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January 2012

Volume 9, No. 1

Strategies, analysis, and news for FX traders

PLAYING THE AUSSIE DOLLAR CONSOLIDATION P. 33

FX winners and losers:2012 outlook p. 6

The grim implications of thedollar carry trade p. 22

2011s FX lessonsfor 2012 p. 12

Swinging with outside barsin the pound/dollar p. 18

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2/332 January2012CURRENCY TRADER

CONTENTS

Contributors................................................. 4

Global Markets

Slower global growth in 2012, but

recession unlikely....................................... 6

Eurozone remains key risk as a new year of

forex trading unfolds.

By Currency Trader Staff

On the Money............................................ 12

The curious events of 2011

and what they mean for 2012

Several strange things happened in the markets

during 2011. By examining them, we might beable to make some useful deductions regarding

2012.

By Barbara Rockefeller

Trading Strategies

Outside weeks in the British pound.......18

A potential longer-term swing opportunity

emerges from the mostly haphazard perfor-

mance after outside weeks in the pound/dollar

pair.

By Currency Trader Staff

Advanced Concepts

The long, awful life of the

dollar carry trade...................................... 22

A failure to maintain the return on the dollar will

inevitably lead to the end of its status as the

worlds principal reserve currency.

By Howard L. Simons

Global Economic Calendar ........................28

Important dates for currency traders.

Events .......................................................28

Conferences, seminars, and other events.

Currency Futures Snapshot.................29

Managed Money Review .......................29

Top-ranked managed money programs

International Markets............................ 30

Numbers from the global forex, stock, and

interest-rate markets.

Forex Journal ........................................... 33

Trading a triangle consolidation.

Looking for an

advertiser?

Click on the company

name for a direct link to the

ad in this months issue.

eSignal

FXCM

Nadex

Questions or comments?Submit editorial queries or comments to

[email protected]
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CONTRIBUTORS

4 January2012CURRENCY TRADER

Editor-in-chief: Mark Etzkorn

[email protected]

Managing editor: Molly Goad

[email protected]

Contributing editor:

Howard Simons

Contributing writers:

Barbara Rockefeller,

Marc Chandler, Chris Peters

Editorial assistant and

webmaster: Kesha Green

[email protected]

President: Phil Dorman

[email protected]

Publisher, ad sales:

Bob Dorman

[email protected]

Classifed ad sales: Mark Seger

[email protected]

Volume 8, Issue 12. Currency Trader is published monthly by TechInfo,Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2011 TechInfo,Inc. All rights reserved. Information in this publication may not be stored orreproduced in any form without written permission from the publisher.

The information in Currency Trader magazine is intended for educationalpurposes only. It is not meant to recommend, promote or in any way implythe effectiveness of any trading sys tem, strategy or approach. Traders areadvised to do their own research and testing to determine the validity of atrading idea. Trading and investing carry a high level of risk. Past perfor-mance does not guarantee future results.

For all subscriber services:www.currencytradermag.com

A publication of Active Trader

CONTRIBUTORS

qHoward Simons is president of Rosewood

Trading Inc. and a strategist for Bianco Research.He writes and speaks frequently on a wide range

of economic and nancial market issues.

qBarbara Rockefeller(www.rts-forex.com) is an international

economist with a focus on foreign exchange. She has worked as a

forecaster, trader, and consultant at Citibank and other nancial

institutions, and currently publishes two daily reports on foreign

exchange. Rockefeller is the author of Technical Analysis for Dum-

mies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock,

Around the World (John Wiley & Sons, 2000), The Global Trader(John Wiley & Sons, 2001), and How to Invest Internationally, pub-

lished in Japan in 1999. A book tentatively titled How to Trade FX

is in the works. Rockefeller is on the board of directors of a large

European hedge fund.
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GLOBAL MARKETS

At the start of the new year, the global economy facesseveral challenges, the prime one being the ongoing uncer-tainty surrounding the European sovereign-debt crisis.Some economists argue the Eurozone is already in a mildrecession, which will likely have a spillover effect on itstrading partners and ultimately slow global growth. Theworst-case scenario is for a disorderly breakup of the

Eurozone a lingering black cloud on the global horizondespite its relatively low probability.

Elsewhere, slowing growth and rising inflation in emerg-ing market economies present another challenge to theglobal economy. Then there are the uncertainties surround-ing the pace of the U.S. economic recovery and whether ornot the U.S. Fed will initiate a third round of quantitative

easing, a so-called QE3

campaign.In the forex arena, the

U.S. dollar index (DXY)rallied smartly in late 2011 about 10 percent off itsMay lows into year-end,with the bulk of those gainsoccurring in the final twomonths of the year (Figure1). The major debates at theoutset of the new year arewhether that rally can be

sustained, if the Euro willrebound, and how othercurrencies are likely to per-form in 2012.

Still growing, but

At the global level, mostanalysts seem to agree theeconomy will continue tomove forward, albeit atsomething less than a fullgallop.

The world economy will

Slower global growth in 2012,but recession unlikely

Eurozone remains key risk as a new year of forex trading unfolds.

BY CURRENCY TRADER STAFF

FIGURE 1: U.S. DOLLAR INDEX

Driven by safe-haven buying, the U.S. dollar made strong gains in late 2011.

Source: TradeStation
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7/33CURRENCY TRADERJanuary2012

keep on expanding in 2012, but at a slower pace than 2011and 2010, says Decision Economics chief global econo-mist Dr. Allen Sinai, who forecasts global GDP in the 2.5 to2.75 percent range in 2012.

According to the International Monetary Fund (IMF),global economic output totaled 5.1 percent in 2010, follow-ing the -0.7-percent recessionary reading in 2009. Nomurapegs 2011s global economic growth at 3.8 percent, butexpects a decline to 3.2 percent for 2012.

There remains a two-track global economy, with emerg-

ing economies growing at a much faster pace than devel-oping economies. Nomura estimates emerging economiesgrew at a 6.6-percent rate in 2011, compared to a 1.5-per-cent growth pace for developing economies. Asia contin-ues to post the strongest GDP growth, which Nomura esti-mates at 8.1 percent for 2011. Latin America also remainsstrong at an estimated 2011 pace of 4.3 percent. Meanwhile,the U.S. and the Eurozone lag far behind, coming in at 2.5percent and 1.9 percent, respectively, for the year.

Theres nothing on the horizon to disrupt that trend inthe coming year, for a very simple reason.

By far the strongest growth will be coming out of

emerging markets, says Michael Woolfolk, managingdirector at BNY Mellon. Thats the manufacturing base ofthe world right now.

But as has been the case for the better part of the year,all predictions of global economic health circle back toEurope.

Jay Bryson, global economist at Wells Fargo, agrees theglobal economy will continue to grow in 2012, assum-ing Europe doesnt blow up. Although Bryson says theEuropean crisis remains the global economys biggest risk,he pegs the odds of a disorderly collapse of the Eurozoneat less than 50 percent. But we dont think its tail risk,

either, he says. What you are dealing with is politics.And politics is always an uncertain game. The market isimpatient for some kind of resolution, and has had mixedreactions to the steps European politicians have announcedthus far.

In its 2012 Global Economic Outlook, Nomura econo-mists wrote, We expect the Eurozone to enter recessionand growth in the rest of the world to slow. A disorderlybreakup of the Euro represents a palpable risk to the globaloutlook: Europes leaders must act.

Sinai also sees Europe as the main source of economicweakness. He forecasts a recession in the Eurozone at leastthrough the first half of the year. Greece is in a depres-

sion. Portugal is in a severe downturn, he notes. Weare calling for Italy and Spain to be in recession, whileGermany and France will continue to grow.

Woolfolk says the top issue facing the global economy in2012 is whether the Eurozone will emerge from the crisisas a political union or an economic union. That will deter-mine the growth trajectory for the Eurozone, he says.

Meanwhile, markets have responded haphazardly to thevarious announcements coming out of Europe, lurchingfrom hope to renewed skepticism and back.

I dont know how patient markets will be, Brysonwarns. We could have a do-or-die moment where theEuropean Central Bank president has his back against thewall and he either has to buy all outstanding Italian gov-ernment debt or face a Eurozone blow-up.

Woolfolk has a more pragmatic and positive takeon the current situation. The thought of some low-proba-bility event next year causing Armageddon is fantasy, hesays. The worse-case scenario is what we have right now a lack of decision.

Woolfolk expects some sort of resolution over the nextcouple months. By the end of February, we should have a

good sense of [whats to come], he explains. When theydecide what they want to be when they grow up, theyllsee a return of capital to their markets. But they have tochoose.

Surveying global economies

Moving around the globe, slower growth is forecast forChina in 2012, but that could mean something closer to a7-percent GDP pace, down from last years 9-percent level.Nomura forecasts Chinas GDP growth in 2012 at 7.9 per-cent, down from 9.2 percent in 2011. The other Asian pow-erhouse, India, is expected to remain steady at around 7.2

percent rate this year, after growing at a 7.3-percent pacein 2011.Japan is expected to return to growth with a 2.3-percent

GDP forecast for 2012, following the earthquake- andtsunami-triggered recession that pushed 2011 GDP growthdown to -0.3 percent.

China is coming off an 11-percent pace [in recent years] that decline sends ripples through Asia, including SouthKorea and Singapore, Sinai says. He adds the strength inthe global economy this year will come from Asia, exclud-ing Japan. Asia is far stronger than any other part of theworld, he says.

Concerns Asia is growing too much, too soon seem to

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GLOBAL MARKETS

have receded.A few months ago some emerging economies were

starting to overheat, Bryson says. There was a risk Chinawould overheat. But that doesnt seem to be a risk now.Growth is slowing and inflation is slowing. In general, abright point globally is that food and oil prices have sta-bilized and come down in the past four to five months.Inflation pressures have dissipated around the world.

The Latin American region also remains a powerhouse,and Sinai forecasts approximately 4-percent GDP growthfor the region in 2012. In 2011, estimated GDP was 8percent for Argentina, 3.2 percent for Brazil, 6.3 percent

for Colombia, and 4.1 percent for Mexico, according toNomura.

The Australian and New Zealand economies are alsoexpected to remain strong in 2012, in part due to their rolesas commodity exporters to Asia, and also because of theirfairly strong fiscal pictures. Nomura forecasts a 4-percentGDP pace for Australia in 2012 and a 3.3-percent pace forNew Zealand.

Despite its relative weakness, the United States couldoffer up a surprise, according to some analysts. Recent

economic data has come in stronger than expected, includ-ing hopeful signals from the labor market. The U.S. lookspoised to surprise on the upside, Sinai says. That willhelp support the world economy.

Regarding Europe, Sinai says the primary risk is for thecontinent to fall into a severe recession and slow othereconomies down; he sees a one-in-five risk the worldeconomy will fall into recession in 2012. Political and fis-cal unity would be very difficult to achieve in a year andwe dont think that will happen in 2012, he says. Wecould see a break-up of some sort some countries likeGreece or Portugal voluntarily leaving, or some countries

simply not signing on for the fiscal plan. Its a mess andthat makes it tough to forecast and quantify.

Dollar reversal?

Driven by the ongoing uncertainty in the Eurozone, theU.S. dollar has been riding higher amid a wave of riskaversion and safe-haven flows in recent months. A returnto stability in Europe and risk appetite could mean a rever-sal in the recent dollar uptrend.

The global uncertainty has been good for the dollarand will continue to begood for the dollar in

the first half, says GregAnderson, director of FXstrategy at Citi.

Sinai agrees safe-havenbuying has been support-ing the U.S. dollar, butsays other bearish factorswill likely re-emerge lon-ger term. Our countryhas too many problems long-run growth prob-lems, deficits, and poli-

tics, he says. Ultimately,the currencies follow eco-nomic performance andeconomic conditions ofcountries.

The markets are goodto the U.S. in times ofstress, but if the negativesoutside of the U.S. shouldresolve, the dollar coulddrop quite sharply. Wehave to be negative on the

dollar.

FIGURE 2: SINGAPORE DOLLAR

Asian currencies, including the SGD, may fare well in 2012.


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9/33CURRENCY TRADERJanuary2012 9

Nick Bennenbroek, headof currency strategy atWells Fargo, expects prog-ress on the Europe debtcrisis, which should helpbroader financial marketsstabilize.

However, Andersonexpects to see a slow shiftaway from the U.S. dollaras a safe haven.

The creditworthiness ofthe dollar and the growthpotential of the U.S. econ-omy are second-rate, hesays. Interest-rate issuesand super-low Fed ratesas far as the eye can see donot make the dollar veryattractive. Anderson spec-ulates the markets mightlook to Australia, Canada,and Norway as safe havensdown the road.

FIGURE 4: CANADIAN DOLLAR

Many analysts see bullish potential for the CAD, though not necessarily vs. the U.S. dollar.


FIGURE 3: CHINESE YUAN/RENMINBI

The Chinese currency could continue to appreciate this year.

Source: www.advfn.com

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GLOBAL MARKETS

Overall, there appear to be more bearish than bullish fac-tors on the horizon for the U.S. Another potential driver inthe second half of the year could be the U.S. presidentialelection.

If we have a tightly contested election over control ofCongress and the White House that kind of uncertaintycould prove to be bearish for the dollar in the second half,Anderson says. There are an awful lot of decisions thatneed to be made right at the beginning of 2013 those[Super Committee-triggered] budget cuts start in January2013, the Bush tax cuts expire, and the debt ceiling will betriggered and the new administration wont even be inau-

gurated yet.

Currency winners

According to Bennenbroek, stability in Europe wouldsupport global equity markets in 2012, which could helpbolster certain currencies. He cites the Canadian dollar(CAD), New Zealand dollar (NZD), Brazilian real (BRL),and Korean won (KRW) as currencies that have shownsensitivity to equity market gains. In light of historicalcorrelations, Bennenbroek sees 12-month upside targets of

96.00 for CAD, 82.00 for the NZD, 1.78 for the BRL, and1.075 for the KRW.

Other potential bullish forex plays include Asian curren-cies. The Asian currencies are the most preferred, Sinaisays. The region (plus Australia and ex-Japan) is bolsteredby bullish economic fundamentals, attractive interest rates,long-run growth potential, and stable politics.

For 2012, Sinai forecasts 10-percent gains for theSingapore dollar (SGD) and the KRW vs. the U.S. dollar(Figure 2), and a 3-percent gain for the Chinese yuan/ren-minbi (Figure 3).

Anderson points to the Canadian dollar as the currency

to watch in 2012 (Figure 4). The Canadian dollar couldbe one of the big winners in 2012, he says. The bullishfactors are tied primarily to U.S. growth, which insulates itfrom Europe to a certain extent. It has excellent credit fun-damentals. Also, of all the central banks it is probably theclosest to tightening policy.

Brian Dolan, chief currency strategist at Forex.com,also highlights the Canadian dollar as a potential winner.However, he adds it is likely to perform better againstcurrencies other than the U.S. dollar, pointing to potential

cross opportunities vs. theSwedish and Norwegian

krone and the Euro.Buy Canada, sellNOK, sell Euro, buyCanada, he says.

Losers

Almost everyone agreesthe Euro will have arough 2012 (Figure 5).The Euro is a clearloser, Sinai says. Theuncertainty on how deep

the downturn will be isa negative. The ECB willbe lowering rates further,which is a negative forthe currency, and thepolitical uncertainty isalso a negative. We expectthe Euro to decline vs. theU.S. dollar in 2012 to the1.20-1.15 area.

He forecasts Euroweakness vs. a broadarray of currencies

FIGURE 5: TOUGH ROW TO HOE FOR EURO

The Euro still faces major headwinds in 2012.


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including the Singapore dollar, the Korean won, the Aussie

and New Zealand dollars, and the Chinese yuan.Another potential bearish play is the Swiss franc, accord-

ing to Sean Callow, senior currency strategist at WestpacInstitutional Bank. To choose just one currency, I wouldbe short the Swiss franc, he says. [The trade is] fairlysimple and you know when youre wrong. The SwissNational Bank (SNB) maintained its 1.20 floor on Euro/Swiss franc (EUR/CHF, Figure 6) at the December policymeeting, which disappointed some and pulled the pairback under 1.22. This looks like a good opportunity to sellsome Swiss franc vs. Euro but also potentially vs. the U.S.dollar. Those who dont want to be long Euro vs. anything

can buy dollar/Swiss (USD/CHF), say, in the 0.93-0.94region.

Of Swiss fundamentals, Callow notes Switzerland isalready experiencing deflation (core CPI -1 percent year-over-year in November), and theres little chance of resur-gent inflation given its sluggish economy and still verystrong currency. Also, he says the SNB forecasts assumethe market will drive the EUR/CHF rate higher in comingmonths.

If it does not, they are highly likely to raise the EUR/CHF floor again, a policythat suddenly restored a

great deal of credibility tothe SNB after its failure atad hoc intervention in pre-ceding years, he says. Iexpect the floor to be raisedto at least 1.25 no later thanthe March policy reviewand see 1.30 achievable bymid-year.

Callow says EUR/USDbears can juice up theirreturn on long EUR/CHF

positions by choosing longUSD/CHF (targeting atleast 1.05, perhaps 1.10),with the dollar supportedby bouts of safe-havendemand and probably thestrongest growth profile inthe G7. If the SNB leavesthe floor at 1.20 or worse is unable to defend it,then of course we wouldexit the trade, he says.

Crystal ball

Aside from the uncertainties of relatively known quantitiesin the markets, theres always the risk of the unknown andunknowable.

Its hard to predict events like the Japan earthquake orthe Arab Spring, but Im sure there will be some surpriseevents, Anderson notes.

These events are a reminder of how quickly things canchange in world politics and markets.

Theres a whole host of risks in the geopolitical bucket,Bryson says. Theres Iran. What happens if we find outtheyre a lot closer to nuclear weapons that we thought?Does that mean F-16s are going to fly? If Iran shuts down

its oil fields, oil prices would spike. What happens if theArab Spring moves into Saudi Arabia? North Korea hasan unstable government who knows how that will playout.

Dolan notes its unlikely significant trends will developin the FX arena.

It is a shorter-term environment, he says. Peopleshould remain short-term focused.y

FIGURE 6: SWISS MISS

The Swiss franc may offer shorting opportunities.


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12/33

1. The strange case of the rising EuroAnalysts wonder when core fundamentals, such asinflation-adjusted relative growth rates, will reassert them-selves in the forex market. But over the past year or two,the market has been beleaguered by risk-on/risk-off senti-ment that has little connection to either inflation or growthrates, and institutional factors that logically should haveimpacted currencies one way instead caused the oppositeeffect.

For example, in December 2011, Moodys placed 15 of 17

Eurozone members on credit watch for a possible down-grade, but the Euro did not fall. Earlier, on August 5, S&Pdowngraded U.S. sovereign debt and the dollar indexrose 10 percent over the next six weeks. This may say moreabout the respect traders decline to bestow upon ratingsagencies and less about the countries being rated, but itscertainly an odd outcome.

There really were fundamentals at work all along wejust werent viewing them with a long enough telescope.Traders prefer to look at interest rates and central bank

policy bias than at growth and infla-

tion. After all, its interest rates (andexpected interest rates) that expressthe fundamentals in a usable way.At year-end 2011, the consensus isfor the Euro to fall, possibly as lowas 1.2000 or parity. The underlyingconcept is that looming recession inEurope is more likely to bring defla-tion than inflation in the coming year.The European Central Bank (ECB)is more likely to reverse the ruinousTrichet 2011 rate hikes than stand pat;it might also institute its own version

of quantitative easing(QE).Quantitative easing has been the

single most important factor drivingthe dollar for the past three years,simplistic or oversimplified as thatmay seem when there have been somany other shocking factors in thenews, including U.S. governmentgridlock, deep Eurogroup policy dif-ferences, and a potential slowdown inChina. Figure 1 is a monthly chart ofthe Euro/U.S. dollar (EUR/USD) pair.The 2006 Euro rally was propelled at

On the Money


ON THE MONEY

The curious events of 2011

and what they mean for 2012Several strange things happened in the markets during 2011. By examining

them, we might be able to make some useful deductions regarding 2012.

BY BARBARA ROCKEFELLER

FIGURE 1: EUR/USD, MONTHLY

Since the 2008 crash, each big move in the EUR/USD pair can be linked to the

U.S. engaging in quantitative easing or the ECB raising rates.

Source: Chart Metastock; data Reuters and eSignal

JASOND2004AM JASOND2005AM JASOND2006AM JASOND2007AM JASOND2008AM JASOND2009AM JASOND2010AM JASOND2011AM JASOND2012AM JASOND2013AM JA

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least in part by ECB rate hikes twowithin four months, including March2006. The variable rate refi operationtook rates from 2 percent in March to3.5 percent in December. By March2007 the rate was 3.75 percent andby July, 4.25 percent. In 2008 the ECBswitched to the fixed-rate version andagain rates were high (3.75 percent inOctober 2008). To show the bias of theECB, it raised rates twice in 2011 (in

April and July), even as the Europeaneconomy was starting to show signs ofcontraction (www.ecb.int/stats/mon-etary/rates/html/index.en.html).

Since the 2008 crash, each big movein the EUR/USD rate can be linkeddirectly either to the U.S. engaging inQE or QE2, or the ECB raising rates.Although the first round of QE endedin October 2010, speculation was rifethat another round was inevitable, andsure enough, in January 2011, the Fedadmitted it might expand the program

and in March 2011, it did. The powerof QE to influence the dollar may haveended when the Fed announced onDec. 15, 2011 that it had no plans toengage in further QE and rates wouldremain the same into mid-2013. Andearlier in December, new ECB chiefMario Draghi began reversing the pre-vious regimes rate hikes, cutting ratesby 25 basis points.

The ECB is already conducting aform of QE as it buys the sovereigndebt of peripheral countries, most

FIGURE 2: SHANGHAI COMPOSITE (RED) VS. NASDAQ (BLACK)

The Shanghai index bubble bears an eerie resemblance to the Nasdaq bubble.

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FIGURE 3: NIKKEI 225 STOCK INDEX

Japans Nikkei stock index has failed to recover its high from more than two

decades ago.

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ON THE MONEY

recently that of Spain and Italy. TheECB endeavors to sterilize thesepurchases, but is not always success-ful. In April 2011 and again in lateNovember, the ECB failed to mop upliquidity in the seven-day repo to thesame amount as the bond purchases.In November, the shortfall was a littlemore than 9 billion hardly at theFeds gigantic levels, but a warningall the same that central banks cannotcontrol everything they seek to man-age.

With the Fed avowedly on hold foranother year and the ECB engaging inrate cuts and stealth quantitative eas-ing, its difficult to see how the Eurocan avoid a third lower low on the

monthly chart, possibly to near 1.0500.

2. Whats a bear market

got to do with it?World equity markets are in bearmarket mode, meaning they are down20 percent or more from peak lev-els (Figures 2-5). Figure 2 shows theShanghai Composite with the Nasdaqtech wreck bubble spike from a fewyears earlier. All bubbles do not lookalike (see the Nikkei bubble and burstin Figure 3), but the Shanghai index

bubble sure looks like the Nasdaqbubble.

The Nikkei fell from a peak of38,957 at year-end 1,989 to 8,441 byDec. 27, 2011. Just as the Nasdaq hasnot recovered its bubble high frommore than a decade ago, the Nikkeihas failed to recover its high in morethan two decades.

In Figure 4, the Greek Athens indexfailed to recover as much as theFrench CAC-40 or the German DAXindex during 2010, and may have

FIGURE 5: S&P 500 (BLACK) VS. EUROTOP 300 (PURPLE, LEFT AXIS)

The S&P 500 outperformed most global stock indices in 2011, but it is still

tracking (highly correlated) to the Eurotop 300 on a long-term basis.

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FIGURE 4: EUROPEAN BEAR MARKETS ATHENS (BLUE), PARISCAC (BLACK), FRANKFURT DAX (ORANGE)

From its peak to close on Dec. 23, 2011, the Athens stock index was down 88

percent and still falling.

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led the other two down during 2011.From the peak to the close on Dec. 23,2011, the Athens index was down 88percent and still falling. The CAC fell49 percent and the DAX 30 percent.And while the S&P 500 outperformed

most global stock indices in 2011, it isstill tracking (i.e., highly correlated to)the Eurotop 300 over the longer timeframe (Figure 5).

Some analysts speak of the U.S.equity markets as decoupling fromthe rest of the equity world and,because of good earnings and animproving economy, outperformingthem in 2012. But as we have learnedto our sorrow, a falling tide lowers allboats in a crisis. Real equity marketfundamentals dont necessarily rule.For example, analysts say (assumingwe want to accept earnings numbersfrom these companies) the price/earnings ratio of the Shanghai indexis around 10 to 11, well under theShanghai historical norm (brief thoughit may be), and certainly under the U.S.benchmark of about 18. U.S. companyearnings are quite good today butvulnerable to recession in Europe or aslowdown in China.

Even if the U.S. equity markets out-

perform others in the coming year, uni-versally declining equity prices sendinvestors fleeing for safe havens, mostprominently the U.S. dollar and U.S.Treasuries. Here again we are facedwith one of the FX markets enduringperversities normally a falling yieldis detrimental to a currency. Investorsseek the highest real return exceptwhen they are seeking the safest park-ing place without regard to return.

If equity prices continue to drop, weshould assume Treasuries yields will

FIGURE 7: 10-YEAR NOTE INDEX (BLACK, RIGHT AXIS) VS. DOLLARINDEX INVERTED SCALE (BLUE, LEFT AXIS)

On the shorter time frame, falling yields are accompanied by a rising dollar

the safe-haven effect.

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FIGURE 6: 10-YEAR NOTE INDEX (BLACK, RIGHT AXIS) VS. DOLLARINDEX (BLUE, LEFT AXIS)

On a longer-term basis, a declining U.S. dollar index generally accompanies

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ON THE MONEY

drop, too. The long time frame in Figure 6 shows how afalling yield brings with it a falling dollar index. But lookagain in the shorter time frame in Figure 7 with the dol-lar index inverted, falling yields are accompanied by a ris-ing dollar, the safe-haven effect.

So, as the new year progresses and you hear some equityanalyst saying it is the U.S. stock market providing sup-port to the dollar, you can blow a raspberry. Its not for-eigners buying U.S. equities that may support the dollar,but fixed-income investors seeking a safe haven regardless

of yield.

3. Whats the role of gold?Gold has been a major source of entertainment over thepast few years. Golds appeal as a safe haven is under-standable, despite the silliness of calling it money whenit cannot be used for actual transactions. If you believethe Fed and Bank of England are unleashing the dogs ofhyperinflation with quantitative easing, then the tradition-al role of gold as an antidote to government perfidy makessense. Now that the ECB is also engaging in quantitativeeasing (even if it doesnt name it as such), and with the

Bank of Japan having engaged in QE for years, surely the

whole world is about to be consumed by inflation.And yet, on Aug. 23, 2011 gold peaked at $1,912.80

(futures basis) and has fallen ever since, if not in a straightline (Figure 8). The peak came about two weeks after theS&P downgrade of the U.S. sovereign rating, and gold haspersistently dropped even as the ECB was buying Spanishand Italian bonds in December. Gold is falling despitethe obvious unsustainability of having a European bail-out fund rated triple-A and backed by countries (notably,France) in great danger of losing their own triple-A ratings.

Something is going on. Its probably not central bankactivity. More central banks (China) are buying than talk-ing about selling. One idea is that gold is now being seenas just another risky commodity rather than the ultimatesafe haven.

So far the price of gold has fallen around 13 percent fromits peak to its Dec. 15 low of $1,565.60. In 2008, gold fellfrom a peak of $1,033.90 (March 17) to $681 (Oct. 24), or 34percent. If it were to mimic the last correction, it would fallto $1,262.45, or well below the trendline on Figure 8. Wecannot expect a single past corrective move to be copiedexactly, but we do know something about breakouts. High

on the list is the application of Fibonacci retracement levelsonce a breakout is confirmed. On thegold chart, the 38-percent retracementlands at about $1,443, the 50-percentretracement around $1,295, and the62-percent retracement around $1,154.The retracement line that is closest tothe one-time 34-percent correction in2008 is the 50-percent version ($1,295vs. $1,262).

This is not a forecast. We want tofollow the gold price, because if thecorrection continues to develop, fall-

ing gold prices imply a rising dollar.We already have a forecast of a risingdollar because of risk aversion drivingthose seeking a safe haven into dollarsand Treasuries. We are so accustomedto the inverse relationship of gold andthe dollar that we fail to consider thatdown-trending gold because of riskaversion actually makes more sense,financially and economically. After all,you cant use gold to buy shoes.yFor information on the author, see p. 4.

FIGURE 8: THE GOLD BUG

A 50-percent retracement of the gold rally would take price down to around$1,295.

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tures trading and options trading involve risk, which may result in nancial loss, and are not suitable for everyone. Any trading decisions that you may make are solely your responsibility. The information presented heror informational purposes only. The contents hereof are not an offer, or a solicitation of an offer, to buy or sell any particular nancial instrument listed on Nadex. Past performance is not indicative of future results.

From aslittle as $100,now anyone

can trade.Nadex is a derivatives exchangecatering directly to retail traders.

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Not only is exchange membershipfree, but you can start trading withas little as $100. And youll neverbe at risk of losing more than thecollateral in your account.

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8/2/2019 Ctm 201201

18/3318 October2010CURRENCY TRADER18 January2012CURRENCY TRADER

Basic price patterns such as outside bars (those with higherhighs and lower lows than the bars preceding them) areattractive because theyre simple, easy to identify, and offercompelling stories. In the case of the outside bar, the storyis absent any other contributing factors, of course itrepresents short-term uncertainty or discombobulation:Price has pushed both below the previous bars low andabove its high, thus failing to establish any clear trend orbias between the two periods.

The following analysis looks at what has happenedafter outside weekly bars in the British pound/U.S. dollarpair (GBP/USD) in recent years. The research revealed an

unexpected application of outside weeks in this currencypair as somewhat counterintuitive swing bars.

Outside weeksFigure 1 shows the pound/dollar rate during the analysisperiod (1998 through 2011), 13 years during which the pairstaged a multi-year uptrend and a massive collapse thatmore than wiped it out in little more than 12 months. Thepair ended the period a little below where it started it, butthe regression line shows a slight upside bias for the entirespan.

Figure 2 shows the median and average returns in the 12

weeks after the 73 outside weeks (OW)that occurred during the analysis peri-od. The returns are measured from theclose of the outside week to the closesof each of the 12 subsequent weeks.Also included are the average andmedian one- to 12-week returns forall weeks during the analysis period.While the overall average returns (theblack line, which barely deviates fromthe x-axis) are virtually flat for the12-week horizon, the overall medianreturns (gray line) exhibit the minor

upside bias shown in Figure 1, at leastthrough week 8.

Getting back to the performance afterthe outside weeks, the median (blue)and average (red) returns divergedramatically. The average returnsflit above and below the breakevenline before moving higher at week 6.Meanwhile, the median returns, asidefrom a spike into positive territory atweek 4, are decidedly negative. Belowthe numbers designating weeks 1-12on the x-axis are percentages (%>0)

TRADING STRATEGIESTRADING STRATEGIES

Outside weeks

in the British poundA potential longer-term swing opportunity emerges from the mostly haphazard

performance after outside weeks in the pound/dollar pair.

BY CURRENCY TRADER STAFF

FIGURE 1: ANALYSIS PERIOD

The 1998-2011 analysis period had a very minor upside bias.
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indicating how often the close of that week was higherthan the close of the outside week for example, the closewas higher at week 1 only 46.58 percent of the time. Asidefrom week 4, the odds of a higher close were below 50 per-cent at all intervals, and were as low as 39.73 percent (atweek 8).

The implication is clear: A smaller number of large upmoves skewed the average returnshigher, but the more representativeoutcome at any interval was for alower close after an outside week.Nonetheless, the divergent median andaverage returns after outside bars sug-gest these returns are simply a morevolatile representation of the pound/dollars ultimate trendlessness duringthis time window.

Higher and lower closesThe most basic parameter to add toan outside week is the location of itsclosing price a higher or lower closeimplying potential bullish or bearishsentiment. There are many ways tomeasure the placement of the close relative to a previous price point, rela-tive to the same weeks opening price,and where it falls within the weeksrange. In this case, we measured theclose relative to the previous weeksclose and whether it was above or

below the opening price, and foundlittle difference between the two

Accordingly, in the following charts,a higher close (HC) refers to an outsideweek that closed higher than the pre-vious week, while a lower close (LC)refers to the opposite. (Also, for clarity,in all subsequent charts, the overallmarket performance will be repre-sented by the pound/dollars medianreturn line.)

Figure 3 shows the performance afterthe 38 instances of higher-closing out-

side weeks. The initial weeks are char-acterized by a bullish bias. The stableuptrend of the average line throughweek 8 is somewhat misleading; themedian return line turns sharply lowerafter week five and subsequentlyplunges into negative territory, and byweek 8 the odds of a higher close areless than 39 percent.

Figure 4 presents the picture forlower-closing outside weeks and itis a surprisingly faithful inversion ofFigure 3: After the 35 instances of these

weeks, the pound/dollar moved mostly lower until week5, at which point price mostly moved higher (although themedian return remained well below the pairs benchmarkreturns). Overall, the median and average returns are heremore in agreement (in direction, if not magnitude) thanin Figure 3. At all intervals except week 3 the odds of a

higher close were less than 50 percent.

FIGURE 3: OUTSIDE WEEKS WITH HIGHER CLOSES

Initial minor bullishness after up-closing outside weeks disappears by week 8.

FIGURE 2: ALL OUTSIDE WEEKS

The somewhat positive average performance after outside weeks is offset by

the much more negative median returns.
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Swinging both waysAlthough the outside bars analyzedhere dont appear to be the source ofany sustained or sizable moves (therewas really no reason to expect theywould be), the pivots from bearish tobullish or vice versa especially inthe case if Figure 4 suggest it might

be worthwhile to look into the poten-tial of a two-part weekly swing setup.For example, a short trade couldbe initiated on the close of a down-closing outside bar, which would becovered and reversed to the long sideafter five weeks, to take advantage ofthe upturn in returns shown in Figure4.

At week 5 after a down-closingoutside bar, the median down move ismore than 0.80 percent, with the oddsof a lower close at 65.71 percent (100-34.29). Figure 5 shows the price movesafter going long five weeks after adown-closing outside week. Throughweek 8 the returns and/or odds ofa higher close increase. The medianreturn at week 8 is above 1.2 percent,with an associated probability of 67.65percent.

Figure 6 shows an almost perfect(and entirely coincidental) examplefrom 2010. The pound/dollar pairmoved lower immediately after the

down-closing outside bar, and the lowclose of the down swing occurred fivedays later. The subsequent upswingpeaked one bar after the eight-weekoptimal exit suggested by Figure 5.

Of course, horrible adverse movesduring the 2008 meltdown (notshown) represent the other side ofthe coin, with more typical resultsperhaps represented in Figure 7. Here,the five- and eight-week inflectionpoints are marked after the two con-secutive down-closing outside weeks


TRADING STRATEGIES

FIGURE 5: WEEK 5 LONG ENTRY

Bullishness prevails five to eight weeks after long entries five weeks afterdown-closing outside weeks.

FIGURE 4: OUTSIDE WEEKS WITH LOWER CLOSES

Bearishness after down-closing outside weeks reverses after five weeks.
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in August. This time, price moves sig-nificantly lower after the exit short/go long bars (5). The implied longtrades exited at the bars marked with8s would have eked out modest gainswhile suffering large open-trade risk. Afinal short signal on the down-closing

outside bar in early November wouldhave been covered and reversed inearly December, although the outcomeof that implied long position was stillundecided in early January.y

FIGURE 7: RECENT SIGNALS

More recent signals show the ideal setup from Figure 6 is not representative of

the majority of cases.

FIGURE 6: IDEAL SETUP

These signals from 2010 represent a near-perfect setup: An initial short signal isreversed five weeks later by a long signal, which is followed by a nine-week rally.

Average and medianThe mean (or average) of a setof values is the sum of the valuesdivided by the number of values inthe set. If a set consists of 10 num-bers, add them and divide by 10 to

get the mean.A statistical weakness of the

mean is that it can be distorted byexceptionally large or small values.For example, the mean of 1, 2, 3,4, 5, 6, 7, and 200 is 28.5 (228/8).Take away 200, and the mean ofthe remaining seven numbers is 4,which is much more representa-tive of the numbers in this set than28.5.

The median can help gauge howrepresentative a mean really is.

The median of a data set is its mid-dle value (when the set has an oddnumber of elements) or the meanof the middle two elements (whenthe set has an even number ofelements). The median is less sus-ceptible than the mean to distortionfrom extreme, non-representativevalues. The median of 1, 2, 3, 4,5, 6, 7, and 200 is 4.5 ((4+5)/2),which is much more in line with themajority of numbers in the set.
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8/2/2019 Ctm 201201


TRADING STRATEGIESADVANCED CONCEPTS

The world can change a great deal after more than threeyears and make what once seemed impossible under-stated. The dollar carry trade the borrowing and sellingof the greenback to fund all manner of other purchasesin lands where the printing presses run more slowly required something of an argument in August 2008 (seeThe short, awful life of the dollar carry trade, CurrencyTrader, August 2008). This was in the early days of the

Federal Reserves drive toward near zero-percent interest

rates, before the full force and fury of the 2008 financialpanic, and more than seven months before the first bout ofquantitative easing.

Those monetary policy episodes led to the primacy ofthe dollar carry trade in world finance, the consequencesof which have dominated many of the articles in this spacein 2010 and 2011. All of the analyses and comparisons inAugust 2008 used the January 1999 inception of the Euro

as a starting point to have as long of a consistent history aspossible. Lets update the originalanalysis with a different startingpoint the Aug. 17, 2007 deci-sion by the FOMC to engage inits first rate-cutting move, a pre-opening intermeeting surprisecut in the target federal fundsrate from 6.5 percent to 6 percent.It was at this point, a little morethan a week after the EuropeanCentral Bank started the bailoutmachine going with a backstop-

ping of BNP-Paribas, the FederalReserve began its era of tryingto solve any and all problemsin financial markets with moremoney for less.

Carry tradedecompositionAll currency trades can be brokeninto their interest-rate spreadcomponent and their spot ratecomponents. The carry tradereturns that follow are based on

The long, awful life of thedollar carry trade

A failure to maintain the return on the dollar will inevitably lead to the

end of its status as the worlds principal reserve currency.

BY HOWARD L. SIMONS

The interest rate return on the USD has declined toward the zone populated by Asian

exporters such as Hong Kong, Taiwan, Singapore, and Japan.

FIGURE 1: THREE-MONTH INTEREST RATE RETURNS ON SELECTEDCURRENCIES AUGUST 2007 ONWARD

0.001%

0.010%

0.100%

0.001%

0.010%

0.100%

ARS

TRY

BRL

ZAR

IDR

INR

MXN

PHP

COP

AUD

NZD

PLN

PEN

NOK

CLP

GBP

DKK

SEK

KRW

EUR

CZK

CAD

THB

USD

TWD

HKD

CHF

SGD

JPY

StandardDeviat

ionOfDailyReturn

AverageDa

ilyReturn

Avg. IR Return

Std. IR Return
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8/2/2019 Ctm 201201


borrowing at the three-month LIBOR rate of thelower-yielding currency (LY3) and lending at thethree-month LIBOR rate of the higher-yieldingcurrency (HY3). The returns on the higher-yield-ing currency are adjusted for the daily changesin the spot rate for the lower-yielding currency(LYS). A 260-day trading year is used.

1. LongRe turnt = 1+HY

3t

260

*

LYSt

LYSt1

1

2. ShortRe turnt=

LY3t

260

3. NetCarryRe turnt = LongRe turnt ShortRe turnt

What do these interest rate carry returns look like sinceAugust 2007? First, Figure 1 shows the interest rate returnon the USD has slipped down toward the zone populatedby Asian exporters such as Hong Kong, Taiwan, Singapore,and Japan; only Switzerland, which also has tried to solveproblems via printing money (see How Eastern Europegot carried away, Currency Trader, August 2009) is in thislow-rate neighborhood. FourAsian countries, the Philippines,

Korea, Thailand, and Taiwan,have unusually high standarddeviations of returns on theirinterest rate returns, a sign theyare using short-term interest ratesin lieu of currency fluctuationsas a macroeconomic adjustingdevice. Finally, both the absoluteinterest rate returns and theirstandard deviations require oneless cycle on their semilogarith-mic axes to display: The worldbecame a lower-rate place after

August 2007.In addition to global short-

term interest rates shifting lower,the correlation matrix betweenthem became more uniform andmore positive. Whereas largeswaths of Table 1 (p. 24-25) forthe ARS, BRL, AUD, and NZDshowed negative correlations ofinterest rate returns, the currentcorrelation matrix has only asmall handful of USD and TWDcorrelations as negative. The

implications here are indisputable: The U.S. adopted andmaintained a short-term interest rate policy way out ofsync with the rest of the world.

The dollar carryNow lets examine the total return from the carry trade ofborrowing three-month USD and lending the proceeds inthree-month LIBOR of the other 28 currencies (Figure 2).Please note how four currencies, the MXN, HKD, KRW,and GBP shift into a negative carry return as the result ofweak spot-rate returns. The AUD, which has benefited

Four currencies (MXN, HKD, KRW, and GBP) shift into a negative carry return as the

result of weak spot-rate returns. The AUD stands out on the other side as having avery strong carry return from both its spot rate and interest-rate spread components.

FIGURE 2: RISK AND RETURN IN THREE-MONTH CARRY AGAINST USDAUGUST 2007 ONWARD

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

1.1%

1.2%

1.3%

1.4%

-0.020%

-0.015%

-0.010%

-0.005%

0.000%

0.005%

0.010%

0.015%

0.020%

0.025%

0.030%

0.035%

0.040%

0.045%

AUD

BRL

ARS

JPY

IDR

CHF

NZD

COP

PEN

PHP

ZAR

SGD

NOK

CZK

TRY

SEK

CLP

CAD

TWD

DKK

THB

EUR

INR

PLN

MXN

HKD

KRW

GBP

StandardDeviationofDailyReturns

AverageDailyReturnVs.

USD

Avg. Return

Std. Dev.

Several of the strongest currencies on a carry trade basis, such as the ARS and TRY,

actually have negative spot-rate changes offset by high interest-rate spreads. The

JPY has gained on the carry trade even as the interest rate component has beennegative.

FIGURE 3: DECOMPOSING THE DOLLAR CARRY TRADEAUGUST 2007 ONWARD

-8.0%

-5.5%

-3.0%

-0.5%

2.0%

4.5%

7.0%

9.5%

12.0%

14.5%

17.0%

BRL

AUD

ARS

JPY

IDR

CHF

NZD

PEN

COP

PHP

ZAR

CZK

SGD

NOK

TRY

CLP

SEK

THB

TWD

DKK

CAD

EUR

INR

PLN

HKD

MXN

GBP

KRW

AverageAnnualSp

otRateAndInterestRateReturns

Rate

Spot

Total

8/2/2019 Ctm 201201

24/33

ON THE MONEY


ADVANCED CONCEPTS

ABLE 1: CORRELATION OF THREE-MONTH INTEREST RATE TOTAL RETURNS SINCE AUGUST 2007

ARS AUD BRL CAD CHF CLP COP CZK DKK EUR GBP HKD IDR INR

ARS 1.000

AUD -0.010 1.000

BRL 0.326 0.471 1.000

AD 0.136 0.894 0.408 1.000

CHF 0.170 0.817 0.211 0.904 1.000

CLP 0.373 0.672 0.885 0.649 0.428 1.000

OP 0.350 0.601 0.816 0.657 0.589 0.778 1.000

CZK 0.359 0.701 0.632 0.776 0.783 0.676 0.890 1.000

KK 0.450 0.686 0.363 0.840 0.901 0.569 0.702 0.848 1.000

UR 0.243 0.804 0.185 0.902 0.969 0.466 0.545 0.741 0.931 1.000

GBP 0.208 0.857 0.334 0.953 0.979 0.550 0.671 0.828 0.925 0.970 1.000

KD 0.258 0.783 0.585 0.927 0.808 0.723 0.792 0.835 0.799 0.775 0.876 1.000

DR 0.489 0.395 0.707 0.420 0.360 0.700 0.702 0.654 0.560 0.382 0.446 0.504 1.000

NR 0.327 0.646 0.858 0.570 0.357 0.957 0.689 0.595 0.474 0.389 0.464 0.639 0.628 1.000

PY 0.524 0.643 0.450 0.804 0.856 0.592 0.761 0.884 0.945 0.856 0.881 0.834 0.572 0.501

RW 0.126 0.490 0.952 0.388 0.150 0.844 0.734 0.523 0.231 0.104 0.273 0.541 0.619 0.832

MXN 0.651 0.490 0.718 0.613 0.592 0.736 0.858 0.839 0.793 0.597 0.666 0.737 0.763 0.642

OK 0.276 0.888 0.374 0.916 0.946 0.616 0.650 0.798 0.912 0.963 0.964 0.819 0.486 0.553

NZD 0.181 0.913 0.501 0.953 0.929 0.666 0.756 0.871 0.878 0.904 0.969 0.898 0.519 0.588

EN 0.450 0.522 0.600 0.641 0.612 0.694 0.695 0.760 0.764 0.625 0.672 0.693 0.678 0.644

PHP 0.359 0.460 0.977 0.407 0.236 0.852 0.834 0.649 0.378 0.195 0.351 0.596 0.716 0.818

PLN 0.273 0.618 0.765 0.555 0.412 0.813 0.732 0.640 0.497 0.423 0.503 0.613 0.568 0.781

EK 0.204 0.880 0.292 0.903 0.890 0.612 0.523 0.685 0.856 0.943 0.913 0.753 0.405 0.572

GD 0.149 0.687 0.650 0.796 0.641 0.690 0.834 0.836 0.643 0.580 0.719 0.909 0.454 0.624

HB 0.247 0.585 0.960 0.571 0.355 0.891 0.867 0.707 0.445 0.307 0.475 0.739 0.665 0.849

TRY 0.472 0.702 0.662 0.807 0.772 0.765 0.882 0.921 0.883 0.771 0.833 0.880 0.608 0.689

WD 0.003 0.214 0.099 0.199 0.194 0.144 0.067 0.045 0.179 0.218 0.231 0.088 0.441 0.057

SD 0.113 0.558 -0.145 0.780 0.868 0.117 0.289 0.517 0.758 0.868 0.841 0.673 0.130 0.017

AR 0.372 0.665 0.789 0.692 0.639 0.781 0.900 0.867 0.739 0.607 0.717 0.778 0.729 0.704

nly a handful of USD and TWD correlations are negative. The implication is that the U.S. adopted and maintained a short-rm interest rate policy way out of sync with the rest of the world. (Table continues on p. 25.)

8/2/2019 Ctm 201201


ABLE 1 (CONTINUED): CORRELATION OF THREE-MONTH INTEREST RATE TOTAL RETURNS SINCE AUGUST 2007

JPY KRW MXN NOK NZD PEN PHP PLN SEK SGD THB TRY TWD USD ZA

RS

UD

RL

AD

HF

CLP

OP

ZK

KK

UR

BP

KD

DR

NR

PY 1.000

RW 0.294 1.000MXN 0.855 0.562 1.000

OK 0.866 0.296 0.679 1.000

ZD 0.858 0.454 0.706 0.949 1.000

EN 0.789 0.469 0.807 0.671 0.691 1.000

HP 0.468 0.940 0.738 0.379 0.508 0.591 1.000

LN 0.514 0.744 0.631 0.555 0.609 0.522 0.750 1.000

EK 0.758 0.254 0.543 0.948 0.883 0.607 0.285 0.536 1.000

GD 0.708 0.609 0.660 0.646 0.785 0.595 0.650 0.620 0.567 1.000

HB 0.526 0.951 0.719 0.471 0.625 0.610 0.956 0.778 0.399 0.792 1.000

RY 0.919 0.525 0.884 0.832 0.863 0.803 0.662 0.673 0.734 0.837 0.724 1.000

WD 0.069 0.192 0.143 0.218 0.230 0.132 0.142 0.116 0.242 -0.160 0.115 -0.050 1.000

SD 0.704 -0.198 0.369 0.755 0.713 0.409 -0.113 0.092 0.723 0.456 0.039 0.526 0.208 1.000

AR 0.779 0.705 0.857 0.719 0.802 0.780 0.803 0.677 0.597 0.743 0.822 0.865 0.207 0.337 1.0

nly a handful of USD and TWD correlations are negative. The implication is that the U.S. adopted and maintained a short-term interest

te policy way out of sync with the rest of the world.

8/2/2019 Ctm 201201

26/33

ON THE MONEY


ADVANCED CONCEPTS

immensely from Australias roleas a supplier to fast-growingEast and South Asian economies,stands out on the other side ashaving a very strong carry returnfrom both its spot rate and inter-est rate spread components.

If we redisplay these carrytrade returns as the averageannual combination of theirinterest rate spreads and spotrate changes, we see how severalof the strongest currencies on acarry trade basis, such as the ARSand TRY, actually have negativespot-rate changes offset by highinterest rate spreads (Figure 3).Japan is an exception in the otherdirection; the JPY has gained onthe carry trade even as the inter-est rate component has beennegative.

The logical rejoinderWhen we last looked at aver-

age annual global equity returnsas a function of the return onthe dollar carry trade, we sawa marked positive correlation.That has deteriorated into a weakpositive correlation with a sub-unitary beta of 0.599 as opposedto the 1.492 beta (ex Turkey andArgentina) we saw in August2008 (Figure 4). This suggestsglobal equity returns are less afunction of the dollar carry tradenow than they were previously.

Much of this deterioration isthe result of the breakdown in thespot rate component. The asser-tion made so often in these pages,equity markets are agnostic toany level of currency spot rates,is borne out in the absence of adefined relationship (Figure 5).

The interest rate spread compo-nent has a stronger but not verysignificant deterministic relation-ship to relative equity perfor-mance (Figure 6). While the asser-

The formerly strongly positive correlation between global equity returns and the dollar

carry trade has deteriorated.

FIGURE 4: WEAK POSITIVE CORRELATION BETWEENDOLLAR CARRY AND EQUITIES

-10%

-5%

0%

5%

10%

15%

20%

-5.0

%

-2.5

%

0.0

%

2.5

%

5.0

%

7.5

%

10.0

%

12.5

%

AverageAnnua

lEquityMarketReturn,

USD

Average Annual Return On Dollar Carry Trade

There is no evident relationship between equity markets and currency spot rates.

FIGURE 5: NO CORRELATION BETWEEN SPOT COMPONENT OF DOLLARCARRY AND EQUITIES

-10%

-5%

0%

5%

10%

15%

20%

-7.5

%

-5.0

%

-2.5

%

0.0

%

2.5

%

5.0

%

7.5

%

10.0

%

AverageAnnualEquityMarketReturn,

USD

Average Annual Return On Spot Rate Component Of Dollar Carry Trade

8/2/2019 Ctm 201201


tion that higher short-term inter-est rates in a country contributeto a relatively strong stock marketperformance might have seemedincongruous throughout muchof history, such are the dynamicsof capital flows in a carry tradeworld.

ImplicationsI excoriated the behavior of the

U.S. Treasury and the FederalReserve in the August 2008 analy-sis, noting how monetary policyappeared to be set in responseto equity market downturns andin callous disregard to the globalconsequences of money-printing,including dollar weakness, assetbubbles outside of the U.S., andthe financing of economic growthoutside of the U.S. via carry trademechanisms.

The opposite has not been true.

While three-month USD LIBORfell in response to weaker equityprices as measured by the MSCIWorld index, it has yet to rise inresponse to higher equity pricesas it had in 2004-2006 (Figure 7).

The unwillingness to maintainthe return on the worlds princi-pal reserve currency will lead tothe end of its use as such, if notnow then once an alternativebecomes available. As the U.S.has benefited immensely from

the dollars role as the reservecurrency over the years othercountries hold it and maintainits value despite the best effortsof American policymakers the cheap-dollar policy will leadto a longer-term diminution ofrelative American welfare in theglobal economy. It quite literallyis being carried away.y

For information on the author, see

p. 4.

The interest rate spread component has a stronger but not very significant

deterministic relationship to relative equity performance.

FIGURE 6: WEAKLY POSITIVE CORRELATION BETWEEN RATE COMPONENTOF DOLLAR CARRY AND EQUITIES

-10%

-5%

0%

5%

10%

15%

20%

-2.5

%

0.0

%

2.5

%

5.0

%

7.5

%

10.0

%

AverageAnnualEq

uityMarketReturn,

USD

Average Annual Return On Rate Component Of Dollar Carry Trade

The three-month USD LIBOR fell in response to weaker equity prices, but it has yet to

rise in response to higher equity prices, as it did in 2004-2006.

FIGURE 7: WORLD EQUITIES NO LONGER AFFECT U.S. SHORT-TERM RATES

225

250

275

300

325

350

375

400

425

450

475

500

525

550

575

600

625

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Jan-99

Jun-99

Dec-99

Jun-00

Dec-00

Jun-01

Nov-01

May-02

Nov-02

May-03

Nov-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Feb-09

Aug-09

Feb-10

Aug-10

Jan-11

Jul-11

MSCIWorldFree

Index

Three-Month

USD

LIBOR

LedOneMonth 3-Mo. USD

MS World Free

8/2/2019 Ctm 201201


CPI: Consumer price index

ECB: European Central Bank

FDD(rstdeliveryday):Therst

day on which delivery of a com-modityinfulllmentofafutures

contract can take place.

FND(rstnoticeday):Also

knownasrstintentday,thisis

therstdayonwhichaclear-nghouse can give notice to abuyer of a futures contract that itntends to deliver a commodity in

fulllmentofafuturescontract.

The clearinghouse also informsthe seller.

FOMC: Federal Open MarketCommittee

GDP: Gross domestic product

ISM: Institute for supplymanagement

LTD(lasttradingday):Thenal

day trading can take place in a

futures or options contract.

PMI: Purchasing managers index

PPI: Producer price index

Economic Releaserelease (U.S.) time (ET)

GDP 8:30 a.m.

CPI 8:30 a.m.

ECI 8:30 a.m.

PPI 8:30 a.m.

SM 10:00 a.m.

Unemployment 8:30 a.m.

Personal income 8:30 a.m.

Durable goods 8:30 a.m.Retail sales 8:30 a.m.

Trade balance 8:30 a.m.

Leading indicators 10:00 a.m.

GLOBAL ECONOMIC CALENDAR

January

1

2

3

U.S.: December ISM manufacturingindexGermany: November employmentreport

45 Canada: November PPI

6

U.S.: December employment reportBrazil: December CPILTD: January forex options; JanuaryU.S. dollar index options (ICE)

7

8

9 Brazil: December PPI

10

11

12

U.S.: December retail salesFrance: December CPIGermany: December CPIUK: Bank of England interest-rateannouncementECB: Governing council interest-rateannouncement

13 U.S.: November trade balanceUK: December PPI

14

15

16India: December PPIJapan: December PPIUK: December CPI

17

18

U.S.: December PPICanada: Bank of Canada interest-rate announcementSouth Africa: December CPIUK: December employment report

19

U.S.: December CPI and housingstartsAustralia: December employmentreportHong Kong: Oct.-Dec. employmentreport

20Canada: December CPIGermany: December PPIHong Kong: December CPI

21

22

23 Australia: Q4 PPI

24

25

U.S.: FOMC interest-rate announce-mentAustralia: Q4 CPIJapan: Bank of Japan interest-rateannouncement

26

U.S.: December durable orders andleading indicatorsBrazil: December employment

reportSouth Africa: December PPI

27 U.S.: Q4 GDP (advance)Japan: December CPI

28

29

30 U.S.: December personal income

31

U.S.: Q4 employment cost indexGermany: December employmentreportIndia: December CPIJapan: December employment

reportFebruary

1U.S.: January ISM manufacturingindexHong Kong: Q4 GDP

2

3U.S.: January employment reportLTD: February forex options; Febru-ary U.S. dollar index options (ICE)

The information on this page is sub-

ect to change. Currency Traderis

not responsible for the accuracy of

calendar dates beyond press time.

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CURRENCY FUTURES SNAPSHOT as of Dec. 30

The information does NOT constitute trade

signals. It is intended only to provide a brief

synopsis of each markets liquidity, direction,

and levels of momentum and volatility. See

the legend for explanations of the different

fields. Note: Average volume and open

interest data includes both pit and side-by-

side electronic contracts (where applicable).

LEGEND:

Volume: 30-day average daily volume, in

thousands.

OI: 30-day open interest, in thousands.

10-day move: The percentage price move

from the close 10 days ago to todays close.20-day move: The percentage price move

from the close 20 days ago to todays close.

60-day move: The percentage price move

from the close 60 days ago to todays close.

The % rank fields for each time window

(10-day moves, 20-day moves, etc.) show

the percentile rank of the most recent move

to a certain number of the previous moves of

the same size and in the same direction. For

example, the % rank for the 10-day move

shows how the most recent 10-day move

compares to the past twenty 10-day moves;

for the 20-day move, it shows how the most

recent 20-day move compares to the pastsixty 20-day moves; for the 60-day move,

it shows how the most recent 60-day move

compares to the past one-hundred-twenty

60-day moves. A reading of 100% means

the current reading is larger than all the past

readings, while a reading of 0% means the

current reading is smaller than the previous

readings.

Volatility ratio/% rank: The ratio is the short-

term volatility (10-day standard deviation

of prices) divided by the long-term volatility

(100-day standard deviation of prices). The

% rank is the percentile rank of the volatility

ratio over the past 60 days.

BarclayHedge Rankings:Top 10 currency traders managing more than $10 million

(as of Nov. 30 ranked by November 2011 return)

Trading advisorNovember

return2011 YTD

return

$ Undermgmt.

(millions)

1. CenturionFx Ltd (6X) 22.30% 62.05% 18.8

2. Friedberg Comm. Mgmt. (Curr.) 17.19% -5.53% 101.8

3. JCH Capital Mgmt (Global Currency) 5.14% -0.10% 15.0

4. INSCH Capital Mgmt (Kintillo X3) 4.27% 12.97% 55.45. ACT Currency Partner AG 2.96% 22.20% 20.0

6. Floyd Cap'l Mgmt (Currency) 2.35% 1.87% 25.0

7. Premium Currency (Currencies) 2.27% 0.48% 592.7

8. CenturionFx Ltd 2.23% 5.48% 17.4

9. Quaesta Capital AG (v-Pro Vol.) 2.21% 1.96% 130.4

10. Gedamo (FX Alpha) 2.11% 25.78% 18.9

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

1. Four Capital (FX) 8.34% 11.27% 1.8

2. ForexAtom 5.38% -2.61% 3.7

3. Sagacity (HedgeFX100) 5.33% 7.83% 1.2

4. Adantia (FX Aggressive) 2.79% 39.25% 1.8

5. Capricorn Currency Mgmt (FXG10 EUR) 1.51% 7.21% 1.4

6. Blue Fin Capital (Managed FX) 0.99% 4.61% 9.3

7. GTA Group (FX Trading) 0.85% -9.70% 2.0

8. MatadorFX (MFX1) 0.20% 2.27% 1.8

9. Halion Capital (Conservative) 0.07% 29.19% 6.6

10. Overlay Asset Mgmt. (SHCFP) 0.06% -8.08% 7.6

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 Vol OI10-day

move / rank

20-day

move / rank

60-day

move / rank

Volatility

ratio / rank

EUR/USD EC CME 256.2 245.1 -0.22% / 0% -3.64% / 75% -2.18% / 21% .11 / 3%

AUD/USD AD CME 111.2 108.9 1.56% / 36% -1.93%/48% 7.71% / 100% .26 / 5%

GBP/USD BP CME 87.8 165.3 -0.55% / 38% -2.01% / 50% 0.09%/11% .32 / 55%

CAD/USD CD CME 65.7 109.6 1.69%/64% -0.30% / 13% 4.22% / 100% .30 / 33%JPY/USD JY CME 65.2 139.6 0.70% / 100% -0.01% / 0% -0.91%/32% .21 / 30%

MXN/USD MP CME 30.6 81.7 -1.15%/9% -2.81% / 65% -0.18% / 3% .12 / 15%

CHF/USD SF CME 23.6 35.0 1.38% / 100% -2.93%/54% -1.85% / 0% .06 / 0%

U.S. dollar index DX ICE 21.5 55.5 0.36%/19% 3.08% / 84% 1.92%/29% .14 / 3%

NZD/USD NE CME 6.0 21.9 2.19%/45% -1.52% / 8% 2.84% / 44% .20 / 5%

E-Mini EUR/USD ZE CME 4.2 6.1 -0.22% / 0% -3.64% / 75% -2.18% / 21% .11 / 3%

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

based on pit-traded contracts.

8/2/2019 Ctm 201201

30/33

INTERNATIONAL MARKETS


CURRENCIES (vs. U.S. DOLLAR)

Rank CurrencyDec. 28price vs.

U.S. dollar

1-monthgain/loss

3-monthgain/loss

6-monthgain/loss

52-weekhigh

52-weeklow

Previous

1 South African rand 0.1227 4.59% -2.69% -15.37% 0.1518 0.1166 16

2 Australian Dollar 1.01569 4.50% 2.70% -2.72% 1.1028 0.9478 143 New Zealand dollar 0.77328 4.34% -1.64% -3.83% 0.8797 0.7207 17

4 Canadian dollar 0.98021 2.58% 0.24% -3.09% 1.059 0.9467 9

5 Swedish krona 0.145735 2.10% -1.18% -6.38% 0.1662 0.1427 15

6 Brazilian real 0.53793 1.52% -1.86% -13.78% 0.65 0.5288 13

7 Singapore dollar 0.77203 1.36% -0.75% -4.15% 0.832 0.7606 8

8 Great Britain pound 1.564455 1.29% 0.29% -1.97% 1.6702 1.5409 6

9 Russian ruble 0.03201 1.25% 2.68% -9.35% 0.0366 0.0306 7

10 Chinese yuan 0.15741 0.51% 0.51% 2.10% 0.1578 0.1505 2

11 Taiwan dollar 0.032995 0.37% 0.52% -4.64% 0.03510 0.0321 3

12 Hong Kong dollar 0.12857 0.24% 0.23% 0.14% 0.1288 0.1281 113 Thai baht 0.031835 -0.08% -1.50% -1.76% 0.0336 0.0314 5

14 Japanese yen 0.01284 -0.23% -1.83% 3.72% 0.0132 0.0117 4

15 Swiss franc 1.06939 -0.59% -3.75% -10.62% 1.3779 1.0269 12

16 Euro 1.306765 -1.35% -3.62% -7.93% 1.4842 1.2901 11

17 Indian rupee 0.018465 -3.10% -8.13% -15.76% 0.0226 0.0181 10

GLOBAL STOCK INDICES

Country Index Dec. 281-monthgain/loss

3-monthgain/loss

6-monthgain loss

52-weekhigh

52-weeklow Previo

1 Switzerland Swiss Market 5,895.30 6.75% 6.19% -1.78% 6,739.10 4,695.30 3

2 U.S. S&P 500 1,249.64 4.79% 8.56% -3.63% 1,370.58 1,074.77 8

3 UK FTSE 100 5,507.40 3.66% 5.55% -4.50% 6,105.80 4,791.00 6

4 Mexico IPC 36,644.86 3.06% 9.59% 1.26% 38,876.80 31,659.30 1

5 Hong Kong Hang Seng 18,518.67 2.67% 2.82% -16.06% 24,468.60 16,170.30 13

6 France CAC 40 3,071.08 1.93% 2.52% -20.27% 4,169.87 2,693.21 14

7 Japan Nikkei 225 8,423.62 1.64% -2.23% -12.70% 10,891.60 8,135.79 10

8 Italy FTSE MIB 14

ctm 201201

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