Strategies, analysis, and news for FX traders
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
and the dollar p. 16
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
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.
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4 December 2008 • CURRENCY TRADER
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
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 coor-
dinated 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
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 correc-
tions 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
“[But Greece] only accounts for a
very small percentage of total GDP
(about 2 percent), and a bigger influ-
ence 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 imple-
ment 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 trad-
ing 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 previ-
ous rules of thumb at the door.”
Also, the forex market is not operating
in a bubble.
“The biggest direct influence on curren-
cies during the last several months has
been the performance of asset markets,”
says Chris Furness, head of currency strat-
egy 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,
“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.”
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 cen-
tral 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
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
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 proj-
ects in an environment of an invest-
ment boom. Effectively the Chinese
authorities will now be squeezing a
5-year capital works program into
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
But as early as August in the wake
of the Olympics, Chinese demand
began to slow. Pressler says month-
ly Chinese imports stood at $111.5
billion in July, but preliminary fig-
ures 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 industrial-
ized nations, the Peoples Bank of
China (PBOC) has been in a mone-
tary easing cycle. However, the
PBOC, unlike the U.S. Federal
Reserve, is not an independent mon-
etary authority, but instead simply
another managed arm of the gov-
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 dol-
lar 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
The dollar must
continue to attract
buyers of U.S.
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 capi-
tal 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
• Demand destruction the devaluative brunt of a crisis,
• 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 sec-
tor 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 down-
sizing, 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
And that’s the critical point
— new crises that might come
down the pike. Restoring con-
fidence 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”
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
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
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,
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
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-
tively, per currency pair.
Figure 1 shows the median five-day performance follow-
ing inside days (in all seven pairs) that closed in the top 20
percent of the day’s range and those that closed in the bot-
tom 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 cur-
rency pairs that showed the most consistent
results in Table 1 — USD/CAD and
Table 2 lists the number of inside-day pat-
terns 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 medi-
an 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
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 per-
formance after down-closing inside days.
Both markets lost ground after up-closing
inside days as USD/CAD slipped an aver-
age 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 exam-
ple, 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
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
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.
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
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
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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
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
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 paral-
lel 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 cur-
rency 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 econo-
my 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 interest-
ing 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 perform-
ance, Pt. II,” Currency Trader, May
2008). We can create a relative per-
formance 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 perform-
ance 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