forextradingmagazinedec08
TRANSCRIPT
December 2008
Volume 5, No. 12
Strategies, analysis, and news for FX traders
GETTING INSIDEINSIDE DAYS:FX performancebreakdown p. 22
EUROPE, EURO adjust to recession p. 8
CAN CHINA keep the ball rolling? p. 12
INDIA: The rupee and emerging markets p. 28
DEPRESSION and the dollar p. 16
Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Global Markets
Recession hits Eurozone . . . . . . . . . . . . .8How Europe handles its recession will play
a large part in determining the course of
the dollar’s primary currency counterpart.
By Currency Trader Staff
Even the dragon is feeling the pinch . . . .12Can China continue to grow its economy?
If not, what are the implications for the
global forex market?
By Currency Trader Staff
On the Money
The six Ds of depression . . . . . . . . . . . . .16The buck has gotten a bounce from the
recent financial panic, but the longer-term
picture isn’t quite as bullish.
By Barbara Rockefeller
Trading Strategies
Inside days: Part 2 . . . . . . . . . . . . . . . . . .22Find out how seven major currency pairs
responded to different types of inside-day
patterns.
By Chris Peters
CONTENTS
2 December 2008 • CURRENCY TRADER
continued on p. 4
4 December 2008 • CURRENCY TRADER
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CONTENTS
Ablesys
CME Group
dbFX
eSignal
Forex.com
FXCM
InterbankFX
MetaStock
PFGBEST.com
RS of Houston
Trader’s Expo
TradeStation
Tsunami Trading
The Wizard
Advanced Strategies
The rupee and emerging markets . . . . . .28Analysis suggests India’s status as a global
economic power is no accident.
By Howard L. Simons
International Markets . . . . . . . . . . . . . .34Numbers from the global forex, stock,
and interest-rate markets.
Forex News
Central banks continue to cut rates . . . .38Interest rates continue to fall as central banks
around the world attempt to keep the liquidity
pump primed.
New Products & Services . . . . . . . . . . . . .42
Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42Conferences, seminars, and other events.
Global Economic Calendar . . . . . . . . . . . .43Important dates for currency traders.
�Howard Simons is president of
Rosewood Trading Inc. and a strategist for
Bianco Research. He writes and speaks fre-
quently on a wide range of economic and
financial market issues.
�Barbara Rockefeller (http://www.rts-forex.com)
is an international economist with a focus on foreign
exchange. She has worked as a forecaster, trader, and con-
sultant 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 tenta-
tively titled How to Trade FX is in the works. Rockefeller is
on the board of directors of a large European hedge fund.
6 December 2008 • CURRENCY TRADER
Editor-in-chief: Mark Etzkorn
Managing editor: Molly Goad
Associate editor: Chris Peters
Contributing writers:
Howard Simons,
Barbara Rockefeller, Marc Chandler
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Art director: Laura Coyle
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Classified ad sales: Mark Seger
Volume 5, Issue 12. Currency Trader is published monthly by TechInfo, Inc., 161 N. Clark Street, Suite 4915, Chicago, IL 60601. Copyright © 2008TechInfo, Inc. All rights reserved. Information in this publication may not bestored or reproduced in any form without written permission from the publisher.
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CONTRIBUTORSCONTRIBUTORS
GLOBAL MARKETS
8 December 2008 • CURRENCY TRADER
Recession hits Eurozone
With world gross domestic product (GDP)expected to slow to 2.2 percent in 2009according to the International MonetaryFund (IMF) — down sharply from 5.0 per-
cent in 2007 and 3.7 percent in 2008 — the Eurozone will notescape the global slowdown unscathed. Recently releaseddata reveals the 15-nation Eurozone economy already is inrecession, and there is a widespread perception theEuropean Central Bank (ECB) was behind the curve inimplementing the necessary rate cuts to stimulate itseconomies. The IMF now forecasts a -0.5-percent gross GDPreading for the Eurozone in 2009, down from their project-ed 1.2 forecast for 2008.
Economists at 4CAST Inc. forecast a 0.2-percent GDPdecline for the Eurozone in 2009, while Moody’sEconomy.com projects a 0.1-percent GDP reading.Regardless, no one is painting a rosy picture.
“There is a clear risk that the negative quarterly sequencewhich started in the second quarter of 2008 will extend fur-ther than we think, meaning the risks are to the downsidein our forecast,” says Steve Webster, chief European econo-mist at 4CAST Inc.
Eurozone GDP fell in Q2 for the first time since the incep-tion of the monetary union in 1999. After a 0.7-percent risein Q1, GDP slid 0.2 percent in the second quarter, on a quar-
ter-over-quarter basis. Third-quarter data revealed a sec-ond consecutive quarter of negative growth with another0.2 percent fall — satisfying the technical definition ofrecession.
Inflation and interest ratesThe Eurozone economy had been struggling with sluggishgrowth for some time, but given the higher inflation rateearlier in 2008 — induced in large part by the record rally incrude oil prices — the central bank was unable to pull thetrigger for interest-rate cuts.
Its hands tied by its inflation-control mandate, the ECBactually hiked rates in July, bringing the official rate up to4.25 percent. But plunging prices in crude oil and othercommodities helped ease inflationary pressures, whichenabled the ECB to focus on the extremely sluggishEuropean growth picture.
“The latest release on consumer prices by Eurostatshowed inflation falling to 3.2 percent in October from 3.6percent in September,” says Enam Ahmed, senior econo-mist at Moody’s Economy.com. “With global commodityprices declining since the summer, it is likely inflation hascome down further, and we expect it to fall just below 3 per-cent by the end of this year.”
On Oct. 8 several central banks — the U.S. FederalReserve, ECB, Bank of Canada, Bank of England, SwissNational Bank, and Sweden’s Riksbank — delivered coor-dinated 0.50-percent rate cuts. Then in November, the ECBannounced another 0.50-percent cut, bringing the overnightrate to 3.25 percent. The ECB followed up on Dec. 4 with asomewhat surprising 0.75-percent cut, dropping the rate to2.5 percent.
“There is a view the ECB was slow to get on the rate-cut-ting horse,” says Charmaine Buskas, senior economicsstrategist at TD Securities.
But now widespread expectations exist for additionalrate cuts into 2009, which could ultimately bring the reporate as low as 2.00 percent by mid-2009.
Weak links and bright spotsWith the rest of the world slowing down, Eurozone
The Euro sell-off may be overdone, but don't look for a return to 1.600 anytime soon.
BY CURRENCY TRADER STAFF
Eurozone and G7 countries
The following countries use the Euro as their currency:
Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, and Spain.
The “Group of Seven” (G7) countries are:
Britain, Canada, France, Germany, Italy, Japan, and the United States.
CURRENCY TRADER • December 2008 9
economies that had relied on exportshave been hit hardest, includingGermany and Italy.
“Both [Germany and Italy] enteredinto a technical recession in the thirdquarter of 2008,” Ahmed says.“However, the countries that lookmost vulnerable are Ireland and Spain.Their economic outlook is furthercompounded by the marked correc-tions to their housing markets.”
Greece has recently posted thestrongest Eurozone economic growth— 0.5 percent in Q3 on a quarter-over-quarter basis — which was boosted bytourism and shipping, according toWebster.
“[But Greece] only accounts for avery small percentage of total GDP(about 2 percent), and a bigger influ-ence came from France, at +0.1 percent[Q3 growth] and Belgium also +0.1percent [Q3 growth],” Webster says.
Ahmed added that Greece wouldlikely be the strongest Eurozone per-former in 2009 as that country’s econ-omy will be supported by continuedemployment growth, public invest-ment in infrastructure and EU-fundinflows.
Risks for the Euro?Despite some chatter that recession inthe Eurozone could cause the centralcurrency system to become unhingedor spark a break-up of the monetaryunion, most strategists downplay thatrisk.
“This is what is called a symmetricshock — everybody needs rates to godown,” explains Jay Bryson, globaleconomist at Wachovia Securities. “Itis much more of a challenge when it isan asymmetric shock — when onecountry does very well and anotherdoesn’t.”
The Euro has fallen sharply vs. theU.S. dollar in recent months (Figure 1),but this was more of a function of theunwinding of global positions thatbrought U.S. dollars back home than abullish-dollar scenario. A safe-havenbid into the U.S.-treasury market dur-
ing the global financial uncertainty ofrecent months has also helped propup the dollar.
Fundamentally, however, someeconomists point out the U.S. actedearlier than other G7 nations to imple-ment fiscal and monetary stimulus inearly 2008, which could potentiallyhelp the U.S. emerge from recessionbefore other countries around theworld.
The Euro trade-weighted exchangerate saw a dramatic 9.8 percentdecrease from the peak in April 2008to the late October low, which shouldhelp reduce pressure on Eurozoneexporters.
Into early December, the Euro/U.S.dollar pair (EUR/USD) had extendedthe consolidation that followed the bigsell-off, holding above key support atthe Oct. 28 low around 1.2300 (Figure2). Some say the sell-off from above$1.6000 is overdone, leaving room fora corrective rally into year end or earlyQ1. However, forex traders should beaware that traditional fundamentalcurrency drivers such as growth andinterest-rate differentials have fallento the wayside in recent months.
The Euro has fallen sharply vs. the U.S. dollar in recent months as safe-haven funds have flown to U.S. treasuries and the dollar. The move hasbrought the Euro/U.S. dollar rate back into the range of the 2006 consolidation.
FIGURE 1 — EURO RETRENCHMENT
Source: TradeStation
continued on p. 10
GLOBAL MARKETS continued
10 December 2008 • CURRENCY TRADER
“[The forex market] is still largely trad-ing on fear and uncertainty, whichexplains why we’ve seen such massiveinflows into the dollar,” Buskas says.“Knee-jerk [price action has] left all previ-ous rules of thumb at the door.”
Also, the forex market is not operatingin a bubble.
“The biggest direct influence on curren-cies during the last several months hasbeen the performance of asset markets,”says Chris Furness, head of currency strat-egy at 4CAST Limited. Looking ahead, hesuggests “any sign of a turn in the equitymarkets could be a very good signal tomark a turn in Euro/dollar.”
Buskas sees the potential for theEUR/USD pair to probe slightly lowershort-term and test the $1.20 area in Q42008 before rebounding in 2009. She pointsto a fourth-quarter 2009 target at $1.40.
Furness advises currency traders to keep aneye on the Euro/Japanese yen (EUR/JPY) andother yen cross rates (Figure 3). Further out,Furness sees the potential for buying opportu-nities in the British pound/yen pair (GBP/JPY).That cross, which was trading around 136.50 onDec. 3, has a major technical target at 134.75,Furness says.
“But, below there is the 1995 low at 129.45,”he adds. “Traders will be looking forAussie/yen on the buy side as well, because theyield, though much reduced, will still be infavor of the Aussie dollar.”
Lingering questionsMost economists’ crystal balls are, unsurpris-ingly, a bit murky at the moment. The consen-sus right now seems to be for uncertainty, witha dash of negativity.
“As with most areas, the outlook is highlyuncertain [for the Eurozone], and depends inpart on the response of the authorities and howfast and how far the ECB and other global cen-tral banks cut rates,” Webster says. “There is astrong argument for large cuts and fiscal injec-tions as soon as possible to try to counter thethreat of a long downturn.”
What will it take to start the recovery process? “Everybody knows the global economy is in recession or
will soon be heading into recession,” Buskas says.
“[Turning things around] largely depends on getting thetrouble sorted out in the credit markets. We are now seeingabnormal risk aversion. Banks have to start lending to otherbanks and to consumers and businesses again.” �
FIGURE 3 — YEN CROSSES
Source: TradeStation
Some analysts see potential for action in the Japanese yen crossrates, including the Euro/yen (top) and British pound/yen (bottom).
FIGURE 2 — CONSOLIDATING AT SUPPORT
Source: TradeStation
As of early December, the Euro/U.S. dollar pair had extended the tradingrange that followed the big sell-off, holding above support at the Oct. 28low (around 1.2300).
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12 December 2008 • CURRENCY TRADER
GLOBAL MARKETS continued
Even the dragonis feeling the pinch
China will continue to play its economic cards close to its vest,
which will impact economies and currencies worldwide.
BY CURRENCY TRADER STAFF
No country is immune from the financial chal-lenges sweeping the globe. Despite postinggross domestic product (GDP) growth in theneighborhood of 9.5 percent for 2008, even the
Chinese economic engine will face slower growth into 2009.A major factor putting the brakes on the Chinese econo-
my next year will be a reduction in exports to the rest of theindustrialized world. Consumers in the U.S. and Eurozone,the main destinations for Chinese manufactured goods,simply aren’t buying as much.
Depending on what measures are used, Chinese growthcomprises roughly 5 to 10 percent of global GDP vs. 25 per-cent for the U.S. Nonetheless, a slowdown in China doeshave a trickle-down impact elsewhere.
Forecasts for 2009 Chinese GDP range from 8.5 percenton the high side from Northern Trust Co. to 8.0 percentfrom Wachovia Securities to 7.6 percent from Moody’sEconomy.com. While even 8 percent GDP growth soundspretty good from the American or European perspective,one needs to put the figures in context. Double-digit GDPnumbers have been common for China in recent years; 2007had an 11.9-percent reading.
“By Chinese standards an 8-percent reading would bethe lowest rate since 2002,” says Jay Bryson, global econo-mist at Wachovia Securities.
Export pictureSluggish consumer activity in the U.S., Europe, and else-where is already showing up in recent export data forChina.
“It is generally showing a slowing trajectory,” says JamesPressler, associate international economist at NorthernTrust Co. “It dropped by more than $8 billion in onemonth.”
According to Pressler, in U.S. dollar terms monthlyChinese exports in September 2008 stood at $136.4 billion.October’s preliminary figure came in at $128 billion.
Virendra Singh, senior economist at Moody’sEconomy.com, says net exports totaled 10 percent of over-all growth in 2007, around 8 percent in 2008, and shouldshrink to about 2 percent in 2009.
The domestic repercussions for China are predictable.“Export-oriented factories are closing down and laying
off a lot of workers,” Singh says. “[That suggests] China’stotal wages will shrink, which means people will be buyingless.”
Pressler says rising unemployment could be a challengeto social stability.
“Unemployment is very much against Beijing’s policy,”he says. “But the more they develop into a global economyand have to run their companies for profit, they are finding
it isn’t that easy.”
Fiscal stimulus, of a sortIn early November the Chinese gov-ernment announced a roughly $586billion fiscal stimulus package aimedat helping the economy. The packageappears “eye-popping” at roughly 14percent of their GDP, according toWachovia’s Bryson, who calls it “astep in the right direction.”
However, Pressler says when youdig deeper into the details, in reality itis “more smoke than fire.”
“They factored into that package alot of projects that were going to getdone anyway,” he says.“Infrastructure is always a nice thingto work on when nobody is buying
Few expect the Chinese government to let the yuan rally even moderately untilthe economic picture clears. In recent months, the Chinese currency hasnoticeably stalled, trading around 6.9 in early December.
FIGURE 1 — HUNKERING DOWN
Source: ADVFN (http://www.advfn.com)
CURRENCY TRADER • December 2008 13
what you are making.” Singh agrees. “They brought forward many projects they
had planned for the next 10 years, such as railway expan-sion and infrastructure,” he says.
In a Nov. 20 research note from Westpac InstitutionalBank in Sydney, analysts wrote: “A great deal of the pack-age had been in the 5-year plan all along (the 2005 plan). Ithad merely been pushed back as thegovernment was not inclined toundertake major capital works proj-ects in an environment of an invest-ment boom. Effectively the Chineseauthorities will now be squeezing a5-year capital works program intotwo years.”
Imports and the domestic pictureOn the other side of the coin,already-slowing Chinese growthhas translated into reduced importsas well — which has in turn con-tributed to the massive downturn incommodity prices across the board.
“China had been the buyer of lastresort for commodities,” Presslersays. “They had a demand foreverything.”
But as early as August in the wakeof the Olympics, Chinese demandbegan to slow. Pressler says month-ly Chinese imports stood at $111.5billion in July, but preliminary fig-ures revealed a post-Olympic dropto $93.1 billion in October.
The positive twist from the fall inglobal commodity prices has been asharp drop in Chinese inflationreadings. Singh says inflation fellfrom close to 8.5 percent in mid-2008to around 4 percent more recently.
Along with most other industrial-ized nations, the Peoples Bank ofChina (PBOC) has been in a mone-tary easing cycle. However, thePBOC, unlike the U.S. FederalReserve, is not an independent mon-etary authority, but instead simplyanother managed arm of the gov-ernment.
While three different benchmarkrates are available from PBOC,Pressler focused in on the primelending rate, which stood at 6.66
percent as of late November. The PBOC cut that rate inSeptember by 0.27 percent and in October by 0.54 percent,and further easing is expected.
The PBOC also dropped deposit rates by 0.54 percent inAugust to 3.60 percent. The impetus was to encourage“people to back away from saving,” Pressler explains.
continued on p. 14
14 December 2008 • CURRENCY TRADER
Economists note the current environment is actually anopportunity for China to build up domestic demand as away of fueling its own growth internally, so the country isnot so dependent on foreign demand for manufacturedgoods.
“The Chinese are very highly dependent on what hap-pens in terms of Western consumers — they are the maindrivers of their economy,” Singh says. “A lot depends onhow the Chinese government makes use of this crisis toweaken that linkage — so their consumers and local domes-tic demand can drive GDP going forward.”
Singh says the government could use three key policy ini-tiates to strengthen the Chinese domestic picture: loweringtaxes, strengthening the social security (retirement) system,and creating a health care system. He says the Chineseboast a savings rate of 35 to 40 percent of their GDP becauseindividuals have to save for retirement and pay for healthcare out of their own pockets.
According to Pressler, the underdeveloped Western por-tion of China, which he says is more agricultural and hasabout half the income of the more developed East, is anoth-er problem. The Chinese government’s “HarmoniousSociety” goals include developing Western China’s infra-structure, schools, and industry.
“Some of the western regions are still very much impov-
erished,” he says. “Developing a domestic growth enginewill be their prime challenge.”
The yuanIn recent months, the Chinese currency — the reniminbi, oryuan — has noticeably stalled out of its steady appreciationpath, trading most recently at 6.84 in late November (Figure1).
Many note that the Chinese government is no longereager to let the currency rally even moderately amid thereduction in the overall export picture.
“We expect the government to not let it appreciate anyfurther,” Singh says. Moody’s Economy.com expects theyuan to stay flat through 2009 and then begin appreciatingagain in second quarter 2010.
If market forces were allowed to move the yuan, Presslerestimates the currency would be trading around 5.5. Whilethe Chinese government could be tempted to allow modestdepreciation in its currency to support its exporters, shoutsof protectionism would likely be heard from the G7 nations,who still publicly want further appreciation.
For now, market watchers say the unspoken compromisewill likely be a sideways yuan for some time to come as theglobal environment works through the challenges of theglobal credit crunch and ensuing economic slowdown. �
GLOBAL MARKETS continued
The dollar has been inversely correlated with oilfor many months, and as 2008 draws to its sadclose we are seeing the renewal of a correlation
with the stock market (Figure 1). The powerful linkage between the S&P 500 and the dol-
lar seems to have started in August and September. Forexanalysts say as the Dow and S&P fall, risk aversion rises,which accounts for the U.S. three-month T-bill yielding ameasly 0.1 percent and the dollar remaining popular as thesafe-haven currency.
But as risk aversion fades on good news, such as theCitigroup bailout and President-elect Barack Obama nam-ing his economic team, the stock market rallies and the dol-
lar drops. Usually markets are characterized by the warpand woof of greed and fear, but lately we have had only fearand fear. Fear — blind, unreasoning, throat-choking fear —drives hot money to the dollar. But as soon as some greedcomes back, the fickle traders dump dollars with gay aban-don.
From 2003 to today, the Euro/U.S. dollar pair(EUR/USD) seems to track the S&P 500 index (Figure 1)and the Dow (Figure 2). But from 1999 to 2003, the relation-ship was inverse. The last time the dollar was so stronglycorrelated with stocks was the 1997-1998 Asian financial cri-sis, but before that, the relationship was inverse, too.Currencies are correlated with stock markets only by the
coincidence of being affectedby the same factors, or onlyduring crisis conditions.
In short, it’s an inconsistentand unreliable “relationship.”In fact, it’s probably not a truerelationship at all. We do notsee, for example, foreign capi-tal flows in and out of U.S.stocks as the dollar rises andfalls. That would be a relation-ship.
ON THE MONEY
As the year winds down, the buck is showing evidence of a renewed correlation with thestock market.
FIGURE 1 — THE DOLLAR AND THE STOCK MARKET
The six Ds of depression
16 December 2008 • CURRENCY TRADER
BY BARBARA ROCKEFELLER
The U.S. dollar is caught in a tangle of market economic forces that may put
downward pressure on the currency for quite some time.
Source: data — eSignal and Reuters Online; charts — MetaStock
The dollar must
continue to
depreciate to
continue to attract
buyers of U.S.
treasuries.
CURRENCY TRADER • December 2008 17
It’s different this timeMarket lore has it that only rookies say “It’s different thistime.” But it really is different this time. The fear and panicwe’ve see in the form of crashing markets is based on a real-istic judgment of the hard economic corrections to come.
There are six words starting with the letter “D” thataccount for everything we see in the news:
• Deleveraging• Downsizing• Demand destruction• Deflation• Detroit• Delayed development (in emerging markets)
Deleveraging refers to the reduction in debt everyone(including hedge funds) used to finance the purchase ofnow-questionable assets. Some of the assets are not reallyquestionable — they are worthless, only nobody has thecourage to say so out loud. It’s a pretty good guess thatTreasury Secretary Henry Paulson retreated from buyingassets under the Troubled Asset Recovery Program (beforePimco even got started repricing them) because he saw how
much was worth exactly zero. This includes hundreds ofbillions of dollars of mortgage-backed assets and literallytrillions in collateralized debt obligations.
It’s almost impossible to wrap your mind around how$200 billion in sub-prime mortgages was blown up by theinvestment banks into a collateralized debt market of many
trillions, but that’s what happened. The blue-collar workerearning $30,000 per year who was talked into believing hecould buy a house worth $300,000, or 10 times his annualsalary (the old norm was three times annual salary) is notreally the party to blame. We should be blaming the asset-creators.
Some of the deleveraging isvoluntary and some is invol-untary, but it doesn’t matter.The point is that credit con-traction is a process with itsown timeline, and this timethe cycle will be very long-lasting because there is somuch debt to be taken outback and shot.
Banks first. From a bank’spoint of view, a loan is anasset (unlike for the rest of us,for whom it’s a liability). Theasset side of the financial sec-tor balance sheet is beingdeflated from 50 to 60 timesthe liability side (deposits andequity capital) to a level morelike three to five times.
This financial sector down-sizing, accompanied by themerging of many institutions,hints at the downsizing tocome for all the banks’ cus-
The relationship between the EUR/USD and the Dow was inverted from 1999 to 2002.The last time the dollar was so strongly correlated with stocks was during the 1997-1998Asian financial crisis.
FIGURE 2 — THE EURO AND THE DOW
Source: data — eSignal and Reuters Online; charts — MetaStockcontinued on p. 18
The reserve currency always takes
the devaluative brunt of a crisis,
and the reserve currency country
always ends up a debtor.
ON THE MONEY continued
tomers, which in practice is you, me,Aunt Agatha, the corner store, andyour local Ford dealer. Downsizing isexactly what it sounds like: a lowerlevel of activity, a reduction in pricesas well as salaries and wages, and areduced standard of living.
Downsizing takes many forms. Itdoesn’t mean we have to give upindoor plumbing, although it almostcertainly means many Chinese whowere planning to get indoor plumbingwill have to wait another three to fiveyears, if not longer.
In Japan, upcoming capital spend-ing is being reduced as a directresponse to the destruction of demand,which impacts exporters.
In the U.S., demand for fuel is down5 percent in the past 10 months,according to the American PetroleumInstitute. Retailers are shaking in theirboots over a likely dismal holiday sea-son.
In the UK, giant retailer Marks &
Spencer ran a 20-percent-off sale, com-monplace in the U.S. but a one-timething in the UK. Downsizing is bothcause and consequence of demanddestruction.
The biggest case of demand destruc-tion is oil (Figure 3). Oil fell by two-thirds, from a peak of $147.27 in July toa low of $49.93 in late November. TheEUR/USD pair has kept pace withremarkable fidelity, albeit by a lesserpercent: 1.4727 on the same date as theoil high (July 11, 2008) to 1.2965 onNov. 25, 2008 or about 12 percent.
Stocks and dollarsWhen it comes to downsizing anddemand destruction, the stock marketdoesn’t get it. When Citigroup wasbailed out and Obama’s financial andeconomic team was named the dayafter, U.S. stock indices rallied likecrazy — a classic bear-market rallycaused by the relief of some immediategloom being lifted.
A great deal of the gloomthat had befallen the marketswas a result of the U.S.Treasury blundering andchanging course. First theTreasury was going to buytoxic assets for $700 billion,then it wasn’t and was goingto inject capital instead, thenmaybe it would buy the assetsor maybe it wouldn’t. In theend, it’s guaranteeing morethan $300 billion of Citigrouppaper. Now we have a tem-plate for any additional bankrescues that might come downthe pike.
And that’s the critical point— new crises that might comedown the pike. Restoring con-fidence and reducing uncer-tainty is a fine thing, but as isoften the case, stock traderswent overboard. The stock
market rally was treating the first threethemes — deleveraging, downsizing,and demand destruction — as aber-rant behavior that would end theminute Citigroup was rescued andObama took charge. But that’s wishfulthinking. All three factors are going toreduce corporate sales and income.Some companies may thrive in thenew era — such as the makers of thesteel and concrete that will be used inan Obama administration’s infrastruc-ture spending and presumably makersof solar and wind power machines inthe Obama alternative-energy initia-tive — but overall, most companieswill experience falling earnings.Doesn’t this drag down stock prices?
Yes, it does. The S&P 500’s long-term average P/E ratio is 15, accordingto http://www.bullandbearwise.com.At the end of September this year, itwas just over 25. The lowest the P/Eratio has been in recent years is 17
18 December 2008 • CURRENCY TRADER
Crude oil fell by two-thirds from July to early December, a drop the EUR/USD pair replicated on a smaller scale.
FIGURE 3 — THE EURO AND CRUDE OIL
Source: data — eSignal and Reuters Online; charts — MetaStock
(September 2006). Surely we mustexpect the S&P index to fall, and there-fore any intermediate rallies today aredoomed to be short-lived.
The immediate implication is thatthe downfall of the stock indices willlead to restored dollar strength. A dis-couraged stock market is also one thatembraces risk aversion, meaning anyforays into commodities, such as oil,will be discouraged, too (see the first“D” — deleveraging). Who wouldlend to a party wishing to get back intocommodity speculation?
As speculators depart in ever-greater numbers from commodityspeculation to lick their wounds, priceinflation at the other end of thepipeline goes down, too. For example,commodity giant BHP Billiton pulledits offer for rival Rio Tinto because ofthe deterioration of near-term globaleconomic conditions. Before the col-lapse of the takeover, the price of thedeal fell from $140 billion to $62 billionas both companies’ shares fell oncrashing commodity prices.
Deflation is an evil thing. One of itsmost pernicious effects is to promotesavings as a form of delayed con-sumption. An individual’s savings area virtue, but a society’s savings areperverse because, collectively, thedrop in aggregate demand leads to aglut of surplus goods that are thensold at distressed prices, followed by adrop in new production becausedemand is demonstrably lower.Employment falls, leading to greatersavings against the rainy day that hasnow come.
This was the core problem in Japanduring its deflationary decade in the1990s, and remains a challenge to theWest, even though we can easily arguethat Americans and Westerners are farless prone to save and far more likelyto consume to the limit.
Ah, but what is the limit? In recentyears, the limit for American con-sumers was set by credit card compa-nies and the banks and housing-marketfinancial institutions that dispensednew mortgages and home-equity linesof credit. Banks are contracting creditbecause they are over-leveraged.Therefore, with these sources of moneydrying up, households will have todownsize consumption.
Motor City madnessThat leads us to Detroit and develop-ing countries. As of early December noone knows if Detroit will be saved bytaxpayer money — rather, we knowtaxpayer money will be spent but wedon’t know in what form and to whateffect. Realistically, the effort to rescueDetroit has a very low probability ofsuccess when you factor in inevitablydeclining demand and the excess bag-gage the Big Three are hauling around— arrogant management and disas-trously expensive labor and pensioncontracts.
It’s not entirely a joke that the onlypeople who really want to buyAmerican cars are the Chinese. Astrong dollar harms Detroit’s exportcapabilities, but the downsizing thatwill come to China as a consequence oflower exports to the U.S. is worse. Thisis already evident, and depending onhow long demand destruction in theU.S. lasts (probably at least three tofive years), it will be disruptive inpolitical ways as well as economic andfinancial ways. As China itself down-sizes, the growth of its dollar reserveshas to slow and perhaps reverse.
Bailouts and bondsSo here’s the crunch. Current planshave the U.S. spending about $1.5-2trillion on stimulus and bailouts, asum that will almost certainly grow to
$3-5 trillion or more. This money hasto come from selling U.S. Treasuries.
Foreigners, including the Japaneseand Chinese, account for about 40 per-cent of the ownership of U.S. debt.Even if they continue to hold the samelevel in reserve they currently haveand don’t need to spend it domestical-ly — a questionable assumption —they will likely not be adding to theirdollar hoard.
So who is going to buy U.S. debtpaper? Risk-averse Americans willbuy some (a manifestation of the sav-ings dilemma), and so will mutualfunds, pension funds, and hedgefunds, driving the yield to ever-lowerlevels. The real yield is already nega-
continued on p. 20
CURRENCY TRADER • December 2008 19
tive all along the yield curve. Aninvestor buys U.S. paper today not toget a return on investment, but areturn of the principal. Conclusion:The dollar must depreciate to ever-cheaper levels to continue to attractbuyers of this paper, with the buyersassuming that an abnormally low dol-lar will eventually rise again to a moreeconomically justifiable level.
The scenario of the six Ds is the dol-
lar thrives and rises on each cyclicalrenewal of the understanding by stock,bond, and commodity markets of theforces at work. This process can go onfor a long time, with two or three cor-rective cycles in the upcoming yearalone.
Longer-term, the dollar is probablytoast. It’s the reserve currency. As theBretton Woods gang in 1944 acknowl-edged, the reserve currency always
takes the devaluative brunt of a crisis(and the reserve currency countryalways ends up a debtor).
The only happy thought to emergefrom all this is the forex market canonly become more popular. It stilloffers terrific leverage and better yet,what looks like a normal, if super-sized, cycle of rises and falls.�
For information on the author see p. 6.
ON THE MONEY continued
“Euro and dollar at parity?”Currency Trader, November 2008.A few short months ago the world was contemplating Euro$2. Now, the talk is all about Euro $1. What are the odds itwill happen?
“Crisis of confidence”Currency Trader, October 2008.As Wall Street and Washington prove themselves equallyinept, the dollar suffers.
“The dollar-oil connection”Currency Trader, September 2008.As oil broke, so did the Euro/dollar pair. What can we learnfrom analyzing bursting bubbles?
“Horizontal patterns in foreign exchange”Currency Trader, August 2008.The Euro’s price action lends itself well to dissection with the Darvas Box.
“Are the summer doldrums here?”Currency Trader, July 2008.If market myth is true, the season will bring a sideways market. But the myth warrants some analysis.
“Manias and crashes: Where will oil lead the dollar?”Currency Trader, June 2008.Although some analysts argue a falling dollar is helping topush up oil prices, it might be the other way around. Thequestion is, when will the bubble-go-round stop?
“Is the Euro going to the moon?”Currency Trader, May 2008.A look at the Euro’s recent gravity-defying performance.
“What’s really driving the dollar?”Currency Trader, April 2008.Signs of a potential turnaround in the buck can be found inan unexpected place.
“Why is the yen trending higher?”Currency Trader, March 2008.The yen’s rise seems to defy logic. Find out what’s behind it.
“Fundamentals lead the charts”Currency Trader, February 2008.The recent global market turmoil and banking crises havethe financial world on edge, but their impact on the dollarmight not be what most people expect.
“A fistful of dollars, a bundle of contradictions”Currency Trader, December 2007.The U.S. currency must resolve several paradoxes toemerge from its funk. One overlooked positive of the currentsituation may offer the depressed buck a way out of its bind.
“The road to 1.5”Currency Trader, November 2007.The dollar appears to be under siege, but perhaps the situation isn’t as grim as popularly believed.
“Helicopter Ben and the Japanese yen” Currency Trader, October 2007.The American and Japanese economies, and the fate of theconfounding yen.
“The dollar’s ‘sub-prime’ future” Currency Trader, September 2007.The fallout from the U.S. housing and mortgage meltdownmay be far from over, and how things unfold will have a bigimpact on the forex market.
“The rising yen — here we go again” Currency Trader, August 2007.The yen has been on the rise vs. the dollar. Find out if it’s areversal or just a correction.
Other Barbara Rockefeller articles:
You can purchase and download past articles at http://store.activetradermag.com.
20 December 2008 • CURRENCY TRADER
TRADING STRATEGIES
In last month’s issue, we looked at short-term per-formance following inside days across seven curren-cy pairs (“Inside days in the major currency pairs,”Currency Trader, November 2008). Inside days have a
lower high and a higher low than the preceding day and
signal a volatility contraction. The study found, overall,inside days preceded slight gains within a week, slightlybetter than the seven pairs’ benchmarks, or typical randommoves.
The analysis measured price action after all inside days,
22 December 2008 • CURRENCY TRADER
This follow-up study digs deeper into inside days and focuses
on the U.S. dollar/Canadian dollar (USD/CAD) and the Euro/U.S. dollar (EUR/USD) pairs.
Inside days: Part 2
Table 1’s left side shows currency pairs declined consistently after inside days that close in the upper 20 percent of their range.However, the table’s right side reveals less consistent behavior after inside days that close in the lower 20 percent of their daily range.
TABLE 1 — INDIVIDUAL CURRENCY PAIRS
After inside days closed in upper 20 percent of range After inside days closed in lower 20 percent of range+1 +2 +3 +4 +5 5D LUM 5D LDM +1 +2 +3 +4 +5 5D LUM 5D LDM
USD/CAD (84) USD/CAD (119)Avg. -0.03% -0.08% -0.13% -0.13% -0.13% 0.65% -0.78% Avg. 0.00% 0.01% -0.01% -0.03% -0.06% 0.74% -0.73%Med. 0.01% -0.06% -0.09% -0.07% -0.09% 0.52% -0.65% Med. 0.02% -0.02% -0.04% -0.08% -0.02% 0.54% -0.54%Min. -1.76% -1.88% -3.22% -2.24% -2.27% 0.00% -4.75% Min. -2.00% -1.54% -2.34% -2.47% -2.94% 0.03% -3.50%Max. 0.78% 1.06% 1.64% 1.62% 2.76% 3.25% 0.00% Max. 1.42% 1.48% 2.59% 2.70% 3.15% 3.69% 0.00%
EUR/USD (86) EUR/USD (115)Avg. -0.11% -0.22% -0.24% -0.16% -0.19% 0.89% -1.16% Avg. 0.05% 0.08% 0.10% 0.15% 0.07% 1.19% -1.04%Med. -0.10% -0.16% -0.26% -0.16% -0.16% 0.76% -1.04% Med. 0.07% 0.06% 0.07% 0.07% 0.01% 0.90% -0.79%Min. -1.57% -2.52% -2.95% -2.46% -3.06% 0.00% -3.78% Min. -1.47% -2.61% -4.33% -3.28% -6.18% 0.00% -6.83%Max. 1.18% 1.62% 2.09% 2.38% 2.60% 2.90% 0.00% Max. 1.65% 3.12% 2.68% 4.13% 4.93% 4.97% 0.00%
GBP/USD (102) GBP/USD (85)Avg. -0.02% 0.03% 0.19% 0.10% 0.12% 1.01% -0.87% Avg. 0.09% 0.06% 0.06% 0.02% -0.01% 0.96% -0.91%Med. -0.03% -0.04% 0.20% 0.03% 0.21% 0.81% -0.61% Med. 0.06% 0.13% 0.16% 0.05% -0.03% 0.85% -0.74%Min. -2.60% -1.79% -2.47% -3.41% -3.00% 0.00% -4.21% Min. -1.60% -1.69% -1.70% -2.28% -2.86% 0.03% -2.86%Max. 2.12% 2.70% 2.86% 3.38% 2.75% 4.41% -0.02% Max. 1.45% 2.19% 2.36% 2.91% 2.82% 3.02% 0.00%
USD/JPY (124) USD/JPY (120)Avg. -0.04% -0.11% -0.11% -0.10% -0.12% 1.05% -1.30% Avg. 0.01% -0.02% 0.05% 0.02% -0.02% 1.27% -1.34%Med. 0.05% -0.04% 0.00% -0.04% 0.12% 0.88% -0.89% Med. 0.11% 0.09% 0.14% 0.23% 0.17% 1.10% -0.83%Min. -3.08% -3.34% -4.67% -4.81% -5.83% 0.04% -7.15% Min. -2.75% -5.37% -3.92% -5.16% -5.56% 0.02% -6.55%Max. 1.84% 2.63% 3.09% 4.18% 3.36% 4.52% -0.04% Max. 2.24% 2.51% 3.02% 3.47% 4.15% 4.28% 0.00%
USD/CHF (86) USD/CHF (113)Avg. -0.07% -0.10% -0.17% -0.17% -0.11% 1.03% -1.15% Avg. -0.01% -0.02% 0.00% -0.05% -0.02% 1.19% -1.16%Med. -0.04% -0.08% -0.13% -0.15% -0.03% 0.92% -1.03% Med. 0.05% 0.04% 0.17% 0.00% -0.12% 1.00% -0.97%Min. -1.39% -2.87% -2.40% -3.20% -3.38% 0.03% -3.90% Min. -1.70% -2.69% -3.70% -3.17% -3.86% 0.00% -4.93%Max. 1.85% 2.23% 2.63% 2.06% 3.39% 3.74% -0.01% Max. 1.26% 1.83% 2.72% 3.15% 3.84% 4.01% -0.01%
AUD/USD (90) AUD/USD (114)Avg. 0.01% -0.09% -0.16% -0.04% 0.05% 1.11% -1.16% Avg. -0.06% -0.01% -0.05% -0.06% -0.06% 1.16% -1.24%Med. 0.03% -0.06% -0.08% -0.09% 0.05% 0.86% -0.78% Med. -0.01% 0.02% 0.03% 0.06% 0.05% 0.96% -0.97%Min. -1.81% -3.16% -3.00% -3.57% -3.14% 0.00% -5.13% Min. -1.64% -2.76% -5.46% -5.46% -5.09% 0.00% -8.85%Max. 1.52% 2.18% 2.34% 3.48% 3.58% 4.53% 0.00% Max. 1.69% 4.82% 3.86% 4.85% 4.14% 7.37% 0.00%
NZD/USD (86) NZD/USD (146)Avg. 0.03% 0.02% -0.08% 0.02% 0.03% 1.09% -1.05% Avg. -0.02% -0.07% -0.01% -0.03% -0.04% 1.14% -1.12%Med. 0.05% 0.14% 0.06% 0.04% -0.07% 0.84% -0.76% Med. 0.04% 0.02% 0.04% 0.06% 0.01% 0.93% -0.78%Min. -1.83% -3.16% -4.56% -5.13% -4.90% 0.00% -6.53% Min. -2.34% -3.98% -3.70% -3.14% -3.63% 0.00% -5.78%Max. 1.69% 2.02% 2.09% 2.80% 4.56% 4.89% 0.00% Max. 2.37% 2.18% 3.10% 4.46% 4.30% 5.98% 0.00%
Avg. total Avg. totalAvg. -0.03% -0.08% -0.10% -0.07% -0.05% 0.98% -1.07% Avg. 0.01% 0.00% 0.02% 0.00% -0.02% 1.09% -1.08%Med. -0.01% -0.04% -0.04% -0.06% 0.00% 0.80% -0.82% Med. 0.05% 0.05% 0.08% 0.06% 0.01% 0.89% -0.80%Min. -2.00% -2.68% -3.32% -3.54% -3.66% 0.01% -5.06% Min. -1.93% -2.95% -3.60% -3.57% -4.30% 0.01% -5.61%Max. 1.57% 2.06% 2.39% 2.84% 3.29% 4.03% -0.01% Max. 1.72% 2.59% 2.90% 3.67% 3.90% 4.76% 0.00%
BY CHRIS PETERS
after up- and down-closing inside days,and after inside days that followed trendruns of consecutive higher highs and high-er closes (and back-to-back lower lows andlower closes). In almost all cases, insidedays were followed by upward pricemoves over the next five days.
For example, currency pairs gained moreground after inside days that closed aboveyesterday’s close than those closing belowit (a median 0.1 percent vs. 0.06 percent,respectively).
However, the previous study focused on the combinedperformance of the major currency pairs. By contrast, thissecond installment breaks out the performance of individ-ual currency pairs following several types of inside-daypatterns: All inside days, inside days that closed in theupper and lower 20 percent of their daily ranges, and up-and down-closing inside days.
Top to bottomThe study examines seven currency pairs from Jan. 2, 1993to Sept. 12, 2008: U.S. dollar/Canadian dollar (USD/CAD),Euro/U.S. dollar (EUR/USD), British pound/U.S. dollar(GBP/USD), U.S. dollar/Japanese yen (USD/JPY), U.S. dol-lar/Swiss franc (USD/CHF), Australian dollar/U.S. dollar(AUD/USD), and New Zealand dollar/U.S. dollar(NZD/USD).
There were 4,174 inside days that formed during the testperiod across all seven currency pairs; 658 patterns closedin the upper 20 percent of the day’s range and 812 closed inthe lower 20 percent for an average of 94 and 116, respec-tively, per currency pair.
Figure 1 shows the median five-day performance follow-ing inside days (in all seven pairs) that closed in the top 20percent of the day’s range and those that closed in the bot-tom 20 percent. The figure compares this performance to its
median benchmark moves, or the typical same-lengthmoves in the past 16 years.
Price rebounded after inside days that closed in the lower20 percent of their daily range, and it dropped after insidedays that closed in the upper 20 percent of their daily range.For example, currency pairs gained a median 0.05 percenton the day after forming an inside day that closed in thelower 20 percent. By day 3, price rose a cumulative 0.08 per-cent before giving back those gains in the next two days.
Meanwhile, price fell 0.04 percent by day 2 after insidedays that closed in the upper 20 percent of their range, aloss that was extended to 0.06 percent by day 4. Overall,Figure 1 suggests price reversed direction after inside daysthat closed near daily extremes even though that pattern
Price rebounded after inside days that closed in the lower 20percent of their daily range, and it dropped after inside daysthat closed in the upper 20 percent of their daily range.
FIGURE 1 — INSIDE DAYS CLOSING NEAR EXTREMES
CURRENCY TRADER • December 2008 23
Price tended to gain in USD/CAD and EUR/USD followinginside days.
FIGURE 2 — AFTER ALL INSIDE DAYS IN USD/CAD AND EUR/USD
Inside days closed more often in the bottom 20 percent of their range than inthe top 20 percent.
continued on p. 24
Up- Down- Closed in Closed inclosing closing the upper the lower
Inside inside inside 20 percent 20 percent days days days of range of range
USD/CAD 542 274 269 84 119
EUR/USD 551 244 308 86 115
TABLE 2 — INSIDE DAYS IN USD/CAD AND EUR/USD
24 December 2008 • CURRENCY TRADER
TRADING STRATEGIES continued
EUR/USD made relatively strong gains following losing insidedays.
FIGURE 4 — DOWN-CLOSING INSIDE DAYSBoth markets lost ground after up-closing inside days asUSD/CAD slipped an average 0.03 percent by day 4 andEUR/USD fell twice as far during the same period.
FIGURE 3 — UP-CLOSING INSIDE DAYS
lasted less than a week. The next step is to break down how individual currency
pairs behaved following these patterns.
Individual resultsTable 1 lists performance statistics for each currency pairand the combined results after inside days that closed in theupper and lower 20 percent of their daily range (left andright sides, respectively). In addition to each pair’s cumula-tive close-to-close moves, it also shows the five-day largestup moves (LUMs), or close-to-high gains, and the five-daylargest down moves (LDMs), or close-to-low losses.
The currency pairs that fell furthest after inside days clos-ing in the upper 20 percent of their ranges are USD/CAD,EUR/USD, and USD/CHF. Each of these three pairsdropped at least a median 0.09 percent by day 3, althoughprice tended to bounce back by day 5.
AUD/USD responded the same way to this pattern,except price gained ground on day 1 before dropping fromdays 2 to 4. GBP/USD declined slightly on day 1, but ulti-mately ended the week squarely in positive territory.
By contrast, NZD/USD and USD/JPY swung back andforth between positive and negative territory. The Japaneseyen was especially inconsistent, even though it formed themost patterns of all pairs tested (124 vs. 102 or fewer). Forinstance, its median five-day move was 0.12 percent, but itsaverage value was -0.12 percent, meaning a few large drops
skewed the average lower than usual.Also, the difference between average five-day LUMs and
LDMs is most striking in the Japanese yen, another sign itspost-pattern moves were more volatile than in other mar-kets.
Closes in the lower 20 percent Table 1’s left side shows currency pairs declined consistent-ly after inside days that close in the upper 20 percent oftheir range. However, the table’s right side reveals less con-sistent behavior after inside days that close in the lower 20percent of their daily range.
For example, there are significant discrepancies betweenaverage and median values in four of seven pairs:JPY/USD, USD/CHF, AUD/USD, and NZD/USD.
By contrast, the Euro, British pound, and Canadian dol-lar produced the most consistent results. Both EUR/USDand GBP/USD climbed at least a median 0.07 percent byday 3 before pulling back by the end of the analysis period,very similar to Figure 1’s overall performance. But whileUSD/CAD’s average and median values are roughly insync, price fell after this pattern instead of rallying as theEuro and British pound did.
Finally, inside days closed in the bottom 20 percent oftheir ranges far more often than they closed in the upper 20percent. These upper-range closes formed 154 times morethan lower-range closes.
CURRENCY TRADER • December 2008 25
Focusing on the Canadian dollar and EuroThe study’s final section focuses on two cur-rency pairs that showed the most consistentresults in Table 1 — USD/CAD andEUR/USD.
Table 2 lists the number of inside-day pat-terns in the Canadian dollar and Euro: Allinside days, up- and down-closing insidedays, and inside days that closed in theupper and lower 20 percent of their dailyrange. Overall, inside days appeared morethan 500 times in both currency pairs —roughly 35 times per year.
Figure 2 compares the average and medi-an performance in the five days followingall inside days in USD/CAD and EUR/USD(upper and lower sections, respectively).Price tended to rally after inside days inboth pairs, climbing an average 0.04 percentby the second day in USD/CAD and gain-ing 0.08 percent by the fifth day inEUR/USD.
Up- and down-closing inside daysFigure 3 shows both currency pairs’ averageand median moves following up-closinginside days, and Figure 4 shows their per-formance after down-closing inside days.
Both markets lost ground after up-closinginside days as USD/CAD slipped an aver-age 0.03 percent by day 4 and EUR/USD felltwice as far during the same period.
The Canadian dollar’s loss was roughlyin-line with its benchmark. On the otherhand, EUR/USD’s five-day decline is out ofsync with its benchmarks’ slight gains, asign the dip is worth investigating. By day 5,the Euro turned upward, but still ended innegative territory, nearly 0.04 percent lowerthan its benchmark move.
Figure 4 shows both currency pairsgained ground and beat their benchmarksafter down-closing inside days. For exam-ple, USD/CAD climbed an average 0.07percent by day 2 before giving back most ofthat gain by day 5. However, the Euro madestrong, consistent gains as it rose an average0.17 percent within a week.
Inside days that closed near extremes Figure 5 shows the performance ofUSD/CAD and EUR/USD after inside days
continued on p. 26
26 December 2008 • CURRENCY TRADER
TRADING STRATEGIES continued
that closed in the upper 20 percent of their daily range. Comparing Figures 1 and 5, you’ll notice both markets
fall after this pattern, which conforms to the combinedresults of all seven currency pairs. USD/CAD declined 0.13percent, on average, by day 3, and benchmark and medianmoves point in the same direction. And the Euro droppedeven further, falling an average 0.24 percent by day 3 beforerebounding slightly by day 5.
Figure 6 shows the behavior of USD/CAD andEUR/USD after inside days that closed in the lower 20 per-cent of their range. The response is less consistent thanFigure 5’s patterns. At first, both currency pairs gainedground, but then the Canadian dollar fell while the Euroadvanced, peaking at 0.15 percent, on average, by day 4.
Table 2 shows inside days closed in the upper 20 percentof their range less often than their lower-20-percent coun-terparts, but Figure 5 shows the markets’ subsequent per-formance is more reliable.
The study’s most striking pattern occurred afterEUR/USD down-closing inside days. According to Figure 4,the Euro beat its benchmarks and jumped an average 0.17percent within a week after this pattern. Also, average andmedian values moved roughly in line with each other. �
Related reading “Inside days in the major currency pairs”Currency Trader, November 2008.Analysis of inside days that occur after short-term pricethrusts.
“Technical tool insight: Inside days”Active Trader, January 2003.An inside day (or bar) is a price bar that is encompassed bythe range of the preceding bar. It represents contractingvolatility from the previous bar.
“Trading the Euro inside out”Currency Trader, September 2005. Analysis of inside and outside days in the Eurocurrencyfutures offer some interesting surprises — and clues for howto trade this market.
“Volatility-based currency trading”Currency Trader, February 2005.Market volatility can be a complex subject, but understandinga few basic principles can help you implement strategies tocapitalize on volatility extremes.
You can purchase and download past articles athttp://store.activetradermag.com.
At first, both currency pairs gained ground after inside daysthat closed in the lower 20 percent of their range. But then theCanadian dollar fell while the Euro advanced, peaking at 0.15percent, on average, by day 4.
FIGURE 6 — INSIDE DAYS — CLOSING IN LOWER 20 PERCENT
USD/CAD declined 0.13 percent, on average, by day 3 afterinside days that closed in the upper 20 percent of their range.Meanwhile, the Euro dropped even further, falling an average0.24 percent by that point.
FIGURE 5 — INSIDE DAYS — CLOSING IN UPPER 20 PERCENT
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ADVANCED STRATEGIES
Future economic historianswill debate whether Indiain the early 21st centuryrepresented an economic
miracle or simply an adjustment fromthe self-inflicted poverty caused by ahalf-century of failed socialist experi-ments. The latter would make India’sdevelopment and entry into the firstrank of world economic powers paral-lel to China’s explosive growth, afterthe Chinese opted out of being a com-munist police state in favor of being amere corporatist police state. Andthey call economics the DismalScience.
One major difference between Indiaand China is currency policy. Chinapegged the yuan to the dollar at whatmany considered to be an artificiallylow rate through July 2005, and thenmanaged its revaluation thereafter.The dollar peg and the artificial cur-rency rate meant China’s monetarypolicy was set in large part by theFederal Reserve; if they consider thisto be an act of overt sabotage, theyhave remained silent. China’s econo-my has boomed, through mid-2008 atleast, on its exports, but as many of itsimports are priced in dollars, theirinflation has risen apace each andevery time the dollar has fallen.
India has opted for greater freedomof movement for the rupee (INR), andit has moved both up and down inresponse, which makes it an interest-ing barometer for actual currency con-
28 December 2008 • CURRENCY TRADER
BY HOWARD L. SIMONS
The rupee appears to have made the transition from emerging to emerged.
The rupee and emerging markets
The period of strongest relative performance for the Indian stock market corresponds directly to the period of greatest INR strength (far right).
FIGURE 1 — STRONG RUPEE, STRONG STOCKS
The average annual inflation rate in India has been much higher than the U.S.rate over the past 40 years.
FIGURE 2 — COMPARATIVE CONSUMER PRICE INFLATION IN INDIA AND U.S.
ditions in emerging markets. Like many other emerging markets,
India has parallel movements betweenits stock market and its currency (see“Currencies and stock index perform-ance, Pt. II,” Currency Trader, May2008). We can create a relative per-formance index of the total return forthe Indian stock market vs. the MorganStanley Capital International (MSCI)index for emerging markets and map itagainst the INR. Figure 1 shows theperiod of strongest relative perform-ance corresponds directly to the periodof greatest INR strength; so much(once again) for the notion a weakercurrency benefits a stock market.
This dual strength suggests a phe-nomenon observed in many emergingmarkets — capital inflows buoyingstocks and the currency simultaneous-ly — is at work. Capital flows often area double-edged sword for emerging markets: They are funon the way in, hell on the way out, and almost certain tocause inflation by virtue of the power of foreign investors to
bid away resources from domestic consumers. This hasbeen the experience forever in Mexico, and it was repeated
continued on p. 30
The forward-rate ratio (FRR) moved in favor of the dollar between July 2007and June 2008, but then started moving in the rupee’s favor.
FIGURE 3 — EXPECTATIONS SLOWLY SHIFTING IN RUPEE'S FAVOR
30 December 2008 • CURRENCY TRADER
ADVANCED STRATEGIES continued
over a wide swath of emerging mar-kets during the September-October2008 financial crisis.
Of course, inflation has been a prob-lem endemic to India for a long time;recall a half-century of socialismbefore they decided to try somethingelse. Figure 2 re-indexes the Indianconsumer price index (CPI) for indus-trial workers and the U.S. all-urbanCPI (not seasonally adjusted) toAugust 1968 and shows the averageannual rate of inflation in India overthe past 40 years has been much high-er than the U.S. rate (7.50 percent to4.68 percent). High-inflationeconomies seldom are rewarded withstrong currencies; the opposite claimis difficult to verify, as the worldseems to have run out of low-inflationcurrencies.
Short-term interest rate differentialsInflation, capital flows and long-terminterest rates are important in estab-lishing currency movements (and willbe discussed here), but they are not asimportant as expectations for short-term interest rates. Let’s return to atool used in previous analysis formeasuring these expectations.
First, take the forward rate ratiobetween six- and nine-month USDLIBOR, the rate at which we can bor-row money for three months startingsix months from now and divide it bynine-month LIBOR itself. This is theFRR6,9 for the dollar. Although there isno actively traded equivalent for INRLIBOR, there is an active market forIndian Treasury bills, and it shouldhave parallel trends to offshore INRmarkets, plus or minus the equivalentof an INR TED spread.
If we subtract the INR FRR6,9 fromthe USD FRR6,9, we get a forward-looking measure of whose short-terminterest rates are going to rise thefastest, and which leads the currency
Changes in the currency rate affect long-term rate differentials, the exact opposite of the case for short-term rate differentials.
FIGURE 5 — INDIAN CAPITAL MARKET YIELD CURVE EXPECTED TO FLATTEN RELATIVE TO U.S.
The relative downturn in Indian stocks led a downturn in the 10-year note differential by an average of six months after mid-2004.
FIGURE 4 — LONG-TERM INTEREST RATES AND RELATIVE STOCK PERFORMANCE
by three months on average. Figure 3shows it moved substantially in favorof the dollar between July 2007 andJune 2008, but started to move in therupee’s favor thereafter.
Capital market movementsWe introduced the topic of India’sstrong stock market at the outset. Asstocks are discounted at capital mar-ket horizons, we should see a relation-ship between the relative performanceof the Indian and U.S. markets asmeasured by MSCI total returns, thespread between INR and USD 10-yearT-note yields (Figure 4). We do, butonly after mid-2004. The relativedownturn in Indian stocks led adownturn in the 10-year note differen-
continued on p. 32
The U.S. capital market has been more volatile than the Indian market. Lowervolatility makes assets more attractive, all else held equal.
FIGURE 6 — U.S. CAPITAL MARKET MORE VOLATILE THAN INDIAN COUNTERPART
32 December 2008 • CURRENCY TRADER
tial by six months on average after that point.After a brief collapse in the differential between 10-year
note yields in early 2004 when it became apparent theFederal Reserve would have to start raising short-term inter-est rates, long-term Indian yields began a prolonged climbagainst U.S. yields. With the six-month lag noted above, thiswas when the Indian stock market began its pronouncedperiod of outperformance against the U.S. market. The com-bination of rising stocks and rising long-term interest ratesindicated the Indian economy was overheating at the time;this would lead to the relative tightening of credit seen in theFRR6,9 differential and the INR’s subsequent rally.
Oddly, the chain of causation, which moves from short-term interest-rate differentials to the currency, seems tomove the other way at the capital market horizon. If we cre-ate forward rate ratios from two to 10 years, the rate at whichwe can lock in borrowing for eight years starting two yearsfrom now, divided by the 10-year rate itself, we see the INRleads the FRR2,10 differential by one year (Figure 5). Changesin the currency rate affect long-term rate differentials, theexact opposite of what we see for short-term rate differen-tials.
If the pattern observable over the short space of thisdecade persists, the INR FRR2,10 should decrease relative tothe USD FRR2,10. This could occur via a flatter Indian yieldcurve, a steeper American yield curve, or a combination ofboth.
Finally, we can see how the U.S. capital market has beenmore volatile than its Indian counterpart. Let’s plot the twoFRR2,10 series on separate scales (Figure 6). Note how theUSD FRR2,10 steepens into 2003, flattens and inverts goinginto 2006, and then steepens in 2007 before flatteningsharply again in 2008. The scale ranges from 0.99 to 1.18.
The INR FRR2,10 had a sharp flattening and rebound inlate 2001-2003, but has remained confined into a very nar-row 1.00-1.05 range since that time. If a sign of a mature andwell-managed economy is stable expectations in capital mar-kets, the U.S. could learn a little from India. Lower volatilitymakes assets more attractive, all else held equal.
Sign of maturityAt what point do emerging markets emerge? In the case ofIndia and the INR, the answer seems to be, “They have —thanks for asking.”
Just as the Euro and the Canadian dollar tend to trade asa function of short-term interest-rate differentials, so, too,does the INR. At present, these differentials point to a post-crisis stabilization in the rupee if the U.S. can manage toreturn to monetary sobriety at some point and the worldavoids a repeat of the Great Depression.
But a stronger or weaker INR as part of normal fluctua-tions is not a cause for alarm. In a mature market, it just “is,”with no further value judgments attached. That is the bestnews of all.�
For information on the author see p. 6.
Related reading:Other Howard Simons articles
“Nordic currency confusion”Currency Trader, November 2008.Get a handle on the dynamics of the Northern Europeancurrencies.
“The Swiss Franc’s commodity connection”Currency Trader, October 2008.How can the Swiss currency be, of all things, a commoditycurrency?
“Franc-ly, my dear, I don’t give a carry” Currency Trader, September 2008.Investigating the Swiss franc carry trade, and what mightchange its dynamics.
“The short, awful life of the dollar carry trade” Currency Trader, August 2008.The implications of the weak-dollar policy and the dollar’s roles asa funding currency.
“Currencies and commitments” Currency Trader, June 2008.Find out what COT data conveys about forex price action.
“Getting carried away with the kiwi” Currency Trader, July 2008.What’s driving the New Zealand dollar, and how long is it likely tolast?
“Currencies and stock index performance” Currency Trader, April 2008.Find out how stock indices relate to the performance of their currencies.
“What’s down with the Australian dollar?” Currency Trader, March 2008.Traders have many assumptions about the nature of the Australiandollar, but only one of these preconceptions appears to have anyimpact on the currency.
“Currencies and U.S. stock-sector returns” Currency Trader, January 2008.This exhaustive analysis challenges some common assumptionsabout the relationship between currency moves and stocks.
“Interest-rate shocks and currency moves” Currency Trader, October 2007.Short-term interest rates are typically cited as the prime catalyst ofcurrency moves. This study puts that idea to the test.
“Stock shocks and the dollar” Currency Trader, September 2007.Want to know what really happens to currencies after big stockmarket moves?
“Howard Simons: Advanced Currency Concepts, Vol. 1”A discounted collection that includes many of the articles listedhere.
You can purchase and download past articles at http://store.activetradermag.com
ADVANCED STRATEGIES continued
INTERNATIONAL MARKETS
Currentprice vs. 1-month 3-month 6-month 52-week 52-week Previous
Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank
1 South African rand 0.09663 8.10% -26.29% -26.16% 0.1504 0.0841 17
2 Indian rupee 0.01995 2.84% -13.60% -14.71% 0.03974 0.01843 9
3 Australian dollar 0.63485 1.52% -26.77% -33.85% 0.9849 0.6005 16
4 Canadian dollar 0.79286 0.71% -17.02% -21.56% 1.0297 0.768 14
5 Euro 1.26905 0.27% -14.24% -19.51% 1.6038 1.2329 11
6 Taiwanese dollar 0.02995 0.10% -6.11% -8.69% 0.03335 0.02974 5
7 Chinese yuan 0.1467 0.09% 0.12% 1.68% 0.1467 0.1344 3
8 Hong Kong dollar 0.12902 0.02% 0.69% 0.64% 0.12902 0.1279 2
9 Thai baht 0.02871 -1.07% -3.30% -8.77% 0.03396 0.02775 4
10 Singapore dollar 0.65665 -1.09% -7.29% -10.83% 0.7434 0.6512 6
11 Russian ruble 0.03638 -1.20% -11.31% -14.28% 0.04334 0.03607 8
12 Japanese yen 0.01045 -1.88% 14.96% 7.99% 0.011 0.00872 1
13 Swedish krona 0.12265 -3.26% -22.40% -27.78% 0.1718 0.1172 12
14 Brazilian real 0.42027 -3.71% -32.09% -30.57% 0.6414 0.394 15
15 Swiss franc 0.82386 -4.20% -9.54% -15.67% 1.0375 0.813 7
16 New Zealand dollar 0.53719 -4.62% -24.26% -31.60% 0.8214 0.519 13
17 British pound 1.49797 -5.08% -19.18% -24.35% 2.0831 1.4556 10
CURRENCIES (vs. U.S. DOLLAR)
ACCOUNT BALANCE
Rank Country 2007 Ratio* 2006 2008+
1 Singapore 41.395 27 36.288 42.2082 Switzerland 65.534 15.8 58.708 64.1063 China 379.162 11.7 249.866 453.1464 Hong Kong 22.796 11.2 20.586 20.4565 Netherlands 55.891 7.4 8.6 6.76 Taiwan 25.402 6.8 24.661 28.3657 Sweden 25.903 6 27.707 25.5848 Russia 72.543 5.9 95.322 49.1819 Germany 175.371 5.4 147.134 174.137
10 Japan 195.904 4.5 170.437 195.14511 Canada 25.603 1.8 20.792 17.90912 Brazil 10.253 0.8 13.276 4.299
As of Nov. 25 *based on one-month gain/loss
34 December 2008 • CURRENCY TRADER
Rank Country 2007 Ratio* 2006 2008+
13 Mexico -6.368 -0.7 -2.425 -10.58814 France -39.363 -1.6 -27.712 -48.88515 India -23.131 -2.1 -9.503 -32.30116 UK -96.687 -3.5 -77.236 -105.14417 Australia -50.816 -5.7 -41.49 -52.98818 U.S. -784.341 -5.7 -811.483 -788.29319 South Africa -18.495 -6.7 -16.608 -19.23720 Spain -138.916 -9.8 -106.399 -154.849
Totals in billions of U.S. dollars*Account balance in percent of GDP +EstimateSource: International Monetary Fund,World Economic Outlook Database, October 2008
CURRENCY TRADER • December 2008 35
NON-U.S. DOLLAR FOREX CROSS RATES
GLOBAL STOCK INDICES
GLOBAL BOND RATESRank Country Rate Nov. 25 1-month 3-month 6-month High Low Previous
1 U.S. 10-year T-note 121.17 5.25% 3.73% 4.89% 122.47 111.15 22 Germany BUND 120.83 3.20% 5.40% 6.72% 121.48 109.65 13 UK Short sterling 96.71 1.42% 2.63% 2.74% 96.98 93.595 54 Japan Government Bond 139.31 0.93% 0.77% 3.73% 141.9 132.09 35 Australia 10-year bonds 95.315 0.25% 1.14% 1.97% 95.50 93.18 4
Country Interest rate Rate (%) Last change May 08 Nov. 07U.S. Fed funds rate 1 0.5 (Oct. 08) 2 4.5Japan Overnight call rate 0.3 0.2 (Oct. 08) 0.5 0.5Eurozone Refi rate 3.25 0.5 (Nov. 08) 4 4UK Repo rate 3 1.5 (Nov. 08) 5 5.75Canada Overnight funding rate 2.25 0.25 (Oct. 08) 3 4.5Switzerland 3-month Swiss Libor 1 1.00 (Nov. 08) 2.75 2.75Australia Cash rate 5.25 0.75 (Nov. 08) 7.25 6.75New Zealand Cash rate 6.5 1.00 (Oct. 08) 8.25 8.25Brazil Selic rate 13.75 0.75 (Sept. 08) 11.75 11.25Korea Overnight call rate 4 0.25 (Nov. 08) 5 5Taiwan Discount rate 2.75 0.25 (Nov. 08) 3.5 3.25India Repo rate 7.5 0.50 (Nov. 08) 7.75 7.75South Africa Repurchase rate 12 0.5 (June 08) 11.5 10.5
GLOBAL SHORT-TERM INTEREST RATES
1-month 3-month 6-month 52-week 52-weekRank Country Index Nov. 25 gain/loss gain/loss gain/loss high low Previous
1 Brazil Bovespa 34,813.00 18.27% -36.10% -51.40% 73,920.00 29,435.00 132 Hong Kong Hang Seng 12,878.60 16.91% -38.98% -46.62% 29,962.90 10,676.30 143 Japan Nikkei 225 8,323.93 16.21% -35.37% -39.20% 16,107.70 6,994.90 154 Mexico IPC 19,297.63 14.25% -26.95% -38.37% 32,292.90 16,480.00 105 South Africa FTSE/JSE All Share 20,263.10 10.34% -24.12% -38.08% 33,232.89 17,814.42 36 UK FTSE 100 4,171.30 8.27% -23.75% -31.15% 6,610.90 3,665.20 27 Germany Xetra Dax 4,560.42 5.21% -27.58% -34.42% 8,117.79 4,014.60 98 France CAC 40 3,209.56 4.64% -26.32% -35.00% 5,795.22 2,838.50 59 Italy MIBTel 15,406.00 3.73% -28.49% -39.14% 30,403.00 14,358.00 7
10 Singapore Straits Times 1,653.25 3.31% -39.52% -46.73% 3,621.84 1,473.77 1111 India BSE 30 8,695.53 2.19% -39.82% -46.81% 21,206.80 7,697.39 1212 U.S. S&P 500 857.39 1.00% -32.32% -38.11% 1,523.57 741.02 613 Switzerland Swiss Market 5,478.40 -0.41% -22.43% -25.60% 8,918.80 5,034.40 114 Canada S&P/TSX composite 8,442.86 -1.11% -36.47% -42.79% 15,154.80 7,647.11 815 Australia All ordinaries 3,575.40 -5.12% -29.76% -38.43% 6,741.40 3,201.50 4
Currency 1-month 3-month 6-month 52-week 52-weekRank pair Symbol Nov. 25 gain/loss gain/loss gain/loss high low Previous
1 Aussie $ / Pound AUD/GBP 0.424 6.97% -9.40% -12.56% 0.4895 0.3786 122 Canada $ / Pound CAD/GBP 0.52954 6.11% 2.66% 3.69% 0.5539 0.482 83 Aussie $ / Franc AUD/CHF 0.77088 5.98% -19.09% -21.60% 1.0095 0.712 154 Aussie $ / Yen AUD/JPY 60.78541 3.52% -36.31% -38.75% 104.448 55.1876 205 Canada $ / Yen CAD/JPY 75.90186 2.63% -27.86% -27.40% 116.404 72.8508 186 Euro / Yen EUR/JPY 121.491 2.19% -25.41% -25.47% 169.958 113.614 177 Real / Pound BRL/GBP 0.28069 1.46% -15.99% -8.22% 0.339 0.2441 108 Aussie $ / Euro AUD/EUR 0.50035 1.25% -14.65% -17.85% 0.6278 0.4725 139 Franc / Pound CHF/GBP 0.5502 0.93% 11.93% 11.51% 0.5734 0.4173 3
10 Aussie $ / Canada $ AUD/CAD 0.80134 0.83% -11.76% -15.69% 0.9833 0.7568 1111 Canada $ / Euro CAD/EUR 0.62491 0.44% -3.28% -2.58% 0.7053 0.6164 712 Real / Yen BRL/JPY 40.23267 -1.87% -40.96% -35.74% 69.3981 39.1567 1913 Franc / Yen CHF/JPY 78.87112 -2.37% -21.33% -21.93% 105.071 76.196 1414 Pound / Yen GBP/JPY 143.415 -3.19% -29.70% -29.96% 230.35 137.608 1615 Real / Euro BRL/EUR 0.33124 -3.97% -20.85% -13.77% 0.4197 0.3124 916 Real / Canada $ BRL/CAD 0.53048 -4.36% -18.18% -11.51% 0.6719 0.4726 617 Franc / Euro CHF/EUR 0.64937 -4.44% 5.49% 4.92% 0.6992 0.5977 218 Franc / Canada $ CHF/CAD 1.03992 -4.85% 8.99% 7.48% 1.1152 0.852 119 Real / Aussie $ BRL/AUD 0.66247 -5.16% -7.31% 4.92% 0.7391 0.6196 420 Pound / Euro GBP/EUR 1.18079 -5.34% -5.78% -6.04% 1.4104 1.1541 5
36 December 2008 • CURRENCY TRADER
Unemployment
Release 1-year Next Release 1-year NextPeriod date Rate Change change release Period date Rate Change change release
AMERICASArgentina Q2 9/22 8.0% -0.4% -0.5% 12/22 ASIA AND SOUTH PACIFICBrazil Oct. 11/19 7.5% -0.1% -1.2% 12/19 Australia Oct. 11/6 4.3% 0.0% 0.0% 12/6Canada Oct. 11/7 6.2% 0.1% 0.4% 12/5 Hong Kong Aug-Oct. 11/18 3.5% 0.1% -0.4% 12/18
EUROPE Japan Oct. 11/28 3.7% -0.3% -0.3% 12/26France Q2 9/4 7.6% 0.0% -0.8% 12/4 Singapore Q3 10/31 2.2% 0.0% 0.5% 1/30Germany Oct. 11/27 7.1% 0.0% -1.0% 1/7UK July-Sep. 11/12 5.8% 0.4% 0.5% 12/17
Gross Domestic Product*
Release 1-year Next Release 1-year NextPeriod date Change change release Period date Change change release
AMERICAS AFRICAArgentina Q2 9/17 20.0% 24.2% 12/18 S. Africa Q3 11/25 4.1% 15.5% 2/24Brazil Q2 9/10 7.7% 12.9% 12/99Canada Q3 12/1 1.2% 6.3% 3/2 ASIA AND SOUTH PACIFIC
EUROPE Australia Q2 9/3 0.3% 2.7% 12/3France Q3 11/14 0.5% 2.6% 2/13 Hong Kong Q3 11/14 6.3% 3.8% 2/25Germany Q3 11/13 0.0% 2.2% 2/13 India Q3 11/28 1.2% 18.7% 2/27UK Q2 9/30 0.4% 4.4% 12/23 Japan Q3 11/17 -0.5% -2.1% NLT 2/17
Singapore Q3 11/21 0.9% 1.7% NLT 2/27* Final estimates, at current prices, seasonally adjusted
CPIRelease 1-year Next Release 1-year Next
Period date Change change release Period date Change change releaseAMERICAS AFRICA
Argentina Oct. 11/11 0.4% 8.4% 12/10 S. Africa Oct. 11/26 0.0% 12.1% 12/17Brazil Oct. 11/7 0.5% 6.4% 12/5Canada Oct. 11/21 -1.0% 2.6% 12/19 ASIA AND SOUTH PACIFIC
EUROPE Australia Q3 10/22 1.2% 5.0% 1/28France Oct. 11/13 -0.1% 2.7% 12/16 Hong Kong Oct. 11/20 0.4% 1.8% 12/22Germany Oct. 11/14 -0.2% 2.4% 12/17 India Oct. 11/28 1.4% 10.5% 12/31UK Oct. 11/18 -0.2% 4.5% 12/16 Japan Oct. 11/28 -0.1% 1.7% 12/26
Singapore Oct. 11/24 1.0% 6.4% 12/23
PPIRelease 1-year Next Release 1-year Next
Period date Change change release Period date Change change releaseAMERICAS AFRICA
Argentina Oct. 11/11 0.6% 11.2% 12/10 S. Africa Oct. 11/27 -0.5% 14.5% 12/18Brazil Oct. 11/6 1.4% 14.7% 12/8Canada Oct. 11/28 -12.5% -0.2% 1/6 ASIA AND SOUTH PACIFIC
EUROPE Australia Q3 10/20 2.0% 5.6% 1/27France Oct. 11/28 -0.4% 2.8% 12/22 Hong Kong Q2 9/12 1.7% 6.6% 12/12Germany Oct. 11/20 0.0% 7.8% 12/19 India Oct. 11/7 -0.9% 11.0% 12/12UK Oct. 11/10 -0.1% 6.8% 12/8 Japan Oct. 11/13 -1.6% 4.8% 12/10
Singapore Oct. 11/28 -8.7% 0.0% 12/30
INTERNATIONAL MARKETS continued
LEGEND:Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
As of Dec. 1
INDUSTRY NEWSFOREX NEWS
In the battle to free up liquidity and jump starteconomies, central banks have liberally deployed theirmain weapon: lowering interest rates.
The U.S. Federal Open Market Committee (FOMC) cutthe fed funds rate to 1 percent in October, its lowest pointsince June 2004. At that time the rate had held at 1 percentfor a year, capping an extended easing cycle intended to
counteract the financial shakiness that followed the burst-ing of the dot-com bubble and the Sept. 11 terrorist attacks.
It is ironic that this easing policy, which has been at leastpartially blamed for abetting the housing bubble and mort-gage crisis, through several dramatic turns of events haslanded us in our current recession. Some wonder whetherthe Fed might cut rates again, perhaps even to zero, and
debate the potential repercussions.“If you get lower interest rates, all
the money market funds and [similar]vehicles start to have lots of prob-lems,” says Joseph Trevisani, chiefmarket strategist for FX Solutions, aNew Jersey-based online forex broker.“Its only going to lead to withdrawals,which would be against the liquidityand stability the Fed is trying to cre-ate.”
Federal Reserve Chairman BenBernanke, speaking before the GreaterAustin Chamber of Commerce in
Austin, Texas on Dec.1, acknowledgeda weak near-term economic outlookand discussed the feasibility of anadditional rate cut. Few expect the Fedto cut rates to zero, and the broadimpact of a 0.5- or 0.25-percent rate cutwhen the rate is already at 1 percentwould likely be minimal. However,that doesn’t mean some portions of thefinancial community aren’t pulling for
38 December 2008 • CURRENCY TRADER
Central banks continue to cut rates
continued on p. 40
The current recession
is already longer than all
but two of the economic
downturns the
U.S. economy has
experienced since 1945.
Managed money: Barclay Trading Group’s currency trader rankings for October 2008
Top 10 currency traders managing more than $10 million
as of Oc. 31, ranked by October 2008 return.
2008 $ UnderRank Trading October YTD mgmt.
advisor return return (millions)
1. John W. Henry & Co. (Int’l. FX) 32.70% 68.85% 46.2
2. Richmond Group (Gl. Currency) 14.86% 22.24% 39.0
3. First Quadrant (Managed Currency) 9.67% 25.12% 478.3
4. Sunrise Cap’l Partners (Currency Fund) 8.55% 13.44% 29.0
5. Lambay Capital Limited (Short-term) 5.00% 5.05% 17.3
6. Mesirow Financial (Currency Alpha) 4.02% 5.17% 1302.1
7. IPM Global Currency Fund (A) 3.72% 28.29% 157.0
8. Alder Cap’l (Alder Global 20) 3.70% 4.00% 165.0
9. ACT Currency Partner AG 3.67% 9.31% 20.0
10. Dominion Capital Mgmt. (FX) 3.62% 0.86% 10.0
Top 10 currency traders managing less than $10 million and more than $1 million as of Oct. 31, ranked by October 2008 return.
1. Alt-FX (AMF 1) 43.39% 18.43% 4.5
2. Putnam Currency Alpha Fund 22.83% 9.05% 1.9
3. Forex Cap’l Mkts (Sentiment) 15.35% -2.05% 2.7
4. Forex Cap’l Mkts (Sentiment Aggr.) 15.21% -20.06% 5.7
5. Spot Forex Mgmt. (Lausanne) 12.64% 34.90% 1.5
6. Aspect Capital (Gl. Currency) 6.82% -7.17% 7
7. Zone Cap’l FX Managed Account 6.56% 11.68% 1.3
8. Spot Forex Mgmt. (Zurich) 6.24% 16.56% 5
9. Absolute Asset Mgmt (Trading 1) 5.96% 5.69% 4.1
10. Marek D. Chelkowski (Forex) 5.72% 10.42% 4.1
Source: BarclayHedge (http://www.barclayhedge.com)
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.
CURRENCY TRADER • December 2008 39
This information is for educational purposes only.
Currency Trader provides this data in good faith,
but assumes no responsibility for the use of this
information. Currency Trader does not recommend
buying or selling any market, nor does it solicit
orders to buy or sell any market. There is a high
level of risk in trading, especially for traders who
use leverage. The reader assumes all responsibili-
ty for his or her actions in the market.
LEGEND:
Volume: 30-day average daily volume, in thousands.
OI: 30-day open interest, in thousands.
10-day move: The percentage price move from theclose 10 days ago to today’s close.
20-day move: The percentage price move from theclose 20 days ago to today’s close.
60-day move: The percentage price move from theclose 60 days ago to today’s close.
The “% rank” fields for each time window (10-daymoves, 20-day moves, etc.) show the percentile rankof the most recent move to a certain number of theprevious moves of the same size and in the samedirection. For example, the % rank for 10-day moveshows how the most recent 10-day move compares tothe past twenty 10-day moves; for the 20-day move,the % rank field shows how the most recent 20-daymove compares to the past sixty 20-day moves; forthe 60-day move, the % rank field shows how themost 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 pastreadings, while a reading of 0% means the currentreading is lower than the previous readings.
Volatility ratio /% rank: The ratio is the short-termvolatility (10-day standard deviation of prices) dividedby the long-term volatility (100-day standard deviationof prices). The % rank is the percentile rank of thevolatility ratio over the past 60 days.
CURRENCY FUTURES SNAPSHOT as of Nov. 28
The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’sliquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.
10-day move / 20-day move / 60-day move / Volatility Market Symbol Exchange Volume OI % rank % rank % rank ratio/rankEurocurrency EC CME 198.5 147.5 0.20% / 0% -1.94% / 11% -11.29% / 62% .15 / 25%Japanese yen JY CME 116.5 126.5 0.86% / 13% 2.86% / 33% 11.93% / 71% .19 / 0%British pound BP CME 67.8 109.9 4.76% / 100% -6.34% / 42% -13.03% / 66% .14 / 3%Swiss franc SF CME 35.2 39.8 -1.94% / 45% -6.36% / 96% -8.65% / 81% .20 / 22%Canadian dollar CD CME 32.0 92.2 -1.09% / 17% -2.15% / 35% -13.96% / 80% .21 / 8%Australian dollar AD CME 29.0 62.2 0.80% / 13% -3.26% / 14% -20.22% / 55% .14 / 10%U.S. dollar index DX ICE 4.8 37.6 -0.28% / 33% -0.10% / 0% 10.00% / 66% .22 / 28%Mexican peso MP CME 4.7 41.9 -2.07% / 36% -4.40% / 25% -21.58% / 59% .15 / 13%E-Mini eurocurrency ZE CME 3.6 2.4 0.20% / 0% -1.94% / 11% -11.29% / 62% .15 / 25%New Zealand dollar NE CME 1.0 18.6 -2.37% / 13% -7.13% / 56% -18.33% / 81% .16 / 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.
such a cut.“The one area where it [would have] a sub-
stantial affect is the banking system, in thesense that it increases their profit margins,”Trevisani says. “That is one good reason to doit, and I think [the Fed] will.”
On Monday, Dec.1 the National Bureau ofEconomic Research’s (NBER) Business CycleDating Committee anticlimacticallyannounced the U.S. economy officially enteredinto a recession in December 2007. Accordingto the bureau, which determines economicpeaks and troughs based on numerous factors,including GDP, employment, and retail sales,the 12-month-and-counting recession isalready longer than all but two of the econom-ic downturns the U.S. economy has experi-enced since 1945.
Cutting rates abroadThe dire need to stimulate spending hascaused central banks around the world to continue cuttingrates, a process that began in earnest just a few months agowith coordinated rate cuts by several major central banks.
The Reserve Bank of Australia (RBA) announced a 1-per-cent rate cut to 4.25 percent on Dec. 2 and on the followingday the Aussie dollar gained 0.8 percent against the U.S.dollar. Figure 1 shows the Australian dollar/U.S. dollar pair(AUD/USD) from the beginning of November throughDec. 3, the day after the rate announcement. Since June theAussie dollar has lost 32.3 percent against the U.S. dollar.
Combined with the Australian central bank’s four previ-ous rate cuts beginning in September, the target cash rate inAustralia has dropped a full 3 percent to its lowest pointsince December 2001. The RBA didn’t cut rates oncebetween then and September 2008.
New Zealand’s central bank cut its cash rate a record 1.5percent to 5 percent on Dec. 4. According to the Reserve
Bank of New Zealand’s statement regarding the cut, one ofthe biggest reasons they chose to decrease the rate stemmedfrom the continued economic slowdown of the nation’s
40 December 2008 • CURRENCY TRADER
FOREX NEWS continued
The kiwi dollar plunged whenthe Reserve Bank of NewZealand cut rates on Dec. 1.
FIGURE 2 — NZD/USD
Source: eSignal
The Aussie dollar gained mod-estly after the RBA loweredinterest rates on Dec. 2.
FIGURE 1 — AUD/USD
Source: eSignal
Bob DormanAd sales East Coast and [email protected]
(312) 775-5421
Allison CheeAd sales West Coast and Southwest
[email protected](415) 272-0999
Mark SegerAccount Executive
[email protected](312) 377-9435
Three good tools for targeting customers . . .
— CONTACT —
trade partners. “Economic activity in New Zealand will be further con-
strained as a result,” Reserve Bank Governor Alan Bollardsaid. The New Zealand dollar lost 3.5 percent against theU.S. dollar on Dec. 1 (Figure 2).
The economic downturn in Europe accelerated inNovember, prompting the Bank of England (BOE) and theEuropean Central Bank (ECB) to make major interest-ratecuts. On Dec. 4 the ECB cut rates 0.75percent to 2.5 percent, while the BOEcut its rate 1 percent to 2 percent thesame day.
The UK’s manufacturing index fell
to a record low of 34.3 in November, while the countries’services also fell to a record low of 40.1.
In a surprise move, the Swedish central bank moved itsDecember meeting up two weeks to address the worseningeconomic situation in its country. The Swedish Riksbankreduced its repo rate a massive 1.75 percent on Dec. 4. In apress release the bank stated it expected to hold at that levelthrough next year. �
CURRENCY TRADER • December 2008 41
ICE millions
The Intercontinental Ex-change’s (ICE) “Millions”currency futures have been
slowly increasing in popularity sincetheir introduction to the exchange onNov. 6. The contracts, which represent10 times the notional value of theICE’s other forex futures contracts(roughly one million units of the basecurrency), are traded on 12 major cur-rency pairs, including Euro/U.S. dol-lar (IEO), British pound/U.S. dollar(IMP), and U.S. dollar/Japanese yen(IEJ).
The entire suite of Millions futureshave traded 348 contracts per day onaverage since they were launchedthrough Dec. 1. The most popular byfar has been the Euro/U.S. dollar con-tract, which has accounted for 46 per-cent of the total volume in the group(six of the contracts have yet to trade).By contrast, the ICE’s most popularcurrency-pair futures contract, theEuro/Japanese yen (EJ), has averagedaily volume of 1,367 contracts so farin 2008. The exchange’s dollar index(DX) futures average around 5,000contracts daily.
However, because of the size of thecontracts, the 5,971 total Millions con-tracts traded since their launch areequivalent in value to 59,710 standardFX futures.�
42 December 2008 • CURRENCY TRADER
� CMS Forex has released VT Trader 2.0. The new inter-face sports large icon-based buttons and a new QuotesBoard, which provides greater visibility of market move-ment and lets traders place market orders and set stops,limits, and price alerts. In addition, VT Trader has expand-ed its arsenal of analytical tools with Traders Guardian, acollection of tools to gauge and analyze risk levels. It offersaccess to Dow Jones FX Select, a live newsfeed providingclients with real-time market news, economic indicators,and Dow Jones columns and rolling market commentarysuch as Dow Jones FX MarketTalk. For more information,visit http://www.cmsfx.com/en/trading-software.
� eSignal has released eSignal OnDemand, a chartingapplication featuring end-of-day market data and delayedintraday snapshots with no exchange fees. eSignalOnDemand offers research tools such as eSignal FormulaScript (EFS) to create, modify, and backtest studies andreplay data to support strategies; advanced charting withanalytics, backtesting, and the ability to program cus-tomized studies; plus the standard eSignal product fea-tures. eSignal OnDemand clients can access up to 15 yearsof historical data, updated whenever they open the appli-cation. In addition to end-of-day quotes, eSignalOnDemand users receive non-streaming current delayedmarket data and prices.
� Charles Schwab has enhanced its StreetSmart.com-trading platform. The upgrades include bracket order tech-nology, customizable trading alerts, and advanced chartingtools. For more information about StreetSmart.com and theactive trading services at Charles Schwab, visithttp://www.schwabat.com.
� TradeStation Securities launched TradeStationScanner, a primary feature of TradeStation 8.4 that allowsusers to scan, sort, and rank thousands of symbols by price,volume, or any of more than 500 fundamental data indica-tors to create custom symbol lists. They can further screensymbols using their own custom EasyLanguage analyticaltechniques for a variety of time intervals, from tick-by-tickto monthly. Further functions include a “scan wizard” thatwalks users through the process of creating and saving theresults of their scans; the ability to link scans run on a broaduniverse of symbols to those run on a smaller list of sym-bols using more precise scanning logic; an“Added/Dropped” tab that displays all symbols that havebeen added or dropped from the previous scan; and theability to place orders from scan results.
� CQG, Inc. and NH Investment & Futures havepartnered, allowing CQG to provide trading connectivity tothe CME Group, ICE U.S., KRX, NYMEX/COMEX, andSGX exchanges. This partnership allows NH Investment &Futures to offer CQG’s professional trading software toclients and traders in the U.S., Europe, Australia, and Asia.Customers clearing through NH Investment & Futures willhave access to CQG’s decision-making tools, consolidatedmarket data, and electronic trading via the CQG Trader andIntegrated Client platforms.
Note: New Products and Services is a forum for industry businesses to
announce new products and upgrades. Listings are adapted from press releas-
es and are not endorsements or recommendations from the Active Trader
Magazine Group. E-mail press releases to [email protected].
Publication is not guar
NEW PRODUCTS & SERVICES
EVENTS
Event: The World Money ShowDate: Feb. 4-7 Location: OrlandoDate: March 17-19 Location: Hong KongDate: May 11-14 Location: Las VegasFor more information: Go tohttp://www.moneyshow.com and click on “Events”
Event: International Trader’s ExpoDate: Feb. 21-24Location: New York, New YorkFor more information: http://www.tradersexpo.com
Event: 25th Annual Risk Management ConferenceDate: March 8-10Location: The Ritz-Carlton, Laguna Niguel, Dana Point, Calif. For more information: http://www.cboermc.com
Event: Live Trading Software and Trading ExposDate: April 5-7 Location: MiamiDate: June 7-9 Location: HoustonFor more information: http://livetradingexpo.com
Event: The 15th Forbes Cruise for InvestorsDate: June 2-14Location: Lisbon to VeniceFor more information: Go tohttp://www.moneyshow.com and click on “Events”
Event: International Trader’s ExpoDate: June 3-6Location: Los AngelesFor more information: http://www.tradersexpo.com
December 2008 • CURRENCY TRADER 43
GLOBAL ECONOMIC CALENDAR
Legend
LTD (last trading day): The finalday trading can take place in afutures or options contract.
FDD (first delivery day): Thefirst day on which delivery of acommodity in fulfillment of afutures contract can take place.
FND (first notice day): Alsoknown as first intent day, this isthe first day on which a clearing-house can give notice to a buyerof a futures contract that itintends to deliver a commodity infulfillment of a futures contract.The clearinghouse also informsthe seller.
CPI: Consumer price index
ECB: European Central Bank
FOMC: Federal Open MarketCommittee
GDP: Gross domestic product
ISM: Institute for supply management
PMI: Purchasing managersindex
PPI: Producer price index
DECEMBER/JANUARY
December
1 U.S.: November ISMCanada: Q3 GDP
2 Australia: Reserve bank board meeting
3 Australia: Q3 GDP
4 France: Q3 employment reportECB: Governing council meeting
5 U.S.: November employment reportBrazil: November CPICanada: November employment reportLTD: December U.S. dollar index options (ICE); December currency options
6
7
8 Brazil: November PPIUK: November PPI
9 Brazil: Q3 GDPCanada: Central bank interest-rate announcementMexico: November PPIS. Africa: Q3 employment report
10 Brazil: Central bank policy meetingJapan: November PPI
11 U.S.: October trade balanceAustralia: November employment reportS. Africa: Reserve bank monetary policy meeting
12 U.S.: November PPI and retail salesHong Kong: Q3 PPIIndia: November PPI
13
14
15 FND: December currency futuresLTD: December U.S. dollar index futures (ICE); December currency futures
16 U.S.: FOMC meeting; NovemberCPI and housing startsFrance: November CPIUK: November CPIFND: U.S. dollar index futures (ICE)
17 Germany: November CPIS. Africa: November CPIUK: Q3 employment report
18 U.S.: November leading indicatorsHong Kong: September-November employment reportS. Africa: November PPI
19 Brazil: November employment reportCanada: November CPIGermany: November PPIHong Kong: Q3 GDPJapan: Bank of Japan monetary policy meetingMexico: November employment report
20
21
22 France: November PPIHong Kong: November CPI
23 UK: Q3 GDP
24 U.S.: November personal income and durable goods
25
26 Japan: November employment report and CPI
27
28
29
30
31 India: November CPI
January
1
2 U.S.: December ISM and employment report
3
4
5
6 Canada: November PPI
7 Germany: November employment report
8 Mexico: December PPI
9 Canada: December employment reportIndia: December PPILTD: January U.S. dollar index options (ICE)
Economic Release time release (U.S.) (ET)GDP 8:30 a.m.CPI 8:30 a.m.ECI 8:30 a.m.PPI 8:30 a.m.ISM 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 a.m.
The information on this page issubject to change. CurrencyTrader is not responsible forthe accuracy of calendar datesbeyond press time.
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