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January 2013

Volume 10, No. 1

Strategies, analysis, and news for FX traders

UNDERSTANDING THE ABE TRADE P. 10

2013 currency kickoff p. 6

The Swiss franc and thenegative interest rate paradox p. 20

Dollar/pound:Breakout pattern odds p. 16

Triangle trade in the Euro/pound p. 29

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2/292 January2013CURRENCY TRADER

CONTENTS

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

Global Markets

2013 currencies to watch ...........................6

With the central banks of the currency majors

mostly engaging in aggressively loose monetary

policy, those searching for movement in the FX

arena might want to look beyond the usual forex

suspects.

By Currency Trader Staff

On the Money

The Abe trade ...........................................10

Analyzing the unintended consequences of a

currency devaluation race to the bottom.By Barbara Rockefeller

Abenomics, European politics,

and American labor .................................14

As the year turns, a few key catalysts

are driving the FX market.

By Marc Chandler

Spot Check

Dollar/pound makes a move ...................16The British pound punctured resistance vs. the

dollar at the outset of the new year. Whats

happened in the past after such moves?

By Currency Trader Staff

Advanced Concepts

The paradox of negative

interest rates ...........................................20

The Swiss National Bank risks losing its bet

itcancounterglobalfundinowsinachronic

nancialcrisis,butsofaritiswinning.

By Howard L. Simons

Global Economic Calendar ........................24

Important dates for currency traders.

Events .......................................................24

Conferences, seminars, and other events.

Currency Futures Snapshot.................25

BarclayHedge Rankings........................25

Top-ranked managed money programs

International Markets............................ 26

Numbers from the global forex, stock, and

interest-rate markets.

Forex Journal ........................................... 29

Triangle pattern breakout.

Looking for an

advertiser?

Click on the company

name for a direct link to the

ad in this months issue.

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CONTRIBUTORS

4 January2013CURRENCY TRADER

Editor-in-chief: Mark Etzkorn

[email protected]

Managing editor: Molly Goad

[email protected]

Contributing editor:

Howard Simons

Contributing writers:

Barbara Rockefeller,

Marc Chandler, Chris Peters

Editorial assistant and

webmaster: Kesha Green

[email protected]

President: Phil Dorman

[email protected]

Publisher, ad sales:

Bob Dorman

[email protected]

Classifed ad sales: Mark Seger

[email protected]

Volume 10, Issue 1. 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 orreproduced in any form without written permission from the publisher.

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

For all subscriber services:www.currencytradermag.com

A publication of Active Trader

CONTRIBUTORS

qHoward Simons is president of Rose-

wood Trading Inc. and a strategist for Bianco

Research. He writes and speaks frequently

on a wide range of economic and nancial

market issues.

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

tional economist with a focus on foreign exchange. She has

worked as a forecaster, trader, and consultant at Citibank

and other nancial institutions, and currently publishes two

daily reports on foreign exchange. Rockefeller is the author

ofTechnical 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 Universitys

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 ofMaking Sense ofthe Dollar: Exposing Dangerous Myths about Trade and Foreign

Exchange (Bloomberg Press, 2009).
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.currencytradermag.com/http://www.rts-forex.com/http://www.rts-forex.com/http://www.currencytradermag.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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GLOBAL MARKETS

As 2013 gets underway, most economists are expectingthe New Year to usher in more of the same: a modestglobal economic recovery characterized by continued slowgrowth and central bank monetary policy accommodation.

In terms of the forex market, the historically low-yieldenvironment for major currencies is likely to continue,which will likely support money flows into higher-yield-ing emerging-market currencies.

Credit Suisse forecasts 2013 global gross domestic prod-uct (GDP) growth at 3.4%, up slightly from 2012s estimat-ed 3.1% pace. The firm expects growth in the major indus-trialized nations to remain sluggish, targeting 2013 GDP of2% in the U.S., 0.3% in Japan, 0.5% for the Euro area, and1.2% for the UK.

In contrast, it sees emerging economies continuing tolead the globe in GDP growth e.g., an 8% pace in 2013for China, 6.9% for India, and 3.9% for Latin America.

Low ratesA big part of the prevailing fundamental picture is thefact that major central banks around the world remainin accommodation mode. As of Jan. 1 the U.S. FederalReserves federal funds rate stood at zero to 0.25% (withno change forthcoming until the U.S. unemployment ratedrops to 6.5%), the Bank of Japans (BOJ) rate was 0.10%,the Bank of Englands was 0.50%, the European CentralBanks rate was 0.75%, the Bank of Canadas was 1%, theReserve Bank of Australias was 3%, and the Reserve Bankof New Zealands rate was 2.5%.

Virtually every monetary policy is accommodative,

says Cary Leahey, senior advisor to Decision Economics.That tends to weaken currencies.

But he notes that when everyone wants to depreciatetheir currencies, it makes it more difficult for any single

currency to win the race to the bottom. What countryscurrency will depreciate the most to get some growth?Leahey asks. If the question is who has the easiest mon-etary policy, it could be the BOJ.

Japan makes some noise (again)New leadership in Japan is pushing hard for aggressivemonetary policy to aid the ailing economy. IncomingPrime Minister Shinzo Abe would like the BOJ to engagein unlimited quantitative easingand set a firm 2% inflationtarget. Abe has come out fighting, threatening to strip thecentral bank of its independence if it doesnt cooperate.

The reality is that neither I nor anyone else really

knows exactly how this is going to play out in 2013, saysGlenn Levine, senior economist at Moodys Analytics. Mysense is we will see more aggressive quantitative easingin 2013. The inflation target may be lifted to 2%, but moreimportantly, this target is likely to be more credible as theBOJ offers a firm commitment to meet this target ratherthan leaving it as a nebulous goal, but then not doingmuch about it.

This could mean more downside for the yen in theweeks ahead, which translates into continued upside forthe U.S. dollar/Japanese yen rate (USD/JPY), which hasrallied smartly since October (Figure 1). Barclays analystssounded a bearish yen theme in their December Global

2013 currencies to watch

With the central banks of the currency majors mostly engaging in

aggressively loose monetary policy, those searching for movement in

the FX arena might want to look beyond the usual forex suspects.

BY CURRENCY TRADER STAFF
http://www.currencytradermag.com/index.php/c/Key_Conceptshttp://www.currencytradermag.com/index.php/c/Key_Conceptshttp://www.currencytradermag.com/index.php/c/Key_Conceptshttp://www.currencytradermag.com/index.php/c/Key_Concepts

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7/29CURRENCY TRADERJanuary2013

FX Quarterly research note: We expect the newly electedJapanese government to give the BOJ a stronger mandatefor targeting higher, much-needed inflation. We think

these changes will have a profound, depreciatory one-offeffect on the JPY of over 10%, taking its cross against theUSD from 78 to 88 over six months. As of Jan. 2, the dol-lar/yen pair had already topped 87.00.

With the new government arriving inTokyo there is more and more pressure onthe BOJ to provide more policy accommo-dation, and that could mean more assetpurchases, says Charles St-Arnaud, FXstrategist at Nomura. With Japan beingforceful on providing fiscal and monetarypolicy we could see the yen depreciate vs.the U.S. dollar.

Dollar and EuroGreg Anderson, North American head ofFX strategy at Citi, says one of the big-gest issues he hears clients discussing iswhether the U.S. dollar is nearing a cycli-cal turn. Such speculation, he suggests,might be premature.

Will the dollar start to rally becauseof strong U.S. growth and the potentialfor the Fed to lead the other G-4 centralbanks in terms of tightening? he says.

Its an interesting question, but I thinkpeople are throwing it out there a yeartoo early. The U.S. dollar index (DXY)has been trading mostly lower sincepeaking in late July 2012. It bounced offsupport in September, made a lower highin November, and by the beginning ofJanuary, it was trading approximatelymidway between that high and the sup-port zone (Figure 2).

Anderson highlights the importanceof the upcoming Italian elections in lateFebruary and German elections in the

fall. Does the political solidarity weveseen over the last three months continueto hold in 2013, and will we see any signsof economic recovery? he asks. Yes, Ithink we will have political solidarity. No,I dont think we will see any economicrecovery, and that will mean more Eurorange trading.

Given the prevailing environment in themajors, where can forex traders look fortrade opportunities?

With the G-4 all printing money, it hasto go somewhere and really the only place

it can go is emerging markets, Anderson says.

Latin America

Through Dec. 20 the Mexican peso (MXN) was one of theLatin regions strongest currency gainers, posting a 9%gain vs. the U.S. dollar in 2012 (Figure 3). Some analystsexpect the Mexican peso to remain an attractive currency

FIGURE 1: DOLLAR/YEN

Anticipated policy changes in Japan could result in further yen depreciation

vs. the dollar.

FIGURE 2: U.S. DOLLAR INDEX

The DXY has been trading mostly lower since peaking in late July 2012.

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GLOBAL MARKETS

into the first quarter of 2013.Mexico is the top pick. Its cheap, it has no intervention,

it has the better U.S. growth outlook story, and there arekey local reforms, says Dirk Willer, head of Latam localmarkets strategy at Citi. Colombia, Chile, and Brazil, bycontrast, have been intervening in the forex market to stifleappreciation in their currencies.

Strength in the fixed-income market in Mexico is play-ing a significant role in the pesos strength. We have seenstrong inflow into local debt, Willer says. But to buy the

local bonds, [foreign investors] have to buy the FX first.Willer outlined his views in late December when resolu-

tion of the U.S. fiscal cliff situation was still up in the air.Our base case is the fiscal cliff will be circumvented andthe Mexican peso could easily have a 50% strengtheningmove, he says.

Into the first quarter Willer expects the Mexican pesoto be the go-to currency, with the bullish picture owingpartially to the local reform story. Labor reforms havemade good progress to make the labor markets more flex-

ible, he says.Mexicos central bank lending rate

stands at 4.5%, and Willer doesnt fore-see a change any time soon. We dontexpect a move, but a hike is slightly morelikely that a cut, he says. They have aninflation target at 3%, plus or minus 1%.They had a food price shock and infla-

tion moved above 4%, which explainstheir more hawkish view.According to Willer, Mexico is the

clearest trade based on U.S. growth,while the other Latin American curren-cies are more tied to Chinese growth.While the China story has been improv-ing lately, it hasnt translated into bet-ter commodity prices, which is a bit ofa divergence, he notes. Given howimportant commodities are for the rest ofLatin America, outside of Mexico, it is alittle concerning.

St-Arnaud highlights the possibilitiesof shorting the Canadian dollar/Mexicanpeso pair (CAD/MXN). Closing at 12.84

on Dec. 31, the pair has the potential tofall to 12.50 or lower, he says (Figure 4).St-Arnaud was positive on the outlookfor the peso, explaining with the newlyelected government we think there willbe a big push for new structural reforms,which should support the currency.

On the Canadian dollar side of thetrade, St-Arnaud notes there is a bigdifference between what Canadian oil

producers receive relative to the price ofthe European benchmark Brent crude oilprice, which has helped strengthen theCanadian dollar.

St-Arnaud explains that althoughCanada is an oil producer, most ofOntario and Quebec rely on importedoil because of a lack of pipelines, whichhas resulted in an over-supply of theCanadian benchmark Western CanadaSelect oil out of Alberta. There is a $50gap between the price of Canadian oil

and Brent, he says. That means the

FIGURE 3: U.S. DOLLAR/PESO

The Mexican peso was one of the Latin regions strongest currencies in

2012.

FIGURE 4: CANADIAN DOLLAR/PESO

An overvalued CAD might provide another opportunity for a bullish MXN trade.

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9/29CURRENCY TRADERJanuary2013 9

CAD is overvalued and should return to a more normalvalue.

Finally, Willer says the Brazilian real (BRL), which haddeclined 9% vs. the U.S. dollar in 2012 through Dec. 20,has been driven lately in large part by governmental spin.They are suggesting they are happy with current levels,

but thats because they have a short-term inflation worry,he explains. In the mid-to-latter part of next year theymight try to get the real toward 2.10-2.20. The dollar/realrate closed 2012 at 2.00521 (Figure 5).

However, foreign investor inflows into Brazil havedeclined. Brazil has so many hurdlesraised in terms of capital controls, it haslost market share, Willer explains.

Non-Euro Europe also offers some inter-esting forex stories at the outset of theNew Year.

Scandi FXWhen asked what his top Scandinaviancurrency was for early 2013, ArneLohmann Rasmussen of Danske BankMarkets said he favors the Swedish krone(SEK).

The Riksbank (Swedens central bank) isexpected to be on hold in February, wherethe market is pricing a high probabilityof a cut, he says. It is also our viewthe global economy is turning, which isexpected to benefit a cyclical currency likethe SEK. We also believe investors will

still favor currencies backed by soundfundamentals and a true triple-A rating,such as Sweden offers.

Rasmussen also suggests being longthe Norwegian krone (NOK), althoughhe notes this trade is not without its risks.In our bullish view, we highlight therisk that some of the safe-haven flowsthat benefitted the Scandies in 2012 mightreverse in 2013. However, our main viewis that this will be mitigated by cyclicalsupport. In late December both the SEKand NOK were at or near their yearly

highs vs. the U.S. dollar, and a little offtheir highs vs. the Euro (Figure 6).

The other risk involves the potential forlooser monetary policy in Sweden andNorway. The Riksbank might cut ratesmuch more aggressively than we forecastgiven the current weak Swedish indica-tors, Rasmussen says. The same appliesto Norway. Here the strong NOK mighttrigger, contrary to our view, new ratecuts. As of late December, the Riksbankrate stood at 1%, while the Norges Bankrate was 1.5%.

Good for carryRasmussen also argues early 2013 could prove very sup-portive for carry currencies. In our view we will be pastthe fiscal cliff, the tail-risk from the debt-crisis will con-tinue to fall which will result in tighter Italian/Spanishbond spreads and forward-looking indicators like global

PMIs are expected to improve, he says. Overall, weexpect the first quarter 2013 will be very strong for carrytrades.y

FIGURE 5: DOLLAR/REAL

The relatively high USD/BRL rate is not expected to change much inearly 2013.

FIGURE 6: KRONES ARE KING

Despite some downside risks, the Swedish (top) and Norwegian (bottom)

currencies continue to have mostly bullish prospects.
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10/29

As of Boxing Day (the day after Christmas) the U.S. gov-ernment was still dithering about going over the fiscalcliff and raising the debt ceiling, and Europe was for-mally entering recession. In Japan, though, newly electedPrime Minister Shinzo Abe was taking bold steps to killdeflationary recession. Abes plan is to boost governmentspending by massive amounts, regardless of the debt ratio(already more than 200% of GDP), and strong-arm theBank of Japan (BOJ) into doubling the inflation target to2%.

What Abe really wants is a devaluation of the yen topromote exports and to lift inflation arising from higherimport prices. As noted in Deciphering the yen (Currency

Trader, November 2012), the yen was already starting oneof its traditional bouts of weakness, in part on expecta-tions of the election and its result (Figure 1). The dollar/yen (USD/JPY) has surpassed the most recent high, 84.18from March 15, 2012, and at the end of December wasnearing the high before that, 85.93 from Sept. 17, 2010(gold horizontal lines). It looks like a dollar rally onlybecause of the spot quotation convention that puts thedollar first in the currency pair. But make no mistake, thedriver here is the yen. Some forecasters are talking about100 in 2013.

Abe is going with the wind, trying to take advantageof a currency move already in place. To boost it along he

invented a new cabinet-level ministryfor Economic Revival and appointeda former trade minister, Akira Amari,to head it. Amari will also chair arevived Council on Economic andFiscal Policy. The level of the yen andexport promotion is at the center offixing deflation and the hollowing outof industry. The Bank of Japan in lateDecember increased the amount ofbond buying by 10% to 101 trillion,and it will almost certainly bow to thepolitical demand to raise the inflation

target, inspiring some discomfort overthe central banks independence.

Its by no means clear that largerdoses of the same medicine will curethe patient of deflation, but thereare no other remedies for a classicKeynesian liquidity trap. This timethe Japanese are adding to interestrate policy a more explicit currencypolicy with the idea that devalua-tion cures deflation. Historically, thishas been true, although over the past

century, major devaluations tended

On the Money


ON THE MONEY

The Abe tradeAnalyzing the unintended consequences

of a currency devaluation race to the bottom.

BY BARBARA ROCKEFELLER

FIGURE 1: DOLLAR/YEN RALLY

The driver in the recent dollar/yen rally is a weak yen, not a strong dollar.

Source: Chart Metastock; data Reuters and eSignal

2011 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 Mar

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to occur as undesirable side effects of other policy choicesand also proved difficult to halt.

However, one of the splendid, if frightening, side effectsof devaluation is a stock market rally. Investors preferequities to bonds when a currency is devaluing, sincethe purchasing power of principal plus interest is falling.One of the famous examples from history is the roaringBerlin and Vienna stock markets in 1921 as the German

and Austrian currencies were losing value by the day, andequities were further boosted over bonds as the ability ofgovernments to repay became questionable.

The economic and financial events of the 1920swere heavily influenced by the loss of physicalwealth in WWI, from factories to farmland, and thedisastrous peace treaty that followed. At the sametime stock markets were soaring inflation was ris-ing, and in some instances became hyperinflation, aswas the case in Germany. Consider the stock marketrallies of the 1920s shown in Table 1. Germany hadthe highest percentage increase in notional stockmarket returns over the period, but its illusory. As

money and wealth manager Bryan Taylor writes:The strong [stock market] recovery only reflectedhow much the hyperinflation of 1922 and 1923devastated German financial assets. In real terms,between May 1918 and November 1922, Germanshares declined by 97.4%, a collapse even worsethan the one that occurred in the United Statesbetween 1929 and 1932. Even with a tenfold recov-ery between 1922 and 1929, the German stock indexwas still 29.6% below its level in May 1918. Table 2shows the recoveries of various indices from theirDepression-era bottoms.

And thats in notional terms. In real terms, the

German government devalued the mark from about 60 tothe dollar in the first half of 1921 to 330 marks to the dollarby November 1921. Conventional economic history has it

that Germany deliberately devalued the mark to deprivethe Allies of excessive war reparations, which didnt workbecause the amounts were fixed in gold and foreign cur-rency terms and actually raised at one point. But whateverthe political reasoning, government selling of marks toobtain gold and foreign currencies to pay war reparationstook on a life of its own through hyperinflation in thereal economy. We have all seen the famous chart showingdevaluation by thousands of percentage points by 1923.

In sum, currency valuations and equity prices are closelyintertwined under crisis conditions. Economic growth,earnings per share, and other measurements that should

be the most influential factors in equity analysis fly out thewindow when the motivation to buy equities is currency-driven. It is precisely when (and only when) crisis condi-tions prevail that intermarket analysis is pertinent anduseful.

The question then becomes whether Japan, by deliber-ately seeking inflation, is inadvertently modeling itself onGermany circa 1921.

There are tremendous differences, of course, not leastthat Japan doesnt owe the rest of the world the equivalentof one years GDP, as Germany did. More than 90% ofJapanese government debt is owned by Japanese institu-tions and citizens. But by selecting a policy of devaluation

and one that may easily come to include massive govern-ment intervention in the FX market, as we saw in 2003, the

TABLE 2: SELECT EQUITY MARKET RECOVERIES FROMTHE GREAT DEPRESSION

Country Market TopMarketBottom

PercentDecline

RecoveryDate

U.S. Sept.1929 June1932 86.20% Sept.1954

Canada Sept.1929 June1932 80.10% Nov.1954

France Feb.1929 Aug.1936 75.00% April1941

Italy Feb1925 May1932 72.90% June1941

Germany June1928 April1932 67.70% Feb.1942

Austria Nov.1928 Dec.1933 62.30% June1954

Switzerland Sept.1928 May1932 61.20% Jan.1946

Spain Feb.1928 July1936 60.60% May1946

UK Sept.1929 June1932 52.30% May1954

Japan July1926 Oct.1931 48.90% May1933

Even with a tenfold recovery between 1922 and 1929, the German

stock market was still 29.6% below its May 1918 level in notional

terms.

Source: www.gold-eagle.com/analysis_98taylor061798.html

TABLE 1: SELECT INTERNATIONAL STOCKMARKET RETURNS, 1921-1929

CountryMarketBottom Market Top

PercentIncrease

Germany Nov.1922 June1928 1088.70%

France April1922 Feb.1929 417.20%

U.S. Aug.1921 Sept.1929 394.00%

Canada Aug.1921 Sept.1929 299.80%

Australia Dec.1916 Feb.1929 196.10%

Italy July1921 Feb.1925 134.60%

Spain Nov.1920 Feb.1928 131.70%

UK Oct.1921 Sept.1929 73.20%

Austria Dec.1925 Nov.1928 53.40%

Japan Dec.1923 July1926 28.70%

Germany had the highest percentage increase in notionalstock market returns, but the gain is deceptive.

Source: www.gold-eagle.com/analysis_98taylor061798.html

7/28/2019 Ctm 201301


ON THE MONEY

new Japanese government is unmistakably nurturing anequity rally. After all, Japan has not yet recovered from theburst bubble of 1990, although most of the rest of worlds

indices are making new all-time highs (Figures 2 and 3).

Even a 50% retracement of the loss would take the Nikkeiindex only to about 22,500, the highest high from the weekof July 5, 1996 more than 16 years ago. Figure 3 com-

pares the Nikkei to the FTSE All-World Index, with theassociated linear regressionlines. Theequity world has prospered every-where but Japan.

The interesting thing about devalu-ation leading to equity rallies is thateveryone knows about it. If the newJapanese government succeeds inpushing the yen down, speculatorswill push volume in the Nikkei to newheights. Its almost as though Japanseeks to blow a bubble, and rememberthat when uncertainty rises about the

wisdom of policies, a preference forhard assets ensues, implying a bubblein commodities, too.

But then consider what happenswhen the government wants to stopthe merry-go-round. Burst bubbles arecharacterized by default, deleverag-ing, disclosure of fraud, downsizing,demand, wealth destruction anddeficits. The pubic deficits willremain unless the sovereign defaults.Deliberately building a bubble belongsin that category of events labeled be

careful what you wish for.Questioning the wisdom of the

new Japanese policies is going to be akey theme in 2013. Because we knowso little about exiting a deflationaryrecession, we must study the primaryexample we do have, hopefully with-out the war that triggered the trueend of the Great Depression. We knowmore today than we knew then abouthow markets and economies work,but to be honest, not much more.

Thats why economic history, suchas Sylvia Nasars review of the greateconomists of the 19th and 20th centu-ries, Grand Pursuit (Simon & Schuster,2011), is so gripping. (Well, grippingif you see the parallels with todayspolicy conundrums and conflicts. Itsnot really bedtime reading unless youhave insomnia.)

One other thing that emerges fromthe historical perspective is that theEuro, despite its multitude of faultsand shortcomings, is perceived as

FIGURE 2: NIKKEI STOCK INDEX, WEEKLY

Even a 50% retracement of the Nikkeis loss would take the index only to

around its levels from mid-1996.

198 2198 31984198519861987198 8198 919901991199 2199 319941995199 61997199819992000200120022003200420052006200720082009201 0201120122013201420152

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FIGURE 3: NIKKEI STOCK INDEX (BLACK) VS. FTSE ALL-WORLDINDEX (BLUE), WEEKLY

Overall, equity markets have prospered almost everywhere but Japan in recent

decades.

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what used to be called a hard currency. Its probably noaccident the gold and FX reserves of the Eurozone memberstates add up almost exactly to the sum that will be avail-

able to struggling economies via the European StabilityMechanism. The European Central Bank (ECB) may betoying with a form of quantitative easing by purchasingthe paper of distressed sovereigns (ECB President MarioDraghis whatever it takes moment last summer), buton the whole the Eurozone is declining to leverage thereserves. Moreover, the ECBs sacred, treaty-based com-mitment to keeping inflation low is the investors goldstandard.

As noted, Japan doesnt enjoy large foreign participationin its government bond market, but if it did, we wouldexpect an exodus from JGBs to European sovereign bonds.This is true even if we expect that neither party nor any

of the Eurozone members will default. Default is not theissue. Yield is not the issue, either. We might also say theexpectation of yen devaluation outweighs the yield differ-ential favoring European countries.

This is the basic assumption of a key FX model by MITeconomist Rudi Dornbusch put forth in a 1976 paper titledExpectations and Exchange Rate Dynamics. Dornbuschstarted with the uncovered interest parity equation thatsays the home interest rate on bonds is always equal tothe foreign interest rate plus the expected rate of deprecia-tion or appreciation of the exchange rate. To get inflation,you need a big and unexpected increase in money supply,exactly what Japan is aiming for today. The increase inmoney supply, when its unexpected, causes the FX rate toovershoot downward and then, perversely, to rise, beforefalling again.

Note the money supply change has to be unexpected a shock. This time it will hardly be a surprise, since it isbeing telegraphed loud and clear, but never mind. Pricesin Japan have been sticky upward for so long that we canbarely imagine a spurt of inflation. If inflation does, in fact,occur, that will be unexpected enough.

The point of Dornbuschs work is that exchange rates farovershoot levels where fundamental economics dictatesthey should go. Also, they overshoot with far greater vola-

tility than warranted or expected. Its called the discon-nect puzzle and it applies pretty much only to the foreignexchange markets. Its overshooting caused not by maniaand panics, as in commodity and equity markets, butrather by real analysis of real economic variables butwithout being able to see far enough down the road. As weall know, FX traders respond to the data in front of them,not to the data that should ensue later in a cycle.

Which leads us to the dollar. At its last meeting, theFederal Reserve announced its intention to tie quantitativeeasing to the unemployment rate rather than the infla-tion rate. Inflation was downgraded to a contingency: QEwill continue as long as unemployment remains high and

inflation doesnt get too high. The Fed isnt deliberatelyseeking to devalue the dollar, but this new policy formulaleads ineluctably to the deduction that devaluation is what

it will secretly accept, and will get. In other words, bothJapan and the U.S. are chasing the same objectives with thesame monetary policy. Japan has an additional advantage deficit spending that the U.S. doesnt have, at leastnot under current budget and deficit-management condi-tions.

Assuming the U.S. budget and debt-ceiling negotia-tions are prolonged and unpleasant, as seems likely justahead of year-end, global investors will be handed anotherreason to divest themselves of dollars. Not only shouldthey fear inflation from QE at some point althoughnobody knows when they need to fear possible tech-nical default, however temporary. The ratings agencies

will frown at the prolonged and often silly talks. The firstdowngrade of U.S. sovereign debt in August 2011 may eas-ily be followed by another downgrade if the ratings agen-cies continue to incorporate political incompetence intotheir analysis. And why shouldnt they?

Now we have two of the majors, the dollar and the yen,in competing devaluations. Ironically, with exports toChina having fallen substantially because of the islandsdispute and exports to Europe also down because ofthe recession, Japans main export hope is the U.S. Theclear winner is the Euro, followed by the Swiss franc, thepound, and the Australian dollar.

Governments in all those countries have complainedabout their currencies being overvalued, but the U.S. andJapan have the lead in specific devaluation policies. Itsgoing to get ugly. This year will almost certainly see moreFX market intervention than we grew accustomed to overthe past decade. Its probably overly dramatic to call it acurrency war, but its certainly a competition.

What we need to fear most is Fishers money illu-sion: that we focus on return without accounting forthe pernicious wealth destruction of inflation. Ignoringinflation the U.S. has been able to do so for nearly fiveyears now, and 25 years in the case of Japan causes baddecision-making. This is not to say we will experience

the conditions of Vienna or Berlin in October 1921, whenprices were rising by 50% per month, but that savers andcreditors suffer under inflation, while debtors benefit.Unfortunately, this means the wise course of action wheninflation is reliably expected is to borrow as much as pos-sible and put it in equities.

No one can yet say whether the Abe trade will work.Japan has been struggling with deflation for decades. Butits all too likely to work in the U.S.

Possibly the best trade in 2013 will be to short the yen,especially against the Euro, and long the S&P.y

For information on the author, see p. 4.
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14/2914 October2010CURRENCY TRADER

The main feature in the forex market continues to beyen weakness (Figure 1). This weakness, based onexpectations the new Japanese government will succeedin driving the dollar to 90 with a combination of moreaggressive monetary and fiscal policy (Abenomics), is

offering support to other currencies. The yen sales area combination of momentum and carry strategies. Asformer Prime Minister Shinzo Abe was campaigningfor office again, he advocated a higher inflation target,open-ended quantitative easing by the Bank of Japan,and new and large public works spending, with theexplicit goal of weakening the yen and finally endingdeflation.

However, there are two other forces in the market aswell. First, the market is anticipating further reductionin the tail risks in Europe. Of course, the large steps backfrom the abyss this year are the product of the European

Central Banks long-term repos and offer of (conditional)outright purchases. But the European Commission willreportedly do its part by granting several countries, includ-ing France and Spain, an extra year (or maybe two for Spain)to reach the 3% deficit target. An official announcementhas not been made, but the signals from the EC and theCommissioner for Economic and Monetary Affairs Olli Rehnare unmistakable.

The other driver is the looming U.S. fiscal cliff and debtceiling. On Dec. 26 the Treasury Department indicated itwould begin taking special measures to avoid violated thedebt ceiling. After the previous weeks failed vote in theHouse of Representatives, attention has turned to the Senate.

With the Democrats enjoying a slim majority, it is possiblethey will vote on a bill along the lines that Obama outlined.

Meanwhile, in Italy, Agenda Monti, the series of reformmeasures from Prime Minister Mario Monti aimed at mod-ernizing Italys economy and putting it on more solid fiscalfooting, is drawing some support from the UDC, some cur-rent cabinet members, and some breakaway politicians. Apoll suggests this support may translate to 15% to 20% of thevote in the late-February Italian election. At the same time,former Italian prime minister (and future candidate) SilvioBerlusconi is trying to claim Italy is the second-strongesteconomy in the Euro area (behind Germany) while maintain-ing Monti has driven the economy into the ground.

Although its difficult to argue both points simultane-ously, the unity of opposites during a political campaign isall too common. Perhaps the most important character at the

moment in the Italian drama is neither Monti nor Berlusconi,but the center-left leader Pier Luigi Bersani. He alreadymade the most sensible response to Montis manifesto, say-ing that he agrees with some of it, other parts less so, and isopen to discussion about the rest. Bersani has his own ambi-tions and seems reluctant to move over for Monti.

In the U.S., the labor dispute at ports on both coasts bearsmonitoring. The Eastern Seaboard and Gulf port dispute isthe most pressing at the moment. The ports handle a greatdeal of consumer goods, and a labor dispute would disruptthe retail sector as well as distort trade and employmentdata. (Only container traffic would be impacted autos,some perishable items, and military cargo would not beincluded.) A last-minute deal was reached on Dec. 29 toextend the existing contract to the first week in February,with the hope that will be sufficient time to reach a newagreement.

Even though the labor dispute would impact importsmore than exports, and therefore would show a reduction ofthe U.S. trade deficit, the initial reaction may be to sell thedollar.y

Marc Chandler is head of global foreign exchange strategies atBrown Brothers Harriman. This article was adapted from his blog,Marc to Market (www.marctomarket.com). For more information

on the author, see p. 4.

Abenomics, Europeanpolitics, and American labor

As the year turns, a few key catalysts

are driving the FX market.

BY MARC CHANDLER

ON THE MONEY


FIGURE 1: YEN ON THE RUN

The yens weakening trend has translated into a more than 11% gain

in the dollar/yen pair since mid-September.

Source: TradeStation
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15/29

HESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PER-

ORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-ORVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSOUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS L IKELY TO ACHIEVE PROFITS OROSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTUREERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

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16/2916 October2010CURRENCY TRADER16 January2013CURRENCY TRADER

No one probably noticed, but when

the British pound/U.S. dollar rate

(GBP/USD) pushed above 1.6308 on

Jan. 2 (Figure 1), it was only the sec-

ond time since spring 2011 the pair

had made a one-year (or longer) new

high, the other instance being the

September 2012 high that eclipsed the

April 2012 peak.

Even though it marked the pound/

dollars highest price in 346 days,

the Jan. 2 move was less than con-

spicuous. After all, the pair closed

the session below the breakout level

and toward the bottom of the days

range, and it followed through to the

downside the next day (not shown

on chart). And as it turns out, this

behavior a pullback after an upside

breakout has been fairly typical in

recent years.

SPOT CHECK

Dollar/pound makes a move

The British pound punctured resistance vs. the dollar at the outset of thenew year. Whats happened in the past after such moves?

BY CURRENCY TRADER STAFF

FIGURE 1: UPSIDE BREAKOUT

The pound/dollar pair broke out above resistance on Jan. 2 but closed toward

the bottom of the days range.

7/28/2019 Ctm 201301


Lets look at the pound/dollars current position, the

implications (if any) of its recent price action, and the con-

text in which it is taking place.

Upside breakout

Figure 1 shows the GBP/USDs Jan. 2 move penetrated

as obvious a resistance level as youre likely to find the

nearly identical December, September, and April 2012

highs. It represented a 71-day upside breakout of the

September high, which in turn was a 103-day breakout of

the April high. As was the case for the Jan. 2 breakout, on

Sept. 21 price close toward the bottom of the days range,

after which price trended lower for roughly two months.

Similarly, after breaking out above the October 2011 high

in April 2012, price turned to the downside after the pat-tern made a new high with a low close.

Analyzing days the pound/dollar pair closed in the

lower portion of the daily range when establishing a new

breakout high (based on high prices, not closing prices)

showed a tendency for the pair to weaken in subsequent

days. For example, Figure 2 compares the median price

action one, two, five, and 10 days after 51-day upside

breakouts with a closing price in the bottom 40% of the

days range to the pairs median price changes for all one-,

two-, five-, and 10-day moves from Jan. 2, 2003 through

Dec. 31, 2012. (All moves are calculated on a close-to-close

basis.) While the pound/dollar s benchmark price action

had a slight upside bias, the moves after the 58 previous

instances of the pattern were negative after day 2.

This general pattern held across breakout lengths of 252days, 62 days, 41 days, and 10 days, with the following

additional characteristics: The longer the breakout length,

the more significant the subsequent downside price move-

ment (the median performance after the 62-day and 51-day

variations was nearly identical, though); also, the lower

the close (e.g., in the bottom 33% or 25% of the breakout

days range) the more significant the subsequent down-

side price action. (The one exception among the sampled

patterns was the 21-day breakout, which tended to be

followed by upside price action that was stronger than

the pound/dollars benchmark performance.) However,longer breakout lengths and more extreme lower closes

also limited the number of sample patterns. For example,

there were 52 instances of 62-day breakouts that closed in

the bottom 40% of the days range but only 21 instances of

252-day breakouts with closes this low. Similarly, requiring

a close in the bottom 25% of the days range (rather than

40%) reduced the number of qualifying 51-day breakouts

from 58 to 38. The Jan. 2 close was in the bottom 20% of

the days range only the fifth time since 2003 a day that

made a new 252-day (or longer) high closed that low.

The patterns general bearishness contrasts to the

FIGURE 2: POST-BREAKOUT WEAKNESS

After new breakout highs that closed in the lower portion of the days range, the

pound/dollar had a tendency to be lower five and 10 days later.

7/28/2019 Ctm 201301

18/29

pound/dollars general tendencies

after all upside breakouts/new highs.

The price action after all upside

breakouts (i.e., regardless of the level

of closing price on the breakout day)

was mildly bullish. For example,

going long on upside breakouts

ranging in length from 40 to 70 days

(tested in increments of two days)

and exiting after five days was netprofitable in all cases, with winning

percentages ranging from 50% to

58% (the win rate peaked at lengths

of 46-50 days and then gradually

declined).

Figure 3 shows another perspective

of upside breakout performance: win-

ning percentage relative to holding

period. In this case, the percentages

reflect exit lengths of one to 10 days

for long entries on 62-day upside

breakouts. The highest win rate is

at day 2 at approximately 60%, after

which the rate declines through day

10 to around 43%. For some addition-

al context, the pound/dollar pair was

higher around 52% of the time five

days after 252-day upside breakouts.

Overall, there appears to be a con-

trast between the pound/dollar pairs

minor bullish bias during the analysis

period (and the bullish tendencies fol-

lowing upside breakouts in general)and the performance after upside

breakouts/new highs that are distin-

guished by a relatively low close.

Now lets take a step back and see

where this short-term behavior fits

into the GBP/USD pairs larger pic-

ture.

Longer-term price action

Figure 4s weekly chart of the pound/


SPOT CHECK

FIGURE 4: WEEKLY PERSPECTIVE

The GBP/USD rate has traded mostly between 1.53 and 1.65 since mid-2010.

FIGURE 3: UPSIDE BREAKOUTS

The odds of the pound/dollar being higher after a 51-day new high gradually

decreased after two days.

7/28/2019 Ctm 201301


dollar shows the recent consolidation to be part of a larger

trading range. The pair has traded mostly between 1.5300

and 1.6500 since mid-2010 (price spiked to above 1.6700 a

couple of times in 2011) after hitting 1.700 in August 2009

and falling as low as 1.4229 in May 2010.The higher low that formed in November 2012 and the

January breakout may look like the pairs initial attempt at

making a run at its previous highs, but Figure 5s monthly

chart shows the pound/dollar has just reached the upper

trendline of a massive four-year triangular consolidation.

It is certainly not inconceivable that price will continue its

upside push and break out of the upside of this pattern,

but theres also no reason to believe it wont retreat from

this resistance, even if its ultimate long-term direction is

upward.

The fundamentals may argue for continued stolid price

action, if not necessarily an indefinitely tighter contraction.

As discussed in British pound has potential near-term

edge over Euro (Currency Trader, December 2012), some

analysts see the pound as more bullish vs. the Euro thanthe U.S. dollar, but a strong catalyst for the UK currency

doesnt appear to be on the immediate horizon. The Jan.

2 resolution, however imperfect, of the U.S. Fiscal Cliff

issue left the forex market relatively untouched, with the

greenback trading bullishly against most currencies in its

immediate aftermath. With no major developments on the

horizon to push the currency strongly one way or the other

(of course, its always the unexpected events that trigger

major moves), the pound/dollar may continue to test sup-

port and resistance and move in fits and starts.y

FIGURE 5: THE BIG CONSOLIDATION

The pound/dollar is now at the upper boundary of a four-year consolidation

pattern.

7/28/2019 Ctm 201301


TRADING STRATEGIESADVANCED CONCEPTS

The role of education has moved front and center in the

public policy debate as national economic growth, not to

mention individual income, increasingly depends on add-

ing value to information.

This may be the case in many endeavors, but it is not at

all clear market analysis is one of them; some believe doc-

trinaire adherence to textbook explanations is a formula for

disaster. Indeed, it is not what a person knows, it is how a

person unlearns commonly held beliefs proven inadequate

that defines the real value of an education.

You are free to contemplate why you were not told this

during your own formal education.

One case in point deriving from the interest rate arbi-

trage model of currencies, wherein expectations of higher

short-term interest rates shouldpropel a currency higher as funds

will be lent there, is the presump-

tion high-yielding currencies are

strong currencies. However, if we

map the total carry returns for 28

currencies against the USD since

the January 1999 inception of the

Euro as a function of the average

annual spot rate and interest rate

spread (see The long, awful life

of the dollar carry trade, January2012), we see two of the most

prominent low-yielding curren-

cies, the CHF and the JPY, have

strongly positive spot-rate returns

(Figure 1). In fact, the only cur-

rency with a negative interest

rate spread against the USD, the

Hong Kong dollar, has had nega-

tive total carry return against the

greenback.

In the case of the JPY, the spot-

The paradox of negative

interest rates

The Swiss National Bank risks losing its bet it can counter global fund

inflows in a chronic financial crisis, but so far it is winning.

BY HOWARD L. SIMONS

Two of the most prominent low-yielding currencies (CHF and the JPY) have strongly

positive spot-rate spread returns.

FIGURE 1: LOW-YIELDING CURRENCIES OFTENHAVE HIGH SPOT-RATE RETURNS

-1.75%

-1.25%

-0.75%

-0.25%

0.25%

0.75%

1.25%

-0.2

5%

0.2

5%

0.7

5%

1.2

5%

1.7

5%

2.2

5%

2.7

5%

3.2

5%

AverageAnnualS

potRateSpreadReturn

Average Annual Interest Rate Spread Return

CHF

JPY

7/28/2019 Ctm 201301


rate strength is attributable in

part to both the countrys per-

sistent skirting with deflation

across its various Lost Decades

and to the necessity of Japans

customers to buy yen to pay their

Japanese suppliers. Moreover, once the yen carry trade

was displaced by the dollar carry trade beginning in 2009,

Japanese investors began repatriating funds (see Requiem

for a carry trade, February 2012).

The Swiss franc case

The CHF presents an interesting case on several grounds.

First, it has tried to remain an island within the Euro sea,

which is quite difficult considering its geography and

trade patterns (see The major Euro crosses, March 2007).

Second, it has been a carry trade-funding currency itself

(see Franc-ly my dear, I dont give a carry, September

2008 and How Eastern Europe got carried away, October

2009). Finally, it has also been a stopping ground for earn-

ings coming from various resource producers, no questions

asked (see The Swiss francs commodity connections,October 2008).

These factors plus flight capital coming out of the

Eurozone during the sovereign credit crises of 2010-2011

pushed the CHF to levels the Swiss National Bank (SNB)

considered unsustainable. Having international investors

consider you a haven is flattering to a point; drowning in

their fund inflows is a little excessive. The SNB, which had

lost somewhere in the neighborhood of CHF 14 billion in

its 2009-2010 interventions to suppress the CHF against the

EUR, went big, as the phrase goes, in September 2011

and announced a ceiling of 1.20 CHF per EUR and prom-

ised it effectively would print as many francs as necessary

to enforce that ceiling.

We can admire their courage even if we question their

sanity. After all, the history of central banks and finance

ministries in wagering their countries wealth and pricestability to defend or impose an arbitrary exchange rate is

not a happy one. George Soros famously broke the Bank of

England in September 1992 by betting the Bank of England

would not be able to keep short-term interest rates high

enough for long enough to defend the 3.00 DEM/GBP

level. A country can fix its interest rates or it can fix an

exchange rate, but it cannot fix both simultaneously; this is

true for large countries such as the U.S. and China and for

any Alpine confederation of your choice.

Negative interest ratesNot very long ago many professionals considered negative

interest rates to be something akin to a perpetual motion

machine, being faster than light, the Chicago Cubs win-

ning the World Series, or other unobserved events. This

was the case despite the occasional gentle reminder from

some the U.S. had effectively negative Treasury bill rates

in 1937 and the Swiss had imposed a negative interest rate

on foreign deposits in 1979. By mid-2012, a host of higher

quality European sovereign interest rates turned negative.

There are several ways to conceive of these negative

interest rates. The first is the lender is paying the borrower

After the SNB imposed the franc ceiling in September 2011, the TOIS was notably in

negative territory.

FIGURE 2: TOIS YIELDS LARGELY NEGATIVE IN AN INVERTED YIELD CURVE

1 23 4

5 67 8

9 1011 12

15 1821 24

-0.275%

-0.225%

-0.175%

-0.125%

-0.075%

-0.025%

0.025%

0.075%

0.125%

Sep-11

Nov-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Maturity In Months

Yield,

InverseScale
http://www.currencytradermag.com/index.php/c/Key_Conceptshttp://www.currencytradermag.com/index.php/c/Key_Concepts

7/28/2019 Ctm 201301

22/29

ON THE MONEY


ADVANCED CONCEPTS

for the privilege of lending money thereto. The second is

the lender is paying a premium for an asset and the amor-

tization over time is a loss of money. The third is the lender

is engaging in an insurance transaction: In exchange for

the known loss on the loan, the lender will avoid the pos-

sibility of a larger unknown loss elsewhere at some point

in the future.

Lets take a look at how the Tomorrow-Next OvernightIndexed Swap (TOIS) market behaved after the SNB

imposed the franc ceiling on Sept. 7, 2011. The most obvi-

ous feature in Figure 2 is how much of it is in negative ter-

ritory. Negative interest rates are not an oddity here, they

are a part of the landscape.

The second feature of the chart that may stand out is

how it started inverting in November 2011 via a twist: The

very shortest maturity swaps started to rise in yield while

the longer maturity swaps were falling in yield. That twist

started to signal greater comfort in the persistence of nega-

tive yields and indeed a greaterdemand for CHF overall; the

more people wanted to hold CHF

as opposed to EUR, the more they

were willing to accept the inter-

est rate penalty. Such willingness

had to be construed as bullish

for the CHF over the longer term

because the minute rates came off

negative levels, the dam would

break and flood the country with

funds willing to push the CHF

higher.

The synthetic forward-rate

structure for Euro/Swiss futures

was quite telling by the time the

Swiss joined other central banks in expanding dollar swap

lines into the Eurozone at the end of November 2011. Six-

month Euro/Swiss forward rates were negative for the

entirety of calendar year 2013, and one-year forward rates

were negative through March 2014 (Figure 3). Anyone

looking to lock in a franc loan could do it at a negative

interest rate, but the risk would be the spot CHF would be

much higher at repayment time.The situation became much more extreme by the end of

September 2012. The negative forward rates are far more

prevalent and persistent indeed, the only positive for-

ward rate visible is the one-year rate starting in December

2014 (Figure 4).

Someone with a classical understanding of interest rate

arbitrage might say the franc should be weak because of

these negative interest rates. Once you unlearn that train-

ing, you then can understand Swiss interest rates are nega-

tive because demand to lend into the CHF is so strong

Six-month Euro/Swiss forward rates were negative for the all of 2013, and one-year

forward rates were negative through March 2014.

FIGURE 3: EURO/SWISS SYNTHETIC FORWARD RATES: DEC. 2, 2011

Rate

6-Mo

1-Yr

2-Yr

-0.15%

-0.10%

-0.05%

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Forward Rate Horizon

Yield

Starting Contract

7/28/2019 Ctm 201301


lenders are willing to accept a

penalty rate.

Nothing lasts forever, though,

and the SNB risks losing its bet it

can counter global fund inflows

in a chronic financial crisis. The

sign it is losing the bet will comewhen the volatility of three-

month CHF forwards rises as

the CHF strengthens against the

EUR; that will signal the markets

belief more increases will come

and must be protected against.

By luck or design, this has yet

to happen (Figure 5). Not only

did the Swiss franc ceiling hold

through the various Eurozone

sovereign debt crises of 2012,the aggressive monetary policies

of the European Central Bank

served to slow the panic and led

to a decline in the CHF against

the EUR in August-September

2012. Volatility has been tame.

There we are in our through-

the-looking-glass world: A cur-

rency with negative interest rates

strengthened against a currency

at existential risk until the latterscentral bank promised to engage

in what amounts to money print-

ing.

If you learned about interest

rate arbitrage or even about sup-

ply/demand balances, you might

have thought the opposite would

occur in both situations. y

For information on the author, seep. 4.

By the end of September 2012 the negative forward rates were far more prevalent

and persistent.

FIGURE 4: EURO/SWISS SYNTHETIC FORWARD RATES: SEPT. 28, 2012

Rate

6-Mo

1-Yr

2-Yr

-0.10%

-0.05%

0.00%

0.05%

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Forward Rate Horizon

Yield

Starting Contract

The franc ceiling held during Europes 2012 sovereign debt crises, and the ECBs

aggressive monetary policies slowed the panic and led to a decline in the CHF vs. the

EUR in August-September 2012.

FIGURE 5: THE SNB MAINTAINED CREDIBILITY ON FRANC CEILING

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

1.200

1.205

1.210

1.215

1.220

1.225

1.230

1.235

1.240

1.245

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Three-MonthVolatilityOfCH

FForEUR

Holder

CHFPerEUR

CHF Per EUR

Volatility

7/28/2019 Ctm 201301


CPI: Consumer price index

ECB: European Central Bank

FDD(rstdeliveryday):Therst

day on which delivery of a com-modityinfulllmentofafutures

contract can take place.

FND(rstnoticeday):Also

knownasrstintentday,thisis

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

fulllmentofafuturescontract.

The clearinghouse also informsthe seller.

FOMC: Federal Open MarketCommittee

GDP: Gross domestic product

ISM: Institute for supplymanagement

LTD(lasttradingday):Thenal

day trading can take place in a

futures or options contract.

PMI: Purchasing managers index

PPI: Producer price index

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

GDP 8:30 a.m.

CPI 8:30 a.m.

ECI 8:30 a.m.

PPI 8:30 a.m.

SM 10:00 a.m.

Unemployment 8:30 a.m.

Personal income 8:30 a.m.

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

Trade balance 8:30 a.m.

Leading indicators 10:00 a.m.

GLOBAL ECONOMIC CALENDAR

January

1

2U.S.: December ISM manufacturingreport

3Germany: November employmentreport

4

U.S.: December employment reportCanada: December employment andNovember PPILTD: January forex futures; JanuaryU.S.dollarindexfutures(ICE)

5

6

7 Brazil: December PPI

8Mexico: Dec. 31 CPI and DecemberPPI

9

10

Brazil: December CPIFrance: December CPIUK: Bank of England interest rateannouncementECB: Governing council interest rateannouncement

11 U.S.: November trade balance

12

13

14 India: December PPI

15U.S.: December PPI and retail salesGermany: December CPI

UK: December CPI and PPI

16U.S.: December CPIJapan: December PPI

17

U.S.: December housing startsAustralia: December employmentreportHong Kong: October-Decemberemployment reportCanada: Bank of Canada interestrate announcement

18

19

20

21Germany: December PPIHong Kong: December CPI

22Japan: Bank of Japan interest rateannouncement

23

Australia: Q4 CPIMexico: December employmentreport and Jan. 15 CPISouth Africa: December CPIUK: December employment report

24 U.S.: December leading indicators

25Canada: December CPIJapan: December CPI

26

27

28 U.S.: December durable goods

29

30U.S.: Q4GDP(advance)andFOMCinterest rate announcement

31

U.S.: December personal incomeBrazil: December employmentreportCanada: December PPIFrance: December PPIGermany: December employmentreportIndia: December CPISouth Africa: December PPI

February

1

U.S.: January ISM manufacturingreport and employment reportAustralia: Q4 PPIJapan: December employmentreport

The information on this page is sub-

ect to change. Currency Traderis

not responsible for the accuracy of

calendar dates beyond press time.

Event:High Frequency Trading World Europe 2013Date: Feb. 12-13Location: Guoman Tower Hotel, LondonFor more information: Go towww.terrapinn.com

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Event: The Traders Expo DallasDate: June 5-7Location: Hyatt Regency Dallas at ReunionFor more information: Go towww.moneyshow.com

EVENTS
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7/28/2019 Ctm 201301


CURRENCY FUTURES SNAPSHOT as of Dec. 28

The information does NOT constitute trade

signals. It is intended only to provide a brief

synopsis of each markets liquidity, direction,

and levels of momentum and volatility. See

the legend for explanations of the different

fields. Note: Average volume and open

interest data includes both pit and side-by-

side electronic contracts (where applicable).

LEGEND:

Volume: 30-day average daily volume, in

thousands.

OI: 30-day open interest, in thousands.

10-day move: The percentage price move

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

from the close 20 days ago to todays close.

60-day move: The percentage price move

from the close 60 days ago to todays close.

The % rank fields for each time window

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

the percentile rank of the most recent move

to a certain number of the previous moves of

the same size and in the same direction. For

example, the % rank for the 10-day move

shows how the most recent 10-day move

compares to the past twenty 10-day moves;

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

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

it shows how the most recent 60-day move

compares to the past one-hundred-twenty

60-day moves. A reading of 100% means

the current reading is larger than all the past

readings, while a reading of 0% means the

current reading is smaller than the previous

readings.

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

term volatility (10-day standard deviation

of prices) divided by the long-term volatility

(100-day standard deviation of prices). The

% rank is the percentile rank of the volatility

ratio over the past 60 days.

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

(as of Nov. 30 ranked by November 2012 return)

Trading advisor Novemberreturn

2012 YTDreturn

$ Undermgmt.

(millions)

1 Iron Fortress FX Mgmt 10.67% 4.44% 11.1

2 HarnessInvestmentGroup(FX) 4.00% 14.37% 4220.0

3 HarmonicCapital(Gl.Currency) 3.70% 26.99% 904.0

4 CapricornCurrencyMgmt(fxSTVOL+) 3.15% -3.79% 83.05 AlderCap'l(AlderGlobal20) 3.00% -7.79% 481.0

6 FDOPartners(EmergingMarkets) 2.66% 8.42% 2664.0

7 JWPartners(FXMacro) 2.07% 4.92% 19.5

8 RhiconCurrencyMgmt(Strategic) 1.93% 1.24% 280.0

9 SwingCapital(FX) 1.62% -13.29% 61.0

10 Sharpe+Signa(Currency) 1.59% 13.70% 89.9

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

1 JPGlobalCapitalMgmt(TroikaI) 10.73% 5.70% 1.1

2 JarrattDavis(ManagedFX) 5.30% 33.80% 4.9

3 HartswellCapitalMgmt(Apollo) 3.12% 24.66% 3.64 GAMCurrencyHedge(CHF) 2.53% 9.63% 6.5

5 DelmanSA(AlgopediaFXHarmonyUSD) 2.11% -9.38% 2.8

6 TMS(ArktosGCSII) 2.09% -0.40% 9.5

7 FxProTech 1.36% 6.44% 2.3

8 RhiconCurrencyMgmt(Sys.Curr.) 1.06% 0.97% 10.0

9 CapricornCurrencyMgmt(FXG10EUR) 0.97% 9.02% 2.6

10 NorthbridgeParkAssetMgmt(MacroFX) 0.63% 3.99% 2.6

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

Does not reflect the performance of any single account.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

Market Sym Exch Vol OI10-day

move / rank

20-day

move / rank

60-day

move / rank

Volatility

ratio / rank

EUR/USD EC CME 224.3 201.9 1.18% / 33% 1.97%/66% 2.49%/39% .13 / 8%

JPY/USD JY CME 114.8 188.2 -2.85%/89% -4.54%/96% -8.76%/96% .36 / 35%

AUD/USD AD CME 100.8 177.7 -1.94%/71% -1.06% / 45% 1.70% / 42% .82/97%

GBP/USD BP CME 94.6 160.3 0.23% / 6% 0.69%/35% 0.49%/9% .35/92%

CAD/USD CD CME 66.4 145.1 -1.28% / 100% -0.54% / 27% -0.82% / 36% .59/100%

MXN/USD MP CME 41.1 171.5 -2.12% / 25% -1.20% / 53% -1.36% / 62% 1.00 / 100%

CHF/USD SF CME 28.0 42.0 1.28%/29% 1.73% / 66% 2.85% / 54% .15 / 10%

U.S. dollar index DX ICE 20.3 37.9 -0.16% / 6% -0.53% / 15% 0.43% / 11% .19/32%

NZD/USD NE CME 15.3 33.6 -3.20% / 80% -0.74% / 55% 0.17% / 2% 1.10/97%

E-Mini EUR/USD ZE CME 3.3 6.6 1.17% / 33% 1.96%/66% 2.49%/39% .13 / 8%

Note:Averagevolumeandopeninterestdataincludesbothpitandside-by-sideelectroniccontracts(whereapplicable).Priceactivityis

based on pit-traded contracts.

7/28/2019 Ctm 201301

26/29

INTERNATIONAL MARKETS


CURRENCIES (vs. U.S. DOLLAR)

Rank CurrencyDec. 26price vs.

U.S. dollar

1-monthgain/loss

3-monthgain/loss

6-monthgain/loss

52-weekhigh

52-weeklow

Previous

1 South African rand 0.116485 3.42% -4.23% -1.52% 0.1338 0.1116 14

2 Euro 1.318775 1.64% 1.99% 5.41% 1.3449 1.2099 10

3 Russian ruble 0.03267 1.43% 1.59% 8.50% 0.0345 0.0291 1

4 Swiss franc 1.092395 1.38% 2.21% 4.86% 1.1154 1.0074 3

5 Swedish krona 0.152745 1.22% 0.21% 7.64% 0.1531 0.1374 6

6 Great Britain pound 1.61336 0.66% -0.58% 3.62% 1.6268 1.5308 13

7 Indian rupee 0.01813 0.42% -3.77% 3.28% 0.0203 0.0174 17

8 Taiwan dollar 0.034405 0.23% 0.97% 3.09% 0.0345 0.032 4

9 Thai baht 0.03266 0.18% 0.99% 3.86% 0.0329 0.031 9

10 Canadian dollar 1.00892 0.18% -1.24% 3.72% 1.0334 0.9601 5

11 Singapore dollar 0.8189 0.13% 0.46% 4.94% 0.8213 0.7682 12

12 Brazilian real 0.480715 0.08% -2.59% -0.57% 0.586 0.4674 16

13 Hong Kong dollar 0.129025 0.00% 0.03% 0.12% 0.129025 0.1285 8

14 New Zealand dollar 0.822225 -0.17% -0.23% 4.46% 0.8458 0.7504 11

15 Chinese yuan 0.1586 -0.51% 0.48% 0.25% 0.1605 0.1566 7

16 Australian Dollar 1.0366 -0.89% -0.59% 3.52% 1.0808 0.9681 2

17 Japanese yen 0.0118 -2.76% -8.17% -5.60% 0.0131 0.0118 15

GLOBAL STOCK INDICES

Country Index Dec. 261-monthgain/loss

3-monthgain/loss

6-monthgain loss

52-weekhigh

52-weeklow

Previo

Japan Nikkei 225 10,230.36 8.96% 14.86% 18.08% 10,255.20 8,238.96 1

2 Brazil Bovespa 60,960.00 7.44% 0.80% 13.23% 68,970.00 52,213.00 10

3 Singapore Straits Times 3,180.81 5.87% 4.40% 13.37% 3,180.81 2,646.35 12

4 Italy FTSE MIB 16,408.30 5.72% 6.20% 26.53% 17,133.40 12,362.50 3

5 France CAC 40 3,674.26 4.95% 7.60% 21.96% 3,674.57 2,922.26 2

6 Australia All ordinaries 4,661.40 4.90% 6.36% 6.36% 4,669.00 4,033.40 14

7 India BSE 30 19,417.46 4.75% 4.21% 14.85% 19,612.20 15,358.00 5

8 Germany Xetra Dax 7,636.23 4.72% 4.94% 24.44% 7,682.90 5,771.27 6

9 South Africa FTSE/JSE All Share 39,427.13 4.40% 11.33% 16.83% 39,427.13 32,092.87 7

0 Mexico IPC 43,495.74 3.86% 7.84% 10.57% 44,000.20 36,428.40 11

1 Hong Kong Hang Seng 22,541.18 3.11% 9.81% 18.75% 22,683.70 18,056.40 8

2 UK FTSE 100 5,954.30 2.90% 3.23% 9.31% 5,989.10 5,229.80 9

3 Switzerland Swiss Market 6,862.50 2.70% 4.92% 15.19% 7,000.60 5,712.10 4

4 Canada S&P/TSX composite 12,373.80 1.55% 1.15% 9.17% 12,740.50 11,280.60 15

5 U.S. S&P 500 1,419.83 0.96% -0.94% 7.56% 1,474.51 1,248.64 13

7/28/2019 Ctm 201301


NON-U.S. DOLLAR FOREX CROSS RATES

ank Currency pair Symbol Dec. 26 1-monthgain/loss

3-monthgain/loss

6-monthgain loss

52-weekhigh

52-weeklow

Previou

1 Euro / Yen EUR/JPY 111.8 4.56% 11.11% 11.70% 111.8 94.65 7

2 Franc / Yen CHF/JPY 92.60 4.30% 11.34% 11.11% 92.60 78.81 4

3 Pound / Yen GBP/JPY 136.755 3.54% 8.29% 9.80% 137.23 117.58 9

4 Canada $ / Yen CAD/JPY 85.525 3.06% 7.59% 9.91% 85.525 74.74 5

5 New Zeal $ / Yen NZD/JPY 69.7 2.71% 8.69% 10.87% 70.85 58.78 8

6 Euro / Aussie $ EUR/AUD 1.272195 2.55% 2.59% 1.82% 1.2974 1.1614 18

7 Aussie $ / Yen AUD/JPY 87.87 1.97% 8.29% 9.69% 88.65 75.6 2

8 Euro / Real EUR/BRL 2.74338 1.56% 4.70% 6.01% 2.7714 2.2481 6

9 Pound / Aussie $ GBP/AUD 1.556395 1.55% 0.01% 0.10% 1.6123 1.4637 21

10 Euro / Canada $ EUR/CAD 1.307115 1.46% 3.26% 1.63% 1.3437 1.2164 16

11 Franc / Canada $ CHF/CAD 1.082735 1.20% 3.49% 1.10% 1.1151 1.0128 15

12 Euro / Pound EUR/GBP 0.81742 1.01% 2.59% 1.72% 0.8486 0.7779 1113 Pound / Canada $ GBP/CAD 1.599095 0.48%

ctm 201301

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