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Strategies, analysis, and news for FX traders
June 2011 Volume 8, No. 6
Currency wars: What will the next FX regime look like? p. 18 The dollar in the second half: Will the bottom hold? p. 6
FX system: Trading the Total power index p. 20
The shackles of reserve currency status p. 12
Contributors .................................................4 Global Markets Can the dollar rally sustain itself? .....................................6
The May rally may have stopped the immediate bleeding, but the near-term and long-term prospects for the U.S. currency are very different. By Currency Trader Staff
Advanced Concepts Malaysia on the jagged edge .................. 24
The Malaysian ringgit is positioned to take advantage of whichever major currency offers cheaper funding. By Howard L. Simons
Global Economic Calendar ........................ 28
Important dates for currency traders.
Conferences, seminars, and other events.
On the Money The reserve currency dilemma ....................................12
Blessing or curse? More than anything, the dollar’s long-term downtrend is an unavoidable symptom of being the “reserve currency.” By Barbara Rockefeller
Currency Futures Snapshot ................. 29 International Markets ............................ 30
N umbers from the global forex, stock, and interest-rate markets.
Currency wars ....................................18
In this excerpt from an article in the August issue of Active Trader magazine, a money manager and finance professor looks at the current global monetary system’s woes, and what a likely solution implies for the dollar. By Davide Accomazzo
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Trading Strategies The Total Power Indicator ....................... 20
Expanding the Elder Ray concept results in a more versatile trading tool with the potential to capture both trending and countertrend moves. By Daniel Fernandez
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Submit editorial queries or comments to firstname.lastname@example.org
2 June 2011 • CURRENCY TRADER
2011). Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag. trader. In 2004 Accomazzo was recruited by UBS Wealth Management USA to manage the portfolios of high net worth investors. Past performance does not guarantee future results. particularly algorithmic trading and the mathematical evaluation of long-term system profitability. Traders are advised to do their own research and testing to determine the validity of a trading idea. Around the World (John Wiley & Sons. Currency Trader is published monthly by TechInfo. q Daniel Fernandez is an active trader with a strong interest in calculus. The information in Currency Trader magazine is intended for educational purposes only.. Inc. a speculative hedge fund that outperformed the S&P 500 during the 1999-2002 boom and bust economic cycles. In 1998 he left to trade his own capital.com Classified ad sales: Mark Seger email@example.com Contributing editor: Howard Simons q Barbara Rockefeller (www. Fernandez is a graduate of the National University of Colombia.rts-forex.com Managing editor: Molly Goad mgoad@currencytradermag. In 2005. It is not meant to recommend. Contributing writers: Barbara Rockefeller. She has worked as a forecaster. head of trading and is the sole principal trader for the company’s managed futures programs. He can be reached at firstname.lastname@example.org.” which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://mechanicalforex. published in Japan in 1999. and a strategist for Bianco Research. 4 June 2011 • CURRENCY TRADER . A publication of Active Trader ® For all subscriber services: www. Second Edition (Wiley. and consultant at Citibank and other financial institutions. and economics who has been focusing on the analysis of forex trading strategies. a commodity trading advisor that focused on trading options on futures and currency futures. ad sales: Bob Dorman bdorman@currencytradermag. strategy or approach.com President: Phil Dorman pdorman@currencytradermag. concentrating in computational chemistry. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. where he majored in chemistry. Rockefeller is the author of Technical Analysis for Dummies. A book tentatively titled How to Trade FX is in the works.com) is an international economist with a focus on foreign exchange.com Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag. and in 1999 he started Kensington Offshore Limited. 2000). Accomazzo co-founded Cervino Capital Management LLC as managing director. He writes and speaks frequently on a wide range of economic and financial market issues. 24/7 Trading Around the Clock. In 2001 he launched Kensington Capital Management LLC.edu. From 1996-1997 he was a Euro-convertible bond/international equities sales trader with Jefferies Group.CONTRIBUTORS q Howard Simons is president of Rosewood Trading Inc. Trading and investing carry a high level of risk. statistics. Copyright © 2011 TechInfo. Illinois 60047.com Davide Accomazzo has been trading professionally since Volume 8. PO Box 487.com Publisher. Inc. 1996. Rockefeller is on the board of directors of a large European hedge fund. The Global Trader (John Wiley & Sons. For the past two years he has published his research and opinions on his blog “Reviewing Everything Forex. All rights reserved.com).co. and currently publishes two daily reports on foreign exchange. promote or in any way imply the effectiveness of any trading system. Issue 6. Marc Chandler. 2001). Lake Zurich. and How to Invest Internationally. where he covered many international funds.
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which supported the dollar with a safe-haven bid amid a massive unwinding of global risk trades in 2008 and 2009.GLOBAL MARKETS Can the dollar rally sustain itself? The May rally may have stopped the immediate bleeding. The biggest exception to the downtrend was during the global financial crisis and early part of the recession. because in addition to another dose of stimulus. the greenback fares poorly against all the other majors. However. “It has been falling like a rock.S. Let’s look at the factors that have been weighing on the U.7.51 to the March 2008 low of 70.3 percent.31 to the May 4 low of 72. it led to a virtual collapse in the dollar.S.5 percent (Figure 2). BY CURRENCY TRADER STAFF U. One thing’s certain: The dollar’s primary trend over the past decade has been down. “The Fed has paid a huge price for QE2. but the jury is still out on whether the early-May low was a significant bottom for the greenback or just a correction in a downtrend destined to continue. from the start of 2011.S.3 percent (Figure 1). currency are very different. from an interest-rate differential perspective. 6 More recently. the dominant trend for the dollar has once again been bearish. the U. From the Jan. A monthly chart of the U.S. the DXY shed another 10. 10 high of 81. Also. dollar bulls launched a rally in May. There are arguments on both sides of the aisle. dollar index (DXY) shows that from the February 2002 FIGURE 1: THE LONG DECLINE high of 120. Blame it on the Fed From the February 2002 to the March 2008 low.” says David Jones. Federal Reserve’s massive liquidity injections via its quantitative easing and subsequent QE2 programs have been in part blamed for the weakness in the dollar. but the near-term and long-term prospects for the U. DXY lost 41. boasting the lowest official rate at zero to 0. and has lost its credibility as a key international cur June 2011 • CURRENCY TRADER . the dollar index dropped 41. president of DMJ Advisors.S. currency.70.25 percent.
“Then. system is a combustible factor for inflation. when the Fed first started reserves in the banking system. it will be the first signal the Fed is withdrawing stimulus and starting After the safe-haven buying during and after the financial crisis dissipated.” he says. this amount of reserves in the 4Cast Inc. There’s no reason to believe this commitment FIGURE 2: RETURN OF THE DOWNTREND will disappear with the end of QE. and does that rally have legs going forward? “A rational market would already have priced it in. the to normalize. “That’s the most important signal to watch. Jones says the bank’s reserve will strengthen the dollar.rency. at the November meeting. dollar returned to its bearish ways. senior currency strategist at Societe week highs but I suspect it will come under pressure once Generale.” he explains.S. “That will start to put a bid back under the dollar. noting this step hinting about additional quantitative easing: “The dollar would involve auctions of term deposits or large-scale went down 5 to 6 percent between August and November reverse repurchase agreements.” “The U. “If it doesn’t do it. we could hear has gained attractiveness. The dollar index lost 10 percent between Jones speculates this could occur as January and May.” he Charmaine Buskas.” says Sean Callow. dollar index has enjoyed a rally to sevensays Sebastien Galy.” she says.. calls the end of QE2 a “watershed” moment.” he says.S. chief strategist North America for says.” “The Fed has a lot of absorbing of reserves to do. rates.” Jones says. others say the end of QE2 may already be facWhat were the sparks for the dollar’s bullish reversal in tored in. early May.” The May rally However. Jones Jones is among the analysts who see the end of QE2 later highlights the historically large level of reserves. “That’s a significant move. and that really is the issue for the dollar. which in part depends on the growth of Asian markets. It all depends on the strength of the U.” Taking a look at the Fed’s current balance sheet.” Currency traders will be watching upcoming Federal Open Market Committee (FOMC) meeting minutes closely.5 trillion.balance was a mere $8 billion. Prior to the global financial potential catalyst for sell-offs in commodities. While most currency analysts don’t expect the Fed to actually raise interest rates in 2011. they will look for any subtle signals that suggest change is afoot. which in June as a supportive factor for the dollar. Jones says traders should watch for the central bank to halt reinvestment of principle on the Fed’s securities holdings.” he says. “I think it meltdown (mid-July 2007). labor market. as well as a currently stand at $1. ity bubbles to deflate. senior curment to maintaining low rates. That’s why gold has gone up and the Swiss franc meeting. 2010. The Fed’s cred“[It] will set up expectations for when the Fed will hike ibility is on the line. “It will cause commod. “Quantitative easing was essentially a commitagain over the summer. early as the September 2011 FOMC CURRENCY TRADER • June 2011 7 .” about more aggressive ways to drain the huge amount of Jones points to August 2010.
3300.” Analysts at 4CAST Inc.4-percent GDP pace in 2011 for the U. but I don’t anticipate a significant rally.” Forex. “This should lend support to the U. “A wild card is probably risk aversion. as the funding currency for global risk taking. dollar from time to time and is difficult to predict.” recovery.2800 objective for the end of October (Figure 3). In the short-term. Dolan sees While the U.4000 target at the end of July for Euro/dollar and a $1. since the U. we would look for a move The U. “The dollar has risen on the back of a mid-cycle slowdown following tightening of monetary policy in China. Typically. traders would do well to exercise caution and tighten stops in the weeks ahead. dollar still holds great safe-haven appeal. either. down.” he says.4000-1.. economy to $1.com chief currency strategist Brian Dolan cites renewed focus on European sovereign debt concerns.GLOBAL MARKETS rency strategist at Westpac Institutional Bank. he warns this is not a “buy-and-hold strategy FIGURE 3: DOLLAR VS. and it may not offer much dollar-bullish news ahead. “Commodities overheating on Asian demand corrected along emerging market equity markets. by most accounts the rebound has been muted. “We think the recovery will continue.3900.S economy is in its second year of economic potential to “buy the dollar on weakness and resell the Euro on strength.S.” Bryson adds. with a 2.” he says.” he says.” he says. Also. “The dollar’s gains were primarily due to risk aversion. dollar multi-month.S. you don’t get a sustained move on a safe-haven rally. higher food and energy prices will erode consumer purchasing power. Dolan points to fresh shocks out of the Eurozone as potential catalysts for additional dollar strength.S. Wells Fargo forecasts a 2. dollar. with a $1.S. EURO — take profits when you do have profits. “In a range-trading environment The dollar’s prospects vs.3800-1.” Galy offers another take on the recent strength.S. the dollar could experience a period of stabilization or even modest gains. “I think we did see a significant bottom [in the dollar].” However. though. “If the Euro/dollar broke below $1. “There’s still a fair amount of deleveraging going on with the consumer. but few associated with a mid-term slow market watchers have long-term bullish biases.S. but it will be muted.” However. Callow says the risk factor is still a major component of the market. State and local government spending is going to remain weak as they struggle to balance their budgets. which resurfaced in May. economy in the second half. I doubt these factors will fuel much further upside for the U. [while] energy and food prices have moved sideways and down [off recent highs]. This has led to short-covering in the U.” says Jay Bryson.” Over the near term.7-percent outlook for 2012. global economist at Wells Fargo. traders look for concentrations 8 June 2011 • CURRENCY TRADER Near-term action . plus the disappointment at the ECB’s (European Central Bank) inadequately hawkish tone at the May meeting. were more bullish on the dollar’s outlook over the next several months. “The key elements of support for the dollar since early April have been an increase in risk aversion and accompanying jitters in currency markets. we think the markets will be disappointed in the behavior of the U. “In general. the Euro might be bullish in the near term.S.
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S. which. the desire to diversify reserves is accelerating. hurdles are not that far off. y June 2011 • CURRENCY TRADER .]. Global investors and business people are saying. will be watching nervously. to play down this debate. Sinai forecasts the potential for the U. unemployment [is high].S.. notably the Aug. look much better than the U.” Over the next year. dollar to fall 5 to 10 percent vs. economy is growing anemically and will continue to do so. and gold. Canada.” In late February Barclays Capital issued a research article titled “In The Long Run. “The growth of a number of Asian economies will be far higher than the U.S. the Canadian dollar.” Others offer a more bearish and detailed longer-term view. The Dollar Is Doomed” that sounded similar negative themes: “As the balance of global economic power shifts east — slowly but seemingly inexorably — there are rumblings about possible alternatives to the dollar as a global reserve currency. but any sensible person knows that you can’t tackle this solely with spending cuts. I think the adults will win the day and that will improve longer-term prospects for the dollar.S. For now that is all they are. dollar in recent years. the management of stop losses becomes increasingly important.’” 10 Sinai also notes several economies around the globe. “Hence. “Current Republicans are resistant to any type of tax increases. chief global strategist at Decision Economics and a 35-year Wall Street veteran who was formerly chief global economist for Lehman Brothers. but the legacy of negative real rates.” Dolan has a relatively optimistic take on the situation. however. and yen. “There is a distinctive seismic shift and systematic movement away from the dollar. Allen Sinai. The rise and fall? Jones also has concerns for the dollar longer term. many central banks would jump at the opportunity to switch allegiance. “The question is.S. while bouts of risk-aversion-induced dollar strength are likely to become milder. over the intermediate to longer term. Euro.S.” he says. outlines several factors likely to depress the dollar. and Australia. even before many are tempted to ‘cash in’ those reserves to soften the pain of rising food and energy prices at home. but the debate in Congress will be unedifying and will only be a preview of the most important fiscal debate — getting a deal done to avoid an S&P ratings downgrade in 2012. He sees the dollar stuck in a +/-5 percent trading range against the Euro and yen over the same time period. and Chinese renminbi. “The U.” Galy explains.” he says. and post-QE2 euphoria fades. “The U. “represents a tremendous shift in the power line-up of the world. as concentration of stops around technical levels will be sought after.S.GLOBAL MARKETS of positions to take out. economy is not generating enough jobs. Swiss franc.S. who hold more than $2 trillion in Treasuries between them. ‘It’s too risky to have all my money [in the U. both the Australian and New Zealand dollars. has its own problems that could end up hurting the dollar. Canadian dollar.” Longer-term prognosis Over the longer term.S.” Buskas notes that in recent years global central banks have reallocated away from the dollar and toward the Euro. the Chinese renminbi. when new reserves come in.” There has been a shift in global central bank asset allocation away from the U. according to Sinai. which are far outside the boundaries of history. there may not be very many underlying bullish factors to support the dollar. “It is all very well for selected fiscal hawks in the U. In the meantime. once a period of stabilization. has a potentially huge sovereign-debt problem amid a continuation of an extremely high budget deficit and debt relative to GDP. Brazilian real. and 15 percent vs. including Asia ex-Japan. He sees the currency in “gradual decline because all superpowers eventually see their power recede. “It will come down to a discussion as part of the 2012 election cycle: How does the U. where are they going to place them?” she says. “Long term. Interest rates are extremely low and will remain so. [T]he re-emergence of the dollar’s downtrend is likely to re-assert itself sooner or later. our Federal Reserve is printing money. And the U. consolidation. It all adds up to a weaker dollar. Of course it’s most likely a deal will be struck to avoid default.S. given the debt-ceiling fiasco. New Zealand dollar.” Callow says. address its long-term debt and deficit situation?” he says. In fact.S. “The U. but Asian investors such as China and Japan. which will favor those currencies. 2 deadline to raise the debt ceiling. and the country can’t take care of its budget deficits. the fundamentals underlying the dollar will remain negative. is that if there were an alternative. Australian dollar. de facto competitive devaluation and unconventional monetary policy over the last few years. toward the Canadian dollar. 10 percent vs.
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The real issue is that a stable international financial system depends. the dollar’s long-term downtrend is an unavoidable symptom of being the “reserve currency. and has always depended.3 percent. the Euro. because it is the inherent nature of the beast. economists have known the dollar was doomed from the moment the Bretton Woods agreement was signed in 1944. and that’s not counting the ones that have gone out of print. This is not because the “dollar must decline” crowd is correct in all respects. In fact. Amazon has 53 pages of books on the subject. that the reserve currency issuer has a duty to supply larger amounts of liquidity to the world market than optimum domestic policies call for. “International financial institutions need to adapt fast to keep up.” The emerging markets as a group will grow by 4. hegemony and the role of the dollar as a reserve currency.” A World Bank official says “The most likely global currency scenario in 2025 will be a multi-currency one centered around the dollar. A web search for the phrase “decline of the dollar” returns 18 million results. and since the end of WW II. nations and investors complained about the shortage of dollars (the 12 June 2011 • CURRENCY TRADER . many of the authors are clear thinkers with a cogent and coherent line of reasoning. no other country has qualified for the job except the United States. but because the real issue is worse than intractable — it’s insoluble. The World Bank predicts that by 2025. on a single central authority acting in specific ways under specific circumstances. And nevermind the acres of forest cut down to print Congressional hearings on the decline of the dollar. least of all the reserve currency issuer itself. This is a hard thing to accept. during the late 1950s and 1960s. Gold and Dollar Crisis. Robert Triffin was a Yale economics professor who identified in his 1960 book. Every reserve currency fails in the end. as do other rapidly growing emerging market countries such as India and Brazil. The World Bank calls it “multipolarity.S.” Is the dollar doomed as a reserve currency? Yes. In fact. You will search in vain for defenders of the dollar. thus running a current-account deficit. six of the emerging market countries will account for over half of all global growth and they will stop accepting the dollar as the single reserve currency. While market observers and investors bemoan dollar weakness. we tend to lose sight of the inconvenient fact that reserve currencies are the fall-guy for conditions outside anyone’s control. while the advanced economies will grow by 2. The inevitable decline and fall of the dollar is due to something called the Triffin Dilemma.7 percent per year to 2025. We now have now had more than 60 years of predictions regarding the end of U.On THE MONEY ON the Money Be careful what you wish for: The reserve currency dilemma Blessing or curse? More than anything.” BY BARBARA ROCKEFELLER China wants a different reserve currency than the dollar. and the renminbi. Setting aside the cranks and ideologues. According to the report. or Triffin Paradox. but it’s even harder to imagine exactly how the global economy will weather the storm.
66890.1 bitterly.3 tion for the foreign reserve holder. In Triffin’s day.55 policy issues rise to the top — all that 1.2 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 determines that the issuer has acquired an unsustainable amount of debt.8 decided to stop issuing the 30-year 3.20 issuer at the same time.FIGURE 1: DOLLAR VS.5 3.15 1. we see a persistent before exchange rates were floated.55 solution is to stop running trade defi0.1 2.00113) 0.40 1.0 of the 30-year issuance was lifted in 2.8 2. 2.45 best interests of reserve holders and 1.S.90 The world has to accept the value 0.7 to them even as the foreigners need to 1.65 liquidity risks inflation.00 of its reserves will almost certainly 1. Source: Chart — Metastock.S.. while Figure ing that decline is its essential nature as a reserve currency Barbara Rockefeller Currency Trader Mag June 2011 Fig 1: USD/DEM from 1970 CURRENCY TRADER • June 2011 13 .7 deficits and an interest in diversifying 2.80 traction — exactly what happened in 0. if it 1. D-MARK “dollar gap”).05 decline over time. retrofitted to But in today’s floating rate world. ereign debt have an easy way out — devaluation.30 that policies optimum for the domestic 1. the 0.40487. the German deutschemark between 1970 and 1999. 0.65 reserves — but then the world would 0. EURO ties face either severe economic conEuro Monthly eSignal (1. The reserve Barbara Rockefeller currency that was once the risk-free Currency Trader Mag June 2011 Fig 2: EUR/USD (inverted) from 1971 asset becomes ever riskier as both parFIGURE 2: DOLLAR VS. trusting and mis1.75 0. -0. thus limiting 0. 1.6 because it was paying down the federal 3. -0.7 bond at the end of October 2001 — 3. As it turned out.85 the Great Depression. data — Reuters and eSignal contract its own economy. and all that debt creates doubt about the ability of 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2 any country to pay it back. but also in acknowledge2.35 economy tend to run counter to the 1.3 — the investing world complained 3.6 keep selling goods to the issuer and 1.9 the issuer becomes ever more indebted 1.9 February 2006 in part due to rising 2.60 1.70 become illiquid and risk a global con0. When the U.4 debt and didn’t need to raise the funds 3.5 2.2 including reserve holders. 1. The dilemma 1. 1.6 liabilities.50 0.95 1.2 3. 2. For the issuer. Two 1. Extrapolating the Euro back to 1971 also highlights the dollar’s long-term Countries that cannot repay sovdecline. is 1. in this case the U.8 1. The solu1. suspension 3.01360) 3.4 1.3 and other large institutional investors. 2.50 other international investors. Figure 1 shows Some observers decry the dollar’s decline without graspthe dollar/deutschemark from 1970 to 1999.66890. shows the Euro from 1971 to the present.60 cits and to contract debt.4 ment of demand from pension funds 2. is to The dollar trended lower vs.0 For foreigners.10 trusting the reserve currency and its 1.66890. the paradox is that 1.5 racking up surplus reserves.25 for the issuer. exchange rates were fixed and devaluation was an occasional thing. Treasury Dollar Mark Monthly from Volcker (1.49400. 1.48040. tendency to devalue the reserve currency.45 traction or default.
In late 2007. Charles Kindelberger writes in Historical Economics (1990. the central bank of the reserve currency issuer cannot be said to control money supply in any meaningful way. After 9/11. first the Euro and then the Chinese yuan or a basket of emerging market currencies. the job of the reserve currency issuer is to lead the world economy in the sense that it provides a market for goods. The distress cries about the decline and fall of the dollar wax and wane over time. for $180 billion available to the central banks of the EMU. but used for only three days.S. In fact. and acts as a lender of last resort. At the time. and Japan. But to color the Triffin Dilemma with emotion from either side of the spectrum is to miss the critical point: both the reserve issuer and the reserve holders are in the same insoluble fix. would have sufficed to end the crisis earlier in the absence of a properly functioning international financial system. The public goods that it provided were a market for surplus or distress goods. 2008. especially a current account deficit. the U. Others find the dollar’s decline an agreeable comeuppance for an arrogant self-appointed world leader that sometimes behaves badly on the world stage.” Look at what happens when leadership is lacking. when Lehman failed. It is inherent that the reserve currency issuer accepts imbalances in its own economy.S. Switzerland. a countercyclical source of capital. First. and the United States was unwilling to do so. In most countries with rising populations. and that it loses control over its money supply. the Fed’s swap lines with the ECB and Bank of England were reactivated. Canada. world economic leader. taking over reserve currency status. and in a liquidity crunch. The only way for the reserve currency not to devalue is for every international participant to embrace much slower rates of growth and global trade far reduced from today’s standards. from 1870 to 1913 when Britain served as 14 It is the very nature of a reserve currency to fall in value. citizen or policy-maker. but not both. Britain was unable to discharge these functions. the reserve currency issuer and reserve currency holders can have either a stable reserve currency or falling standards of living.S. The Fed opened the lines up again on September 18. and the lender of last resort in crises. a very large number of FX market observers and participants believe that the accommodative monetary policy since the 2008-09 financial crisis must be inflationary. but it’s not clear that even the right policy choices in the U. For the dollar to lose reserve currency status belongs in the category of “be careful what you wish for. p. With vast amounts of reserve currency in the hands of foreigners able to convert the money to gold (in the old days) or other currencies in any amount at any time. with $20 billion named as available to the ECB and $5 billion to the Swiss National Bank. In a nutshell. investors. As a practical matter.S.S. management of the gold standard that maintained a coherent set of exchange rates and coordinated macroeconomic policies.S. to losing its reserve currency status should be a very frightening prospect — for non-U. Many non-domestic parties using the dollar have a mismatch between dollar-denominated assets and liabilities. debt burden is inflation and devaluation. 231): “The international economic system flourished. If you are a U. The logical conclusion is that loss of confidence in the dollar will lead to other currencies. the Great Depression may have begun in the U. the Fed said June 2011 • CURRENCY TRADER . the swap lines were reauthorized to help cope with the subprime crisis. The Great Depression is largely ascribable to this gap. whether rates are fixed or floating.” Let’s take two points from Kindelberger’s statement. Second. and the only way to surmount the now seemingly unsustainable U. because it is the reserve currency that facilitates global growth. whether rates are fixed or floating. this is not an acceptable choice. they are as cyclical as the world economy. In the current cycle. is a source of capital. England. losing reserve currency status would be wonderfully welcome. It is the very nature of a reserve currency to fall in value. more or less. the Fed acts as a reserve currency issuer should act — as a lender of last resort to other central banks. aside from the blow to national pride.ON THE MONEY in an expanding world. with the stock market crash of 1929 and the wrong monetary and fiscal policy choices. After 1913. as often charged. because it is the reserve currency that facilitates global growth.
1. gold reserves had fallen to a 26-year low of $15.S. the former is generally preferable. taking the dollar off the gold standard and floating the currency two years later. “When stability of the internal price level and stability of the external exchanges are incompatible. either. In June 2009. Emotions run so high on the subject of the gold standard that we tend to forget what actually happened to cause the U. 2010. the Fed shows them as “other assets. for collective reserve unit. This is because. It’s not hard to argue that these are of no benefit to the U. the lines were extended to Feb.S.S. France announced it would convert $300 million (USD) for gold and Spain followed with $60 million.S.S.S. 1. And this brings up the other central issue — countries very seldom sacrifice self-interest for the “public good” of the international financial system and other countries. the second year the U. both reflecting and enabling economic growth. First. In fact. succumbed to the same influences in August 1971. 21. employment and market stability. too. the gold standard is already a barbaric relic. not to mention depriving China of interest revenue. Before the dollar faced this problem. it will always experience reserves falling as a ratio to total currency balances outstanding everywhere in the world. In the interwar period 1918-1939. What does the Fed get in return? A claim on local currency deposits at the foreign central banks. But were the U.S. growth would suffer and U. whether we wish it or not. deGaulle 15 . rates and thus consumer spending on Chinese imports reduced. but rather that the gold standard is a barbaric relic. is encouraging inflation down the road. By 1967. for example. The issuing country’s central bank lacks control over internal price stability. In truth. but don’t lose sight of the corollary that failing foreign banks are of no use.” Note that Keynes did not say gold itself is a barbaric relic. It’s thought deGaulle was playing the gold card to get U. citizens would have a legitimate grievance.). Chinese citizens may have had a legitimate grievance. 2011. At the very center of the Triffin Dilemma is that global money supply growth.S. agreement to the French proposal for a new international reserve unit of account named the CRU. including plain old supply and demand. The unit would be gold-backed and thus the member countries issuing the CRU with the most gold would have bigger voting rights.there was “no upper limit on collateral. Another issue with the inadequacy of the gold standard — not enough gold — is that the issuer of the reserve currency has its purchasing power determined by international market forces responding to factors outside the issuer’s control. and the U. unemployment would have been higher under rising U.” He went on. The Bretton Woods agreement that put the dollar at the center of the financial system was flawed from the very beginning.” meaning it stood ready to lend essentially any amount. is bigger and faster than the growth of gold supplies.S. to have raised interest rates during the worst recession since CURRENCY TRADER • June 2011 the 1930s solely to favor China.S. trade balance turned negative (for the first time since 1894). accompanied by a 30-percent devaluation of sterling (from $4. The 1964 trade deficit was about $3 billion and by mid-1965. The U. French president Charles deGaulle launched an attack on the U. U. the UK was forced to go off the gold standard in September 1931.S. Actual numbers can be hard to come by. Unless the reserve currency country expends all its effort to increasing gold reserves. in 1965 following complaints of a “dollar shortage” in the 1950s and early 1960s.1 billion (at $35/oz. China has complained that the lengthy period of ultra-low interest rates in the U. going off the gold standard in 1971 was inevitable. U. the UK faced it — and lost. the only option to fund trade and investment was the dollar. He was warning that a system dependent on something as undersupplied and subject to market fickleness as gold was inherently unstable. at all.S.S.S. since U.86 to $3. As John Maynard Keynes wrote in A Tract on Monetary Reform in 1924. “There is no escape from a ‘managed’ currency. the FOMC extended the lines again to Aug.’ “exorbitant privilege” of being the reserve currency issuer (which provided a built-in buyer of its debt and thus lower financing costs for its government).25 in three months). given the inability to produce new gold at the same pace as global economic growth.” The Financial Times reported in November 2008 that the amount outstanding was $615 billion. to go off the gold standard in the first place and to devalue two years later. 2010 and on Dec. In recent years.
The U. whose pound shared reserve currency status with the dollar). In terms of replacing the UK and the U. with a record 80 tons of gold sold in London in one five-day period (and the pound was devalued in November that year. The Bundesbank would be leery of increasing money supply because of its inflationary effect. and yes. the Gold Pool had sent almost 1. by 14 percent.S. and the UK economy was weakening.-led “Gold Pool. So. But more important is the impact of the Triffin Dilemma come 2025. it is likely to continue a long-term secular downtrend unless and until the U. 4. was building a fiscal deficit for an unfunded war in Vietnam. Individuals and corporations cannot use SDRs — only governments.S. Air Force delivering emergency supplies of gold from Ft. and already today we often see reports that sovereigns are buying Euros on dips. with all due respect to the World Bank and the IMF. today. In other words.S.S. as the reserve currency issuer. the first devaluation since 1949). the Eurozone and China will lose control over their money supply and will have their public finances gone over with a fine-tooth comb. The year 1967 was a bad one for the two reserve currency countries. the U. SDRs were called “paper gold” but they were never called “money. In April of that year. and thus was born the Special Drawing Right or SDR.S. But it is politically unrealistic to think that sovereigns will be able to sell the idea of yet another fiat currency to be controlled by foreigners to voters already uneasy about their own fiat currency. gold reserves had fallen to $12 billion. and thus the renminbi does not yet qualify for reserve currency status. It shares the Euro with at least three countries that were in need of bailouts and one that is likely to default within the next 18 months (Greece).” now named the Group of Ten (G10). the IMF may be an improvement in the sense that it has no voters to tax or to woo and no wars to fight and to fund. It is also unrealistic to think that the IMF will act without the same self-interest as individual countries. see p. y For information on the author.S. On March 15. By March 1968.ON THE MONEY withdrew France from the U. June 2011 • CURRENCY TRADER . asked for a two-week closing of the London gold market. as sovereign issuers of the reserve currency. China and others propose SDRs as the new reserve currency. reverses from a severe deficit condition to surpluses. It predicts the Euro and renminbi will join the dollar as reserve currencies.S. we would be back to the dollar as the sole reserve currency.S. 1968. Knox. Gresham’s Law would come into effect — “bad” money would drive out “good” money. World growth would slow down to a crawl. Let us gently suggest that while Germany. By reserve currency definition. it would face the same complaints of “DM shortages” that the dollar faced in the 1960s. It’s interesting the latest World Bank report on multipo16 Economists have known the dollar was doomed from the moment the Bretton Woods agreement was signed in 1944. with its fiscal rectitude and rock-hard abhorrence of inflation. By the end of 1967.” And therein lies the problem.000 tons of gold to the weighing room floor at the Bank of England. just like the U. some members will always be more equal than others. The Greek two-year note has to pay 26 percent to attract investors. could no doubt easily become the replacement for the U. they do not perform the other functions of real money — to execute transactions and serve as a store of value. U. whereupon there will be a dollar shortage and the cycle begins anew. The Chinese currency is not fully convertible and the market for money market instruments is not free of government rate-setting and heavy regulation. but while SDRs may be a useful unit of account. with the U. Does this look like a reserve currency replacement? If Germany were to leave the Eurozone and reissue the Deutschemark. it does not have its own currency. we are stuck with the dollar. larity does not propose the SDR as a reserve currency to replace the dollar. the G10 met in Stockholm. formed in 1961 to provide emergency intervention funds (and managed by the Bank of England.S. and to critics who long for a totally impossible return to the gold standard. Capital outflows from sterling to dollars to gold accelerated.
CURRENCY TRADER • June 2011 17 .
incentivized to run large trade deficits. at least for a few years. or the way we trade and pay each other globally.S. which was abandoned in reality after the Great Depression. and virtually all players will engage in a currency war in one form or another. the U. Being the provider of the global currency allowed the U.” The discussion was based on the idea that the most pressing issue in the aftermath of the 2008 global financial crisis is the need to determine the future of the International Monetary System (IMS). staring down the global monetary abyss and hoping for a flash of ingenuity and a new regime to fix a badly imbalanced monetary system. who warned a country that provides the global reserve currency will eventually have an incentive to run too-large deficits and will then have to inflate its way out them. the inherent flaws in the global monetary system as a whole. BY DAVIDE ACCOMAZZO The renewed downward spiral of the U. dollar has re-ignited the debate over over its future as the global reserve currency and. dollar as the global reserve currency — and the only currency convertible into gold. The high stakes June 2011 • CURRENCY TRADER . 40 years later. 18 What went wrong? After WWII the U. is now in its fourth decade and is plainly falling victim to its internal shortcomings and contradictions.S. A perhaps unforeseen development a few years ago might also have accelerated this process. great financial benefits.S.S.On THE MONEY ON the Money Currency wars In this excerpt from an article in the August issue of Active Trader magazine. successfully lobbied for the dollar to effectively become the global currency. However. The constant demand for dollars to settle international trade lowered the U. Not only was the U. At the end of WWII. Here we are. This convertibility ended during the stagflation crisis at the beginning of the 1970s. We are now locked in an unsustainable global position where the large exporting countries feel they cannot succeed without constantly undervalued currencies. a money manager and finance professor looks at the current global monetary system’s woes. The current “free-floating” system. and effectively ended the pure global gold standard. chronic imbalances. creating systemic. cost of financing and allowed the country to run larger trade and fiscal deficits than otherwise would have been possible. WWI marked the end of the first wave of globalization.S. which was ushered in by the end of the Bretton Woods era. President Nixon closed the conversion window in 1971. every major financial and social crisis has ended with a redesign of the IMS. Recently I moderated a faculty panel discussion at Pepperdine University on the critical and timely topic of “currency wars. named after Yale University economist Robert Triffin. Historically. Meanwhile. the advantage of being able to run larger deficits thanks to the currency’s role as a global reserve unit leads to the Triffin Dilemma.S. by association.S. and what a likely solution implies for the dollar. will eventually have to inflate its way out of trouble. but many emerging markets decided to marry their fortunes to the produce-at-the-lowest-cost-and-export model and heavily manipulate their currencies vis-à-vis the dollar to achieve trade advantages. the Bretton Woods agreement established the U.
As far as the renminbi. for the foreseeable future. The idea of a return to some form of gold standard was dismissed as impractical by all panelists. Gold does have certain characteristics that might help finesse the system. however. dollar and British pound/ U. but this is impractical for a number of reasons. the question remains. To the extent we agreed the dollar as the center of the system was part of the problem. CNY). A not-so-pure gold standard.. Fredericks stressed his opinion that the current system ultimately worked and dealt with a major crisis (2008) in the best possible way. Volatility-based systems and momentum-driven approaches should perform well in this environment (see “Active alpha investing for the market’s new normal. be more stable than the present one? A nostalgic fringe has been calling for a restoration of the gold standard. the International Monetary Fund’s unit of account).activetradermag.poker game is on. it is unclear whether any country would trade domestically oriented monetary policy for FX stability. Common currencies are complicated affairs. the consensus reached by the panel was to recommend a gradual but inevitable move away from a dollar-centric universe. its lack of convertibility and other restrictions means it’s not yet a viable alternative. Fredericks made a few provocative comments on this topic: He rejected the notion that gold is a viable monetary benchmark because of its limited supply (one of the arguments of gold bugs is that gold’s finite nature would limit politicians’ ability to create money) by raising the possibility of new gold discoveries. dollar.S. y For information on the author. and that any true solution must take into consideration the genesis of the problem itself. such as limiting surpluses and monetary/fiscal policy to avoid inflationary temptations.” to help regulate global liquidity alongside a basket of currencies modeled after the Special Drawing Rights (SDRs.S. an evolution of the present system into a potentially multi-currency regime makes it imperative to diversify geographically within traditional asset classes.) If gold is not the ultimate answer. Swiss Franc/dollar. as traders need volatility to generate superior performance. but with a number of caveats. Ed Fredericks. I trade a goldbased strategy. in the long term. dollar. since today there is no real alternative to the U.com). CURRENCY TRADER • June 2011 19 . is a global currency such as the one John Maynard Keynes advocated 70 years ago a workable solution? Possibly. My take on gold was largely in line with Zoellick’s idea: to utilize gold as a “thermometer. on what kind of global system can we agree upon that might. a domestically oriented monetary policy. I did not entirely agree with this view. and Clemens Kownatzki. would eventually be manipulated just like the current currency system.” highlights the three major objectives a government will want to achieve. 4. A common currency requires a loss of sovereign power to some degree. dollar and Canadian dollar/U. Another famous macroeconomic dilemma. World Bank President Robert Zoellick recently called for a mixed system of multiple major currencies (including a liberalized renminbi). A more consistent allocation to gold would also seem. based on paper claims or other types of derivatives. Australian dollar/U. The discussion The Pepperdine panel. on newsstands in July. It is likely that volatility in currencies (and gold. Euro/yen.g. arrived at a few conclusions on these issues. March 2011). as well as a few disagreements. proponents of this solution might actually find this a plus) and probably would not end mercantilist policies.” Active Trader. while only being able to realize two of them: an open current account. However. While it was agreed the system would have to evolve to incorporate new challenges. A global currency. consisting of professors Peggy Crawford. or rather “trilemma. arguing that perhaps the system’s flaws created the crisis.S. but a pure gold standard tends to be deflationary (admittedly. such as nondeliverable forwards and ETFs (e. or even the development of synthetic gold. see the August issue of Active Trader magazine (www. the Market Vectors Chinese Renminbi fund. (Disclaimer: As a money manager. The details are vague and it is unclear which entity would enforce the given parameters—in fact. The issues While short-term solutions vary from allowing a faster appreciation of the Chinese renminbi (China runs the largest trade surplus) to a diversification of global reserves away from the USD to other currencies. see p. a stable currency. To read an extended version of this article. Japanese yen/dollar. a rational hedge. with gold as an international reference point for global monetary policy. as a currency proxy) will remain a constant for the foreseeable future. For longer-term investors. requires some sort of supranational oversight in terms of trade policy. One of the most interesting exchanges occurred on the subject of gold and its role within a reformed financial system. from a trading perspective this is good news. think of the Euro and the disconnect between the monetary union it represents and the fiscal disunion that characterizes it. Most of the action will be reserved for the usual suspects: Euro/dollar. a few options are available. Crawford stressed this dynamic and Kownatzki emphasized the long-term time frame that would be required.S.
the Bear Power indicator goes below zero.TRADING STRATEGIES The Total Power Indicator Expanding the Elder Ray concept results in a more versatile trading tool with the potential to capture both trending and countertrend moves. bull. It does this through the placing of current Bear and Bull Power readings in the context of their longer-term histories. The method Elder developed used three technical indicators that highlighted how bullish and bearish movements pull away or toward the “consensus price. and whether bears or bulls are dominant. price has seen a significant and continued pull toward one direction away from the EMA compared to the other. and total (net) power values.5 times the 14-day average true range (ATR). the system goes long if there’s a 100-percent Bull Power value along with a total net power of 100 percent. The bull and bear total power values indicate which one has been the most favored. 30 days). A version of the indicator’s code for the MetaTrader 4 platform can be downloaded by clicking here. which simply show the distance between the EMA and the low or high of the current bar. A high total net power value indicates that during the past n periods. but it doesn’t give enough information regarding how this is relevant across a longer span of time. The Total Power Indicator: Improving Elder Ray dominant (positive Bull Power) bars there were in an initial look-back period (for example. The indicator consists of three lines that gauge the bear. and when the high is above the 13-period EMA. BY DANIEL FERNANDEZ The Elder Ray Index trading setup was developed by Dr. The Total Power Indicator (TPI) is designed to provide a clearer view of the current market condition and how these price deviations relate to past market action. It starts by counting the number of bear-dominant (positive Bear Power) and bull20 Applying the TPI To test our hypothesis. we can easily create a daily trendfollowing system using this new concept: The system goes short when the Bear Power value is 100 percent on the last closed bar and the value of the total net power is also 100 percent. The setup lets us know how current price is deviating from the consensus price. On daily forex charts the indicator seems to work best with Bear and Bull Power indicators based on a 10-day EMA instead of a 13-period EMA and analyzing the results with a 45-day look-back period. Trades are closed whenever the total net power value falls below 90 percent. These indicators show how price is moving relative to its consensus (represented by the EMA). One of the limitations of the Elder Ray setup is that it fails to deliver clear signals because it doesn’t provide a very good picture of a market’s longer-term context. When the low is below the 13-period EMA.” The setup includes a simple 13-period exponential moving average (EMA) coupled with two indicators Elder called Bear Power and Bull Power. Alexander Elder to capture the development of trending moves based on the idea of what he called buying and selling pressure.and bear-dominant bars over the total number of periods. the Bull Power indicator goes above zero. The idea behind the TPI is to show not just how much price has pulled away from the 13-period consensus price. meaning that significant “pulling” toward the side opposite to the previously developing trend has started. The total net power is the absolute difference between bull-dominant and beardominant bars divided by the total number of periods. Every position is entered with a stop-loss order set at 1. June 2011 • CURRENCY October 2010 • CURRENCY TRADER . and draws two lines showing the percentage of bull. respectively. but how much this movement has been to the upside or downside.
41 1. Most losses were generated through CURRENCY TRADER • June 2011 The NZD/USD pair had the largest profit. a long trade was initiated. especially in the NZD/ USD pair.86% 76 4. of trades Profit-to-loss ratio Profit factor Ulcer Index 65% 36% 7. and 8 pips (ticks) for the three respective pairs.63 9. which was better than the curves of any of the individual pairs.S.01*Account balance / (ATR*contract size)).6578 with a stop-loss value of 145 pips. dollar (AUD/ USD).76 System results The strategy was simulated on MetaTrader 4 using 11 years of daily data from June 2000 through May 2011.000/ (0.90% 4. The position was entered at 0.Position size is determined by the following equation: Trade size = 0. The trade was exited more than four months later after a retracement pushed the total net power index below 90 percent. dollar pair (EUR/USD).55 AUD/USD 56% 35% 22% 4.01*100.12% 4.39% 84 3. TABLE 1: STRATEGY PERFORMANCE EUR/USD Total profit Win % Max. effectively allowing the system to capture a trending move of more than 800 pips.0097*100. The total Bull Power (green line) was at 100 percent.27% 88 2. the same values were used to evaluate the three pairs. Australian dollar/U.54% 248 3.S. U.03 lots ( 0.83 9.99 1.87 6. FIGURE 2: COMPOSITE EQUITY CURVE The equity curve for the three-pair portfolio was superior to that of any of the three individual currencies.S. Table 1 shows the strategy’s results (from a profit perspective) were fairly homogeneous across the three pairs. FIGURE 1: TRADE EXAMPLE The TPI did a good job of capturing sizable trend moves. 21 . and the New Zealand dollar vs. even though it had the lowest winning percentage.37% 14. The indicator periods and other variables were not optimized. Figure 2 shows the equity curve for the three-pair portfolio. with most profits coming from longerterm trend moves like the one shown in Figure 1. Trading costs were assessed in the form of bid/ask spreads of 2.000)) assuming a $100.16 Portfolio 340% 33% 33. Figure 1 shows an example of a sample trade entered in the NZD/ USD pair from 2009. 4. annual profit No. and when momentum peaked as the total net power (blue line) reached 100 percent. derived from an ATR value of 97 and a position size equal to 1. dollar (NZD/USD) because a preliminary visual analysis revealed these to be the pairs with the most potential. drawdown Avg.000 account balance.9 1.89 3.65 NZD/USD 72% 28% 14.7 1. The system was tested on the Euro/U.
7 reflects the system’s ability to exit losing trades quickly while holding onto moves that eventually develop into long-term trends. The strategy had an overall average compounded yearly profit of 14. which happen when the total Most of the system’s losses resulted from successive losing trades in choppy net power value falls and then returns conditions. However. FIGURE 4: USING DURATION The analysis shows the TPI may also be used for the purpose of range trading: Crosses of the Bull and Bear Power lines appear to signal reversals that could be exploited until the total net power line reaches 100 percent. Expanding on the Elder Ray concept.54 percent. A new interpretation with lots of potential This trade was initiated after the market had established bearish dominance. The EUR/USD pair had the smallest drawdown of the three pairs (as it does with most trend-following systems). seem to represent the best trading opportunities. a maximum drawdown of 33 percent. These entries.TRADING STRATEGIES repetitive failed entries during ranging markets (Figure 3). the Total Power Indicator gives traders a graphical and easy way to gauge June 2011 • CURRENCY TRADER 22 . Figure 4 shows an example of such a trade. as shown in Figure 5. This might lead to additional entry/exit criteria that could complement the strategy during the rangy conditions that often cause trades to be closed a loss. the system captured trends very efficiently in this pair. An implication of these numbers is the TPI may generate better results if we take into account the duration of bear and bull total power readings of 100 percent before the net power line goes toward this value. where a successful trend is captured and the entry followed an already established bearish dominance. while the AUD/USD posted the highest. The overall portfolio’s excellent profit-to-loss ratio of 3. The NZD/USD pair had an exceptionally high profit-to-loss ratio (average profit divided by average loss). to 100 percent within an already established trend.76 which is just above the worst value (9. as it is quite common for the most successful trades to emerge from entry signals that follow an extended period of bull or bear total power dominance. and an Ulcer Index of 9. it’s worth noting a significant number of losing trades didn’t hit their stop-loss targets thanks to the exit logic based on the total net power value.65) from the individual pairs (but is compensated for by the FIGURE 3: LOSING TRADES effect of profit compounding).
whether there is a bias toward the bullish or bearish side of the market. 4. as is applying the indicator to other time frames and currency pairs. FIGURE 5: RANGE TRADING WITH THE TPI Crosses of the Bull and Bear Power lines have the potential to signal reversals that could be exploited until the total net power line reaches 100 percent. but the results are preliminary in nature and many more sophisticated techniques could be devised to better exploit the TPI’s potential. or if the bias is currently changing. see p. CURRENCY TRADER • June 2011 23 . The system described here illustrates how this concept can be traded. Using the indicator to profit from ranging conditions is another potential option. y For information on the author.how price is pulling above or below the consensus value established by a moving average. “Manual” traders will also find the TPI an easy-to-interpret indication of how strong momentum is in a given direction.
BY HOWARD L. and there is no active options market between the two currencies. what is really a geographic expression is turned into a political entity out of force of history. is separated from the peninsula by several hundred miles of the South China Sea. although the indigenous Ainu people might disagree. what would we do?” This is how Gordon Moore and Andrew Grove of Intel decided to exit the low-margin DRAM chip business in the 1980s to focus on high-margin microprocessors. Malaysia falls into this category as well.ADVANCED CONCEPTS TRADING STRATEGIES Malaysia on the jagged edge FIGURE 1: OPTIONS MARKET LEADS RINGGIT WEAKLY The Malaysian ringgit is positioned to take advantage of whichever major currency offers cheaper funding. such as India or Italy. “If we were starting this business today. Its second half. such as Japan. covering the northern coast of the island of Borneo. the boundaries are drawn by nature. but its mountainous rainforest-covered terrain had been the home of multiple independent political entities prior to the Muslim and then European colonial eras. FIGURE 2: RINGGIT WEAKENING AGAINST YEN This MYR/JPY cross-rate has been confined. To a certain extent. its main peninsula looks like a homogenous entity on a map. this lesson applies to the establishment of national boundaries. In other cases. 24 . but this relationship is not tight enough to trade. While the Suez and Panama canals June 2011 • CURRENCY TRADER Excess volatility rises before the ringgit falls and vice-versa. Companies who try to defend historic business models are destined to become future business school cases. SIMONS One of the lessons learned well in Silicon Valley is to ask the question. In some instances.
In the operate effectively as a natural chokepoint for waterborne case of the MYR. Even after China loosened its peg to the dollar in July 2005.9 and the USD FRR6. Nowhere was this seen more than the decision to impose capital controls after the early stages of the 1997-1998 Asian crisis and by the willingness of its thenprime minister Mahathir bin Mohamad to blame anyone and everyone else. has had a weak Middle East to Singapore or eastward to Japan or Korea.00. No real trend Can a managed currency trend? Absolutely.had to be excavated by human effort.” February 2010 for some other colorful currency etymologies). It rises before the Straits are the place to be. for the crisis. a struggle motivated in large part by resentment of Chinese and Indian nationals being given equal treatment by the British. the ringgit falls and vice-versa. the Straits of Malacca of necessity lower than they would be otherwise. Malaysia’s history. indicates the exchange rate tail is wagging the expected interest-rate dog. excess volatility or the ratio of implied commerce. there before the world discovered the pirates of Somalia. including the uninvolved George Soros. If you want to move a crude oil tanker from the to high-low-close volatility minus 1. and the Malaysian Navy had been fighting pirates nowhere near tight enough to trade. The picture is different for the MYR per JPY crossrate (bottom): movements in the cross rate have led changes in the expected interest-rate differential. What a managed float does do. “ringgit.” is a Malay term for “jagged. for invading colonial armies. All you needed in either case was a ruler and a willingness to find out after the fact policies either had failed (as was the case in Brazil) or changed (as was the case in China). the MYR remained a managed floating currency. is change the dynamics of both implied and realized volatility. As we have done for other South Asian currencies such This strategic location between the Middle East and as the Philippine peso and Thai baht (see “No whacks at India to the west and China to the east has forever made Malaysia a stomping ground. but this relationship is too. 25 .9 doesn’t exhibit a strong relationship (top). however. has led Malaysia to protect its independence fiercely. Pirates have figured this out. The word for its currency.” a reference to the serrated edges of Spanish silver dollars which arrived there on mainly Portuguese and Dutch ships in the 15th and 16th centuries (see “Islamic Currencies: What’s for dinar?. FIGURE 3: RELATIVE INTEREST RATE EXPECTATIONS literally. all we need do is look at the Brazilian real of the late 1990s or the Chinese yuan between July 2005 and July 2008. Both are CURRENCY TRADER • June 2011 The differential between the MYR FRR6. This history of controls has made the long-term analysis of the MYR more a short-term analysis than we would like. leading relationship to the MYR (Figure 1). including its relatively recent brutal occupation by Japan during World War II and its long struggle for independence from the British thereafter.
The more this FRR6. this spread often is more telling than the forward expectation differential. Let’s see how this comes into play with one of the key Interest rates variables we have used to analyze nearly all currencies. this indicates the exchange rate tail is wagging the expected interest rate dog. If a currency is managed. We should expect the differential between the MYR FRR6. As we have seen in a wide range of minor currencies. with the normal effect being a greater differential leading to a stronger MYR.9 and those of both the USD FRR6. the JPY FRR6.9). Both the expected interest rate differential and the absolute three-month yield spread indicate the yen had been the more the absolute rate spread between the USD important currency for the ringgit market.9 exceeds 1. and MYR has only recently been linked to 26 June 2011 • CURRENCY TRADER . as distasteful as that metaphor may sound.9 and the JPY FRR6. but the MYR both weakened and then strengthened during this period. the expected interest rate differential turned negative. allowed to fluctuate. This does not appear to be a strong relationship for the USD (Figure 3. This is the rate at which FIGURE 4: RINGGIT AND SHORT-TERM RATE SPREADS we can lock in borrowing for three months starting six months from now. respectively). Note the rather prominent feature in the spring of 2006 associated with the Bank of Japan’s failed attempt to end quantitative easing and raise short-term interest rates. let’s add the MYR’s cross-rate to the Japanese yen in recognition of Japanese banks’ importance in the region (Figure 2). As the USD FRR6.” April and May 2011.00. bottom). short-term interest rates must be the interest rate expectation differential as measure the forward rate ratios between six and nine months (FRR6.9 steepened sharply and then contracted just as rapidly as the Bank of Japan backed away from its actions.9 steepened in 2008-2009.9 to lead the MYR by three months. top). The general principle is you can fix a currency or fix an interest rate. In practice. managed floating or the pegging that comes with a currency board arrangement often produces greater short-term interest rate volatility than would exist otherwise. but it has matched the cross-rate to the JPY the expected rate differential itself: While fairly closely until July 2010. This cross-rate has been rather confined as well. The The absolute rate spread between the USD and MYR has only recently been gist of the answer is similar to that seen for linked to the MYR’s dollar rate. and there is no active options market between the two currencies. Here movements in the cross-rate have led changes in the expected interest rate differential. The picture is different for the MYR per JPY cross-rate (Figure 3.ADVANCED CONCEPTS ON THE MONEY the Philippines” and “The Baht and I: Time to Thai one on. divided by the nine-month rate itself. but you cannot fix both. Now let’s see if the answer changes much if we use the simple three-month interest rate spread between the MYR and both the USD and JPY (Figure 4). the steeper the money market yield curve is.
CURRENCY TRADER • June 2011 27 . gets knocked about on occasion but in the end seems to endure. The post-September 2005 history until the hint of QE2 in August 2010 indicated Malaysian equities led capital flows from the U. 4. see p.FIGURE 5: YIELD CURVE FLATTENED FROM SHORT END the MYR’s dollar rate. We can map the total return on the Malaysian stock market in USD terms to both the U. The implication here is the move of U. what had been a leading relationship for Malaysian equities relative to Japanese equities broke after the March 2009 global market low and never recovered. it has matched the cross-rate to the JPY fairly closely until July 2010. This does appear to be the case for the Malaysian yield curve after the March 2009 global market low (Figure 5). this parallels Malaysia’s history and geography: It stands in the middle of larger entities.S.S.S. FIGURE 6: CARRY INTO RINGGIT The implication is the move of U. The role of relative stock market returns is more difficult to assess completely given the MYR’s peg up until July 2005. If the MYR’s managed float is being policed by short-term interest rates. and Japanese markets and overlay the total carry return for borrowing the dollar and the yen and lending in the ringgit (Figure 6).y For information on the author. It is situated to take advantage of whichever major currency is offering cheaper funding. Both the expected interest rate differential and the absolute three-month yield spread indicate the yen had been the more important currency for the ringgit market even though Japan’s prominence in global banking is not what it once was. then we should expect to see a very stable capital market yield curve with nearly all of the shifts occurring at the short end of the curve. Capital market horizons Malaysia’s capital market yield curve wasn’t very stable after the March 2009 global market low. short-term interest rates to and then below their Japanese counterparts made the dollar the preferred funding currency for Malaysian stock market investment. However. This switchover behavior between the yen and the dollar and the observed greater importance of interest rate differentials between the ringgit and the yen as opposed to the dollar indicate Malaysia enjoys an option. short-term interest rates to and then below their Japanese counterparts made the dollar the preferred funding currency for Malaysian stock market investment.S. In a twist of fate.
: May employment report Brazil: Q1 GDP France: Q1 employment report LTD: June forex options. The clearinghouse also informs the seller. 22-24 Location: Caesars Palace. dollar index futures (ICE) U. June U.S.m.S.: June employment report Canada: June employment report UK: June PPI LTD: June forex options. 8:30 a. 10:00 a.m.m.com June 2011 • CURRENCY TRADER .: May ISM manufacturing report Australia: Q1 GDP U. Hong Kong: Q1 PPI LTD: June forex futures.com/hftchicago Event: The World MoneyShow Vancouver 2011 Date: July 7-9 Location: Vancouver Convention Centre For more information: Go to www.: May housing starts Hong Kong: March-May emplyoment report U.S. 8:30 a.S.: May PPI and retail sales India: May PPI Japan: Bank of Japan interest-rate announcement UK: May CPI U. dollar index options (ICE) 20 Germany: May PPI Hong Kong: Q1 GDP 22 23 24 21 Hong Kong: May CPI U.S.S.: Fed beige book U. 16-19 Location: Caesars Palace.m.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.: May personal income 28 UK: Q1 GDP May CPI 29 Canada:Q1 GDP France: France: May PPI Germany: May employment report India: May CPI South Africa: May PPI 30 July 1 2 3 4 5 6 7 U.com/vcms/?scode=013104 28 Event: The Futures & Forex Expo Las Vegas Date: Sept. June 1 2 3 4 5 6 7 8 9 U.S.moneyshow.S. Las Vegas For more information: Go to www. dollar index futures (ICE) U. dollar index options (ICE) EVENTS Event: High Frequency Trading World Chicago Date: June 27-29 Location: The Congress Plaza Hotel.terrapinn.m. 8:30 a. June U.: June ISM manufacturing report Japan: May employment report and CPI 15 16 17 18 19 The information on this page is subject to change.m. & France: May CPI UK: May emplyoment report FDD: June forex futures.m. 8:30 a.com/events/Forex_Options_Expos. 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.asp Event: International Traders Expo Date: Nov. June U.S. FND (first notice day): Also known as first intent day.m. PMI: Purchasing managers index PPI: Producer price index Economic release (U.GLOBAL ECONOMIC CALENDAR CPI: Consumer price index ECB: European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. 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. 8:30 a. Las Vegas For more information: Go to www.S.: April trade balance Australia: May employment report Mexico: May PPI and May 31 CPI UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement Canada: May employment report Germany: May CPI Japan & UK: May PPI 25 26 27 U.tradersexpo.m. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.moneyshow.S.S.: Q1 GDP (third) and May durable goods 10 11 12 13 14 Brazil: May CPI and PPI U. 8:30 a.m.S.S. 8:30 a.: May leading indicators Canada: May PPI 8 Australia: June employment report Brazil: June CPI and PPI Mexico: June PPI and June 30 CPI UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.S. 8:30 a.: FOMC interest-rate announcement Brazil: May employment report South Africa: May CPI Mexico: May employment report and June 15 CPI U. June U. 10:00 a.S. Chicago For more information: www.m.
70% 2.4 29. 10.40% 4.93% / 60% 60-day move / rank 2.1 6.52% / 22% 0. 20-day move: The percentage price move from the close 20 days ago to today’s close.0 18. (Int'l.33 / 80% .0 15.2 54.8 85. (Emerging Mkts) Aurora Futures Corp (FX) Iron Fortress FX Mgmt Greenwave Capital Mgmt (GDS Beta) Wealth Builder FX Group (Aggressive) Overlay Asset Mgmt.5 8. It is intended only to provide a brief synopsis of each market’s liquidity. (SHCFP) Sagacity (HedgeFX100) 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. in thousands.54 / 70% .70% / 27% -0.05% 6. See the legend for explanations of the different fields.04% 12.07% / 60% -0.51% / 89% 1.2 32.3 Trading advisor 1.3 200.89% / 21% 0. CURRENCY TRADER • June 2011 29 . 10.36% -3. 9.6 1. 8. the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves.85% / 36% -2.CURRENCY FUTURES SNAPSHOT as of June 1 Market EUR/USD GBP/USD AUD/USD JPY/USD CAD/USD CHF/USD U.59% 2011 YTD return 9.96% 16.75% 8.60% 3. 4. direction. 8.17% / 6% 4.61% / 29% -1.27 / 55% Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).42% -2.6 10-day move / rank 1. and levels of momentum and volatility.5 4.40% 3. 6. Price activity is based on pit-traded contracts.11% 5.71% -6.1 7.11% / 99% 2.4 122.67% 6. 5. 1. BarclayHedge Rankings: Top 10 currency traders managing more than $10 million (as ofApril 30 ranked by April 2011 return) April return 14.21 / 3% . 2.27% / 57% 2.36% / 31% 0.40% 7.27% / 72% 1.4 128. Does not reflect the performance of any single account.1 43. 7.76% 7.0 1. 7. 2. 6.21% / 0% 9. For example. Richmond Group (Gl. The information does NOT constitute trade signals.14% 8. 9.0 N/A 690.93% / 60% -0.4 70.68% 4. The % rank is the percentile rank of the volatility ratio over the past 60 days.1 10. 60-day move: The percentage price move from the close 60 days ago to today’s close. OI: 30-day open interest. FX) CenturionFx Ltd (6X) Halion Capital (Conservative) King's Crossing Cap'l (FX Model) Overlay Asset Mgmt.0 3. The “% rank” fields for each time window (10-day moves. (millions) 36.29% 5. Currency) 24FX Management Ltd Cambridge Strategy (Asian Mrkts) Sunrise Cap'l Partners (Currency Fund) Alder Cap'l (Alder Global 20) Harmonic Capital (Gl.19% / 60% 0.1 110.74% / 50% -0.84% 5.79% 2.2 107.49% / 43% 2.5 OI 250.5 9.0 117.83% 10. for the 60-day move.88% 4.08% / 78% 2. Currency) Cambridge Strategy (Extended Mkts) FX Concepts (Multi-Strategy) JCH Capital Mgmt (Global Currency) John W.64% 6.17% 6.57% 12.5 6.49% 11.57 / 100% .89% / 21% Volatility ratio / rank .95% -1.0 8.98% / 22% 5.45 / 88% . 3. LEGEND: Volume: 30-day average daily volume.6 1. in thousands. 5.70% 6.27 / 55% . dollar index MXN/USD NZD/USD E-Mini EUR/USD Sym EC BP AD JY CD SF DX MP NE ZE Exch CME CME CME CME CME CME ICE CME CME CME Vol 333.11% 4. for the 20-day move.2 1.76% $ Under mgmt.62% 3.06% / 20% 20-day move / rank -2.1 104.0 3309.70% / 20% 0. 4.0 56.70% 11.18% 4.06% 9.21 / 12% .20% 2.S.02% / 0% -2.67% 6.26% / 66% 11.34 / 8% .0 11. 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).4 32. it shows how the most recent 20-day move compares to the past sixty 20-day moves. it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves.69% / 26% 3.41% 5.95% / 96% -2.68% / 50% 4. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable).03% 23. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.06% / 20% 0.0 112. 3. 20-day moves. A reading of 100% means the current reading is larger than all the past readings. etc.53% / 82% -1. Henry & Co. 10-day move: The percentage price move from the close 10 days ago to today’s close.) 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.23 / 23% .1 158. while a reading of 0% means the current reading is smaller than the previous readings.41% 1.1 673.
0309 0.52 9.108.1275 Previous 4 1 15 17 12 16 10 7 13 3 14 11 8 5 6 2 9 GLOBAL STOCK INDICES Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Switzerland Canada South Africa Singapore Japan U.84% 11.129 0.35 60.798.0108 0.21% 6.52% 5.40 18.33% 1.0227 1.33% 3-month gain/loss -1.73% 4.40% -0.59 32.87% -2.83% -2.02% 1.90 35.681.971.02% 2.542.50 21.63 1.S.0338 0.600.21% 1.00 Previous 11 13 3 2 4 5 8 14 6 15 7 1 10 9 12 30 June 2011 • CURRENCY TRADER .213.0576 0.80 38.00 23.0366 1.74% -2.0302 0.30 13.98 64.32% 2.63717 0.056.77% -0.266.022395 0.12 8.15% -10.95% 1.26% -3.0351 0.50% -3.94 1.81% -2.13% -2.03% 2.318.27% 5.4395 0.1236 1.118.0307 0.384.331.15403 0.22% 0.08% -6.68% -0.41 3.97% 12.34% 4.87 1-month gain/loss 0.10% -0.021 0.48% -1.035375 1.797.24% -3.91% -6.1461 0.S.273.058675 0.128475 0.00 18.6324 0.7056 1.48% -7.876.87 73.6626 0.76 4.27% -0.28% 0.64% 5.370.094.48% 6.163.35% 4.00% -0.739.94% -1.019.12% 2.20% -0.816 0.75% 7.88% -4.82% 2.50 26.105.74% 11.52% -2.48% 0.15403 0.80678 0.1942 0.21% 6.60 1.149945 0.75% -1.32% -0.988.069.80 52-week low 5.938.72% -5.37% 0.010.37% 0.614985 0.S.50 33.191.169.08% -3.26% -0.8593 0.07 7.14291 1-month gain/loss 1.50 3. UK Mexico France Brazil Hong Kong Germany Australia India Italy Index Swiss Market S&P/TSX composite FTSE/JSE All Share Straits Times Nikkei 225 S&P 500 FTSE 100 IPC CAC 40 Bovespa Hang Seng Xetra Dax All ordinaries BSE 30 FTSE MIB May 27 6.80361 1.90% 2.00 24.1662 1.99% -2.08% -1.950.313.97% -3.40% 0.8175 1.10 5.1281 0.103.227.1607 0.819. DOLLAR) Rank Currency 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Swiss franc New Zealand dollar Chinese yuan Japanese yen Taiwan dollar Hong Kong dollar Singapore dollar Great Britain pound Indian rupee Australian Dollar Thai baht Russian ruble Canadian dollar Swedish krona Euro Brazilian real South African rand May 27 price vs.489.0966 0.022025 1.90% 8. dollar 1.94% -1.8095 0.4141 0.760.01224 0.29% -0.28% 6-month gain loss 1.065.INTERNATIONAL MARKETS CURRENCIES (vs.60 23.891.07% 2.14% -5.92% -3.158715 1.830.53% -3.27% 2.41% -1.91 4.43% 6.58% -0.63% -5.38% -1.06 3.24% -3.48% -4.10 20.9369 0.00 30.60 7. U.58 6.321.521.0127 0.5285 0.135.18% 0.15% 6.55% 0.05% -3.80 4.41 5.87% 7.14% -0.61 10.00 11.935.790.03456 0.28% 1.329.6702 0.032885 0.295.03% 3.10 14.85% 52-week high 6.00 16.84% -1. U.4842 0.39% 6-month gain/loss 15.26% -0.47 4.04% 1.71 2.00% 3-month gain/loss 6.49% 52-week high 1.50 5.12% 9.1518 52-week low 0.20 3.30 18.07% 6.43% -0.69% 2.
52 1.59664 1.4193 0.22968 1-month gain/loss 3.8972 0.36% -5.5 0.8636 77.04% 2.72% -7.4911 1.75 2.5 1.8845 78.920625 83.12% 1.8098 0.63 1.25 0.43 1.945 1.4249 52-week low 0.4528 1.25 (March 11) 0.16% -9.945 1.73% -1.56% -3.72147 1.25 5.905 1.5 2 1.08% -5.10% 6.125 (April 11) 0.25 0-0.25 0.5158 2.69 1.37 122.55% 1.10) Nov 2010 0-0.5 Last change 0.1 (Oct.42% 0.5 1 0.25 (Sept 10) 0.55% -0.5 1 0.25 (April 11) 0.75 2.23% 4.3746 1.16% -2.12% -4.54193 2.74% 0.17% 1.25 5.76% 1.18% -2.92% -2.19 1.5 CURRENCY TRADER • June 2011 31 . 08) 0.419535 0.81% 3.29941 86.3842 89.2493 126.25 0.2947 1.501 0.485 1.35% 2.6956 0.9 1.19% 1.5 (Dec.5 2.019905 1.77% -2.37% 2.124755 0.5 (Nov.24% 7.38312 133.05% 2.5 (May 11) 0.99% 0.7726 66.9818 89.0212 1.35% 4.22% 3-month gain/loss 6.25 (April 11) 0.10% -2.6412 1.25 5.8042 2.2174 1.035485 93.82% -2.16% -3.90% -3.355 1.75 106.97% 0.58% 4.25 0.86 1.1 1.31225 1.39 1.35% -2.5 (March 09) 0.45% 0.46 1.53% 52-week high 1.25 4.12% -4.51% 0.63% 1.25 7.5 6.2295 Previous 8 21 13 12 7 3 20 1 19 17 2 9 5 15 16 18 10 11 6 4 14 GLOBAL CENTRAL BANK LENDING RATES Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate Rate 0-0.1 1 0.4304 139.89% 1.5 May 2010 0-0.5 9. DOLLAR FOREX CROSS RATES Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair Franc / Canada $ Yen / Real Aussie $ / Real Pound / Canada $ Aussie $ / Canada $ Franc / Yen Canada $ / Real New Zeal $ / Yen Pound / Aussie $ Euro / Real Aussie $ / Yen Euro / Canada $ Pound / Yen Euro / Aussie $ Aussie $ / New Zeal $ Pound / Franc Euro / Pound Aussie $ / Franc Canada $ / Yen Euro / Yen Euro / Franc Symbol CHF/CAD JPY/BRL AUD/BRL GBP/CAD AUD/CAD CHF/JPY CAD/BRL NZD/JPY GBP/AUD EUR/BRL AUD/JPY EUR/CAD GBP/JPY EUR/AUD AUD/NZD GBP/CHF EUR/GBP AUD/CHF CAD/JPY EUR/JPY EUR/CHF May 27 1.5 (March 11) 0.NON-U.84% -3.589 56.0186 1.57% -0.53% -2.00% -0.1366 73.15% 0.18% 1.18% 5.75 3 10.7515 1.866275 0.25 (Nov 10) 0.33% -2.1 1.662475 65.16% 3.S.0389 93.8995 0.53% -2.16% 12.25 (March 09) 0.25 4.5 12 3 1.124755 0.1 1 0.18% 1.66% 2.68% 6-month gain loss 10.49% 2.98% -1.64% 0.26% 6.33572 1.30% -1.64% 2.75 7. 10) 0.25 4.525 115.
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