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Strategies, analysis, and news for FX traders

January 2013 Volume 10, No. 1

2013 currency kickoff p. 6 The Swiss franc and the negative interest rate paradox p. 20 Dollar/pound: Breakout pattern odds p. 16 Triangle trade in the Euro/pound p. 29

Contributors..................................................4 Global Markets 2013 currencies to watch............................6
With the central banks of the currency majors mostly engaging in aggressively loose monetary policy, those searching for movement in the FX arena might want to look beyond the usual forex suspects. By Currency Trader Staff

Global Economic Calendar......................... 24

Important dates for currency traders.

Events ........................................................24
Conferences, seminars, and other events.

Currency Futures Snapshot.................. 25 BarclayHedge Rankings......................... 25

Top-ranked managed money programs

On the Money The Abe trade............................................ 10

Analyzing the unintended consequences of a currency devaluation race to the bottom. By Barbara Rockefeller

International Markets............................. 26
Numbers from the global forex, stock, and  interest-rate markets.

Forex Journal............................................29
Triangle pattern breakout.

Abenomics, European politics, and American labor.................................. 14

As the year turns, a few key catalysts are driving the FX market. By Marc Chandler

Spot Check Dollar/pound makes a move.................... 16

The British pound punctured resistance vs. the dollar at the outset of the new year. Whats happened in the past after such moves? By Currency Trader Staff

Looking for an advertiser?

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

Advanced Concepts The paradox of negative interest rates ............................................ 20

The Swiss National Bank risks losing its bet it can counter global fund inflows in a chronic financial crisis, but so far it is winning. By Howard L. Simons

Questions or comments?
Submit editorial queries or comments to webmaster@currencytradermag.com
2 January 2013 CURRENCY TRADER

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A publication of Active Trader

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.

For all subscriber services:

www.currencytradermag.com q Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund. q Marc Chandler (marc@terrak.com) is the head of global foreign exchange strategies at Brown Brothers Harriman and an associate professor at New York Universitys School of Continuing and Professional Studies. Chandler has spent more than 20 years analyzing, writing, and speaking about global capital markets. He is the author of Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange (Bloomberg Press, 2009).

Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag.com Managing editor: Molly Goad mgoad@currencytradermag.com Contributing editor: Howard Simons

Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag.com

President: Phil Dorman pdorman@currencytradermag.com Publisher, ad sales: Bob Dorman bdorman@currencytradermag.com Classified ad sales: Mark Seger seger@currencytradermag.com

Volume 10, Issue 1. 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.



2013 currencies to watch

With the central banks of the currency majors mostly engaging in aggressively loose monetary policy, those searching for movement in the FX arena might want to look beyond the usual forex suspects.

As 2013 gets underway, most economists are expecting the New Year to usher in more of the same: a modest global economic recovery characterized by continued slow growth and central bank monetary policy accommodation. In terms of the forex market, the historically low-yield environment for major currencies is likely to continue, which will likely support money flows into higher-yielding emerging-market currencies. Credit Suisse forecasts 2013 global gross domestic product (GDP) growth at 3.4%, up slightly from 2012s estimated 3.1% pace. The firm expects growth in the major industrialized nations to remain sluggish, targeting 2013 GDP of 2% in the U.S., 0.3% in Japan, 0.5% for the Euro area, and 1.2% for the UK. In contrast, it sees emerging economies continuing to lead the globe in GDP growth e.g., an 8% pace in 2013 for China, 6.9% for India, and 3.9% for Latin America.

says Cary Leahey, senior advisor to Decision Economics. That tends to weaken currencies. But he notes that when everyone wants to depreciate their currencies, it makes it more difficult for any single currency to win the race to the bottom. What countrys currency will depreciate the most to get some growth? Leahey asks. If the question is who has the easiest monetary policy, it could be the BOJ.

Japan makes some noise (again)

Low rates

A big part of the prevailing fundamental picture is the fact that major central banks around the world remain in accommodation mode. As of Jan. 1 the U.S. Federal Reserves federal funds rate stood at zero to 0.25% (with no change forthcoming until the U.S. unemployment rate drops to 6.5%), the Bank of Japans (BOJ) rate was 0.10%, the Bank of Englands was 0.50%, the European Central Banks rate was 0.75%, the Bank of Canadas was 1%, the Reserve Bank of Australias was 3%, and the Reserve Bank of New Zealands rate was 2.5%. Virtually every monetary policy is accommodative,

New leadership in Japan is pushing hard for aggressive monetary policy to aid the ailing economy. Incoming Prime Minister Shinzo Abe would like the BOJ to engage in unlimited quantitative easing and set a firm 2% inflation target. Abe has come out fighting, threatening to strip the central bank of its independence if it doesnt cooperate. The reality is that neither I nor anyone else really knows exactly how this is going to play out in 2013, says Glenn Levine, senior economist at Moodys Analytics. My sense is we will see more aggressive quantitative easing in 2013. The inflation target may be lifted to 2%, but more importantly, this target is likely to be more credible as the BOJ offers a firm commitment to meet this target rather than leaving it as a nebulous goal, but then not doing much about it. This could mean more downside for the yen in the weeks ahead, which translates into continued upside for the U.S. dollar/Japanese yen rate (USD/JPY), which has rallied smartly since October (Figure 1). Barclays analysts sounded a bearish yen theme in their December Global

FX Quarterly research note: We expect the newly elected it can go is emerging markets, Anderson says. Japanese government to give the BOJ a stronger mandate for targeting higher, much-needed inflation. We think Latin America these changes will have a profound, depreciatory one-off Through Dec. 20 the Mexican peso (MXN) was one of the effect on the JPY of over 10%, taking its cross against the Latin regions strongest currency gainers, posting a 9% USD from 78 to 88 over six months. As of Jan. 2, the dolgain vs. the U.S. dollar in 2012 (Figure 3). Some analysts lar/yen pair had already topped 87.00. expect the Mexican peso to remain an attractive currency With the new government arriving in Tokyo there is more and more pressure on FIGURE 1: DOLLAR/YEN the BOJ to provide more policy accommodation, and that could mean more asset purchases, says Charles St-Arnaud, FX strategist at Nomura. With Japan being forceful on providing fiscal and monetary policy we could see the yen depreciate vs. the U.S. dollar.

Dollar and Euro

Greg Anderson, North American head of FX strategy at Citi, says one of the biggest issues he hears clients discussing is whether the U.S. dollar is nearing a cyclical turn. Such speculation, he suggests, might be premature. Will the dollar start to rally because of strong U.S. growth and the potential for the Fed to lead the other G-4 central banks in terms of tightening? he says. Its an interesting question, but I think people are throwing it out there a year too early. The U.S. dollar index (DXY) has been trading mostly lower since peaking in late July 2012. It bounced off support in September, made a lower high in November, and by the beginning of January, it was trading approximately midway between that high and the support zone (Figure 2). Anderson highlights the importance of the upcoming Italian elections in late February and German elections in the fall. Does the political solidarity weve seen over the last three months continue to hold in 2013, and will we see any signs of economic recovery? he asks. Yes, I think we will have political solidarity. No, I dont think we will see any economic recovery, and that will mean more Euro range trading. Given the prevailing environment in the majors, where can forex traders look for trade opportunities? With the G-4 all printing money, it has to go somewhere and really the only place

Anticipated policy changes in Japan could result in further yen depreciation vs. the dollar.


The DXY has been trading mostly lower since peaking in late July 2012.


into the first quarter of 2013. Mexico is the top pick. Its cheap, it has no intervention, it has the better U.S. growth outlook story, and there are key local reforms, says Dirk Willer, head of Latam local markets strategy at Citi. Colombia, Chile, and Brazil, by contrast, have been intervening in the forex market to stifle appreciation in their currencies. Strength in the fixed-income market in Mexico is playing a significant role in the pesos strength. We have seen strong inflow into local debt, Willer says. But to buy the

local bonds, [foreign investors] have to buy the FX first. Willer outlined his views in late December when resolution of the U.S. fiscal cliff situation was still up in the air. Our base case is the fiscal cliff will be circumvented and the Mexican peso could easily have a 50% strengthening move, he says. Into the first quarter Willer expects the Mexican peso to be the go-to currency, with the bullish picture owing partially to the local reform story. Labor reforms have made good progress to make the labor markets more flexible, he says. Mexicos central bank lending rate FIGURE 3: U.S. DOLLAR/PESO stands at 4.5%, and Willer doesnt foresee a change any time soon. We dont expect a move, but a hike is slightly more likely that a cut, he says. They have an inflation target at 3%, plus or minus 1%. They had a food price shock and inflation moved above 4%, which explains their more hawkish view. According to Willer, Mexico is the clearest trade based on U.S. growth, while the other Latin American currencies are more tied to Chinese growth. While the China story has been improving lately, it hasnt translated into better commodity prices, which is a bit of a divergence, he notes. Given how important commodities are for the rest of Latin America, outside of Mexico, it is a little concerning. St-Arnaud highlights the possibilities The Mexican peso was one of the Latin regions strongest currencies in of shorting the Canadian dollar/Mexican 2012. peso pair (CAD/MXN). Closing at 12.84 on Dec. 31, the pair has the potential to fall to 12.50 or lower, he says (Figure 4). FIGURE 4: CANADIAN DOLLAR/PESO St-Arnaud was positive on the outlook for the peso, explaining with the newly elected government we think there will be a big push for new structural reforms, which should support the currency. On the Canadian dollar side of the trade, St-Arnaud notes there is a big difference between what Canadian oil producers receive relative to the price of the European benchmark Brent crude oil price, which has helped strengthen the Canadian dollar. St-Arnaud explains that although Canada is an oil producer, most of Ontario and Quebec rely on imported oil because of a lack of pipelines, which has resulted in an over-supply of the Canadian benchmark Western Canada Select oil out of Alberta. There is a $50 gap between the price of Canadian oil An overvalued CAD might provide another opportunity for a bullish MXN trade. and Brent, he says. That means the

CAD is overvalued and should return to a more normal Good for carry value. Rasmussen also argues early 2013 could prove very supFinally, Willer says the Brazilian real (BRL), which had portive for carry currencies. In our view we will be past declined 9% vs. the U.S. dollar in 2012 through Dec. 20, the fiscal cliff, the tail-risk from the debt-crisis will conhas been driven lately in large part by governmental spin. tinue to fall which will result in tighter Italian/Spanish They are suggesting they are happy with current levels, bond spreads and forward-looking indicators like global but thats because they have a short-term inflation worry, PMIs are expected to improve, he says. Overall, we he explains. In the mid-to-latter part of next year they expect the first quarter 2013 will be very strong for carry might try to get the real toward 2.10-2.20. The dollar/real trades. y rate closed 2012 at 2.00521 (Figure 5). However, foreign investor inflows into Brazil have declined. Brazil has so many hurdles FIGURE 5: DOLLAR/REAL raised in terms of capital controls, it has lost market share, Willer explains. Non-Euro Europe also offers some interesting forex stories at the outset of the New Year.

Scandi FX

When asked what his top Scandinavian currency was for early 2013, Arne Lohmann Rasmussen of Danske Bank Markets said he favors the Swedish krone (SEK). The Riksbank (Swedens central bank) is expected to be on hold in February, where the market is pricing a high probability of a cut, he says. It is also our view the global economy is turning, which is expected to benefit a cyclical currency like the SEK. We also believe investors will still favor currencies backed by sound fundamentals and a true triple-A rating, such as Sweden offers. Rasmussen also suggests being long the Norwegian krone (NOK), although he notes this trade is not without its risks. In our bullish view, we highlight the risk that some of the safe-haven flows that benefitted the Scandies in 2012 might reverse in 2013. However, our main view is that this will be mitigated by cyclical support. In late December both the SEK and NOK were at or near their yearly highs vs. the U.S. dollar, and a little off their highs vs. the Euro (Figure 6). The other risk involves the potential for looser monetary policy in Sweden and Norway. The Riksbank might cut rates much more aggressively than we forecast given the current weak Swedish indicators, Rasmussen says. The same applies to Norway. Here the strong NOK might trigger, contrary to our view, new rate cuts. As of late December, the Riksbank rate stood at 1%, while the Norges Bank rate was 1.5%.

The relatively high USD/BRL rate is not expected to change much in early 2013.


Despite some downside risks, the Swedish (top) and Norwegian (bottom) currencies continue to have mostly bullish prospects.

On the Money ON THE MONEY

The Abe trade

Analyzing the unintended consequences of a currency devaluation race to the bottom.


As of Boxing Day (the day after Christmas) the U.S. government was still dithering about going over the fiscal cliff and raising the debt ceiling, and Europe was formally entering recession. In Japan, though, newly elected Prime Minister Shinzo Abe was taking bold steps to kill deflationary recession. Abes plan is to boost government spending by massive amounts, regardless of the debt ratio (already more than 200% of GDP), and strong-arm the Bank of Japan (BOJ) into doubling the inflation target to 2%. What Abe really wants is a devaluation of the yen to promote exports and to lift inflation arising from higher import prices. As noted in Deciphering the yen (Currency

Trader, November 2012), the yen was already starting one of its traditional bouts of weakness, in part on expectations of the election and its result (Figure 1). The dollar/ yen (USD/JPY) has surpassed the most recent high, 84.18 from March 15, 2012, and at the end of December was nearing the high before that, 85.93 from Sept. 17, 2010 (gold horizontal lines). It looks like a dollar rally only because of the spot quotation convention that puts the dollar first in the currency pair. But make no mistake, the driver here is the yen. Some forecasters are talking about 100 in 2013. Abe is going with the wind, trying to take advantage of a currency move already in place. To boost it along he Barbara Rockefeller invented a new cabinet-level ministry Currency Trader Mad Jan 2013 for Economic Revival and appointed Figure 1: Dollar/Yen Rally FIGURE 1: DOLLAR/YEN RALLY a former trade minister, Akira Amari, to head it. Amari will also chair a 88.0 87.5 revived Council on Economic and 87.0 Fiscal Policy. The level of the yen and 86.5 86.0 export promotion is at the center of 85.5 fixing deflation and the hollowing out 85.0 of industry. The Bank of Japan in late 84.5 84.0 December increased the amount of 83.5 bond buying by 10% to 101 trillion, 83.0 and it will almost certainly bow to the 82.5 82.0 political demand to raise the inflation 81.5 target, inspiring some discomfort over 81.0 80.5 the central banks independence. 80.0 Its by no means clear that larger 79.5 doses of the same medicine will cure 79.0 78.5 the patient of deflation, but there 78.0 are no other remedies for a classic 77.5 Keynesian liquidity trap. This time 77.0 76.5 the Japanese are adding to interest 76.0 rate policy a more explicit currency 75.5 policy with the idea that devalua2011 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 Feb Mar A tion cures deflation. Historically, this The driver in the recent dollar/yen rally is a weak yen, not a strong dollar. has been true, although over the past Source: Chart Metastock; data Reuters and eSignal century, major devaluations tended



Country Germany France U.S. Canada Australia Italy Spain UK Austria Japan Market Bottom Nov. 1922 April 1922 Aug. 1921 Aug. 1921 Dec. 1916 July 1921 Nov. 1920 Oct. 1921 Dec. 1925 Dec. 1923 Market Top June 1928 Feb. 1929 Sept. 1929 Sept. 1929 Feb. 1929 Feb. 1925 Feb. 1928 Sept. 1929 Nov. 1928 July 1926 Percent Increase 1088.70% 417.20% 394.00% 299.80% 196.10% 134.60% 131.70% 73.20% 53.40% 28.70%

Germany had the highest percentage increase in notional stock market returns, but the gain is deceptive.
Source: www.gold-eagle.com/analysis_98taylor061798.html

to occur as undesirable side effects of other policy choices and also proved difficult to halt. However, one of the splendid, if frightening, side effects of devaluation is a stock market rally. Investors prefer equities to bonds when a currency is devaluing, since the purchasing power of principal plus interest is falling. One of the famous examples from history is the roaring Berlin and Vienna stock markets in 1921 as the German and Austrian currencies were losing value by the day, and equities were further boosted over bonds as the ability of governments to repay became questionable. The economic and financial events of the 1920s TABLE 2: S  ELECT EQUITY MARKET RECOVERIES FROM were heavily influenced by the loss of physical THE GREAT DEPRESSION wealth in WWI, from factories to farmland, and the disastrous peace treaty that followed. At the same Market Percent Recovery Country Market Top Bottom Decline Date time stock markets were soaring inflation was rising, and in some instances became hyperinflation, as U.S. Sept. 1929 June 1932 86.20% Sept. 1954 was the case in Germany. Consider the stock market Canada Sept. 1929 June 1932 80.10% Nov. 1954 rallies of the 1920s shown in Table 1. Germany had France Feb. 1929 Aug. 1936 75.00% April 1941 the highest percentage increase in notional stock market returns over the period, but its illusory. As Italy Feb 1925 May 1932 72.90% June 1941 money and wealth manager Bryan Taylor writes: Germany June 1928 April 1932 67.70% Feb. 1942 The strong [stock market] recovery only reflected Austria Nov. 1928 Dec. 1933 62.30% June 1954 how much the hyperinflation of 1922 and 1923 devastated German financial assets. In real terms, Switzerland Sept. 1928 May 1932 61.20% Jan. 1946 between May 1918 and November 1922, German Spain Feb. 1928 July 1936 60.60% May 1946 shares declined by 97.4%, a collapse even worse than the one that occurred in the United States UK Sept. 1929 June 1932 52.30% May 1954 between 1929 and 1932. Even with a tenfold recovJapan July 1926 Oct. 1931 48.90% May 1933 ery between 1922 and 1929, the German stock index Even with a tenfold recovery between 1922 and 1929, the German was still 29.6% below its level in May 1918. Table 2 stock market was still 29.6% below its May 1918 level in notional shows the recoveries of various indices from their terms. Depression-era bottoms. Source: www.gold-eagle.com/analysis_98taylor061798.html And thats in notional terms. In real terms, the

German government devalued the mark from about 60 to the dollar in the first half of 1921 to 330 marks to the dollar by November 1921. Conventional economic history has it that Germany deliberately devalued the mark to deprive the Allies of excessive war reparations, which didnt work because the amounts were fixed in gold and foreign currency terms and actually raised at one point. But whatever the political reasoning, government selling of marks to obtain gold and foreign currencies to pay war reparations took on a life of its own through hyperinflation in the real economy. We have all seen the famous chart showing devaluation by thousands of percentage points by 1923. In sum, currency valuations and equity prices are closely intertwined under crisis conditions. Economic growth, earnings per share, and other measurements that should be the most influential factors in equity analysis fly out the window when the motivation to buy equities is currencydriven. It is precisely when (and only when) crisis conditions prevail that intermarket analysis is pertinent and useful. The question then becomes whether Japan, by deliberately seeking inflation, is inadvertently modeling itself on Germany circa 1921. There are tremendous differences, of course, not least that Japan doesnt owe the rest of the world the equivalent of one years GDP, as Germany did. More than 90% of Japanese government debt is owned by Japanese institutions and citizens. But by selecting a policy of devaluation and one that may easily come to include massive government intervention in the FX market, as we saw in 2003, the



new Japanese government is unmistakably nurturing an equity rally. After all, Japan has not yet recovered from the burst bubble of 1990, although most of the rest of worlds indices are making new all-time highs (Figures 2 and 3). Barbara Rockefeller

Even a 50% retracement of the loss would take the Nikkei index only to about 22,500, the highest high from the week of July 5, 1996 more than 16 years ago. Figure 3 compares the Nikkei to the FTSE All-World Index, with the Currency Trader Mad Jan 2013 associated linear regression lines. The Figure 2: Nikkei Stock Index (Weekly) equity world has prospered everyFIGURE 2: NIKKEI STOCK INDEX, WEEKLY where but Japan. 4100 4000 The interesting thing about devalu3900 3800 ation leading to equity rallies is that 3700 3600 everyone knows about it. If the new 3500 3400 Japanese government succeeds in 3300 3200 pushing the yen down, speculators 3100 3000 will push volume in the Nikkei to new 2900 2800 heights. Its almost as though Japan 2700 2600 seeks to blow a bubble, and remember 2500 2400 that when uncertainty rises about the 2300 2200 wisdom of policies, a preference for 2100 2000 hard assets ensues, implying a bubble 1900 1800 in commodities, too. 1700 1600 But then consider what happens 1500 1400 when the government wants to stop 1300 1200 the merry-go-round. Burst bubbles are 1100 1000 characterized by default, deleverag900 800 ing, disclosure of fraud, downsizing, 700 600 demand, wealth destruction and 500 deficits. The pubic deficits will 1982 1983 1984 1985 1986 1987 1988 1989 1990 19911992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2 remain unless the sovereign defaults. Even a 50% retracement of the Nikkeis loss would take the index only to Deliberately building a bubble belongs around its levels from mid-1996. in that category of events labeled be Barbara Rockefeller careful what you wish for. Currency Trader Mad Jan 2013 FIGURE 3:Index  NIKKEI STOCK INDEX (BLACK) VS. FTSE ALL-WORLD Figure 3: Nikkei Stock (Black) vs. FTSE All-World Index (Blue) Weekly Questioning the wisdom of the INDEX (BLUE), WEEKLY new Japanese policies is going to be a 29 28 key theme in 2013. Because we know 28 27 70 so little about exiting a deflationary 27 26 26 recession, we must study the primary 25 65 25 example we do have, hopefully with24 24 23 out the war that triggered the true 60 23 22 end of the Great Depression. We know 22 21 55 21 more today than we knew then about 20 20 how markets and economies work, 19 50 19 18 but to be honest, not much more. 18 17 Thats why economic history, such 45 17 16 16 as Sylvia Nasars review of the great 15 40 15 economists of the 19th and 20th centu14 14 13 ries, Grand Pursuit (Simon & Schuster, 13 35 12 2011), is so gripping. (Well, gripping 12 11 11 30 if you see the parallels with todays 10 10 policy conundrums and conflicts. Its 9 9 25 8 not really bedtime reading unless you 8 7 have insomnia.) 7 20 6 6 One other thing that emerges from 5 the historical perspective is that the 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20 Euro, despite its multitude of faults Overall, equity markets have prospered almost everywhere but Japan in recent and shortcomings, is perceived as decades.





what used to be called a hard currency. Its probably no accident the gold and FX reserves of the Eurozone member states add up almost exactly to the sum that will be available to struggling economies via the European Stability Mechanism. The European Central Bank (ECB) may be toying with a form of quantitative easing by purchasing the paper of distressed sovereigns (ECB President Mario Draghis whatever it takes moment last summer), but on the whole the Eurozone is declining to leverage the reserves. Moreover, the ECBs sacred, treaty-based commitment to keeping inflation low is the investors gold standard. As noted, Japan doesnt enjoy large foreign participation in its government bond market, but if it did, we would expect an exodus from JGBs to European sovereign bonds. This is true even if we expect that neither party nor any of the Eurozone members will default. Default is not the issue. Yield is not the issue, either. We might also say the expectation of yen devaluation outweighs the yield differential favoring European countries. This is the basic assumption of a key FX model by MIT economist Rudi Dornbusch put forth in a 1976 paper titled Expectations and Exchange Rate Dynamics. Dornbusch started with the uncovered interest parity equation that says the home interest rate on bonds is always equal to the foreign interest rate plus the expected rate of depreciation or appreciation of the exchange rate. To get inflation, you need a big and unexpected increase in money supply, exactly what Japan is aiming for today. The increase in money supply, when its unexpected, causes the FX rate to overshoot downward and then, perversely, to rise, before falling again. Note the money supply change has to be unexpected a shock. This time it will hardly be a surprise, since it is being telegraphed loud and clear, but never mind. Prices in Japan have been sticky upward for so long that we can barely imagine a spurt of inflation. If inflation does, in fact, occur, that will be unexpected enough. The point of Dornbuschs work is that exchange rates far overshoot levels where fundamental economics dictates they should go. Also, they overshoot with far greater volatility than warranted or expected. Its called the disconnect puzzle and it applies pretty much only to the foreign exchange markets. Its overshooting caused not by mania and panics, as in commodity and equity markets, but rather by real analysis of real economic variables but without being able to see far enough down the road. As we all know, FX traders respond to the data in front of them, not to the data that should ensue later in a cycle. Which leads us to the dollar. At its last meeting, the Federal Reserve announced its intention to tie quantitative easing to the unemployment rate rather than the inflation rate. Inflation was downgraded to a contingency: QE will continue as long as unemployment remains high and

inflation doesnt get too high. The Fed isnt deliberately seeking to devalue the dollar, but this new policy formula leads ineluctably to the deduction that devaluation is what it will secretly accept, and will get. In other words, both Japan and the U.S. are chasing the same objectives with the same monetary policy. Japan has an additional advantage deficit spending that the U.S. doesnt have, at least not under current budget and deficit-management conditions. Assuming the U.S. budget and debt-ceiling negotiations are prolonged and unpleasant, as seems likely just ahead of year-end, global investors will be handed another reason to divest themselves of dollars. Not only should they fear inflation from QE at some point although nobody knows when they need to fear possible technical default, however temporary. The ratings agencies will frown at the prolonged and often silly talks. The first downgrade of U.S. sovereign debt in August 2011 may easily be followed by another downgrade if the ratings agencies continue to incorporate political incompetence into their analysis. And why shouldnt they? Now we have two of the majors, the dollar and the yen, in competing devaluations. Ironically, with exports to China having fallen substantially because of the islands dispute and exports to Europe also down because of the recession, Japans main export hope is the U.S. The clear winner is the Euro, followed by the Swiss franc, the pound, and the Australian dollar. Governments in all those countries have complained about their currencies being overvalued, but the U.S. and Japan have the lead in specific devaluation policies. Its going to get ugly. This year will almost certainly see more FX market intervention than we grew accustomed to over the past decade. Its probably overly dramatic to call it a currency war, but its certainly a competition. What we need to fear most is Fishers money illusion: that we focus on return without accounting for the pernicious wealth destruction of inflation. Ignoring inflation the U.S. has been able to do so for nearly five years now, and 25 years in the case of Japan causes bad decision-making. This is not to say we will experience the conditions of Vienna or Berlin in October 1921, when prices were rising by 50% per month, but that savers and creditors suffer under inflation, while debtors benefit. Unfortunately, this means the wise course of action when inflation is reliably expected is to borrow as much as possible and put it in equities. No one can yet say whether the Abe trade will work. Japan has been struggling with deflation for decades. But its all too likely to work in the U.S. Possibly the best trade in 2013 will be to short the yen, especially against the Euro, and long the S&P. y For information on the author, see p. 4.


Abenomics, European politics, and American labor

As the year turns, a few key catalysts are driving the FX market.
The main feature in the forex market continues to be yen weakness (Figure 1). This weakness, based on expectations the new Japanese government will succeed in driving the dollar to 90 with a combination of more aggressive monetary and fiscal policy (Abenomics), is offering support to other currencies. The yen sales are a combination of momentum and carry strategies. As former Prime Minister Shinzo Abe was campaigning for office again, he advocated a higher inflation target, open-ended quantitative easing by the Bank of Japan, and new and large public works spending, with the The yens weakening trend has translated into a more than 11% gain explicit goal of weakening the yen and finally ending in the dollar/yen pair since mid-September. deflation. Source: TradeStation However, there are two other forces in the market as well. First, the market is anticipating further reduction Although its difficult to argue both points simultanein the tail risks in Europe. Of course, the large steps back ously, the unity of opposites during a political campaign is from the abyss this year are the product of the European all too common. Perhaps the most important character at the Central Banks long-term repos and offer of (conditional) moment in the Italian drama is neither Monti nor Berlusconi, outright purchases. But the European Commission will but the center-left leader Pier Luigi Bersani. He already reportedly do its part by granting several countries, includmade the most sensible response to Montis manifesto, saying France and Spain, an extra year (or maybe two for Spain) ing that he agrees with some of it, other parts less so, and is to reach the 3% deficit target. An official announcement open to discussion about the rest. Bersani has his own ambihas not been made, but the signals from the EC and the tions and seems reluctant to move over for Monti. Commissioner for Economic and Monetary Affairs Olli Rehn In the U.S., the labor dispute at ports on both coasts bears are unmistakable. monitoring. The Eastern Seaboard and Gulf port dispute is The other driver is the looming U.S. fiscal cliff and debt the most pressing at the moment. The ports handle a great ceiling. On Dec. 26 the Treasury Department indicated it deal of consumer goods, and a labor dispute would disrupt would begin taking special measures to avoid violated the the retail sector as well as distort trade and employment debt ceiling. After the previous weeks failed vote in the data. (Only container traffic would be impacted autos, House of Representatives, attention has turned to the Senate. some perishable items, and military cargo would not be With the Democrats enjoying a slim majority, it is possible included.) A last-minute deal was reached on Dec. 29 to they will vote on a bill along the lines that Obama outlined. extend the existing contract to the first week in February, Meanwhile, in Italy, Agenda Monti, the series of reform with the hope that will be sufficient time to reach a new measures from Prime Minister Mario Monti aimed at modagreement. ernizing Italys economy and putting it on more solid fiscal Even though the labor dispute would impact imports footing, is drawing some support from the UDC, some curmore than exports, and therefore would show a reduction of rent cabinet members, and some breakaway politicians. A the U.S. trade deficit, the initial reaction may be to sell the poll suggests this support may translate to 15% to 20% of the dollar. y vote in the late-February Italian election. At the same time, former Italian prime minister (and future candidate) Silvio Marc Chandler is head of global foreign exchange strategies at Berlusconi is trying to claim Italy is the second-strongest Brown Brothers Harriman. This article was adapted from his blog, economy in the Euro area (behind Germany) while maintainMarc to Market (www.marctomarket.com). For more information ing Monti has driven the economy into the ground. on the author, see p. 4.
14 14 January October 2013 2010 CURRENCY TRADER


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Dollar/pound makes a move

The British pound punctured resistance vs. the dollar at the outset of the new year. Whats happened in the past after such moves?



The pound/dollar pair broke out above resistance on Jan. 2 but closed toward the bottom of the days range.

No one probably noticed, but when the British pound/U.S. dollar rate (GBP/USD) pushed above 1.6308 on Jan. 2 (Figure 1), it was only the second time since spring 2011 the pair had made a one-year (or longer) new high, the other instance being the September 2012 high that eclipsed the April 2012 peak. Even though it marked the pound/ dollars highest price in 346 days, the Jan. 2 move was less than conspicuous. After all, the pair closed the session below the breakout level and toward the bottom of the days range, and it followed through to the downside the next day (not shown on chart). And as it turns out, this behavior a pullback after an upside breakout has been fairly typical in recent years.
January October 2013 2010 CURRENCY TRADER


After new breakout highs that closed in the lower portion of the days range, the pound/dollar had a tendency to be lower five and 10 days later.

Lets look at the pound/dollars current position, the implications (if any) of its recent price action, and the context in which it is taking place.

Upside breakout

Figure 1 shows the GBP/USDs Jan. 2 move penetrated as obvious a resistance level as youre likely to find the nearly identical December, September, and April 2012 highs. It represented a 71-day upside breakout of the September high, which in turn was a 103-day breakout of the April high. As was the case for the Jan. 2 breakout, on Sept. 21 price close toward the bottom of the days range, after which price trended lower for roughly two months. Similarly, after breaking out above the October 2011 high in April 2012, price turned to the downside after the pattern made a new high with a low close. Analyzing days the pound/dollar pair closed in the lower portion of the daily range when establishing a new breakout high (based on high prices, not closing prices) showed a tendency for the pair to weaken in subsequent days. For example, Figure 2 compares the median price action one, two, five, and 10 days after 51-day upside breakouts with a closing price in the bottom 40% of the days range to the pairs median price changes for all one-, two-, five-, and 10-day moves from Jan. 2, 2003 through Dec. 31, 2012. (All moves are calculated on a close-to-close

basis.) While the pound/dollars benchmark price action had a slight upside bias, the moves after the 58 previous instances of the pattern were negative after day 2. This general pattern held across breakout lengths of 252 days, 62 days, 41 days, and 10 days, with the following additional characteristics: The longer the breakout length, the more significant the subsequent downside price movement (the median performance after the 62-day and 51-day variations was nearly identical, though); also, the lower the close (e.g., in the bottom 33% or 25% of the breakout days range) the more significant the subsequent downside price action. (The one exception among the sampled patterns was the 21-day breakout, which tended to be followed by upside price action that was stronger than the pound/dollars benchmark performance.) However, longer breakout lengths and more extreme lower closes also limited the number of sample patterns. For example, there were 52 instances of 62-day breakouts that closed in the bottom 40% of the days range but only 21 instances of 252-day breakouts with closes this low. Similarly, requiring a close in the bottom 25% of the days range (rather than 40%) reduced the number of qualifying 51-day breakouts from 58 to 38. The Jan. 2 close was in the bottom 20% of the days range only the fifth time since 2003 a day that made a new 252-day (or longer) high closed that low. The patterns general bearishness contrasts to the



The odds of the pound/dollar being higher after a 51-day new high gradually decreased after two days.


pound/dollars general tendencies after all upside breakouts/new highs. The price action after all upside breakouts (i.e., regardless of the level of closing price on the breakout day) was mildly bullish. For example, going long on upside breakouts ranging in length from 40 to 70 days (tested in increments of two days) and exiting after five days was net profitable in all cases, with winning percentages ranging from 50% to 58% (the win rate peaked at lengths of 46-50 days and then gradually declined). Figure 3 shows another perspective of upside breakout performance: winning percentage relative to holding period. In this case, the percentages reflect exit lengths of one to 10 days for long entries on 62-day upside breakouts. The highest win rate is at day 2 at approximately 60%, after which the rate declines through day 10 to around 43%. For some additional context, the pound/dollar pair was higher around 52% of the time five days after 252-day upside breakouts. Overall, there appears to be a contrast between the pound/dollar pairs minor bullish bias during the analysis period (and the bullish tendencies following upside breakouts in general) and the performance after upside breakouts/new highs that are distinguished by a relatively low close. Now lets take a step back and see where this short-term behavior fits into the GBP/USD pairs larger picture.

Longer-term price action

The GBP/USD rate has traded mostly between 1.53 and 1.65 since mid-2010.

Figure 4s weekly chart of the pound/




The pound/dollar is now at the upper boundary of a four-year consolidation pattern.

dollar shows the recent consolidation to be part of a larger trading range. The pair has traded mostly between 1.5300 and 1.6500 since mid-2010 (price spiked to above 1.6700 a couple of times in 2011) after hitting 1.700 in August 2009 and falling as low as 1.4229 in May 2010. The higher low that formed in November 2012 and the January breakout may look like the pairs initial attempt at making a run at its previous highs, but Figure 5s monthly chart shows the pound/dollar has just reached the upper trendline of a massive four-year triangular consolidation. It is certainly not inconceivable that price will continue its upside push and break out of the upside of this pattern, but theres also no reason to believe it wont retreat from this resistance, even if its ultimate long-term direction is upward.

The fundamentals may argue for continued stolid price action, if not necessarily an indefinitely tighter contraction. As discussed in British pound has potential near-term edge over Euro (Currency Trader, December 2012), some analysts see the pound as more bullish vs. the Euro than the U.S. dollar, but a strong catalyst for the UK currency doesnt appear to be on the immediate horizon. The Jan. 2 resolution, however imperfect, of the U.S. Fiscal Cliff issue left the forex market relatively untouched, with the greenback trading bullishly against most currencies in its immediate aftermath. With no major developments on the horizon to push the currency strongly one way or the other (of course, its always the unexpected events that trigger major moves), the pound/dollar may continue to test support and resistance and move in fits and starts. y




The paradox of negative interest rates

The Swiss National Bank risks losing its bet it can counter global fund inflows in a chronic financial crisis, but so far it is winning.

The role of education has moved front and center in the public policy debate as national economic growth, not to mention individual income, increasingly depends on adding value to information. This may be the case in many endeavors, but it is not at all clear market analysis is one of them; some believe doctrinaire adherence to textbook explanations is a formula for disaster. Indeed, it is not what a person knows, it is how a person unlearns commonly held beliefs proven inadequate that defines the real value of an education. You are free to contemplate why you were not told this during your own formal education. One case in point deriving from the interest rate arbitrage model of currencies, wherein expectations of higher short-term interest rates should propel a currency higher as funds FIGURE 1:  LOW-YIELDING CURRENCIES OFTEN will be lent there, is the presumpHAVE HIGH SPOT-RATE RETURNS tion high-yielding currencies are 1.25% strong currencies. However, if we JPY map the total carry returns for 28 0.75% currencies against the USD since the January 1999 inception of the 0.25% Euro as a function of the average annual spot rate and interest rate spread (see The long, awful life -0.25% CHF of the dollar carry trade, January 2012), we see two of the most -0.75% prominent low-yielding currencies, the CHF and the JPY, have -1.25% strongly positive spot-rate returns (Figure 1). In fact, the only cur-1.75% rency with a negative interest rate spread against the USD, the Hong Kong dollar, has had negaAverage Annual Interest Rate Spread Return tive total carry return against the Two of the most prominent low-yielding currencies (CHF and the JPY) have strongly greenback. positive spot-rate spread returns. In the case of the JPY, the spotAverage Annual Spot Rate Spread Return











TOIS Yields Largely Negative In An Inverted Yield Curve


Sep-11 Nov-11 Dec-11 Feb-12 Apr-12 Jun-12 12 15 18 21 24 Aug-12

-0.275% Yield, Inverse Scale -0.225% -0.175% -0.125% -0.075% -0.025% 0.025%



0.075% rate strength is attributable in 0.125% Maturity In Months part to both the countrys persistent skirting with deflation across its various Lost Decades After the SNB imposed the franc ceiling in September 2011, the TOIS was notably in negative territory. and to the necessity of Japans customers to buy yen to pay their ised it effectively would print as many francs as necessary Japanese suppliers. Moreover, once the yen carry trade to enforce that ceiling. was displaced by the dollar carry trade beginning in 2009, We can admire their courage even if we question their Japanese investors began repatriating funds (see Requiem sanity. After all, the history of central banks and finance for a carry trade, February 2012). ministries in wagering their countries wealth and price stability to defend or impose an arbitrary exchange rate is The Swiss franc case not a happy one. George Soros famously broke the Bank of The CHF presents an interesting case on several grounds. England in September 1992 by betting the Bank of England First, it has tried to remain an island within the Euro sea, would not be able to keep short-term interest rates high which is quite difficult considering its geography and enough for long enough to defend the 3.00 DEM/GBP trade patterns (see The major Euro crosses, March 2007). level. A country can fix its interest rates or it can fix an Second, it has been a carry trade-funding currency itself exchange rate, but it cannot fix both simultaneously; this is (see Franc-ly my dear, I dont give a carry, September 2008 and How Eastern Europe got carried away, October true for large countries such as the U.S. and China and for any Alpine confederation of your choice. 2009). Finally, it has also been a stopping ground for earnings coming from various resource producers, no questions Negative interest rates asked (see The Swiss francs commodity connections, Not very long ago many professionals considered negative October 2008). interest rates to be something akin to a perpetual motion These factors plus flight capital coming out of the machine, being faster than light, the Chicago Cubs winEurozone during the sovereign credit crises of 2010-2011 ning the World Series, or other unobserved events. This pushed the CHF to levels the Swiss National Bank (SNB) was the case despite the occasional gentle reminder from considered unsustainable. Having international investors some the U.S. had effectively negative Treasury bill rates consider you a haven is flattering to a point; drowning in their fund inflows is a little excessive. The SNB, which had in 1937 and the Swiss had imposed a negative interest rate on foreign deposits in 1979. By mid-2012, a host of higher lost somewhere in the neighborhood of CHF 14 billion in its 2009-2010 interventions to suppress the CHF against the quality European sovereign interest rates turned negative. There are several ways to conceive of these negative EUR, went big, as the phrase goes, in September 2011 interest rates. The first is the lender is paying the borrower and announced a ceiling of 1.20 CHF per EUR and prom-





tive yields and indeed a greater demand for CHF overall; the 0.25% more people wanted to hold CHF 0.20% as opposed to EUR, the more they 0.15% 0.10% were willing to accept the inter0.05% est rate penalty. Such willingness 0.00% -0.05% had to be construed as bullish 2-Yr -0.10% for the CHF over the longer term 1-Yr -0.15% because the minute rates came off 6-Mo negative levels, the dam would Forward Rate Horizon Rate break and flood the country with funds willing to push the CHF Starting Contract higher. Six-month Euro/Swiss forward rates were negative for the all of 2013, and one-year The synthetic forward-rate forward rates were negative through March 2014. structure for Euro/Swiss futures was quite telling by the time the for the privilege of lending money thereto. The second is Swiss joined other central banks in expanding dollar swap the lender is paying a premium for an asset and the amorlines into the Eurozone at the end of November 2011. Sixtization over time is a loss of money. The third is the lender month Euro/Swiss forward rates were negative for the is engaging in an insurance transaction: In exchange for entirety of calendar year 2013, and one-year forward rates the known loss on the loan, the lender will avoid the poswere negative through March 2014 (Figure 3). Anyone sibility of a larger unknown loss elsewhere at some point looking to lock in a franc loan could do it at a negative in the future. interest rate, but the risk would be the spot CHF would be Lets take a look at how the Tomorrow-Next Overnight much higher at repayment time. Indexed Swap (TOIS) market behaved after the SNB The situation became much more extreme by the end of imposed the franc ceiling on Sept. 7, 2011. The most obviSeptember 2012. The negative forward rates are far more ous feature in Figure 2 is how much of it is in negative terprevalent and persistent indeed, the only positive forritory. Negative interest rates are not an oddity here, they ward rate visible is the one-year rate starting in December are a part of the landscape. 2014 (Figure 4). The second feature of the chart that may stand out is Someone with a classical understanding of interest rate how it started inverting in November 2011 via a twist: The arbitrage might say the franc should be weak because of very shortest maturity swaps started to rise in yield while these negative interest rates. Once you unlearn that trainthe longer maturity swaps were falling in yield. That twist ing, you then can understand Swiss interest rates are negastarted to signal greater comfort in the persistence of nega- tive because demand to lend into the CHF is so strong
0.35% 0.30% Yield Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14




FIGURE 4:  EURO/SWISS SYNTHETIC FORWARD RATES: SEPT. 28, 2012 lenders are willing to accept a penalty rate. Nothing lasts forever, though, and the SNB risks losing its bet it can counter global fund inflows in a chronic financial crisis. The sign it is losing the bet will come when the volatility of threemonth CHF forwards rises as the CHF strengthens against the EUR; that will signal the markets belief more increases will come and must be protected against. By luck or design, this has yet to happen (Figure 5). Not only did the Swiss franc ceiling hold through the various Eurozone sovereign debt crises of 2012, the aggressive monetary policies of the European Central Bank served to slow the panic and led to a decline in the CHF against the EUR in August-September 2012. Volatility has been tame. There we are in our throughthe-looking-glass world: A currency with negative interest rates strengthened against a currency at existential risk until the latters central bank promised to engage in what amounts to money printing. If you learned about interest rate arbitrage or even about supply/demand balances, you might have thought the opposite would occur in both situations. y For information on the author, see p. 4.

Euroswiss Synthetic Forward Rates: September 28, 2012



Yield -0.05%

2-Yr 1-Yr Jun-14 Sep-14 6-Mo Mar-13 Rate Jun-13 Sep-13 Forward Rate Horizon Dec-13 Dec-14 Mar-15 -0.10% Mar-14


Starting Contract

By the end of September 2012 the negative forward rates were far more prevalent and persistent.

1.245 1.240

12.0% 11.5%

CHF Per EUR Volatility

11.0% 10.5% 10.0% 9.5% Three-Month Volatility Of CHF For EUR Holder



9.0% 8.5%



8.0% 7.5%


7.0% 6.5%


6.0% 5.5%


5.0% 4.5%


4.0% 3.5%











The franc ceiling held during Europes 2012 sovereign debt crises, and the ECBs aggressive monetary policies slowed the panic and led to a decline in the CHF vs. the EUR in August-September 2012.









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.

1 2 3 4 5 6 7 8 9 10

U.S.: December ISM manufacturing report Germany: November employment report U.S.: December employment report Canada: December employment and November PPI LTD: January forex futures; January U.S. dollar index futures (ICE)

18 19 20

21 Hong Kong: December CPI 22 announcement 23 24

Germany: December PPI

Japan: Bank of Japan interest rate Australia: Q4 CPI Mexico: December employment report and Jan. 15 CPI South Africa: December CPI UK: December employment report U.S.: December leading indicators Canada: December CPI Japan: December CPI

Brazil: December PPI Mexico: Dec. 31 CPI and December PPI Brazil: December CPI France: December CPI UK: Bank of England interest rate announcement ECB: Governing council interest rate announcement U.S.: November trade balance


26 27 28 U.S.: December durable goods 29 30 interest rate announcement

U.S.: Q4 GDP (advance) and FOMC U.S.: December personal income Brazil: December employment report Canada: December PPI France: December PPI Germany: December employment report India: December CPI South Africa: December PPI U.S.: January ISM manufacturing report and employment report Australia: Q4 PPI Japan: December employment report

11 12 13 14 India: December PPI


15 Germany: December CPI 16

U.S.: December CPI Japan: December PPI

U.S.: December PPI and retail sales UK: December CPI and PPI


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


U.S.: December housing starts Australia: December employment report Hong Kong: October-December employment report Canada: Bank of Canada interest rate announcement

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Vol 224.3 114.8 100.8 94.6 66.4 41.1 28.0 20.3 15.3 3.3

OI 201.9 188.2 177.7 160.3 145.1 171.5 42.0 37.9 33.6 6.6

10-day move / rank 1.18% / 33% -2.85% / 89% -1.94% / 71% 0.23% / 6% -1.28% / 100% -2.12% / 25% 1.28% / 29% -0.16% / 6% -3.20% / 80% 1.17% / 33%

20-day move / rank 1.97% / 66% -4.54% / 96% -1.06% / 45% 0.69% / 35% -0.54% / 27% -1.20% / 53% 1.73% / 66% -0.53% / 15% -0.74% / 55% 1.96% / 66%

60-day move / rank 2.49% / 39% -8.76% / 96% 1.70% / 42% 0.49% / 9% -0.82% / 36% -1.36% / 62% 2.85% / 54% 0.43% / 11% 0.17% / 2% 2.49% / 39%

Volatility ratio / rank .13 / 8% .36 / 35% .82 / 97% .35 / 92% .59 / 100% 1.00 / 100% .15 / 10% .19 / 32% 1.10 / 97% .13 / 8%

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.

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Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency South African rand Euro Russian ruble Swiss franc Swedish krona Great Britain pound Indian rupee Taiwan dollar Thai baht Canadian dollar Singapore dollar Brazilian real Hong Kong dollar New Zealand dollar Chinese yuan Australian Dollar Japanese yen Dec. 26 price vs. U.S. dollar 0.116485 1.318775 0.03267 1.092395 0.152745 1.61336 0.01813 0.034405 0.03266 1.00892 0.8189 0.480715 0.129025 0.822225 0.1586 1.0366 0.0118 1-month gain/loss 3.42% 1.64% 1.43% 1.38% 1.22% 0.66% 0.42% 0.23% 0.18% 0.18% 0.13% 0.08% 0.00% -0.17% -0.51% -0.89% -2.76% 3-month gain/loss -4.23% 1.99% 1.59% 2.21% 0.21% -0.58% -3.77% 0.97% 0.99% -1.24% 0.46% -2.59% 0.03% -0.23% 0.48% -0.59% -8.17% 6-month gain/loss -1.52% 5.41% 8.50% 4.86% 7.64% 3.62% 3.28% 3.09% 3.86% 3.72% 4.94% -0.57% 0.12% 4.46% 0.25% 3.52% -5.60% 52-week high 0.1338 1.3449 0.0345 1.1154 0.1531 1.6268 0.0203 0.0345 0.0329 1.0334 0.8213 0.586 0.129025 0.8458 0.1605 1.0808 0.0131 52-week low 0.1116 1.2099 0.0291 1.0074 0.1374 1.5308 0.0174 0.032 0.031 0.9601 0.7682 0.4674 0.1285 0.7504 0.1566 0.9681 0.0118 Previous 14 10 1 3 6 13 17 4 9 5 12 16 8 11 7 2 15


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

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

Dec. 26 10,230.36 60,960.00 3,180.81 16,408.30 3,674.26 4,661.40 19,417.46 7,636.23 39,427.13 43,495.74 22,541.18 5,954.30 6,862.50 12,373.80 1,419.83

1-month gain/loss 8.96% 7.44% 5.87% 5.72% 4.95% 4.90% 4.75% 4.72% 4.40% 3.86% 3.11% 2.90% 2.70% 1.55% 0.96%

3-month gain/loss 14.86% 0.80% 4.40% 6.20% 7.60% 6.36% 4.21% 4.94% 11.33% 7.84% 9.81% 3.23% 4.92% 1.15% -0.94%

6-month gain loss 18.08% 13.23% 13.37% 26.53% 21.96% 6.36% 14.85% 24.44% 16.83% 10.57% 18.75% 9.31% 15.19% 9.17% 7.56%

52-week high 10,255.20 68,970.00 3,180.81 17,133.40 3,674.57 4,669.00 19,612.20 7,682.90 39,427.13 44,000.20 22,683.70 5,989.10 7,000.60 12,740.50 1,474.51

52-week low 8,238.96 52,213.00 2,646.35 12,362.50 2,922.26 4,033.40 15,358.00 5,771.27 32,092.87 36,428.40 18,056.40 5,229.80 5,712.10 11,280.60 1,248.64

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

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



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 / Yen Franc / Yen Pound / Yen Canada $ / Yen New Zeal $ / Yen Euro / Aussie $ Aussie $ / Yen Euro / Real Pound / Aussie $ Euro / Canada $ Franc / Canada $ Euro / Pound Pound / Canada $ Euro / Franc Canada $ / Real Aussie $ / New Zeal $ Pound / Franc Aussie $ / Real Aussie $ / Canada $ Aussie $ / Franc Yen / Real Symbol EUR/JPY CHF/JPY GBP/JPY CAD/JPY NZD/JPY EUR/AUD AUD/JPY EUR/BRL GBP/AUD EUR/CAD CHF/CAD EUR/GBP GBP/CAD EUR/CHF CAD/BRL AUD/NZD GBP/CHF AUD/BRL AUD/CAD AUD/CHF JPY/BRL Dec. 26 111.8 92.60 136.755 85.525 69.7 1.272195 87.87 2.74338 1.556395 1.307115 1.082735 0.81742 1.599095 1.207375 2.098805 1.260775 1.47691 2.156385 1.027435 0.948925 0.02454 1-month gain/loss 4.56% 4.30% 3.54% 3.06% 2.71% 2.55% 1.97% 1.56% 1.55% 1.46% 1.20% 1.01% 0.48% 0.27% 0.10% -0.70% -0.72% -0.96% -1.06% -2.23% -2.87% 3-month gain/loss 11.11% 11.34% 8.29% 7.59% 8.69% 2.59% 8.29% 4.70% 0.01% 3.26% 3.49% 2.59% 0.66% -0.21% 1.39% -0.36% -2.73% 2.05% 0.65% -2.74% -5.76% 6-month gain loss 11.70% 11.11% 9.80% 9.91% 10.87% 1.82% 9.69% 6.01% 0.10% 1.63% 1.10% 1.72% -0.09% 0.53% 4.31% -0.90% -1.18% 4.11% -0.19% -1.28% -3.95% 52-week high 111.8 92.60 137.23 85.525 70.85 1.2974 88.65 2.7714 1.6123 1.3437 1.1151 0.8486 1.6162 1.2222 2.1463 1.3138 1.5434 2.2253 1.0755 1.0328 0.0262 52-week low 94.65 78.81 117.58 74.74 58.78 1.1614 75.6 2.2481 1.4637 1.2164 1.0128 0.7779 1.5515 1.2003 1.7067 1.2436 1.4199 1.8187 0.9951 0.9238 0.021 Previous 7 4 9 5 8 18 2 6 21 16 15 11 19 17 3 10 20 1 12 13 14


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 0.75 0.5 1 0-0.25 3 2.5 7.25 2.75 1.875 8 5 Last change 0.5 (Dec 08) 0-0.1 (Oct 10) 0.25 (July 12) 0.5 (March 09) 0.25 (Sept 10) 0.25 (Aug 11) 0.25 (Dec 12) 0.5 (March 11) 0.25 (Oct 12) 0.25 (Oct 12) 0.125 (June 11) 0.5 (Apr 12) 0.5 (July 12) June 2012 0-0.25 0-0.1 1 0.5 1 0-0.25 3.5 2.5 8.5 3.25 1.875 8 5.5 Dec. 2011 0-0.25 0-0.1 1 0.5 1 0-0.25 4.25 2.5 11 3.25 1.875 8.5 5.5


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

Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3

Release date
12/21 11/30 11/30 12/28 11/15 12/21 12/6 12/5 11/16 11/30 11/12 11/23

-2.5% -0.3% 0.9% 0.5% 0.6% 1.8% 2.0% 0.2% 6.5% 3.4% -0.9% -0.4%

1-year change
0.7% 4.9% 2.9% 1.8% 1.8% 2.3% 8.0% 1.9% 1.3% 12.0% -3.6% 0.3%

Next release
3/22 2/29 2/29 3/27 2/14 3/27 3/12 3/6 2/27 2/28 2/14 2/22


Unemployment AMERICAS

Q3 Nov. Nov. Q3 Oct. Aug.-Oct. Nov. Sept.-Nov. Nov. Q3

Release date
11/19 12/21 12/7 12/6 11/2 12/12 12/6 12/18 12/28 10/31

7.6% 4.9% 7.2% 9.9% 5.3% 7.8% 5.2% 3.4% 4.1% 1.9%

0.4% -0.4% -0.2% 0.1% 0.2% -0.2% -0.1% -0.1% -0.1% -0.1%

1-year change
0.4% -0.3% -0.3% 0.7% 0.1% -0.5% 0.0% 0.2% -0.4% -0.1%

Next release
2/19 1/4 1/4 3/7 1/3 1/23 1/17 1/17 2/1 1/31



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

Release date
12/14 12/7 12/20 12/12 12/12 12/18 12/12 10/24 12/20 12/31 12/28 12/24

0.9% 0.6% -0.2% 0.2% -0.1% 0.2% 0.2% 1.4% 0.3% 0.9% -0.4% 0.1%

1-year change
10.6% 5.5% 0.8% 1.4% 1.9% 2.6% 5.6% 2.0% 3.7% 9.6% -0.2% 3.6%

Next release
1/15 1/10 1/25 1/12 1/15 1/15 1/23 1/23 1/21 1/31 1/25 1/23




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

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

Release date
12/14 11/29 12/27 12/20 12/18 12/13 11/2 12/13 12/14 12/28 12/28

0.9% -0.1% -0.5% -0.1% -0.2% 0.3% 0.6% 0.3% 0.1% 0.0% -1.7%

1-year change
13.0% -0.2% 1.9% 1.4% 2.2% 5.2% 1.1% -1.5% 7.2% -0.9% -4.9%

Next release
1/15 1/4 1/31 1/21 1/15 1/31 2/1 3/14 1/14 1/16 1/29

As of Dec. 28 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.




Triangle pattern breakout.

Date: Dec. 20, 2012 Entry: Long the Euro/British pound pair (EUR/GBP) at 0.8134. Reason for trade/setup: On Dec. 19 the Euro/pound traded slightly above the implied resistance of the Oct. 22 high (dashed line on main chart and solid horizontal line on weekly inset). Given the markets short-term upward momentum forming what many chartists would likely describe as an ascending triangle we anticipated a more significant push above this level, but set up a limit order for the first lower daily close to enter at a more favorable level. As it happened, the pair closed lower the next day (Dec. 20). Initial stop: 0.8016, a little below the Dec. 10 swing low. Initial target: 0.8236 Second target: 0.8388

Source: TradeStation

Profit/loss: +0.43, marked to market at 0.8177 around 10:05 p.m. ET on Dec. 30. Outcome: The pair pushed above the resistance level on Dec. 24 and traded within 12 ticks of the initial target on Dec. 26 before turning lower on Dec. 28 (the first lower close since the breakout). To protect against a winning trade turning into a loser, the stop was raised on Dec. 30 to 0.8131 essentially breakeven, and a level that allows the pair to pull back below the original breakout level without getting knocked out of the trade. With the outlook still bullish, another long entry could be attempted if this trade gets stopped out. 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.

Exit: Trade still open as of Dec. 30.



Currency pair

Entry price

Initial stop

Initial target









Trade length
6 days

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.