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Saxo #FXdebatesTrading insights rom
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Investors are still lookin
or an alternative to
money, as the risk o
debasement has never
been reater, notes
Ole Hansen, Head o
Commodity Stratey at
Saxo Bank. Does this make
old the hottest currencytoday? Is old really
money? It is the question
central bankers wish they
never had to answer
INDEX
John Hardy Rakesh ShahNick BeecroftOle Hansen
Rakesh Shah
Steen Jakobsen
To correct the
imbalances the monetary
union has created, a
proound restructurin
o the system is theonly option. Europeans
need to either embrace
a mandate or chane,
or ace the slow death
o japanisation, arues
Steen Jakobsen, Saxo
Banks chie economist.
The Federal Reserves
aressive quantitativeeasin proramme since
the onset o the nancial
crisis in 2008 has been the
chie driver in weakenin
the US Dollar. However,
despite the late 2012
launch o an open-ended
QE3 and the Feds best
eorts to kill it, there areencourain sins or the
reenback, arues John
Hardy, Head o FX Stratey
at Saxo Capital Markets.
Is there a nancialtimebomb hidin in
the nancial markets?
Currency wars, ar rom
helpin the nations
involved in competitive
devaluation, may actually
damae rather than boost
lobal trade says RakeshShah, Head o Saxo FX
Academy. Find out how
to benet rom this
situation in this chapter.
How lon will it take beore
the Renminbi replaces the
Dollar as the worlds rst
reserve currency? Years,
decades - or centuries? NickBeecrot, Chairman o Saxo
Capital Markets stresses
that the Chinese are a
patient nation and alsowarns that the supertanker
o Chinese RMB
appreciation could chane
direction in heavy seas.
To optimise your tradin
experience on our award-
winnin tradin platorm,
Head o Saxo FX Academy
Rakesh Shah presents itskey unctionality in the
platorm as well as his 10
olden rules or practical
applications in tradin.
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CHAPTER I PAGE 5 CHAPTER II PAGE 8 CHAPTER III PAGE 11 CHAPTER IV PAGE 14 CHAPTER V PAGE 17 CHAPTER VI PAGE 20
The Dollar& the FED
The Euroin crisis
Gold: justanothercurrency?
YuanDiplomacy
CurrencyWars
10 Rulesfor praticaltradingstrategies
00:00
FOREWORD PAGE 3
Blomberg
By Robert Bierman
WELCOME PAGE 4
By Torben Kaaber and
Charlotte Kan
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FOREWORD
In a world with ew economic certainties, currencies
have become a key indicator as to who is winnin in
the lobal economy. The Euro, the Yuan and the Dollar
have become headlines beyond the nancial news,
dinner conversation where never beore discussed and
topics or debate when nancial leaders ather. With
the status o the worlds biest currencies up or
discussion, invariably old attracts interest as an option.
Saxo and Bloomber LINK have convened the worlds
leadin nancial minds or DISCUSSION and DEBATE.
Lately, reardless o the primary purpose o the atherin,orein exchane is a topic at the top o the aenda.
News on the Bloomber Terminal covers an
astoundin rane o topics. Take the past month,
or instance, in October 2012, stories in the top ten
most read rane rom Lance Armstrons troubles to
senior executive chanes at Citiroup, the state o
unemployment in the U.S. and the price o Oil.
Whats interestin is to look loner term. In the 12
months precedin October 2012, the most-read story
on the Bloomber Terminal was headlined CentralBanks Cut Cost o Borrowin Dollars to Ease Crisis.
That headline ran November 30, 2011 as the world
souht to nd ways to ease the impact o the Euro
crisis. Fast orward nearly a year later and the most-
read story o September 2012 was Fed Undertakes
QE3 with $40 Billion MBS Purchases per Month.
Bloomber LINK and Saxo Capital Markets have teamed
up in an eort to ive ocus to key issues that recur
in debates amonst serious participants in the orein
exchane markets. This e-book is one o the products o
that collaboration. The best minds at Saxo Capital Market
have brouht orward their best thouhts on the FXmarkets and shared them with you in this publication.
We know you will nd the contents to be thouht-
provokin and useul as you consider how you
will play in the FX markets. There will be more to
come as our collaborators at Saxo Bank continue
to build this library o valuable insiht.
The debate will continue in live orm as the
#FXdebates produced by Bloomber LINK and Saxo
Capital Markets convene in-person in 2013.
The FX debate will continue or lon into the uture,and we thank you or joinin it alonside us.
Robert Bierman
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The lobal economic slowdown and the Eurozone debt
crisis have tested not just the world leaders and their
people, but also investors ability to anticipate, innovate
and allocate. The possible collapse o the sinle market
and its consequences on the lobal economy have orcedorex players to be creative and examine various investment
scenarios. At Saxo, we believe that the development o the
Euro crisis and touh economic times will present hue
challenes, but also a myriad o opportunities or orex
traders. Our Saxo eBook aims at challenin your views
and help you become more creative in your tradin. We
invite you to join the debate and share your views with us.
Is the Eurozone crisis a major concern or a reat
opportunity or FX traders? As the second most traded
currency lobally, the uture o the Euro and the sinle
currency project will heavily impact FX markets. Our
chie economist Steen Jakobsen thinks we are stuck
in a vicious circle o protest and denial, and the best
way out o the crisis is a radical restructurin o the
Eurozone. Macro has ailed miserably, and needs to be
replaced by micro, he arues. Do you aree? You may
not, and you may be riht. At Saxo Capital Markets, we
like to look at the bier picture and think outside the
box. All over the planet, to revive moribund economiespolicy makers and central bankers are resortin to the
biest orm o denial o all: quantitative easin - or in
the words o Saxos Head o FX Stratey John Hardy
extend and pretend. Will QE Innity ail to revive the
US economy, or does it have an alternative motive - to k
the Dollars value? What about the Renminbi? Is China
determined to take over the Dollars role as the worlds
reserve currency - and i it does when? Find out what ou
experts think, share your views and join the #FXdebates
WELCOME!
Charlotte KanEDITOR AT SAXO CAPITAL MARKETS
Torben KaaberCEO OF SAXO CAPITAL MARKETS
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Gold,just another
currency?Ole Hansen
CHAPTER I
HEAD OF COMMODITY STRATEGY
Ole Sloth Hansen is a specialist in all traded Futures, with over 20 years experience both on the buy and sell side. Ole joined Saxo Bank in 2008
and is today part o the Tradin Advisory Team analysin a diversied rane o products rom xed income to commodities. He previously workedor 15 years in London, most recently or a multi-asset utures and orex Hede und, where he was in chare o the trade execution team.
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1850 19501900 1980 TODAY
...AND THAT OF THE DOLLAR
1850-2012
16th C. 18th C. 21th C.
THE VALUE OF GOLD...
1560-2012
Since the 16th Century, golds purchasing power has maintained a broadly constant level. *
An ounce of gold has repeatedlybought a mid-range outfit ofclothing throughout the ages
On the other hand, the USdollar that bought 14.5 loaves
of bread in 1900 buys only 3/4of a loaf today.
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A passionate advocate o the necessity to revert back
to the old standard is US Conressman Ron Paul. On
July 13 2011, durin a Conressional hearin beore the
House Financial Services Committee, the Republican
conronted Fed Chairman Ben Bernanke with the question:
The price of gold today is $1,580. The Dollarduring these last three years has devaluedalmost 50%. When you wake up in the morning,do you care about the price of gold?
Clearly puzzled, Bernanke answered that he did indeed
pay attention to the price o old, but that it refects
several thins - like lobal uncertainty. The reason people
hold old is as a protection aainst what we call tail
risks, really, really bad outcomes, Bernanke said, beore
bein interrupted aain by Ron Paul with the question:
Revered throuhout the aes as a symbol o prosperity, thanks to its natural beauty, scarcity, and durability, old has
been the reserve asset that has backed at currencies in nancial economic systems worldwide, rom 700 BC when
old coins were rst manuactured on a lare scale in Lydia (a reion o Turkey), until the Bretton Woods areement
o xed exchane rates was sined in 1944, markin the end o the old standard. Over the past years, with the
world economy hittin the doldrums, old has reained its appeal as a sae-haven asset, but will it last? Here we ask
Ole Hansen, Head o Commodity Stratey at Saxo Bank, whether old can really be considered a currency asset.
The Gold Standard
So whatis gold?Central bankers may dier, but the question
certainly makes them break into a sweat.
The role o old in the nancial markets, its
nature and value, are not only dicult to
dene they are also controversial Is old a
Do you think gold is money?
Lookin increasinly uneasy, Bernanke answered: no,its a precious metal. He went on to awkwardly
explain that old is an asset. Central banks hold
old because it is a orm o reserves, and a lon-
term tradition, accordin to Bernanke. Ater alon pause, Ron Paul sharply concluded:
Some people still think its money.
Fearin that the Feds monetary policy will lead
inexorably to the death o the Dollar, Ron Paul thinks
the US and lobal monetary systems should be totally
reormed because at currencies do not lead to honest
trade as they are not backed by physical assets. Will
old save the world, as Ron Paul seems to believe?
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The Euroin crisis
Steen Jakobsen
CHAPTER II
The cycle between denialand protest is destinedto last or a while
CHIEF ECONOMIST
Steen Jakobsen was appointed as Chie Economist in March 2011. Steen has over 20 years o experience within the elds o
proprietary tradin and alternative investment. He started his career at Citibank N.A. Copenhaen, rom where he moved to
Hania Merchant Bank as Director, Head o Sales and Options. In 1992, he joined Chase Manhattan in London as VP, Head o
Scandinavian Sales, and then the Chase Manhattan Proprietary Tradin group. In 1995-1997 he worked as a Proprietary Trader and
Head o Flow Desk at Swiss Bank Corp., London. In 1997 he became global Head o Tradin, FX and Options at Christiania (nowNordea) in New York beore joinin UBS in New York in 1999 as Executive Director o the global Proprietary Tradin group.
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12,797
13,174 10,904
4,745 2,570
2,088 1,507
355
1,826
215103% 229% 81% 82.5%
165%
debt
GDP
debt ( bn)
GDP ( bn)
Public Debt / G
< 80
80 - 100
100 - 20
> 200
(2011DATA)
PUBLIC DEBT VS GDP
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Delay is the deadliestorm o denial
Restructurethe Eurozone?
From the time it erupted in 2009, the Eurozone debt
crisis has paralysed equity and debt markets and little
proress has been made towards a resolution - leavin
investors, the reions leaders and their citizens in a state
o limbo. Yet what is at stake is not just the uture o the
sinle market, but the entire world economy. The reionis the planets second biest economic powerhouse.
The Euro is also the second reserve currency lobally.
It may seem unpalatable, but to correct the imbalances
the monetary union has created, an upheaval o the
system may be the only option, Steen Jakobsen arues.
A greek exit may sound like a rihtenin scenario,
but prooundly restructurin the Eurozone may be
less painul than the slow death o Japanisation
with defation, massive scal decits, and neative
real-rates. Here Saxos chie economist considers the
dierent outcomes or the Euro debt crisis and whatto consider when tradin the sinle currency.
C Northcote Parkinson
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The Dollar& the Fed
John Hardy
CHAPTER III
QE wont breakthe buck
HEAD OF FX STRATEGY
John J. Hardy is Head o F X Stratey or Saxo Bank. A raduate o the University o Texas at Austin, John
started at Saxo Bank in 2002. As author o the popular FX Update and FX Monthly columns on Tradinfoor.com, John has developed an ex tensive ollowin amon Saxo Banks clients, the press and sales traders.
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OR DEBTMONETISATION?
2008
2009
2010
2011
2012
2013
2.25 2.242.43
2.922.82
QE1 QE2 QE3
$ tn
Federal Reserves Balance sheet [annual average in $ trillions]
Yield on US 10-year Treasuries
$100 billion in government-sponsoredenterprises + up to $500 billion inmortgage-backed securities.
$600 bn $600 bn $40 bn / month +
The Fed's balance sheet has almost tripled since 2008. At the same time,government borrowing costs have hit new lows.
$15.58 trillion
OIL EXPORTERS BRAZIL
CARIBBEAN TAIWAN SWITZERLAND
RUSSIA
BELGIUM
LUXEMBOURG
SINGAPORE
IRELAND NORWAY
FRANCE
GERMANY
THAILAND
UK
HONG KONG
JAPAN
CHINA
7.3%
6.9%
OTHERS
12.1%
OTHER INTRAGOVERNMENTAL HOLDINGS 13.1%OTHER NON INTRAGOVERNMENTAL HOLDINGS
26%
US SOCIAL SECURITY FEDERAL RESERVE HOLDINGS
10.7%17.2%
1.7%
1.2%
0.9%
0.9% 0.8%
0.6% 0.4%
0.4% 0.3%
0.4%
0.5%0.9%
1%
1%
1.5%
1.5%
Official holders of US Debt
DOMEST
FOREIGN
The Federal Reserve is the second single largest holder of US debt after the US Social SecurFund and thus holds more US debt than China, the third largest holder of US debt.
0.95
4.07
2.05
3.843.36
1.921.62
$40 billion a month in mortgage-backedsecurities + reinvestment of principal =increase of longer-term assets by about$85 billion a month.
$600 billion in longer-term Treasurysecurities purchased by June 2011.
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However, despite the late 2012 launch
o an open-ended QE3, the reenback
will not et much weaker, arues John
Hardy, Head o FX Stratey at Saxo
Capital Markets. Here we look at how
the balance o positives outweih
neatives or the Dollar, and why the
US currency may rise despite the
Feds best eorts to kill it with QE.
QE1 QE2 QE3
NOVEMBER 2008
MARCH 2009
NOVEMBER 2010
JUNE 2011
TODAY
?
QE wont break the buckThe Federal Reserves aggressive quantitative
easing programme (QE) since the onseto the fnancial crisis in 2008 has been thechie driver in weakening the US Dollar.
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YuanDiplomacy
Nick Beecroft
CHAPTER IV
The supertankero Renminbi appreciationcan change direction
Senior Market Analyst
Nick Beecrot has over 30 years o international tradin experience within the nancial industry. Nick publishes comments and
analysis on lobal macro-economic and political developments and their implications or the nancial markets, with a special ocuson Forex, g7 interest rates and bond markets, includin in-depth examination o Central Bank thinkin and tactics.
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SOURCES:
US Census Bureau (2012) / IMF (2011) / Bloomberg (201
51
3,240
BILATERAL TRADE IMBALANCE
BEGGAR THY NEIGHBOUR
$bn FOREIGN CURRENCY RESERVES$10 bn
CURRENT ACCOUNT BALANCE
CHINA VS USA ($ Million)
2005 2006 2007 2008 2009 2010 2011
- 200
- 300
- 400
- 500
- 600
- 700
- 800
- 900
- 100
0
100
200
200
300
400
0.12
0.12
0.13
0.13
0.14
0.14
0.15
0.15
0.16
YUAN / DOLLAR EXCHANGE RAT
CHINA IMPORTS
$273,121BnUS EXPORTS
$69,999Bn
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But where, and what, will it lead to?Nick Beecrot, Chairman o Saxo Capital
Markets Ltd, explains that the reputation
o the Chinese as a cautious and wise
nation may be deserved. Traders who
expect the redback to become the
worlds new reserve currency soon should
take notice o the old Chinese proverb:
Man who waits or roast duck to fy into
mouth must wait very, very lon time.
Internationalisationo the Renminbi:a step-by-step strategy
Gradually allowing the Renminbi to becomean internationally-traded currency is the
long, tricky journey the Peoples Banko China (PBOC) has embarked on.
Fi t t t t th t th t i i t d i
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CurrencyWars
Rakesh Shah
CHAPTER V
Is there a fnancialtime bomb hiding inthe FX market?
HEAD OF FX ACADEMY AT SAXO CAPITAL MARKETS UK
Rakesh has over 17 years experience in leveraed tradin in London and New York, havin worked or several lobal investment
banks. In January 2012, Rakesh joined Saxo Capital Markets as Head o FX Academy where he brins his unique expertise in pramatic
tradin strateies to Saxos customers. He requently presents seminars aimed at hih requency proessional traders.
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SOURCE:BLOOMBERG10/12
91.1
86.3
82.4
0.0959
0.4393
0.6045
93.4
0.474
8
0.0097
99.70.157
0.493
0.075
0.0853
0.0697
0.5578
94.7
87.
0.1289
88.6
80.9
2008 2009 2010 2011 20122007
YUAN / DOLLAR DOLLAR INDEX(BoE Calculated Effective Exchange Rates)
EURO INDEX(BoE Calculated Effective Exchange Rates)
MEXICAN PESO / DOLLAR BRAZILIAN REAL / DOLLAR
BANXICO
CENTRALBANK
PBOC
FED
ECB
BACEN
4.5%
0.25%
0.75%
6%
INTERESTRATE (%)
7.25%
IS MONETARY EASING
A HOSTILE ACT?
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Wars play their part in history, shapin and chanin the landscape or enerations to come.Financial markets are no exception. The 21st century has created a lobal economy where hyper
liquidity allows the transer o nancial assets rom one zone to another on an unprecedented
scale. Superpowers fex muscles or the control o these assets throuh the settin o interest
rates, loan and debt areements to manae current account surpluses. In this context a classic
currency war is brewin, spurred by devaluation and infation, the danerous by-products o a
near-zero interest rate environment. Is there a nancial time bomb hidin in the orein exchane
market? Rakesh Shah, FX trader and head o Saxo FX academy raises this hypothesis.
The Battle Scene
The primary tools or htin currency wars are interest
rates, with most countries eaerly anticipatin moves
rom the United States and the Eurozone. Lowerin
interest rates can have an unwanted side eect o lettin
infation rise. Even the worlds juernaut, China, has runinto challenes with sustainin rowth without lettin
infation run wild. Some countries have advantaes.
Brazil is an example. The countrys bankin system was
not hit as hard durin the subprime lendin scandals.
This combined with the rise in commodity prices, led to
hiher rowth rates, allowin Brazil to be somewhat
more fexible with economic policies. Based on this, i
commodity demand slows down, we will have to redrawth ti l b l d i ti
A classic currencywar is brewing
00:00
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10 Rules orpractical trading
strategiesRakesh Shah
CHAPTER VI
Trading the markets,ollowing the trendsand managing the risk
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Nothin beats market experience. Why? The
markets are dynamic, each day presents a new set
o opportunities and every situation needs to be
evaluated in the perspective o the bier picture within
which it sits. E.. EUR/USD can be tradin at 1.30 on
Monday and on Wednesday at the same key support
or resistance level. Dont be ooled into thinkin that
the trade dynamics on both days will be the same.
I you are a discretionary trader, you will need to adjust
your tradin analysis to take into account all the new
data, economic actors and related instrument prices (e..
other cross currencies in the case o the Euro). Map out
all the outcomes rom iven situations to allow you to
execute aster. Keep an eye on the tradin calendar; this
is one o the most useul tools or the experienced trader.
I you are a systematic trader, then you will still need to
check (i.e. have lters) that ensure the risk, exit taretsand volatility still match your stratey. get busy analysin
and usin demo account or tradin new ideas as soon
as is possible to build up your tradin experience.
FX Trader and Head o Saxo Academy Rakesh Shah looks at strateies and the practicality o tradin the currency markets.Rakeshs 10 Rules or practical tradin application:
Trading the markets, ollowingthe trends and managing the risks
1. AUTOMATING FILTERS FOR HIGHERQUALITY STRATEGY COMPOSITION
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CONTACTS DISCLAIMER
This material has been provided or inormation and
educational purposes only and should not considered
as an oer (or solicitation o an oer) to buy or
sell any currency, product or nancial instrument,
to make any investment, or to participate in any
particular tradin stratey. Any opinion or statementexpressed are the views o the author(s) and may not
necessarily represent those o Saxo Capital Markets
UK Limited (SCML). SCML makes no representation
or warranty, and assumes no liability, or the accuracy
or completeness o the inormation provided herein.
In providin this material SCML, or any aliated company
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situation, specic needs or demands and nothin herein is
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or divest in a particular manner and Saxo Capital Markets
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The contents o these materials reer to past perormance
and past perormance is not a reliable indicator
o uture perormance and will not necessarily be
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prots or losses similar to those achieved in the
past, or that sinicant losses will be avoided.
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