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Trading The asianei’ pediable aue p. 18

Time-adjusTing inTraday

age ad vlume daa p. 22

rough seas ahead f dlla, Eu? p. 12

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Biih pud devaluai p. 26

economic roadblocks for The yen p. 6

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http://clk.atdmt.com/FXM/go/249857933/direct/01/

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contrIBUtors

qhw s is president of Rosewood

Trading Inc. and a strategist for Bianco Research.

He writes and speaks frequently on a wide

range of economic and financial market issues.

qb r (www.rts-forex.com) is an inter-

national economist with a focus on foreign exchange. She

has worked as a forecaster, trader, and consultant at Citibank

and other financial institutions, and currently publishes two

daily reports on foreign exchange. Rockefeller is the author of

Technical Analysis for Dummies (For Dummies, 2004), 24/7 Trading

Around the Clock, Around the World (John Wiley & Sons, 2000),

The Global Trader (John Wiley & Sons, 2001), and How to Invest

Internationally , published in Japan in 1999. A book tentativelytitled How to Trade FX is in the works. Rockefeller is on the

board of directors of a large European hedge fund.

qd fz is an active trader with

a strong interest in calculus, statistics, and eco-

nomics who has been focusing on the analysis

of forex trading strategies, particularly algorith-

mic trading and the mathematical evaluation of

long-term system profitability. For the past two

years he has published his research and opinions on his blog

“Reviewing Everything Forex,” which also includes reviews

of commercial and free trading systems and general inter-

est articles on forex trading (http://fxreviews.blogspot.com).

Fernandez is a graduate of the National University of Colombia,

where he majored in chemistry, concentrating in computational

chemistry. He can be reached at [email protected].

qcp m started his trading

career on the foreign exchange desk at HSBC in

London. He then moved to SBC (which later

merged to become UBS), as head of technicalanalysis. He has been a regular commentator on

financial television. He also ran a global proprie-

tary trading team and became one of the bank’s most successful

traders. Since then, his company has managed funds for some

of the world’s leading investment banks and financial institu-

tions. He also holds a distinction in the Society of Technical

Analysts Diploma and has been their guest speaker. Further

details are available at www.marneycapital.com.

Augu 2010 • CURRENCY TRADER

et--: Mak Ezk

[email protected]

m t: Mlly Gad

[email protected]

ctt t:

Hwad sim

ctt wt:

Babaa rkefelle, Ma chadle,

chi Pee

et tt

wt: Keha Gee

[email protected]

Pt: Phil Dma

[email protected]

P, :

Bb Dma

[email protected]

c : Mak sege

[email protected]

Vlume 7, Iue 8. cuey tade i publihed mhly by tehIf, I.,161 n. clak s., suie 915, chiag, IL 60601. cpyigh © 2010 tehIf,I. All igh eeved. Ifmai i hi publiai may be ed epdued i ay fm wihu wie pemii fm he publihe.

the ifmai i cuey tade magazie i ieded f eduaialpupe ly. I i mea emmed, pme i ay way imply heeffeivee f ay adig yem, aegy appah. tade ae advied d hei w eeah ad eig deemie he validiy f a adig idea.tadig ad iveig ay a high level f ik. Pa pefmae de guaaee fuue eul.

f v:www.ueyademag.m

A publiai f Aive tade ®

contrIBUtors

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8/8/2019 Ctm 201008

http://slidepdf.com/reader/full/ctm-201008 6/376 Augu 2010 • CURRENCY TRADER

GLoBAL MArKEts

Although a major forex theme over the pastcouple of years has been the strengthening of the U.S. dollar (in late 2008 and again in firsthalf of 2010) vs. most major currencies, the Japanese yen has been a notable exceptionto this trend. From August 2008 to late July2010, dollar/yen pair had fallen from a high of 110.65 to a low of 86.26, a 22-percent decline.The pair dropped a little more than 30 percent

from the June 2007 high of 124.13.Interest in the pair has increased in recentweeks because the dollar/yen rate is nowwithin striking distance of its November 2009low at 84.83, which is the only significant chartpoint standing in the way of a retest of the1995 low of 81.12 (Figure 1). The pair wouldneed to drop another 6 percent or so below the June 2010 low to test that milestone.

Japan, however, represents an unusual (andcomplex) economical and political story, whichadds to the challenge of determining whetherthe November 2009 low is vulnerable and if

the yen will retest the 1995 low later this yearor next.

jp’ tAfter its deep economic pullback in 2009 when it posteda -5.2 percent GDP reading, views are mixed on how 2010will turn out for Japan. Paul Sheard, global chief economistand head of economic research at Nomura, forecasts a 3.4-percent GDP rate for 2010, while economists at Moody’sAnalytics forecast 2.9-percent annual GDP growth.

In contrast, James Pressler, associate international econo-mist at Northern Trust Co. in Chicago, expects Japan toslip back into recession after a couple of positive quarters

of growth, forecasting a negative 1.5 percent GDP readingfor this year.

Today, any discussion of Japan must consider its ongo-ing battle with deflation. What was initially dubbed Japan’s “Lost Decade” of economic dislocation and finan-cial malaise has now stretched to 20 years and counting, asmeasured from the Nikkei stock index top in 1989.

“Japan slipped into deflation in the mid 1990s and hasnever really escaped from it,” Sheard says, concedingonly brief exceptions in 1997 (because of an increase in the

consumption tax) and two quarters in 2008, which experi-

T : a v t 1995?Th ’s bshss vs. th ct s s cg bcs th m

smg tctb Js cmc chgs vvg mt cs.

By CurrenCy Trader STaff

The USD/JPY pair has only the November 2009 low between it and

the 1995 all-time low.

Source: TradeStation

FIGURE 1: IN STRIKING DISTANCE

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GLoBAL MArKEts

Japan’s exports fell sharply, so did the country’s economicgrowth. Pressler notes Japan’s first-quarter 2009 annual-ized GDP reading came in at -15.8 percent.

However, export demand picked up as the global econo-my began to recover, which helped turn Japanese GDP fig-ures positive in late 2009 and early 2010. However, Presslerforecasts quarter-on-quarter GDP to decline by 0.2 percentin the second quarter of 2010 because of the country’s lack of domestic economic firepower.

“Domestic demand has neverreally kicked in,” he says. “We

believe the economy will go back in recession in 2010.”Sheard holds a slightly dif-

ferent view. “Japan is enjoy-ing a cyclical recovery,” hesays. “GDP is expanding.” Buthe adds, “It will probably takemany years to get back to a strongrecovery.”

Deflation will remain the pivotal issue. “Thekey question is, will there be a recovery strongenough and long-lasting enough to get the economy out of deflation?” Sheard says. “I don’t think that’s probable. You

need to see strong domestic demand growth, and we arenot seeing that. Japan is experiencing export-led growth,with demand coming from China. Japan is sitting next tothe fastest growing economy in the world.”

Pt twt Japan’s governmental revolving door — the country is cur-rently on its third Prime Minister in less than three years— has some market watchers wondering if this instabilityhas contributed to the lack of a strong, coordinated policyresponse to deal with the economy.

The current Prime Minister, Naoto Kan, took office in June 2010. He follows Yukio Hatoyama, who was in office

from September 2009 through June 2010. Prior to that, TaroAso held the Prime Minister’s office for about one year aswell.

Some analysts, however, downplay that importance inthe turnover of administrations. “I don’t believe the [politi-cal] instability has been a major contributor to the malaisein recent years,” Bhattacharyya says. “Rather, the politi-cal will was not there to undertake unpopular reforms.Going forward it could be a problem with the twisted diet( Japanese legislative branch) situation.”

Prime Minister Kan is the leader of the Democratic Partyof Japan (DPJ) and previously held the post of FinanceMinster. Kan’s predecessor Hatoyama was also from the

DPJ party, and was the trailblazer who broke the

stronghold of the Liberal Democratic Party (LDP),which had essentially run Japan since WWII.“The LDP has basically been in power

virtually for the entire post-warperiod,” Pressler says. The DPJ, henotes, “was a party on the sidelinesfor the past 60 years. There werea lot of expectations on the DPJ— they made a lot of promises of

total reform.”Expectations are still high, espe-

cially given the current Prime Minister’sprevious post. But it might not be long

before reality sets in.“When [Kan] was Finance Minister, he was putting

pressure on the BOJ to make moves in monetary policy,”Sheard says. “There was hope when he became PrimeMinister that he would take a stronger stance still. Therehas been rhetoric, but we haven’t really seen any realaction.”

Sheard is not optimistic the new regime will take avastly different approach to the deflation situation thathas maintained a stranglehold on the Japanese economy.“Unfortunately, a leopard doesn’t change its spots,” hesays. “It’s unlikely we will get a ‘Eureka’ moment whenpolicymakers suddenly say, ‘We get it.’ More than likely,

Japan will continue to muddle through.”Sheard also points out the lack of political will to hake

up the economy has a very practical facet. Japan is thehome of an aging population, who tend to actually benefitfrom falling prices and, as he points out, “the older peopletend to vote.”

dt , t t t ttIn addition to deflation and ineffective government, Japanis also plagued by a bleak fiscal house. At the end of 2009, Japan’s $9.8 trillion debt represented 190 percent of itsGDP, according to Pressler. Compare that to Eurozone

guidelines, which require a member country’s debt to be

Reated reading

“How Japan ost more than a decade” by Hwad sim ( Active Trader , Augu, 2010).A lk a Japa’ aemp exiae ielf fm i fiaialpblem hugh lw iee ae, ad he impliai f uie wh adped a imila appah duig he 2008-2009 fiaial ii.

8/8/2019 Ctm 201008

http://slidepdf.com/reader/full/ctm-201008 9/37CURRENCY TRADER • Augu 2010

below 60 percent of GDP.Recently, there has been talk of raising the

consumption tax in Japan to help close its fis-cal gap. However, some analysts question thewisdom of such a move right now.

“Raising taxes now would not be a goodthing because it would be contractionary forthe economy,” Sheard says. He doesn’t think anew tax is likely to be implemented any time

soon, with 2014 being a more likely time hori-zon.In Japan’s favor, however, the country’s

debt is primarily held internally — that is, by Japanese consumers and institutions. Thisis a vastly different debt situation than, forexample, the U.S., whose debt is largely held by foreigners.

“I’m not worried from a macro point of view about the level of government debt,”Sheard says. “Japan’s debt is self-financed. Japan has a lot of leeway to get its act togeth-er.”

Comparing Japan’s situation with the recent Greek crisis(a note actually sounded by Kan in a speech soon after hetook office), Nikhilesh Bhattacharyya wrote the followingin a Moody’s Analytics update on July 12: “With no majorreliance on foreign lending and a high stock of householdand corporate savings, Japan’s situation is very differentfrom Greece’s. This was evident in recent weeks, as theyield on a 10-year government bond moved to a seven-year low in Japan, while it hovered near a 11-year high inGreece.”

Also a boon for Japan is its large international reserves— a little more than $1 trillion in June, making these hold-ings the second-largest in the world after China’s, accord-

ing to Pressler. The reserve fund is a function of Japan’srole as a large export economy. “They are selling more thanthey buy, which means they accumulate more in [foreign]currency,” Pressler says.

“If Toyota exports cars to the U.S., the consumer paysfor it in dollars. But those dollars have to be convertedinto yen,” Sheard explains. “There is a constant stream of money coming into Japan that puts upward pressure onthe yen.”

Japan also boasts a goods trade balance or surplus,which in 2009 stood at 28.7 billion, Pressler says. If youadd services and investment income, the trade balancerises to $141.7 billion he says.

y t

So with all this political drama, economic malaise, and lowinterest rates, why has the yen been strengthening vs. theU.S. dollar (Figure 2)? There are a couple of reasons.

First, as Japan runs a current account surplus that putsnatural upward pressure on the yen, as Japanese manufac-turers sell their goods abroad. That surplus is also one of the reasons the yen still attracts “safe-haven” buying dur-ing global economic and financial crises — the same effect(but for different reasons) that pumped up the dollar dur-ing the 2008 meltdown. “When you see a rise in risk aver-sion, you see the yen and Swiss franc strengthen,” saysBrian Dolan, chief currency strategist at Forex.com.

Bhattacharyya highlights another factor supporting the

yen. “Repatriation of funds by Japanese investors due toheightened uncertainty in Europe and the global stock market decline,” he says.

Nonetheless, these factors might not be enough to keepthe currency strong in the longer term.

“I think it will appreciate further in coming months, but begin to depreciate slowly in 2011,” Bhattacharyya says.“Based on recent comments in the media, the BOJ mayintervene if the dollar/yen hits 85.”

In a July 21 currency update, Wells Fargo’s head of cur-rency strategy Nick Bennenbroek wrote: “In our view, theyen is probably very near its peak. Both Japanese and U.S.interest rate expectations are stable at low levels, and the

Some analysts see limited bullish potential for the yen vs. the dollar

over the next several months, but few predict longer-term strength and

many think it’s more likely the USD/JPY pair will be stuck in a trading

range.


FIGURE 2: RECENT YEN ACTION

8/8/2019 Ctm 201008


prospects for a further compression in yields spreads (thatwould contribute to further strength in the yen) appearslimited. Additionally, the threat of a Bank of Japan policyresponse is increasing given the move in the dollar/yenexchange rate. Recent media reports cite persons familiarwith Bank of Japan deliberations suggesting that, shouldthe dollar/yen rate remain near 85 per dollar, the central

bank could respond by expanding or extending its liquid-ity operations, or increasing its regular monthly govern-ment bond purchases.”

Dolan expects a range trade ahead. “Buy it on weaknessunder 85.50/86.50, look to sell in the 88.00/90.00 area.”

However, Dolan also warns: “If we get an ugly move instock markets and the global recovery flounders, we could

see the dollar/yen drop. If markets take aserious turn for the worse, all bets are off, andwe could see a washout below 85.00 amid thesafe-haven aspect [of the yen] and the highcorrelation of selling on yen crosses.”

Sheard also expects mostly range trading

in the next several months. “The BOJ has noappetite for a game-changing shift in policy,”he says. “My forecast is that the yen movessideways into year-end.”

c/The dollar/yen pair might not be the onlysource for guidance on the fate of the yen.Tom Fitzpatrick, chief technical strategist atCitigroup, says he looks at China/yen (theyuan/yen rate) rather than the dollar/yenrate because China has become Japan’s big-gest trading partner.

Fitzpatrick identifies the 12.3 level as the“the line in the sand” for China/yen (Figure3). He adds that equates to roughly 83.3 in thedollar/yen pair — near the November 2009chart point.

“We would have to see dollar/China threeto four percent lower from here before the1995 low in the dollar/yen could come intoplay,” he says. “I’m not convinced it will gothat low.”

y t

Fitzpatrick also notes the high correlation between U.S. two-year Treasury yields andthe dollar/yen of late (Figure 4). “We suspectit will be difficult to see two-year yields moveupward aggressively,” he says, implying lim-ited bullish potential for the yen vs. the dollar.

Overall, Fitzpatrick believes both upsideand downside for dollar/yen is limited. “Itis a high bar for it to go up aggressively,” hesays. “I see it trapped more in a range tradefor months to come, between 83.50 and upinto the low 90s.” ›

One analyst says the difficulty for two-year yields (represented here

inversely by 2-year T-note prices, bottom) to move upward aggressively

implies a cap on yen bullishness.


FIGURE 4: THE YEN AND TWO-YEAR TREASURIES

The 12.3 level in the yuan/yen pair equates to roughly 83.3 in the

dollar/yen pair — approximately the November 2009 chart point.

Source: ADVFN (www.advfn.com)

FIGURE 3: THE YUAN AND THE YEN

10 Augu 2010 • CURRENCY TRADER

GLoBAL MArKEts

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The FX market is suffering from the discontent that ariseswhen standard analysis fails to deliver in the usual ways.We used to expect gold to be inversely correlated with thedollar, but since the Greek sovereign-debt crisis started inDecember 2009, gold has been linked more strongly to theEuro. We used to be able to count on bond vigilantes rant-ing about bloated central-bank balance sheets and too-lowinterest rates feeding inflation, but instead we have disin-flation and a risk of outright deflation.

The old ways of looking at market prices may have beenshallow, but in practice, “stockbroker economics” was

good enough to serve as a guide to successful FX trading.But now we have lost our usual compasses.There are two big themes worrying FX market partici-

pants today. The first is the issue of which central bank is right, the U.S Federal Reserve or the European CentralBank (ECB)? The Fed is primarily worried about persistentlow growth and deflation, with fiscal deficits a secondarypriority. The ECB, however, puts fiscal sustainability firstand charges the Fed with using “oversimplified” analysisto justify prolonging stimulus. This is a serious and prob-ably insoluble issue that will get resolved only by history, but meanwhile it will have a huge effect on the FX market.

The second theme is the strange and unstable relation-ships among asset classes. If global growth is slowing, whyis oil rising? If the U.S. economy (especially the consumer)is deleveraging, why is the stock market rising? How canyou reconcile a decelerating economy that has no inflationwith rising gold prices?

The issue of which central bank is right can’t be decided by theory. The Fed is taking the Keynesian stance that ashortage of demand is behind recessionary conditions, andthe cure is to goose demand. The ECB is taking the stancethat business and economic cycles are influenced (but notdetermined) by monetary policy, and confidence — busi-nesses and consumer — is more important. What business-

es and consumers want is stability and non-inflationaryconditions. ECB chief Jean-Claude Trichet says the time forspending cuts and tax increases is right now. Any addi-tional growth to be had from prolonged stimulus would be fleeting; fiscal consolidation is a necessity to maintainconfidence. Besides, if Europe were to prolong stimulus,it would empty its arsenal of weapons necessary to fightanother recession.

This issue can’t be resolved here and now, but let’s notethe U.S. differs from Europe in a few important ways.On the national spirit front, consider the Coast Guard

unit in charge of the BP oil-spill cleanup in the Gulf hasreceived 120,000 proposals in about 90 days. Only some350 were deemed worthy of further research and fewerthan 50 were actually tested, but 120,000 is a truly impres-sive number. At a guess, no equivalent disaster in Europehas ever inspired such a massive public-spirited volun-tary response, despite Europe having a clearer and morerefined social contract. This is the can-do American spirit,and it’s a wonderful thing.

On the aggregate behavioral economics front, Americansreacted differently from Europeans as the crisis unfolded.Americans pulled back hard while Europeans did so to a

much lesser degree. In the U.S., the financial crisis trig-gered the “new normal,” or consumer deleveraging. Westill have plenty of evidence of unbridled materialism andover-indebtedness (witness the popularity of iPads andKindles), but consumer debt has contracted since the hous-ing crisis hit. Consumer credit was $2.3 trillion in 2005 androse to $2.51 trillion by March 2009 — but it fell to $2.4trillion by May 2010. Also in 2005, the savings rate was-0.5 percent, which was the first negative number sincethe Depression (1932-33), but in 2009 the rate had risen to1.9 percent. These may seem like small changes, but in acountry the size of the U.S., the ripple impact is very bigindeed.

On the Money


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By BarBara roCkefeller

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http://slidepdf.com/reader/full/ctm-201008 13/37CURRENCY TRADER • Augu 2010 13

The housing market reflects the new

prudent mentality, too, with the inven-tory of unsold homes likely rising to anunprecedented 10-month supply thissummer, and prices expected to fall a totalof about 30 percent (to 2006 levels) by theend of the year.

Businesses see this consumer behavior,and even if they are selling industry-to-industry and not directly to the consumer,they are scared to invest in new plantsand equipments. Non-bank corporationsin the U.S. are sitting on $1.8 billion in

surplus cash. Instead of the consumer orcorporate sector taking on debt, it’s thegovernment, with the U.S. deficit at $1.42trillion in 2009, up nearly $1 trillion from2008, and representing more than 12 per-cent of GDP. The government forecasts adecline in the deficit in 2010, but plenty of perfectly sane people project deficits and a rising debt-to-GDP ratio far into the future as economic behavior shifts tothe “new normal.”

Deleveraging applies to banks, too, which are reluctantto lend. According to the Fed, in May 2010 bank lending

contracted 8 percent annually, despite the lowest interestrates in a generation and government programs designedto goose bank lending. As a result of lower activity in everysector, unemployment remains stubbornly high (near 10percent) while inflation can barely be seen (less than 2 per-cent in June 2010).

In contrast, Europeans view deleveraging as anotherpoint on a continuum, not something deserving of thephrase “the new normal.” And central bank policymakerscontinue to speak of standard monetary matters and fear of inflation as though the financial crisis did not have a long-term and lasting deflationary effect. In the UK, for example,

one central bank policymaker has repeatedly drawn head-lines for wanting to hike interest rates because of impend-ing inflationary pressure that must arise from the expan-sion of money supply last year. In contrast, in the U.S. someanalysts fret about the U.S. entering a Japanese-style “lostdecade,” which in Japan has actually been almost threedecades, characterized chiefly by deflation, ultra-low inter-est rates, and giant government deficits.

Instead of debating when the Fed will start its exit plan— raising interest rates and selling off the trove of assetsit acquired during the bailout — we are debating a secondmonetary policy stimulus. In his most recent congressionaltestimony in late July, Fed chief Ben Bernanke said the Fed

stands ready to act if necessary. Unfortunately, in a practi-cal sense, the bank’s toolbox is nearly empty. The Fed fundsrate is already only 0.25 percent, the 2-year note yields onlya little more than 0.5, and the 10-year note is yielding lessthan 3 percent. One of the few tools left to the Fed is directlending to businesses, something the Fed is legally entitled

to do but has not done since the Depression.The U.S. has not been in this economic position since the1930s. We understand many of the policy mistakes madethen, such as trade protectionism and a too-early focus on budget balancing, but that doesn’t mean the Fed or anyother band of economic experts knows what to do next.

T

Now we come to what this means for the dollar. There aretwo possible interpretations. The first is that aside fromChina and some other Asian countries, the developedworld is going to hell in a hand basket. The Baltic Dry

Index, which measures international shipping rates, is oftenused as a proxy for world growth (Figure 1). The index alsoreflects the very slow changes in supply and demand foractual ships, so it falls short as a global growth proxy, butnever mind — it’s dramatic enough. The policy implica-tion of contracting world growth is that every developedcountry needs to devalue its currency as fast as possible toexploit an export boom and take up domestic slack.

This, of course, is literally impossible — everyone can’tdevalue at once. Besides, there are other complications.Trade is already constrained by tariffs and subsidies. Somecountries, notably Japan but also increasingly the U.S., arefunding currencies for the carry trade: borrow in Japan or

2004 2005 2006 2007 2008 2009 2010

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900950

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x10

FIGURE 1: BAlTIC DRY INDEX

The Baltic Dry Index, which measures international shipping rates and is often

used as a proxy for world growth, does not paint a pretty picture.

8/8/2019 Ctm 201008


on tHE MonEY

the U.S. at nearly zero percent and buy, say, a Brazilian orIndonesian note for 5 percent.

The other interpretation is the dollar should be the safehaven for international investors. The U.S. has free, stable,liquid, and fairly honest and transparent markets withplenty of variety. It’s a no-brainer — sacrifice yield forcapital preservation.

In the past few years, the dollar has served in both thesefunctions, carry-trade funding currency and safe haven,sometimes both on the same day. The tension is intolerableand the volatility is both confusing and destructive.

T e t

Set against the dollar is the Euro. The EMU, facing a crisisof confidence in the viability of its banks as well as its sov-ereign debt, cobbled together a bailout plan for both banksand sovereigns that leans heavily on the InternationalMonetary Fund (IMF). It will issue notes from a joint entityto which every member will pledge repayment funds, andwill seek a triple-A rating from the ratings agencies. It isstress-testing 91 banks, of which only a handful will failand require recapitalization, whether by the private marketor governments.

Greece will probably default, but that day keeps gettingpushed out in time. Meanwhile, several countries underthe microscope (including Greece, Portugal, Ireland andSpain) were able to sell notes into the private market in June and July. Bid-to-offer demand was high, so we can’tpoint to behind-the-scenes arm-twisting. The hunger foryield was authentic.

That’s the key — authentic hunger. Investors wouldrather have a iffy 26-week note from Portugal at 1.947 per-cent than a rock-solid six-month note from U.S. at 0.18 per-cent. Who wouldn’t rather have nearly $10,000 in interestearnings on $1 million than less than $1000? It’s raw rela-tive return on a decent bet — that Portugal won’t defaulton anything in six months, and even if it does default onthe 10-year note, the six-month note won’t be affected or

won’t lose as much as the 1.8-percent breakeven. Until theU.S. is back in the game of competitive interest rates, the

underlying tone for the dollar has to be a weak one.Until a European sovereign really does default, that is.

Then the dollar becomes the safe haven, but even then thedollar-based investor making the bet on Portugal mightget bailed out by the rest of the EMU. And if the Euro hastrended upward during the holding period, a dollar-basedinvestor could still make a net gain on the currency thatmore than offsets the temporary loss of yield. For some-one who intends to hold to maturity, it’s a very good betindeed. No doubt this is part of the reasoning of Asiansovereigns, including China, that have added Europeansovereign debt (including some of the PIIGS) since the

beginning of the year.

c’ p p

China bought as much as €400 million of 10-year Spanish bonds in early July, having bid for as much as €1 billion.Asian investors made up 14 percent of the Spanish issue(compared to 5 percent in January), and China accountsfor about half of demand from Asian investors. Of China’srecord $2.4543 trillion in reserves at the end of June,approximately 20 percent are thought to be Euro-denomi-nated.

That Asian sovereigns such as China are buying

European bonds during a sovereign bond crisis sends quite amessage — China has confidence Europe will bail out itsfellow sovereigns — not a sure thing, or the return would be lower, but it’s a good bet. It also means Asian buyershave a big incentive to keep the Euro from falling too far, if not actively nudging it upward. While Western traders arefocused on potential failure and selling Euro rallies, Asiansovereigns are busy buying Euro dips. On at least oneoccasion, European multinational corporations, perhapsprodded by the ECB, primed the pump. (Sometimes Asiansovereigns are selling Euro rallies, too. Does this meanthey are trying to “manage” the exchange rate? Possibly.)

Meanwhile, the very same Asian sovereigns hold greateramounts of dollar-denominated U.S. debt. Why wouldthey seek to support the Euro and not the dollar? Theanswer probably lies in the mindset toward each invest-ment. Chinese officials have said they are “stuck” with thedollar. It’s the only currency that has markets big enoughand liquid enough to serve its purposes. Investing inEuropean sovereign paper, however, can be done if theraw return is worth it. It’s a bit like keeping your retire-ment savings in a CD but being willing to allocate “playmoney” to equities or Las Vegas. Behavioral finance willsomeday (soon) give us loftier terms to name these differ-ent behaviors, but even without academic names, we know

While Wesern raders are

ocused on poenial European

soverein ailure and sellin Euro

rallies, Asian sovereins are usy

uyin Euro dips.

http://www.imf.org/

http://www.imf.org/

http://www.imf.org/

http://www.imf.org/

8/8/2019 Ctm 201008


these behaviors exist.At what point might Asian sovereigns

throw in the towel? Somewhere in the back of their heads, there is a loss number that reaches the intolerable. Figure 2projects the year-end 2010 range for theEuro/dollar pair (EUR/USD) at $1.0963on the downside and $1.4467 on theupside. The average price year-to-dateis about 1.3550. Depending on the entrylevel at the time of the purchase of a sov-ereign bond, a rate of, say, 1.2500 may be

tolerable and a rate of 1.4500 would bevery nice. But we can’t say 1.1000 would be fatal — it’s still inside the projectedrange and thus within the realm of theprobable.

We don’t know what charts Asian sov-ereigns look at, but we can be sure theylook at charts. That they were buyingEuropean sovereign debt during a sover-eign debt crisis and during a pronouncedEuro downtrend says something abouttheir long-term mentality. It’s also pos-

sible there are other trade-offs behind thescenes, such as preferential trade deals orsome foreign policy benefit. Perhaps justshowing some independence to the U.S.,perceived as a bully, is a goal.

We mustn’t neglect the identity of Euro bulls during a Euro downtrend.

On the intermarket front, confusionreigns. On a day-to-day basis stock mar-ket gyrations are tending to lead oil andcommodities, although the S&P manageda nearly 62-percent retracement of its cri-

sis-induced losses, while oil regained only50 percent, and the CRB index not quite38 percent (Figure 3). The relationship ispretty weak on these grounds. If oil is a big determining factor for the dollar andoil is being led by equities, we should geta high correlation of the dollar index andthe S&P 500 (Figure 4). Can you see it?It appears as if the S&P led the dollar upin 2007-2008, albeit with a six-month lag,and again in 2009-2010 with a four-monthlag. On the whole, though, to consider theS&P a leading indicator for the dollar is

7 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Euro (1.29290, 1.30280, 1.27320, 1.28860, -0.00370)

FIGURE 2: EURO/DOllAR WEEKlY WITH 52-WEEK MOvING AvG.

Asian nations that have been buying European debt seem prepared to

weather a fairly significant decline in the already depressed Euro.

2004 2005 2006 2007 2008 2009 2010

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2.410, 266.860, 261.530, 266.860, +5.32999), S&P 500 (1,072.14, 1,097.50, 1,072.14, 1,093.67, +24.0801), LIGHT CRUDE Continuous (76.4300, 79.4200, 76.1600, 79.30

FIGURE 3: CRB INDEX, OIl, AND S&P 500

Stock-market gyrations are tending to lead oil (green) and commodities

(orange), although the S&P’s rebound (black) from its crisis-induced losses

has been much more substantial than that of oil or the CRB commodity index.

8/8/2019 Ctm 201008


on tHE MonEY


pretty risky.Conventional wisdom holds that the stock market leads

the economy — i.e., that it foreshadows recession and

recovery. The Baltic Dry Index plays a similar role. Figure 5

shows compares the two. There are huge discrepancies, asin 1998-2000 when stocks rallied but the index fell, and in2004-2005, when stocks did it again but the index crashed

— twice. The correlation looks stronger in more recenttimes, although in 2007 stocks fell a goodseven months ahead of the Baltic DryIndex, and in 2009-2010 the stock indexlagged the Baltic. How can both embodyvalid economic forecasts? They can’t, andthey don’t.

Instead of looking for the easy way toevaluate FX market trends with a quick glance at some other security, we have todo the work of teasing out exactly whois buying and who is selling, whether

their actions make sense given the lawsof probability, and following the one surething in finance — that a higher returnalmost always wins, except under excep-tional circumstances.

m t t p w

This is not to say the big Euro downtrendwill end any time soon. We do haveexceptional circumstances. The “new nor-mal” in the U.S. bodes ill for U.S. growth,oil prices, stock prices, and the prospect of Treasury yields rising any time soon. TheU.S. is the world’s biggest economy andevents in the U.S. have a domino effectworldwide. The safe-haven motivationto hold dollars is not going away. But theEuro downtrend is at great risk of endingif additional market participants buy thestory the Asian sovereigns are evidently buying — that fiscal consolidation andinflation control will restore confidenceand promote both growth and a higherEuro.

We might even say the European

policy stance contains a currency policyand the U.S. policy stance does not, andsome traders will be attracted to thataspect alone. You might think this leadsto stalemate and a prolonged periodof range-trading, but it’s more likely tolead to alternating upside and downside breakouts that will be very confusing anddifficult to trade, implying that positionsshould be reduced. And decreased vol-ume means increased volatility.›

For information on the author, see p. 4.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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BALTIC DRY INDEX (1,781.00, 1,781.00, 1,781.00, 1,781.00, +20.0000), S&P 500 (1,072.14, 1,097.50, 1,072.14, 1,093.67, +24.0801)

FIGURE 5: BAlTIC DRY INDEX vS. S&P 500

There are huge discrepancies between the S&P 500 (red) and the Baltic Dry

Index (black).

A S O N D 2006 A M J J A S O N D 2007M A M J J A S O N D 2008M A M J J A S O N D 2009M A M J J A S O N D 2010M A M J J

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94Dollar Index (82.7120, 83.4510, 82.5610, 83.3930, +0.64600), S&P 500 (1,072.14, 1,097.50, 1,072.14, 1,093.67, +24.0801)

FIGURE 4: DOllAR INDEX vS. S&P 500

Overall, there is little evidence the S&P (red) functions as a leading indicator

for the dollar (black).

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8/8/2019 Ctm 201008

http://slidepdf.com/reader/full/ctm-201008 18/3718 Mh 2010 • CURRENCY TRADER18 Augu 2010 • CURRENCY TRADER

Reliable patterns are difficult to come by in the markets,and capitalizing on them in real trading can be a challengein itself. Also, the first and most-obvious application of atrading idea might not turn out to be the best.

“Taking advantage of the Asian trading session”(Currency Trader, June, 2010) showed the average high-low range and open-to-close moves of three currencypairs during the Asian forex session were highly stablewhen adjusted for volatility. Although these price movesvaried significantly over time when measured on an abso-lute-pip basis, they proved to be quite consistently sizedwhen normalized by the 14-day average true range (ATR).

“Adjusting for volatility” explains how the Asian-sessionprice action was normalized.

Table 1 compares the Asian session’s absolute high-low ranges and open-to-close moves (top) to the ATR-

adjusted values (bottom). The standard deviations of theATR-adjusted values of are much lower than the absolutefigures. For example, the standard deviations for the vola-tility adjusted ranges represent only 6 to 7 percent of theaverage-range values vs. approximately 45 to 50 percentfor the comparable absolute-pip ranges. Also, the ATR-adjusted averages and standard deviations for the rangesand open-to-close moves were almost identical for allthree currency pairs, indicating that taking volatility intoaccount makes it possible to identify a fundamental aspectof market behavior that provides a more reliable tool forpredicting Asian-session currency movement.

This information could be used to exploit the predict-ability of the Asian-session range. For example, if theEUR/ USD reaches its highest ATR-adjusted range read-ing, you might enter a trade that targets a closing price based on the average open-to-close move.

a ptt,

European trade a b tt th as sss sts t th e sss.

By daniel fernandez

trADInG strAtEGIEstrADInG strAtEGIEs

TABlE 1: IDENTIFYING A CONSISTENTCHARACTERISTIC

Absoute pips:

Ag.range (StD) Ag.

open-cose (StD)

EUr/UsD 60 28 30 15EUr/cHF 38 17 17 9

EUr/GBP 28 1 12 8

As percentage of 14-day ATR:

EUr/UsD 5 3 22 3

EUr/cHF 8 3 21 3

EUr/GBP 5 3 19 2

The currency pairs’ moves were quite inconsistent

when measured on an absolute basis (top), but they

proved to be much more stable when adjusted for

volatility (bottom).

Adjusting for oatiity

the pe f vlailiy adjuig he Aia-eipie ai i he aile “takig advaage f he Aiaadig ei” ied f dividig he high-lw agead pe--le mve by he aveage ue age, afllw:

1. calulae he 1-day Atr a he begiig f eahAia adig ei (i.e., eah day).

2. the age ad ablue mveme value f eahAia ei ae alulaed i pip.

3. the value fm ep 2 ae divided by he 1-day Atralulaed a he begiig f eah epdig e-i.

I he igial aalyi, all he Atr-adjued value fmep 3 wee aveaged f give ix-mh peid allw mpai bewee diffee ime peid.

8/8/2019 Ctm 201008

http://slidepdf.com/reader/full/ctm-201008 19/37CURRENCY TRADER•August2010 19

The analysis that follows illustrates a trading approachdeveloped around this information that tested profitably both in the original 2006-2010 period and in an additionalsix-year period in the Euro/U.S. dollar pair (EUR/USD).However, it adds an important change: It operates outsidethe Asian forex trading session

Challenges of the Asian session

The most logical application for a trading system based on predictable range and open-close moves for the Asian ses-sion would be to enter trades during that period, attempt-ing to capture either the predicted average range or close,as previously described. Unfortunately, the low volatilityand liquidity of the Asian session make it difficult to accu-rately test such an approach, and suggest it might not bepractical in real trading.

First, the profit-target values would likely be very low because the strategy would be attempting to capturemoves in the neighborhood of 10 to 20 percent of the 14-day ATR. These amounts can be as small as 4 to 10 pips

during (typical) non-volatile market conditions.Second, the bid-ask spread tends to widen during the

Asian session. This, in turn, makes testing less accurate because the variations within the spread can be signifi-cant. Low liquidity also makes slippage, which can only be estimated in a test, a much more important factor.

Finally, the Asian session’s low liquidity also increasesthe significance of “broker dependency” — i.e., the dif-ferences between the price quotes/feeds of different forex brokers. A strategy might test very differently on one broker’s data than another.

Together, these factors decrease simulation accuracy

and can lead to significant overestimations of profitabil-ity. The challenge is to exploit an inefficiency based onthe Asian session without trading within this time frame.Such a system would “look back” at the Asian session and decide a certain course of action because the predictabilityof the Asian session sets up a trade with a positive statisti-cal expectation in the subsequent time period.

Strategy: Use the Asian session,

but trade outside of it

In this case, when an “average” Asian session occurs,there appears to be a significant tendency for price to

subsequently trend (during the European session) in theopposite direction of the Asian session. This is especiallytrue when the move from the previous Asian session’sclose and the current Asian session’s close is in the samedirection as the current Asian intra-session movement.

These tendencies lay the foundation for a system thatuses the definition of an average Asian session — identi-fied in the previous analysis — to profit from the subse-quent moves during the forex trading day. The systementers a long trade when:

1. The Asian session’s net movement (open – close) isnegative;

The above information has been approved and/or communicated by Deutsche Bank AG Londonin accordance with appropriate local legislation and regulation. Deutsche Bank AG London isregulated for the conduct of investment business in the UK by the Financial Services AuthorityTrading in margin foreign exchange can be risky. The use of leverage in foreign exchange tradin

can lead to large losses as well as large gains. Markets referred to in this publication can be higvolatile. For general information regarding the nature and risks of the proposed transaction andtypes of financial instruments please go to www.globalmarkets.db.com/riskdisclosures. Thisproduct may not be appropriate for all investors. Before entering into this product you shouldtake steps to ensure that you understand and have made an independent assessment of theappropriateness of the product.

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8/8/2019 Ctm 201008


2. The close of today’s Asian ses-sion is below the close of yester-day’s Asian session;

3. The Asian session’s net move-ment is between 20 and 30 per-cent of the 14-day ATR.

Similarly, short trades areentered when:

1. The Asian session’s net move-ment is positive;

2. The close of today’s Asiansession is above the close of yesterday’s Asian session;

3. The Asian session’s net move-ment is between 20 and 30 per-cent of the 14-day ATR.

The strategy uses a profit targetof 1.5 times the 14-day ATR; thestop-loss is half the 14-day ATR.Because a strong move is expectedduring the next trading session, thesystem closes all open positionsafter 10 hours. (All the trade criteria

are based on visual observations andno optimizations were performed.)Figure 1 shows a sample trade.

Poition izing

To equalize risk across trades, tradesize is adjusted according to account balance and volatility. Approximately1.5 percent of the account equityis risked per position, assuming a100,000-unit standard forex lot size.The formula is:

tade ize = 0.003 * AccouBalace (i UsD) / Atr (i pip)

For example, if the 14-day ATR is80 pips, the account size is $100,000,and a long trade is triggered at 1.4250,the trade parameters would be:

lot size = (0.003*100,000)/80 =3.75 lo, o $375,000;

Stop-oss = (1.250 – 0.0080)*0.5 = 1.210 (0-pip op lo, half of heAtr);

Profit target = (1.250 +0.0080)*1.5 = 1.370 (120-pip pofi age, 1.5 imehe Atr)

The system was tested onhourly EUR/USD data from Jan. 1, 2000 to Jan 1, 2010,assessing trading costs of two pips per position.

sytem performance

Overall the system producedgood results, reaching a newequity high every year from2000 to 2009, as shown inFigure 2. One of the mostimportant things about thesystem is that even thoughit was built on assumptionstaken from 2006-2010 data,it was also profitable dur-ing the previous six years,suggesting the trade prem-ise, based on the volatility


trADInG strAtEGIEs

TABlE 2: PERFORMANCESUMMARY

Test period: 1/12000-1/10/2000

Iiial accou equiy $100,000

ne pofi $122,870

ne pofi 122.87%

Pofi faco 1.56

no. of ade 328

Wi % 55%

Pofi/lo aio 1.3Aual compoud pofi 8.3%

Maximum dawdow 13.83%

The system had a modest winning

percentage, but winning trades were

large enough, and losers small enough,

to generate a significant profit over time.

FIGURE 1: A SHORT TRADE

Trades are entered based on the current Asian session’s open-to-close move as a

percentage of the 14-day ATR, the direction of the market since the previous day’s Asian

close, and the direction of the market during the current Asian session.

Source: Metatrader

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8/8/2019 Ctm 201008


trADInG strAtEGIEs

“Exploiting currencies with time and volume” (Currency

Trader , December 2009) discussed the commonality of cur-rency markets — how the actual volume throughout a 24-

hour trading day correlates significantly to average hourly

ranges, and most importantly, how those patterns are very

predictable, exhibiting a significant degree of “stationarity”

(Figure 1).

Although identifying the optimal times of day to trade is

extremely valuable, real-time analysis of a market is poten-

tially invaluable. Unfortunately, because the forex market

is so fragmented it is almost impossible to get an accurate

real-time measure of all the volume occurring at any given

moment. However, historical analysis shows there is avery high correlation between the number of price updates

(“tick updates”) per unit of time and the volume traded

per unit of time.

Tick updates are easily quantified and can be plotted

in real time, and because many forex data vendors nowcapture tick updates, currency volume can be plotted in

real time by using tick updates as a proxy. Although most

tick update databases date back only to the recent past

(making any statistically meaningful analysis difficult),

Zurich-based Olsen Data (www.olsendata.com) has been

capturing tick updates since 1986, making their database

an invaluable research tool.

The two indicators that will be described here — the

Marney Volume Indicator (MVI) and the Marney Range

Indicator (MRI) — are designed to determine the unique

volume and range profiles of individual currency mar-kets in real time. They will be illustrated using this data,

imported into the MultiCharts analysis platform.

Providing context

for volume and range

The MVI and MRI time-adjust aver-

age volume and true range data,

respectively, throughout the day. The

indicators take each hour of the day

(for example, 8:00 to 9:00 a.m.) and

then calculate the average volume ortrue range for that hour over the past

n days. This gives you a measurement

of whether the current volume or

range is larger or smaller than is typi-

cal for that specific time period.

The MVI and MRI are shown in the

following charts using hourly price

data and tick-volume proxy updates,

but they can also be plotted using

higher-frequency data or actual vol-

ume, if available.

Time-adjustedage ad volume

B djustg td volum d g dt to th tm of d, th “M idctos”

hl hghlght mkt’s uqu chctstcs d td ootuts.

By CaSpar Marney

FIGURE 1: vOlUME (%) ANAlYSIS BY CURRENCY PAIR

Despite the wide range of currency pairs and native trading sessions, volume

profiles are very similar.


http://www.olsendata.com/

http://www.olsendata.com/

8/8/2019 Ctm 201008


FIGURE 2: vOlUME AND RANGE vS. MvI AND MRI IN AUD/JPY

The top panel shows 24-period SMAs of the hourly range and volume data.

The bottom half shows the 24-period MVI and MRI. The AUD/JPY pair has the

expected volume and range peaks during the Asian sessions, but its largest hourly ranges and volumes occur during the London afternoon session.

FIGURE 3: MvI AND MRI APPlIED TO USD/CAD

USD/CAD shows little activity during the Asian session, displaying a much

more significant volume increase when U.S. and Canadian markets open.

CURRENCY TRADER • Augu 2010 23

Figure 2 compares 24-period simple

moving averages (SMAs) of the

hourly range and volume data (top)

to 24-period MVI and MRI (bottom)

in the Australian dollar/Japanese

yen (AUD/JPY) pair. The histogram

bars represent the hourly volumes

and ranges, with the blue bars repre-senting up hours and red bars down

hours. The MVI and MRI (with the

range expressed as a percent of the

closing price) illustrate how stable the

relationship between time, volume

and range are over time. The indica-

tors show the three peaks in both

range and volume that coincide with

the opening of the Asian, European

and London and, finally, the U.S.

forex sessions. The yellow, verticaldashed lines mark session breaks at

10 p.m. (the New York close); both

indicators tend to peak occur around

3 p.m. London time.

Because the indicators are plot-

ted in real-time they allow you to

see whether the current volume

and range are above or below their

expected levels at any given time of

day. The indicators can be used sev-

eral ways to exploit a market’s unique“pulse.”

The AUD/JPY pair in Figure 2, for

example, has pronounced peaks in

volume and range during the Asian

sessions, which is to be expected.

Perhaps less intuitively, the pair dis-

plays its largest ranges and volumes

during the London afternoon ses-

sion, even though neither currency is

native to that time period.

In contrast, in Figure 3 the U.S. dol-

8/8/2019 Ctm 201008


on tHE MonEY

lar/Canadian dollar (USDCAD) pair shows little activity

during the Asian session, displaying a much more signifi-

cant increase in volume when the U.S. and Canadian mar-

kets open.

Click here to download code for the MVI and MRI, and

for information about analysis programs that include the

indicators.

T wt t t

“Exploiting currencies with time and vol-

ume” showed how the largest ranges andvolumes occurred in the London after-

noon session, and how that characteristic

could be profitably exploited by trading in

the direction of a new high or low for the

day. However, if we were to look at trades

only during periods of above-average vol-

ume and range, there would hardly ever

be any trades executed outside of those

hours. For example, a significant move

accompanied by above-average volume

and range using the MVI and MRI at,say, 2 a.m. would unlikely indicate above

average volume and range if only an SMA

was used.

Time-adjusting the range and volume

makes it possible to determine whether

these are above average for any given

time of day. Let’s define a simple trading

strategy to test whether this theory has

value in trading:

If both range and volume are above thecurrent MVI and MRI levels:

1. buy if the market makes a new 24-

hour high;

2. sell if the market makes a new 24-

hour low.

A trailing stop was used to exit trades:

All long trades were exited when price

made a 24-hour low, and all short trades

were exited when price made a 24-hour

high. Figure 4 shows several trade signals

FIGURE 4: TRADE SIGNAlS

Trades are entered when volume and range are above the 24-day MVI and

MRI, and price breaks out above or below the 24-hour high/low.


FIGURE 5: FIlTERING TRADES

The MVI and MRI (bottom) version of the system traded less frequently than

the SMA version (top), avoiding many losing trades.

TABlE 1: TEST SETTINGS

Idia lk-bak peid: 2 daycuey pai: AUD/JPYte peid: Mah 2000-Mah 2010time fame: HulyIiial au ize: ¥62,000,000tade ize: 100,000tadig : 0.02 pi pe ud u

http://www.currencytradermag.com/index.php/c/Article_Follow-ups/d/Time-adjusted_range_and_volume_links_and_code



8/8/2019 Ctm 201008


in the AUD/JPY pair; Table 1 lists the test settings.

Almost any breakout during the London afternoon ses-

sion will trigger a signal when using standard SMAs of

range and volume as triggers, since that period usually has

above-average ranges and volumes. Figure 5 shows how

the MVI and MRI (bottom) avoided many losing trades

triggered by using the standard SMAs (top). Conversely,

hardly any breakouts during the Asian session would

trigger trade entries when using simple moving averages

because that session tends to have much lower than aver-

age ranges and volumes. Again, the MVI and MRI ensure

trade entries are triggered only if the volume and range are

above average for the specific time of day. Figure 6 com-

pares the strategy’s equity curve using SMAs (top) vs. the

MVI and MRI (bottom), while Table 2 compares some keyperformance statistics.

If the presence of above-average ranges and volumes

for a given time of day are significant, it is worthwhile to

consider if performance is related to the degree to which a

reading exceeds the average. Figure 7 shows the results of

taking signals when the range and volume exceed the MVI

and MRI by a certain multiple (from 1 to 2, tested in incre-

ments of 0.1). The higher the multiple, the higher the profit

factor (gross profit/gross loss).

uing th initor involm n rng nlyi

The MVI and MRI are also useful for discretionary trad-

ing. There is already a huge body of work on volume and

range analysis. To summarize though, there are four main

principles:

1. Bullish volume: Increasing volume in an uptrend.

2. Bearish volume: Increasing volume in a downtrend.

3. Bullish range: Increasing range in an uptrend.

4. Bearish range: Increasing range in a downtrend.

Combinations of these signals can be equally significant.

For example, a market making a new high on decreasing

volume or range can indicate the move will not be sus-

tained.

Accordingly, knowing what the likely ranges and vol-

umes are going to be by applying the MVI and MRI can

provide an additional edge. You can measure not only

whether the volume and range are higher than average,

but whether they are higher than average for a specific

time of day, and whether they are likely to increase or

decrease.

confirming sue n Pead

The MVI and MRI also complement existing research on

the Standardized Unexpected Earnings (SUE) effect: If a

company’s earnings are within expectations by a small

CURRENCY TRADER • August 2010 25

FIGURE 6: EQUITY CURvES

The SMA version of the strategy (top) had a more volatile

(and less profitable) equity curve than the version using

the MVI and MRI (bottom).

TABlE 2: PERFORMANCE COMPARISON

MvI/MRI SMA

no. of tades: 813 1333Wiig pecetage: 3.17% 37.28Max. dawdow: 15.96% 16.82%net pofit: ¥5,555,980 ¥,591,880retu o capital: 89.61% 7.06%Pofit facto: 1.23 1.19Aveage wiig tade: ¥ 6,83 ¥ 3,5

The MVI/MRI strategy was more profitable (on

fewer trades), and had a higher winning percentageand profit factor.

cotiued o p. 37

8/8/2019 Ctm 201008


trADInG strAtEGIEsADVAncED strAtEGIEs

no ma i a ilad,but the UK is

attempts t sve ecmc es th excess me, sg gvemet

ebt, tfc ek cuec thete the efe f the gb

cmmut ess th the hgh tffs f the Get depess.

By Howard l. SiMonS

One of the advantages of being an island is no matter how badly you mismanage your affairs you can be viewed asa natural geopolitical entity. This has worked well for the Japanese in recent decades and seems to be working forthe United Kingdom now. We will ignore for the sake of argument divided islands such as New Guinea, Hispaniolaand Ireland.

Both the British and the Japanese have been pushingtheir luck with economic policies in recent years, particu-

larly their dual attempts to paper over collapsed financialsectors with low interest rates, quantitative easing, and

ever-expanding public sectors. The very significant differ-ence that the UK has remained a center for global financialmarkets while Japan has retained its famous insularity hasnot mattered on the policy front.

A second difference lies in the trade responses to neigh- boring continental giants. Viewed through a long historicallens, Japan never really owned the slot of the major Asianeconomic power — it simply rented it while China spentthe 20th century in various stages of unhappiness. High-

cost Japan really cannot compete with low-cost China,regardless of any level of the yen relative to the yuan, andthey wisely have chosen not to playthis game even though they fear yenstrength.

The British, on the other hand, havespoken openly about devaluing thepound competitively against the Euro; by late 2009 Bank of England (BOE)Governor Mervyn King was so bereft of actual intellectual ideas he decided topursue this course. (Perhaps he shouldhave been called “Helicopter Merv.”)

The whole affair quickly turned into atragicomic race to the bottom in 2010.

On the surface, this is lunacy regard-less of the ultimate disposition of theEuro. The Eurozone is the UK’s majortrading partner and major source of imported consumer goods. Each down-tick in the pound makes British con-sumers poorer by weakening the GBP’sclaim on imported goods and services.Let’s take a look at this policy of delib-erate self-impoverishment and see howwell it has served the British.

The gap between the forward rate and the three-month rate six months out

shot higher during the 2008 financial crisis and peaked during the March 2009

decision by the Bank of England to engage in quantitative easing. By April 2010

the gap had stopped shrinking and currently rests at a level far above any prior

to 2009.

FIGURE 1: UK FORWARD RATES FEll TO STIll-HIGH lEvElS

8/8/2019 Ctm 201008


uexpetedly lowiteret rateFirst, let’s map the shock of Britishmonetary policy in 2009. We can dothis by comparing the forward rate between six and nine months (the rateat which we can lock in borrowing for

three months starting six months fromnow) to the actual three-month rate sixmonths later (represented by the three-month GBP LIBOR rate). Even thoughthe role of a market is to measure andnot to forecast, the forward rate doestell us where the market’s traded expec-tations were. Figure 1 shows the gap between the forward rate and the three-month rate led six months shot higherduring the financial crisis of 2008 andreached a peak during the March 2009decision by the BOE to ease quantita-tively. The gap stopped shrinking byApril 2010 and currently rests at levelsfar greater than anything prior to 2009.

The rational expectations hypoth-esis says only unexpected changes inmonetary policy can impact output andemployment, while expected changesaffect only forward inflation. In addi-tion, the first surprise is the only realsurprise. If the same move blindsidesthe market a second time, that’s themarket’s fault. Thus, we can interpret

the narrowing gap between expectedand actual three-month rates in late2009 and early 2010 as diminishingreturns on monetary policy. We can dubit the “Cole Porter” market in honor of the composer’s following ditty:

In olden days a glimpse of stockingwas looked on as something shockingNow heaven knowsanything goes.

crrey impat

Now let’s map the currency cross-rateexpressed as EUR per GBP (EUR/GBP)against the relative steepness of the twomoney market curves. These will bemeasured, as usual, by the forward rate ratios from six tonine months (FRR6,9). The more this ratio exceeds 1.00, thesteeper the yield curve.

As the British money machine cranked into high gear in2008, the GBP FRR6,9 kept gaining on its EUR counterpart(Figure 2). This was all the more remarkable consideringthe EUR FRR6,9 was itself moving to record steepness.Restated, the European Central Bank was out of control, but the BOE was more out of control. Sobriety is a vastly

overrated virtue for central bankers. Unsurprisingly, theGBP kept weakening against the EUR. The opposite onlyoccurred on a much smaller scale when the GBP FRR6,9 started to flatten relative to its European counterpart in2010. It’s as if the rest of the world really did not want tohave much to do with either currency.

This sad truth is visible when we compare and contrastthis with an identical chart for the British and Americanmarkets (Figure 3). Here, too, the British FRR6,9 dwarfedthe American FRR

6,9

all through the 2008-2009 period, and

FIGURE 2: INTEREST RATE EXPECTATIONS, GBP AND EUR

As the British money machine cranked into high gear in 2008, the GBP FRR 6,9

kept gaining on its EUR counterpart and the GBP kept weakening against the

EUR.

The British FRR 6,9 dwarfed the American FRR 6,9 throughout the 2008-2009

period as the American FRR 6,9 kept making new steepness records, but the

GBP never weakened as much against the dollar as it did against the Euro.

Since U.S. monetary policy was virtually unchanged throughout the 2009-2010

period in question, this was not a case of the dollar getting stronger so much asboth the pound and the Euro getting weaker.

FIGURE 3: INTEREST RATE EXPECTATIONS, USD AND GBP

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8/8/2019 Ctm 201008


comparison. Here the UK market out-performed the U.S. market into 2008 asthe GBP gained on the USD (Figure 7).The relationship subsequently reversed.It is clear, though, the British marketdid not suffer vis-à-vis the Americanmarket during the long period of pound strength, nor did it gain on a rel-ative basis once the pound weakened.If anything, the 2009-2010 relationship

appears more pro-cyclical: A strongerGBP leads to British outperformanceand vice-versa. Those who argue other-wise and accept the protectionist argu-ment that a weaker currency leads to anincrease in the expected profitability of a nation’s businesses need to considerthe actual data.

bad eighorFinally, we need to consider competi-tive devaluation in the historic contextof 1930s-style “beggar-thy-neigh- bor” protectionism. The attempts by Japan, China, the U.S., the UK andSwitzerland to solve financial crises andeconomic downturns by papering theproblems over with excess money, ris-ing government debt and an artificiallyweak currency threaten the welfare of the global community no less than didthe high tariffs of the Great Depression.Anyone who thinks they have a magic bullet in making their exports cheapermust answer the question, “Yes, but

to whom are you going to export?”As John Donne noted, “No man is anIsland, entire of itself; every man ina piece of the Continent, a part of themain…”

No country in an interdependentworld is an island, either, and it is hightime they recognize this and end exper-iments such as the recent and failedBritish attempt at competitive devalua-tion.›For information on the author, see p. 4.

Once European legacy currencies were no longer being sold for dollars in mid-

2002 (green line), the UK stock market underperformed its Eurozone counterpart

until the future of the Euro came into question in early 2010. No forward-looking

competitive advantage for the UK vis-à-vis the Eurozone is visible in the data.

FIGURE 6: UK/EUROzONE PERFORMANCE lINKED TO GBP/EUR

The UK market outperformed the U.S. market into 2008 as the GBP gained

on the USD. The relationship reversed thereafter. However, the British market

did not suffer vis-à-vis the American market during the long period of pound

strength, nor did it gain on a relative basis once the pound weakened.

FIGURE 7: UK/U.S. PERFORMANCE lINKED TO GBP/USD RATE

8/8/2019 Ctm 201008


cUrrEncY FUtUrEs snAPsHot as of 7/28/10


leGend:

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Th mt s noT csttt t sgs. it s t t v b sss ch mt’s qt, ct, vs mmtm vtt. S th

g xts th t s. nt: avg vm tst t cs bth t s-b-s ctc ctcts (wh cb).

BarcayHedge Rankings for June 2010

Top 10 currency traders managing more than $10 miion

as of 6/30/10, ranked by June 2010 return

Trading Adisor June

Return2010 YTDReturn

$ Under Mgmt.

(Miions)

1. Fiedbeg cmm. Mgm. (cu.) 8.61% .90% 85.3

2. 2FX Maageme Ld 7.80% 25.60% 28.2

3. ou capial Mgm. (cuey) 6.7% 9.15% 1355.0

. Dahaa capial (High Expue) 5.8% 50.81% 100.0

5. Fi Quada (Maaged cuey) 3.21% 15.05% 512.06. Exalibu Ablue reu Fud 2.63% 5.39% .0

7. QFs Ae Mgm (QFs cuey) 1.99% -1.8% 63.0

8. Haheage (Lg tem cuey) 1.97% 8.30% 525.0

9. Hami capial (Gl. cuey) 1.52% 1.01% n/A

10. MIGFX I (reail) 1.3% 26.1% 13.0

Top 10 currency traders managing ess than $10M & more than $1Mas of 6/30/10, ranked by June 2010 return

1. D2W capial Mgm (radial Wealh) 9.80% 63.25% 1.2

2. BEAM (FX Pp) 1.16% 3.1% 1.7

3. M2 Glbal Mgm (2.5X) 0.6% .20% 2.5

. capi Adviy Mgm (FXG10) 0.5% .36% 9.25. KMJ capial (cuey) 0.6% 0.55% 1.2

6. Geewave capial Mgm (GDs Bea) 0.% -3.29% 8.0

7. Maek D. chelkwki (Fex) 0.10% 0.09% .9

8. Blue Fi capial (Maaged cuey) 0.05% 3.35% 3.

9. Duy capial (cuey) 0.0% 0.76% 3.

10. tide Ae Mgm. (Gl. cuey) 0.02% 0.62% 7.0

Based on estimates of the composite of all accounts or the fully funded subset method.

Does not reflect the performance of any single account.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE .

Market Sym Exch vo OI10-day

moe / rank

20-day

moe / rank

60-day

moe / rank

voatiity

ratio / rank

EUr/UsD Ec cME 291.8 223.9 1.96% / 28% 6.26% / 100% -1.78% / 0% .13 / 8%

JPY/UsD JY cME 125.6 117.0 0.90% / 30% 1.15% / 22% 8.20% / 95% .17 / 2%

AUD/UsD AD cME 101.1 67.3 1.35% / 29% 5.17% / 93% -3.83% / 38% .3 / 23%GBP/UsD BP cME 106.3 12.0 2.18% / 56% 3.32% / 65% 2.1% / 100% . / 90%

cAD/UsD cD cME 83.6 82.8 0.39% / 22% 2.81% / 8% -0.90% / 15% .0 / 18%

cHF/UsD sF cME 37.7 8.2 -0.33% / 50% 2.07% / 7% 2.9% / 81% .15 / 27%

MXn/UsD MP cME 20.3 63.6 0.35% / 20% 1.72% / 71% -3.77% / 70% .31 / 30%

U.s. dlla idex DX IcE 18.0 26.9 -1.5% / 25% -.60% / 90% -2.2% / 100% .15 / 8%

nZD/UsD nE cME 7.3 1.2 1.97% / 33% 3.50% / 62% 0.58% / 27% .55 / 0%

E-Mii EUr/UsD ZE cME 3.9 3.0 1.96% / 28% 6.26% / 100% -1.78% / 0% .13 / 8%

ne: Aveage vlume ad pe iee daa ilude bh pi ad ide-by-ide elei a (whee appliable). Pie aiviy i

baed pi-aded a.

8/8/2019 Ctm 201008


8/8/2019 Ctm 201008


international markets

32 augu 2010 • CURRENCY TRADER

CURRENCIES (vs. U.S. DOLLAR)

Rank CurrencyJuly 27

price vs.U.S. dollar

1-monthgain/loss

3-monthgain/loss

6-monthgain/loss

52-weekhigh

52-weeklow

Previous

1 swdh 0.136755 5.90% -1.87% -0.39% 0.148 0.1227 8

2 eu 1.294745 4.67% -2.95% -8.21% 1.5144 1.1891 17

3 sw fc 0.95196 3.90% 2.38% -0.67% 1.0087 0.853 2

4 suh afc d 0.1355 3.30% -0.28% 2.96% 0.1389 0.1204 6

5 au D 0.89858 2.83% -3.18% -0.18% 0.9405 0.8069 3

6 G B pud 1.5483 2.81% 0.18% -4.36% 1.7042 1.4235 4

7 Jp y 0.011475 2.41% 8.05% 3.15% 0.01179 0.01023 10

8 nw Zd d 0.73081 2.37% 1.29% 2.97% 0.7635 0.6475 1

9 ru ub 0.03302 2.20% -3.93% 0.14% 0.03497 0.03029 16

10 sgp d 0.73343 1.71% 0.33% 2.86% 0.7355 0.688 9

11 th bh 0.031045 0.55% -0.02% 2.51% 0.03157 0.02891 14

12 Bz 0.56478 0.47% -1.20% 3.49% 0.5882 0.5076 5

13 tw d 0.03116 0.34% -2.43% -0.13% 0.03201 0.03022 15

14 Ch yu 0.1475 0.18% 0.71% 0.69% 0.14760 0.1458 12

15 Hg kg d 0.128755 0.14% -0.04% 0.07% 0.129 0.1281 13

16 Cd d 0.96688 0.10% -3.34% 2.56% 1.0068 0.8987 7

17 id up 0.02128 -1.07% -5.65% -1.09% 0.02263 0.02018 11

GLOBAL STOCK INDICES

Country Index July 271-monthgain/loss

3-monthgain/loss

6-monthgain loss

52-weekhigh

52-weeklow

Previou

1 Uk Ftse 100 5,365.70 5.80% -4.24% 2.84% 5,833.70 4,512.10 13

2 iy Ftse miB 21,158.08 5.10% -3.99% -3.82% 24,559 18,045 4

3 suh afc Ftse/Jse a sh 28,461.48 4.29% -0.22% 6.19% 29,565.10 23,931.64 9

4 Bz Bvp 66,674.00 3.81% 0.25% 2.47% 71,989.00 53,256.00 25 sgp s t 2,979.38 3.81% -0.41% 10.09% 3,037.97 2,521.36 5

6 U.s. s&P 500 1,113.84 3.65% -5.90% 1.49% 1,219.80 968.65 15

7 Fc CaC 40 3,666.40 2.52% -4.64% -2.48% 4,088.18 3,287.57 8

8 au a d 4,513.90 2.36% -8.13% -3.34% 5,048.60 4,142.20 10

9 id Bse 30 18,077.61 1.71% 2.19% 10.97% 18,237.60 14,684.50 1

0 Hg kg Hg sg 20,973.39 1.19% -1.36% 4.69% 23,099.60 18,971.50 3

1 Cd s&P/tsX cp 11,716.69 0.95% -3.54% 3.28% 12,321.80 10,384.60 14

2 Gy X Dx 6,207.31 0.81% 0.78% 10.00% 6,341.52 5,158.60 6

3 mxc iPC 32,695.31 0.39% 0.05% 6.81% 34,223.90 26,449.20 7

4 swzd sw m 6,275.20 -0.57% -5.88% -3.06% 6,990.70 5,749.70 11

5 Jp n 225 9,496.85 -2.03% -15.30% -7.37% 11,408.20 9,076.41 12

gLObAL CENtRAL bANk LENDINg RAtES

Country Interest Rate Rate Last change Jan-10 Jul-09

Ud s Fd fud 0-0.25 0.5 (Dc. 08) 0-0.25 0-0.25

Jp ovgh c 0.1 0.2 (Dc. 08) 0.1 0.1

euz rf 1 0.25 (my 09) 1 1

egd rp 0.5 0.5 (mch 09) 0.5 0.5

Cd ovgh fudg 0.5 0.25 (Ju 10) 0.25 0.25

swzd 3-h sw lb 0.25 0.25 (mch 09) 0.25 0.25

au Ch 4.5 0.25 (my 10) 3.75 3

nw Zd Ch 2.75 0.25 (Ju 10) 2.5 2.5

Bz sc 9.5 0.75 (ap 10) 8.75 8.75k ovgh c 2 0.5 (Fb. 09) 2 2

tw Dcu 1.25 0.25 (Fb. 09) 1.25 1.25

id rp 5.75 0.25 (Juy 10) 4.75 4.75

suh afc rpuch 6.5 0.5 (m. 10) 7 7.5

8/8/2019 Ctm 201008


Tts bs u.S.

s

*acct bc

s ct Gdp

+estmt

Sc: International

Monetary Fund, World

Economic Outlook

Database, a 2010.

NON-U.S. DOLLAR fOREx CROSS RAtES

ank Currency pair Symbo Juy 271-monthgain/oss

3-monthgain/oss

6-monthgain oss

52-weekhigh

52-weekow

Preiou

1 Eu / caada $ EUr/cAD 1.3391 .57% 0.0% -10.50% 1.601 1.2502 16

2 Eu / real EUr/BrL 2.29285 .18% -1.78% -11.30% 2.712 2.1772 19

3 Fa / caada $ cHF/cAD 0.98585 3.80% 5.93% -3.15% 1.0629 0.8989

Auie $ / caada $ AUD/cAD 0.92936 2.73% 0.17% -2.67% 0.9895 0.863 5

5 Pud / caada $ GBP/cAD 1.6013 2.71% 3.65% -6.75% 1.8213 1.89 7

6 Auie $ / real AUD/BrL 1.591025 2.3% -2.01% -3.5% 1.6978 1.95 8

7 Eu / Ye EUr/JPY 112.8 2.25% -10.15% -11.01% 138.715 107.29 1

8 Ye / real JPY/BrL 0.020305 1.83% 9.25% -0.39% 0.02127 0.01838 17

9 Eu / Auie $ EUr/AUD 1.0865 1.80% 0.23% -8.05% 1.708 1.377 20

10 Eu / Pud EUr/GBP 0.836235 1.73% -3.13% -.02% 0.911 0.8065 18

11 Fa / Ye cHF/JPY 82.97 1.62% -5.20% -3.70% 91.59 76.36 2

12 Eu / Fa EUr/cHF 1.360075 0.61% -5.21% -7.59% 1.5363 1.3092 21

13 Auie $ / Ye AUD/JPY 78.3 0.7% -10.3% -3.19% 88.08 6.508 3

1 Auie $ / new Zeal $ AUD/nZD 1.22955 0.2% -.2% -3.06% 1.3233 1.1931 11

15 Pud / Ye GBP/JPY 13.95 0.39% -7.22% -7.27% 163.057 127.065 6

16 new Zeal $ / Ye nZD/JPY 63.69 0.00% -6.22% -0.16% 69.5573 59.5878 1

17 Pud / Auie $ GBP/AUD 1.72306 -0.01% 3.7% -.19% 2.0151 1.6328 12

18 caada $ / real cAD/BrL 1.711965 -0.38% -2.17% -0.90% 1.82 1.6003 15

19 Auie $ / Fa AUD/cHF 0.9391 -1.03% -5.% 0.50% 1.0079 0.877 10

20 Pud / Fa GBP/cHF 1.6267 -1.20% -2.15% -3.71% 1.809 1.5778 13

21 caada $ / Ye cAD/JPY 8.27 -2.23% -10.51% -0.56% 9.1955 81.113 9

gLObAL bOND RAtES

Rank Country Rate Juy 27 1 month 3 months 6 months High low Preious

1 U.s. 10-yea t-e 122.3 0.69% 3.98% 3.98% 123.5 11.78 1

2 Japa Gveme Bd 11.82 0.57% 1.67% 1.55% 13.28 137.11 3

3 UK sh elig 99.22 0.06% -0.03% -0.15% 99.52 98.9 5

Aualia 10-yea bd 9.73 0.00% 0.55% 0.21% 9.99 9.09

5 Gemay BUnD 127.69 -1.00% 2.5% 3.69% 129.93 119.85 2

ACCOUNt bALANCERank Country 2008 Ratio* 2007 2009+

1 sigape 36.188 19.222 7.311 33.838

2 nway 83.825 18.59 5.678 52.901

3 Hg Kg sAr 29.296 13.618 25.529 23.373

swede 37.279 7.783 39.05 25.7815 Gemay 25.722 6.69 253.756 160.627

6 taiwa Pvie f chia 25.122 6.239 32.975 2.572

7 nehelad 1.978 .787 67.589 1.652

8 Japa 157.079 3.21 210.967 11.656

9 swizelad 11.97 2.388 3.531 3.102

10 caada 7.606 0.507 1.53 -36.132

11 Kea -5.776 -0.62 5.876 2.668

12 Uied Kigdm -0.725 -1.517 -75.83 -28.838

13 Belgium -12.855 -2.539 9.956 -1.25

1 czeh republi -6.669 -3.086 -5.83 -1.92

15 Ialy -78.87 -3.18 -51.691 -71.27

16 Aualia -6.683 -.06 -57.552 -0.91

17 Uied sae -706.068 -.889 -726.572 -17.999

18 Ielad -13.886 -5.189 -13.876 -6.705

19 spai -153.665 -9.592 -1.35 -7.136

8/8/2019 Ctm 201008


IntErnAtIonAL MArKEts

Unempoyment Period Reease date Rate Change 1-year change Next reease

AMERICAS

Ageia Q1 5/21 8.3% -0.1% -0.1% 8/23Bazil Jue 7/22 7.0% -0.5% -1.1% 8/26caada Jue 7/9 7.9% -0.2% -0.7% 8/6

EUROPE

Fae Q1 6/3 9.5% 0.0% 0.8% 9/2Gemay Jue 7/29 7.0% 0.0% -0.7% 8/31UK Mah-Jue 7/1 7.8% -0.1% 0.3% 8/11

ASIA andS. PACIFIC

Aualia Jue 7/8 5.2% 0.0% -0.6% 8/12Hg Kg Apil-Jue 7/20 .6% 0.0% -0.8% 8/17Japa Jue 7/30 5.3% 0.1% 0.0% 8/27sigape Q2 7/30 2.3% 0.1% -0.9% 10/29sigape Q1 /30 2.2% -0.1% -0.1% 7/30

GDP Period Reease date Change 1-year change Next reease

AMERICAS

Ageia Q1 6/18 -0.6% 1.8% 9/17Bazil Q1 6/8 -2.7% 15.2% 9/3caada Q1 5/31 2.5% 5.6% 8/31

EUROPE

Fae Q1 5/12 0.% 0.7% 8/13Gemay Q1 5/12 0.6% 3.2% 8/13UK Q1 7/12 2.1% 2.7% 8/6

AFRICA s. Afia Q1 5/2 2.2% -.7% 8/2

ASIA andS.PACIFIC

Aualia Q1 6/2 0.6% 2.7% 9/1Hg Kg Q1 5/1 -6.5% 9.2% 8/13Idia Q1 5/31 19.1% 12.2% 8/31Japa Q1 5/20 1.2% .9% 8/16sigape Q1 5/21 .1% 15.5% nLt 8/27

CPI Period Reease date Change 1-year change Next reease

AMERICAS

Ageia Jue 7/1 0.8% 11.0% 8/13

Bazil Jue 7/7 0.0% .8% 8/6

caada Jue 7/23 -0.1% 1.0% 8/20

EUROPE

Fae Jue 7/13 0.0% 1.5% 8/13

Gemay Jue 7/9 0.1% 0.9% 8/10

UK Jue 7/13 0.1% 3.2% 8/17

AFRICA s. Afia Jue 7/28 0.0% .2% 8/25

ASIA andS.PACIFIC

Aualia Q2 7/28 0.6% 3.1% 10/27

Hg Kg Jue 7/22 0.3% 2.8% 8/20

Idia Jue 7/30 1.2% 12.% 8/31

Japa Jue 7/30 0.0% -0.7% 8/27

sigape Jue 7/23 -1.0% 2.7% 8/23

PPI Period Reease date Change 1-year change Next reease

AMERICAS

Ageia May 6/11 1.0% 15.2% 9/3Bazil Jue 7/7 -0.% 5.5% 8/6

caada Jue 7/29 -0.9% 0.2% 8/30

EUROPE

Fae Jue 7/29 0.1% 3.% 9/30Gemay Jue 7/20 0.6% 1.7% 8/19UK Jue 7/9 -0.3% 5.1% 8/6

AFRICA s. Afia Jue 7/29 3.% 9.% 8/26

ASIA andS. PACIFIC

Aualia Q2 7/26 0.3% 1.0% 10/25Hg Kg Q2 6/1 1.7% .0% 9/13Idia Jue 7/1 0.7% 10.6% 8/16Japa Jue 7/12 -0.% 0.5% 8/11sigape Jue 7/29 -1.2% 1.7% 8/27

as J, 30 2010 leGend: Chg: Chg m vs t s. nlT: n t th. rt: ummt t.

8/8/2019 Ctm 201008



the informaion on his page is

subje o hange. curreny

trader is no responsible for

he auray of alendar daes

beyond press ime.

cPI: cume pie idex

EcB: Eupea ceal Bak

FDD (fi delivey day): the fi

day whih delivey f a m-mdiy i fulfillme f a fuuea a ake plae.

FnD (fi ie day): Alkw a fi ie day, hi i

he fi day whih a lea-ighue a give ie abuye f a fuue a ha i

ied delive a mmdiy ifulfillme f a fuue a.the leaighue al ifmhe elle.

FoMc: Fedeal ope Makecmmiee

GDP: G dmei pdu

IsM: Iiue f upplymaageme

LtD (la adig day): the fialday adig a ake plae i afuue pi a.

PMI: Puhaig maage idex

PPI: Pdue pie idex

Emi releaeeleae (U.s.) ime (Et)

Gdp 8:30 .m.

Cpi 8:30 .m.

eCi 8:30 .m.

ppi 8:30 .m.

iSM 10:00 .m.

ummt 8:30 .m.

ps cm 8:30 .m.

db gs 8:30 .m.rt ss 8:30 .m.

T bc 8:30 .m.

lg cts 10:00 .m.

GLoBAL EconoMIc cALEnDAr: AUGUst

at 2010

1 2 3 5 6 7

8 9 10 11 12 13 1

15 16 17 18 19 20 21

22 23 2 25 26 27 28

29 30 31 1 2 3

at

1

2 U.S.: July ISM manufacturing report

3 U.S.: June personal income

4

5 Brazil: July PPI

UK: Bank of England interest-rate

announcement

ECB: Governing council interest-rate

announcement

6 U.S.: July employment report

Brazil: July CPI

Canada: July employment report

UK: July PPI

78

9 Mexico: July 31 CPI and July PPI

10 U.S.: FOMC interest-rate announce-

ment

Germany: July CPI

Japan: Bank of Japan interest-rate

announcement

11 U.S.: June trade balance Japan: July PPI

UK: June employment report

12 Australia: July employment report

13 U.S.: July CPI and retail sales

France: Q2 GDP and July CPI

Germany: Q2 GDP

Hong Kong: Q2 GDP

14

15

16 India: July PPI

Japan: Q2 GDP

17 U.S.: July PPI and housing starts

Hong Kong: May-July employment

report

UK: July CPI

18

19 U.S.: July leading indicators Germany: July PPI

20 Canada: July CPI

Hong Kong: July CPI

21

22

23

24 Mexico: Aug. 15 CPI

South Africa: Q2 GDP

25 U.S.: July durable goods

Mexico: Q2 GDP and July employ-

ment report

South Africa: July CPI

26 Brazil: July employment report

South Africa: PPI27 Japan: July employment report and

CPI

28

29

30 U.S.: July personal income Canada: July PPI

31 Canada: Q2 GDP Germany: July employment report

spt

1 U.S.: August ISM manufacturing

index

Australia: Q2 GDP

2 France: Q2 employment report

ECB: Governing council interest-rate

announcement

3 U.S.: August employment report

Brazil: Q2 GDP

4

5

6

8/8/2019 Ctm 201008

http://slidepdf.com/reader/full/ctm-201008 36/3736 Augu2010•CURRENCY TRADER

EvEnts

Event:theCBOEOpioIeie

Dates: Aug.26,Oc.21

Location:Chicago

For more information:Goowww.cboe.comadclick

oEducaio>semiar

Event:FifhaualfreeParitradigshow

Date:sep.17-18Location:Pari

For more information:www.aloAt.com

Event: securiytraderAociaio77haual

cofereceadbuiemeeig

Date:sep.22-25

Location: WahigoD.C.

For more information:www.ecuriyrader.org

Event:CBOERealtradigwihDasherida

Date: sep.23

Location:Chicago

For more information:Goowww.cboe.comadclick

oEducaio>semiar

Event:theForex,Fuure&EtFExpoLavega2010

Date:sep.23-25

Location:CaearPalace,Lavega

For more information:Goowww.moeyhow.com

Event:sECCuomerProecioRuleoe-dayemiar

Date: sep.29

Location:Bayard,newYorkCiyFor more information: www.fmwolie.com

Event: thethirdKuwaitraderExpo

Date: Oc.13-14

Location: J.W.Marrio,KuwaiCiy

For more information:www.meraderexpo.com

Event: theFirQaartraderExpo

Date: Oc.17-18

Location: J.W.Marrio,Qaar

For more information:www.meraderexpo.com

Event:CMEGroup’GlobalFiacialLeaderhip

Coferece

Date: Oc.18-20

Location:Riz-CarloBeachReor,naple,Fla.

For more information:www.gflc.com

Event:FXree.comIeraioaltraderCoferece

Date:Oc.20-22

Location:Barceloa,spai

For more information:www.rader-coferece.com

Event: 2010sydeytradig&Ieig

semiar&Expo

Date: Oc.29-30

Location: sydey

For more information:

www.radigadieigexpo.com.au

Event:LavegatraderExpoDate:no.17-20

Location:CaearPalace,Lavega

For more information:Goowww.moeyhow.com

Carry trades involve buying (or lending) a currencywith a high interest rate and selling (or borrowing) a cur-rency with a low interest rate. Traders looking to “earncarry” will buy a high-yielding currency while simultane-ously selling a low-yielding currency.

PIIGS: Portugal, Ireland, Italy, Greece, and Spain.

Quantitative easing is a tool a central bank uses toattempt to stimulate the economy when cutting inter-est rates is not feasible — such as when rates are alreadyat or near zero. Through quantitative easing, the central bank purchases assets (e.g., treasuries, mortgages, securi-ties) from financial institutions to pump money into the

financial system. Quantitative easing is often referred to as“printing money.” Critics contend the practice runs a highrisk of creating high inflation, among other drawbacks.

True range (TR): A measure of price movement or vol-atility that accounts for the gaps that occur between price bars. This calculation provides a more accurate reflectionof the size of a price move over a given period than thestandard range calculation, which is simply the high of aprice bar minus the low of a price bar. The true range cal-culation was developed by Welles Wilder and discussedin his book New Concepts in Technical Trading Systems(Trend Research, 1978).

True range can be calculated on any time frame or price bar — five-minute, hourly, daily, weekly, etc. The followingdiscussion uses daily price bars for simplicity. True rangeis the greatest (absolute) distance of the following:

1. Today’s high and today’s low.2. Today’s high and yesterday’s close.3. Today’s low and yesterday’s close.

Average true range (ATR) is simply a moving average

of the true range over a certain time period. For example,the five-day ATR would be the average of the true rangecalculations over the last five days.›

KEYCOnCEPts

8/8/2019 Ctm 201008


deviation, then little market impact is expected; the larger

the deviation from expectations, the larger the likely

impact on the market.

Similarly, Post Earnings Announcement Drift (PEAD)research involves the tendency of a market to continue

to move for a certain amount of time after an unexpected

announcement — disproving efficient market theory.

Although both these theories are primarily

concerned with equities, they also apply to other

markets, including currencies, and we can also

highlight both of these exploitable effects using

the MVI and MRI: We can determine how big

an impact any event or economic announcement

has on the market by analyzing it relative to the

expected volume and range.The following example illustrates a recent

example of both the SUE and PEAD effects. On

March 30, 2010 UK GDP growth was announced

for the final quarter of 2009. The estimate was

+0.3 percent, up from the +0.1 percent initial

estimate. The actual number came in at +0.4 per-

cent. As Figure 8 shows, this was positive for the

British pound, with both the range and volume

increasing above the average expected values

for that time of day, demonstrating an equiva-

lent of the SUE effect. The Euro/British pound(EUR/GBP) pair then continued lower through-

out the day (pound strengthening), dem-

onstrating the subsequent effect of PEAD

on the price action. An early indication

the market would trend lower was given

by the higher-than-average volume and

range values for that time of day.

market context

While all currency pairs show a degree

of commonality, with the highest ranges

and volume occurring during the London

afternoon, each also has a unique, predict-

able, profile. Plotting these profiles using

the MVI and MRI helps identify when

volume and ranges are likely to increase

or decrease during the day, providing a

useful additional indicator for volume

and range analysis.

average using the MVI and MRI provides a much more

meaningful analysis of the market.

Though conceived as a way of quantifying the unique

behavior of currency markets, these indicators and theprinciples behind them can be applied to any market, and

also to other indicators, such as volatility. › For information on the author, see p. 4.

FIGURE 7: PROFIT FACTOR MUlTIPlES

The higher the multiple of the MVI and MRI, the higher the profit factor (gross profit/gross loss).

FIGURE 8: MvI AND MRI APPlIED TO EUR/GBP

Both the range and volume increased above the average expected values for

trADInG strAtEGIEs cont. from p. 25

ctm 201008

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