ForexTradingMagazinedec08

Strategies, analysis, and news for FX traders December 2008 Volume 5, No. 12 GETTING INSIDE CAN CHINA INSIDE DAYS: keep the ball FX performance rolling? p. 12 breakdown p. 22 INDIA: The rupee EUROPE, EURO and emerging adjust to recession markets p. 28 p. 8 DEPRESSION and the dollar p. 16

CONTENTS Trading Strategies Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Inside days: Part 2 . . . . . . . . . . . . . . . . . .22 Find out how seven major currency pairs responded to different types of inside-day Global Markets patterns. Recession hits Eurozone . . . . . . . . . . . . .8 By Chris Peters How Europe handles its recession will play a large part in determining the course of continued on p. 4 the dollar’s primary currency counterpart. By Currency Trader Staff Even the dragon is feeling the pinch . . . .12 Can China continue to grow its economy? If not, what are the implications for the global forex market? By Currency Trader Staff On the Money The six Ds of depression . . . . . . . . . . . . .16 The buck has gotten a bounce from the recent financial panic, but the longer-term picture isn’t quite as bullish. By Barbara Rockefeller 2 December 2008 • CURRENCY TRADER

CONTENTS Advanced Strategies The rupee and emerging markets . . . . . .28 Analysis suggests India’s status as a global economic power is no accident. By Howard L. Simons International Markets . . . . . . . . . . . . . .34 Numbers from the global forex, stock, New Products & Services . . . . . . . . . . . . .42 and interest-rate markets. Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 Forex News Conferences, seminars, and other events. Central banks continue to cut rates . . . .38 Interest rates continue to fall as central banks Global Economic Calendar . . . . . . . . . . . .43 around the world attempt to keep the liquidity Important dates for currency traders. pump primed. Have a question about something you’ve seen in Currency Trader? Submit your editorial queries or comments to webmaster@currencytradermag.com. 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. Ablesys FXCM Trader’s Expo CME Group InterbankFX TradeStation dbFX MetaStock Tsunami Trading eSignal PFGBEST.com The Wizard Forex.com RS of Houston 4 December 2008 • CURRENCY TRADER

CONTRIBUTORS CONTRIBUTORS A publication of Active Trader ® For all subscriber services: www.currencytradermag.com Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag.com Managing editor: Molly Goad mgoad@currencytradermag.com Associate editor: Chris Peters cpeters@currencytradermag.com Contributing writers: Howard Simons, Barbara Rockefeller, Marc Chandler Editorial assistant and Webmaster: Kesha Green Howard Simons is president of kgreen@currencytradermag.com Rosewood Trading Inc. and a strategist for Art director: Laura Coyle Bianco Research. He writes and speaks fre- lcoyle@currencytradermag.com quently on a wide range of economic and President: Phil Dorman financial market issues. pdorman@currencytradermag.com Publisher, Ad sales East Coast and Midwest: Barbara Rockefeller (http://www.rts-forex.com) Bob Dorman is an international economist with a focus on foreign bdorman@currencytradermag.com exchange. She has worked as a forecaster, trader, and con- Ad sales sultant at Citibank and other financial institutions, and West Coast and Southwest only: Allison Chee currently publishes two daily reports on foreign achee@currencytradermag.com exchange. Rockefeller is the author of Technical Analysis for Classified ad sales: Mark Seger Dummies (For Dummies, 2004), 24/7 Trading Around the seger@currencytradermag.com Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Volume 5, Issue 12. Currency Trader is published monthly by TechInfo, Inc., Internationally, published in Japan in 1999. A book tenta- 161 N. Clark Street, Suite 4915, Chicago, IL 60601. Copyright © 2008 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. tively titled How to Trade FX is in the works. Rockefeller is The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the on the board of directors of a large European hedge fund. effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results. 6 December 2008 • CURRENCY TRADER

GLOBAL MARKETS Recession hits Eurozone The Euro sell-off may be overdone, but don't look for a return to 1.600 anytime soon. BY CURRENCY TRADER STAFF W ith world gross domestic product (GDP) ter-over-quarter basis. Third-quarter data revealed a sec- expected to slow to 2.2 percent in 2009 ond consecutive quarter of negative growth with another according to the International Monetary 0.2 percent fall — satisfying the technical definition of Fund (IMF) — down sharply from 5.0 per- recession. cent in 2007 and 3.7 percent in 2008 — the Eurozone will not Inflation and interest rates escape the global slowdown unscathed. Recently released The Eurozone economy had been struggling with sluggish data reveals the 15-nation Eurozone economy already is in growth for some time, but given the higher inflation rate recession, and there is a widespread perception the earlier in 2008 — induced in large part by the record rally in European Central Bank (ECB) was behind the curve in crude oil prices — the central bank was unable to pull the implementing the necessary rate cuts to stimulate its trigger for interest-rate cuts. economies. The IMF now forecasts a -0.5-percent gross GDP Its hands tied by its inflation-control mandate, the ECB reading for the Eurozone in 2009, down from their project- actually hiked rates in July, bringing the official rate up to ed 1.2 forecast for 2008. 4.25 percent. But plunging prices in crude oil and other Economists at 4CAST Inc. forecast a 0.2-percent GDP commodities helped ease inflationary pressures, which decline for the Eurozone in 2009, while Moody’s enabled the ECB to focus on the extremely sluggish Economy.com projects a 0.1-percent GDP reading. European growth picture. Regardless, no one is painting a rosy picture. “The latest release on consumer prices by Eurostat “There is a clear risk that the negative quarterly sequence showed inflation falling to 3.2 percent in October from 3.6 which started in the second quarter of 2008 will extend fur- percent in September,” says Enam Ahmed, senior econo- ther than we think, meaning the risks are to the downside mist at Moody’s Economy.com. “With global commodity in our forecast,” says Steve Webster, chief European econo- prices declining since the summer, it is likely inflation has mist at 4CAST Inc. come down further, and we expect it to fall just below 3 per- Eurozone GDP fell in Q2 for the first time since the incep- cent by the end of this year.” tion of the monetary union in 1999. After a 0.7-percent rise On Oct. 8 several central banks — the U.S. Federal in Q1, GDP slid 0.2 percent in the second quarter, on a quar- Reserve, ECB, Bank of Canada, Bank of England, Swiss National Bank, and Sweden’s Riksbank — delivered coordinated 0.50-percent rate cuts. Then in November, the ECB announced another 0.50-percent cut, bringing the overnight Eurozone and G7 countries rate to 3.25 percent. The ECB followed up on Dec. 4 with a somewhat surprising 0.75-percent cut, dropping the rate to The following countries use the Euro 2.5 percent. as their currency: “There is a view the ECB was slow to get on the rate-cut- Austria, Belgium, Cyprus, Finland, France, ting horse,” says Charmaine Buskas, senior economics Germany, Greece, Ireland, Italy, Luxembourg, strategist at TD Securities. Malta, Netherlands, Portugal, Slovenia, and Spain. But now widespread expectations exist for additional rate cuts into 2009, which could ultimately bring the repo The “Group of Seven” (G7) countries are: rate as low as 2.00 percent by mid-2009. Britain, Canada, France, Germany, Italy, Japan, and the United States. Weak links and bright spots With the rest of the world slowing down, Eurozone 8 December 2008 • CURRENCY TRADER

FIGURE 1 — EURO RETRENCHMENT The Euro has fallen sharply vs. the U.S. dollar in recent months as safe- haven funds have flown to U.S. treasuries and the dollar. The move has economies that had relied on exports brought the Euro/U.S. dollar rate back into the range of the 2006 have been hit hardest, including consolidation. Germany and Italy. “Both [Germany and Italy] entered into a technical recession in the third quarter of 2008,” Ahmed says. “However, the countries that look most vulnerable are Ireland and Spain. Their economic outlook is further compounded by the marked corrections to their housing markets.” Greece has recently posted the strongest Eurozone economic growth — 0.5 percent in Q3 on a quarter-over- quarter basis — which was boosted by tourism and shipping, according to Webster. “[But Greece] only accounts for a very small percentage of total GDP (about 2 percent), and a bigger influence came from France, at +0.1 percent Source: TradeStation [Q3 growth] and Belgium also +0.1 percent [Q3 growth],” Webster says. ing the global financial uncertainty of Ahmed added that Greece would recent months has also helped prop likely be the strongest Eurozone per- up the dollar. former in 2009 as that country’s econ- Fundamentally, however, some omy will be supported by continued economists point out the U.S. acted employment growth, public invest- earlier than other G7 nations to implement in infrastructure and EU-fund ment fiscal and monetary stimulus in inflows. early 2008, which could potentially help the U.S. emerge from recession Risks for the Euro? before other countries around the Despite some chatter that recession in world. the Eurozone could cause the central The Euro trade-weighted exchange currency system to become unhinged rate saw a dramatic 9.8 percent or spark a break-up of the monetary decrease from the peak in April 2008 union, most strategists downplay that to the late October low, which should risk. help reduce pressure on Eurozone “This is what is called a symmetric exporters. shock — everybody needs rates to go Into early December, the Euro/U.S. down,” explains Jay Bryson, global dollar pair (EUR/USD) had extended economist at Wachovia Securities. “It the consolidation that followed the big is much more of a challenge when it is sell-off, holding above key support at an asymmetric shock — when one the Oct. 28 low around 1.2300 (Figure country does very well and another 2). Some say the sell-off from above doesn’t.” $1.6000 is overdone, leaving room for The Euro has fallen sharply vs. the a corrective rally into year end or early U.S. dollar in recent months (Figure 1), Q1. However, forex traders should be but this was more of a function of the aware that traditional fundamental unwinding of global positions that currency drivers such as growth and brought U.S. dollars back home than a interest-rate differentials have fallen bullish-dollar scenario. A safe-haven to the wayside in recent months. bid into the U.S.-treasury market dur- continued on p. 10 CURRENCY TRADER • December 2008 9

GLOBAL MARKETS continued FIGURE 2 — CONSOLIDATING AT SUPPORT As of early December, the Euro/U.S. dollar pair had extended the trading range that followed the big sell-off, holding above support at the Oct. 28 low (around 1.2300). “[The forex market] is still largely trading on fear and uncertainty, which explains why we’ve seen such massive inflows into the dollar,” Buskas says. “Knee-jerk [price action has] left all previous rules of thumb at the door.” Also, the forex market is not operating in a bubble. “The biggest direct influence on currencies during the last several months has been the performance of asset markets,” says Chris Furness, head of currency strategy at 4CAST Limited. Looking ahead, he suggests “any sign of a turn in the equity markets could be a very good signal to mark a turn in Euro/dollar.” Buskas sees the potential for the EUR/USD pair to probe slightly lower short-term and test the $1.20 area in Q4 Source: TradeStation 2008 before rebounding in 2009. She points to a fourth-quarter 2009 target at $1.40. FIGURE 3 — YEN CROSSES Furness advises currency traders to keep an eye on the Euro/Japanese yen (EUR/JPY) and Some analysts see potential for action in the Japanese yen cross other yen cross rates (Figure 3). Further out, rates, including the Euro/yen (top) and British pound/yen (bottom). Furness sees the potential for buying opportu- nities in the British pound/yen pair (GBP/JPY). That cross, which was trading around 136.50 on Dec. 3, has a major technical target at 134.75, Furness says. “But, below there is the 1995 low at 129.45,” he adds. “Traders will be looking for Aussie/yen on the buy side as well, because the yield, though much reduced, will still be in favor of the Aussie dollar.” Lingering questions Most economists’ crystal balls are, unsurpris- ingly, a bit murky at the moment. The consen- sus right now seems to be for uncertainty, with a dash of negativity. “As with most areas, the outlook is highly uncertain [for the Eurozone], and depends in part on the response of the authorities and how fast and how far the ECB and other global central banks cut rates,” Webster says. “There is a strong argument for large cuts and fiscal injec- Source: TradeStation tions as soon as possible to try to counter the threat of a long downturn.” “[Turning things around] largely depends on getting the What will it take to start the recovery process? trouble sorted out in the credit markets. We are now seeing “Everybody knows the global economy is in recession or abnormal risk aversion. Banks have to start lending to other will soon be heading into recession,” Buskas says. banks and to consumers and businesses again.” 10 December 2008 • CURRENCY TRADER

“I trade one way. My way.” Years of learning and experience have taught you to trade the right way – your way. Now there’s a brokerage dedicated to giving you the confidence you need to trade by your rules, with the sophisticated tools and comprehensive data you need. So if you’re serious about trading your way, go with the broker who’s serious about helping you get there – TradeStation. Find out about our special offer for new accounts and how you can get TradeStation Free! TM 800.426.6516 | TradeStation.com TM TM TM 2008 Rated Best for: Frequent Traders H Options Traders H International Traders H Trading Technology H Trade Experience Overall Best Online Broker StockS optionS FutureS Forex Member nYSe, FinrA, nFA and Sipc IMPORTANT INFORMATION: No offer or solicitation to buy or sell securities, securities derivative or futures products of any kind, or any type of trading or investment advice, recom- mendation or strategy, is made, given or in any manner endorsed by TradeStation Securities, Inc. or any of its affiliates. • Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. • Active trading is generally not appropriate for someone of limited resources, limited investment or trading experience, or low-risk tolerance. • There is a risk of loss in futures trading. Options and Security Futures trading is not suitable for all investors. Please visit our Web site for relevant risk disclosures. • System access and trade placement and execution may be delayed or fail due to market volatility and volume, quote delays, system and software errors, Internet traffic, outages and other factors. • All proprietary technology in TradeStation is owned by TradeStation Technologies, Inc., an affiliate of TradeStation Securities, Inc. • Trading foreign exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or greater than your entire investment; therefore, you should not invest or risk money that you cannot afford to lose. You should be aware of all risks associated with foreign exchange trading. Barron’s awards are based on a review of TradeStation’s brokerage products and services by a Barron’s journalist. Barron’s is a registered trademark of Dow Jones & Company. Leader in Rule-Based Trading tag line based on industry awards and reviews. © 2008 TradeStation Securities, Inc. All rights reserved.

GLOBAL MARKETS continued Even the dragon is feeling the pinch China will continue to play its economic cards close to its vest, which will impact economies and currencies worldwide. BY CURRENCY TRADER STAFF N o country is immune from the financial chal- Export picture lenges sweeping the globe. Despite posting Sluggish consumer activity in the U.S., Europe, and else- gross domestic product (GDP) growth in the where is already showing up in recent export data for neighborhood of 9.5 percent for 2008, even the China. Chinese economic engine will face slower growth into 2009. “It is generally showing a slowing trajectory,” says James A major factor putting the brakes on the Chinese econo- Pressler, associate international economist at Northern my next year will be a reduction in exports to the rest of the Trust Co. “It dropped by more than $8 billion in one industrialized world. Consumers in the U.S. and Eurozone, month.” the main destinations for Chinese manufactured goods, According to Pressler, in U.S. dollar terms monthly simply aren’t buying as much. Chinese exports in September 2008 stood at $136.4 billion. Depending on what measures are used, Chinese growth October’s preliminary figure came in at $128 billion. comprises roughly 5 to 10 percent of global GDP vs. 25 per- Virendra Singh, senior economist at Moody’s cent for the U.S. Nonetheless, a slowdown in China does Economy.com, says net exports totaled 10 percent of over- have a trickle-down impact elsewhere. all growth in 2007, around 8 percent in 2008, and should Forecasts for 2009 Chinese GDP range from 8.5 percent shrink to about 2 percent in 2009. on the high side from Northern Trust Co. to 8.0 percent The domestic repercussions for China are predictable. from Wachovia Securities to 7.6 percent from Moody’s “Export-oriented factories are closing down and laying Economy.com. While even 8 percent GDP growth sounds off a lot of workers,” Singh says. “[That suggests] China’s pretty good from the American or European perspective, total wages will shrink, which means people will be buying one needs to put the figures in context. Double-digit GDP less.” numbers have been common for China in recent years; 2007 Pressler says rising unemployment could be a challenge had an 11.9-percent reading. to social stability. “By Chinese standards an 8-percent reading would be “Unemployment is very much against Beijing’s policy,” the lowest rate since 2002,” says Jay Bryson, global econo- he says. “But the more they develop into a global economy mist at Wachovia Securities. and have to run their companies for profit, they are finding it isn’t that easy.” FIGURE 1 — HUNKERING DOWN Fiscal stimulus, of a sort Few expect the Chinese government to let the yuan rally even moderately until In early November the Chinese gov- the economic picture clears. In recent months, the Chinese currency has ernment announced a roughly $586 noticeably stalled, trading around 6.9 in early December. billion fiscal stimulus package aimed at helping the economy. The package appears “eye-popping” at roughly 14 percent of their GDP, according to Wachovia’s Bryson, who calls it “a step in the right direction.” However, Pressler says when you dig deeper into the details, in reality it is “more smoke than fire.” “They factored into that package a lot of projects that were going to get done anyway,” he says. “Infrastructure is always a nice thing Source: ADVFN (http://www.advfn.com) to work on when nobody is buying 12 December 2008 • CURRENCY TRADER

what you are making.” percent as of late November. The PBOC cut that rate in Singh agrees. “They brought forward many projects they September by 0.27 percent and in October by 0.54 percent, had planned for the next 10 years, such as railway expan- and further easing is expected. sion and infrastructure,” he says. The PBOC also dropped deposit rates by 0.54 percent in In a Nov. 20 research note from Westpac Institutional August to 3.60 percent. The impetus was to encourage Bank in Sydney, analysts wrote: “A great deal of the pack- “people to back away from saving,” Pressler explains. age had been in the 5-year plan all along (the 2005 plan). It continued on p. 14 had merely been pushed back as the government was not inclined to undertake major capital works projects in an environment of an investment boom. Effectively the Chinese authorities will now be squeezing a 5-year capital works program into two years.” Imports and the domestic picture On the other side of the coin, already-slowing Chinese growth has translated into reduced imports as well — which has in turn con- tributed to the massive downturn in commodity prices across the board. “China had been the buyer of last resort for commodities,” Pressler says. “They had a demand for everything.” But as early as August in the wake of the Olympics, Chinese demand began to slow. Pressler says monthly Chinese imports stood at $111.5 billion in July, but preliminary figures revealed a post-Olympic drop to $93.1 billion in October. The positive twist from the fall in global commodity prices has been a sharp drop in Chinese inflation readings. Singh says inflation fell from close to 8.5 percent in mid-2008 to around 4 percent more recently. Along with most other industrialized nations, the Peoples Bank of China (PBOC) has been in a monetary easing cycle. However, the PBOC, unlike the U.S. Federal Reserve, is not an independent monetary authority, but instead simply another managed arm of the government. While three different benchmark rates are available from PBOC, Pressler focused in on the prime lending rate, which stood at 6.66 CURRENCY TRADER • December 2008 13

GLOBAL MARKETS continued Economists note the current environment is actually an erished,” he says. “Developing a domestic growth engine opportunity for China to build up domestic demand as a will be their prime challenge.” way of fueling its own growth internally, so the country is not so dependent on foreign demand for manufactured The yuan goods. In recent months, the Chinese currency — the reniminbi, or “The Chinese are very highly dependent on what hap- yuan — has noticeably stalled out of its steady appreciation pens in terms of Western consumers — they are the main path, trading most recently at 6.84 in late November (Figure drivers of their economy,” Singh says. “A lot depends on 1). how the Chinese government makes use of this crisis to Many note that the Chinese government is no longer weaken that linkage — so their consumers and local domes- eager to let the currency rally even moderately amid the tic demand can drive GDP going forward.” reduction in the overall export picture. Singh says the government could use three key policy ini- “We expect the government to not let it appreciate any tiates to strengthen the Chinese domestic picture: lowering further,” Singh says. Moody’s Economy.com expects the taxes, strengthening the social security (retirement) system, yuan to stay flat through 2009 and then begin appreciating and creating a health care system. He says the Chinese again in second quarter 2010. boast a savings rate of 35 to 40 percent of their GDP because If market forces were allowed to move the yuan, Pressler individuals have to save for retirement and pay for health estimates the currency would be trading around 5.5. While care out of their own pockets. the Chinese government could be tempted to allow modest According to Pressler, the underdeveloped Western por- depreciation in its currency to support its exporters, shouts tion of China, which he says is more agricultural and has of protectionism would likely be heard from the G7 nations, about half the income of the more developed East, is anoth- who still publicly want further appreciation. er problem. The Chinese government’s “Harmonious For now, market watchers say the unspoken compromise Society” goals include developing Western China’s infra- will likely be a sideways yuan for some time to come as the structure, schools, and industry. global environment works through the challenges of the “Some of the western regions are still very much impov- global credit crunch and ensuing economic slowdown. 14 December 2008 • CURRENCY TRADER

ON THE MONEY The six Ds of depression The U.S. dollar is caught in a tangle of market economic forces that may put downward pressure on the currency for quite some time. BY BARBARA ROCKEFELLER T he dollar has been inversely correlated with oil for many months, and as 2008 draws to its sad close we are seeing the renewal of a correlation with the stock market (Figure 1). The powerful linkage between the S&P 500 and the dollar drops. Usually markets are characterized by the warp and woof of greed and fear, but lately we have had only fear and fear. Fear — blind, unreasoning, throat-choking fear — drives hot money to the dollar. But as soon as some greed comes back, the fickle traders dump dollars with gay aban- lar seems to have started in August and September. Forex don. analysts say as the Dow and S&P fall, risk aversion rises, From 2003 to today, the Euro/U.S. dollar pair which accounts for the U.S. three-month T-bill yielding a (EUR/USD) seems to track the S&P 500 index (Figure 1) measly 0.1 percent and the dollar remaining popular as the and the Dow (Figure 2). But from 1999 to 2003, the relation- safe-haven currency. ship was inverse. The last time the dollar was so strongly But as risk aversion fades on good news, such as the correlated with stocks was the 1997-1998 Asian financial cri- Citigroup bailout and President-elect Barack Obama nam- sis, but before that, the relationship was inverse, too. ing his economic team, the stock market rallies and the dol- Currencies are correlated with stock markets only by the coincidence of being affected by the same factors, or only FIGURE 1 — THE DOLLAR AND THE STOCK MARKET during crisis conditions. As the year winds down, the buck is showing evidence of a renewed correlation with the stock market. The dollar must continue to depreciate to continue to attract buyers of U.S. treasuries. In short, it’s an inconsistent and unreliable “relationship.” In fact, it’s probably not a true relationship at all. We do not see, for example, foreign capital flows in and out of U.S. stocks as the dollar rises and falls. That would be a relation- Source: data — eSignal and Reuters Online; charts — MetaStock ship. 16 December 2008 • CURRENCY TRADER

It’s different this time much was worth exactly zero. This includes hundreds of Market lore has it that only rookies say “It’s different this billions of dollars of mortgage-backed assets and literally time.” But it really is different this time. The fear and panic trillions in collateralized debt obligations. we’ve see in the form of crashing markets is based on a real- It’s almost impossible to wrap your mind around how istic judgment of the hard economic corrections to come. $200 billion in sub-prime mortgages was blown up by the There are six words starting with the letter “D” that investment banks into a collateralized debt market of many account for everything we see in the news: • Deleveraging The reserve currency always takes • Downsizing • Demand destruction the devaluative brunt of a crisis, • Deflation • Detroit and the reserve currency country • Delayed development (in emerging markets) always ends up a debtor. Deleveraging refers to the reduction in debt everyone (including hedge funds) used to finance the purchase of now-questionable assets. Some of the assets are not really trillions, but that’s what happened. The blue-collar worker questionable — they are worthless, only nobody has the earning $30,000 per year who was talked into believing he courage to say so out loud. It’s a pretty good guess that could buy a house worth $300,000, or 10 times his annual Treasury Secretary Henry Paulson retreated from buying salary (the old norm was three times annual salary) is not assets under the Troubled Asset Recovery Program (before really the party to blame. We should be blaming the asset- Pimco even got started repricing them) because he saw how creators. Some of the deleveraging is voluntary and some is invol- FIGURE 2 — THE EURO AND THE DOW untary, but it doesn’t matter. The relationship between the EUR/USD and the Dow was inverted from 1999 to 2002. The point is that credit con- The last time the dollar was so strongly correlated with stocks was during the 1997-1998 Asian financial crisis. traction is a process with its own timeline, and this time the cycle will be very long- lasting because there is so much debt to be taken out back and shot. Banks first. From a bank’s point of view, a loan is an asset (unlike for the rest of us, for whom it’s a liability). The asset side of the financial sector balance sheet is being deflated from 50 to 60 times the liability side (deposits and equity capital) to a level more like three to five times. This financial sector downsizing, accompanied by the merging of many institutions, hints at the downsizing to come for all the banks’ cus- Source: data — eSignal and Reuters Online; charts — MetaStock continued on p. 18 CURRENCY TRADER • December 2008 17

ON THE MONEY continued FIGURE 3 — THE EURO AND CRUDE OIL Crude oil fell by two-thirds from July to early December, a drop the EUR/USD pair replicated on a smaller scale. A great deal of the gloom that had befallen the markets was a result of the U.S. Treasury blundering and changing course. First the Treasury was going to buy toxic assets for $700 billion, then it wasn’t and was going to inject capital instead, then maybe it would buy the assets or maybe it wouldn’t. In the end, it’s guaranteeing more than $300 billion of Citigroup paper. Now we have a tem- plate for any additional bank rescues that might come down the pike. And that’s the critical point — new crises that might come down the pike. Restoring confidence and reducing uncer- Source: data — eSignal and Reuters Online; charts — MetaStock tainty is a fine thing, but as is often the case, stock traders tomers, which in practice is you, me, Spencer ran a 20-percent-off sale, com- went overboard. The stock Aunt Agatha, the corner store, and monplace in the U.S. but a one-time market rally was treating the first three your local Ford dealer. Downsizing is thing in the UK. Downsizing is both themes — deleveraging, downsizing, exactly what it sounds like: a lower cause and consequence of demand and demand destruction — as aber- level of activity, a reduction in prices destruction. rant behavior that would end the as well as salaries and wages, and a The biggest case of demand destruc- minute Citigroup was rescued and reduced standard of living. tion is oil (Figure 3). Oil fell by two- Obama took charge. But that’s wishful Downsizing takes many forms. It thirds, from a peak of $147.27 in July to thinking. All three factors are going to doesn’t mean we have to give up a low of $49.93 in late November. The reduce corporate sales and income. indoor plumbing, although it almost EUR/USD pair has kept pace with Some companies may thrive in the certainly means many Chinese who remarkable fidelity, albeit by a lesser new era — such as the makers of the were planning to get indoor plumbing percent: 1.4727 on the same date as the steel and concrete that will be used in will have to wait another three to five oil high (July 11, 2008) to 1.2965 on an Obama administration’s infrastruc- years, if not longer. Nov. 25, 2008 or about 12 percent. ture spending and presumably makers In Japan, upcoming capital spend- of solar and wind power machines in ing is being reduced as a direct Stocks and dollars the Obama alternative-energy initia- response to the destruction of demand, When it comes to downsizing and tive — but overall, most companies which impacts exporters. demand destruction, the stock market will experience falling earnings. In the U.S., demand for fuel is down doesn’t get it. When Citigroup was Doesn’t this drag down stock prices? 5 percent in the past 10 months, bailed out and Obama’s financial and Yes, it does. The S&P 500’s long- according to the American Petroleum economic team was named the day term average P/E ratio is 15, according Institute. Retailers are shaking in their after, U.S. stock indices rallied like to http://www.bullandbearwise.com. boots over a likely dismal holiday sea- crazy — a classic bear-market rally At the end of September this year, it son. caused by the relief of some immediate was just over 25. The lowest the P/E In the UK, giant retailer Marks & gloom being lifted. ratio has been in recent years is 17 18 December 2008 • CURRENCY TRADER

(September 2006). Surely we must Ah, but what is the limit? In recent $3-5 trillion or more. This money has expect the S&P index to fall, and there- years, the limit for American con- to come from selling U.S. Treasuries. fore any intermediate rallies today are sumers was set by credit card compa- Foreigners, including the Japanese doomed to be short-lived. nies and the banks and housing-market and Chinese, account for about 40 per- The immediate implication is that financial institutions that dispensed cent of the ownership of U.S. debt. the downfall of the stock indices will new mortgages and home-equity lines Even if they continue to hold the same lead to restored dollar strength. A dis- of credit. Banks are contracting credit level in reserve they currently have couraged stock market is also one that because they are over-leveraged. and don’t need to spend it domestical- embraces risk aversion, meaning any Therefore, with these sources of money ly — a questionable assumption — forays into commodities, such as oil, drying up, households will have to they will likely not be adding to their will be discouraged, too (see the first downsize consumption. dollar hoard. “D” — deleveraging). Who would So who is going to buy U.S. debt lend to a party wishing to get back into Motor City madness paper? Risk-averse Americans will commodity speculation? That leads us to Detroit and develop- buy some (a manifestation of the sav- As speculators depart in ever- ing countries. As of early December no ings dilemma), and so will mutual greater numbers from commodity one knows if Detroit will be saved by funds, pension funds, and hedge speculation to lick their wounds, price taxpayer money — rather, we know funds, driving the yield to ever-lower inflation at the other end of the taxpayer money will be spent but we levels. The real yield is already nega- pipeline goes down, too. For example, don’t know in what form and to what continued on p. 20 commodity giant BHP Billiton pulled effect. Realistically, the effort to rescue its offer for rival Rio Tinto because of Detroit has a very low probability of the deterioration of near-term global success when you factor in inevitably economic conditions. Before the col- declining demand and the excess bag- lapse of the takeover, the price of the gage the Big Three are hauling around deal fell from $140 billion to $62 billion — arrogant management and disas- as both companies’ shares fell on trously expensive labor and pension crashing commodity prices. contracts. Deflation is an evil thing. One of its It’s not entirely a joke that the only most pernicious effects is to promote people who really want to buy savings as a form of delayed con- American cars are the Chinese. A sumption. An individual’s savings are strong dollar harms Detroit’s export a virtue, but a society’s savings are capabilities, but the downsizing that perverse because, collectively, the will come to China as a consequence of drop in aggregate demand leads to a lower exports to the U.S. is worse. This glut of surplus goods that are then is already evident, and depending on sold at distressed prices, followed by a how long demand destruction in the drop in new production because U.S. lasts (probably at least three to demand is demonstrably lower. five years), it will be disruptive in Employment falls, leading to greater political ways as well as economic and savings against the rainy day that has financial ways. As China itself down- now come. sizes, the growth of its dollar reserves This was the core problem in Japan has to slow and perhaps reverse. during its deflationary decade in the 1990s, and remains a challenge to the Bailouts and bonds West, even though we can easily argue So here’s the crunch. Current plans that Americans and Westerners are far have the U.S. spending about $1.5-2 less prone to save and far more likely trillion on stimulus and bailouts, a to consume to the limit. sum that will almost certainly grow to CURRENCY TRADER • December 2008 19

ON THE MONEY continued tive all along the yield curve. An lar thrives and rises on each cyclical takes the devaluative brunt of a crisis investor buys U.S. paper today not to renewal of the understanding by stock, (and the reserve currency country get a return on investment, but a bond, and commodity markets of the always ends up a debtor). return of the principal. Conclusion: forces at work. This process can go on The only happy thought to emerge The dollar must depreciate to ever- for a long time, with two or three cor- from all this is the forex market can cheaper levels to continue to attract rective cycles in the upcoming year only become more popular. It still buyers of this paper, with the buyers alone. offers terrific leverage and better yet, assuming that an abnormally low dol- Longer-term, the dollar is probably what looks like a normal, if super- lar will eventually rise again to a more toast. It’s the reserve currency. As the sized, cycle of rises and falls. economically justifiable level. Bretton Woods gang in 1944 acknowl- The scenario of the six Ds is the dol- edged, the reserve currency always For information on the author see p. 6. Other Barbara Rockefeller articles: “Euro and dollar at parity?” “Why is the yen trending higher?” Currency Trader, November 2008. Currency Trader, March 2008. A few short months ago the world was contemplating Euro The yen’s rise seems to defy logic. Find out what’s behind it. $2. Now, the talk is all about Euro $1. What are the odds it “Fundamentals lead the charts” will happen? Currency Trader, February 2008. “Crisis of confidence” The recent global market turmoil and banking crises have Currency Trader, October 2008. the financial world on edge, but their impact on the dollar As Wall Street and Washington prove themselves equally might not be what most people expect. inept, the dollar suffers. “A fistful of dollars, a bundle of contradictions” “The dollar-oil connection” Currency Trader, December 2007. Currency Trader, September 2008. The U.S. currency must resolve several paradoxes to As oil broke, so did the Euro/dollar pair. What can we learn emerge from its funk. One overlooked positive of the current from analyzing bursting bubbles? situation may offer the depressed buck a way out of its bind. “Horizontal patterns in foreign exchange” “The road to 1.5” Currency Trader, August 2008. Currency Trader, November 2007. The Euro’s price action lends itself well to dissection with The dollar appears to be under siege, but perhaps the the Darvas Box. situation isn’t as grim as popularly believed. “Are the summer doldrums here?” “Helicopter Ben and the Japanese yen” Currency Trader, July 2008. Currency Trader, October 2007. If market myth is true, the season will bring a sideways The American and Japanese economies, and the fate of the market. But the myth warrants some analysis. confounding yen. “Manias and crashes: Where will oil lead the dollar?” “The dollar’s ‘sub-prime’ future” Currency Trader, June 2008. Currency Trader, September 2007. Although some analysts argue a falling dollar is helping to The fallout from the U.S. housing and mortgage meltdown push up oil prices, it might be the other way around. The may be far from over, and how things unfold will have a big question is, when will the bubble-go-round stop? impact on the forex market. “Is the Euro going to the moon?” “The rising yen — here we go again” Currency Trader, May 2008. Currency Trader, August 2007. A look at the Euro’s recent gravity-defying performance. The yen has been on the rise vs. the dollar. Find out if it’s a reversal or just a correction. “What’s really driving the dollar?” Currency Trader, April 2008. Signs of a potential turnaround in the buck can be found in an unexpected place. You can purchase and download past articles at http://store.activetradermag.com. 20 December 2008 • CURRENCY TRADER

TRADING STRATEGIES Inside days: Part 2 This follow-up study digs deeper into inside days and focuses on the U.S. dollar/Canadian dollar (USD/CAD) and the Euro/U.S. dollar (EUR/USD) pairs. BY CHRIS PETERS I n last month’s issue, we looked at short-term per- signal a volatility contraction. The study found, overall, formance following inside days across seven curren- inside days preceded slight gains within a week, slightly cy pairs (“Inside days in the major currency pairs,” better than the seven pairs’ benchmarks, or typical random Currency Trader, November 2008). Inside days have a moves. lower high and a higher low than the preceding day and The analysis measured price action after all inside days, TABLE 1 — INDIVIDUAL CURRENCY PAIRS Table 1’s left side shows currency pairs declined consistently after inside days that close in the upper 20 percent of their range. However, the table’s right side reveals less consistent behavior after inside days that close in the lower 20 percent of their daily range. After inside days closed in upper 20 percent of range After inside days closed in lower 20 percent of range +1 +2 +3 +4 +5 5D LUM 5D LDM +1 +2 +3 +4 +5 5D LUM 5D LDM USD/CAD (84) USD/CAD (119) Avg. -0.03% -0.08% -0.13% -0.13% -0.13% 0.65% -0.78% Avg. 0.00% 0.01% -0.01% -0.03% -0.06% 0.74% -0.73% Med. 0.01% -0.06% -0.09% -0.07% -0.09% 0.52% -0.65% Med. 0.02% -0.02% -0.04% -0.08% -0.02% 0.54% -0.54% Min. -1.76% -1.88% -3.22% -2.24% -2.27% 0.00% -4.75% Min. -2.00% -1.54% -2.34% -2.47% -2.94% 0.03% -3.50% Max. 0.78% 1.06% 1.64% 1.62% 2.76% 3.25% 0.00% Max. 1.42% 1.48% 2.59% 2.70% 3.15% 3.69% 0.00% EUR/USD (86) EUR/USD (115) Avg. -0.11% -0.22% -0.24% -0.16% -0.19% 0.89% -1.16% Avg. 0.05% 0.08% 0.10% 0.15% 0.07% 1.19% -1.04% Med. -0.10% -0.16% -0.26% -0.16% -0.16% 0.76% -1.04% Med. 0.07% 0.06% 0.07% 0.07% 0.01% 0.90% -0.79% Min. -1.57% -2.52% -2.95% -2.46% -3.06% 0.00% -3.78% Min. -1.47% -2.61% -4.33% -3.28% -6.18% 0.00% -6.83% Max. 1.18% 1.62% 2.09% 2.38% 2.60% 2.90% 0.00% Max. 1.65% 3.12% 2.68% 4.13% 4.93% 4.97% 0.00% GBP/USD (102) GBP/USD (85) Avg. -0.02% 0.03% 0.19% 0.10% 0.12% 1.01% -0.87% Avg. 0.09% 0.06% 0.06% 0.02% -0.01% 0.96% -0.91% Med. -0.03% -0.04% 0.20% 0.03% 0.21% 0.81% -0.61% Med. 0.06% 0.13% 0.16% 0.05% -0.03% 0.85% -0.74% Min. -2.60% -1.79% -2.47% -3.41% -3.00% 0.00% -4.21% Min. -1.60% -1.69% -1.70% -2.28% -2.86% 0.03% -2.86% Max. 2.12% 2.70% 2.86% 3.38% 2.75% 4.41% -0.02% Max. 1.45% 2.19% 2.36% 2.91% 2.82% 3.02% 0.00% USD/JPY (124) USD/JPY (120) Avg. -0.04% -0.11% -0.11% -0.10% -0.12% 1.05% -1.30% Avg. 0.01% -0.02% 0.05% 0.02% -0.02% 1.27% -1.34% Med. 0.05% -0.04% 0.00% -0.04% 0.12% 0.88% -0.89% Med. 0.11% 0.09% 0.14% 0.23% 0.17% 1.10% -0.83% Min. -3.08% -3.34% -4.67% -4.81% -5.83% 0.04% -7.15% Min. -2.75% -5.37% -3.92% -5.16% -5.56% 0.02% -6.55% Max. 1.84% 2.63% 3.09% 4.18% 3.36% 4.52% -0.04% Max. 2.24% 2.51% 3.02% 3.47% 4.15% 4.28% 0.00% USD/CHF (86) USD/CHF (113) Avg. -0.07% -0.10% -0.17% -0.17% -0.11% 1.03% -1.15% Avg. -0.01% -0.02% 0.00% -0.05% -0.02% 1.19% -1.16% Med. -0.04% -0.08% -0.13% -0.15% -0.03% 0.92% -1.03% Med. 0.05% 0.04% 0.17% 0.00% -0.12% 1.00% -0.97% Min. -1.39% -2.87% -2.40% -3.20% -3.38% 0.03% -3.90% Min. -1.70% -2.69% -3.70% -3.17% -3.86% 0.00% -4.93% Max. 1.85% 2.23% 2.63% 2.06% 3.39% 3.74% -0.01% Max. 1.26% 1.83% 2.72% 3.15% 3.84% 4.01% -0.01% AUD/USD (90) AUD/USD (114) Avg. 0.01% -0.09% -0.16% -0.04% 0.05% 1.11% -1.16% Avg. -0.06% -0.01% -0.05% -0.06% -0.06% 1.16% -1.24% Med. 0.03% -0.06% -0.08% -0.09% 0.05% 0.86% -0.78% Med. -0.01% 0.02% 0.03% 0.06% 0.05% 0.96% -0.97% Min. -1.81% -3.16% -3.00% -3.57% -3.14% 0.00% -5.13% Min. -1.64% -2.76% -5.46% -5.46% -5.09% 0.00% -8.85% Max. 1.52% 2.18% 2.34% 3.48% 3.58% 4.53% 0.00% Max. 1.69% 4.82% 3.86% 4.85% 4.14% 7.37% 0.00% NZD/USD (86) NZD/USD (146) Avg. 0.03% 0.02% -0.08% 0.02% 0.03% 1.09% -1.05% Avg. -0.02% -0.07% -0.01% -0.03% -0.04% 1.14% -1.12% Med. 0.05% 0.14% 0.06% 0.04% -0.07% 0.84% -0.76% Med. 0.04% 0.02% 0.04% 0.06% 0.01% 0.93% -0.78% Min. -1.83% -3.16% -4.56% -5.13% -4.90% 0.00% -6.53% Min. -2.34% -3.98% -3.70% -3.14% -3.63% 0.00% -5.78% Max. 1.69% 2.02% 2.09% 2.80% 4.56% 4.89% 0.00% Max. 2.37% 2.18% 3.10% 4.46% 4.30% 5.98% 0.00% Avg. total Avg. total Avg. -0.03% -0.08% -0.10% -0.07% -0.05% 0.98% -1.07% Avg. 0.01% 0.00% 0.02% 0.00% -0.02% 1.09% -1.08% Med. -0.01% -0.04% -0.04% -0.06% 0.00% 0.80% -0.82% Med. 0.05% 0.05% 0.08% 0.06% 0.01% 0.89% -0.80% Min. -2.00% -2.68% -3.32% -3.54% -3.66% 0.01% -5.06% Min. -1.93% -2.95% -3.60% -3.57% -4.30% 0.01% -5.61% Max. 1.57% 2.06% 2.39% 2.84% 3.29% 4.03% -0.01% Max. 1.72% 2.59% 2.90% 3.67% 3.90% 4.76% 0.00% 22 December 2008 • CURRENCY TRADER

after up- and down-closing inside days, and after inside days that followed trend TABLE 2 — INSIDE DAYS IN USD/CAD AND EUR/USD runs of consecutive higher highs and high- Inside days closed more often in the bottom 20 percent of their range than in er closes (and back-to-back lower lows and the top 20 percent. lower closes). In almost all cases, inside Up- Down- Closed in Closed in days were followed by upward price closing closing the upper the lower moves over the next five days. Inside inside inside 20 percent 20 percent For example, currency pairs gained more days days days of range of range ground after inside days that closed above USD/CAD 542 274 269 84 119 yesterday’s close than those closing below EUR/USD 551 244 308 86 115 it (a median 0.1 percent vs. 0.06 percent, respectively). However, the previous study focused on the combined median benchmark moves, or the typical same-length performance of the major currency pairs. By contrast, this moves in the past 16 years. second installment breaks out the performance of individ- Price rebounded after inside days that closed in the lower ual currency pairs following several types of inside-day 20 percent of their daily range, and it dropped after inside patterns: All inside days, inside days that closed in the days that closed in the upper 20 percent of their daily range. upper and lower 20 percent of their daily ranges, and up- For example, currency pairs gained a median 0.05 percent and down-closing inside days. on the day after forming an inside day that closed in the lower 20 percent. By day 3, price rose a cumulative 0.08 per- Top to bottom cent before giving back those gains in the next two days. The study examines seven currency pairs from Jan. 2, 1993 Meanwhile, price fell 0.04 percent by day 2 after inside to Sept. 12, 2008: U.S. dollar/Canadian dollar (USD/CAD), days that closed in the upper 20 percent of their range, a Euro/U.S. dollar (EUR/USD), British pound/U.S. dollar loss that was extended to 0.06 percent by day 4. Overall, (GBP/USD), U.S. dollar/Japanese yen (USD/JPY), U.S. dol- Figure 1 suggests price reversed direction after inside days lar/Swiss franc (USD/CHF), Australian dollar/U.S. dollar that closed near daily extremes even though that pattern (AUD/USD), and New Zealand dollar/U.S. dollar continued on p. 24 (NZD/USD). There were 4,174 inside days that formed during the test FIGURE 2 — AFTER ALL INSIDE DAYS period across all seven currency pairs; 658 patterns closed IN USD/CAD AND EUR/USD in the upper 20 percent of the day’s range and 812 closed in Price tended to gain in USD/CAD and EUR/USD following the lower 20 percent for an average of 94 and 116, respec- inside days. tively, per currency pair. Figure 1 shows the median five-day performance following inside days (in all seven pairs) that closed in the top 20 percent of the day’s range and those that closed in the bottom 20 percent. The figure compares this performance to its FIGURE 1 — INSIDE DAYS CLOSING NEAR EXTREMES Price rebounded after inside days that closed in the lower 20 percent of their daily range, and it dropped after inside days that closed in the upper 20 percent of their daily range. CURRENCY TRADER • December 2008 23

TRADING STRATEGIES continued FIGURE 3 — UP-CLOSING INSIDE DAYS FIGURE 4 — DOWN-CLOSING INSIDE DAYS Both markets lost ground after up-closing inside days as USD/CAD slipped an average 0.03 percent by day 4 and EUR/USD made relatively strong gains following losing inside EUR/USD fell twice as far during the same period. days. lasted less than a week. skewed the average lower than usual. The next step is to break down how individual currency Also, the difference between average five-day LUMs and pairs behaved following these patterns. LDMs is most striking in the Japanese yen, another sign its post-pattern moves were more volatile than in other mar- Individual results kets. Table 1 lists performance statistics for each currency pair and the combined results after inside days that closed in the Closes in the lower 20 percent upper and lower 20 percent of their daily range (left and Table 1’s left side shows currency pairs declined consistent- right sides, respectively). In addition to each pair’s cumula- ly after inside days that close in the upper 20 percent of tive close-to-close moves, it also shows the five-day largest their range. However, the table’s right side reveals less con- up moves (LUMs), or close-to-high gains, and the five-day sistent behavior after inside days that close in the lower 20 largest down moves (LDMs), or close-to-low losses. percent of their daily range. The currency pairs that fell furthest after inside days clos- For example, there are significant discrepancies between ing in the upper 20 percent of their ranges are USD/CAD, average and median values in four of seven pairs: EUR/USD, and USD/CHF. Each of these three pairs JPY/USD, USD/CHF, AUD/USD, and NZD/USD. dropped at least a median 0.09 percent by day 3, although By contrast, the Euro, British pound, and Canadian dol- price tended to bounce back by day 5. lar produced the most consistent results. Both EUR/USD AUD/USD responded the same way to this pattern, and GBP/USD climbed at least a median 0.07 percent by except price gained ground on day 1 before dropping from day 3 before pulling back by the end of the analysis period, days 2 to 4. GBP/USD declined slightly on day 1, but ulti- very similar to Figure 1’s overall performance. But while mately ended the week squarely in positive territory. USD/CAD’s average and median values are roughly in By contrast, NZD/USD and USD/JPY swung back and sync, price fell after this pattern instead of rallying as the forth between positive and negative territory. The Japanese Euro and British pound did. yen was especially inconsistent, even though it formed the Finally, inside days closed in the bottom 20 percent of most patterns of all pairs tested (124 vs. 102 or fewer). For their ranges far more often than they closed in the upper 20 instance, its median five-day move was 0.12 percent, but its percent. These upper-range closes formed 154 times more average value was -0.12 percent, meaning a few large drops than lower-range closes. 24 December 2008 • CURRENCY TRADER

Focusing on the Canadian dollar and Euro The study’s final section focuses on two currency pairs that showed the most consistent results in Table 1 — USD/CAD and EUR/USD. Table 2 lists the number of inside-day patterns in the Canadian dollar and Euro: All inside days, up- and down-closing inside days, and inside days that closed in the upper and lower 20 percent of their daily range. Overall, inside days appeared more than 500 times in both currency pairs — roughly 35 times per year. Figure 2 compares the average and median performance in the five days following all inside days in USD/CAD and EUR/USD (upper and lower sections, respectively). Price tended to rally after inside days in both pairs, climbing an average 0.04 percent by the second day in USD/CAD and gain- ing 0.08 percent by the fifth day in EUR/USD. Up- and down-closing inside days Figure 3 shows both currency pairs’ average and median moves following up-closing inside days, and Figure 4 shows their performance after down-closing inside days. Both markets lost ground after up-closing inside days as USD/CAD slipped an average 0.03 percent by day 4 and EUR/USD fell twice as far during the same period. The Canadian dollar’s loss was roughly in-line with its benchmark. On the other hand, EUR/USD’s five-day decline is out of sync with its benchmarks’ slight gains, a sign the dip is worth investigating. By day 5, the Euro turned upward, but still ended in negative territory, nearly 0.04 percent lower than its benchmark move. Figure 4 shows both currency pairs gained ground and beat their benchmarks after down-closing inside days. For example, USD/CAD climbed an average 0.07 percent by day 2 before giving back most of that gain by day 5. However, the Euro made strong, consistent gains as it rose an average 0.17 percent within a week. Inside days that closed near extremes Figure 5 shows the performance of USD/CAD and EUR/USD after inside days continued on p. 26 CURRENCY TRADER • December 2008 25

TRADING STRATEGIES continued FIGURE 6 — INSIDE DAYS — CLOSING IN LOWER 20 PERCENT FIGURE 5 — INSIDE DAYS — CLOSING IN UPPER At first, both currency pairs gained ground after inside days 20 PERCENT that closed in the lower 20 percent of their range. But then the Canadian dollar fell while the Euro advanced, peaking at 0.15 USD/CAD declined 0.13 percent, on average, by day 3 after percent, on average, by day 4. inside days that closed in the upper 20 percent of their range. Meanwhile, the Euro dropped even further, falling an average 0.24 percent by that point. Related reading that closed in the upper 20 percent of their daily range. “Inside days in the major currency pairs” Comparing Figures 1 and 5, you’ll notice both markets Currency Trader, November 2008. Analysis of inside days that occur after short-term price fall after this pattern, which conforms to the combined thrusts. results of all seven currency pairs. USD/CAD declined 0.13 percent, on average, by day 3, and benchmark and median “Technical tool insight: Inside days” moves point in the same direction. And the Euro dropped Active Trader, January 2003. even further, falling an average 0.24 percent by day 3 before An inside day (or bar) is a price bar that is encompassed by rebounding slightly by day 5. the range of the preceding bar. It represents contracting Figure 6 shows the behavior of USD/CAD and volatility from the previous bar. EUR/USD after inside days that closed in the lower 20 per- “Trading the Euro inside out” cent of their range. The response is less consistent than Currency Trader, September 2005. Figure 5’s patterns. At first, both currency pairs gained Analysis of inside and outside days in the Eurocurrency ground, but then the Canadian dollar fell while the Euro futures offer some interesting surprises — and clues for how advanced, peaking at 0.15 percent, on average, by day 4. to trade this market. Table 2 shows inside days closed in the upper 20 percent of their range less often than their lower-20-percent coun- “Volatility-based currency trading” terparts, but Figure 5 shows the markets’ subsequent per- Currency Trader, February 2005. Market volatility can be a complex subject, but understanding formance is more reliable. a few basic principles can help you implement strategies to The study’s most striking pattern occurred after capitalize on volatility extremes. EUR/USD down-closing inside days. According to Figure 4, the Euro beat its benchmarks and jumped an average 0.17 You can purchase and download past articles at percent within a week after this pattern. Also, average and http://store.activetradermag.com. median values moved roughly in line with each other. 26 December 2008 • CURRENCY TRADER

AbleTrend is designed to seek pro ts in volatile markets with managed risk FREE Interactive Webinar Award Winning Trading Register FREE at: www.ablesys.com Software Monday 4pm, Wednesday 7pm and Friday 2pm EST Bring your own symbols and find out what AbleTrend 7.0 says about your positions. Learn if any buy/sell signals have occurred. Identify support levels. And get the answers instantly! Whether you trade stocks, comodities, FOREX, the E-MINIs, or the ETFs . . . whether you prefer day trading, swing trading or 1997 - 2008 position trading . . . you will see results on the spot. For Stocks, Getting Speci c Buy/Sell/Stop Signals “ I have found that the most important things in trading are 1. nding the Futures FOREX & Options At An Early Stage is Priceless trend early. 2. SUPPORT AbleTrend 7.0 and RESISTANCE in real Now You Can Subscribe to a Test Drive of time and 3. entering Abletrend 7.0 With FREE One-On-One Consultation on retracements, which is about controlling losses. Also, STAYING IN THE TREND. Your software shows me how to do these things with precise accuracy and elegant simplicity. The software you have developed has the most accurate support and resistance levels I have seen. They will indicate the pivots in “ advance, a feature that alone is worth the price. — John Meyer MD. Atlanta, GA 0 Dayoday!Trial 3 T Sta2rtisco8u1n2t Code: $ 0D Get Started Today! T RA DE RS ' RE S OURC E CUT Reader’s Choice Awards LINK S 1997-2008 in Stock Trading System; Futures Trading System Call Free (888) 272-1688 & Option Trading System www.ablesys.com Ablesys Corp. • 20954 Corsair Blvd. • Hayward, CA 94545 • Tel: 510-265-1883 • Fax: 510-265-1993 These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the bene t of hindsight. No representation is being made that any account will or is likely to achieve pro ts or losses similar to these being shown. The testimonial may not be representative of the experience of other clients and the testimonial is no guarantee of future performance or success CTA Firm

ADVANCED STRATEGIES The rupee and emerging markets The rupee appears to have made the transition from emerging to emerged. FIGURE 1 — STRONG RUPEE, STRONG STOCKS The period of strongest relative performance for the Indian stock market corresponds directly to the period of greatest INR strength (far right). BY HOWARD L. SIMONS F uture economic historians will debate whether India in the early 21st century represented an economic miracle or simply an adjustment from the self-inflicted poverty caused by a half-century of failed socialist experi- ments. The latter would make India’s development and entry into the first rank of world economic powers parallel to China’s explosive growth, after the Chinese opted out of being a com- munist police state in favor of being a mere corporatist police state. And they call economics the Dismal FIGURE 2 — COMPARATIVE CONSUMER PRICE INFLATION Science. IN INDIA AND U.S. One major difference between India and China is currency policy. China The average annual inflation rate in India has been much higher than the U.S. pegged the yuan to the dollar at what rate over the past 40 years. many considered to be an artificially low rate through July 2005, and then managed its revaluation thereafter. The dollar peg and the artificial currency rate meant China’s monetary policy was set in large part by the Federal Reserve; if they consider this to be an act of overt sabotage, they have remained silent. China’s economy has boomed, through mid-2008 at least, on its exports, but as many of its imports are priced in dollars, their inflation has risen apace each and every time the dollar has fallen. India has opted for greater freedom of movement for the rupee (INR), and it has moved both up and down in response, which makes it an interesting barometer for actual currency con- 28 December 2008 • CURRENCY TRADER

FIGURE 3 — EXPECTATIONS SLOWLY SHIFTING IN RUPEE'S FAVOR ditions in emerging markets. Like many other emerging markets, The forward-rate ratio (FRR) moved in favor of the dollar between July 2007 and June 2008, but then started moving in the rupee’s favor. India has parallel movements between its stock market and its currency (see “Currencies and stock index performance, Pt. II,” Currency Trader, May 2008). We can create a relative performance index of the total return for the Indian stock market vs. the Morgan Stanley Capital International (MSCI) index for emerging markets and map it against the INR. Figure 1 shows the period of strongest relative performance corresponds directly to the period of greatest INR strength; so much (once again) for the notion a weaker currency benefits a stock market. This dual strength suggests a phe- nomenon observed in many emerging markets — capital inflows buoying stocks and the currency simultaneous- ly — is at work. Capital flows often are a double-edged sword for emerging markets: They are fun bid away resources from domestic consumers. This has on the way in, hell on the way out, and almost certain to been the experience forever in Mexico, and it was repeated cause inflation by virtue of the power of foreign investors to continued on p. 30

ADVANCED STRATEGIES continued FIGURE 4 — LONG-TERM INTEREST RATES over a wide swath of emerging mar- AND RELATIVE STOCK PERFORMANCE kets during the September-October 2008 financial crisis. The relative downturn in Indian stocks led a downturn in the 10-year note Of course, inflation has been a prob- differential by an average of six months after mid-2004. lem endemic to India for a long time; recall a half-century of socialism before they decided to try something else. Figure 2 re-indexes the Indian consumer price index (CPI) for industrial workers and the U.S. all-urban CPI (not seasonally adjusted) to August 1968 and shows the average annual rate of inflation in India over the past 40 years has been much higher than the U.S. rate (7.50 percent to 4.68 percent). High-inflation economies seldom are rewarded with strong currencies; the opposite claim is difficult to verify, as the world seems to have run out of low-inflation currencies. Short-term interest rate differentials Inflation, capital flows and long-term interest rates are important in estab- FIGURE 5 — INDIAN CAPITAL MARKET YIELD CURVE EXPECTED TO FLATTEN RELATIVE TO U.S. lishing currency movements (and will be discussed here), but they are not as Changes in the currency rate affect long-term rate differentials, the exact important as expectations for short- opposite of the case for short-term rate differentials. term interest rates. Let’s return to a tool used in previous analysis for measuring these expectations. First, take the forward rate ratio between six- and nine-month USD LIBOR, the rate at which we can bor- row money for three months starting six months from now and divide it by nine-month LIBOR itself. This is the FRR6,9 for the dollar. Although there is no actively traded equivalent for INR LIBOR, there is an active market for Indian Treasury bills, and it should have parallel trends to offshore INR markets, plus or minus the equivalent of an INR TED spread. If we subtract the INR FRR6,9 from the USD FRR6,9, we get a forward- looking measure of whose short-term interest rates are going to rise the fastest, and which leads the currency 30 December 2008 • CURRENCY TRADER

FIGURE 6 — U.S. CAPITAL MARKET MORE VOLATILE THAN INDIAN COUNTERPART The U.S. capital market has been more volatile than the Indian market. Lower volatility makes assets more attractive, all else held equal. by three months on average. Figure 3 shows it moved substantially in favor of the dollar between July 2007 and June 2008, but started to move in the rupee’s favor thereafter. Capital market movements We introduced the topic of India’s strong stock market at the outset. As stocks are discounted at capital market horizons, we should see a relationship between the relative performance of the Indian and U.S. markets as measured by MSCI total returns, the spread between INR and USD 10-year T-note yields (Figure 4). We do, but only after mid-2004. The relative downturn in Indian stocks led a downturn in the 10-year note differen- continued on p. 32

ADVANCED STRATEGIES continued Related reading: tial by six months on average after that point. Other Howard Simons articles After a brief collapse in the differential between 10-year note yields in early 2004 when it became apparent the “Nordic currency confusion” Federal Reserve would have to start raising short-term inter- Currency Trader, November 2008. est rates, long-term Indian yields began a prolonged climb Get a handle on the dynamics of the Northern European against U.S. yields. With the six-month lag noted above, this currencies. was when the Indian stock market began its pronounced “The Swiss Franc’s commodity connection” period of outperformance against the U.S. market. The com- Currency Trader, October 2008. bination of rising stocks and rising long-term interest rates How can the Swiss currency be, of all things, a commodity indicated the Indian economy was overheating at the time; currency? this would lead to the relative tightening of credit seen in the FRR6,9 differential and the INR’s subsequent rally. “Franc-ly, my dear, I don’t give a carry” Oddly, the chain of causation, which moves from short- Currency Trader, September 2008. term interest-rate differentials to the currency, seems to Investigating the Swiss franc carry trade, and what might move the other way at the capital market horizon. If we cre- change its dynamics. ate forward rate ratios from two to 10 years, the rate at which “The short, awful life of the dollar carry trade” we can lock in borrowing for eight years starting two years Currency Trader, August 2008. from now, divided by the 10-year rate itself, we see the INR The implications of the weak-dollar policy and the dollar’s roles as leads the FRR2,10 differential by one year (Figure 5). Changes a funding currency. in the currency rate affect long-term rate differentials, the “Currencies and commitments” exact opposite of what we see for short-term rate differen- Currency Trader, June 2008. tials. Find out what COT data conveys about forex price action. If the pattern observable over the short space of this decade persists, the INR FRR2,10 should decrease relative to “Getting carried away with the kiwi” the USD FRR2,10. This could occur via a flatter Indian yield Currency Trader, July 2008. curve, a steeper American yield curve, or a combination of What’s driving the New Zealand dollar, and how long is it likely to both. last? Finally, we can see how the U.S. capital market has been “Currencies and stock index performance” more volatile than its Indian counterpart. Let’s plot the two Currency Trader, April 2008. FRR2,10 series on separate scales (Figure 6). Note how the Find out how stock indices relate to the performance of their USD FRR2,10 steepens into 2003, flattens and inverts going currencies. into 2006, and then steepens in 2007 before flattening sharply again in 2008. The scale ranges from 0.99 to 1.18. “What’s down with the Australian dollar?” The INR FRR2,10 had a sharp flattening and rebound in Currency Trader, March 2008. late 2001-2003, but has remained confined into a very nar- Traders have many assumptions about the nature of the Australian row 1.00-1.05 range since that time. If a sign of a mature and dollar, but only one of these preconceptions appears to have any well-managed economy is stable expectations in capital mar- impact on the currency. kets, the U.S. could learn a little from India. Lower volatility “Currencies and U.S. stock-sector returns” makes assets more attractive, all else held equal. Currency Trader, January 2008. This exhaustive analysis challenges some common assumptions Sign of maturity about the relationship between currency moves and stocks. At what point do emerging markets emerge? In the case of India and the INR, the answer seems to be, “They have — “Interest-rate shocks and currency moves” thanks for asking.” Currency Trader, October 2007. Just as the Euro and the Canadian dollar tend to trade as Short-term interest rates are typically cited as the prime catalyst of a function of short-term interest-rate differentials, so, too, currency moves. This study puts that idea to the test. does the INR. At present, these differentials point to a post- “Stock shocks and the dollar” crisis stabilization in the rupee if the U.S. can manage to Currency Trader, September 2007. return to monetary sobriety at some point and the world Want to know what really happens to currencies after big stock avoids a repeat of the Great Depression. market moves? But a stronger or weaker INR as part of normal fluctua- tions is not a cause for alarm. In a mature market, it just “is,” “Howard Simons: Advanced Currency Concepts, Vol. 1” with no further value judgments attached. That is the best A discounted collection that includes many of the articles listed news of all. here. You can purchase and download past articles at For information on the author see p. 6. http://store.activetradermag.com 32 December 2008 • CURRENCY TRADER

INTERNATIONAL MARKETS CURRENCIES (vs. U.S. DOLLAR) Current price 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 South African rand 0.09663 8.10% -26.29% -26.16% 0.1504 0.0841 17 2 Indian rupee 0.01995 2.84% -13.60% -14.71% 0.03974 0.01843 9 3 Australian dollar 0.63485 1.52% -26.77% -33.85% 0.9849 0.6005 16 4 Canadian dollar 0.79286 0.71% -17.02% -21.56% 1.0297 0.768 14 5 Euro 1.26905 0.27% -14.24% -19.51% 1.6038 1.2329 11 6 Taiwanese dollar 0.02995 0.10% -6.11% -8.69% 0.03335 0.02974 5 7 Chinese yuan 0.1467 0.09% 0.12% 1.68% 0.1467 0.1344 3 8 Hong Kong dollar 0.12902 0.02% 0.69% 0.64% 0.12902 0.1279 2 9 Thai baht 0.02871 -1.07% -3.30% -8.77% 0.03396 0.02775 4 10 Singapore dollar 0.65665 -1.09% -7.29% -10.83% 0.7434 0.6512 6 11 Russian ruble 0.03638 -1.20% -11.31% -14.28% 0.04334 0.03607 8 12 Japanese yen 0.01045 -1.88% 14.96% 7.99% 0.011 0.00872 1 13 Swedish krona 0.12265 -3.26% -22.40% -27.78% 0.1718 0.1172 12 14 Brazilian real 0.42027 -3.71% -32.09% -30.57% 0.6414 0.394 15 15 Swiss franc 0.82386 -4.20% -9.54% -15.67% 1.0375 0.813 7 16 New Zealand dollar 0.53719 -4.62% -24.26% -31.60% 0.8214 0.519 13 17 British pound 1.49797 -5.08% -19.18% -24.35% 2.0831 1.4556 10 As of Nov. 25 *based on one-month gain/loss ACCOUNT BALANCE Rank Country 2007 Ratio* 2006 2008+ Rank Country 2007 Ratio* 2006 2008+ 1 Singapore 41.395 27 36.288 42.208 13 Mexico -6.368 -0.7 -2.425 -10.588 2 Switzerland 65.534 15.8 58.708 64.106 14 France -39.363 -1.6 -27.712 -48.885 3 China 379.162 11.7 249.866 453.146 15 India -23.131 -2.1 -9.503 -32.301 4 Hong Kong 22.796 11.2 20.586 20.456 16 UK -96.687 -3.5 -77.236 -105.144 5 Netherlands 55.891 7.4 8.6 6.7 17 Australia -50.816 -5.7 -41.49 -52.988 6 Taiwan 25.402 6.8 24.661 28.365 18 U.S. -784.341 -5.7 -811.483 -788.293 7 Sweden 25.903 6 27.707 25.584 19 South Africa -18.495 -6.7 -16.608 -19.237 8 Russia 72.543 5.9 95.322 49.181 20 Spain -138.916 -9.8 -106.399 -154.849 9 Germany 175.371 5.4 147.134 174.137 Totals in billions of U.S. dollars 10 Japan 195.904 4.5 170.437 195.145 *Account balance in percent of GDP +Estimate 11 Canada 25.603 1.8 20.792 17.909 Source: International Monetary Fund, 12 Brazil 10.253 0.8 13.276 4.299 World Economic Outlook Database, October 2008 34 December 2008 • CURRENCY TRADER

NON-U.S. DOLLAR FOREX CROSS RATES Currency 1-month 3-month 6-month 52-week 52-week Rank pair Symbol Nov. 25 gain/loss gain/loss gain/loss high low Previous 1 Aussie $ / Pound AUD/GBP 0.424 6.97% -9.40% -12.56% 0.4895 0.3786 12 2 Canada $ / Pound CAD/GBP 0.52954 6.11% 2.66% 3.69% 0.5539 0.482 8 3 Aussie $ / Franc AUD/CHF 0.77088 5.98% -19.09% -21.60% 1.0095 0.712 15 4 Aussie $ / Yen AUD/JPY 60.78541 3.52% -36.31% -38.75% 104.448 55.1876 20 5 Canada $ / Yen CAD/JPY 75.90186 2.63% -27.86% -27.40% 116.404 72.8508 18 6 Euro / Yen EUR/JPY 121.491 2.19% -25.41% -25.47% 169.958 113.614 17 7 Real / Pound BRL/GBP 0.28069 1.46% -15.99% -8.22% 0.339 0.2441 10 8 Aussie $ / Euro AUD/EUR 0.50035 1.25% -14.65% -17.85% 0.6278 0.4725 13 9 Franc / Pound CHF/GBP 0.5502 0.93% 11.93% 11.51% 0.5734 0.4173 3 10 Aussie $ / Canada $ AUD/CAD 0.80134 0.83% -11.76% -15.69% 0.9833 0.7568 11 11 Canada $ / Euro CAD/EUR 0.62491 0.44% -3.28% -2.58% 0.7053 0.6164 7 12 Real / Yen BRL/JPY 40.23267 -1.87% -40.96% -35.74% 69.3981 39.1567 19 13 Franc / Yen CHF/JPY 78.87112 -2.37% -21.33% -21.93% 105.071 76.196 14 14 Pound / Yen GBP/JPY 143.415 -3.19% -29.70% -29.96% 230.35 137.608 16 15 Real / Euro BRL/EUR 0.33124 -3.97% -20.85% -13.77% 0.4197 0.3124 9 16 Real / Canada $ BRL/CAD 0.53048 -4.36% -18.18% -11.51% 0.6719 0.4726 6 17 Franc / Euro CHF/EUR 0.64937 -4.44% 5.49% 4.92% 0.6992 0.5977 2 18 Franc / Canada $ CHF/CAD 1.03992 -4.85% 8.99% 7.48% 1.1152 0.852 1 19 Real / Aussie $ BRL/AUD 0.66247 -5.16% -7.31% 4.92% 0.7391 0.6196 4 20 Pound / Euro GBP/EUR 1.18079 -5.34% -5.78% -6.04% 1.4104 1.1541 5 GLOBAL STOCK INDICES 1-month 3-month 6-month 52-week 52-week Rank Country Index Nov. 25 gain/loss gain/loss gain/loss high low Previous 1 Brazil Bovespa 34,813.00 18.27% -36.10% -51.40% 73,920.00 29,435.00 13 2 Hong Kong Hang Seng 12,878.60 16.91% -38.98% -46.62% 29,962.90 10,676.30 14 3 Japan Nikkei 225 8,323.93 16.21% -35.37% -39.20% 16,107.70 6,994.90 15 4 Mexico IPC 19,297.63 14.25% -26.95% -38.37% 32,292.90 16,480.00 10 5 South Africa FTSE/JSE All Share 20,263.10 10.34% -24.12% -38.08% 33,232.89 17,814.42 3 6 UK FTSE 100 4,171.30 8.27% -23.75% -31.15% 6,610.90 3,665.20 2 7 Germany Xetra Dax 4,560.42 5.21% -27.58% -34.42% 8,117.79 4,014.60 9 8 France CAC 40 3,209.56 4.64% -26.32% -35.00% 5,795.22 2,838.50 5 9 Italy MIBTel 15,406.00 3.73% -28.49% -39.14% 30,403.00 14,358.00 7 10 Singapore Straits Times 1,653.25 3.31% -39.52% -46.73% 3,621.84 1,473.77 11 11 India BSE 30 8,695.53 2.19% -39.82% -46.81% 21,206.80 7,697.39 12 12 U.S. S&P 500 857.39 1.00% -32.32% -38.11% 1,523.57 741.02 6 13 Switzerland Swiss Market 5,478.40 -0.41% -22.43% -25.60% 8,918.80 5,034.40 1 14 Canada S&P/TSX composite 8,442.86 -1.11% -36.47% -42.79% 15,154.80 7,647.11 8 15 Australia All ordinaries 3,575.40 -5.12% -29.76% -38.43% 6,741.40 3,201.50 4 GLOBAL SHORT-TERM INTEREST RATES Country Interest rate Rate (%) Last change May 08 Nov. 07 U.S. Fed funds rate 1 0.5 (Oct. 08) 2 4.5 Japan Overnight call rate 0.3 0.2 (Oct. 08) 0.5 0.5 Eurozone Refi rate 3.25 0.5 (Nov. 08) 4 4 UK Repo rate 3 1.5 (Nov. 08) 5 5.75 Canada Overnight funding rate 2.25 0.25 (Oct. 08) 3 4.5 Switzerland 3-month Swiss Libor 1 1.00 (Nov. 08) 2.75 2.75 Australia Cash rate 5.25 0.75 (Nov. 08) 7.25 6.75 New Zealand Cash rate 6.5 1.00 (Oct. 08) 8.25 8.25 Brazil Selic rate 13.75 0.75 (Sept. 08) 11.75 11.25 Korea Overnight call rate 4 0.25 (Nov. 08) 5 5 Taiwan Discount rate 2.75 0.25 (Nov. 08) 3.5 3.25 India Repo rate 7.5 0.50 (Nov. 08) 7.75 7.75 South Africa Repurchase rate 12 0.5 (June 08) 11.5 10.5 GLOBAL BOND RATES Rank Country Rate Nov. 25 1-month 3-month 6-month High Low Previous 1 U.S. 10-year T-note 121.17 5.25% 3.73% 4.89% 122.47 111.15 2 2 Germany BUND 120.83 3.20% 5.40% 6.72% 121.48 109.65 1 3 UK Short sterling 96.71 1.42% 2.63% 2.74% 96.98 93.595 5 4 Japan Government Bond 139.31 0.93% 0.77% 3.73% 141.9 132.09 3 5 Australia 10-year bonds 95.315 0.25% 1.14% 1.97% 95.50 93.18 4 CURRENCY TRADER • December 2008 35

INTERNATIONAL MARKETS continued Gross Domestic Product* Release 1-year Next Release 1-year Next Period date Change change release Period date Change change release AMERICAS AFRICA Argentina Q2 9/17 20.0% 24.2% 12/18 S. Africa Q3 11/25 4.1% 15.5% 2/24 Brazil Q2 9/10 7.7% 12.9% 12/99 Canada Q3 12/1 1.2% 6.3% 3/2 ASIA AND SOUTH PACIFIC EUROPE Australia Q2 9/3 0.3% 2.7% 12/3 France 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 Q2 9/30 0.4% 4.4% 12/23 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 Unemployment Release 1-year Next Release 1-year Next Period date Rate Change change release Period date Rate Change change release AMERICAS Argentina Q2 9/22 8.0% -0.4% -0.5% 12/22 ASIA AND SOUTH PACIFIC Brazil Oct. 11/19 7.5% -0.1% -1.2% 12/19 Australia Oct. 11/6 4.3% 0.0% 0.0% 12/6 Canada Oct. 11/7 6.2% 0.1% 0.4% 12/5 Hong Kong Aug-Oct. 11/18 3.5% 0.1% -0.4% 12/18 EUROPE Japan Oct. 11/28 3.7% -0.3% -0.3% 12/26 France Q2 9/4 7.6% 0.0% -0.8% 12/4 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 July-Sep. 11/12 5.8% 0.4% 0.5% 12/17 CPI Release 1-year Next Release 1-year Next Period date Change change release Period date Change change release AMERICAS AFRICA Argentina Oct. 11/11 0.4% 8.4% 12/10 S. Africa Oct. 11/26 0.0% 12.1% 12/17 Brazil Oct. 11/7 0.5% 6.4% 12/5 Canada Oct. 11/21 -1.0% 2.6% 12/19 ASIA AND SOUTH PACIFIC EUROPE Australia Q3 10/22 1.2% 5.0% 1/28 France Oct. 11/13 -0.1% 2.7% 12/16 Hong Kong Oct. 11/20 0.4% 1.8% 12/22 Germany Oct. 11/14 -0.2% 2.4% 12/17 India Oct. 11/28 1.4% 10.5% 12/31 UK Oct. 11/18 -0.2% 4.5% 12/16 Japan Oct. 11/28 -0.1% 1.7% 12/26 Singapore Oct. 11/24 1.0% 6.4% 12/23 PPI Release 1-year Next Release 1-year Next Period date Change change release Period date Change change release AMERICAS AFRICA Argentina Oct. 11/11 0.6% 11.2% 12/10 S. Africa Oct. 11/27 -0.5% 14.5% 12/18 Brazil Oct. 11/6 1.4% 14.7% 12/8 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 Oct. 11/28 -0.4% 2.8% 12/22 Hong Kong Q2 9/12 1.7% 6.6% 12/12 Germany Oct. 11/20 0.0% 7.8% 12/19 India Oct. 11/7 -0.9% 11.0% 12/12 UK Oct. 11/10 -0.1% 6.8% 12/8 Japan Oct. 11/13 -1.6% 4.8% 12/10 Singapore Oct. 11/28 -8.7% 0.0% 12/30 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate. As of Dec. 1 36 December 2008 • CURRENCY TRADER

FOREX NEWS INDUSTRY NEWS Central banks continue to cut rates I n the battle to free up liquidity and jump start economies, central banks have liberally deployed their main weapon: lowering interest rates. The U.S. Federal Open Market Committee (FOMC) cut the fed funds rate to 1 percent in October, its lowest point counteract the financial shakiness that followed the bursting of the dot-com bubble and the Sept. 11 terrorist attacks. It is ironic that this easing policy, which has been at least partially blamed for abetting the housing bubble and mortgage crisis, through several dramatic turns of events has since June 2004. At that time the rate had held at 1 percent landed us in our current recession. Some wonder whether for a year, capping an extended easing cycle intended to the Fed might cut rates again, perhaps even to zero, and debate the potential repercussions. “If you get lower interest rates, all Managed money: Barclay Trading Group’s the money market funds and [similar] currency trader rankings for October 2008 vehicles start to have lots of prob- Top 10 currency traders managing more than $10 million lems,” says Joseph Trevisani, chief as of Oc. 31, ranked by October 2008 return. market strategist for FX Solutions, a New Jersey-based online forex broker. 2008 $ Under “Its only going to lead to withdrawals, Rank Trading October YTD mgmt. which would be against the liquidity advisor return return (millions) and stability the Fed is trying to cre- 1. John W. Henry & Co. (Int’l. FX) 32.70% 68.85% 46.2 ate.” 2. Richmond Group (Gl. Currency) 14.86% 22.24% 39.0 Federal Reserve Chairman Ben 3. First Quadrant (Managed Currency) 9.67% 25.12% 478.3 Bernanke, speaking before the Greater Austin Chamber of Commerce in 4. Sunrise Cap’l Partners (Currency Fund) 8.55% 13.44% 29.0 5. Lambay Capital Limited (Short-term) 5.00% 5.05% 17.3 6. Mesirow Financial (Currency Alpha) 4.02% 5.17% 1302.1 The current recession 7. IPM Global Currency Fund (A) 3.72% 28.29% 157.0 8. Alder Cap’l (Alder Global 20) 3.70% 4.00% 165.0 is already longer than all 9. ACT Currency Partner AG 3.67% 9.31% 20.0 10. Dominion Capital Mgmt. (FX) 3.62% 0.86% 10.0 but two of the economic Top 10 currency traders managing less than $10 million and more than $1 million as of Oct. 31, ranked by October 2008 return. downturns the 1. Alt-FX (AMF 1) 43.39% 18.43% 4.5 2. Putnam Currency Alpha Fund 22.83% 9.05% 1.9 U.S. economy has 3. Forex Cap’l Mkts (Sentiment) 15.35% -2.05% 2.7 4. Forex Cap’l Mkts (Sentiment Aggr.) 15.21% -20.06% 5.7 experienced since 1945. 5. Spot Forex Mgmt. (Lausanne) 12.64% 34.90% 1.5 Austin, Texas on Dec.1, acknowledged 6. Aspect Capital (Gl. Currency) 6.82% -7.17% 7 a weak near-term economic outlook 7. Zone Cap’l FX Managed Account 6.56% 11.68% 1.3 and discussed the feasibility of an 8. Spot Forex Mgmt. (Zurich) 6.24% 16.56% 5 additional rate cut. Few expect the Fed 9. Absolute Asset Mgmt (Trading 1) 5.96% 5.69% 4.1 to cut rates to zero, and the broad 10. Marek D. Chelkowski (Forex) 5.72% 10.42% 4.1 impact of a 0.5- or 0.25-percent rate cut when the rate is already at 1 percent Source: BarclayHedge (http://www.barclayhedge.com) would likely be minimal. However, Based on estimates of the composite of all accounts or the fully funded subset method. Does not reflect the performance of any single account. that doesn’t mean some portions of the PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. financial community aren’t pulling for continued on p. 40 38 December 2008 • CURRENCY TRADER

CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s as of Nov. 28 liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. 10-day move / 20-day move / 60-day move / Volatility Market Symbol Exchange Volume OI % rank % rank % rank ratio/rank Eurocurrency EC CME 198.5 147.5 0.20% / 0% -1.94% / 11% -11.29% / 62% .15 / 25% Japanese yen JY CME 116.5 126.5 0.86% / 13% 2.86% / 33% 11.93% / 71% .19 / 0% British pound BP CME 67.8 109.9 4.76% / 100% -6.34% / 42% -13.03% / 66% .14 / 3% Swiss franc SF CME 35.2 39.8 -1.94% / 45% -6.36% / 96% -8.65% / 81% .20 / 22% Canadian dollar CD CME 32.0 92.2 -1.09% / 17% -2.15% / 35% -13.96% / 80% .21 / 8% Australian dollar AD CME 29.0 62.2 0.80% / 13% -3.26% / 14% -20.22% / 55% .14 / 10% U.S. dollar index DX ICE 4.8 37.6 -0.28% / 33% -0.10% / 0% 10.00% / 66% .22 / 28% Mexican peso MP CME 4.7 41.9 -2.07% / 36% -4.40% / 25% -21.58% / 59% .15 / 13% E-Mini eurocurrency ZE CME 3.6 2.4 0.20% / 0% -1.94% / 11% -11.29% / 62% .15 / 25% New Zealand dollar NE CME 1.0 18.6 -2.37% / 13% -7.13% / 56% -18.33% / 81% .16 / 3% 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. LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to today’s close. 20-day move: The percentage price move from the close 20 days ago to today’s close. 60-day move: The percentage price move from the close 60 days ago to today’s close. The “% rank” fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for 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. This information is for educational purposes only. Currency Trader provides this data in good faith, but assumes no responsibility for the use of this information. Currency Trader does not recommend buying 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. CURRENCY TRADER • December 2008 39

FOREX NEWS continued FIGURE 2 — NZD/USD FIGURE 1 — AUD/USD The kiwi dollar plunged when such a cut. the Reserve Bank of New The Aussie dollar gained mod- Zealand cut rates on Dec. 1. “The one area where it [would have] a sub- estly after the RBA lowered stantial affect is the banking system, in the interest rates on Dec. 2. sense that it increases their profit margins,” Trevisani says. “That is one good reason to do it, and I think [the Fed] will.” On Monday, Dec.1 the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee anticlimactically announced the U.S. economy officially entered into a recession in December 2007. According to the bureau, which determines economic peaks and troughs based on numerous factors, including GDP, employment, and retail sales, the 12-month-and-counting recession is already longer than all but two of the economic downturns the U.S. economy has experienced since 1945. Cutting rates abroad Source: eSignal Source: eSignal The dire need to stimulate spending has caused central banks around the world to continue cutting Combined with the Australian central bank’s four previ- rates, a process that began in earnest just a few months ago ous rate cuts beginning in September, the target cash rate in with coordinated rate cuts by several major central banks. Australia has dropped a full 3 percent to its lowest point The Reserve Bank of Australia (RBA) announced a 1-per- since December 2001. The RBA didn’t cut rates once cent rate cut to 4.25 percent on Dec. 2 and on the following between then and September 2008. day the Aussie dollar gained 0.8 percent against the U.S. New Zealand’s central bank cut its cash rate a record 1.5 dollar. Figure 1 shows the Australian dollar/U.S. dollar pair percent to 5 percent on Dec. 4. According to the Reserve (AUD/USD) from the beginning of November through Bank of New Zealand’s statement regarding the cut, one of Dec. 3, the day after the rate announcement. Since June the the biggest reasons they chose to decrease the rate stemmed Aussie dollar has lost 32.3 percent against the U.S. dollar. from the continued economic slowdown of the nation’s Three good tools for targeting customers . . . — CONTACT — Bob Dorman Allison Chee Mark Seger Ad sales East Coast and Midwest Ad sales West Coast and Southwest Account Executive bdorman@activetradermag.com achee@activetradermag.com seger@activetradermag.com (312) 775-5421 (415) 272-0999 (312) 377-9435 40 December 2008 • CURRENCY TRADER

trade partners. to a record low of 34.3 in November, while the countries’ “Economic activity in New Zealand will be further con- services also fell to a record low of 40.1. strained as a result,” Reserve Bank Governor Alan Bollard In a surprise move, the Swedish central bank moved its said. The New Zealand dollar lost 3.5 percent against the December meeting up two weeks to address the worsening U.S. dollar on Dec. 1 (Figure 2). economic situation in its country. The Swedish Riksbank The economic downturn in Europe accelerated in reduced its repo rate a massive 1.75 percent on Dec. 4. In a November, prompting the Bank of England (BOE) and the press release the bank stated it expected to hold at that level European Central Bank (ECB) to make major interest-rate through next year. cuts. On Dec. 4 the ECB cut rates 0.75 percent to 2.5 percent, while the BOE cut its rate 1 percent to 2 percent the same day. The UK’s manufacturing index fell ICE millions T he Intercontinental Ex- change’s (ICE) “Millions” currency futures have been slowly increasing in popularity since their introduction to the exchange on Nov. 6. The contracts, which represent 10 times the notional value of the ICE’s other forex futures contracts (roughly one million units of the base currency), are traded on 12 major currency pairs, including Euro/U.S. dollar (IEO), British pound/U.S. dollar (IMP), and U.S. dollar/Japanese yen (IEJ). The entire suite of Millions futures have traded 348 contracts per day on average since they were launched through Dec. 1. The most popular by far has been the Euro/U.S. dollar contract, which has accounted for 46 percent of the total volume in the group (six of the contracts have yet to trade). By contrast, the ICE’s most popular currency-pair futures contract, the Euro/Japanese yen (EJ), has average daily volume of 1,367 contracts so far in 2008. The exchange’s dollar index (DX) futures average around 5,000 contracts daily. However, because of the size of the contracts, the 5,971 total Millions contracts traded since their launch are equivalent in value to 59,710 standard FX futures. CURRENCY TRADER • December 2008 41

NEW PRODUCTS & SERVICES CMS Forex has released VT Trader 2.0. The new inter- TradeStation Securities launched TradeStation face sports large icon-based buttons and a new Quotes Scanner, a primary feature of TradeStation 8.4 that allows Board, which provides greater visibility of market move- users to scan, sort, and rank thousands of symbols by price, ment and lets traders place market orders and set stops, volume, or any of more than 500 fundamental data indica- limits, and price alerts. In addition, VT Trader has expand- tors to create custom symbol lists. They can further screen ed its arsenal of analytical tools with Traders Guardian, a symbols using their own custom EasyLanguage analytical collection of tools to gauge and analyze risk levels. It offers techniques for a variety of time intervals, from tick-by-tick access to Dow Jones FX Select, a live newsfeed providing to monthly. Further functions include a “scan wizard” that clients with real-time market news, economic indicators, walks users through the process of creating and saving the and Dow Jones columns and rolling market commentary results of their scans; the ability to link scans run on a broad such as Dow Jones FX MarketTalk. For more information, universe of symbols to those run on a smaller list of sym- visit http://www.cmsfx.com/en/trading-software. bols using more precise scanning logic; an “Added/Dropped” tab that displays all symbols that have eSignal has released eSignal OnDemand, a charting been added or dropped from the previous scan; and the application featuring end-of-day market data and delayed ability to place orders from scan results. intraday snapshots with no exchange fees. eSignal OnDemand offers research tools such as eSignal Formula CQG, Inc. and NH Investment & Futures have Script (EFS) to create, modify, and backtest studies and partnered, allowing CQG to provide trading connectivity to replay data to support strategies; advanced charting with the CME Group, ICE U.S., KRX, NYMEX/COMEX, and analytics, backtesting, and the ability to program cus- SGX exchanges. This partnership allows NH Investment & tomized studies; plus the standard eSignal product fea- Futures to offer CQG’s professional trading software to tures. eSignal OnDemand clients can access up to 15 years clients and traders in the U.S., Europe, Australia, and Asia. of historical data, updated whenever they open the appli- Customers clearing through NH Investment & Futures will cation. In addition to end-of-day quotes, eSignal have access to CQG’s decision-making tools, consolidated OnDemand users receive non-streaming current delayed market data, and electronic trading via the CQG Trader and market data and prices. Integrated Client platforms. Charles Schwab has enhanced its StreetSmart.com- trading platform. The upgrades include bracket order tech- Note: New Products and Services is a forum for industry businesses to nology, customizable trading alerts, and advanced charting announce new products and upgrades. Listings are adapted from press releas- tools. For more information about StreetSmart.com and the es and are not endorsements or recommendations from the Active Trader active trading services at Charles Schwab, visit Magazine Group. E-mail press releases to editorial@currencytradermag.com. http://www.schwabat.com. Publication is not guar EVENTS Event: The World Money Show Event: Live Trading Software and Trading Expos Date: Feb. 4-7 Location: Orlando Date: April 5-7 Location: Miami Date: March 17-19 Location: Hong Kong Date: June 7-9 Location: Houston Date: May 11-14 Location: Las Vegas For more information: http://livetradingexpo.com For more information: Go to http://www.moneyshow.com and click on “Events” Event: The 15th Forbes Cruise for Investors Date: June 2-14 Event: International Trader’s Expo Location: Lisbon to Venice Date: Feb. 21-24 For more information: Go to Location: New York, New York http://www.moneyshow.com and click on “Events” For more information: http://www.tradersexpo.com Event: International Trader’s Expo Event: 25th Annual Risk Management Conference Date: June 3-6 Date: March 8-10 Location: Los Angeles Location: The Ritz-Carlton, Laguna Niguel, For more information: http://www.tradersexpo.com Dana Point, Calif. For more information: http://www.cboermc.com 42 December 2008 • CURRENCY TRADER

GLOBAL ECONOMIC CALENDAR DECEMBER/JANUARY Legend December 18 U.S.: November leading indicators LTD (last trading day): The final Hong Kong: September-November day trading can take place in a 1 U.S.: November ISM employment report futures or options contract. Canada: Q3 GDP FDD (first delivery day): The S. Africa: November PPI first day on which delivery of a 2 Australia: Reserve bank board 19 Brazil: November employment commodity in fulfillment of a meeting report futures contract can take place. FND (first notice day): Also 3 Australia: Q3 GDP Canada: November CPI Germany: November PPI known as first intent day, this is 4 France: Q3 employment report Hong Kong: Q3 GDP the first day on which a clearing- ECB: Governing council meeting house can give notice to a buyer Japan: Bank of Japan monetary of a futures contract that it 5 U.S.: November employment report policy meeting intends to deliver a commodity in Brazil: November CPI Mexico: November employment fulfillment of a futures contract. Canada: November employment report The clearinghouse also informs report the seller. 20 CPI: Consumer price index LTD: December U.S. dollar index ECB: European Central Bank options (ICE); December currency 21 options FOMC: Federal Open Market 22 France: November PPI Committee 6 Hong Kong: November CPI GDP: Gross domestic product ISM: Institute for supply 7 23 UK: Q3 GDP management 8 Brazil: November PPI 24 U.S.: November personal income PMI: Purchasing managers UK: November PPI and durable goods index PPI: Producer price index 9 Brazil: Q3 GDP 25 Canada: Central bank interest-rate Economic Release time announcement 26 Japan: November employment release (U.S.) (ET) report and CPI GDP 8:30 a.m. Mexico: November PPI CPI 8:30 a.m. S. Africa: Q3 employment report 27 ECI 8:30 a.m. 10 Brazil: Central bank policy meeting 28 PPI 8:30 a.m. Japan: November PPI ISM 10:00 a.m. 29 Unemployment 8:30 a.m. 11 U.S.: October trade balance 30 Personal income 8:30 a.m. Australia: November employment Durable goods 8:30 a.m. report 31 India: November CPI Retail sales 8:30 a.m. S. Africa: Reserve bank monetary Trade balance 8:30 a.m. policy meeting Leading indicators 10 a.m. 12 U.S.: November PPI and retail sales January DECEMBER 2008 Hong Kong: Q3 PPI 1 30 1 2 3 4 5 6 India: November PPI 2 U.S.: December ISM and 7 8 9 10 11 12 13 13 employment report 14 15 16 17 18 19 20 14 3 21 22 23 24 25 26 27 28 29 30 31 1 2 3 15 FND: December currency futures 4 LTD: December U.S. dollar index futures (ICE); December currency 5 January 2009 futures 6 Canada: November PPI 28 29 30 31 1 2 3 16 U.S.: FOMC meeting; November 7 Germany: November employment 4 5 6 7 8 9 10 CPI and housing starts report 11 12 13 14 15 16 17 France: November CPI UK: November CPI 8 Mexico: December PPI 18 19 20 21 22 23 24 25 26 27 28 29 30 31 FND: U.S. dollar index futures (ICE) 9 Canada: December employment report 17 Germany: November CPI India: December PPI The information on this page is S. Africa: November CPI LTD: January U.S. dollar index subject to change. Currency UK: Q3 employment report Trader is not responsible for options (ICE) the accuracy of calendar dates beyond press time. December 2008 • CURRENCY TRADER 43

THIS MONTH’S ADVERTISERS Click on these boxes to link directly to these advertisers’ Web sites

ForexTradingMagazinedec08

0 comments

Notes on slide 1

Favorites, Groups & Events