CANADIAN DOLLARS RESISTANCE CHECK P.

10
Strategies, analysis, and news for FX traders

September 2013 Volume 10, No. 9

System testing in the yen & pound p. 20 The FX tapering trade p. 6

The Polish zlotys sweet spot p. 26 Stress in the forex market p. 14

CONTENTS

Contributors..................................................... 4 Global Markets The tapering trade....................................... 6

Although everyone knows tapering is a done deal, theres plenty of uncertainty about how it will play out in the FX market. By Currency Trader Staff

Global Economic Calendar..........................30

Important dates for currency traders.

Events .........................................................30
Conferences, seminars, and other events.

Currency Futures Snapshot.........................31 BarclayHedge Rankings...............................31

Top-ranked managed money programs

Spot Check Dollar/Canada plays with resistance...........10

Can the USD/CAD pair continue to make new 52-week highs and emerge from its longer-term dormancy? By Currency Trader Staff

International Markets....................................32
Numbers from the global forex, stock, and  interest-rate markets.

Forex Journal.................................................35
Going short as a prelude to a long position.

On the Money Too much conditionality............................14

The markets can handle some uncertainty, but the lead-up to the Feds eventual announcement on tapering may be stressing the system. By Barbara Rockefeller

Looking for an advertiser?

Click on the company name for a direct link to the ad in this months issue. Ablesys eSignal FXCM Interactive Brokers NinjaTrader The World MoneyShow Toronto

Trading Strategies System testing in dollar/yen and pound/dollar pairs..............................20

Different currency pairs require different testing parameters when developing trading systems. By Daniel Fernandez

Advanced Concepts The Polish zloty (pronounced Zloty).................................26

Analysis of the Polish currency suggests Poland shouldnt be in a rush to join the Euro. By Howard L. Simons

Questions or comments?
[email protected]
2

Submit editorial queries or comments to

September 2013 CURRENCY TRADER

CONTRIBUTORS

A publication of Active Trader

For all subscriber services:

www.currencytradermag.com 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.

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

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

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), The Foreign Exchange Matrix (Harriman House, 2013), 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. q Daniel Fernandez is an active trader with a strong interest in calculus, statistics, and economics who has been focusing on the analysis of forex trading strategies, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For the past two years he has published his research and opinions on his blog Reviewing Everything Forex, which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://mechanicalforex.com). Fernandez is a graduate of the National University of Colombia, where he majored in chemistry, concentrating in computational chemistry. He can be reached at [email protected].

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

Volume 10, Issue 9. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2013 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.

September 2013 CURRENCY TRADER

How Do You Turn Trading Possibilities into Profit?

eSignals award-winning trading software and new iPad app help you find and instantly execute on the most profitable trading opportunities
eSignal Mobile
is a new way of accessing up-to-theminute information on today's financial markets your watch list, charting and analytical tools, and more all on your iPad.

Designed to support everything from day trading to active investing, eSignals trading software offers you award-winning charting tools, streaming stock quotes and direct access to your choice of broker all from a single, customizable platform. Award-Winning Products
eSignal products have consistently been voted #1 by users worldwide

Lightning-fast data: Stocks, Forex, Futures, Options, ETFs Advanced Charting: Customizable technical analysis tools Access to 100s of exchanges and indices worldwide Trading integration with 50+ brokers

Try eSignal Risk-Free for 30 days!*

Sign up now and start trading in minutes.

800.900.1779 | www.eSignal.com

eSignal, an Interactive Data company. *If youre not completely satisfied during the trial, cancel the service, and we will refund your subscription fees. Taxes, add-on service/exchange fees and activation fees are non-refundable. x14789

GLOBAL MARKETS

The tapering trade

Although everyone knows tapering is a done deal, theres plenty of uncertainty about how it will play out in the FX market.

BY CURRENCY TRADER STAFF

At the outset of the fourth quarter financial markets remained firmly focused on the U.S. Federal Reserve and when so-called tapering, or the planned cutback in asset purchases currently $85 billion per month in asset purchases will occur. Fed chairman Ben Bernanke has signaled the central banks intentions to begin tapering this year, and markets are anticipating an announcement at the Sept. 17-18 Federal Open Market Committee (FOMC) meeting. Its important to remember that tapering is not the same as tightening its just the beginning of what will be a very long process of reversing the extraordinary monetary accommodation that began during the global financial crisis in 2008 and persists to this day. The Feds exit strategy will have many moving parts, and the bank has repeatedly reminded the markets that the timing and execution of the tapering process will be data-dependent. Although there have been signs of improvement in the U.S. economy, some analysts argue the recovery is still fragile, and numerous risks remain on the horizon. If the Fed doesnt taper in September, there are scheduled FOMC meetings in late October and mid-December that could also initiate the process. However, the forex market is generally expecting tapering to begin in September, and a delay could trigger a volatile market reaction. Alternately, other analysts and traders believe the market might be setting up for a buy the rumor, sell the fact type of trade. tation the Fed will cut the federal funds rate currently at 0-0.25% until well after it terminates its quantitative easing program. Nonetheless, investors and traders in the U.S. and abroad have been jittery about the inauguration of tapering. The market is so focused on the timing of the first taper, its almost as if [everyone] is forgetting this is a process that could take a very long time, says Laura Rosner, U.S. economist at BNP Paribas. Many economists are forecasting a modest initial cutback in the range of $10 to 20 billion per month. Timing is one thing, magnitude is another, says Ryan Sweet, director at Moodys Analytics. They want to start small because inflation is still too low. The personal consumption expenditure (PCE) is 1.4% year-over-year. While Moodys Analytics expects the Fed to announce the start of tapering at the September meeting, BNP Paribas believes the Fed will drag its feet until its December meeting. (The Aug. 21 release of the minutes from the June 20-21 FOMC revealed the Fed believed the U.S. economy would be stronger in the second half of 2013, and conditions were on track for tapering to commence by the end of the year. However, the Fed avoided discussing timing more specifically than that.) Our forecast is for a December start to tapering, which will proceed until September of next year, Rosner says. We think it will be evenly split between Treasuries and agencies, with a $10 billion reduction in Treasuries from $45 billion to $35 billion and a $10 billion reduction in agency mortgage-backed securities from $40 billion to $30 billion. This would leave the Fed still purchasing $65 billion in assets each month still a very accommodative stance in addition to maintaining near-zero interest rates. An
September 2013 CURRENCY TRADER

Getting ready to exit

The Fed is optimistic the U.S. economic recovery finally has some legs enough to allow the central bank to begin downsizing the $85 billion in bond and mortgage-backed security purchases it makes each month. There is no expec6

The forex market is generally expecting tapering to begin in September, and a delay could trigger a volatile market reaction.

actual rate increase is not expected until mid-2015.

Timing factors

Fed officials have successfully broadcast their tapering intentions and communicated policy moves ahead of time to the financial markets. But have the markets over-anticipated the unwinding process? One analyst thinks that might be the case. The market is a bit ahead of itself expecting Fed tapering in September it may be disappointed, says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. Rosner explains why the Fed may choose to hold steady in September. Fed officials have expressed caution and a desire to be sure they do not start the process prematurely, she says. The [economic] picture is still very mixed and there are emerging risks we are learning more about. There is the possibility of fiscal negotiations stalling around the debt ceiling, the budget, and the continuation resolution. This will be coming to the forefront again, but markets are not focusing on it right now. The federal governments current spending resolution is set to expire on Sept. 30, setting up a potential political showdown. A short-term resolution could be passed to keep the government operating for a few months, but there is still the possibility for a market-rattling government shutdown. A battle could emerge over how to deal with the next round of scheduled sequester-related spending cuts. Also, uncertainty over a so-called grand bargain to address comprehensive tax reform and entitlement reform remains. There are economic risks that could emerge over the uncertainty over the political process, Rosner says. For tapering to be successful it would be good to start the proCURRENCY TRADER September 2013

cess when the data are on the upswing and other risks are not on the horizon. The timing of the start of tapering matters because it has the potential to damage confidence and create uncertainty and stress.

Market reaction

All the talk and expectation about tapering begs the question: Is tapering already priced in? Mostly, but not entirely, it seems, says Sean Callow, senior currency strategist at Westpac Institutional Bank. Surveys of economists find about two-thirds looking for the first move on Sept. 18. There has been a great deal of discussion in FX markets about the timing of tapering, so no one will be shocked by a September move. But looking at the other side of the coin, what could happen if no tapering is announced in September? On that headline, Brown Brothers Harrimans Chandler says, the dollar sells off and medium-term investors want to take advantage of the sell-off and buy the dollar.

Likely impact

When the Fed finally does announce tapering in September, October, or December which currencies will be the forex winners and losers? There is no doubt many investors look at tapering as the potential start of a very lucrative multi-quarter or even multi-year trade, betting on sustained recovery in the U.S. economy, boosting the U.S. dollar against virtually every currency, Westpacs Callow says. The question however is whether confirmation of such a Fed move will produce a major response. Bernanke raised the prospect of a reduction in QE way back in May at his Joint Economic Committee appearance. The danger for U.S. dollar bulls is
7

GLOBAL MARKETS

FIGURE 1: A REAL DOLLAR TURNING POINT?

The U.S. dollar has traded in a wide range since bottoming in 2008, but some analysts see the possibility of a major trend reversal as a result of the QE tapering process.
Source for all figures: TradeStation

FIGURE 2: YEN ON THE HOT SEAT

Tapering could extend the Japanese yens current downtrend.

that confirmation of tapering proves to be a classic sell the fact episode, as was seen with QE2 in November 2010. Chandler also notes the potential for a buy the rumor, sell the fact type of trade once tapering is announced. The market is leaning too much one way, he says. Looking ahead, Callow says whether the U.S. dollar makes sustained gains on tapering depends on whether the Fed feels confident the economy has sufficiently rebounded from its soft first half. Reducing QE modestly in the face of mixed data, he notes, could give the impression the Fed felt obliged to trim QE because they had talked about it so much and had increasing doubts about its efficacy. The general view is the U.S. dollar will be a broad-based winner once tapering is announced. Tapering ... will reduce the amount of liquidity and will lead to upward pressure on interest rates, which is dollar-supportive, says Charles St-Arnaud, Nomura FX strategist and economist. We expect the latter months of the year to be very positive for the dollar. The U.S. dollar index (DXY) has been in a broad trading range since its multi-year downtrend hit its nadir in 2008 (Figure 1). St-Arnaud believes the greenback could be at a pivotal longer-term turning point. We think the constant declines weve seen in the U.S. dollar over the past decade are coming to an end, he says. Weve reached a level where it should be reversed. There was a lot of negativity priced into the dollar, including structural issues, the twin deficits, and a negative trade balance. But we have an economy that will
September 2013 CURRENCY TRADER

need less imports in the future. Shale gas and shale oil is helping that. Nomuras year-end targets reflect dollar appreciation across the board. We expect the yen to end the year at 1.02, the Euro/U.S. dollar to be below 1.25, the Canadian dollar at $1.10, and the Australian dollar at .8600, St-Arnaud says.

Big losers

According to Callow, there will be many currency losers as a result of the tapering process foremost among them the Japanese yen (Figure 2). The yen is an obvious loser, given the stark contrast with the BOJs (Bank of Japans) Volatility ahead open-ended QE, which might even be increased at the Oct. Theres plenty of fodder for churning market action this 31 BOJ meeting, he says. The Euro is also at risk if the fall and trading opportunities regardless of whether Eurozone economy falters again, as we expect. Obviously, the Fed does or doesnt taper in September. a fall in the EUR/USD pair would be welcomed by Assuming the Fed starts tapering for the right reasons European policymakers. obvious economic strength and it is not half-hearted, However, Nomuras St-Arnaud believes the biggest such as a token $5-10 billion reduction, the U.S. dollar losers will be emerging-market currencies. They will be should gain, Callow says. harder hit than developed currencies, he says. However, he notes there are no precedents for the Feds Callow agrees. The biggest fireworks might be in unwinding of its record monetary stimulus or the Bank of emerging markets, where currencies that drew heavy Japan sustaining its maximum-speed QE, let alone havdemand during episodes of QE as alternatives to U.S. doling both occur simultaneously. Investors, he notes, should lar have already suffered bouts of heavy selling, he says. brace themselves for unintended side effects. Perhaps the In a research note to clients, Normura analysts comment- safest prediction is greater volatility, he says. y ed on the risks to Latin American currencies: In a research note to clients, FIGURE 3: MEXICAN PESO Nomura analysts commented on the risks to Latin American currencies: A stronger U.S. dollar in the context of a tapering expansion of the Feds balance sheet and flattish commodity prices promises challenges ahead. We believe that we could see a winners curse dynamic in the region, as countries that have received the most portfolio flows see their currencies depreciate the most, despite having relatively stronger fundamentals. Perhaps, we see slightly more risk in Mexico than in the rest of [Latin America] since this is the country that has received more inflows in the past months. Figure 3 shows the Mexican peso (MXN) gave back some of its gains vs. the dollar in spring and summer after strengthening over the Normura sees more tapering-related risk in the Mexican peso than most other previous year. Latin American currencies. For emerging-market currencies, the
CURRENCY TRADER September 2013

impact of a rising dollar on global commodity prices is a key piece of the puzzle. Many Latin American nations are commodity exporters, and because most commodities are priced in U.S. dollars, a rising greenback would make those commodities more expensive in the global marketplace, which could weigh on demand. If the Feds move in tandem with a strong dollar ends up causing commodity prices to weaken, the moves on the BRL (Brazilian real), CLP (Chilean peso) and COP (Colombian peso) could be just the beginning of a prolonged adjustment, Normura states in its research note.

SPOT CHECK

Dollar/Canada plays with resistance

Can the USD/CAD pair continue to make new 52-week highs and emerge from its longer-term dormancy?
BYCURRENCY TRADER STAFF
Having traded for the better part of three years in a trading range between roughly .9450 and 1.0650, the U.S. dollar/Canadian dollar pair (USD/CAD) established something of a minor milestone in June when it hit its first 52-week high since October 2011. In Figure 1 blue dots highlight weeks dollar/Canada hit a new 52-week high three consecutive weeks between June 21 and July 5, and before that the two consecutive weeks in September-October 2011. At the far left of the chart is the new yearly high from March 2009, which was the last in a series of new 52-week highs the pair made when the 2008-2009 financial crisis drove safe-haven funds into the dollar and propelled dollar/Canada off its late2007 all-time low, as shown in Figure 2. Figure 3 shows the USD/CADs performance after initial 52-week highs (i.e., those that were not preceded the previous week by a 52-week high) between May 1974 and August 2013. There were 53 such weeks during this analysis window. The chart shows the average and median FIGURE 1: WEEKLY DOLLAR/CANADA price moves from the close of the week that made the new 52-week high to the closes of the next 12 weeks. To provide a benchmark to provide context for these moves, the chart also shows the average and median price changes for all one- to 12-week periods in the analysis window. Although the price action after new 52-week highs is clearly more bullish than the USD/CADs benchmark performance, this edge occurs almost entirely in the first three weeks, after which price tends to move sideways to lower (extrapolating from the combined behavior of the average and median returns). Also, the USD/CADs mostly flat benchmark performance is a result of the pairs roughly offsetting long-term bull and bear markets over the past 40 years. It would thus be logical to analyze the performance after new 52-week highs in different market conditions, yet all but a handful of the 53 instances represented in Figure 3 occurred during the two major bull phases 1974-1985 and 1992-2001 marked on Figure 2. This makes it impossible to learn much from the perFIGURE 2: MONTHLY DOLLAR/CANADA

In June and early July, the USD/CAD pair made three consecutive 52-week highs, pulled back, and tested this resistance area in late August.

The 2008-2009 run-up interrupted the downtrend that had prevailed in the USD/CAD rate since 2002.

10 10

September October 2013 2010 CURRENCY TRADER

I work hard at my trading and want a platform that works as hard as I do. Thats why

I chose NinjaTrader.
It not only lets me execute like a pro - their Ecosystem, support and training have me thinking like a pro too.

I may not be a pro, but I trade like one.

Professional traders move through the markets with confidence and precision. NinjaTraders extensive video library, partner Ecosystem and live training webinars provide you with the foundation to become a more confident trader. Our award winning software lets you execute trades with professional precision, and the best part is that getting started with NinjaTrader is FREE.

So what are you waiting for? Start trading like a pro today!

ninjatrader.com/AT

1patternforallmarkets.com

tradermakers.com

ampclearing.com

Featured Ecosystem Partners | to view more go to ninjatrader.com/partners CURRENCY TRADER September 2013

11

SPOT CHECK

FIGURE 3: USD/CAD AFTER NEW 52-WEEK HIGHS

The pair outperformed its benchmark price moves after hitting new 52-week highs, but the bulk of the typical gain occurred in the first three weeks.

FIGURE 4: AFTER 52-WEEK HIGHS IN BEAR MARKETS

There were only a handful of examples, but new 52-week highs tended to bring a false hope of bullish follow-through when dollar/ Canada was in a downtrend.

FIGURE 5: DAILY DOLLAR/CANADA

If history is any guide, run-ups in the USD/CAD pair are unlikely to extend too far without a correction.

formance of the eight bear-phase examples from 1986-1991 and 2002-2013 shown in Figure 4, although the trajectory of their price action is pretty much what wed intuit during a downtrend: Although the average and median returns were both positive one week after new 52-week highs, both were negative at week 2; the median return continued to decline, while the average return jumped to positive territory in weeks 3-9 before turning negative in the final three weeks. In short, the USD/CADs performance after 52-week highs during these bear phases could be described as mostly incidences of false upside breakouts perhaps a higher close after a week or two, but an eventual return to the downtrend. This, in fact, is a fairly accurate description of what happened after the new 52-week highs in Figure 1. And, with only eight examples, it is easy to confirm that. But for the bullish aberration during the 2008-2009 financial crisis, we are left with the unsatisfying conclusion that new 52-week highs are generally followed by additional price gains (mostly in the first three weeks) during bull markets, while theyre followed by declines in bear markets when they occur at all. The question now is whether dollar/Canadas long consolidation and slow (but steady) climb since September 2012 (a gain of nearly 10% as of the end of August) portends the beginning of another bullish phase in which new 52-week highs imply continued gains, or if the pairs latest rally is simply a move toward the upper end of its trading range that is destined to fail. Here, two observations are relevant. The first is that dollar/Canada in late August was in the process of testing what at that point was a well-established resistance area defined by the June-July 52-week highs and the 2011 highs; a move above 1.0608 (the high of the week ending July 5), would constitute a new 52-week high which, if it occurs in the next several weeks, would be a relatively quick reoccurrence and would reinforce bullish momentum. Bullish phases, after all, should be characterized by regularly recurring new highs. Second, fundamental and sentiment factors mostly driven by anticipation of a scaling back of the Federal Reserves quantitative easing program are still aligned in favor of the U.S. dollar. Arguably, the biggest threat to U.S. dollar strength in the near future is a failure of the Fed to announce a definitive plan to begin its tapering process after its Sept. 17-18 meeting. However, given dollar/Canadas traditional fits-andstarts trading behavior illustrated by the zigzagging daily prices in Figure 5, the pair is unlikely to catapult above its recent highs in parabolic fashion. Pullbacks should allow traders wishing to test the long side to enter at relatively advantageous levels. y
September 2013 CURRENCY TRADER

12

Forex.
How profitable are you?
Percentage of profitable and unprofitable accounts as reported to the NFA
Q1 2013

% Profit

% Loss

Total Accounts

Spread Markups

Interactive Brokers
CitiFX Pro OANDA FXDD Gain Capital IBFX/TradeStation ILQ Alpari FXCM MB Trading

43.3%
41.0% 38.1% 36.2% 33.0% 33.0% 30.3% 29.9% 29.9% 26.9%

56.7%
59.0% 61.9% 63.9% 67.0% 67.0% 69.7% 70.1% 71.0% 73.1%

19,666
652 22,121 5,707 12,384 9,792 1,021 2,212 21,775 3,877

NO
YES YES YES YES YES YES YES1 YES YES

Data provided by forexmagnates.com, includes the impact of any commissions

There is a substantial risk of loss in foreign exchange trading. Past performance is not necessarily indicative of future results. The same philosophy and technology that enables our clients to achieve superior forex trading results also drives our clients trading and investing of stocks, options, futures, and bonds worldwide on over 100 markets.

For more information visit

interactivebrokers.com/forex

Interactive Brokers
Lower your cosTs To maximize your reTurn
Member - NYSE, FINRA, SIPC. Lower investment costs will increase your overall return on investment, but lower costs do not guarantee that your investment will be profitable Supporting documentation for any claims and statistical information will be provided upon request. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets. [1] Standard Account. 07-IB13-554CH593 CURRENCY TRADER September 2013 13

On the Money ON THE MONEY

Too much conditionality

The markets can handle some uncertainty, but the lead-up to the Feds eventual announcement on tapering may be stressing the system.

BY BARBARA ROCKEFELLER
The FX market is gearing up for a historic change the announcement by the Federal Reserve of a reduction in its purchases of Treasuries and mortgaged-backed securities from $85 billion per month. Anticipation of this event has been building since May the 10-year T-note yield rose from 1.64% on May 1 to nearly 3% by the last week of August 2013, a two-year high (and up from 1.40% in July 2012). But Fed tapering is combining with events that develBarbara Rockefeller Currency Trader Mag September 2013 Figure 1: Reuters US 10-Year Note Yield Index

FIGURE 1: U.S. 10-YEAR NOTE YIELD INDEX

oped separately, including stock market bubbles, commodity price wobbles, and emerging market distress. The bottom line is the Feds decisions will reach far beyond American shores. The Fed may be being blamed for global disruptions that are not entirely its fault, but the final goal is admirable to restore the conditions that are necessary for equilibrium in various markets. The problem is the Feds policy procedures, and to a certain extent, those of the Bank of England, are creating too much uncertainty. Market players are supposed to be able to juggle such unknowns, but when there are too many balls in 34 34 the air, the surfeit of conditionalities 33 33 becomes overwhelming and the result 32 32 is chaotically jumpy prices across mul31 31 tiple markets. 30
30 29 29 28 28 27 27 26 26 25 25 24 24 23 23 22 22 21 21 20 20 19 19 18 18 17 17 16 16 15

Too much uncertainty from too much conditionality

9 25

4 11 March

18

25 1 8 April

15

22

29 6 May

13

20

28 3 10 June

17

24

1 8 July

15

22

29

5 12 August

19

26

2 9 16 September

23

30 7 14 October

21

When the initial consensuses on tapering started falling apart, longer-term yields spiked and flopped three times. The projection of the linear regression channel indicates the yield may reach 3.22% by Sept. 30.
Source: Chart Metastock; data Reuters and eSignal

The Fed has never said exactly when it will begin tapering, by how much, or over what period. Normally, markets can live with a degree of uncertainty, but this time, as the first consensuses on timing and amount started falling apart, longer-term yields spiked and flopped three times (Figure 1). The yield index broke its 20-day moving average and handdrawn support twice since mid-July, and its not unfair to label the June and July highs spiky. The linear regression channel, extended from the last data point, indicates the yield may be 3.221% by Sept. 30, in a standard error range of 3.018% to 3.429%. Note
September 2013 CURRENCY TRADER

14

Its never a good thing when markets dont trust their central banks, but its worse in the case of the U.S., because foreigners, including central banks, hold a vast amount of government issuance.

the lowest of the hand-drawn support lines matches up pretty well with the channels bottom. Its nice when that happens, since it seems like a confirmation of support. In late August, the thinking was that unless the Sept. 6 nonfarm payrolls report is catastrophically low (below 100,000), the Fed would announce tapering at its Sept. 17-18 policy meeting and start implementing it in October. The early estimates from fixed-income analysts were for tapering to proceed at a rate of $20 billion per month, and the Fed said nothing to disabuse the market of that notion. The Feds silence lent credence to the idea, although some complained the Fed could be more forthcoming and name an amount itself. And yet some analysts wrote tapering would be postponed or reduced to a really low number, like $5 billion. In mid-August, the New York fed released its July primary dealer survey showing a modification. Now the pros think the Fed will cut purchases by $15 billion, split $10 billion in Treasuries and $5 billion in mortgagebacked securities. Then there will be a second tapering in December for another $15 billion, albeit perhaps in different proportions. Note that if the Fed cuts $30 billion in this fashion, it will be still be purchasing $55 billion per month in Jan. 1, 2014 and that sum certainly still constitutes extraordinary accommodation. The dealers, however, are holding to the timeline of an end to QE by June 2014. So why did the 10-year yield rise so far, so fast and with three violent pullbacks? The explanation seems to be that investors accept the tapering scenario but dont believe the Feds forward guidance that the fed funds rate will remain at zero for an extended period, likely 2015, according to primary dealer surveys. Remember, the fed funds rate has been near zero since December 2008. Heres the Feds statement on forward guidance from the minutes of the July FOMC meeting: [T]he Committee decided to keep the target range for the fedCURRENCY TRADER September 2013

eral funds rate at 0 to percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committees 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Atlanta fed blog had an Aug. 19 post, Does Forward Guidance Reach Main Street? that noted: All but one FOMC participant expects the funds rate to be lifted off the floor in 2015, with the median projection that the fed funds rate will be 1 percent by the end of 2015. But the market disagrees with the FOMC, and several press reports indicate the market is expecting the first fed funds rate hike in 2014, not 2015. For example, the CME Groups Fed Watch puts a 52% probability on the first rate hike occurring in December 2014, and those odds only increase through the first half of 2015. Using fed funds futures to predict rate changes has not proven to be a reliable process, but never mind the point is, the market doesnt trust the Fed to stay its hand as promised. Its never a good thing when markets dont trust their central banks, but in the case of the U.S., its worse, because foreigners, including central banks, hold a vast amount of government issuance. Withdrawals from bond mutual funds and ETFs were already at $30.3 billion by the third week of August the third biggest drop for any month on record. For perspective, October 2008 had withdrawals of $42 billion, according to investment research firm TrimTabs. To be fair, panic was worse earlier in the tapering debate $67.1 billion in June 2013. As for official foreign government holdings, the latest data is for June from the Treasury International Capital System (TICS) report. It shows China cut holdings by $1.268 billion from May. Japan cut $20.3 million, and Hong
15

ON THE MONEY

Be skeptical of forecasts of a rising dollar based solely on the yield story.

Kong, $1.22 million. The TICS report can be tricky, because holders can switch to corporate debt and to equities, not leaving the U.S. market (or the dollar) altogether. All the same, total foreign government holdings of U.S. Treasury paper fell to $4.0092 trillion in June from $4.0728 trillion in May (and $4.097 trillion in March). Analysts arent too worried about a drop in foreign holdings, because, as the Chinese have said, its the only game in town and to dump Treasuries would be self-defeating. But European Central Bank (ECB) chief Mario Draghi saying (as he did a year ago) he would do whatever it takes to preserve the Eurozone, even intervening in the sovereign bond market, makes European paper and the Euro look a lot more attractive than before, and blessedly free of conditionalities. to Bloomberg. The head of the Brazil Development Bank tried to put a good spin on the reals sell-off, pointing out that a stronger dollar will tend to create favorable conditions in the medium term for our competitiveness. But in practice, as economist Carmen Reinhart said on the sidelines of Jackson Hole in a Bloomberg Television interview, Emerging markets had a capital flow bonanza lasting several years, the golden boom years, and the probability of a banking crisis, the probability of a currency crash, the probability of a default, all increase afterward. In other words, so far we have avoided the contagion that occurred in the 1997-98 Asian debt crisis, but the process is just beginning and its too soon to say a fresh crisis can be avoided. So far, the Turkish lira and Indian rupee are at historic lows, and the Indonesian rupiah is the lowest its been since 2009. The Malaysian ringgit and Thai baht are at three-year lows, too. Is it enough that emerging-market devaluation will promote exports? Unfortunately, the answer may be no. Failure to take advantage of yield-seeking capital inflows with structural reforms is also behind the current capital flight. India, for example, didnt fix inefficient and corrupt sectors, such as energy. Labor market restrictions and failing electric power and transportation systems are a drag on the export sector no matter how low the rupee goes. Besides, inflation is very high, about 10%, but the public has a deep and not unjustified distrust of the banking and investment firms, as shown by a deep preference for gold. India is the worlds single largest gold importer even after restrictions introduced this year. Not to put too fine a point on it, but when the citizens prefer gold, theres something wrong with the financial system. The Reserve Bank is about to get a new chief who is thought to be smart and capable, but honestly, theres just so much one institution can do. The risk is that the Reserve Bank will raise rates too high and choke off what growth the economy can eke out against already gale-force headwinds. Cracks can be seen in other emerging markets, too. Mexico is about to invite foreign oil companies to start joint exploration with state-owned Pemex, but the prognosis is not bright for a surge in production and exports; the bureaucracy is too dense. China seems to be holding its own, with better purchasSeptember 2013 CURRENCY TRADER

Where the rubber meets the road

Where capital outflow is a real issue is not the U.S. but rather emerging markets. In recent weeks, stock markets and currencies in Brazil, India, Indonesia, Malaysia, the Philippines, Turkey, and South Africa have headed south, and in a hurry. Several emerging countries (Brazil, India, Malaysia, Turkey) have intervened in the currency market and/or started experimenting with capital controls. Intervention reduces reserves, of course, with Turkey spending 12.7%, Indonesia, as much as 13.6%, and the Ukraine, 10%, according to the Financial Times. Indian reserves are down a more modest 5.5%, and Brazil, 1.8%. Nomura reported that reserves in 21 emerging economies have fallen $153 billion from their peak this spring, a level of spending that hasnt been seen since 2008. The International Monetary Fund (IMF) Cofer report, by the way, shows emergingmarket central banks held $7.4 trillion in reserves at the end of Q1, so hundreds of millions in intervention is not fatal. Emerging-market stock declines and intervention are likely to stay on the front page for some time to come. The Brazilian central bank chief didnt attend the Kansas City feds symposium in Jackson Hole, Wyo., so he could stay home and baby-sit the real, already down 15% year to date, the biggest drop after the South African rand. The exodus from emerging-market equities and currencies is staggering as much as $1 trillion since May, according
16

Barbara Rockefeller Currency Trader Mag September 2013 Figure 2: Copper Continuous Futures (Monthly)

FIGURE 2: COPPER CONTINUOUS FUTURES (MONTHLY)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

In 2012 copper started sagging again, in large part because of a drop in imports by China. The market has still not recovered to its previous levels, despite favorable news about Chinese demand.
Source: Chart Metastock; data Reuters and eSignal

ing managers indices and the like, but analysts still worry about zombie banks and a banking sector crisis if a true accounting unmasked all the non-performing assets in the system. One of the governments crackdowns entailed halting the construction of government buildings, which were starting to rival Versailles. And again, the public has preferred to put its savings anywhere but in bank accounts and other investments, especially real estate. The landscape is dotted with empty condo towers and ghost towns. An emerging-market survey would not be complete without mentioning Greece. German Finance Minister Wolfgang Schaeuble recently made an off-hand comment about Greece needing another bailout, and the European peripheral bond market didnt burp. The minister for privatization had to resign after appearing too cozy with a buyer of state assets and he is the third privatization minister to resign in a year. Privatization is $1 billion short of its target, money that is needed by specific dates to redeem maturing bonds. And in July, the tax authority just wrote off more than 65% of taxes (about 42 billion) as uncollectible.

Wither copper?

Analysts use different proxies for global growth, including the Baltic Dry Index and the CRB commodities index, but lets take a look at copper. Figure 2 shows the crash
CURRENCY TRADER September 2013

in demand during 2008 that took price to a multi-year low, followed by recovery in 2009 and 2010, and a peak in early 2011. But in 2012 copper declined again, in large part because of a drop in imports by China. The market is still not recovering to full-speed-ahead levels, despite favorable news about Chinese demand, which resulted in copper imports hitting a 14-month high in July (with iron ore at a record high). China accounts for about 40% of global demand for industrial metals, including copper. Insiders in the copper trading world measure Chinese demand in part on the spread between the world futures price and the premium paid for the physical stuff in Chinese warehouses. This has recently been at the highest since 2000, when China was just beginning a rapid ascent to its current powerhouse status. But there are some issues with this rosy outlook. For one thing, the Chinese government has been cracking down on leverage, including the use of metals as collateral to get credit for non-trading purposes. For another, copper mining and refining is not keeping pace with demand, especially from emerging markets like China and India, where consumers increasingly want better housing and that includes plumbing. In a nutshell, a supply shortage contributes to whatever firmness can be detected in copper prices over the summer of 2013; the downward slope of
17

ON THE MONEY

the resistance line is not encouraging. If there is vibrantly resurgent demand in China in combination with supply shortages, the price of copper should be high and rising. This is, by the way, one of those times when looking at a chart of monthly data is useful. Meanwhile, the Commodity Futures Trading Commission is investigating banks that own metals warehouses and also trade metals for their own account and serve as intermediaries for other traders. Can there be a big, fat conflict of interest in here? Metals users in the U.S. say there is, and subpoenas are already flying. Big banks own oil tankers (Morgan Stanley) while Goldman owns everything from coal mines to utilities, and JP MorganChase is buying up geothermal plants in the Far West. In fact, JP MorganChase just paid a big fine ($285 million) and gave back profits ($125 million) arising from a case of alleged price manipulation in energy markets and is exiting the physical commodities trading business altogether. But elsewhere, physical commodity trading firms are springing up under every bush The Economist magazine reports the number of trading firms in Geneva alone doubled (to 400) from 2000 to 2011. Now couple increased oversight (and, possibly, pricing that is more reflective of true supply and demand) with the rising cost of leverage,

whether the Fed raises the funds rate next year or the year after. Commodities trading is a leverage business. At the least we can expect higher volatility in commodities, which affects suppliers such as Canada and Australia, as well as others without a G7 currency.

The FX world is increasingly becoming divided into groups that reflect strength or vulnerability to the Feds upcoming actions. In the first group are the dollar, Euro, and pound, with the Euro holding its own despite having a yield disadvantage of nearly 150 basis points (German bund vs. Treasuries). The U.S. will have to offer a bigger premium to get a currency effect. The second group consists of the commodity currencies the Canadian, Australian, and New Zealand dollars which are about to become ever more vulnerable to commodity price volatility as leverage becomes costly. The third group is emerging-market currencies, which have to raise interest rates delicately to avoid capital outflows while maintaining growth. This group can still exhibit contagion and deliver another global crisis. The fourth group is not a group at all its the yen, which is highly correlated to the Nikkei stock index. Its the best intermarket correlation we have. The correlation Barbara Rockefeller with the yield differential is weak and Currency Trader Mag September 2013 Figure 3: Reuters US 10-Year Note Yield Index vs. Dollar Index tends to work the usual way: favoring FIGURE 3: U.S. 10-YEAR NOTE YIELD INDEX VS. DOLLAR INDEX the dollar as yields rise, except when 30.5 something else is not interfering, such 30.0 29.5 as safe-haven flows back to yen. The 29.0 28.5 Swiss franc, by the way, sometimes 28.0 27.5 belongs to the Euro group and some27.0 26.5 times to the yen group. 26.0 Bottom line: be skeptical when you 25.5 25.0 see forecasts of a rising dollar based 24.5 24.0 solely on the yield story. There are 23.5 23.0 deep undercurrents below the surface, 22.5 22.0 and so far, only emerging markets 21.5 21.0 are behaving in a predictable man20.5 20.0 ner. Figure 3 shows the dollar index 19.5 19.0 (green) with the 10-year T-note yield. 18.5 18.0 The relationship is not consistent. 17.5 There are two spiky highs in the dol17.0 16.5 lar index over the past few months, 16.0 15.5 while the yield index is a one-way 15.0 14.5 street. y 14.0
13.5 13.0 February April May June July August September November 2013 February April May June July August September

FX groupings

The dollar index/10-year yield relationship is inconsistent. The dollar index (green) has made two spiky highs over the past few months, while the yield index has moved almost exclusively upward.
Source: Chart Metastock; data Reuters and eSignal

Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange, and the author of the new book The Foreign Exchange Matrix (Harriman House). For more information on the author, see p. 4.
September 2013 CURRENCY TRADER

18

Did It or Didnt It? Market Trend Changes Instantly. So Does AbleTrend Indicator. AbleTrend Identifies Trend Changes As Soon As They Happen!
Test Drive AbleTrend 7.0 To Pinpoint True Market Support/ Resistance Levels And The Early Stages Of Trend Changes
1. Small blue dots are T2 stops for buy positions 2. Small red dots are T2 stops for sell positions showing the market support levels showing market resistance levels

Award Winning Trading Software

1997 - 2013

For Stocks, Futures FOREX & Options

AbleTrend 7 .0

3. T2 stops helps to define the retracements

4. T2 helps to define early trend changes

AbleTrend T2 offers the following advantages:

1. T2 stops are defined by the markets own support and resistance levels and are therefore 100% objective. 2. The scientific calculations behind T2 stops are universal, not curve-fitted. 3. T2 stops can be back-tested to reveal the characteristics of individual markets. 4. T2 stops are updated with each new tick so there are no delays. 5. T2 stops are proprietary, not shareware, and are for the exclusive use of software owners. 6. Successful AbleTrend users around the world have relied on T2. Their common conclusion: Never fight T2 stops.

30 DAY TRIAL START TODAY!

$20 DISCOUNT CODE: ACT1308

T RA DE RS ' RE S OURC E

LINK S

REGISTERED WITH THE

SINCE 1995

CTA

CFTC

Get Started Today! www.ablesys.com/AT1308

Ablesys Corp. 20954 Corsair Blvd. Hayward, CA 94545 Tel: 510-265-1883 Fax: 510-265-1993
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS 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. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

Readers Choice Awards 1997-2013 in Stock Trading System; Futures Trading System & Option Trading System

CTA Firm

TRADING STRATEGIES

System testing in dollar/yen and pound/dollar pairs

Different currency pairs require different testing parameters when developing trading systems.
BY DANIEL FERNANDEZ

Whats most important when developing a forex trading system? A currency pairs most recent behavior, or its broad characteristics over a long time period? How much data do you need to develop trading rules, and how much follow-up data is necessary to verify its performance? These were some of the questions addressed in FX trading system development: Outperforming your tests (Currency Trader, August 2013), which explored the probability of success of trading systems using different insample (IS) and out-of-sample (OS) period lengths in the Euro/U.S. dollar (EUR/USD). The study revealed that larger in-sample periods used for system generation led to better probabilities, with the highest success rate associated with the longest test period (5,000 days). However, the study didnt evaluate other currency pairs, so it was unclear whether this characteristic was universal or merely specific to the EUR/USD. To expand our perspective, lets perform the same analysis on two additional currency pairs, the U.S. dollar/Japanese yen (USD/JPY) and the British pound/U.S. dollar (GBP/USD), and see how the probabilities of out-of-sample success compare to the EUR/USD pair.

The testing process

The study used price-based strategies generated on daily data from Jan. 1, 1986 to Aug. 1, 2012 using the Kantu software (see note at end of article). In-sample periods ranged from 500 to 5,500 days, while out-of-sample periods ranged from 200 to 800 days. For each IS/OS combination, 1,000 different trading systems with coefficients of determination above 0.9 were generated, all with trading frequencies of more than 10 trades per year. The systems were created using randomly distributed, non-overlapping IS/OS combinations. For example, when generating systems for the 1,000-IS/200-OS combination, a system might have been generated on IS price data from Feb. 10, 2001 to Nov. 7, 2003 (1,000 days) and then tested on OS data from Nov. 8, 2003 to May 26, 2004 (200 days). This study generated fewer systems than the EUR/USD study (1,000 vs. 5,000) because systems satisfying the 0.9 determination coefficient threshold in the IS period were about five times less frequent in the USD/JPY and GBP/ USD pairs than in the EUR/USD. Tests were repeated at least three times to ensure reproducibility. In the GBP/USD pair, however, only a limited number of tests were conducted using longer IS periods
September October 2013 2010 CURRENCY TRADER

20

FIGURE 1: USD/JPY OUT-OF-SAMPLE SYSTEM PROFITABILITY

(more than 4,000 days) because of the scarcity of systems with high determination coefficients.

Test results

The OS probabilities of success for the USD/JPY (Figure 1) and GBP/USD pairs (Figure 2) follow significantly different patterns than that exhibited by the EUR/USD (Figure 3). These charts show the percentage of systems that were profitable in OS testing (vertical axis) in terms of the IS and OS period lengths (horizontal axis). Both the USD/JPY and (especially) GBP/USD pairs have greater than 50% odds of OS profitability using very short IS period lengths, as well as positive average daily profit values characteristics that were not evident in the EUR/USD. The former phenomenon hints at something fundamental: Generating systems on small amounts of data can lead to successful trading in these pairs. This means, historically, these pairs have exhibited conditions similar to those in their immediate past, while the EUR/USD requires much more data in order to develop profitable trading systems. Interestingly, Figure 1 shows the USD/JPY pairs odds of OS profitability initially increase as the IS period grows, but this probability drops sigCURRENCY TRADER September 2013

The yen/dollars percentage of systems that were profitable in OS testing in terms of the IS and OS period lengths.

FIGURE 2: GBP/USD OUT-OF-SAMPLE SYSTEM PROFITABILITY

Like the dollar/yen pair, the GBP/USD had better than 50% odds of OS profitability using very short IS data periods, as well as positive average daily profit values characteristics that were not present in the EUR/USD pair.

21

TRADING STRATEGIES

FIGURE 3: EUR/USD OUT-OF-SAMPLE SYSTEM PROFITABILITY

The OS profitability of trading systems in the EUR/USD pair increased with longer IS periods.

FIGURE 4: EXCEEDING IN-SAMPLE PERFORMANCE USD/JPY

nificantly after the 3,000 day-mark, eventually falling below 50% at 5,500 days. Also, the longer OS periods (800 days, blue dots) also have the highest probabilities of success (greater than 70%), while the shorter OS periods (200 days, red dots) have much lower success in OS testing. This is clearly a result of the potential for more systems to experience drawdowns that dominate the performance of short OS periods. This ordering of the OS period lengths hints to a trading edge around the 3,000 day IS threshold, with longer OS trading offering better odds of success. In contrast, in Figure 2 the GBP/ USD never produces the initial above50% probability of success using short IS periods (less than 1,500 days), suggesting that market conditions changed drastically enough in this pair to render larger data periods irrelevant.

Bettering in-sample performance

In the dollar/yen, the percentage of systems that exceeded IS profitability in the OS period peaked around a 3,000-day IS period length.

The percentage of systems that exceeded IS profits in the OS tests follow similar trends. The USD/JPY peaks around the 3,000 IS period length, with values mostly dropping after this point (Figure 4). Also, there is no convergence of different OS periods toward high IS period lengths, which suggests there is a better chance of surpassing IS results with low OS period lengths. This means a low OS period length has a lower chance of
September 2013 CURRENCY TRADER

22

FIGURE 5: EXCEEDING IN-SAMPLE PERFORMANCE GBP/USD

being profitable (only slightly above 50%), but if youre profitable i.e., if your system is not within a drawdown phase you are likely to exceed IS per-trade profit expectations. In the pound/dollar, Figure 5 shows an increased probability of systems exceeding IS profitability as the IS length increases, but the effect is diminished by the below-50% probability of selecting a winning strategy, along with the negative average daily return of the generated strategies. Average daily profitability follows a similar curve to the profitable OS probabilities. In the USD/JPY pair there was a peak at around 3,000 days, with a maximum value close to $10/ day (Figure 6). This value is higher than the maximum value found in the EUR/USD study, which was close to $6/day (not shown). Its also worth noting significant values (more than $4/day) accompany low IS periods in both the USD/JPY and the GBP/ USD (Figure 7), suggesting you can get positive mean profits for systems generated using very short IS period lengths (less than 1,000 days).

The pound/dollars overall increasing probability of systems exceeding IS profitability was diminished by a below-50% probability of having a winning strategy and a negative average daily return (see Figure 6).

FIGURE 6: AVERAGE DAILY PROFITS USD/JPY

Different instruments, different design strategies

This extension of the system-testing study shows the same system design approach did not apply to different currency pairs. Although the EUR/ USD analysis showed system generation should be based on very long IS periods (more than 5,000 days), the
CURRENCY TRADER September 2013

Average daily profitability in the USD/JPY pair peaked around 3,000 days, with a maximum value close to $10/day.

23

TRADING STRATEGIES

Updating strategies based on smaller amounts of data might be justified for some currency pairs.

current study shows the story is different for the USD/JPY and GBP/USD pairs. Although the USD/JPY might benefit from medium-term IS periods (3,000 days), the GBP/USD had optimal performance using very short IS periods (less than 1,000 days). This means that while, historically, it might have worked to generate a system for the EUR/USD using 13 years of FIGURE 7: AVERAGE DAILY PROFITS GBP/USD

daily data, the same approach would have failed in the USD/JPY and the GBP/USD, where using eight and two years, respectively, would have worked best. This suggests updating strategies based on smaller amounts of data might be justified for currency pairs that tend to reflect the market conditions of the recent past. In these cases, large amounts of past data might be irrelevant.

A final note on the dollar/yen

This analysis also hints that the USD/ JPY has a higher potential for the generation of more profitable strategies in OS conditions, as both the average daily profit and the probability to succeed in the OS are higher (at optimal values) than they are for the EUR/ USD a conclusion that is valid only for price-based strategies. y
You can repeat this study, or conduct your own tests in other instruments, using the demo version of the Kantu software available at http://mechanicalforex.com/kantu-systemgenerator. Daniel Fernandez is an active trader focusing on forex strategy analysis, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For more information on the author, see p. 4.

Average daily profits of more than $4/day accompany low IS periods in both the USD/JPY and the GBP/USD.

24

September 2013 CURRENCY TRADER

OCTOBER 2426, 2013

Metro Toronto Convention Centre

TORONTO

Money-Making Strategies Using The Leading Experts Tips & Tricks! TODAY!

Attend & Discover

Youll Take Home Highly Protable Ideas Such As:

A Unique Way to Play Utilities
PETER SCHIFF Markets LARRY BERMAN ETFs PETER HODSON Markets

Find out the 11 ETFs to Trade in Whipsaw Conditions Discover the 2 Stocks to Ride the LNG Waves 5 Bottom Up Bargains The Very Best Stocks of the Big 20

TYLER BOLLHORN Trading Strategies

BART DILIDDO Options

MARK BUNTING Markets

4 Cash Cows for Bad and Good Times Where to Hunt for Big Yields 3 Solid Income Picks from China

ROBYN GRAHAM ETFs

COLIN CIESZYNSKI Trading Strategies

CRAIG BASINGER Income

Easy to Register Free at

www.WorldMoneyShowToronto.com Or Call 800/970-4355 Today!
Mention Priority Code 032391
CURRENCY TRADER September 2013

Gold Sponsor

To Exhibit: Call 800/822-1134

Media Partner

a Production of

25

TRADING STRATEGIES ADVANCED CONCEPTS

The Polish zloty (pronounced Zloty)

Analysis of the Polish currency suggests Poland shouldnt be in a rush to join the Euro.
BYHOWARD L. SIMONS
When the book is closed on human history and they start handing out the hardware at that Big Award Show in the Sky, Poland is going to win the Lousy Choice of Neighbors prize by acclamation. This is a place whose one unquestioned natural border is the Baltic Sea in the north and, arguably, the Carpathian Mountains in its otherwise undefined southeast. Other than that, its history includes losing large chunks of land to an expanding Prussia from the west, an expanding Russia from the east, Austria from the south, and during the Thirty Years War to invading Swedes under Gustavus (Hop on the bus, Gus) Adolphus. It disappeared once in the 18th century after a series of partitions, reemerged as an independent country after the collapse of imperial Germany and tsarist Russia in World War I, with borders swung far FIGURE 1:  OPTIONS MARKET MORE COMFORTABLE into what is now Russia and WITH WEAKER PLN/USD RATE with a corridor to the Baltic at Danzig. That lasted 20 years and about three months before Poland was repartitioned between Nazi Germany and the Soviet Union; this triggered World War II in Europe. After the Poles fought bravely and hopelessly in a losing effort, Free Polish soldiers joined the Allied cause and participated in the air war against Germany and in the Italian campaign, most heroically at Monte Cassino. They were rewarded for their efforts by watching France being rewarded a victors share and by being resubjugated to Russian rule with borders shoved almost 200 miles west to the lines of the Oder and Neisse rivers. Excess volatility has been very low since 2004, and was not very large in either However, he who laughs last direction before 2004. laughs best: The collapse of
September 2013 CURRENCY TRADER

26

FIGURE 2: O  PTIONS MARKET MORE COMFORTABLE WITH WEAKER PLN/EUR RATE

The excess volatility measure on a EUR basis rises before the PLN weakens and falls before the PLN strengthens. This signals an active two-way trade between the two currencies and a relatively unencumbered trade.

the Soviet bloc began with the 1980 Polish dockworkers strikes in Gdansk (the former Danzig) under Lech Walesa.

The once and future zloty

The Polish currencys name, zloty, derives, like that of so many others, from golden. It came and went in various forms and valuations with the country itself, but always remained in secondary circulation with official coins of the realm. Once again, it may disappear into the Euro at some point after 2015 according to current projections, but given Polands history and luck, the Euro might disappear two minutes after the official announcement is made. We shall see. Regardless, the zloty (PLN) trades heavily against both the USD and the EUR and has been a borrower of the Swiss franc (CHF) as part of the franc carry trade. As the CHF has been capped against the EUR since September 2011, for now lets focus on the exchanges into the USD and EUR, even though the CHF has traded below the franc ceiling regularly since January 2013. The PLNs history has been much less exciting than the countrys history. The excess volatility, or ratio of the implied volatility for three-month non-deliverable forwards to high-low-close (HLC) volatility, minus 1.00,
CURRENCY TRADER September 2013

has been very low in absolute terms since 2004 and was not very large in either direction before 2004 (Figure 1). Restated, the demand by USD holders for insurance on the PLN is muted. About all we can say in this regard is the market is slightly more comfortable with a weaker PLN. As a refresher, HLC volatility is defined as:

Where N is the number of days between 4 and 29 that minimizes the function:

The excess volatility measure on a EUR basis is more descriptive (Figure 2). Here it rises before the PLN weakens and falls before the PLN strengthens and has been doing so since 1999. This behavior is a very strong signal of active two-way trade between the two currencies and, tellingly, in a world of overt currency-fixing, of a relatively unencumbered trade at that.
27

ON THE MONEY ADVANCED CONCEPTS

FIGURE 3:  PLN A WEAK FUNCTION OF RELATIVE INTEREST RATE EXPECTATIONS TO USD

Interest rates

Relatively higher expected interest rates boost the PLN, but not greatly.

FIGURE 4:  PLN SELDOM A FUNCTION OF RELATIVE INTEREST RATE EXPECTATIONS TO EUR

The PLN has been a wellbehaved currency as well in terms of expected interest rate differentials, as measured by the difference in forward rate ratios between six and nine months (FRR6,9) against the USD and EUR. This did not change much after the reliability of LIBOR came into question after March 2008 (see Major currencies and The Great LIBOR Kerfuffle, Currency Trader, June 2013). The general pattern has been for the PLN to firm against the USD as a weak lagging function of the difference between the PLN FRR6,9 and USD FRR6,9. Relatively higher expected interest rates boost the PLN, but not greatly (Figure 3). The pattern has been quite different for the expected interest rate differential between the PLN and EUR (Figure 4). This is attributable in large part to the Eurozones difficulties in selecting one longer-term course for monetary policy and sticking to it. The enormous but discontinuous steepening of the EUR FRR6,9 from mid-2010 onwards pushed the differential lower but did not lead to significant weakening of the PLN on the cross-rate. Restated, the Euro had its own problems and the zloty was not going along for the ride. Something else was at work.

The enormous but discontinuous steepening of the EUR FRR 6,9 from mid-2010 onwards pushed the differential lower but didnt lead to significant weakening of the PLN on the cross-rate.

Carry trades and relative asset returns

The last factor we will look at is one of the more telling, and that

28

September 2013 CURRENCY TRADER

is the excess carry returns on borrowing either the USD or EUR yes, for much of this history the CHF was the currency borrowed most and lending into the PLN. In the case of the dollar carry, the relative performance of Polish equities to American equities mirrored the excess carry return until October 2011 (Figure 5). The U.S. stock market strengthened after this date and Polish stocks started to weaken as the Eurozone economy turned softer. Once again, neighbors matter. A parallel construct for the EUR carry into the PLN and Polish performance relative to the Eurozone confirms this economic dependence. Here the two measures have been in convergence for more than a decade (Figure 6). A stronger carry into the PLN and relatively stronger Polish stock market performance are largely one and the same. An external observer might conclude Poland has as much of a happy medium as it is going to get. Its currency can trade against the dollar without having to match the European Central Banks peripatetic policies, and its asset markets can remain linked to the Eurozones without having to worry about the course of the Federal Reserves policies. Given its history, Poland should take this deal now and worry about joining the Euro later. y
Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. For more information on the author, see p. 4.

FIGURE 5: U  SD CARRY INTO PLN OUTPACING RELATIVE STOCK PERFORMANCE

The relative performance of Polish equities to American equities mirrored the excess carry return until October 2011, after which the U.S. stock market strengthened and Polish stocks started to weaken as the Eurozone economy softened.

FIGURE 6: E  UR CARRY INTO PLN IN CONVERGENCE WITH RELATIVE STOCK PERFORMANCE

The two measures have been in convergence for more than a decade. A stronger carry into the PLN and relatively stronger Polish stock market performance are largely one and the same.

CURRENCY TRADER September 2013

29

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: I nstitute for Supply Management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: P urchasing Managers Index PPI: P roducer 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.

September 1 2 3 4 17
U.S.: August ISM index U.S.: Fed beige book and July trade balance Australia: Q2 GDP Canada: Bank of Canada interestrate announcement Japan: Bank of Japan interest-rate announcement UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: August employment report Brazil: August CPI and PPI Canada: August employment report LTD: September forex options; September U.S. dollar index options (ICE)

18 19 20 21 22

U.S.: August CPI Hong Kong: June-Aug. Employment report South Africa: Q2 employment report UK: August CPI and PPI U.S.: FOMC interest-rate announcement and August housing starts South Africa: August CPI FDD: September forex futures; September U.S. dollar index futures (ICE) U.S.: August leading indicators Canada: August CPI Mexico: August employment report

6 7 8 9 10 11 12 13 14 15 16

Kong: Q2 GDP and August 23 Hong CPI

24 Mexico: Sept. 15 CPI 25 U.S.: August durable goods

U.S.: Q2 GDP

26 Brazil: August employment report

Mexico: Aug. 31 CPI and August PPI South Africa: Q2 GDP France: Q2 employment report Germany: August CPI Japan: August PPI UK: August employment report Australia: August employment report France: August CPI Hong Kong: Q2 PPI U.S.: August PPI and retail sales

27 28 29 31

South Africa: August PPI U.S.: August personal income France: Q2 GDP Japan: August CPI

August PPI 30 France: India: August CPI

1 2 3 4

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

India: August PPI LTD: September forex futures; September U.S. dollar index futures (ICE)

U.S.: September ISM manufacturing index Germany: September employment report Japan: September employment ECB: Governing council interest-rate announcement U.S.: September Germany: August PPI Japan: Bank of Japan interest-rate announcement

October

EVENTS
Event: Quant Invest 2013 Date: Sept. 24-26 Location: Hotel Lutetia, Paris For more information: Go to www.terrapinn.com Event: World Commodities Week 2013 Date: Oct. 8-9 Location: ETC Venues, St Pauls, London For more information: Go to www.terrapinn.com Event: The World MoneyShow Orlando Date: Jan. 29 - Feb. 1, 2014 Location: Gaylord Palms Resort and Convention Center, Orlando For more information: Go to www.moneyshow.com
Event: The Trading Show West Coast Date: Feb. 12-13, 2014 Location: San Francisco For more information: Go to www.terrapinn.com
September 2013 CURRENCY TRADER

30

CURRENCY FUTURES SNAPSHOT as of Aug. 30

Market EUR/USD JPY/USD GBP/USD AUD/USD CAD/USD MXN/USD U.S. dollar index CHF/USD NZD/USD E-Mini EUR/USD Sym EC JY BP AD CD MP DX SF NE ZE Exch CME CME CME CME CME CME ICE CME CME CME Vol 196.6 130.5 102.9 94.9 60.0 34.4 32.6 29.1 12.8 3.3 OI 227.5 170.4 144.6 187.5 107.7 97.1 67.8 37.5 12.2 4.5 10-day move / rank -0.97% / 100% -0.60% / 29% -0.93% / 100% -3.16% / 85% -1.94% / 75% -3.30% / 64% 1.04% / 100% -0.54% / 50% -4.62% / 100% -0.97% / 100% 20-day move / rank -0.60% / 21% 0.71% / 8% 1.39% / 26% 0.09% / 11% -1.29% / 21% -4.99% / 74% 0.20% / 6% -0.28% / 13% -1.16% / 14% -0.60% / 21% 60-day move / rank -0.29% / 5% -0.96% / 11% -0.74% / 22% -7.42% / 62% -1.74% / 44% -3.92% / 47% 0.59% / 17% -0.14% / 5% -3.77% / 51% -0.29% / 5% Volatility ratio / rank .39 / 40% .30 / 22% .35 / 10% .13 / 25% .41 / 52% .30 / 45% .35 / 25% .30 / 5% .37 / 65% .39 / 40%

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 July 31 ranked by July 2013 return) July return 5.33% 5.20% 3.92% 2.46% 1.23% 1.21% 1.09% 0.96% 0.95% 0.80% 6.15% 3.94% 2.78% 1.30% 0.89% 0.67% 0.05% -0.15% -0.15% -0.39% 2013 YTD return 26.75% 14.85% -22.50% 1.22% 1.03% 4.37% 1.32% 11.54% -4.36% -5.69% 40.25% 39.67% -10.22% 11.38% 14.02% 36.44% 0.36% 0.44% -0.80% -3.52% $ Under mgmt. (millions) 33 61.2 1076 41 170 26.4 30 14.5 22 456 5.4 3.7 3.0 1.1 2.7 2.7 1.3 1.0 8.0 4.0

Trading advisor 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Gables Capital Mgmt (Global FX) Sequoia Capital Fund Mgmt (FX) Ortus Capital Mgmt. (Currency Aggr) ABC Arbitrage AM (ABCA FX) Excalibur Absolute Return Fund Gedamo (FX Alpha) DynexCorp (Currency) BBK Bisang Blass Kavena (Currencies) Algo K Alpha EUR/USD Currency Fund QFS Asset Mgmt (QFS Currency) SMILe Global (Mgmt FX) Investment Capital Adv (Managed Acts) Hartswell Capital Mgmt (Apollo) JP Global Capital Mgmt (Troika I) Exclusive Returns (Viktory) Fornex (Foyle) Four Capital (FX) Seneca (Willowdale Fund) Quaesta Capital GmbH (vTrader FX 2XL) BlueFin Capital (Managed FX)

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 September 2013

31

INTERNATIONAL MARKETS

CURRENCIES (vs. U.S. DOLLAR)

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency Great Britain pound Swiss franc Euro Japanese yen Swedish krona Chinese yuan Taiwan dollar Hong Kong dollar Singapore dollar Russian ruble Australian Dollar Canadian dollar Thai baht New Zealand dollar South African rand Brazilian real Indian rupee Aug. 26 price vs. U.S. dollar 1.556845 1.08501 1.33822 0.010125 0.15404 0.162345 0.033445 0.12895 0.781965 0.030275 0.90259 0.95261 0.03139 0.78024 0.09762 0.411435 0.01554 1-month gain/loss 1.56% 1.51% 1.26% 1.15% 0.25% 0.25% 0.18% 0.03% -0.89% -1.42% -1.62% -1.90% -2.45% -2.69% -4.52% -7.49% -7.97% 3-month gain/loss 2.93% 4.32% 3.48% 2.53% 2.34% 0.39% 0.27% 0.10% -1.14% -5.17% -6.48% -1.69% -5.96% -3.63% -6.52% -15.66% -13.33% 6-month gain/loss 2.88% 0.84% 1.32% -5.02% -1.27% 2.09% -0.80% 0.02% -3.15% -8.03% -12.29% -2.47% -6.33% -6.87% -13.47% -18.83% -15.98% 52-week high 1.6286 1.1017 1.3639 0.0129 0.159 0.1624 0.0345 0.129 0.8213 0.0337 1.0570 1.0334 0.0348 0.8619 0.1223 0.5137 0.0194 52-week low 1.4877 1.0274 1.251 0.0097 0.1464 0.1576 0.0326 0.1288 0.7792 0.03 0.8898 0.9445 0.0312 0.7704 0.0966 0.4082 0.0154 Previous 16 15 9 17 2 12 7 14 8 5 13 4 11 3 1 6 10

GLOBAL STOCK INDICES

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
32

Index FTSE/JSE All Share Bovespa FTSE MIB Swiss Market CAC 40 Xetra Dax All ordinaries S&P/TSX composite Hang Seng IPC FTSE 100 S&P 500 Nikkei 225 Straits Times BSE 30

Aug. 26 43,290.55 51,429.00 16,977.80 8,022.20 4,067.13 8,435.15 5,127.10 12,760.30 22,005.32 40,419.93 6,441.00 1,656.78 13,636.28 3,084.41 18,558.13

1-month gain/loss 6.26% 4.06% 3.39% 2.89% 2.48% 2.31% 2.06% 0.89% 0.17% -1.57% -1.74% -2.06% -3.49% -4.69% -6.03%

3-month gain/loss 4.48% -8.81% -1.06% -1.72% 1.80% 0.62% 3.82% 0.50% -3.00% 0.69% -4.75% -0.20% -3.58% -9.05% -7.35%

6-month gain loss 9.41% -9.69% 9.17% 7.68% 12.29% 11.03% 2.10% 0.79% -2.28% -7.06% 2.72% 10.68% 19.63% -5.22% -2.40%

52-week high 43,290.55 63,473.00 17,897.40 8,411.30 4,123.89 8,557.86 5,229.80 12,904.70 23,944.70 46,075.00 6,875.60 1,709.67 15,942.60 3,464.79 20,443.60

52-week low 35,045.55 44,107.00 12,362.50 6,355.80 3,341.52 6,871.00 4,281.50 11,759.00 19,076.80 37,034.30 5,605.60 1,343.35 8,488.14 2,931.60 17250.80

Previous 12 15 3 9 4 11 5 13 2 7 6 8 1 14 10

South Africa Brazil Italy Switzerland France Germany Australia Canada Hong Kong Mexico UK U.S. Japan Singapore India

September 2013 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 / Real Yen / Real Aussie $ / Real Canada $ / Real Pound / Canada $ Franc / Canada $ Pound / Aussie $ Euro / Canada $ Euro / Aussie $ Aussie $ / New Zeal $ Pound / Yen Franc / Yen Aussie $ / Canada $ Euro / Yen Pound / Franc Euro / Franc Euro / Pound Canada $ / Yen Aussie $ / Yen Aussie $ / Franc New Zeal $ / Yen Symbol EUR/BRL JPY/BRL AUD/BRL CAD/BRL GBP/CAD CHF/CAD GBP/AUD EUR/CAD EUR/AUD AUD/NZD GBP/JPY CHF/JPY AUD/CAD EUR/JPY GBP/CHF EUR/CHF EUR/GBP CAD/JPY AUD/JPY AUD/CHF NZD/JPY Aug. 26 3.25276 0.024615 2.1939 2.31547 1.6343 1.13899 1.724865 1.404795 1.48249 1.15627 153.72 107.120 0.947495 132.145 1.43505 1.23317 0.85943 94.55 89.13 0.83187 77.035 1-month gain/loss 9.47% 9.33% 6.34% 6.05% 3.53% 3.48% 3.24% 3.22% 2.92% 1.05% 0.40% 0.34% 0.28% 0.12% 0.06% -0.25% -0.31% -2.52% -2.73% -3.09% -3.80% 3-month gain/loss 22.69% 21.62% 10.87% 16.56% 4.70% 6.11% 10.07% 5.26% 10.65% -3.04% 0.35% 1.69% -4.88% 0.88% -1.31% -0.81% 0.51% -3.66% -8.83% -10.35% -6.05% 6-month gain loss 24.84% 17.05% 8.06% 20.17% 5.48% 3.39% 17.30% 3.88% 15.51% -5.87% 8.29% 6.13% -10.08% 6.65% 2.04% 0.46% -1.53% 3.20% -7.67% -13.02% -1.98% 52-week high 3.2599 0.0262 2.2253 2.3271 1.641 1.1402 1.7355 1.4071 1.4909 1.29 156.48 107.12 1.0685 132.75 1.5207 1.256 0.8747 100.65 105.05 0.9981 85.86 52-week low 2.5189 0.0196 1.9633 1.8879 1.5286 1.0304 1.4439 1.2387 1.202 1.1287 124.11 81.92 0.9224 98.38 1.4062 1.2004 0.7909 79 79.81 0.8263 62.25 Previous 14 21 16 10 19 18 13 15 9 20 6 5 17 3 12 8 7 2 4 11 1

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 0.5 0.5 1 0-0.25 2.5 2.5 9 2.5 1.875 7.25 5 Last change 0.5 (Dec 08) 0-0.1 (Oct 10) 0.25 (May 13) 0.5 (Mar 09) 0.25 (Sep 10) 0.25 (Aug 11) 0.25 (Aug 13) 0.5 (Mar 11) 0.5 (Aug 13) 0.25 (May 13) 0.125 (Jun 11) 0.25 (May 13) 0.5 (Jul 12) Feb. 2013 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3 2.5 7.25 2.75 1.875 7.75 5 Aug. 2012 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3.5 2.5 7.5 3 1.875 8 5
33

CURRENCY TRADER September 2013

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
Q1 Q2 Q2 Q2 Q2 Q1 Q2 Q1 Q2 Q2 Q2 Q2

Release date
6/24 8/30 8/30 8/27 8/14 6/27 8/27 6/5 8/16 8/30 8/12 8/16

Change
-6.2% 5.3% 0.9% 0.5% 1.6% 0.9% 0.9% 0.6% -2.4% -4.3% 0.6% 5.1%

1-year change
2.1% 3.3% 3.4% 1.9% 3.4% 2.2% 6.9% 2.6% 3.3% 10.2% 2.6% 3.8%

Next release
9/20 12/3 9/30 9/27 9/6 9/26 9/10 9/4 11/15 11/29 11/14 11/22

EUROPE AFRICA ASIA and S. PACIFIC

Unemployment AMERICAS

Period
Q2 July July Q1 July April-June July May-July July Q2

Release date
8/20 8/22 8/9 5/7 8/29 8/14 8/8 8/19 8/30 7/31

Rate
7.9% 5.6% 7.2% 10.2% 5.4% 7.8% 5.7% 3.3% 3.8% 2.1%

Change
0.7% -0.4% 0.1% 0.3% -0.1% 0.0% 0.0% 0.0% -0.1% 0.2%

1-year change
0.0% 0.2% -0.1% 0.8% -0.3% -0.2% 0.5% 0.1% -0.5% -0.1%

Next release
9/13 9/26 9/6 9/5 10/1 9/11 9/12 9/17 10/1 10/31

EUROPE

ASIA and S. PACIFIC CPI

Period
Argentina July July July July July July July Q2 July July July July Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date
8/15 8/7 8/23 8/14 8/13 8/13 8/21 7/24 8/20 8/30 8/30 8/23

Change
0.9% 0.3% 0.1% 0.3% 0.5% -0.1% 1.1% 0.4% 0.5% 1.7% 0.2% 0.3%

1-year change
10.6% 3.2% 1.3% 1.1% 1.9% 2.8% 6.3% 2.4% 6.9% 10.8% 0.7% 1.9%

Next release
9/13 9/6 9/20 9/12 9/11 9/17 9/18 10/23 9/23 9/30 9/27 9/23

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
July July July July July July Q2 Q1 July July July

Release date
8/15 8/29 8/30 8/20 8/13 8/29 8/2 6/14 8/14 8/12 8/29

Change
1.1% 0.3% 1.0% -0.1% 0.2% 0.7% 0.1% 1.1% 0.6% 0.5% 0.7%

1-year change
13.7% 1.4% 2.9% 0.5% 2.1% 6.9% 1.2% 0.6% 5.8% 0.3% 0.3%

Next release
9/13 9/30 9/30 10/4 9/17 9/26 11/1 9/12 9/16 9/11 9/27

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

34

September 2013 CURRENCY TRADER

FOREXTRADE JOURNAL

Going short as a prelude to a long position.

TRADE
Date: Aug. 30. Entry: Short the U.S. dollar/Canadian dollar pair (USD/CAD) at 1.0538. Reason for trade/setup: Although the analysis in Spot Check leans toward a longer-term long position in dollar/ Canada, the late-August rally that took the pair toward the top of its trading range presented the possibility of profiting from a short trade before going long on an expected pullback (see daily chart inset). Analysis of the pairs price action as of Aug. 28, centering around the modest spike high on Aug. 23, indicated it was likely to underperform over the next several days (based on 76 examples). Although price moved sideways to higher over the next couple of days, a short position was entered when the pair challenged and then pulled back from its intraday high on the morning of Aug. 30. The stop will be placed relatively nearby, as any move above 1.06 will likely trigger trendfollowing buying. The target the anticipated buy level for a long position will be placed below the recent congestion. Initial stop: 1.0588. Initial target: 1.0426.

Source: TradeStation

RESULT
Exit: Trade still open on Aug. 30. Profit/loss: .0010, marked to market around 1:30 p.m. ET on Aug. 30. Outcome: It will be interesting to watch this trade unfold. If no significant pullback occurs and price continues to creep higher, a decision will need to be made whether it is wiser to reverse position at the stop-loss level or wait for a more significant move (and a post-breakout pullback). On the other hand, a pullback to (and stagnation or bullishness around) 1.0475 the recent intraday consolidation low might prompt an early exit and/or reversal. 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 8/30/13 Currency pair USD/CAD Entry price 1.0538 Initial stop 1.0588 Initial target 1.0426 IRR 2.24 MTM Date P/L point .0010 % 0.09% LOP .0030 LOL -.0019 Trade length 3 hrs.

1.0528 8/30/13

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 September 2013

35