2013 – Trading the shifting Landscape

How to benefit from emerging Trends
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• Trading OTC Forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange or futures you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange and futures trading, and seek advice from an independent financial advisor if you have any doubts. • The information and opinions in today’s webinar are of a general nature only and do not take into consideration your personal circumstances, so before acting on anything in this presentation, you should consider whether it is appropriate having regard to your circumstances.

Legals

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• 2013 is shaping up very different to 2010, 2011 or even 2012 – in some ways less risky in others more • But it is too easy for pundits, strategists and prognosticators to make predictions for the next year and then ignore them. • One big global IB even closed out a trade of 2013 in the first week of January – some trade • So today I am not going to tell you what is going to happen – rather we’ll talk about the market set up and some opportunities that are likely to arise this year • We’ll focus on these risks and the opportunities that these differences can throw up in 2013 for your trading

Today

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Source: CXO Advisory Group, LLC via www.forbes.com

Are predictors really that bad?

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2012 a quick glance back
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• US Treasuries rallied and European bonds recovered substantial losses after Draghi promised shock and awe • The USD tried to get off the canvas but didn’t quite succeed • Stocks keep on keeping on as Central Banks drop cash from Helicopters • Yield hogs drove currencies and junk and emerging debt performance • The world just didn’t end – all the doom and gloom led to a lot of fear a mid year swoon and then a huge rally • But the economies of Europe, the USA and Japan remain weak really weak • Central Bank cash dampened stock and currency volatility – VIX at pre-GFC lows. Minsky is getting worried

Fear gave way to HOPE

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Spain 5 Yr CDS Italy 5 Yr CDS

Germany 5 Yr CDS

Italy 5 Yr CDS

EURUSD

700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 Jan-10

700 600 500 400 300 200 100 0 Jan-13

700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 Jan-10

1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5 Jan-13

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Source: FARM, Bloomberg

www.GlobalFX.com.au

Source: FARM, Bloomberg

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European CDS and Euro

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2013 themes
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Source: Vitaliy Katsenelson, Contrarian Edge

Stocks are going sideways

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S&P 500
1,800.00

1,600.00

1,400.00

1,200.00

1,000.00

800.00

600.00 Aug-99

Aug-00

Aug-01

Aug-02

Aug-03

Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Source: FARM, Bloomberg

www.GlobalFX.com.au

Or is it a new bull market?

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Fed Credit Balances S&P 500 Fed Credit Balances S&P 500

3,500.00

1600.0 1500.0

2,930.00 2,910.00 2,890.00 2,870.00 2,850.00 2,830.00 2,810.00 2,790.00 2,770.00 2,750.00 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12
Source: FRED

1500.0

3,000.00

1400.0

1450.0

2,500.00

1300.0
1200.0

1400.0

2,000.00

1100.0 1000.0

1350.0

1,500.00

900.0

1,000.00

800.0
700.0

1300.0

500.00 Jul-07
Source: FRED

600.0 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
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1250.0

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Can’t fight the Fed

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• Economic rhetoric and market performance continue to be disconnected • Central Banks continue to drop money in the financial system dampening volatility • Even though observed market volatility feels like it is starting to rise • Risk on Risk off meme is starting to break down • Money is being deployed away from safe havens - EURCHF • Negative rhetoric is giving way to positive Hope • Abe is trying to end the Japanese safe haven currency play once and for all

Is this just New Year Hype?

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EURCHF - Rockets

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• A. Gary Shilling calls the difference between the economic reality and the market, particularly stock market, performance as the GRAND DISCONNECT • Put simply - markets aren’t always reflective of what the economy is doing or will do. • What they are reflective of however is perceptions of what the economy is doing and how it will do. The market moves are then influenced by whether the data is stronger or weaker than the market expected. • Sentiment has shifted and only a shock will shake confidence

The Grand Disconnect

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Citi G10
80.00 60.00 40.00 20.00 0.00 -20.00 -40.00 -60.00 -80.00 -100.00 -120.00 Jan-03 Aug-03 Mar-04 Oct-04 May-05 Dec-05 Source: FARM, Bloomberg

Jul-06

Feb-07 Sep-07 Apr-08 Nov-08 Jun-09

Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12

www.GlobalFX.com.au

Economic Surprise now more important than economic data

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Low Volatility leads to High Volatility

The Setup for 2013 - Minsky

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S&P 500 VIX Vol index
90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Jun-03

Jan-04

Aug-04 Mar-05

Oct-05

May-06 Dec-06

Jul-07

Feb-08

Sep-08

Apr-09

Nov-09

Jun-10

Jan-11

Aug-11

Mar-12

Oct-12

Source: FARM, Bloomberg

www.GlobalFX.com.au

• Because vol is the new credit spread ala pre-GFC when spreads narrowed so much people chased leverage to enhance yield • This sets us up for range breaks even if they are only short term but in time this will add to some big longer term trend reversals • Options desks around globe have recently lost money trying to buy vol that never rallies then time decay gets them before vol spikes. Just after that vol spikes and risk currencies get slammed.

Vol is the new credit

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CBOE EuroCurrency ETF Volatility Index
35.00 70.00

CBOE Gold ETF Volatility Index

30.00

60.00

25.00

50.00

20.00

40.00

15.00

30.00

10.00

20.00

5.00

10.00

0.00 Nov-07 Source: FRED

Jun-08

Jan-09

Aug-09

Mar-10

Oct-10

May-11

Dec-11

Jul-12

0.00 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: FRED

www.GlobalFX.com.au

www.GlobalFX.com.au

Vol is low across the board

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CBOE China ETF Volatility Index
70.00 120.00

CBOE Crude Oil ETF Volatility Index

60.00

100.00

50.00 80.00 40.00 60.00 30.00 40.00 20.00 20.00

10.00

0.00 Mar-11 Source: FRED

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

0.00 May-07

May-08

May-09

May-10

May-11

May-12

www.GlobalFX.com.au

Source: FRED

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Vol is low across the board - II

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• We have said don’t fight the Fed – but there is a big caveat • Do we really believe that the low volatility environment reflects the economic reality or Central Banks goosing stocks • Is the chance for economic and market shocks really lower than at any time since the GFC started? • Are we back where we were in the “Great Moderation” • We know every time the Fed has stopped buying markets have swooned

The question for 2013

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1. 2. 3. 4. 5.

USDJPY to 100 EURUSD to 1.3830+, EURJPY to 139.30 AUDUSD to be strangled between 0.96 and 1.08/10 Gold to at least 1521, Silver to 26.90 Nikkei to head to 14000 if it closes Jan 2013 above current levels. 6. S&P to make its high below 1520 and then turn 7. Options, Options, Options – vol is cheap use it And for those who trade shares I really like Apple lower in 2013

My top 7ish Trades

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• As you can see most of my trades, except the AUDUSD, are break out trades • Break Outs = Big Potential Profits • Why? Low Vol • S&P turn will also benefit from low vol – puts are cheap
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The Specifics

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USD/JPY
130.00

120.00

110.00

100.00

90.00

80.00

70.00 Jan-03 Aug-03 Mar-04 Oct-04 May-05 Dec-05 Source: FARM, Bloomberg

Jul-06

Feb-07 Sep-07 Apr-08 Nov-08 Jun-09

Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12

www.GlobalFX.com.au

USDJPY bear market is over BUT Abe has changed the rules

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108!

The Yen’s fall is a no brainer

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1.4030

So is Euro Yen

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Nikkei JPY Curncy

20,000.00 18,000.00 16,000.00 14,000.00 12,000.00 10,000.00 8,000.00 6,000.00 Jun-03
Source: FARM, Bloomberg

135 125 115 105 95 85 75 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
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14000+

Yen weakness will drag the Nikkei with it

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138.30

As much as I hate it EUR should rally

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Euro Head and Shoulders

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Dollar Index

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A chart
7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00 Dec-83

Dec-85

Dec-87

Dec-89

Dec-91

Dec-93

Dec-95

Dec-97

Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Dec-09

Dec-11

Source: FARM, Bloomberg

www.GlobalFX.com.au

• Where is this market likely to go? • Continue to rally or have a retracement?

What do you think of this market?

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A close up on GOLD

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Silver
60.00

50.00

40.00

30.00

20.00

10.00

0.00 Jan-80

Jan-82

Jan-84

Jan-86

Jan-88

Jan-90

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Source: FARM, Bloomberg

www.GlobalFX.com.au

Silver’s round trip

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Wedging toward resolution 34

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Gold
2,000.00

JPY Curncy

70

1,800.00

80
1,600.00

1,400.00

90

1,200.00

100

1,000.00

110
800.00

600.00

120

400.00 Jun-07

Oct-07

Feb-08 Jun-08

Oct-08

Feb-09 Jun-09

Oct-09

Feb-10 Jun-10

Oct-10

Feb-11 Jun-11

Oct-11

Feb-12 Jun-12

Oct-12

130

Source: FARM, Bloomberg

www.GlobalFX.com.au

The US dollar is a big part of the moves – it should rally in time

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AUDUSD Rangebound

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“When institutions look for alternatives to holding large deposits earning a near zero return, they look not just at domestic assets, but at foreign assets as well.”
RBA Deputy Governor Phil Lowe – November 2012

• THAT’S WHAT IT IS ALL ABOUT Interest rates and return of your money

But AUD should do well

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4-Week Moving Average of Initial Claims S&P 500 (inverted-RHS)

700,000 650,000 600,000 550,000 500,000 450,000 400,000 350,000

600 700 800 900 1000 1100 1200 1300 1400 1500

300,000 1600 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12
Source: FRED

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Improving employment is good for stocks but can it last?

US stocks and employment

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The Risks to the outlook

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• The number one risk is a re-emergence of the Sovereign Debt issues in Europe or concerns over the US fiscal position • Second most obvious risk is an inability of companies to hit top line revenue and then profit numbers with a weak economy • Third risk for traders is that we really are heading into a low vol environment and ranges will be reinforced • And of course China’s glide path might dip over the course of the year.

Risks

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"It's a risky year," World Bank chief economist Kaushik Basu January 15 2013

The enemy of low Vol

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