currency trader 0109 p 2

7/30/2019 Currency Trader 0109 p 2

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January 2009Volume 6, No. 1

Strategies, analysis, and news for FX traders

CURRENCY TRENDS:The majors p. 26

SPOT CHECK:Dollar vs. Eurorelative performance p. 32

FED CUTS

and the fate of the buck p. 38

FOREX WATCH 2009 p. 8

THE EURO:Back in the saddleor just a bounce? p. 14

INSIDE-DAY FADE:Simple setup proves

resilient p. 20



Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Global Markets

2009: Around the world

in four currencies . . . . . . . . . . . . . . . . . . . . 8What does the new year hold for currency

traders after 2008’s turmoil? Here are few

ideas to keep on your radar.

By Currency Trader Staff

On the Money

The Euro: Prosperity or perdition? . . . . .14The belief the Euro sell-off has ended may

be based on some false assumptions about

how the U.S. and Europe are handling the

economic crisis.

By Barbara Rockefeller

Trading StrategiesInside-day setups . . . . . . . . . . . . . . . . . . . 20Inside days present interesting setup

opportunities in the Euro/U.S. dollar pair —

if you pay attention to the details.

By Chris Peters

Advanced Strategies

Let the trend be your friend:

The majors . . . . . . . . . . . . . . . . . . . . . . . 26

If currencies trend so much, why do trendfollowers usually have such blah performance?

This and other questions are answered in

this study of currency trends.

By Howard L. Simons

CONTENTS

2 January 2009 • CURRENCY TRADER

continued on p. 4



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Have a question about something you’ve seen inCurrency Trader ?

Submit your editorial queries or comments to

[email protected].

Looking for an advertiser?Consult the list below and click on the company name for a direct link

to the ad in this month’s issue of Currency Trader .

CONTENTS

CME Group

dbFX

eSignal

FXCM

InterbankFX

MetaStock

PFGBEST.com

RS of Houston

Trader’s Expo

Tsunami Trading

Spot Check

Euro relative performance . . . . . . . . . . . .32The Euro/U.S. dollar pair crashed hard in

October, but opinions vary on whether this

was a dollar story or a Euro story. Analyzing

the Euro’s performance vs. other currencies

sheds light on the situation.

By Currency Trader Staff

International Markets . . . . . . . . . . . . . .34

Numbers from the global forex, stock,

and interest-rate markets.

Forex News

Rate cuts fuel deflation fears . . . . . . . . . .38Inflation continued to drop as the Fed cut

its target lending rate to a historic low in

December, amplifying the dollar’s

mid-month drop against major currencies.

New Products & Services . . . . . . . . . . . . .40

Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Conferences, seminars, and other events.

Global Economic Calendar . . . . . . . . . . . .41

Important dates for currency traders.

Key concepts . . . . . . . . . . . . . . . . . . . . . . . 42

Forex Journal . . . . . . . . . . . . . . . . . . . . . 43Long or short the Euro?



http://www.fxcm.com/fss.html



Howard Simons is president of

Rosewood Trading Inc. and a strategist for

Bianco Research. He writes and speaks fre-

quently on a wide range of economic and

financial market issues.

Barbara Rockefeller (http://www.rts-forex.com )

is an international economist with a focus on foreign

exchange. She has worked as a forecaster, trader, and con-

sultant at Citibank and other financial institutions, and

currently publishes two daily reports on foreign

exchange. Rockefeller is the author of Technical Analysis for

Dummies (For Dummies, 2004), 24/7 Trading Around theClock, Around the World (John Wiley & Sons, 2000), The

Global Trader (John Wiley & Sons, 2001), and How to Invest

Internationally , published in Japan in 1999. A book tenta-

tively titled How to Trade FX is in the works. Rockefeller is

on the board of directors of a large European hedge fund.


Editor-in-chief: Mark Etzkorn

[email protected]

Managing editor: Molly Goad

[email protected]

Associate editor: Chris Peters

[email protected]

Contributing writers:Howard Simons,

Barbara Rockefeller, Marc Chandler

Editorial assistant and

Webmaster: Kesha Green

[email protected]

Art director: Laura Coyle

[email protected]

President: Phil Dorman

[email protected]

Publisher,

Ad sales East Coast and Midwest:

Bob Dorman

[email protected]

Ad sales

West Coast and Southwest only:

Allison Chee

[email protected]

Classified ad sales: Mark Seger [email protected]

Volume 6, Issue 1. Currency Trader is published monthly by TechInfo, Inc.,161 N. Clark Street, Suite 4915, Chicago, IL 60601. Copyright © 2009TechInfo, Inc. All rights reserved. Information in this publication may not bestored or reproduced in any form without written permission from the publisher.

The information in Currency Trader magazine is intended for educational pur-poses only. It is not meant to recommend, promote or in any way imply theeffectiveness of any trading system, strategy or approach. Traders are advisedto do their own research and testing to determine the validity of a trading idea.Trading and investing carry a high level of risk. Past performance does notguarantee future results.

For all subscriber services:www.currencytradermag.com

A publication of Active Trader ®

CONTRIBUTORSCONTRIBUTORS

http://www.rts-forex.com/





http://www.metastock.com/ct67





GLOBAL MARKETS


2009: Around the world in four currencies

After the yen, the U.S. dollar jumped the most during the late-2008

market crisis.

FIGURE 1 — EURO RETRENCHMENT

The dollar might struggle vs. the Euro, at least early in 2009.

FIGURE 2 — EURO/DOLLAR

Source: TradeStation

There are opportunities in the forex market as currencies realign after the fall 2008

market dislocation, but traders should tread carefully.

BY CURRENCY TRADER STAFF


Amid the storm of financial and eco-nomic crises that dominated the year,many traders were happy to close thedoor on 2008. Last year’s action in the

foreign exchange market was volatile, with fall andwinter action driven by massive risk aversion andglobal position liquidation.

The Japanese yen came out on top of the 2008

carnage, chalking up a 23-percent gain vs. the dol-lar. The main factor propelling the yen was a mas-sive exit out of carry trades , which sparked double-digit losses in many of the high-yielding currenciesthat were the on the long side of this popular trade.The Australian dollar (AUD) dropped 21 percentvs. the dollar through Dec. 30, the New Zealanddollar (NZD) declined 25 percent, the Brazilian realplunged 24 percent, the Mexican peso sank 22 per-cent and the South African rand (ZAR) plummeted27 percent.

The British pound (GBP), which posted a dismal27.3 percent drop vs. the U.S. dollar as of Dec. 30,was the weakest of the most liquid currencies,according to John Rothfield, senior currency ana-lyst at Bank of America. He says Britain’s papersuffered especially because its economy is so relianton the financial and housing sectors.

The most positive performers, Rothfield adds,were the low-yielding currencies pointing to theyen and the Swiss franc, which gained 7 percent vs.the dollar.

Dollar actionThe U.S. dollar was the second-biggest beneficiary

of the economic crisis, as funds flooded into the buck as a safe haven (Figure 1). The U.S. dollarended the year with a modest 4.8-percent gain vs.the Euro, as August through November saw asharp reversal of the bear market action that hasdominated the greenback since 2002. TheEuro/dollar (EUR/USD) plunged to $1.23 inNovember from the 1.6000 July high (Figure 2) — a38.2-percent retracement of the 2002-2008 bear mar-ket for the U.S. dollar.

Into year-end, however, the U.S. dollar gave back some its gains, as the immediate financial panicsubsided and the U.S. made a historic shift to a


http://slidepdf.com/reader/full/currency-trader-0109-p-2 9/45CURRENCY TRADER • January 2009 9

near-zero interest rate policy: On Dec. 16,the U.S. Federal Reserve slashed the Fedfunds rate to a range from zero to 0.25 basispoints, which detracts from the dollar froman interest-rate differential perspective.The Euro/dollar had climbed back above1.4000 by year-end.

Rothfield says U.S. fundamentals aren’tparticularly good. He chalks up a large por-tion of the massive fall rally in the dollar to“unusual market conditions and a hugeshortage of the dollar globally,” which trig-gered safe-haven buying in the greenback and U.S. Treasuries.

“We think in the early part of the year —through the spring — the U.S. dollar willstruggle under the weight of U.S. quantita-tive easing,” he says.

Euro/pound and the ECB vs. BOEOutside the dollar arena, forex traders arefocusing squarely on Euro/pound(EUR/GBP). The pair rocketed 18 percentin December, surging to around 0.9800 onDec. 29 (Figure 3). The Euro has never trad-ed at parity (1.00) with the pound, but thefundamental outlook for the UK is bleak.

“I think when traders come back to work in the new year they will push the momen-tum to test parity,” Ideaglobal analystKevin Chau says.

“We see that parity is an objective formarket players,” says Michael Woolfolk,senior currency strategist at the Bank of New York Mellon. “Market sentiment islong Euro and short pound with an eye onan important psychological level.”

Expected central bank action and inter-est-rate differentials are playing a part inthe recent trend.

“The European Central Bank [ECB] isgoing to drag its feet on cutting interestrates, while the Bank of England [BOE]takes continued aggressive action,”

Woolfolk says.The BOE is scheduled to meet on Jan. 8

and the market widely anticipates it willcut rates, which currently stand at 2 percent(expectations range from 0.5 to 1-percent).The ECB is also expected to slash rates, butat a more muted pace, at its Jan. 15 meeting.The ECB’s current repo rate is 2.5 percent.Analysts forecast a cut ranging from 0.25 to0.50 percent.

ECB President Jean-Claude Trichet has been on the record with cautious state-

continued on p. 10

http://www.pfgbest.com/tw

http://www.pfgbest.com/kit



GLOBAL MARKETS continued


ments that suggest muted interest-rate easing.“The ECB has built a tremendous amount of mar-

ket credibility by not shocking the market,”Woolfolk says.

In addition to interest-rate differentials, growthdifferentials also favor a continuation of the recentEuro/pound trend. Bank of New York Mellon is

forecasting a 2-percent decline for UK 2009 grossdomestic product (GDP) vs. a 1-percent decline forthe Eurozone.

“The recession has not hit central Europe asacutely as it has hit the UK,” Woolfolk says.

Woolfolk, for one, sees the potential for theuptrend to extend beyond the parity level into thenew year “until the ECB signals that it is prepared toadopt a zero interest-rate policy along with the U.S.and UK,” he says.

Finally, Woolfolk says recent trade data is also bullish for the Euro vs. the pound.

“The trade figures in the Eurozone are relativelystable and balanced, vs. a large trade deficit in theUK,” he says.

He says October 2008 data showed an EU tradesurplus of €900 million vs. a deficit of £3.9 billion forthe UK.

On the downside, Woolfolk cites .9250 as key sup-port.

“If we were to close below that level, it would takeout this bullish uptrend,” he says.

Woolfolk does warn of the potential for “buy therumor, sell the fact” action around the early JanuaryBOE meeting and says traders “may get in early andtake profits if the BOE does what they are expect-ing.”

But once the Euro/pound conquers the paritylevel in the weeks ahead, Woolfolk predicts forextraders will continue eyeing round numbers at1.0100 and then 1.0200.

Woolfolk advises traders to watch for indicationsthe ECB is considering a zero interest-rate policy,which could prompt significant profit-taking.

Aussie/Canada

Another cross with potential for movement is the

Australian dollar/Canadian dollar (AUD/CAD)pair, according to Brian Dolan, chief currency strate-gist at Forex.com. The pair was trading around 0.8500 atyear-end (Figure 4), and Dolan sees a possible move to0.9500 or parity.

Dolan believes a number of factors including interest-ratedifferentials, commodity exports, and regional growthopportunities are tipping in favor of Australia in the newyear.

The Bank of Canada’s (BOC) lending rate currently standsat 1.5 percent; a 0.50-percent cut is expected at the Jan. 20meeting. That compares to the 4.25-percent rate target cur-rently held by the Reserve Bank of Australia (RBA), which is

scheduled to meet next on Feb. 3. Further rate cuts areexpected, with Dolan forecasting a bottom to the RBA eas-ing cycle around 3.25-3.00 percent, which would still favorthe Aussie dollar over the Canadian currency.

Dolan also interprets a more bullish commodity-exportpicture for Australia.

“Both are considered commodity currencies, but the bigdifference is that Canada is oil reliant and I expect oil pricesto remain weak,” he says.

Australia is the world’s leading coal exporter and Dolansaw continued massive demand for coal from China.

FIGURE 4 — AUSSIE/CANADA


Economic fundamentals in favor of the land down under make the

Aussie/Canada pair a market to watch in coming months.

FIGURE 3 — EURO/POUND


With a weak UK economic picture, the EUR/GBP pair could make a

run to 1.000 and beyond.

continued on p. 12



http://www.dbfx.com/ct



“There is regional support for Australian com-modity output,” he says.

Canada, Dolan notes, is closely tied with the U.S.,which is in the midst of a recession, while Australiais close in proximity to the Asian region.

“Generally speaking, the Asian region seems to befaring best out of all the regions globally, which will

support Australia,” Dolan says.Dolan thinks the .8250 to .8400 zone is a good buy-

ing area for Aussie/Canada.“Try to pick it up if we get some weakness near

term,” he says.Dolan says the strategy would be negated on a

drop below .8000 if that were to occur. On theupside, he sees .9500-1.000 as an objective.

Outright Aussie playBob Sinche, head of global currency strategy at Bank of America, likes the Australian dollar on an out-

right basis, calling it currently an “out of favor” cur-rency.“We think on a relative basis, the Australian dollar is still

pretty well positioned for the new year,” he says. “It has suf-fered a lot in the second half of [2008].”

Sinche notes the Australian dollar sank 27.5 percent vs.the U.S. dollar in the second half of the year vs. a 9.5 percentgain in the first half.

“[The Australian dollar] went from being one of the top-performing currencies to one of the worst-performing cur-rencies,” he continues. “It is viewed as a risk currency andpart of its performance will depend on risk appetite in thenew year.”

But he notes Australia’s recent remarkable turnaround inits trade balance from deficit to surplus is a bullish factor.

Looking ahead, Sinche agrees with Dolan in that as amajor commodity exporter of coal and iron ore, Australia iswell positioned geographically from long-term growth inChina.

The Aussie/dollar scored a high at .9850 in July 2008 andsubsequently sank to .6000 in late October, amid massive

carry trade unwinding (Figure 5).“It had an enormous correction,” Sinche says. “The sell-

off has been excessive. If it regained just half of that declinewe could get up to .7900, which would be more than a 15-percent move from current levels [around .6900].”

South African randMarc Chandler, global head of FX strategy at BrownBrothers Harriman, sees potential in the long dollar/shortrand play. At year-end, the USD/ZAR pair was tradingaround 9.36 (Figure 6). Chandler thinks the cross couldreturn to the 11.00 level in the first half of 2009.

“People seem reluctant to invest in high flying currencymarkets,” Chandler says. “South Africa is the poster childfor high risk in emerging markets, and countries that aremost prone to crises will be avoided.”

Chandler says the expected contraction in the global econ-omy in 2009 would keep commodity prices under pressure,which will also weigh bearishly on the South African econ-omy.

Playing it safeThere may be opportunity, but forextraders should be cautious in the new year

as volatile conditions could reemerge atany time.

“People are looking for singles asopposed to doubles and home runs in theearly part of the year because of the uncer-tainty on the global front,” Rothfield says.“People had been very defensive in thefourth quarter of the year and had to sellgood stuff to offset losses in other areas.We will get some further unwind of theextreme risk aversion and see a temporaryreturn of risk appetite and search foryields.”

As an emerging-market poster child, South Africa and its currency, the rand,

could be under pressure in 2009.

FIGURE 6 — DOLLAR/RAND

Source: ADVFN (http://www.advfn.com)

GLOBAL MARKETS continued FIGURE 5 — AUSSIE/U.S. DOLLAR


Some analysts believe the Australian dollar’s sell-off was overdone

and the currency is poised to rebound.

http://www.advfn.com/

http://www.advfn.com/



http://www.odlsecurities.com/usa/index.html



The consensus forecast today for the Euro/dollar(EUR/USD) is a move up to 1.5000 and proba-

bly higher—perhaps a test of the July 2008 high

above 1.6000. But this forecast is based on few facts and

questionable assumptions.

All forecasts entail creating a scenario for the most likely

outcome. Sometimes it’s all too easy to convince yourself a

scenario is highly likely given certain facts and reasonable

assumptions. But in a crisis situation such as today’s, noteven “facts” are reliable and just about every assumption

should be looked at with suspicious eyes.

These are the times we question whether what we think

we know is true, and wonder whether what we don’t know

is going to jump up and bite us on the nose. This is true of

fundamentals and technicals alike.

Figure 1 shows the EUR/USD on a weekly basis. The

Euro uptrend from the 2000

low to the 2008 high is clear.

The precipitous drop starting

in October 2008 is equallyclear. In retrospect, the gov-

ernment allowing Lehman to

fail on Sept. 15 was the trigger

for the Euro’s fall, which was

really the dollar’s rise. Fear

and greed were replaced by

fear and more fear, and the

dollar became a safe haven.

Now that the shock of the

Lehman failure is fading, the

Euro/dollar price is returninginside its “normal” channel.

This is the basis, in part, of

forecasts calling for the Euro

to continue rising and for the

price to meet 1.5000 around

year-end and test the old July

high of 1.6038 at some time

during 2009.

Rethinking assumptions

This scenario might seem rea-

ON THE MONEY

After the precipitous drop that started in October 2008 the EUR/USD is moving back inside its normal channel.

FIGURE 1 — BACK TO NORMAL

The Euro:

Prosperity or perdition?


BY BARBARA ROCKEFELLER

The cold, hard realities of the current market may force the European Central Bank

to alter its course, with important ramifications for the Euro.

Source: data — eSignal and Reuters Online; charts — MetaStock



sonable, but it’s not. It

assumes the Lehman Collapse

Shock did not have a perma-

nent effect on the primary

trend. Once a trend is broken,

we need to consider all factors

anew. Notice the red support

line connecting lows was bro-

ken along with the linear

regression channel line.

Okay, so let’s assume the

Lehman Shock started some-

thing fresh but it’s just not

evident yet (Figure 2).

Support and resistance get broken all the time and it

doesn’t necessarily mean a

move is over, but we can feel

If the Euro fails to surpass the previous intermediate high, it could test the low of 1.1815

from November 2005.

FIGURE 2 — SETTING UP A TEST

Source: data — eSignal and Reuters Online; charts — MetaStockcontinued on p. 16

http://www.ibfx.com/spin



ON THE MONEY continued

comfortable making such an

assertion only if price now

surpasses the previous inter-

mediate high (upper horizon-

tal gold line) at 1.4867, a level

that occurred right after the

Lehman Shock. If the Euro

fails to match and surpass that

level, it might test the previ-

ous low (bottom horizontal

gold line) at 1.1815 from

November 2005. In other

words, there may be a new

probable range forming.

We can try to measure thenew range by drawing a new

trend channel (Figure 3). In

this scenario, the recent

EUR/USD high is a breakout,

as yet untested, above the

upper boundary of a new

downtrend channel. Let’s say

the Euro falls by 50 percent of

the original down move, or to

about 1.3650. That would put

it back at the channel top and,as we know, a 50-percent

move is an important bench-

mark. Together with the fail-

ure to test and surpass the old

intermediate high, it might

mean the down-sloping chan-

nel is the right one.

The problem with this

channel is it’s a work in

progress — and it’s too steep.

So let’s invent a new moreprobable trendline channel at

about a 45 degree angle,

which is the slope of the up

move from 2006 to the high in

2008 (Figure 4). It’s fairly

crazy to construct linear

regression channels out of

thin air, but let’s add another

assumption: high volatility

and choppiness characterize

the first phase of a crisis, and


A hypothetical 45-degree downtrend channel projects the possibility of the EUR/USD pair

challenging the October 2008 low, or even a run below 1.2000 by this time next year.

FIGURE 4 — IMAGINARY TREND CHANNEL


An alternate scenario posits the recent EUR/USD high as an as-yet-untested breakout

above the upper boundary of a new downtrend channel.

FIGURE 3 — ALTERNATE SCENARIO




as players become familiar with the

new environment, increasingly stable

prices will emerge. In fact, currencies

sometimes have prolonged periods of

sideways price action with little or no

trend. This makes a trendline’s slope

less steep.

If this scenario is true and useful,

the EUR/USD pair could not only

challenge the October 2008 low

around 1.2329, but also make a run

below 1.2000 by this time next year—

perhaps as far as 1.1000. In fact, 1.1214

is a 62-percent retracement of the big-

picture move from the low of 0.8229in October 2000 to the high in July

2008 at 1.6038, as shown in Figure 5.

Fibonacci numbers are an unfounded

superstition, but enough traders like

continued on p. 18

A 62-percent retracement of the move from 0.8229 in October 2000 to 1.6038

in July 2008 would put price at 1.1214.

FIGURE 5 — BIG PICTURE FIBONACCI RETRACEMENT


http://www.ibfx.com/spin



them that we ignore them at our peril.

If the imaginary trend channel is the

correct scenario, why would the price

development proceed that way? For

once we have an easy answer. The

European Central Bank (ECB) has

been in denial, stating that inflation is

still a worry and they need to see more

data before they can cut rates further.

Now that the Fed has effectively cut to

zero, the Bank of Japan has cut to near-

ly zero, and the Bank of England is

widely expected to follow suit in early

January, the ECB is the only major cen-

tral bank that is out of line. The yield

differential favors the Euro right now,

with the overnight repo rate at 2.5 per-

cent.

Evidently the ECB is not impressed

by French wholesale inflation falling

from 4.3 percent year-over-year in

October to 1.9 percent in November, or

other indicators of severe contraction.

The German Kiel Institute says

German GDP will fall 2.7 percent in

2009, to be followed by a pathetic 0.3

percent in 2010. One ECB policy mem-

ON THE MONEY continued

“The six Ds of depression”

Currency Trader , December 2008.

The buck has gotten a bounce from therecent financial panic, but the longer-term

picture isn’t quite as bullish.

“Euro and dollar at parity?”

Currency Trader , November 2008.

A few short months ago the world was contemplating Euro

$2. Now, the talk is all about Euro $1. What are the odds it

will happen?

“Crisis of confidence”

Currency Trader , October 2008.

As Wall Street and Washington prove themselves equally

inept, the dollar suffers.

“The dollar-oil connection”

Currency Trader , September 2008.

As oil broke, so did the Euro/dollar pair. What can we learn

from analyzing bursting bubbles?

“Horizontal patterns in foreign exchange”

Currency Trader , August 2008.

The Euro’s price action lends itself well to dissection with

the Darvas Box.

“Are the summer doldrums here?”

Currency Trader , July 2008.

If market myth is true, the season will bring a sideways

market. But the myth warrants some analysis.

“Manias and crashes: Where will oil lead the dollar?”

Currency Trader , June 2008.

Although some analysts argue a falling dollar is helping to

push up oil prices, it might be the other way around. The

question is, when will the bubble-go-round stop?

“Is the Euro going to the moon?”

Currency Trader , May 2008.

A look at the Euro’s recent gravity-defying performance.

“What’s really driving the dollar?”

Currency Trader , April 2008.

Signs of a potential turnaround in the buck can be found inan unexpected place.

“Why is the yen trending higher?”

Currency Trader , March 2008.

The yen’s rise seems to defy logic. Find out what’s behind it.

“Fundamentals lead the charts”

Currency Trader , February 2008.

The recent global market turmoil and banking crises have

the financial world on edge, but their impact on the dollar

might not be what most people expect.

“A fistful of dollars, a bundle of contradictions”

Currency Trader , December 2007.The U.S. currency must resolve several paradoxes to

emerge from its funk. One overlooked positive of the current

situation may offer the depressed buck a way out of its bind.

“The road to 1.5”


The dollar appears to be under siege, but perhaps the

situation isn’t as grim as popularly believed.

“Helicopter Ben and the Japanese yen”


The American and Japanese economies, and the fate of the

confounding yen.

“The dollar’s ‘sub-prime’ future”


The fallout from the U.S. housing and mortgage meltdown

may be far from over, and how things unfold will have a big

impact on the forex market.

“The rising yen — here we go again”


The yen has been on the rise vs. the dollar. Find out if it’s a

reversal or just a correction.

Other Barbara Rockefeller articles:

You can purchase and download past articles at http://store.activetradermag.com.


http://store.activetradermag.com/




ber said in December it would be logi-

cal for the bank to cut rates once it sees

inflation expectations dropping under

2 percent.

But the ECB is not entirely asleep at

the switch. On Dec. 19 the ECB acted

to remove some of the carry-trade

charm of the Euro and halt a flood of

incoming deposits from the dollar and

the British pound by cutting the offi-

cial deposit rate by 50 basis points to 1

percent below the key repo rate of 2.5

percent, and raising the lending rate

by 50 basis points to 1 percent above

the key rate. This created a wider ratespread “corridor.” It still leaves the

Euro with a rate advantage for

deposits, but a much smaller one, and

it has the side effect of raising the cost

of borrowing for European firms.

You’d think that’s the last thing a cen-

tral bank would want to do in the cur-

rent economic environment, although

it has the bonus of raising bank prof-

itability.

The effect of the Dec. 19 announce-ment was immediate and huge — the

Euro swooned more than 500 points in

a few hours. We must expect the same

response if and when the ECB cuts the

repo rate itself, possibly at its Jan. 8

policy meeting. The market expects

the ECB to ultimately cut rates to 0.50

percent, a total of 200 basis points. If

the ECB were to cut by 25-bp incre-

ments, it would have many months to

go to get to 0-0.25 percent, like the Fed.In fact, it would take to Sept 2010.

This seems improbable on the face

of it. The ECB may be stubborn but it

also values its reputation as a respon-

sive institution, even if it values more

highly its reputation for inflation-

fighting. So let’s assume the ECB cuts

by 50-bp increments, getting to 0.025

percent or 0.50 percent by June. The

expectation of these cuts is Euro-nega-

tive.

Finally, we all know by now that

monetary policy alone cannot carry

the weight of fixing a Great

Depression II. That’s why the Fed fol-

lowed the Bank of Japan and instituted

a policy of “quantitative easing,”

which in practice means buying just

about any assets not on life-support

from the banks and giving them cash.

So far the banks are hoarding cash and

refusing to lend it out, but Fed chair-

man Ben Bernanke has hope the banks

will eventually find the confidence to

start lending again.

The ECB has already bought muchin the way of unconventional collater-

alized assets, ballooning its balance

sheet by roughly a third, but it does

not have the ability to mandate stimu-

lative fiscal policies. Together the EU

countries will be spending €200 bil-

lion, but this is independent of the

ECB. Europe lacks pan-EU fiscal insti-

tutions to boost every nation across the

board. The collaboration of the U.S.

Fed and the U.S. Treasury, togetherwith an activist Executive, hold out

more recovery hope than Europe can

dream of — probably a total of $2 or

even $3 trillion. In fact, we might say

the one thing the ECB lacks above all

else is President-elect Barack Obama,

although French President Nicolas

Sarkozy has the same “whatever it

takes” stance.

Advantage, dollar?Last fall some clever analyst came up

with the “FIFO” scenario — the U.S.

was the first in to financial institution

crisis and recession, so it would also be

the first out. Judging from the robust-

ness of the U.S. government response,

this is probably a good bet. June could

arrive with the ECB still cutting rates

and European governments squab-

bling over additional fiscal stimulus

while the U.S. begins to show signs of

recovery and talk swirls around

regarding when the Fed should start

raising rates to offset all that inflation-

inducing new money supply.

In short, an ECB being out of sync

with the Fed has only a temporary

Euro-favorable effect. Financial crisis

has already morphed into an econom-

ic crisis, and the ECB lacks sufficient

tools to deal with it.

To be fair, it’s not certain the U.S.

action will suffice to pull the country

out of Great Depression II. But sitting

on your hands and letting the generals

fight the last war (inflation) sure won’tdo it, either.

For information on the author see p. 6.

http://www.tsunami-trade.com/



The November and December 2008 issues of Currency Trader featured articles examining theshort-term behavior of major currency pairs

after inside days.The original analysis covered seven currency pairs: U.S.

dollar/Canadian dollar (USD/CAD), Euro/U.S. dollar(EUR/USD), British pound/U.S. dollar (GBP/USD), U.S.dollar/Japanese yen (USD/JPY), U.S. dollar/Swiss franc(USD/CHF), Australian dollar/U.S. dollar (AUD/USD),and New Zealand dollar/U.S. dollar (NZD/USD). Theresults showed inside days — overall, in all currency pairs

— were more often than not followed by bullish priceaction during the analysis period, but there was another,more interesting, tendency that appeared tradable in somesituations: Inside days were often followed by “inverted”price action relative to the inside day’s close. Inside daysthat closed higher preceded short-term down moves, andvice versa.

The following analysis shows how specific inside-daysignals reflecting these tendencies performed over a 10-yearperiod and offers insight on how to construct useful tradesetups. The signals are applied to the EUR/USD pair

because previous testingshowed the basic patterntendencies were more con-sistent and profitable inthis market.

The first patternThe first pattern tests thetwo-day move followinginside days that close high-er or lower than the previ-ous day’s close. The traderules for long trades are:

Enter long at today’s closeif:1. Today’s low is above

yesterday’s low.2. Today’s high is below

yesterday’s high.3. Today’s close is below

yesterday’s close.Exit position at the closetwo days after entry.

As formulas, these rulesare:

1. If High < High[1];

2. Low > Low[1];

3. If Close < Close[1]

TRADING STRATEGIES

Inside-day setups



Fading the direction of inside days in the Euro/U.S. dollar pair shows promise,but trend direction makes a big difference in the results.

With the addition of a very simple filter, taking trades in the opposite direction of an inside

day’s close proved to be profitable on both the long and short sides of the market. Better

performance in different categories is highlighted.

TABLE 1 — FADING UP- AND DOWN-CLOSING INSIDE DAYS

All trades Long trades Short trades

no filter filter no filter filter no filter filter

Net profit $11,647 $28,369 $13,799 $17,406 -$2,152 $10,963

Profit factor 1.11 1.6 1.28 1.76 0.96 1.45

Number of trades 340 168 178 92 162 76

Winning percentage 45.29% 54.76% 46.63% 54.35% 43.83% 55.26%

Avg. trade net profit $34 $169 $78 $189 -$13 $144

Avg. winning trade $790 $823 $767 $809 $817 $840

Avg. losing trade -$591 -$623 -$525 -$548 -$661 -$715

Avg. win/avg. loss 1.34 1.32 1.46 1.47 1.24 1.17

Longest winning streak 9 7 5 4 7 5

Longest losing streak 9 5 9 5 7 5

Total commission $6,800 $3,360 $3,560 $1,840 $3,240 $1,520

Return on initial capital 46.59% 113.48%

% time in market (exposure) 21.69% 11.42%

Longest flat period 57 days 127 days

Max. drawdown -$18,052 -$6,190 -$12,762 -$4,958 -$16,616 -$4,750

% of initial capital -72.21% -24.76% -51.05% -19.83% -66.46% -19.00%

Net profit as % of drawdown 64.52% 458.30% 108.13% 351.09% -12.95% 230.80%




The rules for short trades are:

Enter short at today’s close if:1. Today’s low is above

yesterday’s low.2. Today’s high is below

yesterday’s high.3. Today’s close is above

yesterday’s close.Exit position at the close two daysafter entry.

All trades were exited on the closetwo days after entry because initialpattern testing showed the early risk-adjusted return was highest on thatday: Further gains were probable withlonger holding periods, but risk increased at a slightly faster pace.

The setup was tested on daily datain the EUR/USD pair from Dec. 31,1998 to Dec. 30, 2008. Anominal initialaccount value of $25,000 was usedand $10 was assessed per trade forcommission and slippage.

Also, to see whether a trend filtermight improve performance, the pat-tern was tested taking long tradesonly when the inside day’s close wasabove the close 40 days ago and tak-ing short trades only when the close

was below the close 40 days ago. Thisrule was not optimized in any way —40 days was simply a representativeintermediate-term look-back period.

1. Execute long trade signals onlyif today’s close is above theclose 40 days ago(Close > Close[40]).

2. Execute short trade signals onlyif today’s close is below theclose 40 days ago(Close < Close[40]).

The signals were tested with the fil-ter because preliminary analysis indi-cated performance could be enhanced by accounting for trend direction —an important factor, considering theuptrend that has dominated theEUR/USD pair for much of its exis-tence.

Table 1 compares the results of thesignals with and without the filter.The no-filter results were profitable

continued on p. 22

Strategy code

The following TradeStation code is for the long-side version of the second entry

signal. The code allows for customization of the strength or weakness of the day’s

close (closethresh) and the look-back period for the trend filter (trendlength).

inputs: trendlength(40), closethresh(.35);

if High < High[1] and

Low > Low[1] and

(Close-Low)/(High-Low) <= closethresh andclose > close[trendlength] then

Buy this bar on close;

http://www.esignal.com/offer/ct



TRADING STRATEGIES continued

overall, thanks to the long trades;short trades actually lost money.Adding the filter made a dramatic dif-ference: Despite cutting the number

of trades in half, profitability morethan doubled, the maximum draw-down was reduced by nearly two-thirds, short trades became profitable,and the overall winning percentageincreased by nearly 10 percentagepoints.

The results were profitable, butonly mildly so. But they support theearlier analysis that suggested therewas potential in fading the directionof an inside day’s close in theEUR/USD pair — as long as the tradeis not fading the prevailing intermedi-ate-term market direction.

Now let’s look at a parallel setupthat defines up-closing and down-closing days a bit differently.

The second

patternThis signal is based onwhether the inside barcloses high or low rela-tive to the day’s range,

rather than above or below the previousday’s close. A close inthe upper 35 percent of the day’s range quali-fies as a strong closeand triggers a shorttrade, while a close inthe lower 35 percent of the day’s range quali-fies as a weak close andtriggers a long trade.The rules are:

Enter long on today’sclose if:1. If today’s high is

below yesterday’shigh.

2. If today’s low isabove yesterday’slow.

3. If today’s close is inthe bottom 35percent of the day’srange.


These signals go long when an inside day closes in the lower portion of the

day's range and go short when an inside day closes in the upper portion of

the range.

FIGURE 1 — INSIDE OUT


The basic (unfiltered) version of this pattern performed much better than the first pattern and, again,

the filter enhanced most performance measures.

TABLE 2 — FADING STRONG- AND WEAK-CLOSING INSIDE DAYS


no filter filter no filter filter no filter filter Net profit $22,905.00 $24,718.00 $12,643.00 $13,546.00 $10,262.00 $11,172.00

Profit factor 1.31 1.87 1.34 2.03 1.29 1.74

Number of trades 254 112 130 56 124 56

Winning percentage 49.61% 59.82% 47.69% 58.93% 51.61% 60.71%

Avg. trade net profit $90.18 $220.70 $97.25 $241.89 $82.76 $199.50

Avg. winning trade $762.33 $791.39 $803.23 $809.33 $722.72 $773.97

Avg. losing trade -$571.48 -$629.00 -$546.43 -$572.26 -$599.87 -$688.32

Avg. win/avg. loss 1.33 1.26 1.47 1.41 1.2 1.12

Longest winning streak 7 9 6 5 9 8

Longest losing streak 10 5 6 4 9 3

Total commission $5,080.00 $2,240.00 $2,600.00 $1,120.00 $2,480.00 $1,120.00

Return on initial capital 91.62% 98.87%

% time in market (exposure) 15.68% 7.87%

Longest flat period 81 Days 146 Days

Max. drawdown -$8,430.00 -$5,000.00 -$7,291.00 -$4,115.00 -$6,900.00 -$4,570.00

% of initial capital 33.72% 20.00% 29.16% 16.46% 27.60% 18.28%

Net profit as % of drawdown 271.71% 494.36% 173.41% 329.19% 148.72% 244.46%




As formulas, these rules are:

1. If High < High[1];

2. Low > Low[1];3. (Close-Low)/(High-Low)

<= .35;

The rules are inverted for shorttrades. Figure 1 shows some recentsignals.

The setup was tested on daily datain the EUR/USD pair from Dec. 28,1998 to Dec. 29, 2008, with the sameaccount size and trade fees as the firsttest. Again, trades were exited aftertwo days and the pattern was testedwith and without the 40-day trend fil-ter.

Table 2 shows the results. The pat-tern’s unfiltered results are better thanthe first pattern’s, and in almost everyaspect, the filter version again per-formed better, especially on a risk-adjusted basis. The filter cut the number of trades in half (and halved com-missions and market exposure) whilenet profit increased slightly. Also, the balance between the maximum num-

ber of consecutive winning trades andthe maximum number of consecutivelosing trades tilted toward the latterwithout the filter; the longest winningstreak far outpaced the longest losingstreak with the filter.

In short, the pattern’s basic tenden-cies appear to be enhanced when longsignals are traded when the market isup and short signals are traded whenthe market is down. Other methods of identifying the trend or immediatetrade context have the potential to

produce better results than the rudi-mentary rule used in this test.

One interesting detail in both pat-terns’ tests is the filtered versions pro-duced slightly larger average losingtrades than the unfiltered versions.But the filtered versions’ much higherwinning percentages and slightlylarger winning trade values morethan made up for this deficit.

Table 3 compares a few key statis-tics for the filtered version of the sec-

ond setup in different portions of the

analysis window: Dec. 28, 1998 through Dec. 28, 2001; Dec.29, 2001 through Dec. 29, 2004; Dec. 30, 2004 through Dec.29, 2008. In terms of the number of trades and winning per-centage, the results were fairly consistent from period to

period, with the exception of the negative return for longcontinued on p. 24




trades from the December 1998 –December 2001 window.

Short trades outperformed longtrades — in terms of consistency andreliability, not net profit — in two of the three periods. This is a good thing,as it indicates the setup is not merelyhitching a ride on the back of theEUR/USD’s upside bias during themajority of the analysis period. Also,the table makes clear the most recentfour-year period (December 2004 –December 2008) was not the best peri-od for the setup, although it was very

positive.For such a simple, robust setup, theresults aren’t bad, and there’s plentyof room to extract more value fromthe pattern. First, losses were not con-trolled — all trades were exited aftertwo days, win or lose. Testing indicat-ed additional profit potential existed beyond this time horizon, but theprobabilities of success decreased astime passed — i.e., winning percent-ages and reward-risk ratios declined,although they remained favorable.

However, taking partial profits at thetwo-day point (or at a price level cor-responding to a high-probability prof-it target in the first days of the trade)and protecting the remainder of theposition with a stop-loss could allowfor additional profits with minimalrisk.

Table 4 shows the results of combining the two filtered versions of thepatterns. The results are — pre-dictably — something of a compro-

mise.

TRADING STRATEGIES continued


Results were relatively consistent from period to period.

TABLE 3 — PERIOD COMPARISON


12/98- 12/01- 12/04- 12/98- 12/01- 12/04- 2/98- 12/01- 12/04-Period 12/01 12/04 12/08 12/01 12/04 12/08 112/01 12/04 12/08

Net profit $2,500.00 $12,270.00 $11,318.00 ($1,430.00) $9,350.00 $6,196.00 $3,930.00 $2,920.00 $5,122.00

Profit factor 1.2 3.16 2.36 0.58 3.73 2.08 1.45 2.3 2.99

Number of trades 37 30 41 7 23 25 30 7 16

Winning % 54.05% 60.00% 65.85% 42.86% 60.87% 64.00% 56.67% 57.14% 68.75%

Longest winning streak 9 5 5 2 5 5 8 3 5

Longest losing streak 5 3 3 3 3 3 3 2 2

Combining the signals produced a higher net profit, but most of the reward/risk

measures were not as good as the second pattern’s statistics.

TABLE 4 — COMBINED SIGNALS

All trades Long trades Short tradesNet profit $51,427.50 $29,292.50 $22,135.00

Profit factor 1.69 1.84 1.56

Number of trades 280 148 132

Winning percentage 55.71% 54.05% 57.58%

Avg. trade net profit $183.67 $197.92 $167.69

Avg. winning trade $805.38 $800.67 $810.33

Avg. losing trade -$598.48 -$511.19 -$704.46

Avg. win/avg. loss 1.35 1.57 1.15

Longest winning streak 10 7 8

Longest losing streak 9 9 7

Total commission $5,600.00 $2,960.00 $2,640.00

Return on initial capital 205.71%

% time in market (exposure) 12.11%

Longest flat period 99 Days

Max. drawdown -$8,960.00 -$8,230.00 -$9,140.00

% of initial capital 35.84% 32.92% 36.56%

Net profit as % of drawdown 573.97% 355.92% 242.18%

Related reading“Inside days in the major currency pairs”

Currency Trader, November 2008.

Analysis of inside days that occur after short-term price thrusts.

“Inside days: Part 2”

Currency Trader, December 2008.

This follow-up study digs deeper into inside days and focuses on the U.S.

dollar/Canadian dollar and the Euro/U.S. dollar pairs.

You can purchase and download past articles at http://store.activetradermag.com.







http://www.cmegroup.com/tradeforex



ADVANCED STRATEGIES

Currencies long have enjoyed a rep-utation for trending, and withgood fundamental reasons. Notonly do currencies reflect long-

term national policies and tendencies that areslow, if not impossible, to change (really, shouldwe expect Switzerland and Argentina to be con-

fused at any point?), they reflect relative mone-tary policies that also tend to persist.

Two cases in point: The U.S. dollar strength-ened for almost five years in the first half of the1980s after Paul Volcker instituted his policy of high interest rates. The greenback fell just asspectacularly, and for an even longer period of time, after May 2002 under the weight of adeliberate policy by the Federal Reserve to solveall economic problems with easy credit.

We can throw darts at a world map, start nar-rating the history of the country hit, and arrive

at pretty much the same conclusion: Currenciesare capable of posting massive long-termtrends. And as any position trader understandsintuitively, almost any trading system or set of indicators works in a trend. Markets make indi-cators work, not vice-versa.

Two questions arise, then. First, if this is thecase then why do self-described trend-followersin currencies tend to have such mediocre per-formance (see “Why currency traders should behumbler,” May 2007 or “Currencies and com-mitments,” June 2008)? Second, which curren-

cies are in fact trendiest?The first question will be dismissed curtlywith this bit of doggerel: “The trend is yourfriend, except for the bend in the end.”Everyone can see the same trend, the trade getscrowded, and then it reverses in an executionvacuum capable of vaporizing — in a matter of hours — weeks of hard-won gains. Such is thelife of a trend-follower.

The second question will be addressed for aset of six major currencies: the Canadian andAustralian dollars (CAD and AUD), the Japanese yen (JPY), the Swiss franc (CHF), the


Analyzing trends in the majors suggests winning trend followers must be quick

on their feet to reap their rewards.

Let the trend be your friend: The majors

During the AUD’s pronounced uptrends, the trend oscillator not only

turned negative but occasionally fell into oversold territory.

FIGURE 1 — AUSTRALIAN DOLLAR

Two supposedly commodity-linked currencies stand out: The Canadian

dollar has spent the most time trending since 1999, and the Aussie

dollar has had the least excess volatility.

TABLE 1 — MAJOR CURRENCIES' SUMMARY TREND STATISTICS

Percent in Average absolute Average excess

trending state trend oscillator volatility

EUR 60.2% 0.1702 0.0751

CHF 61.0% 0.1659 0.0281JPY 64.0% 0.1639 0.0547

GBP 65.2% 0.1717 0.0867

AUD 67.6% 0.1672 0.0190

CAD 67.9% 0.1545 0.0474

BY HOWARD L. SIMONS



British pound (GBP), and the Euro (EUR). Wewill visit a set of minor currencies next month.

Trendiness

Trends are like Supreme Court Justice Potter

Stewart’s famous definition of obscenity (“Iknow it when I see it”). If a market is moving ina straight line with few retracements, we all canspot the trend. But defining it is difficult. Twoaccepted methods of defining when a markethas serial correlation of returns, or a lower-than-expected number of day-to-day signchanges in returns, are the Durbin-Watson andWald-Wolfowitz tests, which indicate the mar-kets are close to being random in distribution.This is visually counterintuitive, but just as hik-ers get lost when they stop trusting their com-

passes, traders can get lost when their lying

eyes get in the way of reality.Other venerated technical indicators of

trendiness, such as Welles Wilder’s directionalmovement index (DMI) and its associated aver-age directional movement index (ADX) do agood job confirming when you are in a trend, but they tend to be slow to capture excessivemovements and abrupt but significant trendchanges. Moreover, the commonly used 14-dayDMI period is a parameterized time period.(Not that this does not work: I learned a good

deal of technical analysis from a bombast whoinsisted on measuring every indicator against asimple 14-day moving average, and who took great glee when one complex tool after anotherfailed to pass the test. There is a powerful lessonhere.)

The trend oscillator

For consistency, we will return to the measureused in June 2008, the adaptive moving average(AMA) system. An optimal trend speed isderived by the number of days between 4 and

Once the CAD’s bull run began, excess volatility dropped during

nearly all periods of positive trend.

FIGURE 2 — CANADIAN DOLLAR

continued on p. 28

The GBP’s excess volatility tends to surge much higher above 0.00

than it falls below it, and it also has the highest average level of any

of the major currencies.

FIGURE 3 — BRITISH POUND

CURRENCY TRADER • January 2009 27

Almost any trading system

or set of indicators works in a

trend. Markets make indicators

work, not vice-versa.



ADVANCED STRATEGIES continued

29 that minimizes the function:

Where Vol is the N -day high/low/close volatility, definedas:

where H, L, and C are high, low, and close, respectively.

Once the MA is calculated, the trend is defined as thevolatility-adjusted oscillator around this central tendency.In the construction of the index, the trend’s “zero point”occurs when price and AMA are equal:

Values of N in excess of 20 define a trending market,while those less than 11 define a sideways market and thosefrom 11 through 20 define markets in transition.

Figures 1-6 depict the daily high-low range for each of thesix major currencies over all days, but show the trend oscil-

lator (red bars) only for trending days. Thestronger the volatility-adjusted trend, the fur-ther away from zero the trend oscillator will be.In general, trend oscillator readings greater than0.40 or less than -0.40, marked on the trendcharts with grey lines, indicate a market is becoming overbought or oversold, respectively.

The bottom charts in each figure depict the

excess volatility (green bars) of each market forthose days when the market is in a trendingstate. Excess volatility is the ratio of the impliedvolatility for three-month non-deliverable for-wards to the high-low-close volatility. (In asmall twist from past practice, we subtracted1.00 from this ratio to depict it more intuitivelyas an oscillator around zero.) Excess volatilityindicates the market is uncomfortable with theexisting trend and is buying insurance in theform of options against its reversal. The morenegative this measure is, the more the market is

comfortable with the trend, and vice-versa.

Ranking the majorsFirst, let’s take a look at the summary rankingsin Table 1. The Canadian dollar (see “Rememberthe forgotten currency,” February 2006) hasspent the most time in a trending state since the Jan. 4, 1999 advent of the Euro. The Australiandollar (see “What’s down with the Australiandollar?” March 2008) has the lowest averageexcess volatility. Both are considered to be com-

modity-linked currencies (see “Of commodities and curren-

cies,” July 2006).The AUD had two rather lengthy uptrends, one between

summer 2001 and spring 2004 and another from fall 2006through July 2008, at which point it broke sharply (Figure1).

What is surprising is how often during its rather pro-nounced uptrends the oscillator not only turned negative but several times fell into oversold conditions. Visualinspection turns up nothing unusual in any of these down-drafts; in each and every case they were sharp and short-lived sell-offs within a broad uptrend. While some could(and indeed will) argue these represent buying opportuni-

ties, they also represent real loss of equity for those withlong positions.The excess volatility chart (bottom) is more interesting in

many ways. During the first broad uptrend, excess volatili-ty remained high as the AUD had been under severe down-ward pressure in the late 1990s. The situation reversed dur-ing the second uptrend — the currency market was verycomfortable with a long AUD position. Excess volatility col-lapsed during the sell-off in September-October 2008, whichindicated the actual severity of the AUD’s move was leftuninsured by options traders.

The Canadian dollar (Figure 2) is the market most cur-rency traders would assume was the trendiest. The CAD

Moves in the trend oscillator above 0.40 and below -0.40 have tended

to produce fairly symmetric, mean-reverting responses in the JPY.

FIGURE 4 — JAPANESE YEN



had a long and powerful uptrend between the beginning of 2003 and the end of 2007, but aswas the case with the AUD, it had a large number of short-lived bona fide downturns. A trend-following trader could — and by evidence did— get knocked out of long positions numeroustimes during this trend. The CAD, like theAUD, broke sharply during the September-

October 2008 credit crunch. Its break was swiftand severe enough to be done without anytrend reversals.

The excess volatility chart tells the real story,though. It remained quite high for the CADduring the tail end of its long bear market(extending through 2001), but once its bull run began, excess volatility dropped during nearlyall periods of positive trend. Also like the AUD,its excess volatility fell sharply in theSeptember-October 2008 sell-off.

There must be something about speaking

English that is related to currency trends, as thethird trendiest currency amongst the majors isthe British pound (Figure 3). This is a little sur-prising given the GBP’s primary trade is notagainst the USD but rather against the Euro.And visually the price chart is far noisier thanthat of either the AUD or the CAD. But let’sremember that point about hikers and theircompasses and accept the data for what it is.

The most interesting aspect of the British pound here is,like the Canadian dollar, how high the excess volatility wasin 1999-2002 and then how it switched to a pattern where

volatility spikes tended to mark tops in price. A data-min-ing trading system designer (which may be a redundancy)could back-fit a trading system to sell the GBP on thesevolatility spikes. In addition, the GBP’s excess volatility is both highly asymmetric — it tends to surge much higherover 0.00 than it falls below it — and has the highest aver-age level of any of the major currencies by far.

Few of us would expect the Japanese yen (Figure 4) torank very high on any measure of trendiness, and we arenot disappointed in that regard. The JPY has remained in afairly narrow trading range since 1999, but within thatrange we have seen several substantial trending moves tied

to global financial crises and developments in the yen carrytrade (see “A closer look at the carry trade,” July 2007).Moves in the trend oscillator outside of ±0.40 tend to pro-duce mean-reverting responses, and as befits a long-termtrading range, these moves have been fairly symmetric.

The excess volatility measure for the JPY was quite highin 2000-2001 as the Bank of Japan contemplated quantitativeeasing, which at the time was regarded as improbable. Oncethey went to the policy, excess volatility fell and remainedin a narrow range until the credit crunch emerged in mid-2007. When traders unwound yen carry trades in response,excess volatility fell and remained low except for a brief period in early September 2008. The market knew what it

wanted to do with the yen, which was to repurchase what ithad borrowed, and proceeded to do so without further ado.

The Swiss franc (see “The Swiss franc’s commodity con-nection,” October 2008) used to, along with the old

Deutsche mark, have a reputation for long-running, pro-nounced trends. This changed after the advent of the Euroand the realignment of global currency trading into two broad currency blocs — the dollar bloc and the Euro bloc(see “The dollar index and ‘firm’ exchange rates,”December 2005).

Even so, the CHF remained in a broad uptrend againstthe USD from mid-2001 until the September-October 2008credit crunch (Figure 5). This is evidenced by a very largenumber of overbought spikes on the trend oscillator against but one oversold spike in mid-2005. Also, the CHFappeared to be very comfortable within its uptrend judging

by its low excess volatility measure after the Swiss NationalBank ceased cutting its LIBOR target rate in mid-2003. Andlike other currencies, its excess volatility broke afterSeptember 2008 as the USD strengthened.

We finally come to the least trendy currency amongst themajors: the Euro. Even though it spent the first two-and-a-half years of its history declining against the dollar and thenext six years rallying — before breaking severely duringthe September-October 2008 credit crunch — it has had suf-ficient backing and filling to spend almost 40 percent of itslife outside of a trending state. As the deepest and most liq-uid currency market in the world, the Euro tends to get very

continued on p. 30

The Swiss franc’s reputation for long-running, pronounced trends

changed after the advent of the Euro and the realignment of global

currency trading into dollar bloc and Euro blocs.

FIGURE 5 — SWISS FRANC



crowded at the end of a trend and reverses sud-denly. This explains why trend-followers in cur-rencies have such a poor track record.

The excess volatility spikes since 2003 haveprovided clear signs as to when these reversalsare coming. The market senses it has moved to anextreme, but instead of reducing trend positions,it seems content to buy option protection. We can

revisit the one article on trading psychologythat’s ever been written as to why this is: Greedovertakes fear when a trend gets strong.

If you’re going to follow trends,

be quick about itIf there is one conclusion we can take away fromthis study on the majors and their trends, it is thewinners must be those who exit too soon. Thiswas Bernard Baruch’s famous maxim, pre-deci-malization — that he was willing to let the otherfellow have the first eighth and the last eighth.

This is more important than ever now that weare in a world of one gigantic trade, with a smallnumber of large players, the dollar-Euro, and aset of various managed floats and pegs aroundthis central rate. Next month we will visit sever-al minor currencies to see whether this lessonholds there, as well.

For information on the author see p. 6.

Related reading: Other Howard Simons articles

“The rupee and emerging markets”Currency Trader , December 2008.

Analysis suggests India’s status as a global economic power

is no accident.

“Nordic currency confusion”


Get a handle on the dynamics of the Northern European

currencies.

“The Swiss franc’s commodity connection”


How can the Swiss currency be, of all things, a commodity

currency?

“Franc-ly, my dear, I don’t give a carry”


Investigating the Swiss franc carry trade, and what might

change its dynamics.

“The short, awful life of the dollar carry trade”


The implications of the weak-dollar policy and the dollar’s roles as a

funding currency.

“Currencies and commitments”

Currency Trader , June 2008.

Find out what COT data conveys about forex price action.

“Getting carried away with the kiwi”Currency Trader , July 2008.

What’s driving the New Zealand dollar, and how long is it likely to

last?

“Currencies and stock index performance”

Currency Trader , April 2008.

Find out how stock indices relate to the performance of their

currencies.

“What’s down with the Australian dollar?”

Currency Trader, March 2008.

Traders have many assumptions about the nature of the Australian

dollar, but only one of these preconceptions appears to have any

impact on the currency.

“Currencies and U.S. stock-sector returns”

Currency Trader, January 2008.

This exhaustive analysis challenges some common assumptions

about the relationship between currency moves and stocks.

“Interest-rate shocks and currency moves”

Currency Trader, October 2007.

Short-term interest rates are typically cited as the prime catalyst of

currency moves. This study puts that idea to the test.

“Howard Simons: Advanced Currency Concepts, Vol. 1”

A discounted collection that includes many of the articles listed here.

You can purchase and download past articles at http://store.activetradermag.com

ADVANCED STRATEGIES continued

Because it tends to get very crowded at the end of a trend, the Euro

can reverse suddenly (which is why trend-followers in currencies have

such a poor track record). The excess volatility spikes since 2003

have signaled when these reversals are coming.

FIGURE 6 — EURO





http://www.newyorktradersexpo.com/



SPOT CHECK

To some observers, the Euro’s sharp decline vs.the dollar from July through November was asea change — the end of the Euro’s bull run —despite the fact the move was triggered by a

historic global economic crisis that drove money into theU.S. dollar as a safe haven.

Figure 1 is a daily chart of the EUR/USD pair. Afterreaching a closing high of 1.5990 on April 22, the pair

moved mostly sideways before the mid- July breakdown (it eclipsed 1.600 intra-

day on three occasions during this peri-od). The pair had shed more than 22 per-cent by the time it closed at 1.2453 onNov. 20 — a sell-off that might seem dra-matic were it not for the fact that the Eurolost nearly 30 percent vs. the Japaneseyen (JPY) during the same period (Figure2).

Table 1 compares the percentagemoves in the Euro and the U.S. dollar vs.the other major currencies (yen, Britishpound, Swiss franc, Canadian dollar,

Australian dollar, and New Zealand dol-lar) during the EUR/USD’s April-November down move and subsequentNovember-December rebound.

The overarching and intertwinedthemes during the fall financial panicwere liquidation and repatriation: money

managers and investors got out of allkinds of assets and reverted money tohome-country currencies. The Japaneseyen — a short-side favorite in forex carrytrades because of Japan’s perennial low-interest-rate environment — was boosteddramatically. Not only did the yen sky-rocket vs. the Euro, it was also the onlymajor currency the buck lost ground


The Euro story is really the dollar story…or maybe the yen story.

Euro relative performance

In the depths of the 2008 financial panic, the Euro lost significant ground vs.

the U.S. dollar. However, it mostly gained ground vs. other major currencies

(except the yen): Through Dec. 17, it had double-digit gains vs. the other

majors (ex-yen) — not too far behind the dollar’s performance.

TABLE 1 — EURO VS. THE DOLLAR: ANALYZING THE OTHER PLAYERS


Apr. 22-Nov. 20 Nov. 20-Dec. 17 Apr. 22-Dec. 17

Euro/dollar -22.12% 15.80% -9.82%

Euro vs. yen -29.03% 8.42% -23.05%

Euro vs. pound 5.50% 9.75% 15.78%

Euro/Swiss -4.92% 1.34% -3.65%Euro vs. Canada 0.17% 7.56% 7.74%

Euro vs. Aussie 20.34% 0.56% 21.02%

Euro vs. kiwi 18.98% 1.96% 21.31%

Average: 1.84% 4.93% 6.53%

Median: 2.84% 4.76% 11.76%

Avg. (ex-yen) 8.01% 4.23% 12.44%

Med. (ex-yen) 5.50% 1.96% 15.78%

Dollar vs. yen -9.04% -6.92% -15.33%

Pound vs. dollar 26.19% -5.47% 22.15%

Dollar vs. Swiss 22.08% -12.49% 6.84%

Dollar vs. Canada 28.63% -8.12% 18.19%

Dollar vs. Aussie 35.34% -15.19% 25.51%

Dollar vs. kiwi 34.58% -13.55% 25.71%

Average: 22.96% -10.29% 13.84%

Median: 27.41% -10.30% 20.17%

Avg. (ex-yen) 29.36% -10.97% 19.68%

Med. (ex-yen) 28.63% -12.49% 22.15%

“Euro story” has really

been the “Dollar story,” or

even the “Dollar/yen” story.



against between April 20 and

Nov. 20 (-9.04).Further inspection of Table 1 suggests the

“Euro story” has really been the “Dollar story,”or even the “Dollar/yen” story: The Euro was battered much more vs. the yen than the greenback, and the EUR/USD pair ’s specific declinewas driven by a singular economic event.

In fact, the Euro gained ground against theAustralian dollar, New Zealand dollar, andBritish pound, held its own against theCanadian dollar, and dropped moderately vs.the Swissie. These gains overall did not com-

pare to the U.S. dollar’s huge surges againstthese currencies, but they do highlight theunique dynamic that was pitting the Euro vs.the dollar in a battle it could not win.

The EUR/USD pair rebounded to the tune of nearly 16 percent from Nov. 20 to Dec. 17 on aclosing basis, cutting the Euro’s total loss sinceApril 22 to a little less than 10 percent.Also, during this November-December rally, the Euro gainedground vs. all the other major curren-cies while the U.S. dollar gave back

much more (a median loss of 10.30 per-cent).

Overall, the Euro and the U.S. dollarare not too far apart when assessingthe entire April 22 to Dec. 17 period,especially when the yen wild card isremoved from the picture. The Eurogained an average 12.44 percent vs. thefive remaining currencies (median15.78), while the dollar gained an aver-age 19.68 percent (median 22.15 per-cent).

In short, the performance under-scores the EUR/USD move is aboutthe dollar more than the Euro. But itraises the question of the importanceof European Central Bank (ECB) inter-est-rate policy as the new year begins.The ECB has lagged other central banks in cutting interest rates in theface of the global economic slowdown.If it is forced to compensate, it couldput a lid on the Euro’s strong reboundvs. the dollar, even if the dollar’s safe-haven pop is over and done with.


The EUR/USD pair collapsed as money flooded into the “safe-haven”

dollar during the fall financial panic, then rebounded sharply in late

November.

FIGURE 1 — EURO/DOLLAR SEESAW


The EUR/JPY (top) and USD/JPY pairs both dropped as money managers

short the yen had to cover their positions. The Euro lost nearly 30 percent vs.

the yen between April and November, while the dollar — which was itself hurtling to the upside vs. most currencies — lost 9.04 percent.

FIGURE 2 — THE YEN WILD CARD




INTERNATIONAL MARKETS

Currentprice vs. 1-month 3-month 6-month 52-week 52-week Previous

Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank

1 Swiss franc 0.93593 13.26% 4.85% -4.60% 1.0375 0.813 15

2 Euro 1.39782 10.39% -0.80% -11.35% 1.6038 1.2329 5

3 Australian dollar 0.70465 8.99% -11.33% -26.30% 0.9849 0.6005 3

4 New Zealand dollar 0.58127 7.74% -13.62% -23.53% 0.8214 0.519 16

5 South African rand 0.10538 7.02% -12.95% -17.12% 0.1489 0.0841 1

6 Singapore dollar 0.69863 6.40% 0.24% -4.93% 0.7434 0.6512 10

7 Swedish krona 0.12921 6.15% -10.69% -22.56% 0.1718 0.1152 13

8 Japanese yen 0.01103 4.35% 16.94% 16.78% 0.01148 0.00891 12

9 Thai baht 0.02923 3.25% -1.52% -3.08% 0.03396 0.0262 9

10 Indian rupee 0.02037 2.16% -3.73% -11.74% 0.03974 0.01843 2

11 Canadian dollar 0.81999 1.75% -12.99% -16.41% 1.0297 0.768 4

12 Taiwanese dollar 0.03044 1.57% -2.44% -7.48% 0.03335 0.02969 6

13 Chinese yuan 0.14677 0.87% 0.32% 0.49% 0.14677 0.1367 7

14 Hong Kong dollar 0.12904 0.02% 0.23% 0.62% 0.12904 0.1279 8

15 Brazilian real 0.42653 -0.26% -18.25% -31.62% 0.6414 0.3751 14

16 British pound 1.46317 -3.51% -17.78% -26.62% 2.0397 1.4351 17

17 Russian ruble 0.03431 -4.05% -11.96% -19.55% 0.04334 0.03267 11

CURRENCIES (vs. U.S. DOLLAR)

ACCOUNT BALANCE

Rank Country 2007 Ratio* 2006 2008+

1 Singapore 41.395 27 36.288 42.2082 Switzerland 65.534 15.8 58.708 64.1063 China 379.162 11.7 249.866 453.1464 Hong Kong 22.796 11.2 20.586 20.4565 Netherlands 55.891 7.4 8.6 6.76 Taiwan 25.402 6.8 24.661 28.3657 Sweden 25.903 6 27.707 25.5848 Russia 72.543 5.9 95.322 49.1819 Germany 175.371 5.4 147.134 174.13710 Japan 195.904 4.5 170.437 195.14511 Canada 25.603 1.8 20.792 17.909

12 Brazil 10.253 0.8 13.276 4.299

As of Jan. 2 *based on one-month gain/loss


Rank Country 2007 Ratio* 2006 2008+

13 Mexico -6.368 -0.7 -2.425 -10.58814 France -39.363 -1.6 -27.712 - 48.88515 India -23.131 -2.1 -9.503 -32.30116 UK -96.687 -3.5 -77.236 -105.14417 Australia -50.816 -5.7 -41.49 -52.98818 U.S. -784.341 -5.7 -811.483 -788.29319 South Africa -18.495 -6.7 -16.608 -19.23720 Spain -138.916 -9.8 -106.399 -154.849

Totals in billions of U.S. dollars*Account balance in percent of GDP +EstimateSource: International Monetary Fund,

World Economic Outlook Database, October 2008



NON-U.S. DOLLAR FOREX CROSS RATES

GLOBAL STOCK INDICES

GLOBAL BOND RATES

Rank Country Rate Jan. 2 1-month 3-month 6-month High Low Previous

1 Germany BUND 125.28 1.47% 8.26% 13.76% 125.56 109.65 12 UK Short sterling 98.28 1.42% 3.99% 4.60% 98.32 93.595 53 U.S. 10-year T-note 124.3 1.24% 7.62% 8.83% 128.65 111.15 24 Australia 10-year bonds 96.04 0.40% 1.47% 2.79% 96.05 93.18 45 Japan Government Bond 139.75 -0.15% 1.67% 3.85% 141.9 132.09 3

Country Interest rate Rate (%) Last change July 08 Jan. 08

U.S. Fed funds rate 0-0.25 0.5 (Dec. 08) 2 3Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.5 0.5Eurozone Refi rate 2.5 0.75 (Dec. 08) 4.25 4UK Repo rate 2 1.00 (Dec. 08) 5 5.5Canada Overnight funding rate 1.5 0.75 (Dec. 08) 3 4Switzerland 3-month Swiss Libor 0.5 0.5 (Dec. 08) 2.75 2.75 Australia Cash rate 4.25 1.00 (Dec. 08) 7.25 6.75

New Zealand Cash rate 5 1.50 (Dec. 08) 8 8.25Brazil Selic rate 13.75 0.75 (Sept. 08) 13 11.25Korea Overnight call rate 3 1.00 (Dec. 08) 5 5Taiwan Discount rate 2 0.75 (Dec. 08) 3.625 3.375India Repo rate 5.5 1.00 (Jan. 09) 9 7.75South Africa Repurchase rate 11.5 0.5 (Dec. 08) 12 11

GLOBAL SHORT-TERM INTEREST RATES

1-month 3-month 6-month 52-week 52-weekRank Country Index Jan. 2 gain/loss gain/loss gain/loss high low Previous

1 Mexico IPC 23,250.96 17.42% -3.23% -18.93% 32,292.90 16,480.00 102 Brazil Bovespa 40,244.00 14.98% -12.79% -34.14% 73,920.00 29,435.00 133 India BSE 30 9,958.22 13.95% -20.50% -27.12% 21,206.80 7,697.39 124 Japan Nikkei 225 8,859.56 12.66% -20.58% -33.32% 15,156.70 6,994.90 155 Hong Kong Hang Seng 15,042.81 12.21% -17.40% -30.69% 27,637.60 10,676.30 146 Singapore Straits Times 1,829.71 11.62% -22.59% -37.04% 3,437.79 1,473.77 117 UK FTSE 100 4,561.80 10.65% -6.33% -15.93% 6,534.70 3,665.20 28 South Africa FTSE/JSE All Share 21,764.90 10.40% -3.53% -25.73% 33,323.89 17,814.42 39 U.S. S&P 500 931.80 9.78% -16.38% -26.14% 1,444.01 741.02 6

10 Germany Xetra Dax 4,973.07 9.74% -12.15% -21.13% 7,923.44 4,014.60 911 Canada S&P/TSX composite 8,987.70 7.92% -17.55% -35.96% 15,154.80 7,647.11 8

12 France CAC 40 3,349.69 6.24% -15.48% -22.04% 5,567.09 2,838.50 513 Italy MIBTel 15,096.00 1.01% -21.54% -32.62% 29,143.00 14,029.00 714 Switzerland Swiss Market 5,533.60 -0.07% -17.79% -19.14% 8,385.40 5,034.40 115 Australia All ordinaries 3,201.50 -7.83% -32.94% -38.57% 6,421.20 3,201.50 4

Currency 1-month 3-month 6-month 52-week 52-weekRank pair Symbol Jan. 2 gain/loss gain/loss gain/loss high low Previous

1 Franc / Pound CHF/GBP 0.64025 17.46% 27.61% 30.11% 0.661 0.4434 92 Aussie $ / Pound AUD/GBP 0.48224 13.07% 7.96% 0.56% 0.4895 0.3786 13 Franc / Canada $ CHF/CAD 1.14413 11.50% 20.75% 14.36% 1.1583 0.8796 184 Franc / Yen CHF/JPY 85.05881 8.78% -10.14% -18.12% 105.071 74.698 135 Aussie $ / Canada $ AUD/CAD 0.86141 7.30% 2.12% -11.65% 0.9833 0.7568 106 Euro / Yen EUR/JPY 126.772 5.80% -15.16% -24.07% 169.958 113.614 67 Canada $ / Pound CAD/GBP 0.56117 5.56% 5.93% 14.05% 0.5663 0.4874 28 Aussie $ / Yen AUD/JPY 63.84087 4.36% -24.24% -36.94% 104.448 55.1876 49 Franc / Euro CHF/EUR 0.66983 2.62% 5.74% 7.66% 0.6992 0.6038 17

10 Aussie $ / Euro AUD/EUR 0.50347 -1.40% -10.73% -16.98% 0.6278 0.4725 811 Real / Canada $ BRL/CAD 0.52142 -1.81% -5.85% -18.02% 0.6719 0.4726 1612 Canada $ / Yen CAD/JPY 74.39076 -2.45% -25.57% -28.39% 112.316 71.9892 513 Real / Pound BRL/GBP 0.2919 3.47% -0.47% -6.70% 0.339 0.2441 714 Aussie $ / Franc AUD/CHF 0.75374 -3.70% -15.36% -22.67% 1.0095 0.712 315 Real / Yen BRL/JPY 38.69557 -4.38% -30.06% -41.41% 69.3981 36.0109 1216 Pound / Yen GBP/JPY 132.729 -7.51% -29.66% -37.14% 222.668 129.816 1417 Canada $ / Euro CAD/EUR 0.58704 -7.78% -12.24% -5.64% 0.6907 0.5799 1118 Real / Aussie $ BRL/AUD 0.60659 -8.36% -7.64% -7.04% 0.7391 0.5991 1919 Real / Euro BRL/EUR 0.30536 -9.60% -17.54% -22.81% 0.4197 0.2941 1520 Pound / Euro GBP/EUR 1.04714 -12.57% -17.09% -17.20% 1.3618 1.0195 20



Unemployment

Release 1-year Next Release 1-year NextPeriod date Rate Change change release Period date Rate Change change release

AMERICAS

Argentina Q3 12/22 7.8% -0.2% -0.3% 2/25 ASIA AND SOUTH PACIFICBrazil Nov. 12/19 7.6% 0.1% -0.6% 1/22 Australia Nov. 12/6 4.3% 0.0% 0.1% 1/15

Canada Nov. 12/5 6.3% 0.1% 0.4% 1/9 Hong Kong Sept.-Nov 12/18 3.8% 0.3% 0.2% 1/19

EUROPE Japan Nov. 12/26 3.9% 0.2% 0.1% 1/30

France Q3 12/4 7.7% 0.1% -0.5% 3/5 Singapore Q3 10/31 2.2% 0.0% 0.5% 1/30

Germany Oct. 11/27 7.1% 0.0% -1.0% 1/7

UK Aug.-Oct. 12/17 6.0% 0.2% 0.7% 1/21

Gross Domestic Product*

Release 1-year Next Release 1-year NextPeriod date Change change release Period date Change change release

AMERICAS AFRICA

Argentina Q3 12/18 -5.1% 19.1% 3/18 S. Africa Q3 11/25 4.1% 15.5% 2/24

Brazil Q3 12/9 1.8% 6.8% 3/10

Canada Q3 12/1 1.2% 6.3% 3/2 ASIA AND SOUTH PACIFIC

EUROPE Australia Q3 12/3 0.1% 1.9% 3/4France Q3 11/14 0.5% 2.6% 2/13 Hong Kong Q3 11/14 6.3% 3.8% 2/25

Germany Q3 11/13 0.0% 2.2% 2/13 India Q3 11/28 1.2% 18.7% 2/27

UK Q3 12/23 -0.3% 2.3% 3/27 Japan Q3 11/17 -0.5% -2.1% NLT 2/17

Singapore Q3 11/21 0.9% 1.7% NLT 2/27

* Final estimates, at current prices, seasonally adjusted

CPI


AMERICAS AFRICA

Argentina Nov. 12/10 0.4% 7.9% 1/13 S. Africa Nov. 12/17 0.1% 11.8% 1/28

Brazil Nov. 12/5 0.4% 6.4% 1/9

Canada Nov. 12/19 -0.3% 2.0% 1/23 ASIA AND SOUTH PACIFIC

EUROPE Australia Q3 10/22 1.2% 5.0% 1/28

France Nov. 12/16 -0.5% 1.6% 1/14 Hong Kong Nov. 12/22 1.8% 3.1% 1/22

Germany Nov. 12/17 -0.5% 1.4% 1/15 India Nov. 12/31 0.0% 10.4% 1/30

UK Nov. 12/16 -0.1% 4.1% 1/20 Japan Nov. 12/26 -0.9% 1.0% 1/30

Singapore Nov. 12/23 -0.3% 5.5% 1/23

PPI


AMERICAS AFRICA

Argentina Nov. 12/10 -0.3% 9.8% 1/13 S. Africa Nov. 12/18 -1.3% 12.6% 1/29

Brazil Nov. 12/8 -0.2% 12.9% 1/7

Canada Oct. 11/28 -12.5% -0.2% 1/6 ASIA AND SOUTH PACIFIC

EUROPE Australia Q3 10/20 2.0% 5.6% 1/27

France Nov. 12/22 -1.9% 1.6% 1/30 Hong Kong Q3 12/12 -1.2% 5.5% 3/13

Germany Nov. 12/19 -1.5% 5.3% 1/21 India Nov. 12/12 -1.8% 8.6% 1/9

UK Nov. 12/8 -0.7% 5.1% 1/9 Japan Nov. 12/10 -1.9% 2.8% 1/15

Singapore Nov. 12/30 -10.2% -12.8% 1/30

INTERNATIONAL MARKETScontinued

LEGEND:

Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

As of Dec. 31



FOREX NEWS

The Fed cut its target federalfunds rate on Dec. 16 to a range

from 0 percent to 0.25 percent.“They’re acknowledging reality,”

says Joseph Trevisani, chief marketanalyst for New Jersey-based forex broker FX Solutions. “Everybodyknows the effective rate has been therefor some time.”

The historic low came at a timewhen inflation was decreasing atrecord levels, bringing on new worriesabout the risk of deflation. NovemberConsumer Price Index (CPI) data, also

released on Dec. 16, showed a 1.7-per-cent drop. This drop was preceded by a1.0-percent drop in October.

The Bureau of Labor Statistics (BLS)attributes much of this drop to the

decline in energy prices. In Novemberalone the BLS’s energy index fell 17

percent, capping four months of decreases and doubling the Octoberdrop. The next-largest declinesoccurred in transportation, which fell9.8 percent in November, and housing,which fell 0.1 percent.

Nonetheless, the November CPI was1.1 percent higher than the November2007 reading. However, the 12-monthchange in July was at 5.6 percent, whencrude oil prices were at their peak.

Looking beyond the energy factor,

Trevisani says the real type of deflationthe Fed should be fearful of is the“feedback loop.”

“Prices fall and then people expectthem to fall so they hold off purchas-

ing. This drops consumption, whichdrops employment,” Trevisani says.

Companies try to combat mutedconsumption by lowering prices andemploying fewer workers.Unemployment in turn perpetuatesless consumption, further fueling the

Rate cuts fuel deflation fearsThe Fed lowered its target rate to a historic low as consumer prices plummet — along with the U.S. dollar.

Managed money: Barclay Trading Group’scurrency trader rankings for November 2008

Top 10 currency traders managing more than $10 million

as of Nov. 30, ranked by November 2008 return.

2008 $ Under

Rank Trading November YTD mgmt.advisor return return (millions)

1. Auriel Currency 2X Fund 5.76% -15.56% 433.1

2. Plimsoll Capital (Headwind) 5.30% 15.14% 22.1

3. Goldman Sachs (Fund. Currency) 4.65% 20.67% 310.0

4. John W. Henry & Co. (Int'l. FX) 4.17% 76.09% 29.1

5. Sunrise Cap'l Partners (Currency Fund) 2.57% 16.35% 29.2

6. Hathersage (Long Term Currency) 2.50% 8.99% 362.1

7. Geo Economic Mgmt. System Ltd 2.29% 16.37% 43.1

8. Spot Forex Mgmt. (Geneva) 2.12% 9.97% 12.0

9. Capricorn Advisory Mgmt (fxST Aggres.) 2.05% 5.88% 62.0

10. arsago Premium Currencies 1.84% 2.57% 181.2

Top 10 currency traders managing less than $10 million and more than

$1 million as of Nov. 30, ranked by November 2008 return.1. Wallwood Consultants (Forex) 13.66% -42.66% 2.0

2. Spot Forex Mgmt. (Lausanne) 8.83% 46.81% 4.0

3. Spot Forex Mgmt. (Zurich) 4.36% 21.64% 6.5

4. Zone Cap'l FX Managed Account 4.18% 16.35% 1.2

5. Aspect Capital (Gl. Currency) 3.10% -4.26% 5.0

6. Swing Capital (FX) 2.03% 25.68% 6.5

7. Capricorn Advisory Mgmt (fxMT Growth) 1.62% 4.65% 1.0

8. Ketch Capital Management (Tack Fund) 1.54% 0.25% 4.0

9. Coe Capital Advisors (FX) 1.02% 5.53% 4.3

10. Quiddity (FX) 0.92% -6.99% 7.0

Source: BarclayHedge (http://www.barclayhedge.com). Based on estimates of the composite of all

accounts or the fully funded subset method. Does not reflect the performance of any single account.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

USD fell to a 13-year low vs. JPY

the day after the Fed cut rates to

its lowest level ever.

FIGURE 1 — USD/JPY

Source: eSignal


The Euro rose significantly against

the dollar in the days surrounding

the December Fed rate cut.

FIGURE 2 — EUR/USD

Source: eSignal

http://www.barclayhedge.com/

http://www.barclayhedge.com/



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.





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 10-day move

shows how the most recent 10-day move compares to

the past twenty 10-day moves; for the 20-day move,

the % rank field shows how the most recent 20-day

move compares to the past sixty 20-day moves; for

the 60-day move, the % rank field 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 lower 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.

CURRENCY FUTURES SNAPSHOTas of Jan. 2

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’sliquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.

Market Symbol Exchange Volume OI 10-day move/% rank 20-day move/% rank 60-day move/% rank Volatility ratio/rank

Eurocurrency EC CME 153.0 124.9 -3.42% / 100% 9.27% / 62% 1.25% / 63% .16 / 43%

Japanese yen JY CME 77.2 112.1 -4.58% / 100% 1.02% / 3% 9.60% / 37% .14 / 0%

British pound BP CME 54.4 85.9 -6.44% / 100% -1.86% / 6% -17.45% / 78% .13 / 8%

Swiss franc SF CME 27.8 30.6 -0.29% / 0% 12.54% / 71% 5.05% / 82% .37 / 77%

Canadian dollar CD CME 26.1 60.1 -1.24% / 50% 3.87% / 67% -9.16% / 49% .08 / 0%

Australian dollar AD CME 23.5 47.2 1.55% / 16% 10.03% / 83% -1.24% / 2% .16 / 58%

Mexican peso MP CME 4.2 26.7 -4.30% / 92% -2.50% / 27% -12.17% / 27% .14 / 48%

U.S. dollar index DX ICE 4.1 23.3 2.72% / 100% -4.32% / 43% 1.77% / 12% .09 / 0%

New Zealand dollar NE CME 1.2 14.0 -0.80% / 50% 10.43% / 100% -7.24% / 16% .12 / 2%

E-Mini eurocurrency ZE CME 2.4 1.8 -3.42% / 100% 9.27% / 62% 1.25% / 50% .16 / 43%

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

downward spiral.“But for the moment, I don’t see that

happening,” he says.

A down dollar Both the Euro and the Japanese yenrallied for five straight days surround-ing the Fed rate cut. From Dec. 11through Dec. 17 the U.S. dollar (Figure1) fell 5.9 percent against the yen, hit-ting a 13-year low on Dec. 17.

On Dec. 19 the Bank of Japan low-ered its interest rate to 0.1 percent, itslowest point since the country ended

its five-year zero-rate policy in 2006.December capped a year in which theU.S. dollar/Japanese yen (USD/JPY)fell 19 percent, the pair’s largest annu-

al drop in more than 20 years.The Euro (Figure 2) gained 10.7 per-

cent against the dollar during thesame time period, rallying 10 percentin December, the Euro/U.S. dollar’s(EUR/USD) largest monthly gain in 30years. The December gain occurredafter the Euro lost more than 20 per-cent against the dollar from Julythrough November.

This information is for educational purposes only.

Currency Trader provides this data in good faith, but

assumes no responsibility for the use of this infor-

mation. Currency Trader does not recommend buy-

ing or selling any market, nor does it solicit orders to

buy or sell any market. There is a high level of risk

in trading, especially for traders who use leverage.

The reader assumes all responsibility for his or her

actions in the market.


Outrageous predictions

On Dec. 17, London-based SaxoBank released their annual

“outrageous claims” for the yearahead, an attempt to predict rare buthigh-impact events that could occur inthe year to come.

Among the predictions for 2009were that the EUR/USD pair couldfall to 0.95 and then go as high as 1.30as the European Central Bank

attempts to deal with the economictroubles of its member states.

Saxo also predicts 2009 could seethe first Asian currencies pegged tothe Chinese yuan, and that Asian eco-nomies will “look toward China tofind new trade partners and scaledown their hitherto U.S.-centricagenda.”

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Note: New Products and Services is a forum for industry businesses to

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Magazine Group. E-mail press releases to [email protected].

Publication is not guaranteed.

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http://slidepdf.com/reader/full/currency-trader-0109-p-2 41/45January 2009 • CURRENCY TRADER 41

GLOBAL ECONOMIC CALENDAR

Legend

LTD (last trading day): The final

day trading can take place in a

futures or options contract.

FDD (first delivery day): The

first day on which delivery of a

commodity in fulfillment of a

futures contract can take place.

FND (first notice day): Also

known as first intent day, this is

the first day on which a clearing-

house can give notice to a buyer

of a futures contract that it

intends to deliver a commodity in

fulfillment of a futures contract.

The clearinghouse also informs

the seller.

CPI: Consumer price index

ECB: European Central Bank

FOMC: Federal Open Market

Committee

GDP: Gross domestic product

ISM: Institute for supplymanagement

PMI: Purchasing managers

index

PPI: Producer price index

JANUARY/FEBRUARY

January

1

2 U.S.: December ISM report

3

45

6 U.S.: December ISM non-manufacturing

report and FOMC minutes

Canada: November PPI

7 Brazil: December PPI

Germany: November employment report

8 Mexico: Dec. 31 CPI and December PPI

9 U.S.: December employment report

Brazil: December CPI

Canada: December employment report

India: December PPI

UK: December PPI

LTD: January currency options (CME);

U.S. Dollar Index futures (ICE)

10

11

12

13 U.S.: November trade balance

14 U.S.: December retail sales

France: December CPI

15 U.S.: December PPI

Australia: December employment report

ECB: Monetary policy announcement

Germany: December CPI

Japan: December PPI

16 U.S.: December CPI

Mexico: Bank of Mexico monetary policy

announcement

17

18

19 Hong Kong: Oct.-Dec. employment

report

Mexico: December employment report

20 Canada: Bank of Canada monetary

policy announcement

UK: December CPI

21 Brazil: Central Bank of Brazil monetary

policy announcement

Germany: December PPI

UK: Sept.-Nov. employment report

22 U.S.: December housing starts

Brazil: December employment reportJapan: Bank of Japan monetary

policy announcement

Hong Kong: December CPI

Mexico: Jan. 15 CPI

23 Canada: December CPI

24

25

26 U.S.: December leading indicators

27 Australia: Q4 PPI

28 Australia: Q4 CPI

South Africa: December CPI

29 U.S.: FOMC monetary policy statement

and December durable goods

Canada: December PPI

Germany: December employment repo

South Africa: December PPI

30 U.S.: Q4 GDP (adv.) and ECI

France: December PPI

India: December CPI

Japan: December employment report

and CPI

31

February

1

2 U.S.: December personal income

3 Australia: Reserve Bank of Australia

monetary policy announcement

4 U.S.: January ISM report

5

6 U.S.: January employment report

Brazil: January CPI

Canada: January employment report

UK: January PPI

LTD: February currency options (CME)

February U.S. Dollar Index futures

Economic Release time

release (U.S.) (ET)

GDP 8:30 a.m.

CPI 8:30 a.m.

ECI 8:30 a.m.

PPI 8:30 a.m.

ISM 10:00 a.m.

Unemployment 8:30 a.m.

Personal income 8:30 a.m.Durable goods 8:30 a.m.

Retail sales 8:30 a.m.

Trade balance 8:30 a.m.

Leading indicators 10 a.m.

The information on this page issubject to change. CurrencyTrader is not responsible for

the accuracy of calendar datesbeyond press time.

January 2009

28 29 30 31 1 2 3

4 5 6 7 8 9 1 0

11 12 13 14 15 16 1 7

18 19 20 21 22 23 2 4

25 26 27 28 29 30 31

FEBRUARY 2009

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 28



KEY CONCEPTS

Average and median:The mean (or average) of a set of

values is the sum of the values divided by the number of

values in the set. If a set consists of 10 numbers, add them

and divide by 10 to get the mean.

A statistical weakness of the mean is that it can be dis-torted by exceptionally large or small values. For example,

the mean of 1, 2, 3, 4, 5, 6, 7, and 200 is 28.5 (228/8). Take

away 200, and the mean of the remaining seven numbers is

4, which is much more representative of the numbers in this

set than 28.5.

The median can help gauge how representative a mean

really is. The median of a data set is its middle value (when

the set has an odd number of elements) or the mean of the

middle two elements (when the set has an even number of

elements). The median is less susceptible than the mean to

distortion from extreme, non-representative values. The

median of 1, 2, 3, 4, 5, 6, 7, and 200 is 4.5 ((4+5)/2), which is

much more in line with the majority of numbers in the set.

Carry trades involve buying (or lending) a currency

with a high interest rate and selling (or borrowing) a cur-

rency with a low interest rate. Traders looking to “earn

carry” will buy a high-yielding currency while simultane-

ously selling a low-yielding currency.

Inside bar: A price bar with a lower high and higher low

than the preceding bar. By definition, an inside bar repre-

sents a volatility contraction from the preceding bar.

Linear regression (“best-fit”) line: A way to calcu-

late a straight line that best fits a set of data (such as closing

prices over a certain period) — that is, a line that most accu-

rately reflects the slope, or trend, of the data.

A regression line is calculated using the “least squares”

method, which refers to finding the minimum squared (x*x,

or x2) differences between price points and a straight line.

For example, if two closing prices are 2 and 3 points away

(the distance being calculated vertically) from a straight

line, the squared differences between the points and the line

are 4 and 9, respectively.

The squared differences are used (instead of just the dif-

ferences) because some differences are negative (for points

below the line) and others are positive (for points above the

line). Squaring all the differences creates all-positive values

and allows you to calculate a formula for the straight line.The “best-fit” line is the line for which the sum of the

squared differences between each price and the straight line

are minimized.

The formula for a straight line (y) is:

y = a + b*t where,

t = time

a = the initial value of the line when “t” is equal to zero

(sometimes called the “intercept” value — i.e., the

point at which the line intercepts the vertical y-axis)

or the point at which a specific line begins

b = the slope of the line, which is the rate at which the

line rises or falls (e.g., 0.75 points per day).

When fitting a straight line to N data points, the “best-fit”

coefficients a and b can be solved for by:

a = [2(2N+1)/N(N-1)] ∑p(t) + [6/(N(N-1)] ∑t*p(t)

b = [12/N(N2 –1)] ∑t*p(t) - [6/N(N-1)]∑p(t)

where,

p(t) = the price at point t

N = the number of prices we are using to calculate the

coefficients.

Volatility: The level of price movement in a market.

Historical (“statistical”) volatility measures the price fluctu-

ations (usually calculated as the standard deviation of clos-

ing prices) over a certain time period — e.g., the past 20

days. Implied volatility is the current market estimate of

future volatility as reflected in the level of option premi-

ums. The higher the implied volatility, the higher the option

premium.

N

t=1 t=1

N N

t=1 t=1

N



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).

FOREX TRADE JOURNAL

TRADE

Date: Nov. 25, Nov. 26, and Dec. 11, 2008.

Entry: Short the Euro/U.S. dollar pair

(EUR/USD) at 1.2954, 1.3064, and 1.3022.

Reason(s) for trade/setup: These signals werethe most recent results of the strategy based on thesetup described in “Short-term momentum signalsin the Euro” (Currency Trader, May 2008), “Euromomentum system, interrupted” (Currency Trader , June 2008), and “Euro momentum signal,tweaked” (Currency Trader, July 2008). The systemgoes short when a short-term momentum calcula-tion is strong relative to a bullish longer-termmomentum calculation. In this case, the 10-daymomentum indicator (ranging from -1.00 to +1.00)

had to be greater than or equal to 0.80 while the 62-day momentum was below -0.6.

Note: These signals were not actually executedin the market, so the results are shown for the followingparameters: a 0.0240-point profit target (a representativevalue found in testing) and a move above the high of theentry bar as the stop-loss. In both cases, the exits are execut-ed on the close of the bar that the condition is triggered on.

Initial stop: A close above the high of the entry bar, esti-mated as 1.3081 (for the first two entries) and 1.3406 (for thethird entry) in the Trade Summary table.

Initial target: The first close 0.0240 or more below theentry price (estimated as 1.2754, 1.2864, and 1.2822 in thetable).

RESULT

Exit: 1.2689 (first trade and second trades); 1.3721 (thirdtrade).

Profit/loss: +0.0265 (first trade); +0.0375 (second trade);-0.0699 (third trade).

Trade executed according to plan? Yes.

Outcome: The first two trades were exited on Nov. 28 at a

better-than-estimated price, thanks to the relatively bigdown move and low close on that day.

The third trade wiped out the accumulated profit — andthen some — as the Euro began what turned out to be a verystrong upside reaction that peaked in mid-December.

While the approach of exiting on the close helped per-formance on the winning trades, it was disastrous in the caseof the losing trade.

Despite the two profitable trades, these results underscorea previously discussed weakness: The signals often come

early and executing trades based on the opens and closes of the bars (rather than specific intrabar price levels) can puttrades at a disadvantage. Past trades based on these signalsfrom previous Trade Journals have used discretion to count-er these problems. Further research should be conducted tosee if these modifications can be applied systematically forfuture use.

Also, like any signal of this type, the system is vulnerableto bad signals when a market transitions from uptrend todowntrend, or makes an outsized move in either direction.

Note: Initial trade targets are typically based on things such as the histor-ical performance of a price pattern or a trading system signal. However,because individual trades are dictated by immediate circumstances, price

targets are flexible and are often used as points at which to liquidate a por-tion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.



One big loser wipes out two winners.

TRADE SUMMARY

Date Contract Entry Initial Initial IRR Exit Date P/L LOP LOL Tradestop target length

11/25/08 EUR/USD 1.2954 1.3081 1.2754 1.18 1.2689 11/28/08 +0.0265 (2%) 0.0393 -0.0126 3 days11/26/08 1.3064 1.3081 1.2864 11.76 1.2689 11/28/08 +0.0375 (2.9%) 0.0503 -0.0006 2 days12/11/08 1.3022 1.3406 1.2822 0.52 1.3721 12/15/08 -0.0699 (-5.4%) — -0.0699 2 days



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currency trader 0109 p 2

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