strategies, analysis, and news for fx traders march 2013 ...€¦ · strategies, analysis, and news...
TRANSCRIPT
March 2013
Volume 10, No. 3
Strategies, analysis, and news for FX traders
GAUGING A EURO REBOUND P. 31
U.S. dollar “new-high” pattern analysis p. 18
Canadian dollar: Loonie comes back to earth p. 6
Foreign exchange rules of engagement p. 10
The price of currency union p. 20
Perspective on “currency war” p. 12
2 March2013•CURRENCY TRADER
CONTENTS
Contributors .................................................4
Global MarketsHas the loonie lost its luster? ....................6Sluggish economic data and looming resistance could put a cap on a major dollar/Canada rally.By Currency Trader Staff
On the MoneyRules of FX engagement .........................10There might be new rules of engagement in foreign exchange, but that hardly means a cur-rency war is inevitable.By Marc Chandler
Straight talk about currency wars ..........12Perspective is needed when addressing the overheated currency war topic.By Barbara Rockefeller
Spot CheckDollar dance .............................................18A market’s phase will dictate the performance of a price pattern. What mode is the dollar currently in?By Currency Trader Staff
Advanced ConceptsThe interest rate price of a currency union..................................20Until it abandons its separate national histories andadoptsacommonfiscalpolicy,theEurozone will suffer the consequences of its fundamental contradiction.By Howard L. Simons
Global Economic Calendar ........................26Important dates for currency traders.
Currency Futures Snapshot .................27
BarclayHedge Rankings ........................27Top-ranked managed money programs
International Markets ............................28 Numbers from the global forex, stock, and interest-rate markets.
Forex Journal ...........................................31Dollar analysis prompts Euro trade.
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CONTRIBUTORS
4 March2013•CURRENCY TRADER
Editor-in-chief: Mark Etzkorn
Managing editor: Molly Goad
Contributing editor:
Howard Simons
Contributing writers:
Barbara Rockefeller,
Marc Chandler, Chris Peters
Editorial assistant and
webmaster: Kesha Green
President: Phil Dorman
Publisher, ad sales:
Bob Dorman
Classified ad sales: Mark Seger
Volume 10, Issue 3. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2013 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher.
The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past perfor-mance does not guarantee future results.
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CONTRIBUTORS
qHoward Simons is president of Rose-wood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on a wide range of economic and financial market issues.
qBarbara Rockefeller (www.rts-forex.com) is an interna-tional economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund.
q Marc Chandler ([email protected]) is the head of global foreign exchange strate-gies at Brown Brothers Harriman and an associate professor at New York University’s School of Continuing and Professional Stud-ies. Chandler has spent more than 20 years analyzing, writing, and speaking about
global capital markets. He is the author of Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange (Bloomberg Press, 2009).
6 March2013•CURRENCY TRADER
GLOBAL MARKETS
The Canadian dollar started 2013 with a thud, falling near-ly 5% vs. the U.S. dollar from mid-January to late February. Once a pillar of economic envy, Canada is running into some trouble in that area, and is expected to experience a modest slowdown in growth this year from 2012 levels.
During and after the global financial crisis, Canada’s economy held up relatively well and its recession was shallow, mild, and accompanied by little job loss. Also, Canada’s banking sector was a strength rather than a weakness. Overall, stringent and conservative banking practices had been seen in Canada, which limited the type of balance sheet rebuilding that had to occur in the U.S.
However, it appears Canadian consumers may have fall-en prey to a temptation that helped sink the U.S. economy. Driven by low interest rates, a housing boom has unfolded in Canada, with house prices soaring and consumers bor-rowing against their climbing home equity. Now, with eco-nomic conditions slowing amid a weak export picture and a bottleneck in Canadian oil supplies, debt-ridden consum-ers are no longer able to step in and drive the economy forward with more spending.
Also, a spate of recent economic data out of Canada has disappointed, pressuring the Canadian dollar to the downside. Since the start of the year, the dollar/Canada pair (USD/CAD) has climbed (reflecting Canadian dollar weakness) from .9815 to 1.0300 — a relatively big move in a short time for a currency that has a reputation for stabil-ity (Figure 1).
Let’s take a look at the underlying economic fundamen-tals for Canada, how monetary policy might unfold, and the implications for the Canadian “loonie” in the coming months.
Economy: A shaky housing marketAfter generating gross domestic product (GDP) growth at an approximately 1.9%-2% pace in 2012, economists expected Canada’s economy to slow down this year. Nomura and BNP Paribas both forecast contraction to a 1.5% pace, and while Moody’s Analytics currently fore-casts a 1.9%-2% rate for 2013, one economist there admits the risks associated with this outlook are to the downside.
BNP Paribas economist Bricklan Dwyer points to two key factors weighing on Canada’s economic outlook: hous-
Has the loonie lost its luster?
Sluggish economic data and looming resistance could put a cap on a major dollar/Canada rally.
BY CURRENCY TRADER STAFF
FIGURE 1: EARLY 2013 SURGE
The USD/CAD pair gained more than 5% between early January and mid-February, and more than 7% since mid-September 2012.
CURRENCY TRADER•March2013 7
ing and household debt. “They have an economy that has been consumer driven and benefit-ted from fast acceleration in house prices,” he says. “Consumers have borrowed against their homes.”
According to Dwyer, Canadian home prices have gained 125% since December 1999. “It’s a huge concern,” he says. “There is a real question about when or if the housing market has topped out — if the froth is just going to be removed and the economy will keep chugging, or if it will face a more substantial correction.”
The parallels are striking to the housing boom and bust that unfolded in the U.S. However, while in recent years U.S. consumers have worked to improve their balance sheets, the Canadians have been going in the opposite direction. Dwyer notes that house-hold debt as a percentage of disposable income is 155.5% in Canada, compared to 139.4% in the U.S. But now Canadian consumers are beginning to pull back on spend-ing, which is removing one of the props from the economy.
Is Canada set up for a U.S.-style housing collapse and recession? Dwyer says no, at least for now. “Our base case is that we see a 15% price correction to take some of the froth out of housing,” he says.
The U.S. connection and exportsIn addition to its uncertain housing market, Canada’s economic picture is further clouded by declining exports to the U.S. “About three-quarters of Canadian exports go to the U.S., and the U.S. is still not back to full employ-ment,” says Mark Hopkins, senior economist at Moody’s Analytics. “The Canadian economy has been running on ginned-up consumption spending to help replace the miss-ing export growth.”
Comparing some numbers before and after the global financial crisis reveals how Canada has suffered on the export front. Canadian merchandise exports in 2012 totaled $462 billion, a 5.2% decline from the 2008 figure of $487 billion, according to Hopkins. Exports to the U.S. in 2012 stood at $338 billion, down 8.4% from $369 billion in 2008.
That trend isn’t likely to reverse soon. The U.S. economy continues to face fiscal challenges that still have the poten-
tial to trigger government spending cuts, which in turn could slow the U.S. economy. Canada has the blessing and the curse to have the close ties to U.S. economic growth, and its fortunes will rise and fall accordingly.
“Depending on how things go with sequestration, the Canadian [growth] forecast could come down,” Hopkins says. “A rule of thumb I use is that exports to the U.S. are about three-quarters of all exports of goods and services, which in turn are about a third of GDP. Thus, roughly one-quarter of Canadian GDP is sold to the U.S. market. So, for every 1% drop in U.S. demand, we could expect roughly a quarter-point reduction in Canadian GDP. This is a direct impact.”
However, Hopkins also notes there is potential for growth in the Pacific Rim. “The biggest market [in the Pacific Rim], not surprisingly, is China,” he says. “In addi-tion to having the largest economy, China has had a vora-cious demand for resources, which it has sought to acquire not simply through Canadian exports, but also through offers to purchase large Canadian resource companies. There are a wide range of commodities in question, mostly ores and minerals, such as nickel and copper, but also wood products.”
Hopkins adds that the biggest potential growth area for exports to Asia is energy — coal, oil, and liquefied natural gas. “For the moment, exports of these products almost all go to the U.S. because Canada lacks the transporta-tion infrastructure to get these resources onto ships in the Pacific,” he says. “Plans to build a pipeline from Alberta
8 March2013•CURRENCY TRADER
GLOBAL MARKETS
through British Columbia to the coast are in development. Although by no means certain, this would greatly improve the ability of Canada to ship its vast energy resources to Asian markets, where oil and gas sell for a much higher price than in North America.”
Ironically, a supply bottleneck currently skews Canada’s oil picture. “There is too much supply and they can’t get it out,” Dwyer says.
Although Canada is an oil producer, there are no pipe-lines linking production in Alberta in the west to consump-tion in Ontario or Quebec in the east. “Because there is no pipeline, Canada still has to import roughly 40% of all the oil it consumes,” explains Charles St-Arnaud, foreign exchange strategist at Nomura.
Currently, Western Canada Select (WCS) oil from Alberta flows to the U.S. Midwest and Cushing, Okla., the main U.S. oil storage hub, and is ultimately land-locked. But because of increased U.S. oil production, Canadian oil is in oversupply. “The Western Canada Select has been sell-ing at a $50 discount to Brent [crude oil] since October,” St-Arnaud says. This, in turn, has weighed on Canadian oil company profits and, ultimately, on government tax revenues. “Oil producers are receiving less money for their oil exports and the lost revenues for the economy is $2.5 billion per month,” he says.
Central bank policyThe expected slowdown in 2013 growth has the Bank of Canada (BOC) backpedaling on its interest-rate tightening bias. The current BOC interest rate is 1%.
In late February, analysts seemed to think the BOC’s changing outlook would be reflected in its March 6 meet-ing. “I think they will shift their rhetoric,” Dwyer says. “Inflation is now below their target band. They are more likely to cut than raise rates in 2013 if things deteriorate more quickly.” Since the beginning of 2012, the BOC has been suggesting rate hikes could be in the works.
The bank’s inflation target is 2% with a +/- 1% band, and right now numbers are nowhere near that level. “In January, headline inflation was 0.5% year over year, reflect-ing weak demand and weaker energy and food prices,” Dwyer says.
The BOC’s softer tone at its January meeting was a major factor behind the Canadian dollar’s decline since the start of the year. Traders had already begun to price in expecta-tions for a rate hike, but now “a lot of investors are looking for the BOC to turn even more dovish at the March meet-
ing,” according to Vassili Serebriakov, FX strategist at BNP Paribas.
Also, the USD has been independently stronger. “The U.S. dollar has been doing a little better against a number of currencies, including the Canadian dollar, in part due to the more open debate on how much more Fed easing will be seen,” says Bob Lynch, head of G-10 FX strategy Americas at HSBC. “If the market needs to scale back on Fed expectations, risk currencies might suffer.”
Dollar/Canada near resistance?However, despite the recent weakness, several forex strate-gists believe the loonie could be ready to level out. In June 2012 the USD/CAD pair hit its high for the year around $1.0445; its high the previous year was 1.0657 (Figure 2). “Last year it poked briefly above $1.04,” Lynch says. “As you get up toward those levels it might be more difficult to extend, barring new [Canada-] bearish developments.
Serebriakov agrees the recent Canadian dollar weakness might be about to run its course. “I don’t think this is the beginning of a substantial weakness in the Canadian dol-lar,” he says. “I think it’s a readjustment to the economic news. I don’t think it’s the next yen or the next pound. I don’t see what would sustain this sell-off very strongly.”
St-Arnaud sees the potential for additional short-term Canadian dollar weakness, but expects a ceiling around $1.05 in the dollar/Canada pair. “Over the next few weeks dollar/Canada could continue to go higher if we see con-tinuing weakness in the economic data,” he says. “We know the first quarter could be relatively weak.” y
FIGURE 2: NEARING RESISTANCE
A longer-term picture shows the dollar/Canada pair approaching the resistance of its 2012 high.
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PER-FORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.
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10 October2010•CURRENCY TRADER
Traditionally, the international arena has been the realm within which nation-states pursue their national interests. The forex market is a subset of this international stage. This state of affairs held true before, during, and after the 1944 Bretton Woods conference, but a new understanding has emerged over the past couple of decades that is pro-ducing new rules of engagement, as it were.
The Group of Seven (G7) industrialized nations often reiterates the current rules of engagement in its vari-ous statements. There are essentially four rules. First, exchange-rate prices are best set by the market. Second, officials should avoid making foreign exchange prices an object of policy. Third, excessive volatility should be avoid-ed. Fourth, in the rare case where official action is needed, coordination is vital.
Beggar-thy-neighbor policiesWhen Brazil’s Finance Minister Guido Mantega first coined the term “currency war” in 2010, it seemed primar-ily directed at the U.S. The implication was the U.S. was pursuing unorthodox monetary policy to offset household and government deleveraging and reflate the world’s larg-est economy.
More recently, the new Japanese government was criticized for resorting to beggar-thy-neighbor policies. Officials in the government, led by Prime Minister Shinzo Abe, had been quoted in the press providing bilateral exchange targets for the dollar/yen rate. Since the election in the mid-November 2012, the yen has declined about 13.5% against the U.S. dollar. The yen has easily been the weakest of both major emerging-market currencies (out-
side of the Venezuelan bolivar, which had been devalued by 32%).
In the weeks leading up to the recent G20 meeting in mid-February 2013, there was much consternation and official push-back at what appeared to be official efforts to manage a depreciation of the yen. The statements issued by the G7 and G20 essentially reiterated the rules of engagement, but did not single out Japan — or any other country for that matter.
Softening stanceIndeed, even in the days before the G20 meeting, Japanese officials had begun tempering their comments and had ceased to cite specific yen targets. Instead, they empha-sized the extremely accommodative monetary and fiscal policies they were pursuing.
The criticism levied against the Japanese officials has other policy implications. Shortly after the G20 meeting, senior Japanese officials backed away from a public-private fund to buy foreign bonds, which probably would have seemed too much like intervention. In addition, despite earlier threats, senior officials downplayed the need to change the Bank of Japan charter. The suggestion had appeared to be too much of a threat to the central bank’s nominal independence.
Arbitrary nature of rulesThe rules of engagement recognize the right of countries to pursue monetary and fiscal policies that promote stable prices and sustainable growth. This means the long-term asset purchases of the U.S., Japan and, maybe soon, the
Rules of FX engagement
There might be new rules of engagement in foreign exchange, but that hardly means a currency war is inevitable.
BY MARC CHANDLER
ON THE MONEY
10 March2013•CURRENCY TRADER
CURRENCY TRADER•March2013 11
UK (again) are not in violation of the rules. Many observers are troubled by this prospect. They
don’t see the difference between a currency that falls because officials prod the market and a currency that declines because of eased monetary policy.
But every game or institution has rules the uninitiated find arbitrary. It’s difficult for some people to understand why the Americans call a game they play with their hands “football.” In basketball, you must dribble the ball as you walk. However, you’re allowed to take a step and a half to shoot the ball. In baseball, if you catch a fly ball, the bat-ter is out. But if there are fewer than two outs and runners on second and third base, a pop-up ball in the infield is an automatic out. Fielders need not even catch the ball.
Essentially, pursuing domestic policies for domestic goals is sanctioned by the rules of international conduct, even if a currency declines as a consequence. It is not prop-er, though, to specifically target or manage an exchange rate. It’s as if the temptations and dangers of beggar-thy-neighbor competitive devaluations are so great that, under the rules of engagement that have evolved since the late 1980s, high-income countries have generally forsworn their use.
The fear is that competitive devaluations can lead to trade wars, and then shooting wars. Of course, the clear reference is to the 1920s and 1930s. However, this fear is just as much a case of Godwin’s Law of Nazi Analogies. In 1990 Mike Godwin postulated: “As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1.” (“Meme, Counter-meme,” Wired magazine, 1994). Although Godwin was referring to online discussions, we can broaden it to include discus-sions of all kinds.
Easing market tensionsThere are several compelling reasons tensions in the cur-rency market will not lead to a trade war — or a shooting war. First, the main participants, the U.S., Europe, Japan, China, and the International Monetary Fund do not view current behavior as an act of war. Second, there are circuit
breakers and a trade-conflict-resolution mechanism under the auspices of the World Trade Organization. Third, as noted above, Japanese officials have ceased their offensive behavior.
Currency war was, arguably, a useful metaphor to illus-trate the tensions, but it took on a life of its own. There are numerous reasons investment capital has flowed into some emerging markets and, as a rule, those flows have slowed during the last couple of years even as several high-income countries pursue unorthodox monetary policies. These include stronger macro fundamentals, such as stronger growth and higher interest rates. Some investors are also attracted to countries where the currency is perceived to be deeply under-valued.
In the final analysis, numerous factors drive exchange rates. Official talk may have short-run impact but, ulti-mately, foreign-exchange prices are driven by interest rates, the larger investment climate, and other macro-eco-nomic variables. Typically, central banks prefer currency movement that is consistent with the thrust of their mon-etary policy.
The synchronized economic downturn prompted a cor-responding policy response, and led to increased tensions in the foreign exchange market. Look for such consterna-tion to ease in the months ahead. y
Marc Chandler is head of global foreign exchange strategies at Brown Brothers Harriman. His blog is called Marc to Market (www.marctomarket.com). For more information on the author, see p. 4.
Ultimately, foreign-exchange prices are driven by interest rates, the larger investment climate, and other macro-
economic variables.
Are we in the midst of a currency war, as the financial press is pushing us to worry about? Yes. But it’s not what the press wants us to think. In fact, much of the talk about currency wars is pure nonsense. As Winston Churchill said in 1949, “There is no sphere of human thought in which it is easier to show superficial cleverness and the appearance of superior wisdom than in discussing questions of cur-rency and exchange.”
A currency war is deliberate devaluation to promote exports that triggers retaliation by other countries. There’s evidence several countries — including Japan, Australia, New Zealand, and many developing countries (South Korea, Philippines, et al) — are doing just that.
But the U.S. and Europe are not using currency war rhetoric — on the contrary, they have plans to improve trade relations with one another in the form of a free-trade pact. Together, the U.S. and Europe account for almost half the world’s output, and a free-trade deal benefits not only both parties, but also improves competitiveness with China, the one country that really has been waging a trade war. Currency war rhetoric is only the first step in a trade war, and so far no country except China has taken the hard actions — tariffs, quotas, subsidies — that spell trade war. If two of the top three currency issuers are not engaged and, indeed, speak out against currency war, is it really a war?
A currency war is really the first shot fired in a trade war. Historically, trade wars result in lower trade volumes for everyone and, we can safely assume, a lowering of household well-being everywhere, too, since export-orient-ed jobs may be saved but the cost of imported goods goes up.
In the days before floating exchange rates, the mecha-nism for implementing a competitive devaluation policy was simple — just declare it. Such a case of devaluation by
fiat occurred on Feb. 14, 2013 when Venezuelan President Hugo Chavez, speaking from Cuba, devalued the bolivar by 32% (from 4.3 to the dollar to 6.3). Venezuela had deval-ued five times since 2003, most recently in January 2010. Because oil is about 95% of Venezuela’s exports and oil is dollar-denominated, Venezuela gets no export advantage from devaluation, but it does get more bolivars per dollar to pay domestic expenses, such as Chavez’s costly re-elec-tion campaign. Devaluation also inhibits imports and thus inflation, which was running above 22% in January. To the extent imports are essential and cannot be cut, in the lon-ger run devaluation raises inflation.
Much of today’s currency war talk assumes countries can simply announce devaluation, when this is true only for fixed currencies. For example, in an op-ed article in the Wall Street Journal a former hedge fund manager wrote the Fed should halt quantitative easing right away and, at the same time, incoming Treasury Secretary Jack Lew should implement a strong-dollar policy. What would that entail, exactly? Aside from interfering with trade or some other tax or subsidy measure, historically, you get a stronger cur-rency by raising interest rates. The Treasury doesn’t do that — the Fed does. Currency policy resides at the Treasury, but the only entity with the tool to execute policy is the Federal Reserve.
Therefore, in speaking of currency wars, we have to keep the facts consistent with the structure of the FX market today, not in centuries past. Countries with fixed exchange rates can engage in currency wars directly. A president, central bank governor, or finance minister can stand up in front of a TV camera and simply command devaluation, and financial parties like banks need to obey or they lose their license to operate.
In contrast, countries with floating exchange rates can-not declare devaluation. To do so they would have to
On the Money
12 March2013•CURRENCY TRADER
ON THE MONEY
Straight talk about currency wars
Perspective is needed when addressing the overheated currency war topic.
BY BARBARA ROCKEFELLER
CURRENCY TRADER•March2013 13
make changes elsewhere in the economy that have the secondary effect of causing currency devaluation. In the floating-rate era, only one instance of a country changing interest rates specifically to influence a cur-rency comes to mind: Japan, which raised rates after the Plaza Accord in 1985 at the request of the U.S. specifically to drive down the dollar against the yen. Germany and the rest of the Europe declined to par-ticipate.
Is it fair to accuse a country of currency war if it imple-ments a policy targeting a certain economic condition that has the secondary effect of causing devaluation? Sane and reasonable people say “no.” If the Federal Reserve is engaging in quantitative easing to nurture an ailing finan-cial system and to stimulate the economy, can it be blamed when the dollar falls? No, since the Fed’s mandate is to keep inflation in check (no more than 2%), unemployment at an acceptable level (most recently defined as 6.5%), and the financial system stable. The Fed’s job is not to manage equity or currency prices. As Fed Chairman Ben Bernanke has said, changes in the dollar that arise from Fed policies targeting the domestic U.S. economy are unintended.
In fact, Bernanke said at the October 2012 annual IMF meeting in Tokyo that perception of the currency war concept is one-sided — by the emerging-market countries that feel aggrieved. Remember, it was Brazilian Finance Minister Guido Mantega who revived the term “currency war” at the G20 meeting in Seoul in November 2010. Bernanke’s rebuttal is more than a simple denial. He said capital inflows to higher-yielding emerging markets are a function of many more factors than interest rate differ-entials. Relative higher growth is one factor, and besides, the correlation of flows with interest rate differentials has tended to diminish over time; it takes a bigger differential to get a lesser flow.
Moreover, Bernanke continued, emerging markets are not helpless. They have tools, including taxes and outright capital controls, to tame hot-money inflows. But perhaps they should reconsider the capital-control form of currency market intervention — after all, a stronger currency allows a lower cost of capital imports, like machinery, that eventu-ally leads to a stronger economy. Finally, emerging markets shouldn’t complain about the U.S. and other countries having an easy-money policy, because it’s keeping alive the source of demand for developing-country exports. No country benefits if the U.S. economy remains mired in the Great Recession.
Bottom line, the Fed and other super-accommodative developed-country central banks are not out to swindle and harm emerging markets. Bernanke, tactfully, did not add the Fed doesn’t work for the Brazilian voter and Brazilian business — it works for the U.S. economy. He could have noted total U.S. exports of goods and services are only 14% of GDP, whereas the percentage is 32% in the UK, 50% in Germany, and 107% in Ireland. In Brazil, the great complainer, exports of goods and services are less than in the U.S., only 12%, according to World Bank data for 2011 (Table 1). Meanwhile, total merchandise trade (exports plus imports), is 25% of U.S. GDP and 19.9% of Brazil’s GDP. According to this table, among developed countries Germany and Ireland, not to mention Canada and the UK, should want a devalued currency.
In addition, Bernanke could have pointed out that dollar
TABLE 1: TRADE AS PERCENTAGE OF GDP 2011
CountryExports of goods andservices as % of GDP
Total merchandise trade as % of GDP
Bolivia 44% 66.8%
Brazil 12% 19.9%
Canada 31% 52.7%
China 31% 49.8%
France 27% 47.3%
Germany 50% 75.8%
Ireland 107% 88.9%
UK 32% 45.4%
US 14% 25%
The data suggests Germany and Ireland, and perhaps Canada and the UK, should want devalued currencies. Source: http://data.worldbank.org/indicator/TG.VAL.TOTL.GD.ZS
14 March2013•CURRENCY TRADER
ON THE MONEY
devaluation harms incoming capital flows. Foreign direct investment (FDI) in the U.S. fell from about $94 billion in the first half of 2011 to $57 billion in the first half of 2012. Even China had a drop in FDI, from $62 billion to $59 bil-lion. Brazil’s drop was smaller, $30 billion from $33 billion. The World Bank reports that over a longer period, Brazil got $50.7 billion in FDI in 2008, rising to $71.5 billion in 2011, while the U.S. showed a drop from $332.7 billion in 2008 to $275.5 billion in 2011. These are absolute dollar amounts, and really should be expressed as a percentage of GDP. In the U.S., FDI is only 1.5% of GDP (1.6% in China), but in Brazil, it’s 2.7%.
Then there’s investment in equity markets. The Treasury International Capital System (TICS) report shows global equity investors seem to respond far more to changes in equity index levels than to changes in the dollar. Meanwhile, inflows to Brazilian equities are robust and only sometimes correlated to the real — again, as Bernanke said, a function of high growth and expectations of a posi-tive growth differential (Figure 1). From December 2011 to June 2012, as the real was weakening, so was the Bovespa stock index. Elsewhere the relationship is wobbly. In the most recent period, as shown by the linear regression lines, the real is falling while the Bovespa is rising. Net-net, a consistent cause-and-effect relationship can’t be deduced. If foreign investors consider the currency a factor in decid-ing to invest in Brazilian equities, it’s not the top-most fac-tor.
Where it is a top-most factor is Japan. In fact, the only longstanding and consistent stock market-currency rela-tionship is between the Nikkei and the yen, a tribute to the export orientation of the big Japanese companies. Generally, the direction of causality is from the yen to equity prices; the Nikkei rises in lockstep with the dol-lar/yen rate (Figure 2). Now here’s a chart showing that policymakers have a logical reason to consider the level of their currency as having a direct effect on the wealth of their citizens.
DenialsOne reason the currency war story fizzled after Mantega’s G20 comments in 2010 was cooler heads prevailed. But then Japan held an election in December 2012, and incom-ing Prime Minister Shinzo Abe made it clear from the very beginning the linchpin of all policy would be aggressive stimulus using quantitative easing and deficit spending. In the early days of Abe’s regime, his political allies and newly appointed officials told the press the goal was to weaken the yen and get the Nikkei to 13,000 (from about 10,000). Abe threatened the independence of the Bank of Japan, which, in a rare joint statement, dutifully agreed to double its inflation target. The governor agreed to resign early, too.
As Figure 2 shows, anticipation of the Abe electoral vic-tory and nearly daily comments from Tokyo about the yen was very effective in creating and maintaining the dollar
FIGURE 1: BRAZILIAN REAL (BLACK, INVERTED) VS. BOVESPA STOCK
From December 2011 to June 2012 Brazil’s Bovespa stock index was weakening along with the real, but elsewhere the relationship between the two is weak.Source: Chart — Metastock; data — Reuters and eSignal
Barbara RockefellerCurrency Trader Mag March 2013Figure 1. Brazilian Real (Black, Inverted) vs. Bovespa StockIndex
2010 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 Feb M
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CURRENCY TRADER•March2013 15
uptrend/yen downtrend, about 13% from mid-November to mid-February. The Japanese yen depreciated to 94.46 per dollar on Feb. 11, the weakest level in almost three years
By the time of the G20 meeting in Moscow in mid-February, complaints were becoming more raucous that Japan was starting a currency war. In an unprecedented move, the G7 issued a statement two days before the G20 meeting that was interpreted as meaning the G7 was satis-fied Japan’s policy actions were not directed specifically at devaluation, and therefore Japan was not to blame for starting a currency war: “We, the G7 Ministers and Governors, reaffirm our longstanding commitment to mar-ket-determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.”
The G7 statement was a warning to the G20 not to single out Japan, or even use the phrase “currency war,” and indeed that’s exactly what the G20 did.
There is a certain amount of sympathy for Japan’s eco-nomic plight — more than two decades of deflationary recession, punctuated by the occasional short-lived recov-
ery. The trade surplus has gone to a deficit, too. The IMF reports Japanese growth from 1994 to 2003 averaged a mere 0.9%, or about one-third the growth rate of advanced countries — and that includes occasional bouts of yen weakness of more than 10% in 1996-1997 and 2000-2001. One analyst estimates a 10% drop in the yen will produce a 0.6% gain in GDP — if it can be sustained.
Economists admit they don’t have any policy prescrip-tion other than QE and stimulus spending. If it devalues the currency, so be it. One idea still floating around within the Japanese government is that it buy foreign bonds as well as its own JGBs. Surely buying foreign govern-ment bonds would violate the G7 commitment to seeking “domestic objectives using domestic instruments” and may yet cause some fireworks.
Japan dodged the bullet this time but no one has any doubt if sentiment were to come down on the side of QE and stimulus failing (as it has done before), this time the yen will be restrained from returning to too-strong levels, presumably by outright intervention. After all, there’s a limit to how much words can achieve alone, isn’t there?
Words countFloating currency countries cannot arbitrarily decree devaluation, but words count. A phrase may not be an actual command, but it can still have the same effect. The FX market responds instantly to comments like the one from Japanese Finance Minister Akira Amari that, golly,
FIGURE 2: USD/JPY (BLACK) VS. THE NIKKEI STOCK INDEX
The stock market-currency relationship between the Nikkei and the Japanese yen is a tribute to the export orientation of big Japanese companies. Generally, the Nikkei rises in step with the dollar/yen rate.
Barbara RockefellerCurrency Trader Mag March 2013Figure 2..USD/JPY (Black) vs. the Nikkei Stock Index
2011 Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 Feb M74.074.575.075.576.076.577.077.578.078.579.079.580.080.581.081.582.082.583.083.584.084.585.085.586.086.587.087.588.088.589.089.590.090.591.091.592.092.593.093.594.094.595.095.596.0
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16 March2013•CURRENCY TRADER
ON THE MONEY
he hadn’t expected the yen to move so far, so fast. Yen shorts covered, only to restore the position the next day when a different comment was published. The CFTC Commitments of Traders Report shows speculative accounts had a net yen short position of 65,891 contracts as of Feb. 19, from 61,306 contracts the week before. Traders had a bigger short position on the Dec. 11 report, 94,401 contracts. This was the biggest number since 188,077 con-tracts on June 26, 2007. The implication is there are plenty of fence-sitters waiting to short the yen if this move turns out to be more than a flash in the pan.
Japan is not the only country to speak out about cur-rency levels. Bank of England Governor Mervyn King recently said real recovery would be much aided by a weaker pound. French Finance Minister Pierre Moscovici called for an ECB exchange rate policy, and President Francois Hollande, evidently jealous of Japan’s success, demanded coordinated action to push the Euro lower so it better represented fundamental values. Bundesbank chief Jens Weidmann shot back within hours that “exchange-rate policy to specifically weaken the Euro would lead to higher inflation in the end.” He also said the ECB would not consider a rising Euro alone in considering a rate cut. Besides, calling for exchange rate system changes simply diverts attention from the need to make their economies more competitive. “Only governments can solve these problems, the central banks cannot. In this respect, the discussion about a supposed overvaluation of the Euro’s
exchange rate simply deviates from the real challenges.”Austrian Finance Minister Maria Fekter agrees with
Weidmann. Eurogroup chief Jean-Claude Juncker said “Europe must not be ‘naïve’ on currencies.” Even the president of the Swiss National Bank — which set a cap for the Swiss franc in the Euro-Swiss cross and intervened to get it, denies a currency war, saying “central banks’ monetary policies are internal programs.” And ECB chief Mario Draghi denounced “chatter” about currency wars as “either inappropriate or fruitless, in all cases self-defeat-ing.” Effective exchange rates are near their long-term averages and besides, Draghi says, “The exchange rate is not a policy target but important for growth and price sta-bility.”
Draghi seemingly used a little currency war rhetoric himself when he added the ECB would still have to assess the economic impact of the Euro’s strength, and he is con-cerned a stronger Euro will be a drag on growth and may cause inflation to drop too far, i.e., deflation. The Euro fell 120 points in under an hour. The charitable interpretation of Draghi’s “drag” remark is that he couldn’t resist being an economist. At the time, the remark made him appear two-faced and, at a guess, he won’t do it again.
The Australian dollar gyrated up and down in a wide range (1.0222 to 1.0375) during February on comments almost every day about whether the Reserve Bank will cut rates to tame the AUD (Figure 3). Reserve Bank Governor Glenn Stevens said the Australian dollar remains stronger
FIGURE 3: AUD/USD WIDE RANGE, HIGH VOLATILITY
The Australian dollar swung in a wide range in February on virtually daily comments about whether the Reserve Bank will cut rates to tame the currency.
Barbara RockefellerCurrency Trader Mag March 2013Figure 3..AUD/USD Wide Range, High Volatility
0137 14 21 28 4
February11 18 25 4
March1
1.011.021.021.021.021.021.021.021.021.021.021.031.031.031.031.031.031.031.031.031.031.041.041.041.041.041.041.041.041.041.041.051.051.051.051.051.051.051.051.051.051.061.061.061.06
CURRENCY TRADER•March2013 17
than expected and a relevant factor in setting interest rates: “As we have noted repeatedly, the exchange rate remains somewhat higher than one might have expected given the decline in export prices so far observed. This has been a relevant factor in the setting of interest rates.” A cut in the rate would not be aimed at achieving a particular response in the exchange rate, but rates “are being set with a recog-nition of the exchange rate’s effect on the economy.”
Also, New Zealand central bank Governor Graeme Wheeler said, “The kiwi is not a one-way bet.” Speaking to a conference, he said he was “prepared to intervene to influence the kiwi.” The NZD fell 1% in response. Other countries are making grumbling noises, too — South Korea, Taiwan, even Norway, which may choose to cut interest rates to counter the krone’s strength. Central bankers in the Philippines and Indonesia have spoken out about policy changes to address currency levels.
The Japanese are now refraining from mentioning the yen in the same breath as comments about stimulating the economy, but other countries are blatantly referenc-ing their currencies when they speak of interest rate policy. Australia and New Zealand are the latest cases, but Switzerland and Norway deserve mention, too. This is a far cry from the G7 statement and G20’s acquiescence. In a nutshell, plenty of countries are, indeed, engaging in influ-encing currency markets.
Newcomers to the FX market may not know it, but this is an unwelcome return to conditions during the 1970s and 1980s when comments from officials and summits were the main fodder for traders to choose positions. For example, after Black Monday in 1987, the G7 issued a communiqué on Dec. 23 (called the “Christmas Communiqué”), saying a further decline in the dollar would be counterproductive. As usual, the G7 was a day late and a dollar short. (Black Monday was Oct. 19 so the Christmas Communiqué was about two months late.) To read the early history of the FX market, replete with hundreds of interventions and market-moving comments and communiqués, check out Volcker and Gyohten, Changing Fortunes, 1992.
We don’t know when, exactly, keeping quiet about FX became the norm. We think it was Treasury Secretary Rubin during the Clinton Administration, circa 1995, who declined to say anything other than the now-famous Rubin mantra “a strong dollar is in the U.S. best interests.” Whoever started it, we do know who put the final nail in the coffin of officials making FX comments — it was the
first ECB chief Wim Duisenberg, who misspoke so often during the first year after the Euro launch (1999) that silence on FX matters became the preferred stance.
Increasing numbers of comments about currency levels from top officials seem to back up the idea that govern-ments are deliberately trying to manipulate currencies with rhetoric and the occasional interest rate change. But not a single country has proposed an actual trade war in the form of the hard actions — tariffs, quotas, and sub-sidies. The real trade war participant, China, is actually relaxing its measures.
So far the currency war is just hot air. Moreover, G7 and G20 are blowing smoke, too. Their communiqués don’t even mention trade and focus instead on the intent of interest rate policy as directed solely to the domestic econ-omy. This is a feint. G7 and G20 seem to be hoping that by defending a sovereign’s right to manage its own economy, nobody will notice the real implications of currency war — that it’s really trade war.
The Fed and the ECB are not part of the currency war gang, but with so many other countries engaged in curren-cy war talk, this is going unnoticed. But we should notice; it implies that unless someone escalates to real trade war measures, this currency war talk will fizzle just like it did in 2011. The odd part is that no country ever depreciated its way to prosperity and we all know that. Small advan-tages from higher exports get dissipated and even over-whelmed by other effects, such as imported inflation or global investors fleeing your equity market.
The current spate of comments from finance ministers and central bankers is a symptom of lack of discipline among top officials and an absence of leadership from the U.S. or the G7. We need somebody important to stand up and call a halt to it, whereupon we can all go back to second-guessing central bank intentions. The obvious can-didate is new Treasury Secretary Jack Lew, but he is a bud-get expert rather than an international markets guy, and he lacks the stature Rubin brought to the job on day one.
Who will save us from currency war officials? We pro-pose Bernanke and Draghi have tea and issue an ultima-tum. y
Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange, and the author of the new book The Foreign Exchange Matrix (Harriman House). For more information on the author, see p. 4.
18 October2010•CURRENCY TRADER18 March2013•CURRENCY TRADER
The U.S. dollar index (DXY) rallied around 4.5% between the first day of February and the first day of March, post-ing four consecutive weeks of higher highs and closes. The run-up swept the short-side implications of the 20-day low breakdown analysis featured in last month’s Spot Check out the window. (The article also included analysis of DXY’s behavior after new 20-week lows; the market failed to trade below its September 2012 low and trigger that signal, however.)
Feb. 1, in fact, turned out to be the low of the early-2013 down swing, marking just two days of downside follow-through after making a new 20-day low on Jan. 30. By Feb. 18, DXY had swung far enough to the upside to establish a 20-day high, and two days later on Feb. 20 it made a new 63-day (three-month) high — the first of several over the next couple of weeks.
Figure 1 highlights the 12 most recent instances of four-week runs of higher highs and higher closes, the last one occurring the week ending March 1. The examples date back to 2005; there have been a total of 55 four-week (or longer) runs since March 1973. Of the 11 previous instances in Figure 1, all were followed by a lower close the following week, seven were followed immediately by two- to four-week down moves, a couple were followed by declines two or three weeks later, and only a couple others (the most notable occurring in Q3 2009) were fol-lowed by significant upswings.
SPOT CHECK
Dollar danceA market’s phase will dictate the performance of a price
pattern. What mode is the dollar currently in?
BY CURRENCY TRADER STAFF
FIGURE 1: DXY FOUR-WEEK RUNS, 2005-MARCH 2013
Most of the instances of four consecutive weeks of higher highs and closes during this period were followed by bearish price action.
FIGURE 2: WEEKLY PATTERN PERFORMANCE, 2005-MARCH 2013
Performance after the four-week runs was a little more bearish than the market benchmark in the first three weeks.
CURRENCY TRADER•March2013 19
Ignoring for a moment the fact there were only 11 examples in the past eight years, Figure 2 shows the performance after these four-week higher-high, higher-close (HH/HC). The blue lines represent the average and median moves from the close of the final week of the pat-tern to the closes of the subsequent 12 weeks; the red lines represent the average and median performance for all one- to 12-week moves during the analysis period, and reveal DXY’s downside bias during this period. The performance after four-week runs was a little more bearish than the market benchmark in the first three weeks, peaked (some-times above the benchmark) into week 7, and then turned back down.
Overall — and especially given the performance after the most recent examples in Figure 1, and the fact that all examples were followed by a lower close the follow-ing week — a trader might be tempted to look for selling opportunities after four-week runs of higher highs and higher closes. However, Figure 3 shows the performance after all 54 previous examples dating back to 1973. Even though it incorporates the marginally bearish data from Figure 2, here the post-pattern performance is unambigu-ously bullish, with positive average and median returns at all intervals.
The big difference between the two data sets is that DXY has been dominated by a general downtrend and consoli-dation (with some sharp counter-rallies in 2008 and 2010) since 2002. The preceding period included the dollar’s monster rally from 1980 to 1985 and the somewhat smaller uptrend from 1995 to 2002 — periods during which four weeks of consecutive higher highs and higher closes were more often than not followed by additional up weeks.
Faced only with this conflicting information — a long-term history that implies upside follow-through and the most recent data suggesting the possibility of weakness — what would a trader do?
The daily time frame: Three-month highsFigure 4 shows DXY’s performance from March 1973 to March 2013 in the 12 days after making new 63-day highs. The dollar index made a new 63-day high 772 times during this period, prior to the six most recent instances shown in Figure 5.
Figure 4 suggests, other factors notwithstanding, expect-ing DXY to continue to rally after making a new 63-day high was a good bet. The percentage of higher closes was lowest (at around 53%) at day 2 and climbed to 58-59% at
FIGURE 3: WEEKLY PATTERN PERFORMANCE, 1973-2013
The price action after all 54 examples of the pattern is clearly bullish, with positive average and median returns at all intervals.
FIGURE 4: AFTER 63-DAY HIGHS, 1973-2013
Overall, DXY continued to rally after making a new 63-day high.
FIGURE 5: RECENT 63-DAY HIGHS
The upside follow through after the initial 63-day highs shown here is in keeping with the signal’s statistics over the past 40 years. continued on p. 25
20 March2013•CURRENCY TRADER
TRADING STRATEGIESADVANCED CONCEPTS
Certain acts define desperation. These include cubicle-dwellers self-identifying as contrarian, paying tuition for a course on entrepreneurship, subscribing to any diet plan and, of course, repeating any management buzz-phrase
such as “thinking outside of the box.” When you hear the latter term, replace it with “thinking with a child’s natural curiosity” and be done with it.
Let’s take the subject of a currency union, please. Having witnessed the construction of the Berlin Wall and its toppling a mere 28 years later, I wonder if the Euro will endure for longer than that tribute to human oppres-sion. You can conceive of the Euro as a single entity or you can think of it as a set of fixed exchange rates between all of its members. As there are 17 members of the Eurozone in early March 2013, the Euro actually converts 136 currency pairs [(172 – 17)/2] into a set of 17 national cur-rencies trading at fixed rates to each other and at a floating rate to the rest of the world. This type of network economics is why centralized nodes, including stock and commodity exchanges, have such cost efficiency in sharing information.
Two asides are in order: While the United Nations, an organization never known as a bastion of efficiency in any-thing, settled on a small set of official languages (just six at last count), the European Union insists on simultaneous translations into all member languages during its proceedings; this may strike notoriously mono-lingual Americans who
The interest rate price of a currency union
Until it abandons its separate national histories and adopts a common fiscal policy, the Eurozone will suffer the consequences of its fundamental contradiction.
BY HOWARD L. SIMONS
Portugal, Spain, and Italy have the flattest yield curves, while stronger credits such as Germany, Finland, and the Netherlands have the steepest.
FIGURE 1: GLOBAL CURRENCY SWAP EXPANSION STEEPENED YIELD CURVES
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CURRENCY TRADER•March2013 21
are impressed with Europeans’ multilin-gual skills as unnecessary, and it certainly is cumbersome. The second is the move to the Euro was devastating to the large population of oddball currency traders at European banks and money-changers: Some people actually made their living trading the Finnish markka against the Portuguese escudo, or some-such, regard-less of its general flouting of the principles of economic utility.
But there is a significant downside to fixing currency rates, and that is a country can fix its short-term interest rates or it can fix its currency exchange rates, but it cannot fix both simultaneously. Thus, if Greece, just to take the prime example of the whole 2009-2012 European sovereign-debt mess, has a de facto fixed exchange rate against Germany, all macroeco-nomic adjustments have to be achieved through higher short-term interest rates as opposed to a combination of higher short-term interest rates and a weaker currency.
Consequences of the fixAccordingly, we should expect the weaker credits within the Eurozone to have higher short-term interest rates and flatter yield curves than they would have other-wise, and the stronger credits within the Eurozone to have lower short-term inter-est rates and a steeper yield curve than they would have otherwise.
A second consequence is the interest rate distortion makes the common cur-rency weaker than it would be otherwise for the stronger credits and stronger than
Here, and in Figures 4-8, the FRR2,10 tends to lead two-year zero-coupon implied volatility by 13 weeks. These charts show how the one variable allowed to operate in a currency union, short-term interest rates, drives volatility and the cost of insuring financial risk.
FIGURE 3: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: PORTUGAL
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The flood of money into the short-term paper of the higher-quality credits, such as Germany, drove volatility higher.
FIGURE 2: TWO-YEAR ZERO-COUPON IMPLIED VOLATILITY SINCE NOV. 30, 2011
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ON THE MONEY
22 March2013•CURRENCY TRADER
ADVANCED CONCEPTS
it would be otherwise for the weaker credits.
The third consequence is a bit stranger. The implied volatility of any short-term interest rate viewed as artificially low and at the anchor end of a yield curve steeper than it would be otherwise rises. The reason is devilishly simple: The market knows once the suppression of short-term interest rates ends, those yields will snap higher and flatten the yield curve in con-sequence.
If we sum these effects, we see lose-lose propositions all the way around: Weaker credits have to struggle with higher short-term interest rates and a stronger currency, while stronger credits have to deal with higher implied volatility and a steeper yield curve. As improperly val-ued currencies affect all segments of an economy, and as interest rates equilibrate current and future consumption, the mechanics of a currency bloc create a large and differing number and distribution of winners and losers in its member states as the price of avoiding those extra trading pairs.
Two measures over timeLet’s illustrate the distortions of the Eurozone currency bloc across two dimen-sions. The first is the sovereign yield curve as measured by the forward rate ratio between two and 10 years (FRR2,10). This is the rate at which borrowing can be locked in for eight years starting two
FIGURE 5: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: ITALY
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FIGURE 4: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: SPAIN
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CURRENCY TRADER•March2013 23
years from now, divided by the 10-year rate itself. The more this ratio exceeds 1.00, the steeper the yield curve is. (As an aside, neither the Greek FRR2,10, nor the Irish FRR2,10 are shown. Greece defaulted in March 2012 and restructured; Ireland similarly stopped issuing 10-year notes. Both yield curves had moved into and out of inversion. The second dimension is the implied volatility of two-year zero-coupon sovereign debt.)
How have these measures traded since the expansion of currency swaps into the Eurozone at the end of November 2011? First, the weakest remaining member of the former PIIGS quintet, Portugal, was the last country to have an inverted yield curve (Figure 1). However, Portugal, Spain, and Italy have the flattest yield curves, while stronger credits such as Germany, Finland, and the Netherlands have the steepest yield curves.
Next, the picture for two-year zero-coupon implied volatility is as expected as well (Figure 2). The weaker credits (Greece after its March 2012 restructur-ing excepted) have the lowest volatility for the counterintuitive reason the market does not consider them accidents waiting to happen. The flood of money into the short-term paper of the higher-quality credits, such as Germany, drove volatility higher, with deleterious consequences for insuring against interest rate volatility.
National historiesNow let’s step back and look at the select-
FIGURE 7: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: NETHERLANDS
FIGURE 6: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: GERMANY
60%
110%
160%
210%
260%
310%
360%
410%
460%
510%
560%
610%
660%
710%
1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24 1.25 1.26 1.27 1.28
May
-10
Jul-1
0
Sep
-10
Nov
-10
Dec
-10
Feb-
11
Apr
-11
Jun-
11
Aug
-11
Oct
-11
Dec
-11
Feb-
12
Apr
-12
Jun-
12
Aug
-12
Oct
-12
Dec
-12
Feb-
13
Two-Year Zero-C
oupon Volatility Led 13 Weeks
Forw
ard
Rat
e R
atio
, 2-1
0 Ye
ars
Yield Curve
Volatility
50%
75%
100%
125%
150%
175%
200%
225%
250%
275%
300%
325%
350%
375%
1.115
1.125
1.135
1.145
1.155
1.165
1.175
1.185
1.195
1.205
1.215
1.225
1.235
1.245
1.255
1.265
May
-10
Jul-1
0
Sep
-10
Nov
-10
Dec
-10
Feb-
11
Apr
-11
Jun-
11
Aug
-11
Oct
-11
Dec
-11
Feb-
12
Apr
-12
Jun-
12
Aug
-12
Oct
-12
Dec
-12
Feb-
13
Two-Year Zero-C
oupon Volatility Led 13 Weeks
Forw
ard
Rat
e R
atio
, 2-1
0 Ye
ars
Yield Curve
Volatility
ON THE MONEY
24 March2013•CURRENCY TRADER
ADVANCED CONCEPTS
ed paths of various strong and weak credits. The FRR2,10 tends to lead two-year zero-coupon implied volatility across a number of markets by 13 weeks, or one calendar quarter. This is consistent with the quarterly expiration and debt issuance cycles in many countries. These are presented in Figures 3-8 without further comment as they show us how the one variable allowed to operate in a currency union — short-term interest rates — drives volatility and the cost of insuring financial risk.
Kick that blocAs Keynes noted famously, “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is com-monly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of
some defunct economist.”The world of currency
trading has been driven by the ideas of several Nobel laureates, including Milton Friedman, who espoused floating exchange rates as a way of getting to self-correct-ing current account balances, and Robert Mundell, the real architect of the Euro.
Both floating exchange rates and the Euro were
designed to replace existing regimes found wanting and in perpetual crisis mode, and both went on to create their own rolling and somewhat quasi-permanent crises. Until the Eurozone both abandons its separate national histories and adopts a common fiscal policy, it will suffer at the interest rate cost defined by its internally fixed exchange rates. That is quite simply a given. y
Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. For more information on the author, see p. 4.
FIGURE 8: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: FINLAND
40%
80%
120%
160%
200%
240%
280%
320%
360%
400%
440%
1.115
1.125
1.135
1.145
1.155
1.165
1.175
1.185
1.195
1.205
1.215
1.225
1.235
1.245
1.255
1.265 M
ay-1
0
Jul-1
0
Sep
-10
Nov
-10
Dec
-10
Feb-
11
Apr
-11
Jun-
11
Aug
-11
Oct
-11
Dec
-11
Feb-
12
Apr
-12
Jun-
12
Aug
-12
Oct
-12
Dec
-12
Feb-
13
Two-Year Zero-C
oupon Volatility Led 13 Weeks
Forw
ard
Rat
e R
atio
, 2-1
0 Ye
ars
Yield Curve
Volatility
A country can fix its short-term interest rates or
it can fix its currency exchange rates, but it cannot
fix both simultaneously.
CURRENCY TRADER•March2013 25
days 10-12. Figure 6, however, shows the DXY’s performance
after the 349 instances of 63-day highs that took place the most recent 20 years, March 1993 to Feb. 19, 2013 (again, prior to the examples shown in Figure 5). Now the post-pattern performance looks more bearish, although until day 10 it was mostly a more volatile version of the DXY’s downside bias; it was only at day 11 that the post-pattern performance was clearly more negative than the benchmark performance.
The same phenomenon apparent in the weekly analysis is evident here: The pattern’s performance is notably determined by the market’s mode or trend at the time. When DXY is trending higher, a four-week run of higher highs and higher closes or a new 63-day high presages additional buying; when DXY is in a downtrend, these patterns both tend to be signs of exhaustion.
Figures 7 and 8 provide some final perspective on this dichotomy: The former shows the 1985 to March 1993 performance after 63-day highs that closed within 0.06 of the day’s high (as was the case on March 1, 2013), while the latter shows this pattern’s perfor-mance from March 1993 to March 2013. The difference between the two is more extreme than in previous examples: The bullish trajectory in Figure 7 is strong than that in Figure 4, while Figure 8 is more clearly bearish than Figure 6.
Right here, right nowAs of March 4, the dollar index had rallied to nearly 82.50 and was poised to challenge the resistance of its 2012 high around 84 (refer to Figure 1). The ques-tion is, does the recent run mean the dollar is in a new uptrend, or is the prevailing environment still side-ways/down, which would imply selling into strength will offer a chance to profit on a pullback? DXY cer-tainly rallied smartly off the support zone defined in the final four months of last year, which was discussed at length last month. But on a longer-term basis, the DXY has been trendless for the better part of four years.
The Forex Trade Journal details a trade based par-tially on this analysis. y
SPOT CHECK
FIGURE 6: AFTER 63-DAY HIGHS, 1993-2013
Instances of 63-day highs that took place between March 1993 and Feb. 19, 2013 were followed by much more bearish action than that shown in Figure 4.
FIGURE 7: 63-DAY HIGHS W/ HIGH CLOSE, 1985-1993
After 63-day highs that closed strongly (within 0.06 of the day’s high), the DXY tended to rally.
FIGURE 8: 63-DAY HIGHS W/ HIGH CLOSE, 1993-2013
Over the past 20 years, strongly closing 63-day highs were followed by more selling than buying.
26 March2013•CURRENCY TRADER
CPI: Consumer price indexECB: European Central BankFDD(firstdeliveryday):Thefirstday on which delivery of a com-modityinfulfillmentofafuturescontract can take place.FND(firstnoticeday):Alsoknownasfirstintentday,thisisthefirstdayonwhichaclear-inghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillmentofafuturescontract.The clearinghouse also informs the seller.FOMC: Federal Open Market CommitteeGDP: Gross domestic productISM: Institute for supply management LTD(lasttradingday):Thefinalday trading can take place in a futures or options contract.PMI: Purchasing managers indexPPI: Producer price index
Economic Release release(U.S.) time(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 10:00 a.m.
GLOBAL ECONOMIC CALENDAR
March
1
U.S.: February ISM manufacturing reportBrazil: Q4 GDPCanada: Q4 GDPJapan: January employment report and CPI
2345
6
U.S.: Fed beige bookAustralia: Q4 GDPBrazil: February PPICanada: Bank of Canada interest-rate announcement
7
U.S.: January trade balanceFrance: Q4 employment reportJapan: Bank of Japan interest-rate announcementMexico: February PPI and Feb. 28 CPIUK: Bank of England interest-rate announcementECB: Governing council interest-rate announcement
8
U.S.: February employment reportBrazil: February CPICanada: February employment reportLTD: March forex options; March U.S.dollarindexoptions(ICE)
9101112 Germany: February CPI
Japan: February PPI
13 U.S.: February retail salesFrance: February CPI
14
U.S.: February PPIAustralia: February employment reportHong Kong: Q4 PPIIndia: February PPI
15 U.S.: February CPI1617
18Hong Kong: December-February employment reportLTD: March forex futures
19
U.S.: February housing startsHong Kong: Q4 GDPUK: February CPI and PPIFND: March U.S. dollar index futures (ICE)
20
U.S.: FOMC interest-rate announcementGermany: February PPISouth Africa: February CPIUK: February employment reportFDD: March forex futures
21U.S.: February leading indicatorsHong Kong: February CPIFDD: March U.S. dollar index futures (ICE)
22 Mexico: February employment report and March 15 CPI
23242526 U.S.: February durable goods
27 Canada: February CPIUK: Q4 GDP
28
U.S.: Q4 GDP (third)Brazil: February employment reportCanada: February PPIGermany: February employment reportSouth Africa: February PPI
29U.S.: February personal incomeFrance: February PPIJapan: February employment report and CPI
3031 India: February CPI
April1 U.S.: March ISM manufacturing
report23
4
Japan: Bank of Japan interest-rate announcementUK: Bank of England interest-rate announcementECB: Governing council interest-rate announcement
5
U.S.: March employment report and February trade balanceCanada: March employment reportLTD: April forex options; April U.S. dollarindexoptions(ICE)
The information on this page is sub-ject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.
CURRENCY TRADER•March2013 27
CURRENCY FUTURES SNAPSHOT as of Feb. 28
The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).
LEGEND:Volume: 30-day average daily volume, in thousands.OI: 30-day open interest, in thousands.10-day move: The percentage price move from the close 10 days ago to today’s close.20-day move: The percentage price move from the close 20 days ago to today’s close.60-day move: The percentage price move from the close 60 days ago to today’s close.The “% rank” fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the short-term volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.
BarclayHedge Rankings: Top 10 currency traders managing more than $10 million
(as of Jan. 31 ranked by January 2013 return)
Trading advisor Januaryreturn
2013 YTD return
$ Under mgmt.
(millions)
1 Hathersage(LongTermCurrency) 7.51% 7.51% 3402 Iron Fortress FX Mgmt 5.82% 5.82% 13.43 INSCHCapitalMgmt(KintilloX3) 5.44% 5.44% 64.74 Vortex FX 5.27% 5.27% 18.45 GablesCapitalMgmt(GlobalFX) 4.16% 4.16% 156 BlacktreeInvestmentPartners(CIS) 4.10% 4.10% 557 TitaniumCapitalPartners(FXMacro) 3.96% 3.96% 1128 ROWAssetMgmt(Currency) 3.80% 3.80% 109 FDOPartners(EmergingMarkets) 3.80% 3.79% 2716
10 QuanticaCapl(DiversifiedFX) 3.71% 3.71% 38.7Top 10 currency traders managing less than $10M & more than $1M
1 SwissSeagull(CrossfireII-Prop) 8.41% 8.41% 2.42 JPGlobalCapitalMgmt(TroikaI) 6.61% 6.61% 1.23 HartswellCapitalMgmt(Apollo) 4.23% 4.23% 3.34 ROWAssetMgmt(Currency) 3.80% 3.80% 105 JarrattDavis(ManagedFX) 3.77% 3.77% 5.36 FxProTech 3.60% 3.60% 2.47 MDC Trading 2.77% 2.77% 1.58 Fornex(FxDirect) 2.54% 2.54% 1.49 MFG(BulpredUSD) 2.15% 2.15% 1.4
10 RhiconCurrencyMgmt(Sys.Curr.) 2.03% 2.03% 10
Based on estimates of the composite of all accounts or the fully funded subset method.Does not reflect the performance of any single account.PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.
Market Sym Exch Vol OI 10-day move / rank
20-day move / rank
60-day move / rank
Volatility ratio / rank
EUR/USD EC CME 307.0 229.3 -2.87% / 100% -3.72% / 100% 0.50% / 2% .51 / 85%
JPY/USD JY CME 217.3 210.9 0.83% / 60% -1.62% / 2% -11.11% / 70% .09 / 13%GBP/USD BP CME 134.9 173.9 -2.36% / 70% -3.90% / 100% -5.31% / 95% .51 / 62%AUD/USD AD CME 96.4 175.7 -1.05% / 53% -1.61% / 69% -1.94% / 85% .46 / 53%CAD/USD CD CME 75.1 145.1 -2.72% / 100% -2.71% / 100% -3.61% / 100% .78 / 83%CHF/USD SF CME 36.2 42.2 -2.05% / 80% -2.78% / 100% -1.02% / 100% .45 / 48%MXN/USD MP CME 35.8 177.2 -0.22% / 9% 0.13% / 7% 1.49% / 33% .33 / 45%U.S. dollar index DX ICE 29.1 51.3 1.82% / 80% 3.51% / 100% 2.97% / 100% .86 / 90%NZD/USD NE CME 15.6 35.9 -1.49% / 100% -0.37% / 17% 0.94% / 17% .74 / 80%E-Mini EUR/USD ZE CME 5.2 7.8 -2.87% / 100% -3.72% / 100% 0.50% / 2% .51 / 85%
Note:Averagevolumeandopeninterestdataincludesbothpitandside-by-sideelectroniccontracts(whereapplicable).Priceactivityisbased on pit-traded contracts.
INTERNATIONAL MARKETS
28 March2013•CURRENCY TRADER
CURRENCIES (vs. U.S. DOLLAR)
Rank CurrencyFeb. 27
price vs. U.S. dollar
1-month gain/loss
3-monthgain/loss
6-monthgain/loss
52-week high
52-week low Previous
1 Brazilian real 0.50412 2.32% 5.01% 2.15% 0.586 0.4674 62 South African rand 0.11317 1.23% 0.45% -4.98% 0.1338 0.1102 163 Thai baht 0.033515 0.34% 2.82% 4.41% 0.0336 0.0311 14 Chinese yuan 0.159025 -0.01% -0.21% 0.68% 0.1608 0.1566 95 Hong Kong dollar 0.128905 -0.04% -0.10% -0.01% 0.129 0.1287 106 Swedish krona 0.154575 -0.24% 2.38% 2.10% 0.159 0.1374 77 Singapore dollar 0.80698 -0.36% -1.35% 0.92% 0.8213 0.7732 128 Swiss franc 1.073825 -0.53% -0.26% 3.06% 1.1154 1.0074 14
9 Indian rupee 0.01848 -0.59% 2.64% 2.33% 0.0203 0.0174 3
10 New Zealand dollar 0.83056 -0.82% 0.91% 2.39% 0.8491 0.7504 211 Japanese yen 0.01087 -1.18% -10.61% -14.48% 0.0129 0.0106 1712 Taiwan dollar 0.033685 -1.46% -1.96% 0.91% 0.0345 0.0329 1113 Australian Dollar 1.025535 -1.61% -1.89% -1.44% 1.08 0.9681 8
14 Russian ruble 0.03268 -1.91% 1.40% 3.96% 0.0345 0.0291 5
15 Canadian dollar 0.97466 -1.97% -3.18% -3.31% 1.0334 0.9601 1316 Euro 1.306985 -2.92% 0.82% 4.46% 1.3639 1.2099 417 Great Britain pound 1.516565 -4.02% -5.34% 0.00% 1.6286 1.5132 15
GLOBAL STOCK INDICES
Country Index Feb. 27 1-month gain/loss
3-month gain/loss
6-month gain loss
52-week high
52-week low Previous
1 Japan Nikkei 225 11,253.97 3.97% 19.43% 23.87% 11,662.50 8,238.96 82 Australia All ordinaries 5,053.10 2.90% 12.96% 15.55% 5,123.00 4,033.40 103 U.S. S&P 500 1,515.99 1.05% 8.37% 7.48% 1,530.94 1,266.74 34 UK FTSE 100 6,325.90 0.50% 9.07% 9.53% 6,412.40 5,229.80 45 Switzerland Swiss Market 7,485.00 0.01% 11.52% 15.31% 7,635.10 5,712.10 26 Singapore Straits Times 3,261.12 -0.39% 8.27% 7.12% 3,319.19 2,712.31 147 Canada S&P/TSX composite 12,732.40 -0.65% 5.13% 5.67% 12,830.60 11,280.60 98 Germany Xetra Dax 7,675.83 -2.01% 4.68% 8.92% 7,871.79 5,914.43 139 France CAC 40 3,691.49 -2.36% 5.41% 6.60% 3,793.26 2,922.26 6
10 South Africa FTSE/JSE All Share 39,275.37 -3.31% 3.89% 9.41% 40,892.65 32,887.45 1111 Brazil Bovespa 57,274.00 -4.59% 1.82% -1.44% 68,970.00 52,213.00 1512 Hong Kong Hang Seng 22,577.01 -4.63% 3.36% 14.03% 23,944.70 18,056.40 713 Mexico IPC 43,772.89 -4.66% 4.80% 9.51% 46,075.00 36,756.10 514 India BSE 30 19,152.41 -4.73% 1.65% 8.34% 20,203.70 15,749.00 1215 Italy FTSE MIB 15,827.00 -11.57% 2.24% 5.42% 17,897.40 12,362.50 1
CURRENCY TRADER•March2013 29
NON-U.S. DOLLAR FOREX CROSS RATES
Rank Currency pair Symbol Feb. 27 1-month gain/loss
3-month gain/loss
6-month gain loss
52-week high
52-week low Previous
1 Canada $ / Yen CAD/JPY 89.685 15.78% 8.36% 13.10% 93.95 74.85 4
2 Franc / Canada $ CHF/CAD 1.10174 1.47% 3.02% 6.58% 1.1151 1.0128 14
3 Euro / Pound EUR/GBP 0.86181 1.15% 6.51% 8.91% 0.8727 0.7779 6
4 Franc / Yen CHF/JPY 98.805 0.70% 11.63% 20.57% 102.90 78.81 5
5 New Zeal $ / Yen NZD/JPY 76.42 0.42% 12.94% 19.75% 79.32 58.78 1
6 Aussie $ / Canada $ AUD/CAD 1.052195 0.36% 1.33% 1.93% 1.0725 0.9951 11
7 Aussie $ / Yen AUD/JPY 94.365 -0.39% 9.80% 15.28% 96.79 75.6 3
8 Aussie $ / New Zeal $ AUD/NZD 1.234755 -0.81% -2.78% -3.75% 1.3061 1.2175 18
9 Euro / Canada $ EUR/CAD 1.34096 -0.97% 4.14% 8.03% 1.3607 1.2164 9
10 Aussie $ / Franc AUD/CHF 0.95503 -1.09% -1.64% -4.36% 1.0328 0.9238 10
11 Euro / Aussie $ EUR/AUD 1.27444 -1.32% 2.77% 5.98% 1.3107 1.1614 12
12 Euro / Yen EUR/JPY 120.26 -1.72% 12.84% 22.21% 126.88 94.65 2
13 Pound / Canada $ GBP/CAD 1.55599 -2.09% -2.22% -0.81% 1.6162 1.5485 17
14 Euro / Franc EUR/CHF 1.217125 -2.40% 1.08% 1.35% 1.2479 1.2003 8
15 Pound / Aussie $ GBP/AUD 1.478805 -2.44% -3.51% -2.69% 1.6123 1.4686 20
16 Pound / Yen GBP/JPY 139.545 -2.82% 5.95% 12.22% 146.94 119.75 7
17 Yen / Real JPY/BRL 0.021555 -3.49% -14.92% -16.31% 0.0262 0.0209 21
18 Pound / Franc GBP/CHF 1.412305 -3.51% -5.09% -6.93% 1.5434 1.4062 16
19 Aussie $ / Real AUD/BRL 2.034305 -3.85% -6.58% -3.51% 2.2253 1.8242 15
20 Canada $ / Real CAD/BRL 1.933395 -4.19% -7.80% -5.34% 2.1463 1.7067 19
21 Euro / Real EUR/BRL 2.5926 -5.13% -3.99% 2.26% 2.7714 2.2777 13
GLOBAL CENTRAL BANK LENDING RATES
Country Interest rate Rate Last change August 2012 February 2012United States Fed funds rate 0-0.25 0.5(Dec08) 0-0.25 0-0.25
Japan Overnight call rate 0-0.1 0-0.1(Oct10) 0-0.1 0-0.1Eurozone Refi rate 0.75 0.25(July12) 0.75 1England Repo rate 0.5 0.5(March09) 0.5 0.5Canada Overnight rate 1 0.25(Sept10) 1 1
Switzerland 3-month Swiss Libor 0-0.25 0.25(Aug11) 0-0.25 0-0.25Australia Cash rate 3 0.25(Dec12) 3.5 4.25
New Zealand Cash rate 2.5 0.5(March11) 2.5 2.5Brazil Selic rate 7.25 0.25(Oct12) 8 10.5Korea Korea base rate 2.75 0.25(Oct12) 3 3.25Taiwan Discount rate 1.875 0.125(June11) 1.875 1.875India Repo rate 7.75 0.25(Jan.13) 8 8.5
South Africa Repurchase rate 5 0.5(July12) 5 5.5
30 March2013•CURRENCY TRADER
INTERNATIONAL MARKETS
GDP Period Release date Change 1-year change Next release
AMERICASArgentina Q3 12/21 -2.5% 0.7% 3/22
Brazil Q4 3/1 6.5% 7.2% 5/29Canada Q4 3/1 0.8% 2.5% 5/31
EUROPEFrance Q3 12/28 0.5% 1.8% 3/27
Germany Q4 2/14 -0.3% 1.6% 5/15UK Q3 12/21 1.8% 2.3% 3/27
AFRICA S. Africa Q3 12/6 2.0% 8.0% 3/12
ASIA and S. PACIFIC
Australia Q3 12/5 0.2% 1.9% 3/6Hong Kong Q4 2/27 6.2% 7.2% 5/10
India Q4 2/28 12.4% 12.0% 5/31Japan Q4 2/14 -0.1% -0.4% 5/16
Singapore Q4 2/22 0.7% 1.5% 5/24
Unemployment Period Release date Rate Change 1-year change Next release
AMERICASArgentina Q4` 2/19 6.9% -0.2% 0.2% 5/20
Brazil Jan. 2/26 5.4% 0.8% -0.1% 3/28Canada Jan. 2/8 7.0% -0.1% -0.5% 3/8
EUROPEFrance Q3 12/6 9.9% 0.1% 0.7% 3/7
Germany Jan. 2/28 5.9% 0.6% -0.5% 3/28UK Oct.-Dec. 2/20 7.8% 0.0% 0.2% 5/20
ASIA and S. PACIFIC
Australia Jan. 2/7 5.4% 0.0% 0.2% 3/14Hong Kong Oct.-Dec. 1/17 3.1% -0.3% -0.2% 4/30
Japan Jan. 3/1 4.2% -0.1% -0.3% 3/29Singapore Q4 1/31 1.8% -0.1% -0.2% 4/30
CPI Period Release date Change 1-year change Next release
AMERICASArgentina Jan. 2/15 1.1% 11.1% 3/13
Brazil Jan. 2/7 0.9% 6.2% 3/8Canada Jan. 2/22 0.1% 0.5% 3/27
EUROPEFrance Jan. 2/20 -0.5% 1.2% 3/13
Germany Jan. 2/20 -0.5% 1.7% 3/12UK Jan. 2/12 -0.5% 2.7% 3/19
AFRICA S. Africa Jan. 2/20 0.3% 5.4% 3/20
ASIA and S. PACIFIC
Australia Q4 1/23 0.2% 2.2% 4/24Hong Kong Jan. 2/22 0.2% 3.0% 3/21
India Jan. 2/28 0.9% 11.6% 3/31Japan Jan. 3/1 0.0% -0.3% 3/29
Singapore Jan. 2/25 0.2% 3.6% 3/25
PPI Period Release date Change 1-year change Next release
AMERICASArgentina Jan. 2/15 1.0% 13.2% 3/13Canada Jan. 2/28 0.0% -0.2% 3/28
EUROPEFrance Jan. 2/28 0.5% 1.4% 3/29
Germany Jan. 2/20 0.8% 1.7% 3/20UK Jan. 2/12 0.2% 1.0% 3/19
AFRICA S. Africa Jan. 2/28 -0.1% 5.2% 3/5
ASIA and S. PACIFIC
Australia Q4 2/1 0.2% 1.0% 5/3Hong Kong Q3 12/13 0.3% -1.5% 3/14
India Jan. 2/14 0.4% 6.6% 3/14Japan Jan. 2/13 0.4% -0.2% 3/12
Singapore Jan. 2/28 2.1% -3.9% 3/28 As of March 1 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
CURRENCY TRADER•March2013 31
TRADE
Date: March 1.
Entry: Long the Euro/U.S. dol-lar pair (EUR/USD) at 1.3018.
Reason for trade/setup: As explained in this month’s Spot Check, the U.S. dollar index (DXY) triggered a couple of sig-nals on March 1: It marked the fourth straight week of higher weekly highs and closing prices, and it was also a new 63-day high that closed strongly (in this case, exactly at the March 1 high).
Prior to 2002 (when the dollar had stronger and longer-lasting bull phases), both patterns tended to be followed by additional buying, but they have since been more bear-ish. Specifically, all the most recent 12 instance of four con-secutive weeks with a higher high and higher close have been followed by a lower weekly close. Although the DXY may be preparing for a run at its 2012 high, it is still in a longer consolidation/downtrend, which favors interpret-ing the patterns in a bearish rather than bullish context.
This near-term short-dollar scenario implies a long EUR/USD position. Also, the Euro is poised for a bounce for a bit of a rebound after a sharp sell-off (triggered by the Italian elections) in late February. Finally, the EUR/USD’s recent sell-off has taken the pair down to a test of the whole-number price of 1.3000.
The initial stop will be placed relatively nearby, as any significant drop below the entry day implies the Euro will challenge its November 2012 low around 1.2700.
Initial stop: 1.2929.
Initial target: 1.3186.
RESULT
Exit: Trade still open on March 5.
Profit/loss: +.0004, marked to market at 1.3046 around 8:55 a.m. ET on March 5.
Outcome: The Euro formed a narrow inside day the first day after entry (closing slightly higher), and rallied mod-estly in the early part of the March 5 session. We were hoping for a more energetic reversal to start out the week, but at least the trade wasn’t knocked out of the box imme-diately. The stop will be raised to breakeven on a move above 1.3100, but an exceptionally weak close on March 5 might be reason to exit the trade early. yNote: Initial trade targets are typically based on things such as the historical per-formance of a price pattern or a trading system signal. However, because individ-ual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce expo-sure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.
Dollar analysis prompts Euro trade.
TRADE SUMMARY
Date Currencypair
Entryprice
Initial stop
Initial target IRR Exit Date
P/LLOP LOL Trade
lengthpoint %3/1/13 EUR/USD 1.3018 1.2929 1.3186 1.89 1.3046 3/5/13 0.0028 0.22% 0.0056 -0.0036 2 days
Legend — IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade). MTM: marked-to-market — the open trade profit or loss at a given point in time.
FOREX TRADE JOURNAL
Source: TradeStation