APRIL - JUNE 2014

inter view

TRADER MAGAZINE

STOCHASTICRSI INDICATOR

Bollinger

NEW FED P O L I C Y

TRADINGTHE NEWS

THE IDEALTRADING MINDSTATE

John

GLOBAL MARKETS & VOLATILY DROP

J OHN B OLLIN G ER E XPL A INS H OW HE CR E AT ED B B NEW INDI C ATOR S A ND H OW TO USE T HE M

G L O B A L FX WATCH

EUROZONE B A N K I N G UNION RISKS

FXCONTENTs

GLOBAL FX WATCHA look at the disconcerting calm of the FX markets with majors evolving in tight ranges, and EM currencies opportunities.

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How to use the Stochastic RSI indicator to pinpoint trading opportunities

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04 EDITOR’S NOTE

TRADING PSYCHOLOGY:31 The Ideal Trading State: Learn what is the right trading state of mind and do the exercises to reach it

FUNDAMENTAL ANALYSIS:15 How Sound is the Pound? and how to trade it against USD and EUR

18 What’s Going Yuan? Why the Chinese currency is entering a new troubled phase

MONETARY POLICY:11 New FED Policy: How will markets react to a more aggressive FED?22 The Risks of the New Banking Union Plan: Eurocrats authorize bailouts AND bail-ins

TRADING METHODS:54 How to Trade the News Effectively: Follow the advice of UK’s most successful Forex fundamental trader76 Two Economic Indicators Traders Should Know: a look at the way elite traders use the CFTC COT Report and the VIX volatility index

MARKET TRENDS:28 Global Integration and Volatility in the Currency Markets

TECHNICAL ANALYSIS:43 Cycle Analysis in Currency Forecasts: the theory of cycles back to the Rothschild family

BOOK REVIEW:65 Diary of a Currency Trader, by Samuel J. Rae

FX MANAGERS:70 Interview with Ryan O’Grady, CEO of ROW Asset Management

TECHNICAL REPORTS:

80 Trends and Targets: Majors, Emerging and Asian Markets

80 Featured pairs: AUD/USD, EUR/SEK, USD/TRL, AUD/NZD

84 CONFERENCES & SEMINARS

INTERNATIONAL DATA:

85 FX Spot Monitor86 Central Bank Rates87 Economic Data - FX Poll88 Markets View

89 ECONOMIC CALENDAR

STOCHASTIC RSI

58INTERVIEWJohn Bollinger talks about his new set of Bollinger Bands tools and gives his advice to FX traders.

FX TRADER MAGAZINE April - June 2014 3

How will markets react to a more aggressive FED?

by Stewart Richardson

Janet Yellen chaired her first FOMC meeting in March, and the result is that market appears to believe that we have a more hawkish FED on our hands. Is the market correct in thinking this ? And if so, what changes should investors be thinking of making ?

One point that we would make at the beg inning of this discussion is that the FED is an institution that chang es slowly, and when a new course has been set, the FED usually continues on that new course for a long time.. . long er than most bel ieve l ikely at the start (see chart 1

of Fed Funds rate back to the mid 1980s). With tapering of QE now roug hly a third of the way throug h (from US$85bn a month down to US$55bn a month) and ta lk of rate rises in mid 2015, we need to tr y and understand just how far this tig htening c ycle wil l g o.

FXMONETARY POLICY

FX TRADER MAGAZINE April - June 2014 11

MONETARY POLICYFX

It is becoming clearer that Yellen’s FED is not quite as dovish as the bulls would have wanted. There are several FOMC members (quite influential thinkers as well) such as Bullard, Richard Fisher and Plosser, who seem to be nudging the FOMC in a slightly more hawkish direction. As a result, it is abundantly clear that QE will end this year unless there is a serious economic reversal or financial market event, and even then, with the whole efficacy of QE being questioned and more FOMC members now worried about price bubbles and potential financial market instability, the FED may take the view that QE simply has to end regardless. What was surprising to the market was that the first rate rise could be as early as April 2015 compared to previous expectations of end 2015, and that the extent of rate rises may be greater than expected with fed funds at 1% by end 2015 (previous expectation 0.75%) and at 2.25%

by end 2016 (previous expectation 1.75). The committee seems to be willing to look through the recent weather related economic slowdown and has become more hawkish than they were back in December.

There is naturally the chance that the FED may have communicated poorly with the market and come across more hawkish than they really are. After the communications debacle around the “non-taper” last September anything is possible. However, they had the chance to correct any market misconception when four Governors spoke at the end of the week. There were no signals from the speeches that the markets had misunderstood policy and so we have to assume believe that the FED is indeed more hawkish.

So, what does a more hawkish FED mean for financial markets? The

The first rate rise could be as early as April 2015 and the extent of rate rises may be greater than expected

Chart 1 : Fed Funds rate back to the mid 1980s

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WHAT ’S GOING YUAN?

The recent PBoC intervention is to change the ‘one way’ mindset, shake out speculators and introduce some volatility

Xi Jinping is making a concrete attempt to rebalance the economy and create a more sustainable growth

The risk is that a controlled depreciation could morph into uncontrolled capital outflows

The Workings of Chinese Currency management

First, a quick reminder of how Chinese currency management works. Since 2005, the PBoC (China’s central bank) has been managing the CNY gradually upward against the US dollar, at an annual rate of about 5% a year through the end of 2011 (except for a hiatus during the global financial crisis), and a slower pace of around 2-3% since 2012. The CNY was allowed to trade

1% below or above a “central parity rate” which is set daily by the PBoC (a measure which has been widened in the years from an initial 0.3%). From September 2012 until a week ago, the spot CNY rate continuously traded above the parity rate—usually, quite close to the 1% limit. This limit-up trading reflected the view that the CNY was a one-way appreciation bet.

Then, recently, a couple of notable things have happened.

• From the end of January the central bank has started to become more aggressive in his market intervention, bringing the daily fixing at levels of increasingly weaker levels for the Yuan. The overall movement has been of almost 3% from the lows with the market now trading well above mid-band, while before it was typically resting on the lower limit of the USD/CNY price.

• On the 15th of March the floating band has been widened from 2% to 4% (2% each side of the daily central parity).

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by Alessandro Balsotti

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Mark Twain

MONETARY POLICYFX

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FXMONETARY POLICY

Market was becoming too much one-way…

When analyzing the price action of the last couple of years, after the Yuan rise resumed, it can be said that the strengthening pressure has been - at least initially - genuine, since China has maintained, despite a substantial reduction over the years, a significant surplus in the balance of payments. In fact, to keep the speed of the rally in check, the PBoC has had to continually a c c u m u l a t e reserves by buying USD/CNY.

Holders of Yuan have also been benefitting from some ‘carry’, in the order of a few percentage points, due to higher interest rates compared to the dollar (much less if you do not have access to the domestic market being a foreign investor). Such a steady trend was bound to attract interest and speculation over time by different sort of players such as hedge funds or local corporations and, as it often happens in such cases, to strengthen the perception that staying short USD/CNY was a trade with very low or even no risks involved. A recent

estimate of JP Morgan believes that the long Yuan positions resulting from speculative activity could have reached around $ 750 billion (of which over 80% from local companies, and the rest from foreigners). Anecdotally, the phenomenon of exports’ over-invoicing has been like a wake-up call for policy-makers and a signal that the

situation was becoming extreme. The big discrepancy between the Chinese reported exports from China to Hong Kong, and the Hong Kong reported imports from China to Hong Kong - China’s reports being consistently higher than Hong Kong’s - made reconciliation impossible several times in recent months. The most reliable hypothesis is that Chinese

exporters keep declaring more than real exports to be able to sell as much as possible USD/CNY (there are rules that allow only currency transactions in the face of real flows of goods).

…which prompted reaction from the authorities

The recent weakening of the Yuan, in just a few weeks, is significant, especially in a market with very low volatility, as the USD/CNY has experienced in recent years. But it would probably not be attracting much attention if it wasn’t for the fact that it is an implicit signal of the change of behavior of the central bank. Why are they doing so?

I think that everything should be placed in a broader context. The ‘new rule’

under Xi Jinping is making a much more concrete attempt to rebalance the economy and create a more sustainable growth, while all efforts under the Hu Jintao guide were nothing more than a ‘facade’ push. Over the past 18 months, the greater determination to fight the excesses generated by years of tumultuous growth (financial leverage, real estate

FXMONETARY POLICY

The currency move is to change the ‘one way’ mindset, shake out speculators

and introduce some volati l ity

Chart 1 - USD/CNY chart – courtesy of JP Morgan

There are many tools available to retail traders that are pitched as ‘vital instruments’ in creating trading success. But the truth is, many of these tools should be disregarded and classed as unessential. In my experience, there is really only one tool a trader needs to master: the news.

The most successful traders navigate the world’s economic and political events with ease. They are the ones who are able to judge the reaction of the markets and adjust their trades accordingly. It’s this big picture thinking and honed fundamental analysis which brings success.

This approach forms the basis of my own trading and its one I ’m teaching thousands of members how to perfect through my educational course. But essentially, there are three components to bear in mind when trading the news.

How to trade the news effectively

by Jarrat Davis

Jarratt Davis has built his reputation as one of the world’s most successful Forex traders and developed a detailed strategy on how to trade the latest economic and political global events. Now, exclusively for FX Trader Magazine, he shares the ideas traders need to implement to make the right trades at the right time.Jarratt Davis’s educational program received FX Trader Magazine’s “Mark of Excellence” 2014.

To receive your reader’s discount on Jarratt Davis’ educational trading program, see at the end of this article.

TRADING STRATEGYFX

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J O H N B O L L I N G E RE X C L U S I V E I N T E R V I E W - F X T R A D E R M A G A Z I N E

“Technical analysis and robust trading systems are a way to minimize the impact of emotions in the trading process.”

John Bollinger celebrated the 30th anniversar y of the Bollinger Bands and recently released an entire suite of Bollinger Bands tools. John tells FX Trader Magazine how and why he created these new BB indicators and in which way they can help traders in the trading process.

FX Technical analysis

58 FX TRADER MAGAZINE April - June 2014