PLAYING THE AUSSIE DOLLAR CONSOLIDATION P.

33
Strategies, analysis, and news for FX traders

January 2012 Volume 9, No. 1

FX winners and losers: 2012 outlook p. 6 The grim implications of the dollar carry trade p. 22 2011s FX lessons for 2012 p. 12 Swinging with outside bars in the pound/dollar p. 18

CONTENTS

Contributors .................................................4 Global Markets Slower global growth in 2012, but recession unlikely .......................................6
Eurozone remains key risk as a new year of forex trading unfolds. By Currency Trader Staff

Events .......................................................28
Conferences, seminars, and other events.

Currency Futures Snapshot ................. 29 Managed Money Review ....................... 29

Top-ranked managed money programs

On the Money............................................12 The curious events of 2011 and what they mean for 2012
Several strange things happened in the markets during 2011. By examining them, we might be able to make some useful deductions regarding 2012. By Barbara Rockefeller

International Markets ............................ 30

Numbers from the global forex, stock, and interest-rate markets.

Forex Journal ...........................................33

Trading a triangle consolidation.

Trading Strategies Outside weeks in the British pound ....... 18

A potential longer-term swing opportunity emerges from the mostly haphazard performance after outside weeks in the pound/dollar pair. By Currency Trader Staff

Looking for an advertiser?

Click on the company name for a direct link to the ad in this months issue. eSignal FXCM Nadex

Advanced Concepts The long, awful life of the dollar carry trade...................................... 22
A failure to maintain the return on the dollar will inevitably lead to the end of its status as the worlds principal reserve currency. By Howard L. Simons

Global Economic Calendar ........................ 28

Important dates for currency traders.

Questions or comments?
Submit editorial queries or comments to [email protected]
2 January 2012 CURRENCY TRADER

CONTRIBUTORS

PLAYING THE AUSSIE DOLLAR CONSOLIDATION P. 33

Strategies, analysis, and news for FX traders

A publication of Active Trader

January 2012 Volume 9, No. 1

For all subscriber services:

www.currencytradermag.com

Editor-in-chief: Mark Etzkorn [email protected] Managing editor: Molly Goad [email protected] Contributing editor: Howard Simons

FX winners and losers: 2012 outlook p. 6 The grim implications of the dollar carry trade p. 22 2011s FX lessons for 2012 p. 12 Swinging with outside bars in the pound/dollar p. 18

Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green [email protected]

President: Phil Dorman [email protected] Publisher, ad sales: Bob Dorman [email protected] Classified ad sales: Mark Seger [email protected]

q Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on a wide range of economic and financial market issues.

Volume 8, Issue 12. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2011 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. 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 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.

q Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund.

January 2012 CURRENCY TRADER

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GLOBAL MARKETS

Slower global growth in 2012, but recession unlikely

Eurozone remains key risk as a new year of forex trading unfolds.

BY CURRENCY TRADER STAFF

At the start of the new year, the global economy faces several challenges, the prime one being the ongoing uncertainty surrounding the European sovereign-debt crisis. Some economists argue the Eurozone is already in a mild recession, which will likely have a spillover effect on its trading partners and ultimately slow global growth. The worst-case scenario is for a disorderly breakup of the FIGURE 1: U.S. DOLLAR INDEX

Eurozone a lingering black cloud on the global horizon despite its relatively low probability. Elsewhere, slowing growth and rising inflation in emerging market economies present another challenge to the global economy. Then there are the uncertainties surrounding the pace of the U.S. economic recovery and whether or not the U.S. Fed will initiate a third round of quantitative easing, a so-called QE3 campaign. In the forex arena, the U.S. dollar index (DXY) rallied smartly in late 2011 about 10 percent off its May lows into year-end, with the bulk of those gains occurring in the final two months of the year (Figure 1). The major debates at the outset of the new year are whether that rally can be sustained, if the Euro will rebound, and how other currencies are likely to perform in 2012.

Still growing, but

Driven by safe-haven buying, the U.S. dollar made strong gains in late 2011.
Source: TradeStation

At the global level, most analysts seem to agree the economy will continue to move forward, albeit at something less than a full gallop. The world economy will
January 2012 CURRENCY TRADER

keep on expanding in 2012, but at a slower pace than 2011 and 2010, says Decision Economics chief global economist Dr. Allen Sinai, who forecasts global GDP in the 2.5 to 2.75 percent range in 2012. According to the International Monetary Fund (IMF), global economic output totaled 5.1 percent in 2010, following the -0.7-percent recessionary reading in 2009. Nomura pegs 2011s global economic growth at 3.8 percent, but expects a decline to 3.2 percent for 2012. There remains a two-track global economy, with emerging economies growing at a much faster pace than developing economies. Nomura estimates emerging economies grew at a 6.6-percent rate in 2011, compared to a 1.5-percent growth pace for developing economies. Asia continues to post the strongest GDP growth, which Nomura estimates at 8.1 percent for 2011. Latin America also remains strong at an estimated 2011 pace of 4.3 percent. Meanwhile, the U.S. and the Eurozone lag far behind, coming in at 2.5 percent and 1.9 percent, respectively, for the year. Theres nothing on the horizon to disrupt that trend in the coming year, for a very simple reason. By far the strongest growth will be coming out of emerging markets, says Michael Woolfolk, managing director at BNY Mellon. Thats the manufacturing base of the world right now. But as has been the case for the better part of the year, all predictions of global economic health circle back to Europe. Jay Bryson, global economist at Wells Fargo, agrees the global economy will continue to grow in 2012, assuming Europe doesnt blow up. Although Bryson says the European crisis remains the global economys biggest risk, he pegs the odds of a disorderly collapse of the Eurozone at less than 50 percent. But we dont think its tail risk, either, he says. What you are dealing with is politics. And politics is always an uncertain game. The market is impatient for some kind of resolution, and has had mixed reactions to the steps European politicians have announced thus far. In its 2012 Global Economic Outlook, Nomura economists wrote, We expect the Eurozone to enter recession and growth in the rest of the world to slow. A disorderly breakup of the Euro represents a palpable risk to the global outlook: Europes leaders must act. Sinai also sees Europe as the main source of economic weakness. He forecasts a recession in the Eurozone at least through the first half of the year. Greece is in a depresCURRENCY TRADER January 2012

sion. Portugal is in a severe downturn, he notes. We are calling for Italy and Spain to be in recession, while Germany and France will continue to grow. Woolfolk says the top issue facing the global economy in 2012 is whether the Eurozone will emerge from the crisis as a political union or an economic union. That will determine the growth trajectory for the Eurozone, he says. Meanwhile, markets have responded haphazardly to the various announcements coming out of Europe, lurching from hope to renewed skepticism and back. I dont know how patient markets will be, Bryson warns. We could have a do-or-die moment where the European Central Bank president has his back against the wall and he either has to buy all outstanding Italian government debt or face a Eurozone blow-up. Woolfolk has a more pragmatic and positive take on the current situation. The thought of some low-probability event next year causing Armageddon is fantasy, he says. The worse-case scenario is what we have right now a lack of decision. Woolfolk expects some sort of resolution over the next couple months. By the end of February, we should have a good sense of [whats to come], he explains. When they decide what they want to be when they grow up, theyll see a return of capital to their markets. But they have to choose.

Surveying global economies

Moving around the globe, slower growth is forecast for China in 2012, but that could mean something closer to a 7-percent GDP pace, down from last years 9-percent level. Nomura forecasts Chinas GDP growth in 2012 at 7.9 percent, down from 9.2 percent in 2011. The other Asian powerhouse, India, is expected to remain steady at around 7.2 percent rate this year, after growing at a 7.3-percent pace in 2011. Japan is expected to return to growth with a 2.3-percent GDP forecast for 2012, following the earthquake- and tsunami-triggered recession that pushed 2011 GDP growth down to -0.3 percent. China is coming off an 11-percent pace [in recent years] that decline sends ripples through Asia, including South Korea and Singapore, Sinai says. He adds the strength in the global economy this year will come from Asia, excluding Japan. Asia is far stronger than any other part of the world, he says. Concerns Asia is growing too much, too soon seem to
7

GLOBAL MARKETS

have receded. A few months ago some emerging economies were starting to overheat, Bryson says. There was a risk China would overheat. But that doesnt seem to be a risk now. Growth is slowing and inflation is slowing. In general, a bright point globally is that food and oil prices have stabilized and come down in the past four to five months. Inflation pressures have dissipated around the world. The Latin American region also remains a powerhouse, and Sinai forecasts approximately 4-percent GDP growth for the region in 2012. In 2011, estimated GDP was 8 percent for Argentina, 3.2 percent for Brazil, 6.3 percent for Colombia, and 4.1 percent for Mexico, according to Nomura. The Australian and New Zealand economies are also expected to remain strong in 2012, in part due to their roles as commodity exporters to Asia, and also because of their fairly strong fiscal pictures. Nomura forecasts a 4-percent GDP pace for Australia in 2012 and a 3.3-percent pace for New Zealand. Despite its relative weakness, the United States could offer up a surprise, according to some analysts. Recent FIGURE 2: SINGAPORE DOLLAR

economic data has come in stronger than expected, including hopeful signals from the labor market. The U.S. looks poised to surprise on the upside, Sinai says. That will help support the world economy. Regarding Europe, Sinai says the primary risk is for the continent to fall into a severe recession and slow other economies down; he sees a one-in-five risk the world economy will fall into recession in 2012. Political and fiscal unity would be very difficult to achieve in a year and we dont think that will happen in 2012, he says. We could see a break-up of some sort some countries like Greece or Portugal voluntarily leaving, or some countries simply not signing on for the fiscal plan. Its a mess and that makes it tough to forecast and quantify.

Dollar reversal?

Asian currencies, including the SGD, may fare well in 2012. Source: TradeStation

Driven by the ongoing uncertainty in the Eurozone, the U.S. dollar has been riding higher amid a wave of risk aversion and safe-haven flows in recent months. A return to stability in Europe and risk appetite could mean a reversal in the recent dollar uptrend. The global uncertainty has been good for the dollar and will continue to be good for the dollar in the first half, says Greg Anderson, director of FX strategy at Citi. Sinai agrees safe-haven buying has been supporting the U.S. dollar, but says other bearish factors will likely re-emerge longer term. Our country has too many problems long-run growth problems, deficits, and politics, he says. Ultimately, the currencies follow economic performance and economic conditions of countries. The markets are good to the U.S. in times of stress, but if the negatives outside of the U.S. should resolve, the dollar could drop quite sharply. We have to be negative on the dollar.
January 2012 CURRENCY TRADER

FIGURE 3: CHINESE YUAN/RENMINBI

The Chinese currency could continue to appreciate this year.

Source: www.advfn.com

FIGURE 4: CANADIAN DOLLAR Nick Bennenbroek, head of currency strategy at Wells Fargo, expects progress on the Europe debt crisis, which should help broader financial markets stabilize. However, Anderson expects to see a slow shift away from the U.S. dollar as a safe haven. The creditworthiness of the dollar and the growth potential of the U.S. economy are second-rate, he says. Interest-rate issues and super-low Fed rates as far as the eye can see do not make the dollar very attractive. Anderson speculates the markets might look to Australia, Canada, and Norway as safe havens down the road.

Many analysts see bullish potential for the CAD, though not necessarily vs. the U.S. dollar.
Source: TradeStation

CURRENCY TRADER January 2012

GLOBAL MARKETS

Overall, there appear to be more bearish than bullish factors on the horizon for the U.S. Another potential driver in the second half of the year could be the U.S. presidential election. If we have a tightly contested election over control of Congress and the White House that kind of uncertainty could prove to be bearish for the dollar in the second half, Anderson says. There are an awful lot of decisions that need to be made right at the beginning of 2013 those [Super Committee-triggered] budget cuts start in January 2013, the Bush tax cuts expire, and the debt ceiling will be triggered and the new administration wont even be inaugurated yet.

Currency winners

According to Bennenbroek, stability in Europe would support global equity markets in 2012, which could help bolster certain currencies. He cites the Canadian dollar (CAD), New Zealand dollar (NZD), Brazilian real (BRL), and Korean won (KRW) as currencies that have shown sensitivity to equity market gains. In light of historical correlations, Bennenbroek sees 12-month upside targets of FIGURE 5: TOUGH ROW TO HOE FOR EURO

96.00 for CAD, 82.00 for the NZD, 1.78 for the BRL, and 1.075 for the KRW. Other potential bullish forex plays include Asian currencies. The Asian currencies are the most preferred, Sinai says. The region (plus Australia and ex-Japan) is bolstered by bullish economic fundamentals, attractive interest rates, long-run growth potential, and stable politics. For 2012, Sinai forecasts 10-percent gains for the Singapore dollar (SGD) and the KRW vs. the U.S. dollar (Figure 2), and a 3-percent gain for the Chinese yuan/renminbi (Figure 3). Anderson points to the Canadian dollar as the currency to watch in 2012 (Figure 4). The Canadian dollar could be one of the big winners in 2012, he says. The bullish factors are tied primarily to U.S. growth, which insulates it from Europe to a certain extent. It has excellent credit fundamentals. Also, of all the central banks it is probably the closest to tightening policy. Brian Dolan, chief currency strategist at Forex.com, also highlights the Canadian dollar as a potential winner. However, he adds it is likely to perform better against currencies other than the U.S. dollar, pointing to potential cross opportunities vs. the Swedish and Norwegian krone and the Euro. Buy Canada, sell NOK, sell Euro, buy Canada, he says.

Losers

The Euro still faces major headwinds in 2012.

Source: TradeStation

Almost everyone agrees the Euro will have a rough 2012 (Figure 5). The Euro is a clear loser, Sinai says. The uncertainty on how deep the downturn will be is a negative. The ECB will be lowering rates further, which is a negative for the currency, and the political uncertainty is also a negative. We expect the Euro to decline vs. the U.S. dollar in 2012 to the 1.20-1.15 area. He forecasts Euro weakness vs. a broad array of currencies
January 2012 CURRENCY TRADER

10

including the Singapore dollar, the Korean won, the Aussie Crystal ball and New Zealand dollars, and the Chinese yuan. Aside from the uncertainties of relatively known quantities Another potential bearish play is the Swiss franc, accord- in the markets, theres always the risk of the unknown and ing to Sean Callow, senior currency strategist at Westpac unknowable. Institutional Bank. To choose just one currency, I would Its hard to predict events like the Japan earthquake or be short the Swiss franc, he says. [The trade is] fairly the Arab Spring, but Im sure there will be some surprise simple and you know when youre wrong. The Swiss events, Anderson notes. National Bank (SNB) maintained its 1.20 floor on Euro/ These events are a reminder of how quickly things can Swiss franc (EUR/CHF, Figure 6) at the December policy change in world politics and markets. meeting, which disappointed some and pulled the pair Theres a whole host of risks in the geopolitical bucket, back under 1.22. This looks like a good opportunity to sell Bryson says. Theres Iran. What happens if we find out some Swiss franc vs. Euro but also potentially vs. the U.S. theyre a lot closer to nuclear weapons that we thought? dollar. Those who dont want to be long Euro vs. anything Does that mean F-16s are going to fly? If Iran shuts down can buy dollar/Swiss (USD/CHF), say, in the 0.93-0.94 its oil fields, oil prices would spike. What happens if the region. Arab Spring moves into Saudi Arabia? North Korea has Of Swiss fundamentals, Callow notes Switzerland is an unstable government who knows how that will play already experiencing deflation (core CPI -1 percent yearout. over-year in November), and theres little chance of resurDolan notes its unlikely significant trends will develop gent inflation given its sluggish economy and still very in the FX arena. strong currency. Also, he says the SNB forecasts assume It is a shorter-term environment, he says. People the market will drive the EUR/CHF rate higher in coming should remain short-term focused.y months. If it does not, they are highly likely to raise the EUR/ CHF floor again, a policy that suddenly restored a FIGURE 6: SWISS MISS great deal of credibility to the SNB after its failure at ad hoc intervention in preceding years, he says. I expect the floor to be raised to at least 1.25 no later than the March policy review and see 1.30 achievable by mid-year. Callow says EUR/USD bears can juice up their return on long EUR/CHF positions by choosing long USD/CHF (targeting at least 1.05, perhaps 1.10), with the dollar supported by bouts of safe-haven demand and probably the strongest growth profile in the G7. If the SNB leaves the floor at 1.20 or worse is unable to defend it, then of course we would The Swiss franc may offer shorting opportunities. exit the trade, he says.
Source: TradeStation

CURRENCY TRADER January 2012

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On THE MONEY ON the Money

The curious events of 2011 and what they mean for 2012
Several strange things happened in the markets during 2011. By examining them, we might be able to make some useful deductions regarding 2012.
BY BARBARA ROCKEFELLER

1. The strange case of the rising Euro

Analysts wonder when core fundamentals, such as inflation-adjusted relative growth rates, will reassert themselves in the forex market. But over the past year or two, the market has been beleaguered by risk-on/risk-off sentiment that has little connection to either inflation or growth rates, and institutional factors that logically should have impacted currencies one way instead caused the opposite effect. For example, in December 2011, Moodys placed 15 of 17

Eurozone members on credit watch for a possible downgrade, but the Euro did not fall. Earlier, on August 5, S&P downgraded U.S. sovereign debt and the dollar index rose 10 percent over the next six weeks. This may say more about the respect traders decline to bestow upon ratings agencies and less about the countries being rated, but its certainly an odd outcome. There really were fundamentals at work all along we just werent viewing them with a long enough telescope. Traders prefer to look at interest rates and central bank Barbara Rockefeller policy bias than at growth and inflaCurrency Trader Mag Jan 2012 Figure 1: EUR/USD (Monthly) tion. After all, its interest rates (and FIGURE 1: EUR/USD, MONTHLY expected interest rates) that express the fundamentals in a usable way. At year-end 2011, the consensus is 1.6 for the Euro to fall, possibly as low as 1.2000 or parity. The underlying 1.5 concept is that looming recession in 1.5 Europe is more likely to bring deflation than inflation in the coming year. 1.4 The European Central Bank (ECB) 1.4 is more likely to reverse the ruinous Trichet 2011 rate hikes than stand pat; 1.3 it might also institute its own version 1.3 of quantitative easing (QE). Quantitative easing has been the 1.2 single most important factor driving 1.2 the dollar for the past three years, simplistic or oversimplified as that 1.1 may seem when there have been so 1.1 many other shocking factors in the news, including U.S. government 1.0 M J ASOND2004 J ASOND2005 J ASOND2006 J ASOND2007 J ASOND2008 J ASOND2009 J ASOND2010 J ASOND2011 J ASOND2012 J ASOND2013 J AS AM AM AM AM AM AM AM AM AM AM gridlock, deep Eurogroup policy differences, and a potential slowdown in Since the 2008 crash, each big move in the EUR/USD pair can be linked to the China. Figure 1 is a monthly chart of U.S. engaging in quantitative easing or the ECB raising rates. Source: Chart Metastock; data Reuters and eSignal the Euro/U.S. dollar (EUR/USD) pair. The 2006 Euro rally was propelled at
January 2012 CURRENCY TRADER

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Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 2: Shanghai Composite (Red) vs. Nasdaq

FIGURE 2: SHANGHAI COMPOSITE (RED) VS. NASDAQ (BLACK)

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least in part by ECB rate hikes two within four months, including March 2006. The variable rate refi operation took rates from 2 percent in March to 3.5 percent in December. By March 2007 the rate was 3.75 percent and by July, 4.25 percent. In 2008 the ECB switched to the fixed-rate version and again rates were high (3.75 percent in October 2008). To show the bias of the ECB, it raised rates twice in 2011 (in April and July), even as the European economy was starting to show signs of contraction (www.ecb.int/stats/monetary/rates/html/index.en.html). Since the 2008 crash, each big move in the EUR/USD rate can be linked directly either to the U.S. engaging in QE or QE2, or the ECB raising rates. Although the first round of QE ended in October 2010, speculation was rife that another round was inevitable, and sure enough, in January 2011, the Fed admitted it might expand the program and in March 2011, it did. The power of QE to influence the dollar may have ended when the Fed announced on Dec. 15, 2011 that it had no plans to engage in further QE and rates would remain the same into mid-2013. And earlier in December, new ECB chief Mario Draghi began reversing the previous regimes rate hikes, cutting rates by 25 basis points. The ECB is already conducting a form of QE as it buys the sovereign debt of peripheral countries, most
CURRENCY TRADER January 2012

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Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 3: Nikkei 225 Stock Index

The Shanghai index bubble bears an eerie resemblance to the Nasdaq bubble.

FIGURE 3: NIKKEI 225 STOCK INDEX

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Japans Nikkei stock index has failed to recover its high from more than two decades ago.

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ON THE MONEY

Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 4: European Bear Markets Athens: Blue/Paris CAC: Black/Frankfurt DAX:Orange
770 760 750 740 730 720 710 700 690 680 670 660 650 640 630 620 610 600 590 580 570 560 550 540 530 520 510 500 490 480 470 460 450 440 430 420 410 400 390 380 370 360 350 340 330 320 310 300 290 280 270

FIGURE 4: EUROPEAN BEAR MARKETS ATHENS (BLUE), PARIS CAC (BLACK), FRANKFURT DAX (ORANGE)
6400 6300 6200 6100 6000 5900 5800 5700 5600 5500 5400 5300 5200 5100 5000 4900 4800 4700 4600 4500 4400 4300 4200 4100 4000 3900 3800 3700 3600 3500 3400 3300 3200 3100 3000 2900 2800 2700 2600 2500 2400 2300 2200 A S O N D 2007M A M J J A S O N D 2008M A M J J A S O N D 2009M A M J J A S O N D 2010M A M J J A S O N D 2011M A M J J A S O N D 2

Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 5: S&P 500 (Black) vs. Eurotop 300 (PurpleLeft Axis)

From its peak to close on Dec. 23, 2011, the Athens stock index was down 88 percent and still falling.

recently that of Spain and Italy. The ECB endeavors to sterilize these purchases, but is not always successful. In April 2011 and again in late November, the ECB failed to mop up liquidity in the seven-day repo to the same amount as the bond purchases. In November, the shortfall was a little more than 9 billion hardly at the Feds gigantic levels, but a warning all the same that central banks cannot control everything they seek to manage. With the Fed avowedly on hold for another year and the ECB engaging in rate cuts and stealth quantitative easing, its difficult to see how the Euro can avoid a third lower low on the monthly chart, possibly to near 1.0500.

FIGURE 5: S&P 500 (BLACK) VS. EUROTOP 300 (PURPLE, LEFT AXIS)
700 650 600 550 500 450 400 350 300 250 200 150 100 050 000 950 900 850 800 750 700 650 600 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1650 1600 1550 1500 1450 1400 1350 1300 1250 1200 1150 1100 1050 1000 950 900 850 800 750 700 650 600

2. Whats a bear market got to do with it?

The S&P 500 outperformed most global stock indices in 2011, but it is still tracking (highly correlated) to the Eurotop 300 on a long-term basis.

World equity markets are in bear market mode, meaning they are down 20 percent or more from peak levels (Figures 2-5). Figure 2 shows the Shanghai Composite with the Nasdaq tech wreck bubble spike from a few years earlier. All bubbles do not look alike (see the Nikkei bubble and burst in Figure 3), but the Shanghai index bubble sure looks like the Nasdaq bubble. The Nikkei fell from a peak of 38,957 at year-end 1,989 to 8,441 by Dec. 27, 2011. Just as the Nasdaq has not recovered its bubble high from more than a decade ago, the Nikkei has failed to recover its high in more than two decades. In Figure 4, the Greek Athens index failed to recover as much as the French CAC-40 or the German DAX index during 2010, and may have
January 2012 CURRENCY TRADER

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Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 6: 10-year Note Index (Black) vs. Dollar Index (BlueLeft Axis)

FIGURE 6: 10-YEAR NOTE INDEX (BLACK, RIGHT AXIS) VS. DOLLAR INDEX (BLUE, LEFT AXIS)
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led the other two down during 2011. From the peak to the close on Dec. 23, 2011, the Athens index was down 88 percent and still falling. The CAC fell 49 percent and the DAX 30 percent. And while the S&P 500 outperformed most global stock indices in 2011, it is still tracking (i.e., highly correlated to) the Eurotop 300 over the longer time frame (Figure 5). Some analysts speak of the U.S. equity markets as decoupling from the rest of the equity world and, because of good earnings and an improving economy, outperforming them in 2012. But as we have learned to our sorrow, a falling tide lowers all boats in a crisis. Real equity market fundamentals dont necessarily rule. For example, analysts say (assuming we want to accept earnings numbers from these companies) the price/ earnings ratio of the Shanghai index is around 10 to 11, well under the Shanghai historical norm (brief though it may be), and certainly under the U.S. benchmark of about 18. U.S. company earnings are quite good today but vulnerable to recession in Europe or a slowdown in China. Even if the U.S. equity markets outperform others in the coming year, universally declining equity prices send investors fleeing for safe havens, most prominently the U.S. dollar and U.S. Treasuries. Here again we are faced with one of the FX markets enduring perversities normally a falling yield is detrimental to a currency. Investors seek the highest real return except when they are seeking the safest parking place without regard to return. If equity prices continue to drop, we should assume Treasuries yields will
CURRENCY TRADER January 2012

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On a longer-term basis, a declining U.S. dollar index generally accompanies falling Treasury yields.
Barbara Rockefeller Currency Trader Mag Jan 2012 Figure 7: 10-year Note Index (Black) vs. Dollar Index Inverted Scale (BlueLeft Axis)
69.5 70.0 70.5 71.0 71.5 72.0 72.5 73.0 73.5 74.0 74.5 75.0 75.5 76.0 76.5 77.0 77.5 78.0 78.5 79.0 79.5 80.0 80.5 81.0 81.5 82.0 82.5 83.0 83.5 84.0 84.5 85.0 85.5 86.0 86.5 87.0 87.5 88.0 88.5 89.0 89.5 90.0 90.5 91.0 2008 Mar prMay unJul Aug OctNov A J Sep Dec2009 MarAprMay Jul Aug OctNov Sep Dec2010 MarAprMay JunJul Aug OctNov Sep Dec2011 MarAprMay JunJul AugSep OctNov 2 Dec

FIGURE 7: 10-YEAR NOTE INDEX (BLACK, RIGHT AXIS) VS. DOLLAR INDEX INVERTED SCALE (BLUE, LEFT AXIS)
45 44 43 42 41 40 39 38 37 36 35 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15

On the shorter time frame, falling yields are accompanied by a rising dollar the safe-haven effect.

15

ON THE MONEY

drop, too. The long time frame in Figure 6 shows how a falling yield brings with it a falling dollar index. But look again in the shorter time frame in Figure 7 with the dollar index inverted, falling yields are accompanied by a rising dollar, the safe-haven effect. So, as the new year progresses and you hear some equity analyst saying it is the U.S. stock market providing support to the dollar, you can blow a raspberry. Its not foreigners buying U.S. equities that may support the dollar, but fixed-income investors seeking a safe haven regardless of yield.

whole world is about to be consumed by inflation. And yet, on Aug. 23, 2011 gold peaked at $1,912.80 (futures basis) and has fallen ever since, if not in a straight line (Figure 8). The peak came about two weeks after the S&P downgrade of the U.S. sovereign rating, and gold has persistently dropped even as the ECB was buying Spanish and Italian bonds in December. Gold is falling despite the obvious unsustainability of having a European bailout fund rated triple-A and backed by countries (notably, France) in great danger of losing their own triple-A ratings. Something is going on. Its probably not central bank activity. More central banks (China) are buying than talking about selling. One idea is that gold is now being seen 3. Whats the role of gold? as just another risky commodity rather than the ultimate Gold has been a major source of entertainment over the safe haven. past few years. Golds appeal as a safe haven is underSo far the price of gold has fallen around 13 percent from standable, despite the silliness of calling it money when its peak to its Dec. 15 low of $1,565.60. In 2008, gold fell it cannot be used for actual transactions. If you believe from a peak of $1,033.90 (March 17) to $681 (Oct. 24), or 34 the Fed and Bank of England are unleashing the dogs of percent. If it were to mimic the last correction, it would fall hyperinflation with quantitative easing, then the traditional role of gold as an antidote to government perfidy makes to $1,262.45, or well below the trendline on Figure 8. We cannot expect a single past corrective move to be copied sense. Now that the ECB is also engaging in quantitative exactly, but we do know something about breakouts. High easing (even if it doesnt name it as such), and with the on the list is the application of Fibonacci retracement levels Bank Rockefeller of Japan having engaged in QE for years, surely the Barbara Currency Trader Mag Jan 2012 once a breakout is confirmed. On the Figure 8: Gold Continuous Most-Traded Futures Contract gold chart, the 38-percent retracement FIGURE 8: THE GOLD BUG lands at about $1,443, the 50-percent 2000 retracement around $1,295, and the 1950 1900 62-percent retracement around $1,154. 1850 1800 The retracement line that is closest to 1750 the one-time 34-percent correction in 1700 1650 2008 is the 50-percent version ($1,295 1600 1550 vs. $1,262). 1500 This is not a forecast. We want to 1450 1400 follow the gold price, because if the 1350 1300 correction continues to develop, fall1250 ing gold prices imply a rising dollar. 1200 1150 We already have a forecast of a rising 1100 dollar because of risk aversion driving 1050 1000 those seeking a safe haven into dollars 950 900 and Treasuries. We are so accustomed 850 to the inverse relationship of gold and 800 750 the dollar that we fail to consider that 700 650 down-trending gold because of risk 600 aversion actually makes more sense, 550 500 financially and economically. After all, 450 S O N D 2007M A M J J A S O N D 2008M A M J J A S O N D 2009M A M J J A S O N D 2010 A M J J A S O N D 2011M A M J J A S O N D 2012M A M J you cant use gold to buy shoes.y
0.0% 23.6% 38.2% 50.0% 61.8% 100.0%

A 50-percent retracement of the gold rally would take price down to around $1,295.

For information on the author, see p. 4.

16

January 2012 CURRENCY TRADER

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TRADING STRATEGIES

Outside weeks in the British pound

A potential longer-term swing opportunity emerges from the mostly haphazard performance after outside weeks in the pound/dollar pair.
BY CURRENCY TRADER STAFF

Basic price patterns such as outside bars (those with higher highs and lower lows than the bars preceding them) are attractive because theyre simple, easy to identify, and offer compelling stories. In the case of the outside bar, the story is absent any other contributing factors, of course it represents short-term uncertainty or discombobulation: Price has pushed both below the previous bars low and above its high, thus failing to establish any clear trend or bias between the two periods. The following analysis looks at what has happened after outside weekly bars in the British pound/U.S. dollar pair (GBP/USD) in recent years. The research revealed an FIGURE 1: ANALYSIS PERIOD

unexpected application of outside weeks in this currency pair as somewhat counterintuitive swing bars.

Outside weeks

The 1998-2011 analysis period had a very minor upside bias.

Figure 1 shows the pound/dollar rate during the analysis period (1998 through 2011), 13 years during which the pair staged a multi-year uptrend and a massive collapse that more than wiped it out in little more than 12 months. The pair ended the period a little below where it started it, but the regression line shows a slight upside bias for the entire span. Figure 2 shows the median and average returns in the 12 weeks after the 73 outside weeks (OW) that occurred during the analysis period. The returns are measured from the close of the outside week to the closes of each of the 12 subsequent weeks. Also included are the average and median one- to 12-week returns for all weeks during the analysis period. While the overall average returns (the black line, which barely deviates from the x-axis) are virtually flat for the 12-week horizon, the overall median returns (gray line) exhibit the minor upside bias shown in Figure 1, at least through week 8. Getting back to the performance after the outside weeks, the median (blue) and average (red) returns diverge dramatically. The average returns flit above and below the breakeven line before moving higher at week 6. Meanwhile, the median returns, aside from a spike into positive territory at week 4, are decidedly negative. Below the numbers designating weeks 1-12 on the x-axis are percentages (%>0)
January 2012 CURRENCY TRADER October 2010 CURRENCY

18

indicating how often the close of that week was higher weeks, the pound/dollar moved mostly lower until week than the close of the outside week for example, the close 5, at which point price mostly moved higher (although the was higher at week 1 only 46.58 percent of the time. Aside median return remained well below the pairs benchmark from week 4, the odds of a higher close were below 50 per- returns). Overall, the median and average returns are here cent at all intervals, and were as low as 39.73 percent (at more in agreement (in direction, if not magnitude) than week 8). in Figure 3. At all intervals except week 3 the odds of a The implication is clear: A smaller number of large up higher close were less than 50 percent. moves skewed the average returns higher, but the more representative FIGURE 2: ALL OUTSIDE WEEKS outcome at any interval was for a lower close after an outside week. Nonetheless, the divergent median and average returns after outside bars suggest these returns are simply a more volatile representation of the pound/ dollars ultimate trendlessness during this time window.

Higher and lower closes

The most basic parameter to add to an outside week is the location of its closing price a higher or lower close implying potential bullish or bearish sentiment. There are many ways to measure the placement of the close relative to a previous price point, relative to the same weeks opening price, and where it falls within the weeks range. In this case, we measured the close relative to the previous weeks close and whether it was above or below the opening price, and found little difference between the two Accordingly, in the following charts, a higher close (HC) refers to an outside week that closed higher than the previous week, while a lower close (LC) refers to the opposite. (Also, for clarity, in all subsequent charts, the overall market performance will be represented by the pound/dollars median return line.) Figure 3 shows the performance after the 38 instances of higher-closing outside weeks. The initial weeks are characterized by a bullish bias. The stable uptrend of the average line through week 8 is somewhat misleading; the median return line turns sharply lower after week five and subsequently plunges into negative territory, and by week 8 the odds of a higher close are less than 39 percent. Figure 4 presents the picture for lower-closing outside weeks and it is a surprisingly faithful inversion of Figure 3: After the 35 instances of these
CURRENCY TRADER January 2012

The somewhat positive average performance after outside weeks is offset by the much more negative median returns.

FIGURE 3: OUTSIDE WEEKS WITH HIGHER CLOSES

Initial minor bullishness after up-closing outside weeks disappears by week 8.

19

TRADING STRATEGIES

FIGURE 4: OUTSIDE WEEKS WITH LOWER CLOSES

Swinging both ways

Bearishness after down-closing outside weeks reverses after five weeks.

FIGURE 5: WEEK 5 LONG ENTRY

Bullishness prevails five to eight weeks after long entries five weeks after down-closing outside weeks.

Although the outside bars analyzed here dont appear to be the source of any sustained or sizable moves (there was really no reason to expect they would be), the pivots from bearish to bullish or vice versa especially in the case if Figure 4 suggest it might be worthwhile to look into the potential of a two-part weekly swing setup. For example, a short trade could be initiated on the close of a downclosing outside bar, which would be covered and reversed to the long side after five weeks, to take advantage of the upturn in returns shown in Figure 4. At week 5 after a down-closing outside bar, the median down move is more than 0.80 percent, with the odds of a lower close at 65.71 percent (10034.29). Figure 5 shows the price moves after going long five weeks after a down-closing outside week. Through week 8 the returns and/or odds of a higher close increase. The median return at week 8 is above 1.2 percent, with an associated probability of 67.65 percent. Figure 6 shows an almost perfect (and entirely coincidental) example from 2010. The pound/dollar pair moved lower immediately after the down-closing outside bar, and the low close of the down swing occurred five days later. The subsequent upswing peaked one bar after the eight-week optimal exit suggested by Figure 5. Of course, horrible adverse moves during the 2008 meltdown (not shown) represent the other side of the coin, with more typical results perhaps represented in Figure 7. Here, the five- and eight-week inflection points are marked after the two consecutive down-closing outside weeks
January 2012 CURRENCY TRADER

20

FIGURE 6: IDEAL SETUP

in August. This time, price moves significantly lower after the exit short/ go long bars (5). The implied long trades exited at the bars marked with 8s would have eked out modest gains while suffering large open-trade risk. A final short signal on the down-closing outside bar in early November would have been covered and reversed in early December, although the outcome of that implied long position was still undecided in early January. y

Average and median

The mean (or average) of a set of values is the sum of the values divided by the number of values in the set. If a set consists of 10 numbers, add them and divide by 10 to get the mean. A statistical weakness of the mean is that it can be distorted by exceptionally large or small values. For example, the mean of 1, 2, 3, 4, 5, 6, 7, and 200 is 28.5 (228/8). Take away 200, and the mean of the remaining seven numbers is 4, which is much more representative of the numbers in this set than 28.5. The median can help gauge how representative a mean really is. The median of a data set is its middle value (when the set has an odd number of elements) or the mean of the middle two elements (when the set has an even number of elements). The median is less susceptible than the mean to distortion from extreme, non-representative values. The median of 1, 2, 3, 4, 5, 6, 7, and 200 is 4.5 ((4+5)/2), which is much more in line with the majority of numbers in the set.

These signals from 2010 represent a near-perfect setup: An initial short signal is reversed five weeks later by a long signal, which is followed by a nine-week rally.

FIGURE 7: RECENT SIGNALS

More recent signals show the ideal setup from Figure 6 is not representative of the majority of cases.

CURRENCY TRADER January 2012

21

ADVANCED CONCEPTS TRADING STRATEGIES

The long, awful life of the dollar carry trade

A failure to maintain the return on the dollar will inevitably lead to the end of its status as the worlds principal reserve currency.
BY HOWARD L. SIMONS
The world can change a great deal after more than three years and make what once seemed impossible understated. The dollar carry trade the borrowing and selling of the greenback to fund all manner of other purchases in lands where the printing presses run more slowly required something of an argument in August 2008 (see The short, awful life of the dollar carry trade, Currency Trader, August 2008). This was in the early days of the Federal Reserves drive toward near zero-percent interest rates, before the full force and fury of the 2008 financial panic, and more than seven months before the first bout of quantitative easing. Those monetary policy episodes led to the primacy of the dollar carry trade in world finance, the consequences of which have dominated many of the articles in this space in 2010 and 2011. All of the analyses and comparisons in August 2008 used the January 1999 inception of the Euro as a starting point to have as long of a consistent history as possible. Lets update the original analysis with a different starting FIGURE 1: THREE-MONTH INTEREST RATE RETURNS ON SELECTED point the Aug. 17, 2007 deciCURRENCIES AUGUST 2007 ONWARD sion by the FOMC to engage in its first rate-cutting move, a pre0.100% 0.100% opening intermeeting surprise Avg. IR Return Std. IR Return cut in the target federal funds rate from 6.5 percent to 6 percent. It was at this point, a little more than a week after the European Central Bank started the bailout machine going with a backstop0.010% 0.010% ping of BNP-Paribas, the Federal Reserve began its era of trying to solve any and all problems in financial markets with more money for less.
Standard Deviation Of Daily Return Average Daily Return

The interest rate return on the USD has declined toward the zone populated by Asian exporters such as Hong Kong, Taiwan, Singapore, and Japan.

ARS TRY BRL ZAR IDR INR MXN PHP COP AUD NZD PLN PEN NOK CLP GBP DKK SEK KRW EUR CZK CAD THB USD TWD HKD CHF SGD JPY

0.001%

0.001%

Carry trade decomposition

All currency trades can be broken into their interest-rate spread component and their spot rate components. The carry trade returns that follow are based on
January 2012 CURRENCY TRADER

22

FIGURE 2: RISK AND RETURN IN THREE-MONTH CARRY AGAINST USD AUGUST 2007 ONWARD
0.045% 0.040% 0.035% 0.030% Average Daily Return Vs. USD 0.025% 0.020% 0.015% 0.010% 0.005% 0.000% -0.005% -0.010% -0.015% JPY PHP COP TRY CLP AUD NOK SGD CAD TWD MXN HKD KRW EUR GBP ARS CHF CZK SEK NZD PEN THB BRL DKK ZAR PLN IDR INR -0.020%
Avg. Return Std. Dev.

1.4% 1.3% 1.2% 1.1% Standard Deviation of Daily Returns 1.0% 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0%

borrowing at the three-month LIBOR rate of the lower-yielding currency (LY3) and lending at the three-month LIBOR rate of the higher-yielding currency (HY3). The returns on the higher-yielding currency are adjusted for the daily changes in the spot rate for the lower-yielding currency (LYS). A 260-day trading year is used. 1. 2. 3.

HY LYS t Long Returnt = 1+ 3t * 1 260 LYSt1 LY Short Returnt = 3t 260

Four currencies (MXN, HKD, KRW, and GBP) shift into a negative carry return as the result of weak spot-rate returns. The AUD stands out on the other side as having a very strong carry return from both its spot rate and interest-rate spread components.

NetCarry Returnt = Long Returnt Short Returnt

What do these interest rate carry returns look like since The dollar carry August 2007? First, Figure 1 shows the interest rate return Now lets examine the total return from the carry trade of on the USD has slipped down toward the zone populated by Asian exporters such as Hong Kong, Taiwan, Singapore, borrowing three-month USD and lending the proceeds in three-month LIBOR of the other 28 currencies (Figure 2). and Japan; only Switzerland, which also has tried to solve Please note how four currencies, the MXN, HKD, KRW, problems via printing money (see How Eastern Europe and GBP shift into a negative carry return as the result of got carried away, Currency Trader, August 2009) is in this weak spot-rate returns. The AUD, which has benefited low-rate neighborhood. Four Asian countries, the Philippines, Korea, Thailand, and Taiwan, FIGURE 3: DECOMPOSING THE DOLLAR CARRY TRADE have unusually high standard AUGUST 2007 ONWARD deviations of returns on their 17.0% interest rate returns, a sign they are using short-term interest rates 14.5% Rate in lieu of currency fluctuations Spot 12.0% as a macroeconomic adjusting Total device. Finally, both the absolute 9.5% interest rate returns and their standard deviations require one 7.0% less cycle on their semilogarith4.5% mic axes to display: The world became a lower-rate place after 2.0% August 2007. -0.5% In addition to global shortterm interest rates shifting lower, -3.0% the correlation matrix between them became more uniform and -5.5% more positive. Whereas large -8.0% swaths of Table 1 (p. 24-25) for the ARS, BRL, AUD, and NZD showed negative correlations of Several of the strongest currencies on a carry trade basis, such as the ARS and TRY, interest rate returns, the current actually have negative spot-rate changes offset by high interest-rate spreads. The correlation matrix has only a JPY has gained on the carry trade even as the interest rate component has been small handful of USD and TWD negative. correlations as negative. The
Average Annual Spot Rate And Interest Rate Returns JPY COP AUD TWD CAD HKD MXN GBP PHP TRY ARS CLP THB PLN

implications here are indisputable: The U.S. adopted and maintained a short-term interest rate policy way out of sync with the rest of the world.

CURRENCY TRADER January 2012

KRW

CHF

NZD

PEN

SGD

DKK

IDR

NOK

SEK

ZAR

CZK

BRL

EUR

INR

23

ADVANCED CONCEPTS ON THE MONEY

TABLE 1: CORRELATION OF THREE-MONTH INTEREST RATE TOTAL RETURNS SINCE AUGUST 2007
ARS ARS AUD BRL CAD CHF CLP COP CZK DKK EUR GBP HKD IDR INR JPY KRW MXN NOK NZD PEN PHP PLN SEK SGD THB TRY TWD USD ZAR 1.000 -0.010 0.326 0.136 0.170 0.373 0.350 0.359 0.450 0.243 0.208 0.258 0.489 0.327 0.524 0.126 0.651 0.276 0.181 0.450 0.359 0.273 0.204 0.149 0.247 0.472 0.003 0.113 0.372 1.000 0.471 0.894 0.817 0.672 0.601 0.701 0.686 0.804 0.857 0.783 0.395 0.646 0.643 0.490 0.490 0.888 0.913 0.522 0.460 0.618 0.880 0.687 0.585 0.702 0.214 0.558 0.665 1.000 0.408 0.211 0.885 0.816 0.632 0.363 0.185 0.334 0.585 0.707 0.858 0.450 0.952 0.718 0.374 0.501 0.600 0.977 0.765 0.292 0.650 0.960 0.662 0.099 -0.145 0.789 1.000 0.904 0.649 0.657 0.776 0.840 0.902 0.953 0.927 0.420 0.570 0.804 0.388 0.613 0.916 0.953 0.641 0.407 0.555 0.903 0.796 0.571 0.807 0.199 0.780 0.692 1.000 0.428 0.589 0.783 0.901 0.969 0.979 0.808 0.360 0.357 0.856 0.150 0.592 0.946 0.929 0.612 0.236 0.412 0.890 0.641 0.355 0.772 0.194 0.868 0.639 1.000 0.778 0.676 0.569 0.466 0.550 0.723 0.700 0.957 0.592 0.844 0.736 0.616 0.666 0.694 0.852 0.813 0.612 0.690 0.891 0.765 0.144 0.117 0.781 1.000 0.890 0.702 0.545 0.671 0.792 0.702 0.689 0.761 0.734 0.858 0.650 0.756 0.695 0.834 0.732 0.523 0.834 0.867 0.882 0.067 0.289 0.900 1.000 0.848 0.741 0.828 0.835 0.654 0.595 0.884 0.523 0.839 0.798 0.871 0.760 0.649 0.640 0.685 0.836 0.707 0.921 0.045 0.517 0.867 1.000 0.931 0.925 0.799 0.560 0.474 0.945 0.231 0.793 0.912 0.878 0.764 0.378 0.497 0.856 0.643 0.445 0.883 0.179 0.758 0.739 1.000 0.970 0.775 0.382 0.389 0.856 0.104 0.597 0.963 0.904 0.625 0.195 0.423 0.943 0.580 0.307 0.771 0.218 0.868 0.607 1.000 0.876 0.446 0.464 0.881 0.273 0.666 0.964 0.969 0.672 0.351 0.503 0.913 0.719 0.475 0.833 0.231 0.841 0.717 1.000 0.504 0.639 0.834 0.541 0.737 0.819 0.898 0.693 0.596 0.613 0.753 0.909 0.739 0.880 0.088 0.673 0.778 1.000 0.628 0.572 0.619 0.763 0.486 0.519 0.678 0.716 0.568 0.405 0.454 0.665 0.608 0.441 0.130 0.729 1.000 0.501 0.832 0.642 0.553 0.588 0.644 0.818 0.781 0.572 0.624 0.849 0.689 0.057 0.017 0.704 AUD BRL CAD CHF CLP COP CZK DKK EUR GBP HKD IDR INR

Only a handful of USD and TWD correlations are negative. The implication is that the U.S. adopted and maintained a shortterm interest rate policy way out of sync with the rest of the world. (Table continues on p. 25.)

24

January 2012 CURRENCY TRADER

TABLE 1 (CONTINUED): CORRELATION OF THREE-MONTH INTEREST RATE TOTAL RETURNS SINCE AUGUST 2007
JPY ARS AUD BRL CAD CHF CLP COP CZK DKK EUR GBP HKD IDR INR JPY KRW MXN NOK NZD PEN PHP PLN SEK SGD THB TRY TWD USD ZAR 1.000 0.294 0.855 0.866 0.858 0.789 0.468 0.514 0.758 0.708 0.526 0.919 0.069 0.704 0.779 1.000 0.562 0.296 0.454 0.469 0.940 0.744 0.254 0.609 0.951 0.525 0.192 -0.198 0.705 1.000 0.679 0.706 0.807 0.738 0.631 0.543 0.660 0.719 0.884 0.143 0.369 0.857 1.000 0.949 0.671 0.379 0.555 0.948 0.646 0.471 0.832 0.218 0.755 0.719 1.000 0.691 0.508 0.609 0.883 0.785 0.625 0.863 0.230 0.713 0.802 1.000 0.591 0.522 0.607 0.595 0.610 0.803 0.132 0.409 0.780 1.000 0.750 0.285 0.650 0.956 0.662 0.142 -0.113 0.803 1.000 0.536 0.620 0.778 0.673 0.116 0.092 0.677 1.000 0.567 0.399 0.734 0.242 0.723 0.597 1.000 0.792 0.837 -0.160 0.456 0.743 1.000 0.724 0.115 0.039 0.822 1.000 -0.050 0.526 0.865 1.000 0.208 0.207 1.000 0.337 KRW MXN NOK NZD PEN PHP PLN SEK SGD THB TRY TWD USD ZAR

1.000

Only a handful of USD and TWD correlations are negative. The implication is that the U.S. adopted and maintained a short-term interest rate policy way out of sync with the rest of the world.

CURRENCY TRADER January 2012

25

ADVANCED CONCEPTS ON THE MONEY

FIGURE 4: WEAK POSITIVE CORRELATION BETWEEN DOLLAR CARRY AND EQUITIES

20%

Average Annual Equity Market Return, USD

15%

10%

5%

0%

-5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

Average Annual Return On Dollar Carry Trade

12.5%

-10%

immensely from Australias role as a supplier to fast-growing East and South Asian economies, stands out on the other side as having a very strong carry return from both its spot rate and interest rate spread components. If we redisplay these carry trade returns as the average annual combination of their interest rate spreads and spot rate changes, we see how several of the strongest currencies on a carry trade basis, such as the ARS and TRY, actually have negative spot-rate changes offset by high interest rate spreads (Figure 3). Japan is an exception in the other direction; the JPY has gained on the carry trade even as the interest rate component has been negative.

The formerly strongly positive correlation between global equity returns and the dollar carry trade has deteriorated.

The logical rejoinder

FIGURE 5: NO CORRELATION BETWEEN SPOT COMPONENT OF DOLLAR CARRY AND EQUITIES

20%

Average Annual Equity Market Return, USD

15%

10%

5%

0%

-5%

-7.5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

Average Annual Return On Spot Rate Component Of Dollar Carry Trade

There is no evident relationship between equity markets and currency spot rates.

10.0%

-10%

When we last looked at average annual global equity returns as a function of the return on the dollar carry trade, we saw a marked positive correlation. That has deteriorated into a weak positive correlation with a subunitary beta of 0.599 as opposed to the 1.492 beta (ex Turkey and Argentina) we saw in August 2008 (Figure 4). This suggests global equity returns are less a function of the dollar carry trade now than they were previously. Much of this deterioration is the result of the breakdown in the spot rate component. The assertion made so often in these pages, equity markets are agnostic to any level of currency spot rates, is borne out in the absence of a defined relationship (Figure 5). The interest rate spread component has a stronger but not very significant deterministic relationship to relative equity performance (Figure 6). While the asserJanuary 2012 CURRENCY TRADER

26

Average Annual Equity Market Return, USD

tion that higher short-term interest rates in a country contribute to a relatively strong stock market performance might have seemed incongruous throughout much of history, such are the dynamics of capital flows in a carry trade world.

FIGURE 6: WEAKLY POSITIVE CORRELATION BETWEEN RATE COMPONENT OF DOLLAR CARRY AND EQUITIES
20%

15%

Implications

10%

I excoriated the behavior of the 5% U.S. Treasury and the Federal Reserve in the August 2008 analysis, noting how monetary policy 0% appeared to be set in response to equity market downturns and -5% in callous disregard to the global consequences of money-printing, including dollar weakness, asset -10% bubbles outside of the U.S., and the financing of economic growth Average Annual Return On Rate Component Of Dollar Carry Trade outside of the U.S. via carry trade mechanisms. The interest rate spread component has a stronger but not very significant The opposite has not been true. deterministic relationship to relative equity performance. While three-month USD LIBOR fell in response to weaker equity prices as measured by the MSCI FIGURE 7: WORLD EQUITIES NO LONGER AFFECT U.S. SHORT-TERM RATES World index, it has yet to rise in 7.0% 625 response to higher equity prices 600 6.5% as it had in 2004-2006 (Figure 7). 3-Mo. USD 575 6.0% The unwillingness to maintain MS World Free 550 5.5% the return on the worlds princi525 pal reserve currency will lead to 5.0% 500 the end of its use as such, if not 4.5% 475 now then once an alternative 4.0% 450 becomes available. As the U.S. 3.5% 425 has benefited immensely from 400 3.0% the dollars role as the reserve 375 2.5% currency over the years other 350 2.0% countries hold it and maintain 325 1.5% its value despite the best efforts 300 1.0% of American policymakers 275 the cheap-dollar policy will lead 0.5% 250 to a longer-term diminution of 0.0% 225 relative American welfare in the global economy. It quite literally is being carried away. y
-2.5% 0.0% 2.5% 5.0% 7.5%

Three-Month USD LIBOR Led One Month

Oct-04

Oct-05

Feb-09

Aug-09

May-02

May-03

Sep-06

Sep-07

Sep-08

Feb-10

Apr-04

Apr-05

Apr-06

Mar-07

Mar-08

Aug-10

Jan-99

Jun-99

Jun-00

Dec-99

Dec-00

Jun-01

Nov-01

Nov-02

For information on the author, see p. 4.

CURRENCY TRADER January 2012

The three-month USD LIBOR fell in response to weaker equity prices, but it has yet to rise in response to higher equity prices, as it did in 2004-2006.

Nov-03

Jan-11

Jul-11

10.0%

MSCI World Free Index

27

GLOBAL ECONOMIC CALENDAR

CPI: Consumer price index ECB: European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. FND (first notice day): Also known as first intent day, this is the first day on which a clearinghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillment of a futures contract. The clearinghouse also informs the seller. FOMC: Federal Open Market Committee GDP: Gross domestic product ISM: Institute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: Purchasing managers index PPI: Producer price index Economic release (U.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m.

January 1 2 3 4 5 6 19
U.S.: December ISM manufacturing index Germany: November employment report Canada: November PPI U.S.: December employment report Brazil: December CPI LTD: January forex options; January U.S. dollar index options (ICE)

20

21 22 23 Australia: Q4 PPI 24 25

U.S.: December CPI and housing starts Australia: December employment report Hong Kong: Oct.-Dec. employment report Canada: December CPI Germany: December PPI Hong Kong: December CPI

7 8 9 Brazil: December PPI 10 11 12

13 14 15 16 17 18

U.S.: December retail sales France: December CPI Germany: December CPI UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: November trade balance UK: December PPI

26 27

28 29 30 U.S.: December personal income 31

U.S.: FOMC interest-rate announcement Australia: Q4 CPI Japan: Bank of Japan interest-rate announcement U.S.: December durable orders and leading indicators Brazil: December employment report South Africa: December PPI U.S.: Q4 GDP (advance) Japan: December CPI

India: December PPI Japan: December PPI UK: December CPI U.S.: December PPI Canada: Bank of Canada interestrate announcement South Africa: December CPI UK: December employment report

U.S.: Q4 employment cost index Germany: December employment report India: December CPI Japan: December employment report U.S.: January ISM manufacturing index Hong Kong: Q4 GDP U.S.: January employment report LTD: February forex options; February U.S. dollar index options (ICE)

February

1 2 3

The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.

EVENTS
Event: The World MoneyShow Orlando Date: Feb. 9-12 Location: Gaylord Palms Resort For more information: Go to www.moneyshow.com/tradeshow/orlando/world_moneyShow/?scode=013104 Event: The International Traders Expo New York Date: Feb. 19-22 Location: Marriott Marquis Hotel, New York For more information: Click here. Event: CBOE Risk Management Conference Date: March 11-13 Location: Hyatt Regency Coconut Point Resort and Spa at Bonita Springs, Fla. For more information: Go to www.cboermc.com Event: The International Traders Expo London Date: March 23-24 Location: Queen Elizabeth II Conference Centre, London For more information: Click here.

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January 2012 CURRENCY TRADER

CURRENCY FUTURES SNAPSHOT as of Dec. 30

Market EUR/USD AUD/USD GBP/USD CAD/USD JPY/USD MXN/USD CHF/USD U.S. dollar index NZD/USD E-Mini EUR/USD Sym EC AD BP CD JY MP SF DX NE ZE Exch CME CME CME CME CME CME CME ICE CME CME Vol 256.2 111.2 87.8 65.7 65.2 30.6 23.6 21.5 6.0 4.2 OI 245.1 108.9 165.3 109.6 139.6 81.7 35.0 55.5 21.9 6.1 10-day move / rank -0.22% / 0% 1.56% / 36% -0.55% / 38% 1.69% / 64% 0.70% / 100% -1.15% / 9% 1.38% / 100% 0.36% / 19% 2.19% / 45% -0.22% / 0% 20-day move / rank -3.64% / 75% -1.93% / 48% -2.01% / 50% -0.30% / 13% -0.01% / 0% -2.81% / 65% -2.93% / 54% 3.08% / 84% -1.52% / 8% -3.64% / 75% 60-day move / rank -2.18% / 21% 7.71% / 100% 0.09% / 11% 4.22% / 100% -0.91% / 32% -0.18% / 3% -1.85% / 0% 1.92% / 29% 2.84% / 44% -2.18% / 21% Volatility ratio / rank .11 / 3% .26 / 5% .32 / 55% .30 / 33% .21 / 30% .12 / 15% .06 / 0% .14 / 3% .20 / 5% .11 / 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.

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each markets liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable). LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to todays close. 20-day move: The percentage price move from the close 20 days ago to todays close. 60-day move: The percentage price move from the close 60 days ago to todays close. The % rank fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.

BarclayHedge Rankings: Top 10 currency traders managing more than $10 million
(as of Nov. 30 ranked by November 2011 return) November return 22.30% 17.19% 5.14% 4.27% 2.96% 2.35% 2.27% 2.23% 2.21% 2.11% 8.34% 5.38% 5.33% 2.79% 1.51% 0.99% 0.85% 0.20% 0.07% 0.06% 2011 YTD return 62.05% -5.53% -0.10% 12.97% 22.20% 1.87% 0.48% 5.48% 1.96% 25.78% 11.27% -2.61% 7.83% 39.25% 7.21% 4.61% -9.70% 2.27% 29.19% -8.08% $ Under mgmt. (millions) 18.8 101.8 15.0 55.4 20.0 25.0 592.7 17.4 130.4 18.9 1.8 3.7 1.2 1.8 1.4 9.3 2.0 1.8 6.6 7.6

Trading advisor 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. CenturionFx Ltd (6X) Friedberg Comm. Mgmt. (Curr.) JCH Capital Mgmt (Global Currency) INSCH Capital Mgmt (Kintillo X3) ACT Currency Partner AG Floyd Cap'l Mgmt (Currency) Premium Currency (Currencies) CenturionFx Ltd Quaesta Capital AG (v-Pro Vol.) Gedamo (FX Alpha) Four Capital (FX) ForexAtom Sagacity (HedgeFX100) Adantia (FX Aggressive) Capricorn Currency Mgmt (FXG10 EUR) Blue Fin Capital (Managed FX) GTA Group (FX Trading) MatadorFX (MFX1) Halion Capital (Conservative) Overlay Asset Mgmt. (SHCFP)

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

Based on estimates of the composite of all accounts or the fully funded subset method. Does not reflect the performance of any single account. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

CURRENCY TRADER January 2012

29

INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)
Rank Currency 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 South African rand Australian Dollar New Zealand dollar Canadian dollar Swedish krona Brazilian real Singapore dollar Great Britain pound Russian ruble Chinese yuan Taiwan dollar Hong Kong dollar Thai baht Japanese yen Swiss franc Euro Indian rupee Dec. 28 price vs. U.S. dollar 0.1227 1.01569 0.77328 0.98021 0.145735 0.53793 0.77203 1.564455 0.03201 0.15741 0.032995 0.12857 0.031835 0.01284 1.06939 1.306765 0.018465 1-month gain/loss 4.59% 4.50% 4.34% 2.58% 2.10% 1.52% 1.36% 1.29% 1.25% 0.51% 0.37% 0.24% -0.08% -0.23% -0.59% -1.35% -3.10% 3-month gain/loss -2.69% 2.70% -1.64% 0.24% -1.18% -1.86% -0.75% 0.29% 2.68% 0.51% 0.52% 0.23% -1.50% -1.83% -3.75% -3.62% -8.13% 6-month gain/loss -15.37% -2.72% -3.83% -3.09% -6.38% -13.78% -4.15% -1.97% -9.35% 2.10% -4.64% 0.14% -1.76% 3.72% -10.62% -7.93% -15.76% 52-week high 0.1518 1.1028 0.8797 1.059 0.1662 0.65 0.832 1.6702 0.0366 0.1578 0.03510 0.1288 0.0336 0.0132 1.3779 1.4842 0.0226 52-week low 0.1166 0.9478 0.7207 0.9467 0.1427 0.5288 0.7606 1.5409 0.0306 0.1505 0.0321 0.1281 0.0314 0.0117 1.0269 1.2901 0.0181 Previous 16 14 17 9 15 13 8 6 7 2 3 1 5 4 12 11 10

GLOBAL STOCK INDICES

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Switzerland U.S. UK Mexico Hong Kong France Japan Italy Brazil Canada South Africa Germany Australia Singapore India Index Swiss Market S&P 500 FTSE 100 IPC Hang Seng CAC 40 Nikkei 225 FTSE MIB Bovespa S&P/TSX composite FTSE/JSE All Share Xetra Dax All ordinaries Straits Times BSE 30 Dec. 28 5,895.30 1,249.64 5,507.40 36,644.86 18,518.67 3,071.08 8,423.62 14,796.55 56,534.00 11,728.41 31,995.87 5,771.27 4,141.70 2,666.25 15,727.85 1-month gain/loss 6.75% 4.79% 3.66% 3.06% 2.67% 1.93% 1.64% 1.50% 0.92% 0.76% 0.52% 0.45% 0.39% -1.05% -2.72% 3-month gain/loss 6.19% 8.56% 5.55% 9.59% 2.82% 2.52% -2.23% 0.38% 6.13% 1.23% 7.77% 2.34% 1.07% -1.29% -4.37% 6-month gain loss -1.78% -3.63% -4.50% 1.26% -16.06% -20.27% -12.70% -23.94% -9.26% -10.50% 0.85% -19.51% -8.43% -12.60% -14.95% 52-week high 6,739.10 1,370.58 6,105.80 38,876.80 24,468.60 4,169.87 10,891.60 23,273.80 71,924.00 14,329.50 33,094.06 7,600.41 5,069.50 3,280.77 20,664.80 52-week low 4,695.30 1,074.77 4,791.00 31,659.30 16,170.30 2,693.21 8,135.79 13,115.00 47,793.00 10,848.20 28,391.18 4,965.80 3,829.40 2,521.95 15,135.90 Previous 3 8 6 1 13 14 10 15 4 7 2 12 5 9 11

30

January 2012 CURRENCY TRADER

NON-U.S. DOLLAR FOREX CROSS RATES

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair Euro / Franc Aussie $ / Franc Aussie $ / Yen New Zeal $ / Yen Aussie $ / Real Canada $ / Yen Pound / Franc Aussie $ / Canada $ Pound / Yen Canada $ / Real Aussie $ / New Zeal $ Franc / Yen Euro / Yen Pound / Canada $ Yen / Real Euro / Pound Euro / Real Pound / Aussie $ Franc / Canada $ Euro / Canada $ Euro / Aussie $ Symbol EUR/CHF AUD/CHF AUD/JPY NZD/JPY AUD/BRL CAD/JPY GBP/CHF AUD/CAD GBP/JPY CAD/BRL AUD/NZD CHF/JPY EUR/JPY GBP/CAD JPY/BRL EUR/GBP EUR/BRL GBP/AUD CHF/CAD EUR/CAD EUR/AUD Dec. 28 1.462945 0.94979 79.12 60.24 1.88815 76.355 1.462945 1.036195 121.875 1.82219 1.31347 83.31 101.8 1.59604 0.023865 0.835285 2.42925 1.54029 1.090975 1.33315 1.28658 1-month gain/loss 18.72% 5.12% 4.92% 4.60% 2.93% 2.84% 1.88% 1.87% 1.53% 1.04% 0.15% -0.35% -1.12% -1.26% -1.73% -2.58% -2.83% -3.07% -3.09% -3.83% -5.62% 3-month gain/loss 4.20% 6.71% 4.61% 0.19% 4.64% 2.11% 4.20% 2.45% 2.15% 2.14% 4.41% -1.96% -1.82% 0.04% 0.04% -3.89% -1.76% -2.35% -3.99% -3.85% -6.15% 6-month gain loss 9.68% 8.84% -6.16% -7.23% 12.83% -6.53% 9.68% 0.39% -5.43% 12.40% 1.15% -13.77% -11.19% 1.16% 20.26% -6.09% 6.78% 0.77% -7.77% -5.00% -5.36% 52-week high 1.5585 0.9749 89.46 67.97 1.88815 88.95 1.5585 1.0612 139.19 1.8282 1.3746 105.79 122.63 1.6354 0.0246 0.9038 2.5367 1.6373 1.3569 1.4316 1.4228 52-week low 1.1778 0.7477 72.72 56.86 1.6066 72.63 1.1778 0.9708 117.7 1.5997 1.2354 82.3 101.35 1.5302 0.0186 0.8297 2.1692 1.4806 1.0135 1.2811 1.2846 Previous 8 14 20 21 10 16 4 18 12 3 9 19 17 7 1 15 6 2 13 11 5

GLOBAL CENTRAL BANK LENDING RATES

Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate Rate 0-0.25 0-0.1 1 0.5 1 0-0.25 4.25 2.5 11 3.25 1.875 8.5 5.5 Last change 0.5 (Dec 08) 0-0.1 (Oct 10) 0.25 (Dec 11) 0.5 (March 09) 0.25 (Sept 10) 0.25 (Aug 11) 0.25 (Dec 11) 0.5 (March 11) 0.5 (Nov 11) 0.25 (June 11) 0.125 (June 11) 0.25 (Oct 11) 0.5 (Nov. 10) June 2011 0-0.25 0-0.1 1.25 0.5 1 0.25 4.75 2.5 12.25 3.25 1.75 7.5 5.5 Dec. 2010 0-0.25 0-0.1 1 0.5 1 0.25 4.75 3 10.75 2.5 1.625 6.25 5.5

CURRENCY TRADER January 2012

31

INTERNATIONAL MARKETS
GDP AMERICAS
Argentina Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore

Period
Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3

Release date
12/16 12/6 11/30 12/23 11/15 12/22 11/29 12/7 11/11 11/30 11/14 11/25

Change
-5.6% 0.3% 1.1% 0.3% 0.8% 1.1% 2.7% 1.6% 6.5% 1.0% 3.4% 2.0%

1-year change
16.4% 8.6% 5.9% 3.1% 2.5% 3.0% 10.8% 6.1% 4.3% 16.0% 14.5% 6.1%

Next release
3/9 3/6 3/2 3/28 2/15 3/27 2/28 3/7 2/1 2/29 2/13 2/24

EUROPE AFRICA ASIA and S. PACIFIC

Unemployment AMERICAS

Period
11/21 12/22 12/2 12/1 11/30 12/14 Nov. Sept.-Nov. Nov. Q3

Release date
7.2% 5.2% 7.4% 9.3% 5.6% 8.3% 12/8 12/19 12/28 10/31

Rate
-0.1% -0.6% 0.1% 0.2% -0.1% 0.4% 5.3% 3.4% 4.5% 2.0%

Change
-0.3% -0.5% -0.2% -0.1% -1.2% 0.4% 0.0% 0.1% 0.0% -0.1%

1-year change
2/22 1/26 1/6 3/1 1/3 1/18 0.2% -0.7% -0.6% -0.1%

Next release
2/22 12/22 12/2 12/1 1/3 12/14 1/19 1/19 1/31 1/31

EUROPE

ASIA and S. PACIFIC CPI

Period
Argentina Nov. Nov. Nov. Nov. Nov. Nov. Nov. Q3 Nov. Nov. Nov. Nov. Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date
12/16 12/8 12/20 12/13 12/9 12/13 12/14 10/26 12/20 12/30 12/28 12/23

Change
0.5% 0.5% 0.1% 0.3% 0.0% 0.2% 0.3% 0.6% 0.3% 0.5% -0.6% 0.5%

1-year change
9.5% 6.6% 2.9% 2.5% 2.4% 4.8% 6.1% 3.5% 5.7% 9.3% -0.5% 5.7%

Next release
1/13 1/9 1/20 1/12 1/12 1/16 1/18 1/25 1/20 1/31 1/27 1/25

AMERICAS

EUROPE AFRICA ASIA and S. PACIFIC

PPI AMERICAS EUROPE AFRICA ASIA and S. PACIFIC

Argentina Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Period
Nov. Oct. Nov. Nov. Nov. Nov. Q3 Q3 Nov. Nov. Nov.

Release date
12/16 11/30 12/23 12/20 12/9 12/15 10/24 12/13 12/14 12/12 12/29

Change
0.9% -0.1% 0.4% 0.1% 0.2% 0.2% 0.6% 1.2% 0.1% 10.0% 1.4%

1-year change
12.7% 4.7% 5.6% 5.2% 5.4% 10.1% 2.7% 9.6% 9.1% 1.7% 11.9%

Next release
1/13 1/5 1/31 1/20 1/13 1/26 1/23 3/13 1/16 1/16 1/27

As of Dec. 30 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

32

January 2012 CURRENCY TRADER

FOREX TRADE JOURNAL

Trading a triangle consolidation.

TRADE
Date: Thursday, Dec. 29, 2011. Entry: Short the Australian dollar/U.S. dollar pair (AUD/USD) at 1.0110. Reason for trade/setup: The Aussie/dollar pair has formed a large triangular consolidation dating back to October (see daily chart inset), with the latest upswing off the mid-December lows taking price to within a few ticks of the down-sloping upper trendline connecting the late-October and early December highs (blue lines in both charts). After hitting 1.0200 on Dec. 28, the pair pulled back sharply; anticipating another swing down toward the up-sloping lower trendline, a short position was entered when price rebounded to 1.0110. Initial stop: A daily close above the consolidation patterns upper trendline. (Requiring a close above this threshold is intended to protect against an intraday penetration of the boundary that is followed by a reversal back within the pattern.) Initial target: .9870, which is a little above the mid-December low.

Source: TradeStation

RESULT
Exit: 1.0209. Profit/loss: -.0099. Outcome: This trade spent virtually no time in the money. The rebound to the entry limit level was simply the first swing of an up move that pushed the pair out of the top of the triangle, stopping the trade out on Dec. 30 and propelling price even higher in the first days of the new year. Fortunately, the loss was fairly small as the position was initiated relatively close to the patterns upper boundary. y
Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.

TRADE SUMMARY Date

12/29/11

Currency pair
AUD/USD

Entry price
1.0110

Initial stop
-

Initial target
-

IRR
-

Exit
1.0209

Date
12/30/11

P/L
-.0099

point

-0.97%

LOP
0.00

LOL
-.0099

Trade length

Legend IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade). MTM: marked-to-market the open trade profit or loss at a given point in time.

CURRENCY TRADER January 2012

33