June 2010 Volume 7, No. 6
Strategies, analysis, and news for FX traders
EURO/DOLLAR PARITY, COMMODITY
CURRENCY SETUPS, AND MORE:
What’s in store for the rest of the year?
p. 6
SIGNALS FROM THE ASIAN
forex session
p. 18
THE EURO’S RECORD MOVE
p. 16
RISK, FEEDBACK LOOPS,
and self-fulfilling
prophecies in FX
p. 12
CHANGING GEARS
in the Aussie dollar p. 32
SOUTH OF THE BORDER:
Colombian peso analysis
June 010 • CURRENCY TRADER
contents
Contributors ...
4
Global Markets
Dollar bulls in the driver’s seat ...
6
A look at the major currency stories at the mid-point of the year, and what the remainder of 010 may bring.
By Currency Trader Staff
On the Money
The world is not flat ...
12
How low can the euro go? By Barbara Rockefeller Spot Check Euro/U.S. dollar ...
16
Where the euro’s been, where it’s going: the numbers.By Currency Trader Staff
Trading Strategies Taking advantage of the
Asian trading session ...
18
Analyzing the often-overlooked Asian trading session points to a novel way of exploiting forex market inefficiencies.
By Daniel Fernandez
Advanced Strategies
Colombian peso, the richest kind ...
22
colombia’s peso gets a helping hand from U.s. interest-rate policy.
By Howard L. Simons
Currency Futures Snapshot ...
25
International Markets ...
26
numbers from the global forex, stock, and interest-rate markets. Global economic calendar ...29
Important dates for currency traders. events ...30
conferences, seminars, and other events. new Products & services ...30
Key concepts ...31
Forex Journal ...32
Reversing direction in the Aussie dollar.Looking for an
advertiser?
click on the company name for a direct link to the ad in this month’s issue. esignal FXcM traders expo Your FX trading RoomQuestions or comments?
submit editorial queries or comments to [email protected].contRIBUtoRs
qHoward 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.
qBarbara Rockefeller (www.rts-forex.com) is an
inter-national 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 (For Dummies, 2004), 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.
qDaniel Fernandez is an active trader with
a strong interest in calculus, statistics, and eco-nomics who has been focusing on the analysis of forex trading strategies, particularly algorith-mic 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
inter-est articles on forex trading (http://fxreviews.blogspot.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].
June 010 • CURRENCY TRADER
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] President: Phil Dorman [email protected] Publisher, ad sales: Bob Dorman [email protected]
Classified ad sales: Mark seger [email protected] Volume 7, Issue 6. currency trader is published monthly by techInfo, Inc., 161 n. clark st., suite 915, chicago, IL 60601. copyright © 010 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.
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6 June 010 • CURRENCY TRADER
GLoBAL MARKets
What a difference a year can make.
Last year the bears pummeled the U.S. dollar as the eas-ing financial crisis let the air out of the “flight-to-quality” trade and reinflated concerns about U.S. structural and fis-cal problems, not to mention sluggish growth prospects.
However, the first five months of 2010 have been a completely different story. Amid dramatic losses in equity markets and the unfolding European sovereign-debt crisis,
global money managers have flocked back to the U.S. dol-lar. Among the major industrialized currencies, the buck has been the place to be.
The biggest currency story of late, of course, has been the Euro’s dramatic decline. The Euro/U.S. dollar pair (EUR/USD), which had recouped the majority of its 2008 losses by the end of 2009, tumbled from above 1.5100 in December to 1.2142 in late May — a nearly 20-percent
decline that took the Euro to its low-est level vs. the dollar in more than four years (Figure 1). The sell-off’s April-May leg was especially precipi-tous, with the pair dropping more than 11-percent from the April 12 high to the May 19 low. The Euro dropped to 1.2110 on June 1.
The Euro’s loss was, of course, the dollar’s gain. “The reason the dol-lar went up is because people didn’t want to own the Euro,” says Philip Roth, chief technical market analyst at Miller Tabak & Co.
The U.S. dollar index (DXY) has recaptured the vast majority of its 2009 sell-off by the end of May (Figure 2). Although the Euro is the single largest component of the dol-lar index, the doldol-lar has posted dol-large gains vs. a wide range of currencies over the past several months. From Dec. 31, 2009 through the May high closes, the dollar surged nearly 15 percent against the Euro, 17 percent
FigURE 1: EURO WOES
Battered first by the European debt crisis and then by a rush into the U.S. dollar, the Euro dropped to its lowest levels vs. the dollar since 2006.
Source: TradeStation
Dollar bulls
in the driver’s seat
As mid-year approaches, the dollar is soaring, the Euro is testing
multi-year lows and commodity currencies may be poised for a rebound.
By CurrEnCy TrAdEr STAff
against the Danish krone, 13 percent vs. the Norwegian krone, 12 percent vs. the Swedish krona, and 11 percent vs. the British pound (Table 1).
The list goes on. During same time period, the greenback rallied 12 per-cent against the Swiss franc, 9 perper-cent against the Australian dollar, 8 per-cent vs. the New Zealand dollar, 6.30 percent vs. the Brazilian real, and 4.14 percent vs. the South Korean won.
The Japanese yen was the one major currency that managed to hold its ground vs. the dollar in the first five months of 2010. Through the highest close as of May 25, the yen had gained 3.59 percent against the dollar (Figure 3). However, most of that was seen not as safe-haven buy-ing but rather a repatriation of the
carry trade. (The Mexican peso also gained incrementally vs. the dollar.) “We’ve seen risk aversion based in part on the global equity sell-off, which prompted carry trade players to square up,” says Michael Woolfolk, managing director at BNY Mellon. For example, traders who had been long the Aussie/yen cross rate would have sold the Australian dollar and bought the Japanese yen to square up that position. The Aussie/yen cross has collapsed over the past month, plunging from 88.00 to 72.00 in the span of four weeks (Figure 4).
Ultimately, the May equity break-down accelerated trends that had already been in place.
The equity connection
Volatility surged in spring as fresh
FigURE 2: DOLLAR BENEFiCiARY
By late May the U.S. dollar index had regained almost all its 2009 losses.
Source: TradeStation
TABLE 1: ON THE YEAR VS. THE DOLLAR
Pair Symbol Dec. 31 May 27 %
+/-euro/$ eUR/UsD 1.33 1.0 1.81% $/Danish krone UsD/DKK 5.193 6.0966 17.37% $/norweg. krone UsD/noK 5.7839 6.508 1.5% Pound/$ GBP/UsD 1.616 1.333 11.33% $/swedish krone UsD/seK 7.17 7.9757 11.60% Aussie/$ AUD/UsD 0.8973 0.817 8.95% Kiwi/$ nZD/UsD 0.731 0.668 8.06% $/franc UsD/cHF 1.0355 1.16 1.5% $/yen UsD/JPY 93.01 89.67 -3.59% $/canada UsD/cAD 1.059 1.07 1.6% $/Brazil real UsD/BRL 1.7 1.8368 5.56% $/Mexican peso UsD/MXn 13.085 1.883 -1.5%
8 June 010 • CURRENCY TRADER
GLoBAL MARKets
(bad) news about the European sovereign-debt crisis kept rolling in, putting pressure on the Euro and pumping up the dollar. Then equity markets began to turn down. From late April through late May, the S&P 500 had lost roughly 15 percent of its value.
“We are going through a significant shock,” says Sebastien Galy, currency strategist at BNP Paribas.
The calamity prompted a new round of U.S. dollar flight-to-quality and safe-haven buying — just as had occurred in 2008 and early 2009.
“The dollar is still the safe-haven and reserve currency of the world — that has been clearly reinforced,” says Julia Coronado, senior economist at BNP Paribas.
“The dollar is a combination safe-haven and also a bet on the future in the form of stability and credibility,” Galy says.
The global equity market downturn has encouraged asset liquidation. In the Eurozone, the Euro Stoxx index was down 13.6 percent year-to-date as of May 25. The FTSE 100 had fallen 8.7 percent, and even China’s Shanghai Composite index was down 20 percent.
“Part of the move [lower] in the Euro/dollar is a function of the stock market,” BNP’s Galy says. “People feel uncomfortable with assets in the Eurozone and now have to get out. The pressure and [bullish] demand for the dollar is so one-sided.”
While the February lows in the Dow Jones Industrial Average and the S&P 500 were holding up as of late May, those levels — around 9835 in the Dow and around 1044 in the
FigURE 4: SQUARiNg UP THE CARRY TRADES
The Aussie/yen pair crumbled in May as risk aversion notched higher and carry trade players bailed out of short-yen positions.
Source: TradeStation
FigURE 3: JAPANESE YEN
The Japanese yen was the one major currency that managed to hold its ground vs. the dollar in 2010, although it is still trading near historically low levels.
GLoBAL MARKets
S&P 500 — are the key chart levels to monitor, according to Miller Tabak’s Roth.
Of the 83-percent gain in the S&P 500 from the March 2009 low to the April 2010 high, Roth notes, “the 2009-2010 advance is going to be corrected for many months.” The 15-percent pullback from the April 2010 high may have just been the start, according to Roth.
Roth warns if the S&P 500 takes out 1040, he sees addi-tional losses toward the 950-900 zone. Such a sell-off could take place perhaps in the fall of 2010 or maybe in 2011, he
says.
More importantly, however, further declines in stocks would likely be dollar-supportive, analysts say.
A continuing dichotomy
Questions looming for the remainder of the year are whether the bull trend in the U.S. dollar can continue, and what other currencies can be expected to outperform in the second half.
“We still like the dollar,” notes Vassili Serebriakov, cur-rency strategist at Wells Fargo. “We’ve been bullish on it for quite a while. Perhaps there is some scope for the losses in the Euro to slow down, but generally, the dollar should do well against the pound, yen, and Swiss franc.”
Analysts seem to agree that in the second half of the year the U.S. dollar should outperform other major curren-cies, but will likely underperform key emerging currencurren-cies, including those in India, Korea, and Brazil.
“The dollar should do well against the majors, but weaker against emerging currencies — especially Asian currencies, such as the Indian rupee and Korean won,”
In the short-term, currency
players are eyeing the Euro’s
January 1999 “launch rate” of
Serebriakov says.
“The U.S. [economic] recovery is looking better than most industrial-ized countries right now — it is good relative to Europe,” BNP Paribas’ Coronado says. “But that’s not the case when you make the comparison to emerging markets. Asia, Brazil, and India are showing solid recoveries that look quite good.” However, she adds this somewhat is to be expected. “We are an older economy, which don’t generally grow as fast as emerg-ing markets.”
Euro woes
With the EUR/USD trading around $1.220 at the beginning of June, cur-rency analysts say the downtrend is likely to continue. “The Euro should continue to flounder and falter,” says Brian Dolan, chief currency strategist at Forex.com. “Into the end of the year, the Euro is likely to see further readjustment.” He targets $1.15 as a year-end objective, and adds “that risks are to the downside.”
In the short-term, BNY Mellon’s Woolfolk notes currency players are eyeing the Euro’s January 1999 “launch rate” of 1.1800. “There will be pullbacks and profit-taking, but that is a reasonable objective, near term,” Woolfolk says.
Galy says his firm’s fourth quarter 2010 target for the year is $1.08. “The Fed will tighten in mid-2011, but the Eurozone will not tighten in 2011,” he explains. “[Interest-rate] differentials will widen.”
There’s another, perhaps longer-term, milestone looming below the 1.1800 level, though. “We are headed to parity (1.00) over the next two to three years,” Woolfolk says.
Wells Fargo’s Serebriakov agrees. “We certainly see the Euro, perhaps one to two years from now, closer to
FigURE 5: LAUNCH RATE, THEN PARiTY?
Two looming downside targets for the Euro are its 1999 launch rate around 1.18 and parity (1.00) with the U.S. dollar.
Source: TradeStation
FigURE 6: CANADiAN DOLLAR
As is the case with other “commodity currencies,” many analysts see gains for the Canadian dollar in the coming months, and a potential drop in the USD/CAD rate below 1.00.
Source: TradeStation
10 June 010 • CURRENCY TRADER
parity with the U.S. dollar. But that is not the forecast for this year.”
Commodity currencies
Another theme currency analysts see playing out in the second half of the year is the potential for commodity cur-rencies, such as the Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD), to perform well. Both the New Zealand and Australian currencies pulled back dramatically in May.
“We are in the midst of a position flush-out as investors reduce [risk] exposure,” says Todd Elmer, Citi currency strat-egist. “But this will be a buying opportunity for currencies like the Canadian dollar and the Australian dollar.”
Elmer expects the Canadian and Aussie dollars to outper-form in the months ahead “once risk appetite stabilizes,” citing “more vigorous recov-eries, greater sensitivity to a
pickup in global growth, and better fiscal positions” than other industrialized countries.
Brian Kim, currency strategist at UBS, sounded a similar note. “In the second half, we think the commodity cur-rencies will do well,” he says. “Several of those countries, such as Canada and New Zealand, will be among the next wave of policy rate hikes, which should give some strength to those currencies.”
“I think the global recovery is still intact, which is likely to benefit commodity currencies,” adds Forex.com’s Dolan.
In addition to commodity exports, bullish interest-rate differentials will buttress the commodity currencies in the second half. As of late May, Australia was leading the major central banks with a 4.50-percent lending rate.
“The RBA (Royal Bank of Australia) has been at the fore-front of central banks willing to dial back monetary stimu-lus, as it has raised its key lending rate 150 basis points (1.5 percent) since this past October,” wrote Wells Fargo economists at in their May Global Chartbook. “With infla-tion currently in the upper half of the bank’s target range, we think the RBA will likely take a breather at its June meeting before considering another rate hike.”
The Bank of Canada (BOC) initiated a rate-hike cycle on June 1 by raising its overnight rate .25 percent to .50 per-cent. Subsequent BOC meetings are scheduled for July 20, September 8, October 19, and December 7.
New Zealand’s central bank lending rate stands at 2.5 percent. The Reserve Bank of New Zealand is scheduled to meet on June 9. Analysts expect the RBNZ to embark on a tightening cycle in the second half of this year, which should support the currency.
Some analysts also say the May wash-out may have cre-ated good buying spots. “The market mayhem brought us down to big levels in the commodity currencies,” Dolan says. “The 77.00-82.00 area is attractive in the Aussie/ dollar.” He is targeting gains toward 92.00-95.00 in the Aussie/dollar pair by year-end (Figure 5).
For the Canadian dol-lar, Dolan sees 1.0700-1.100 as a potential sell zone, with a target of .9900-.9700 by year end (Figure 6).
Not a golden opportunity?
For a completely different, longer-term perspective, Miller Tabak’s Roth note the U.S. dollar and the Euro have both declined a great deal vis-à-vis gold.
“I don’t think either currency is very attractive long-term,” he says. “The fact that gold has made new highs in terms of the pound, the Euro, the Swiss franc and the dol-lar shows that a lot of investors don’t want to own any of these currencies.”
Caution advised
Financial market conditions are jittery and volatile as we enter the summer months.
“Right now a lot of people are going with the short-Euro trend,” UBS Kim says. “It’s tough to fight the trend. But you have to be cautious near term.”
BNP Paribas Galy also warns currency traders to be “extremely prudent. Be very tactile, because trends don’t last very long. Don’t be highly leveraged.” ›
“The dollar should do well against
the majors, but will be weaker
against emerging currencies,
especially Asian currencies, such as
Oil is up because the dollar is down, or so say the flat-earthers. Gold is up and equities are down because of sovereign risk in Europe. The world is flat and everything is connected or correlated to everything else, at least in the world of international finance. It’s convenient shorthand — just look at the price of oil and you know, or think you know, where the Euro/dollar pair is priced, or soon will be.
Poppycock. Yes, it’s true the near-instantaneous avail-ability of news and price information has changed the trading landscape, but it hasn’t changed the laws of sup-ply and demand or the rules governing human behavior;
traders are still human beings, however technically well-equipped. The world is flat and everything is related to everything else only if you are very short-sighted.
The risk angle
We used to live in a two asset-class world. When stocks fell or became overly volatile, investors demanded bonds, driving the price up and the yield down. Traders could easily anticipate this risk-appetite/risk-aversion behavior. Sometimes what moved the markets could be surprising, but at least the logic was clear. Now other commodities are being treated the same way — as a proxy for risk appetite
or risk aversion — and it upsets the analytical apple cart.
Take the Australian dollar. When Chinese and other Asian demand for commodities rose during the 2000s, Australia was the obvious beneficia-ry. In addition, Australia did not suf-fer much from the sub-prime fallout, so it did not need emergency pump-priming or draconian interest-rate cuts. Australia has a sophisticated and well-managed central bank that not only maintained higher interest rates than the rest of the developed world throughout the 2008-2009 cri-sis, but was the first G7 country to raise rates in 2009. The Reserve Bank of Australia (RBA) adopted inflation targeting in 1993 and has achieved credibility on that measure. A data box on the RBA Web site shows the cash rate (4.5 percent) and inflation rate (2.9 percent) as the top entries. The higher rates in Australia, of course, were the underlying reason On the Money
1 June 010 • CURRENCY TRADER
on tHe MoneY
FigURE 1: FEAR AND THE AUSSiE DOLLAR
Sell-offs in the AUD/USD pair have been driven more than once by fear rather than fundamentals.
source: chart — Metastock; data — Reuters and esignal
The world is not flat
feedback effects and self-fulfilling prophecies set up
interesting scenarios for the Euro and other markets.
FigURE 2: gOLD AND RiSK
The price of gold is a function of sovereign risk fear, even when the name of the sovereign changes.
source: chart — Metastock; data — Reuters and esignal FigURE 3: THE EURO AND gOLD
During the week the Euro and gold both started correcting upward, no new development in the European sovereign-debt saga justified a rise in either market.
source: chart — Metastock; data — Reuters and esignal
for the carry trade against many other lower-yielding currencies, especially the Japanese yen. The rise in risk aversion from the sub-prime crisis in 2008 and now the European sovereign risk crisis would naturally cause a pullback in the AUD against all the
carry trade currencies. The actual pullbacks, however, appear exces-sive given the excellent fundamentals behind the AUD, especially the enor-mous interest-rate advantage.
In Figure 1 the AUD/USD pair rose from a low of .4778 in April 2001 to a high of .9849 in July 2008, or a rise of more than 100 percent. But when the Lehman crisis started affecting all classes of financial instruments in September 2008, the AUD/USD rate fell to a low of .6009 by October, a 40-percent drop in three months. Note that the drop exceeded the 62-percent
Fibonacci retracement level, by the way, but failed to reach the 100-per-cent retracement level.
In May 2010 something similar unfolded — a 10 percent drop from the November 2009 high at .9406 to .8088 as of May 21, 2010. So far this has been a 38-percent retracement. Should we expect another drop of more than 62 percent as we saw in 2008? That would take the AUD to 73.14.
The point here is the AUD is being governed by risk aversion alone, with no weight given to the commodity outlook or the interest-rate differen-tial, both of which confer tremendous real advantage. If the market is being driven by fear alone, we must say it is irrational. Fear is more “real” than true economic demand for commodities and higher yield. In a yield-starved world, this is irrational, indeed.
fear to forecast currencies, let’s take a look at gold. Gold is the quintessential proxy for risk aversion. From 2005 to the end of 2009, gold rose alongside the Euro — a positive correlation (Figure 2). This was universally interpreted as a sign gold was a substitute for the falling dollar and ris-ing U.S. sovereign risk — the risk that Fed money creation would inevitably lead to inflation.
But suddenly the Greek debt crisis catapulted Europe to the top of the sovereign-risk pile, and today there’s an inverse relationship between gold and the Euro instead of the inverse relationship between gold and the dollar.
So far, so good; we can accept a switch in focus. But note again gold fundamentals, such as the cost of min-ing, supply, central bank sales, or demand for jewelry in India — are at best gnats. The price of gold is a function of sovereign risk fear, even if the name of the sovereign changes. The traditional supposed driver of gold, inflation, is nowhere to be seen.
The Euro and gold should, therefore, be moving in lock-step — both symbolize sovereign risk. The Financial Times reported in May that Europeans are buying gold coins at an unprecedented pace — foundries are working around the clock and exports from the U.S. to Europe are high.
Figure 3 affirms the price of gold denominated in Euros tracked the EUR/USD rate very closely since the begin-ning of the year, but it is an interactive relationship. If you examine the chart closely, you will see times when gold
was falling and it took a day or two for the Euro to catch up, or the Euro dragged gold the other way, as was the case on May 10. In other words, the relationship between gold and the Euro has taken on a life of its own, like Frankenstein. During the week the Euro and gold both started correcting upward, no new development in the European sovereign-debt saga justified a rise in either one. In fact, profit-taking in gold that started early in the week seems to have been one of the key triggers for the Euro to make a bottom, however temporary it turns out to be.
Gold traders decided to take profits and it aided the Euro? Yes. This new development suggests the new “robo-trading” poses a big risk to anyone trying to trade the FX market in a rational way. We are shocked, shocked, to find there is gambling going on here.
The Euro scenario
Feedback effects between gold and the Euro, or between equity indices and currencies, raise the risk for everyone. An excessively volatile move in one security can feed an overreaction in another, which then jumps to a third. Another example might be the Shanghai Composite Stock Index bear market arising from fear of Chinese tighten-ing, which leads to commodity price drops, which leads to declines in resource stocks in Japan, which leads to a drop in the Nikkei, which leads to a stronger yen that is itself under siege from position-paring in carry trades triggered
by the same drop in commodities. Because all these markets are huge, the result could be tsunami-level waves of selling followed by a more modest creeping back as traders see oversold conditions.
It’s no wonder Germany insti-tuted a ban on naked short sales of European bonds and the equities of important financial institutions, the U.S. is changing circuit break-ers in equities, and there is talk of intervention in FX. We do not think speculation is a dirty word, but mar-ket linkage and automatic correla-tion trading are making speculacorrela-tion more dangerous than ever — and all divorced from the economic reality of supply and demand. If you were not a technical trader to begin with, you had better become one now.
That would be for short-term trad-ing, by which we mean a holding period of a day or less. For longer-term trading, the macro big picture factors should still hold sway. For
1 June 010 • CURRENCY TRADER
on tHe MoneY
FigURE 4: FiBBiNg THE EURO
The EUR/USD has already broken two big support lines and is at the 50-percent retracement level. Parity (1.00) is highlighted red. If the previous intermediate low at 1.1672 breaks, parity may be an irresistible target.
EMU countries to guarantee the debt of a member is an extraordinary move that violates both the spirit and the letter of the Maastricht Treaty — and demonstrates the depth of the commitment to the concept of the Eurozone.
Most analysts think it will not work. Taking on new debt promotes growth only if the money is applied to a pro-ductive use, such as improving communications or trans-portation — not if it’s used to pay for social services. The restructuring and thus, by definition, partial default by Greece and perhaps some other countries is almost inevi-table. Sentiment toward the Eurozone and the Euro has not been this negative since the early days in 1999 when the currency was first launched. Remember the Euro fell from 1.1719 on Day One to the all-time low 0.8229 in October 2000.
Only two outcomes are possible: The EMU devises cred-ible new institutions to enforce the original fiscal probity concepts, or Greece is expelled from the EMU. At the end of May 2010, we are only at Chapter 2 or 3 of a saga that will run to 20 or more chapters.
The Euro may revive before we know the ending, and probably will rally several times before it’s over, but overall, we have no reason to suppose the trend now in place will end anytime soon, and that’s despite any other development in stocks, bonds or commodities.
We venture this forecast because the people who determine the compositions of the really big portfolios are treasury committee members selecting the composition of national reserves, and sover-eign wealth funds that allocate money to different currencies for long-run return and stabil-ity of returns. An FX trader may feel compelled to jump if gold or oil changes levels, but we assume serious asset man-agers at the national level are not so flighty. We concede this is a very big assumption, but we would bet that no reserve or sovereign wealth fund man-ager has been among those dumping Australian dollars.
How far can the Euro go? We
dislike Fibonacci retracement lines because there is no rea-son to suppose human behavior is dictated by a number sequence (why this one instead of any of the many other interesting number sequences?), except when the humans in question expect those numbers to materialize, forming a self-fulfilling prophecy. The downfall of the Euro may be the ideal chart for the Fibonacci sequence to play out. Figure 4 shows the EUR/USD has already broken two big support lines and is at the 50-percent retracement level. If it continues downward, as we expect, it may reach 1.1236, the 62-percent retracement level, or the previous interme-diate low of 1.1672 from November 2005 (green), or the starting point, 0.8229 from October 2009.
In between is the always interesting number of 1.00, or parity (red). If the previous intermediate low at 1.1672 breaks, parity is the irresistible, magnetic number. ›
16 Month 010 • CURRENCY TRADER
16 June 010 • CURRENCY TRADER
sPot cHecK
After dropping below its May low vs. the U.S. dollar on June 1 — to 1.2110, its lowest level since April 13, 2006 — the Euro has many forex watchers wondering how much lower it can go.
Projections of a drop to the Euro’s January 1999 official “launch” price of 1.1800 and the 1.0000 parity level with the dollar have been thrown into the ring mostly because they are there — they are psychologically compelling “headline” numbers. (Few people have yet had the nerve to seriously argue the year-2000 low of .8227 is in danger of being tested any time soon.)
Review of Figure 1’s monthly chart shows the EUR/ USD pair punching through its 2008 and 2009 lows with the next obvious downside chart-based target the November-December 2005 lows around 1.1640-1.1660 (which, if reached, would fulfill the prediction of a retrace-ment to the 1.1800 launch level).
The 1.2000 zone the pair descended in May to was argu-ably a significant target, as this general level encompasses the pair’s initial high in late 1998, the mid-2003 high, and the 2004 and 2005-2006 consolidations. (Fibonacci fans will no doubt point out 1.2100 is approximately a 50-percent
retracement of the rally from the October 200 all-time low to the July 2008 all-time high.)
Most analysts are, not surprisingly, foreseeing greater losses for the Euro over the next couple of years. Let’s look at where the Euro has been and see if it sheds any light on the prob-ability of these various targets getting hit.
Extreme action
One thing Figure 1 makes perfectly clear is the Euro’s roller coaster ride over the past two years has no prec-edent in the currency’s brief lifetime. From late 2000 to early 2008 the Euro was on a one-way bullish track, with the 2004-2005 aborted top/consolida-tion the only significant roadblock. The Euro nearly doubled in value against the dollar, gaining 95 percent low to high.
Table 1 shows the EUR/USD pair tumbled a little more than 23 percent
Euro/U.S. dollar
Minor signals may point to a bounce in the relatively near future, but
the pair has a couple of big monkeys clinging to its back.
FigURE 1: THE EURO’S Big PiCTURE
The EUR/USD pair punched through its 2008 and 2009 lows in May 2010. The next downside chart target is the November-December 2005 lows around 1.1640-1.1660.
from its November 2009 high to the May 2010 close — a move that would have been unprec-edented if not for the pair’s 30-percent decline from its July 2008 all-time high to the October 2008 low.
The slightly lower monthly low established on June 1 was the seventh consecutive lower monthly low, something that has occurred less than a handful of times over the past decade: in July 2001, when the EUR/USD pair rallied to a higher monthly high and close, then con-solidated for several months before embarking on a strong uptrend in 2002; in July 1999, when the pair again formed an outside month, consolidated for three months, then turned lower again. In May 2000 the pair marked its eight consecutive lower monthly low. It gained ground in June before turning lower to form the October 2000 all-time low.
May was the sixth consecutive month of lower highs, lows, and closes for EUR/USD, a feat the pair accom-plished only one other time, in June 1999. Finally, the Euro dropped more than 7 percent from the April low to the May low, which it has done only one other time — from September to October 2008.
Although it might be tempting to note the bullish price action that has, at least temporarily, followed many of these events, there are simply too few of them to use as models for future price behavior—the unavoidable prob-lem when analyzing extreme market events. We are left to invoke abstracts, such as the observation that extreme moves tend to be at least partially reversed; but such observations, while true, make poor trading guidelines.
Until 2008, the Euro’s biggest decline vs. the Euro was the 30.28-percent drop from the January 1999 open to the October 2000 low. Table 1 shows the 2008 high-to-low col-lapse was on par with 1999-October sell-off — except that the latter move took nearly two years to unfold while the former took only three months. The November 2009-May 2010 drop was smaller on a percentage basis, and has lasted a little longer than the 2008 move, but it is still the second-biggest drop on record for the EUR/USD pair since 2001.
Table 2 shows how much the EUR/USD pair would have to drop (measured from several notable highs and lows) to reach various milestones that have been men-tioned in the press. The January 1999 open (launch price) of 1.1800 isn’t too far below the May 2010 closing price (-4.10 percent), but the 1.00 parity level would constitute another decline of nearly 20 percent. A move to the all-time low would require a 33-percent decline below the May close, and would constitute a nearly 50-percent decline from the all-time high.
Such moves are obviously not out of the question, although they are unlikely to occur overnight and without intervening upside action.
TAblE 1: THE bIG MOVES
July 2008 high Nov. 2009 high
Price 1.6039 1.5143
Oct. 2008 low 1.2729 -26.00%
May 2010 close 1.2305 -30.35% -23.06%
The EUR/USD’s early 2010 sell-off would have been exceptional had it not been for the even larger, faster collapse in July-October 2008.
TAblE 2: HOW FAR THE EURO WOUlD HAVE TO FAll
July 2008 high Oct. 2008 low Nov. 2009 high May 2010 close
Price 1.6039 1.2729 1.5143 1.2305
launch 1.1800 -26.43% -7.30% -22.08% -4.10%
Parity 1.0000 -37.65% -21.44% -33.96% -18.73%
All-time low 0.8227 -48.71% -35.37% -45.67% -33.14%
The January 1999 (launch) rate isn’t too far below the May 2010 closing price (-4.10 percent), but the 1.00 parity level would constitute a decline of nearly 20 percent.
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18 June 010 • CURRENCY TRADER
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Taking advantage
of the Asian
trading session
Breaking down the range characteristics of the Asian forex session
produces some surprisingly reliable trading statistics.
By dAniEl fErnAndEz
Two of the most important questions in trading are wheth-er exploitable inefficiencies develop in the markets, and if such inefficiencies persist as a market evolves. A particu-larly interesting case involves the possibilities associated with low-volatility periods during which currency prices trade in limited ranges. This article explores this issue in the context of the Asian trading session (11 p.m. to 7 a.m. GMT) from 2006 to 2010 in the Euro/U.S. dollar (EUR/ USD), Euro/British pound (EUR/GBP), and Euro/Swiss franc (EUR/CHF).
These currency pairs were chosen because of their rela-tive inactivity during the Asian session, none of them containing a currency native to this trading period. By evaluating certain characteristics of these currency pairs during the Asian session over a four-year period we can determine whether their character has changed over time, or if they behave in a predictable manner that could be exploited in trading.
Analyzing the Asian session
The study was conducted using hourly data from Metaquotes from January 2006 to December 2009. (To ensure data quality, this data was compared to comparable data from Dukascopy and Oanda; no significant differ-ences were detected.)
Two key characteristics of a specific forex trading session are 1) its overall range (high – low for the session) and 2) the “absolute movement” within the trading session (the absolute value of the open – close for the session). Let’s divide the 2006 to 2010 price data into six-month sub-peri-ods and calculate the overall range and absolute move-ment averages for the three currency pairs.
Figure 1 shows the average range values (in pips, .0001) and Figure 2 shows the average absolute movement val-ues. The results are not surprising. The highest values in both categories belong to the most liquid pair, EUR/USD, and the open-close differences are quite low for all the pairs, reflecting the low volatility of the Asian session.
However, the results show the Asian session’s characteristics have changed substantially since 2006 in absolute pip terms: In Figure 2, for example, the low-est average absolute movement value for the EUR/USD was 14 pips, which increased to a maximum of 53 pips during the July-Dec. 2008 period, in line with an average overall range that increased from a minimum of 31 to 106 pips in Figure 1.
The standard deviation and average figures in Table 1 show all three cur-rency pairs have undergone significant changes during the Asian session over the years; exploiting any movement using absolute pip values would most likely not be possible over the long-term.
FigURE 1: OVERALL ASiAN SESSiON RANgE
However, the absolute movements and overall ranges increased and decreased in line with market volatility, with the second half of 2008 producing the highest average values for all the currency pairs. Let’s see what analyzing the range and absolute movement in the context of changing volatility does to the results.
Adjusting for volatility
Using the 14-period daily average true range (ATR) to measure volatility, each currency’s range and absolute move-ment figures were divided by their respective 14-day ATRs to express these figures as a percentage of the ATR. Then, the results were averaged in six-month periods as detailed above:
1. The average 14-period daily ATR is calculated at the beginning of each Asian trading session (i.e., each day).
2. The range and absolute movement values for each Asian session are calculated in pips.
3. The values from step 2 are divided by the 14-day ATR calculated at the beginning of each corresponding session.
4. All the ATR-adjusted values from step 3 are averaged for a given six-month period.
The results of these calculations are shown in Figure 3 and 4 (range and absolute movement, respectively). What we see now is completely different from the absolute pip-value results in Figures 1 and 2. The highest average range as a percentage of ATR belongs to the EUR/CHF pair for most of the analy-sis period (Figure 3), while the highest average absolute movement did not belong exclusively to the EUR/USD, but
FigURE 2: ABSOLUTE (OPEN-CLOSE) MOVEMENT
The average absolute movement (the absolute value of the open minus the close) for each six-month period. The EUR/USD pair had the biggest overall ranges (Figure 1) and open to close moves.
FigURE 3: SESSiON RANgE AS PERCENTAgE OF ATR
The average high-low ranges for each six-month period are shown here as percentages of the 14-day average true range.
TABLE 1: ASiAN SESSiON iN PiPS Range avg. Range StD Absolute movement avg. Absolute movement StD EUR/USD 60 8 30 15 EUR/CHF 38 17 17 9 EUR/gBP 8 1 1 8
The average range and absolute-movement figures for the three currency pairs expressed in pips.
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FigURE 4: OPEN-CLOSE MOVEMENT AS PERCENTAgE OF ATR
The average absolute movement for each six-month period as a percentage of each currency pair’s 14-day average true range.
momentarily passed to the EUR/CHF pair in the second half of 2006.
However the most important find-ing is shown in Table 2: The standard deviations of these ATR-adjusted values are much lower than those in Table 1, giving us a much more reliable tool for predicting average Asian-session currency movement during a given period. Whereas the standard deviations in Table 1 were approximately 45 to 50 percent of the average ranges, in Table 2 they were only 6 to 7 percent.
It’s also important that the averages and standard deviations for the range and absolute movement in Table 2 are almost identical for all three currency pairs, indicating that by taking vola-tility into account, we are better able to identify a fundamental aspect of market behavior.
Context is everything
This information can be used to design systems around the Asian session that could trade market inef-ficiencies inherent to this time period. Even though the absolute pip values indicated significant variation in the Asian session’s characteristics over time, adjusting the currency pairs’
behavior taking volatility into account eliminated most of this variability and left us with values that have a significant predictive com-ponent, which means they are promising candidates for developing trading ideas that exploit predictable ranges.
For example, if the EUR/ USD reaches its highest ATR-adjusted range reading, you may be able to enter a trade that targets a close value based on the average abso-lute movement value. This type of trading idea will be explored in a future article. ›
For information on the author, see p. 4.
TABLE 2: ASiAN SESSiON AS PERCENTAgE OF ATR Range avg. Range StD Absolute movement avg. Absolute movement StD EUR/USD 5 3 3 EUR/CHF 8 3 1 3 EUR/gBP 5 3 19
The average range and absolute-movement figures for the three currency pairs are expressed here as a percentage of the 14-day average true range.
Related reading
Daniel Fernandez articles:“Adaptive FX money management”
Currency Trader, november 009. this article shows how a money-man-agement system that adjusts trade size based on market volatility can transform an unprofitable forex trading strategy into a profitable approach.
“Using dynamic look-back periods in FX systems”
Currency Trader, May 010
A robust approach to making a trading system dynamic improves profitability and shrinks drawdowns.
Other articles: “Breakout timing”
Currency Trader, July 009
Are particular times of the day, month, or year better than others for trading certain strategies or currencies? these tests indi-cate some momentum signals might have better odds of success depending on the time of month they occur.
“Time-zone trading in the Euro”
Currency Trader, June 007
Intraday trends in forex often begin when the markets shift from one regional trading center to another. Historical testing uncov-ers several promising price moves in the euro currency futures.
Overarching issue
The fact that, as of June 1, the EUR/ USD pair had essentially consolidated for two weeks without falling to a dramatically lower low might be con-sidered evidence of waning bearish momentum (Figure 2). The pattern itself had mixed performance over a relatively small (fewer than 20) sam-ples over the past 10 years.
As a final note, what looked to be a energetic intraday turnaround for the Euro and the stock market — both rallied sharply from negative terri-tory in early trading to go positive on the day — fizzled by the end of the day (Figure 3), which points to an unavoidable truth about the Euro and the dollar these days: For better or worse, the EUR/USD pair is still very much in the grips of the reactionary stock-driven relationship established in the 2008-2009 financial crisis — that is, turmoil in the global equity mar-kets drives money into the U.S. dollar as a safe-haven, which drives down the EUR/USD rate.
Any doubt this relationship was fading disappeared in May — and was reinforced on June 1, for good measure. Barring a surprise develop-ment that will convince investors European debt issues have worked themselves out, a rally in equities stands to be the Euro’s best friend in the near future. ›
FigURE 3: EURO AND THE STOCK MARKET
The EUR/USD pair (top) mirrored the stock market’s (represented here by the E-Mini S&P 500 futures, bottom) ups and downs very closely on June 1.
Source: TradeStation
FigURE 2: BEARiSH MOMENTUM ON DECLiNE?
As of June 1, the EUR/USD pair had mostly moved sideways for two weeks, with one push to the upside, and a push to a slightly lower low on June 1.
Source: TradeStation
sPot cHecK
continued from p. 17June 010 • CURRENCY TRADER
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Certain European nations, particularly France and Italy, have a long tradition of businesspeople keeping three sets of books: one for themselves, one for their partner, and one for the tax authorities. This culture of off-the-books accounting for tax purposes led to the now-forgotten “mattress trade” in the Euro between 2000 and 2002. The common currency came into existence at just over 1.17 dol-lars per Euro and slid down toward 0.82 by October 2000; it did not embark on a multi-year bull market until May 2002.
The reason for the Euro’s early weakness was attributed by many to the selling of “legacy” currencies held as cash for dollars prior to those legacy coins and bills being taken
out of circulation at the start of 2002. French francs, Italian lira, Spanish pesetas, Portuguese escudos and the rest had to be pulled out from literal and figurative mattresses, converted into some other form of cash, and the dollar was the refuge of choice. Such is the power of an underground economy.
Of course, that trade cuts both ways. Legend has it coun-terfeit C-notes, $100 bills with the new enlarged portrait of Benjamin Franklin and other anti-counterfeiting devices, were being offered for sale on the streets of Bangkok before they were issued for circulation in the U.S. A second obser-vation in this regard was counterfeit $100 bills were the currency of choice in Russia during the tumultuous 1990s.
By Gresham’s Law (bad money driv-ing out good), the real $100 notes were hoarded and the counterfeits were passed into circulation. It is indeed all about the Benjamins.
The velvet underground
If you play a word association game with “Colombia,” you might get more than a few giggles. Ever since the hey-day of Pablo Escobar and his Medellin cartel, the country has been associated with the large, um, “pharmaceutical precursors” sector. The efforts by the Bogota government and the U.S. Drug Enforcement Administration to control this trade have led to an ongoing low-level war with the FARC guerillas who seem to take special joy in blowing up crude oil pipelines in Colombia’s Caño Limòn oilfields. The drug traffic raises the relative size of the illegitimate sectors of the Colombian economy to the legitimate ones by increasing the former and decreasing the latter. The
Colombian peso,
the richest kind
Getting a handle on a currency in a country with a largely “off-the-books” economy is difficult,
but in this case the driving force is Washington d.C.
By HoWArd l. SiMonS
FigURE 1: PESO LARgELY iNDEPENDENT OF iNFLATiON
The official Colombian CPI has increased at an average annual rate of 9.58 percent since January 1994, while the U.S. figure over the same period is 2.455. Although this implies the COP should have weakened against the USD over this period, it didn’t — thanks to the Fed’s low-interest-rate policy since 2003.
extent to which this is true can be illus-trated by the heading for Colombian GDP data on Bloomberg: “GDP Excluding Drug Crops.”
Truth be told, any economic data from countries such as Afghanistan, now alleged to provide more than 90 percent of the world’s opium poppy, should be taken with a modicum of skepticism. A World Bank official regarded as an expert on Third World debt was asked in 1976 by a graduate student in international economics how he arrived at certain figures. He point-ed up to his office ceiling. Puzzlpoint-ed, the student pressed onwards. The reply came, “I was pointing at that light. When no actual data are available, I stare up at that light, think about what information I have and arrive at what the debt level should be.” Some early life experiences are more indelible than others.
Scratch the
commodity connection
We recently explored some curren-cies such as the South African rand or Chilean peso (see “Cry, the beloved currency” March 2010, and “Chilean peso makes exceptions to currency rules,” May 2010). Those were easy to do as the gold and copper markets, respectively, are transparent. While Colombia is a large exporter of coffee, cut flowers, emeralds and other gem-stones, and (increasingly) crude oil, no one pretends it is the dominant export. We will not be able to establish a com-modity link for the Colombian peso (COP) here.
We can, however, infer certain fac-tors of economic and financial success
for the country. The official consumer price index (CPI) for Colombia has increased at an average annual rate of 9.58 percent since January 1994 (Figure 1); this compares to an average annual rate of consumer inflation in the U.S. of 2.455 percent over the same period (please refer to previ-ous anecdote on the credibility of numbers).
Given the role of relative inflation expectations in the interest-rate parity model, we should expect the COP to
have weakened against the USD over this period. We would have been wrong. The Federal Reserve’s policy of low interest rates since 2003 put the COP in an uptrend between April 2003 and May 2008. That trend broke when the financial crisis of 2008 led to massive dollar buying and shedding of risky assets around the world, but it resumed after the Fed embarked upon quantitative easing in March 2009. Some might consider this picture a
damn-FigURE 2: iNSURANCE ON THE PESO RiSES AND FALLS WiTH iT
Colombian peso excess volatility for a USD holder has tended to rise and fall in the general direction of the currency and without the typical lead time evident in other currencies.
FigURE 3: PESO NOW MOViNg WiTH ABSOLUTE iNTEREST RATE
After June 2000, the COP generally moved parallel to the interest-rate gap for another six years. That connection weakened and broke during the financial crisis, but resumed after the bear-market low and the introduction of quantitative easing in March 2009.
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June 010 • CURRENCY TRADER
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ing indictment of the Federal Reserve’s money-solves-everything approach, and who are we to disagree?
Pricing the risk
We have seen across a wide range of currencies how “excess volatility,” or the ratio of implied volatility on three-month non-deliverable forwards to realized high-low-close volatility, minus 1.00, tends to lead movements in the currency by three months on average. This makes perfect sense as the measure indicates which party in the trade has the higher level of anxiety, and in which direc-tion.
The relationship is rather different for the COP, how-ever. In this case the COP excess volatility for a USD holder has tended to rise and fall in the general direction of the currency and without the normal lead time (Figure 2). When the COP strengthens, put option buying rises and vice-versa. Even though the COP has put in some pro-longed rallies since 2003, the market never embraces COP strength, only COP weakness.
Interest rates not important
Just as we saw for the Chilean peso two months ago, the relatively illiquid interest-rate arbitrage market for Colombian deposits make a normal interest rate analysis for the COP difficult. We cannot compare relative yield curves for the COP and the USD by constructing forward rate ratios (FRRs) for each; the key FRR for currencies between six and nine months, the rate at which we can lock in borrowing for three months beginning six months from now divided by the nine-month rate itself, is
inap-plicable.
A simple spread between six-month deposit rates in both countries is revealing for one factor, and that is the huge interest-rate gap between the start of 1999 and the middle of 2000. Colombian short-term rates were in excess of 30 percent at that point. As the interest-rate gap nar-rowed, the COP weakened as those seeking yield went elsewhere. After June 2000, the general course of the COP moved parallel to the interest-rate gap for another six years. The connection weakened and broke dur-ing the financial crisis, but resumed in force after the bear market low and arrival of quantitative easing in March 2009.
Relative asset returns
Those high interest rates should provide a tip-off to which way the USD carry to the COP has been moving over the years. Even if the COP spot rate weakens, the interest-rate spread should be more than enough to compensate. This has been especially true since U.S. short-term rates were driven near zero. The rate of return on this carry trade has moved in parallel to the relative performance of Colombian equities to U.S. equities expressed in USD terms (Figure 4).
Here the numbers are a little inspiring. In USD terms, Colombian equities have outperformed American stocks at an annualized rate of 26.1 percent since December 2008. The annualized return on the carry trade has been 15.9 percent, with the spot rate accounting for 11.1 percent of that. As it turns out, a brave investor who borrowed the USD and who either lent in the COP or bought Colombian equities at the time of the October 2008 low was rewarded handsomely. The action was undertaken without comment at the time and was assigned the label of “brave” or “fool-ish” only in retrospect.
Can the dual success of the COP and returns on COP-denominated assets continue? The answer will come not from Colombia but rather from Washington, D.C. If the Federal Reserve persists in its manic monetary policies, the success could endure for a long time.
Perhaps someone in Bogota or even in Medellin is star-ing at a picture of Ben Bernanke and wonderstar-ing, “What’s he smoking?” ›
For information on the author, see p. 4. FigURE 4: PESO BECAME A CARRY TRADE AFTER MiD-2006
The rate of return on the COP carry trade has moved parallel to the relative performance of Colombian equities to U.S. equities.
CURRENCY FUTURES SNAPSHOT
as of 5/28/10LEGEND:
Volume: 30-day average daily volume, in
thou-sands.
OI: 30-day open interest, in thousands. 10-day move: The percentage price move from
the close 10 days ago to today’s close.
20-day move: The percentage price move from
the close 20 days ago to today’s close.
60-day move: The percentage price move from
the close 60 days ago to today’s close.
The “% rank” fields for each time window
(10-day moves, 20-(10-day moves, etc.) show the per-centile 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 com-pares 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 short-term
volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day stan-dard deviation of prices). The % rank is the per-centile rank of the volatility ratio over the past 60 days.
The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.
Contract Symbol Exchange Volume OI 10-day move/% rank 20-day move/% rank 60-day move/% rank Volatility ratio/rank
EUR/USD EC CME 443.1 256.5 -0.51% / 5% -7.39% / 87% -9.54% / 95% .22 / 55% JPY/USD JY CME 156.8 139.0 1.56% / 27% 3.44% / 67% -0.46% / 12% .56 / 55% GBP/USD BP CME 145.8 132.0 -0.48% / 10% -5.14% / 75% -4.41% / 35% .14 / 10% AUD/USD AD CME 140.9 126.1 -4.31% / 44% -8.26% / 65% -6.90% / 91% .66 / 75% CAD/USD CD CME 110.9 126.3 -1.83% / 42% -3.26% / 50% -2.06% / 75% .51 / 62% CHF/USD SF CME 62.2 46.4 -2.24% / 20% -6.91% / 94% -7.11% / 97% .21 / 10% MXN/USD MP CME 36.8 108.1 -1.99% / 31% -4.38% / 50% -2.06% / 85% .47 / 63% U.S. dollar index DX ICE 30.6 40.6 0.34% / 0% 5.18% / 81% 7.34% / 91% .22 / 35% NZD/USD NE CME 11.4 21.0 -3.94% / 47% -6.67% / 93% -2.73% / 50% .65 / 87% E-Mini EUR/USD ZE CME 7.4 5.6 -0.86% / 10% -7.05% / 83% -9.91% / 98% .23 / 55% Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).
Managed money: Barclay Trading Group’s
currency trader rankings for April 2010
Top 10 currency traders managing more than $10 million as of April 30, ranked by April 2010 return.
2010 $ Under April YTD mgmt. Rank Trading advisor return return (millions)
1. Goldman Sachs (Fund. Currency) 13.12% 34.17% 557.4
2. 24FX Management Ltd 12.80% 4.33% 30.5
3. MIGFX Inc (Retail) 5.66% 17.12% 13.0
4. FX Concepts (Multi-Strategy) 3.64% 10.79% 2769.0
5. Gables Capital Mgmt (Global FX) 3.24% 0.07% 10.1
6. Friedberg Comm. Mgmt. (Curr.) 2.98% 19.23% 70.4
7. Quantica Capl (Diversified FX) 2.80% 5.97% 26.0
8. Excalibur Absolute Return Fund 2.58% 2.93% 45.5
9. Auriel Currency 2X Fund 2.29% 0.50% 143.0
10. FX Concepts (GCP) 2.25% 6.38% 3323.0
Top 10 currency traders managing less than $10 million and more than $1 million as of April 30, ranked by April 2010 return.
1. Excel Capital Mgmt. (FX) 9.64% 93.31% 2.4
2. D2W Capital Mgmt (Radical Wealth) 9.60% 29.51% 1.6
3. Rove Capital (Dresden) 2.62% 6.31% 2.2
4. Overlay Asset Mgmt. (Emerging Mkts) 1.95% 5.35% 8.0
5. Armytage AAM (Asian Currency) 1.76% 0.53% 4.0
6. Greenwave Capital Mgmt (GDS Alpha) 1.42% 2.42% 8.0
7. Wooster Asset Mgmt (Portage Fund) 1.25% 0.28% 6.9
8. BEAM (FX Prop) 1.13% 3.23% 1.7
9. Greenwave Capital Mgmt (GDS Beta) 0.85% 1.08% 8.0
10. Marathon Capital (System FX) 0.43% 2.08% 10.0
Source: BarclayHedge (www.barclayhedge.com). 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.
26 June 2010 • CURRENCY TRADER
TRADING STRATEGIES
INTERNATIONAL MARKETS
Current
price vs. 1-month 3-month 6-month 52-week 52-week Previous Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank
1 Japanese yen 0.01114 4.70% -0.58% -1.94% 0.01179 0.01011 17
2 Chinese yuan 0.146395 -0.03% -0.06% -0.03% 0.14760 0.1458 14
3 Hong Kong dollar 0.128175 -0.50% -0.48% -0.66% 0.129 0.1281 15
4 Thai baht 0.03071 -1.24% 1.54% 1.87% 0.03157 0.02866 11
5 Taiwan dollar 0.03098 -2.26% -0.55% -0.27% 0.03201 0.03007 9
6 Singapore dollar 0.705305 -3.34% -0.50% -2.51% 0.7326 0.6817 2
7 Brazilian real 0.53263 -6.44% -2.43% -7.77% 0.5882 0.478 3
8 Indian rupee 0.021035 -6.51% -2.50% -2.57% 0.02263 0.01988 4
9 South African rand 0.12583 -6.74% -1.63% -6.85% 0.1389 0.1187 13
10 British pound 1.433635 -6.78% -6.19% -13.92% 1.7042 1.4235 1
11 Canadian dollar 0.928665 -7.22% -1.54% -2.23% 1.0068 0.8527 5
12 Russian ruble 0.03175 -7.43% -4.57% -8.61% 0.03497 0.03007 8
13 New Zealand dollar 0.66339 -7.47% -3.72% -8.98% 0.7635 0.609 7
14 Swiss franc 0.86021 -7.72% -6.75% -13.59% 1.0087 0.8549 16
15 Euro 1.226035 -8.38% -9.19% -18.42% 1.5144 1.216 12
16 Swedish krona 0.124845 -10.35% -9.73% -14.17% 0.148 0.1228 10
17 Australian dollar 0.81505 -12.12% -8.08% -12.00% 0.9405 0.7702 6
CURRENCIES (vs. U.S. DOLLAR)
ACCOUNT BALANCE
Rank Country 2008 Ratio* 2007 2009+1 Singapore 36.188 19.222 47.311 33.838
2 Norway 83.825 18.59 54.678 52.901
3 Hong Kong SAR 29.296 13.618 25.529 23.373
4 Sweden 37.279 7.783 39.054 25.781 5 Germany 245.722 6.69 253.756 160.627 6 Taiwan Province of China 25.122 6.239 32.975 42.572 7 Netherlands 41.978 4.787 67.589 41.652 8 Japan 157.079 3.214 210.967 141.656 9 Switzerland 11.947 2.388 43.531 43.102 10 Canada 7.606 0.507 14.53 -36.132 11 Korea -5.776 -0.62 5.876 42.668
As of May 26 *based on one-month gain/loss
Rank Country 2008 Ratio* 2007 2009+
12 United Kingdom -40.725 -1.517 -75.483 -28.838 13 Belgium -12.855 -2.539 9.956 -1.254 14 Czech Republic -6.669 -3.086 -5.483 -1.942 15 Italy -78.874 -3.418 -51.691 -71.27 16 Australia -46.683 -4.406 -57.552 -40.941 17 United States -706.068 -4.889 -726.572 -417.999 18 Ireland -13.886 -5.189 -13.876 -6.705 19 Spain -153.665 -9.592 -144.435 -74.136
Totals in billions of U.S. dollars
*Account balance as percent of GDP +Estimate
Source: International Monetary Fund, World Economic Outlook Database, April 2010.
GLOBAL STOCK INDICES
GLOBAL BOND RATES
Country Interest rate Rate (%) Last change Sept. 2009 April 2009
United States Fed funds rate 0-0.25 0.5 (Dec. 08) 0-0.25 0-0.25
Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.1 0.1
Eurozone Refi rate 1 0.25 (May 09) 1 1
England Repo rate 0.5 0.5 (March 09) 0.5 0.5
Canada Overnight funding rate 0.50 0.25 (June 10) 0.25 0.25
Switzerland 3-month Swiss Libor 0.25 0.25 (March 09) 0.25 0.25
Australia Cash rate 4.5 0.25 (May 10) 3.5 3
New Zealand Cash rate 2.5 0.50 (April 09) 2.5 2.5
Brazil Selic rate 9.5 0.75 (April 10) 8.75 10.25
Korea Overnight call rate 2 0.5 (Feb. 09) 2 2
Taiwan Discount rate 1.25 0.25 (Feb. 09) 1.25 1.25
India Repo rate 5.25 0.25 (April 10) 4.75 4.75
South Africa Repurchase rate 7 0.5 (Aug. 09) 7 7.5
GLOBAL CENTRAL BANK LENDING RATES
1-month 3-month 6-month 52-week 52-week
Rank Country Index May 26 gain/loss gain/loss gain/loss high low Previous
1 Canada S&P/TSX composite 11,543.90 -6.00% -0.74% 0.94% 12,321.80 9,535.50 4
2 Mexico IPC 31,328.49 -7.23% -0.97% 2.89% 34,223.90 22,956.00 7
3 India BSE 30 16,387.84 -7.65% -0.25% -2.77% 18,047.90 13,220.00 10
4 South Africa FTSE/JSE All Share 27,047.51 -7.72% 1.06% 0.08% 29,565.10 21,665.90 5
5 Germany Xetra Dax 5,758.02 -9.07% 2.85% 2.56% 6,341.52 4,524.01 2
6 Switzerland Swiss Market 6,167.50 -9.35% -8.10% -1.84% 6,990.70 5,204.80 14
7 Singapore Straits Times 2,696.02 -10.21% -1.99% -2.40% 3,037.97 2,211.81 3
8 Hong Kong Hang Seng 19,196.45 -11.07% -6.85% -13.57% 23,099.60 16,977.70 6
9 Australia All ordinaries 4,330.40 -11.86% -6.90% -8.40% 5,048.60 3,710.10 13
10 U.S. S&P 500 1,067.95 -11.89% -3.31% -2.16% 1,219.80 869.32 1
11 UK FTSE 100 5,038.10 -12.44% -5.91% -3.00% 5,833.70 4,096.10 9
12 Brazil Bovespa 60,190.00 -12.61% -9.49% -9.34% 71,989.00 48,262.00 11
13 Japan Nikkei 225 9,522.66 -14.72% -5.96% 1.49% 11,408.20 9,050.33 8
14 France CAC 40 3,408.59 -14.73% -8.09% -7.36% 4,088.18 2,957.83 12
15 Italy FTSE MIB 18,778.41 -17.58% -10.87% -14.34% 24,559 17,626 15
NON-U.S. DOLLAR FOREX CROSS RATES
Rank Country Rate May 26 1-month 3-month 6-month High Low Previous
1 U.S. 10-year T-note 121.16 3.93% 3.11% 0.57% 122.08 112.90 3
2 Germany BUND 128.72 3.76% 3.43% 4.19% 129.55 117.47 1
3 Japan Government Bond 140.6 0.97% 0.50% 0.75% 140.98 135.45 5
4 Australia 10-year bonds 94.68 0.55% 0.17% -0.03% 94.87 94.09 4
5 UK Short sterling 99.24 -0.03% -0.10% -0.14% 99.52 98.62 2
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol May 26 gain/loss gain/loss gain/loss high low Previous
1 Yen / Real JPY/BRL 0.020915 11.90% 1.88% 6.30% 0.02227 0.01838 21
2 Pound / Aussie $ GBP/AUD 1.75895 6.08% 2.05% -2.18% 2.0859 1.6328 9
3 Euro / Aussie $ EUR/AUD 1.50423 4.26% -1.20% -7.29% 1.8005 1.377 16
4 Pound / Franc GBP/CHF 1.66664 1.00% 0.59% -0.37% 1.8112 1.5778 4
5 Pound / Canada $ GBP/CAD 1.54376 0.48% -4.72% -11.95% 1.9173 1.4894 10
6 Franc / Canada $ CHF/CAD 0.92629 -0.54% -5.29% -11.62% 1.0724 0.909 19
7 Euro / Franc EUR/CHF 1.425295 -0.71% -2.61% -5.58% 1.5383 1.3989 11
8 Canada $ / Real CAD/BRL 1.74355 -0.83% 0.91% 6.01% 1.8338 1.6003 13
9 Euro / Canada $ EUR/CAD 1.320215 -1.25% -7.76% -16.55% 1.63 1.2748 17
10 Euro / Pound EUR/GBP 0.85516 -1.70% -3.19% -5.23% 0.9411 0.8399 20
11 Euro / Real EUR/BRL 2.301855 -2.07% -6.92% -11.54% 2.8724 2.2286 18
12 Aussie $ / Franc AUD/CHF 0.947505 -4.77% -1.42% 1.86% 1.0079 0.8457 7
13 Aussie $ / New Zeal $ AUD/NZD 1.228555 -5.03% -4.53% -3.33% 1.3233 1.1931 12
14 Aussie $ / Canada $ AUD/CAD 0.87766 -5.29% -6.64% -9.99% 0.9895 0.8725 14
15 Aussie $ / Real AUD/BRL 1.530245 -6.07% -5.79% -4.58% 1.6978 1.5256 15
16 Pound / Franc GBP/JPY 128.7 -10.94% -5.67% -12.19% 163.057 127.065 1
17 Canada $ / Yen CAD/JPY 83.37 -11.39% -0.95% -0.26% 94.1955 79.6163 2
18 New Zeal $ / Yen NZD/JPY 59.56 -11.63% -3.14% -7.13% 69.5573 58.1679 5
19 Franc / Yen CHF/JPY 77.225 -11.83% -6.19% -11.85% 91.549 76.36 8
20 Euro / Yen EUR/JPY 110.07 -12.46% -8.64% -16.77% 139.2 108.8 6
