.7% 7.8% -0.9% 4.6%

1-year change
9.9% 4.2% 6.0% 1.5% 5.6% 4.6% 13.1% 1.2% 11.0% 17.2% -3.7% 11.2%

Next release
9/16 9/6 8/31 9/28 8/16 10/5 8/30 1/9 8/12 8/31 8/15 8/19


Unemployment AMERICAS

Q1 May May Q1 May Feb.-April May March-May April Q1

Release date
5/20 6/22 6/10 6/3 6/30 6/15 6/9 6/16 5/19 5/30

7.4% 6.4% 7.4% 9.2% 6.0% 7.7% 4.9% 3.5% 4.7% 1.9%

0.1% 0.0% -0.2% -0.1% -0.1% -0.3% 0.0% 0.0% 0.1% -0.3%

1-year change
-0.9% -1.1% -0.7% -0.3% -1.2% -0.3% -0.3% -1.1% -0.4% -0.3%

Next release
8/22 7/19 7/8 9/1 7/28 7/13 7/7 7/19 7/1 7/29



Argentina May May May May May May May Q1 May May April May Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date
6/15 6/7 6/29 6/15 6/10 6/14 6/22 4/27 6/21 6/30 5/27 6/29

0.8% 0.5% 0.7% 0.1% 0.0% 0.2% 0.5% 1.6% 5.2% 0.5% 0.3% 0.6%

1-year change
9.7% 6.6% 3.7% 2.0% 2.3% 4.5% 4.6% 3.3% 5.1% 8.7% 0.3% 4.5%

Next release
7/14 7/7 7/22 7/12 7/12 7/12 7/20 7/27 7/21 7/29 7/1 7/25



As of June 30

Argentina Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore May April May May May May Q1 Q1 May May May

Release date
6/15 5/31 6/30 6/20 6/10 6/30 4/21 6/13 6/14 6/10 6/29

0.9% 0.5% -0.9% 0.0% 0.2% 0.4% 1.2% 3.5% 0.7% -0.1% 2.5%

1-year change
12.5% 5.0% 17.6% 6.1% 5.3% 6.9% 2.9% 8.2% 9.1% 2.2% 7.6%

Next release
7/14 7/4 7/30 7/20 7/8 7/28 7/26 9/15 7/14 7/12 7/29

LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.




A false breakout trade in the Aussie dollar.
Date: Monday, June 27, 2011. Entry: Long the Australian dollar/U.S. dollar pair (AUD/USD) at 1.4030. Reason for trade/setup: After drifting lower for several weeks after its early May top (see “Spot check”), on June 27 the Aussie dollar/U.S. dollar pair punched decisively through the bottom of a triangular consolidation. Rather than short on the expectation of an immediate continuation move, we established a long position in anticipation of the move being a false breakout of an all-tooobvious congestion pattern. (A longer-term short position would be viable after such a rebound.) This paper-trade position was established on a pullback after the intraday rebound from the day’s low (see chart inset). Initial stop: 1.0379, 0.12 below the entry day’s low. Initial target: 1.0532. Outcome: The first 24 hours or so gave little indication whether the trade idea would work. The pair had wandered a little higher, tagging 1.0500. y
To see the result of this trade, go to after July 5. Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.

Source: TradeStation

Exit: Trade still open. Profit/loss: +.0057.

TRADE SUMMARY Date 6/27/11 Currency pair AUD/USD Entry price 1.0430 Initial stop 1.0379 Initial target 1.0532 IRR 2.00 MTM Date P/L point .0057 % 0.55% LOP 0.0070 LOL -0.0007 Trade length 1 day

1.0487 6/28/11

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



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