CTM 201303

GAUGING A EURO REBOUND P.
31
Strategies, analysis, and news for FX traders
March 2013 Volume 10, No. 3
U.S. dollar new-high pattern analysis p. 18 Canadian dollar: Loonie comes back to earth p. 6 Foreign exchange rules of engagement p. 10 The price of currency union p. 20 Perspective on currency war p. 12
CONTENTS
Contributors..................................................4 Global Markets Has the loonie lost its luster?.....................6

Sluggish economic data and looming resistance could put a cap on a major dollar/Canada rally. By Currency Trader Staff
Global Economic Calendar......................... 26

Important dates for currency traders.
Currency Futures Snapshot.................. 27 BarclayHedge Rankings......................... 27

Top-ranked managed money programs
On the Money Rules of FX engagement.......................... 10

There might be new rules of engagement in foreign exchange, but that hardly means a currency war is inevitable. By Marc Chandler
International Markets............................. 28
Numbers from the global forex, stock, and interest-rate markets.
Forex Journal............................................31
Dollar analysis prompts Euro trade.
Straight talk about currency wars........... 12

Perspective is needed when addressing the overheated currency war topic. By Barbara Rockefeller
Spot Check Dollar dance.............................................. 18

A markets phase will dictate the performance of a price pattern. What mode is the dollar currently in? 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 interest rate price of a currency union.................................. 20

Until it abandons its separate national histories and adopts a common fiscal policy, the Eurozone will suffer the consequences of its fundamental contradiction. By Howard L. Simons
Questions or comments?
Submit editorial queries or comments to webmaster@currencytradermag.com
2 March 2013 CURRENCY TRADER
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CONTRIBUTORS
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 3. 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.
March 2013 CURRENCY TRADER
GLOBAL MARKETS
Has the loonie lost its luster?

Sluggish economic data and looming resistance could put a cap on a major dollar/Canada rally.
BY CURRENCY TRADER STAFF
The Canadian dollar started 2013 with a thud, falling nearly 5% vs. the U.S. dollar from mid-January to late February. Once a pillar of economic envy, Canada is running into some trouble in that area, and is expected to experience a modest slowdown in growth this year from 2012 levels. During and after the global financial crisis, Canadas economy held up relatively well and its recession was shallow, mild, and accompanied by little job loss. Also, Canadas banking sector was a strength rather than a weakness. Overall, stringent and conservative banking practices had been seen in Canada, which limited the type of balance sheet rebuilding that had to occur in the U.S. FIGURE 1: EARLY 2013 SURGE
However, it appears Canadian consumers may have fallen prey to a temptation that helped sink the U.S. economy. Driven by low interest rates, a housing boom has unfolded in Canada, with house prices soaring and consumers borrowing against their climbing home equity. Now, with economic conditions slowing amid a weak export picture and a bottleneck in Canadian oil supplies, debt-ridden consumers are no longer able to step in and drive the economy forward with more spending. Also, a spate of recent economic data out of Canada has disappointed, pressuring the Canadian dollar to the downside. Since the start of the year, the dollar/Canada pair (USD/CAD) has climbed (reflecting Canadian dollar weakness) from .9815 to 1.0300 a relatively big move in a short time for a currency that has a reputation for stability (Figure 1). Lets take a look at the underlying economic fundamentals for Canada, how monetary policy might unfold, and the implications for the Canadian loonie in the coming months.
Economy: A shaky housing market
The USD/CAD pair gained more than 5% between early January and mid-February, and more than 7% since midSeptember 2012.
After generating gross domestic product (GDP) growth at an approximately 1.9%-2% pace in 2012, economists expected Canadas economy to slow down this year. Nomura and BNP Paribas both forecast contraction to a 1.5% pace, and while Moodys Analytics currently forecasts a 1.9%-2% rate for 2013, one economist there admits the risks associated with this outlook are to the downside. BNP Paribas economist Bricklan Dwyer points to two key factors weighing on Canadas economic outlook: housMarch 2013 CURRENCY TRADER
ing and household debt. They have an economy that has been consumer driven and benefitted from fast acceleration in house prices, he says. Consumers have borrowed against their homes. According to Dwyer, Canadian home prices have gained 125% since December 1999. Its a huge concern, he says. There is a real question about when or if the housing market has topped out if the froth is just going to be removed and the economy will keep chugging, or if it will face a more substantial correction. The parallels are striking to the housing boom and bust that unfolded in the U.S. However, while in recent years U.S. consumers have worked to improve their balance sheets, the Canadians have been going in the opposite direction. Dwyer notes that household debt as a percentage of disposable income is 155.5% in Canada, compared to 139.4% in the U.S. But now Canadian consumers are beginning to pull back on spending, which is removing one of the props from the economy. Is Canada set up for a U.S.-style housing collapse and recession? Dwyer says no, at least for now. Our base case is that we see a 15% price correction to take some of the froth out of housing, he says.
The U.S. connection and exports
In addition to its uncertain housing market, Canadas economic picture is further clouded by declining exports to the U.S. About three-quarters of Canadian exports go to the U.S., and the U.S. is still not back to full employment, says Mark Hopkins, senior economist at Moodys Analytics. The Canadian economy has been running on ginned-up consumption spending to help replace the missing export growth. Comparing some numbers before and after the global financial crisis reveals how Canada has suffered on the export front. Canadian merchandise exports in 2012 totaled $462 billion, a 5.2% decline from the 2008 figure of $487 billion, according to Hopkins. Exports to the U.S. in 2012 stood at $338 billion, down 8.4% from $369 billion in 2008. That trend isnt likely to reverse soon. The U.S. economy continues to face fiscal challenges that still have the potenCURRENCY TRADER March 2013
tial to trigger government spending cuts, which in turn could slow the U.S. economy. Canada has the blessing and the curse to have the close ties to U.S. economic growth, and its fortunes will rise and fall accordingly. Depending on how things go with sequestration, the Canadian [growth] forecast could come down, Hopkins says. A rule of thumb I use is that exports to the U.S. are about three-quarters of all exports of goods and services, which in turn are about a third of GDP. Thus, roughly onequarter of Canadian GDP is sold to the U.S. market. So, for every 1% drop in U.S. demand, we could expect roughly a quarter-point reduction in Canadian GDP. This is a direct impact. However, Hopkins also notes there is potential for growth in the Pacific Rim. The biggest market [in the Pacific Rim], not surprisingly, is China, he says. In addition to having the largest economy, China has had a voracious demand for resources, which it has sought to acquire not simply through Canadian exports, but also through offers to purchase large Canadian resource companies. There are a wide range of commodities in question, mostly ores and minerals, such as nickel and copper, but also wood products. Hopkins adds that the biggest potential growth area for exports to Asia is energy coal, oil, and liquefied natural gas. For the moment, exports of these products almost all go to the U.S. because Canada lacks the transportation infrastructure to get these resources onto ships in the Pacific, he says. Plans to build a pipeline from Alberta
7
GLOBAL MARKETS
through British Columbia to the coast are in development. Although by no means certain, this would greatly improve the ability of Canada to ship its vast energy resources to Asian markets, where oil and gas sell for a much higher price than in North America. Ironically, a supply bottleneck currently skews Canadas oil picture. There is too much supply and they cant get it out, Dwyer says. Although Canada is an oil producer, there are no pipelines linking production in Alberta in the west to consumption in Ontario or Quebec in the east. Because there is no pipeline, Canada still has to import roughly 40% of all the oil it consumes, explains Charles St-Arnaud, foreign exchange strategist at Nomura. Currently, Western Canada Select (WCS) oil from Alberta flows to the U.S. Midwest and Cushing, Okla., the main U.S. oil storage hub, and is ultimately land-locked. But because of increased U.S. oil production, Canadian oil is in oversupply. The Western Canada Select has been selling at a $50 discount to Brent [crude oil] since October, St-Arnaud says. This, in turn, has weighed on Canadian oil company profits and, ultimately, on government tax revenues. Oil producers are receiving less money for their oil exports and the lost revenues for the economy is $2.5 billion per month, he says.
FIGURE 2: NEARING RESISTANCE
A longer-term picture shows the dollar/Canada pair approaching the resistance of its 2012 high.
Central bank policy
ing, according to Vassili Serebriakov, FX strategist at BNP Paribas. Also, the USD has been independently stronger. The U.S. dollar has been doing a little better against a number of currencies, including the Canadian dollar, in part due to the more open debate on how much more Fed easing will be seen, says Bob Lynch, head of G-10 FX strategy Americas at HSBC. If the market needs to scale back on Fed expectations, risk currencies might suffer.
The expected slowdown in 2013 growth has the Bank of Canada (BOC) backpedaling on its interest-rate tightening bias. The current BOC interest rate is 1%. In late February, analysts seemed to think the BOCs changing outlook would be reflected in its March 6 meeting. I think they will shift their rhetoric, Dwyer says. Inflation is now below their target band. They are more likely to cut than raise rates in 2013 if things deteriorate more quickly. Since the beginning of 2012, the BOC has been suggesting rate hikes could be in the works. The banks inflation target is 2% with a +/- 1% band, and right now numbers are nowhere near that level. In January, headline inflation was 0.5% year over year, reflecting weak demand and weaker energy and food prices, Dwyer says. The BOCs softer tone at its January meeting was a major factor behind the Canadian dollars decline since the start of the year. Traders had already begun to price in expectations for a rate hike, but now a lot of investors are looking for the BOC to turn even more dovish at the March meet8
Dollar/Canada near resistance?
However, despite the recent weakness, several forex strategists believe the loonie could be ready to level out. In June 2012 the USD/CAD pair hit its high for the year around $1.0445; its high the previous year was 1.0657 (Figure 2). Last year it poked briefly above $1.04, Lynch says. As you get up toward those levels it might be more difficult to extend, barring new [Canada-] bearish developments. Serebriakov agrees the recent Canadian dollar weakness might be about to run its course. I dont think this is the beginning of a substantial weakness in the Canadian dollar, he says. I think its a readjustment to the economic news. I dont think its the next yen or the next pound. I dont see what would sustain this sell-off very strongly. St-Arnaud sees the potential for additional short-term Canadian dollar weakness, but expects a ceiling around $1.05 in the dollar/Canada pair. Over the next few weeks dollar/Canada could continue to go higher if we see continuing weakness in the economic data, he says. We know the first quarter could be relatively weak. y
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Rules of FX engagement
There might be new rules of engagement in foreign exchange, but that hardly means a currency war is inevitable.
BYMARC CHANDLER
Traditionally, the international arena has been the realm within which nation-states pursue their national interests. The forex market is a subset of this international stage. This state of affairs held true before, during, and after the 1944 Bretton Woods conference, but a new understanding has emerged over the past couple of decades that is producing new rules of engagement, as it were. The Group of Seven (G7) industrialized nations often reiterates the current rules of engagement in its various statements. There are essentially four rules. First, exchange-rate prices are best set by the market. Second, officials should avoid making foreign exchange prices an object of policy. Third, excessive volatility should be avoided. Fourth, in the rare case where official action is needed, coordination is vital.
side of the Venezuelan bolivar, which had been devalued by 32%). In the weeks leading up to the recent G20 meeting in mid-February 2013, there was much consternation and official push-back at what appeared to be official efforts to manage a depreciation of the yen. The statements issued by the G7 and G20 essentially reiterated the rules of engagement, but did not single out Japan or any other country for that matter.
Softening stance
Beggar-thy-neighbor policies
When Brazils Finance Minister Guido Mantega first coined the term currency war in 2010, it seemed primarily directed at the U.S. The implication was the U.S. was pursuing unorthodox monetary policy to offset household and government deleveraging and reflate the worlds largest economy. More recently, the new Japanese government was criticized for resorting to beggar-thy-neighbor policies. Officials in the government, led by Prime Minister Shinzo Abe, had been quoted in the press providing bilateral exchange targets for the dollar/yen rate. Since the election in the mid-November 2012, the yen has declined about 13.5% against the U.S. dollar. The yen has easily been the weakest of both major emerging-market currencies (out10
Indeed, even in the days before the G20 meeting, Japanese officials had begun tempering their comments and had ceased to cite specific yen targets. Instead, they emphasized the extremely accommodative monetary and fiscal policies they were pursuing. The criticism levied against the Japanese officials has other policy implications. Shortly after the G20 meeting, senior Japanese officials backed away from a publicprivate fund to buy foreign bonds, which probably would have seemed too much like intervention. In addition, despite earlier threats, senior officials downplayed the need to change the Bank of Japan charter. The suggestion had appeared to be too much of a threat to the central banks nominal independence.
Arbitrary nature of rules
The rules of engagement recognize the right of countries to pursue monetary and fiscal policies that promote stable prices and sustainable growth. This means the long-term asset purchases of the U.S., Japan and, maybe soon, the
March2010 2013CURRENCY CURRENCYTRADER TRADER October
UK (again) are not in violation of the rules. Many observers are troubled by this prospect. They dont see the difference between a currency that falls because officials prod the market and a currency that declines because of eased monetary policy. But every game or institution has rules the uninitiated find arbitrary. Its difficult for some people to understand why the Americans call a game they play with their hands football. In basketball, you must dribble the ball as you walk. However, youre allowed to take a step and a half to shoot the ball. In baseball, if you catch a fly ball, the batter is out. But if there are fewer than two outs and runners on second and third base, a pop-up ball in the infield is an automatic out. Fielders need not even catch the ball. Essentially, pursuing domestic policies for domestic goals is sanctioned by the rules of international conduct, even if a currency declines as a consequence. It is not proper, though, to specifically target or manage an exchange rate. Its as if the temptations and dangers of beggar-thyneighbor competitive devaluations are so great that, under the rules of engagement that have evolved since the late 1980s, high-income countries have generally forsworn their use. The fear is that competitive devaluations can lead to trade wars, and then shooting wars. Of course, the clear reference is to the 1920s and 1930s. However, this fear is just as much a case of Godwins Law of Nazi Analogies. In 1990 Mike Godwin postulated: As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1. (Meme, Counter-meme, Wired magazine, 1994). Although Godwin was referring to online discussions, we can broaden it to include discussions of all kinds.
Ultimately, foreign-exchange prices are driven by interest rates, the larger investment climate, and other macroeconomic variables.
breakers and a trade-conflict-resolution mechanism under the auspices of the World Trade Organization. Third, as noted above, Japanese officials have ceased their offensive behavior. Currency war was, arguably, a useful metaphor to illustrate the tensions, but it took on a life of its own. There are numerous reasons investment capital has flowed into some emerging markets and, as a rule, those flows have slowed during the last couple of years even as several high-income countries pursue unorthodox monetary policies. These include stronger macro fundamentals, such as stronger growth and higher interest rates. Some investors are also attracted to countries where the currency is perceived to be deeply under-valued. In the final analysis, numerous factors drive exchange rates. Official talk may have short-run impact but, ultimately, foreign-exchange prices are driven by interest rates, the larger investment climate, and other macro-economic variables. Typically, central banks prefer currency movement that is consistent with the thrust of their monetary policy. The synchronized economic downturn prompted a corresponding policy response, and led to increased tensions in the foreign exchange market. Look for such consternation to ease in the months ahead. y Marc Chandler is head of global foreign exchange strategies at Brown Brothers Harriman. His blog is called Marc to Market (www.marctomarket.com). For more information on the author, see p. 4.
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Easing market tensions
There are several compelling reasons tensions in the currency market will not lead to a trade war or a shooting war. First, the main participants, the U.S., Europe, Japan, China, and the International Monetary Fund do not view current behavior as an act of war. Second, there are circuit
CURRENCY TRADER March 2013
On the Money ON THE MONEY
Straight talk about currency wars

Perspective is needed when addressing the overheated currency war topic.
BY BARBARA ROCKEFELLER
Are we in the midst of a currency war, as the financial press is pushing us to worry about? Yes. But its not what the press wants us to think. In fact, much of the talk about currency wars is pure nonsense. As Winston Churchill said in 1949, There is no sphere of human thought in which it is easier to show superficial cleverness and the appearance of superior wisdom than in discussing questions of currency and exchange. A currency war is deliberate devaluation to promote exports that triggers retaliation by other countries. Theres evidence several countries including Japan, Australia, New Zealand, and many developing countries (South Korea, Philippines, et al) are doing just that. But the U.S. and Europe are not using currency war rhetoric on the contrary, they have plans to improve trade relations with one another in the form of a free-trade pact. Together, the U.S. and Europe account for almost half the worlds output, and a free-trade deal benefits not only both parties, but also improves competitiveness with China, the one country that really has been waging a trade war. Currency war rhetoric is only the first step in a trade war, and so far no country except China has taken the hard actions tariffs, quotas, subsidies that spell trade war. If two of the top three currency issuers are not engaged and, indeed, speak out against currency war, is it really a war? A currency war is really the first shot fired in a trade war. Historically, trade wars result in lower trade volumes for everyone and, we can safely assume, a lowering of household well-being everywhere, too, since export-oriented jobs may be saved but the cost of imported goods goes up. In the days before floating exchange rates, the mechanism for implementing a competitive devaluation policy was simple just declare it. Such a case of devaluation by
fiat occurred on Feb. 14, 2013 when Venezuelan President Hugo Chavez, speaking from Cuba, devalued the bolivar by 32% (from 4.3 to the dollar to 6.3). Venezuela had devalued five times since 2003, most recently in January 2010. Because oil is about 95% of Venezuelas exports and oil is dollar-denominated, Venezuela gets no export advantage from devaluation, but it does get more bolivars per dollar to pay domestic expenses, such as Chavezs costly re-election campaign. Devaluation also inhibits imports and thus inflation, which was running above 22% in January. To the extent imports are essential and cannot be cut, in the longer run devaluation raises inflation. Much of todays currency war talk assumes countries can simply announce devaluation, when this is true only for fixed currencies. For example, in an op-ed article in the Wall Street Journal a former hedge fund manager wrote the Fed should halt quantitative easing right away and, at the same time, incoming Treasury Secretary Jack Lew should implement a strong-dollar policy. What would that entail, exactly? Aside from interfering with trade or some other tax or subsidy measure, historically, you get a stronger currency by raising interest rates. The Treasury doesnt do that the Fed does. Currency policy resides at the Treasury, but the only entity with the tool to execute policy is the Federal Reserve. Therefore, in speaking of currency wars, we have to keep the facts consistent with the structure of the FX market today, not in centuries past. Countries with fixed exchange rates can engage in currency wars directly. A president, central bank governor, or finance minister can stand up in front of a TV camera and simply command devaluation, and financial parties like banks need to obey or they lose their license to operate. In contrast, countries with floating exchange rates cannot declare devaluation. To do so they would have to
12
TABLE 1: TRADE AS PERCENTAGE OF GDP 2011

Exports of goods and Country Bolivia Brazil Canada China France Germany Ireland services as % of GDP 44% 12% 31% 31% 27% 50% 107% Total merchandise trade as % of GDP 66.8% 19.9% 52.7% 49.8% 47.3% 75.8% 88.9%
make changes elsewhere in the economy that have the UK 32% 45.4% secondary effect of causing currency devaluation. In US 14% 25% the floating-rate era, only one instance of a country The data suggests Germany and Ireland, and perhaps Canada changing interest rates specifically to influence a curand the UK, should want devalued currencies. rency comes to mind: Japan, which raised rates after Source: http://data.worldbank.org/indicator/TG.VAL.TOTL.GD.ZS the Plaza Accord in 1985 at the request of the U.S. specifically to drive down the dollar against the yen. Germany and the rest of the Europe declined to parMoreover, Bernanke continued, emerging markets are ticipate. not helpless. They have tools, including taxes and outright Is it fair to accuse a country of currency war if it implecapital controls, to tame hot-money inflows. But perhaps ments a policy targeting a certain economic condition that they should reconsider the capital-control form of currency has the secondary effect of causing devaluation? Sane market intervention after all, a stronger currency allows and reasonable people say no. If the Federal Reserve is a lower cost of capital imports, like machinery, that eventuengaging in quantitative easing to nurture an ailing finanally leads to a stronger economy. Finally, emerging markets cial system and to stimulate the economy, can it be blamed shouldnt complain about the U.S. and other countries when the dollar falls? No, since the Feds mandate is to having an easy-money policy, because its keeping alive keep inflation in check (no more than 2%), unemployment the source of demand for developing-country exports. No at an acceptable level (most recently defined as 6.5%), and country benefits if the U.S. economy remains mired in the the financial system stable. The Feds job is not to manage Great Recession. equity or currency prices. As Fed Chairman Ben Bernanke Bottom line, the Fed and other super-accommodative has said, changes in the dollar that arise from Fed policies developed-country central banks are not out to swindle targeting the domestic U.S. economy are unintended. and harm emerging markets. Bernanke, tactfully, did In fact, Bernanke said at the October 2012 annual IMF not add the Fed doesnt work for the Brazilian voter and meeting in Tokyo that perception of the currency war Brazilian business it works for the U.S. economy. He concept is one-sided by the emerging-market countries could have noted total U.S. exports of goods and services that feel aggrieved. Remember, it was Brazilian Finance are only 14% of GDP, whereas the percentage is 32% in the Minister Guido Mantega who revived the term currency UK, 50% in Germany, and 107% in Ireland. In Brazil, the war at the G20 meeting in Seoul in November 2010. great complainer, exports of goods and services are less Bernankes rebuttal is more than a simple denial. He said than in the U.S., only 12%, according to World Bank data capital inflows to higher-yielding emerging markets are for 2011 (Table 1). Meanwhile, total merchandise trade a function of many more factors than interest rate differ(exports plus imports), is 25% of U.S. GDP and 19.9% of entials. Relative higher growth is one factor, and besides, Brazils GDP. According to this table, among developed the correlation of flows with interest rate differentials has countries Germany and Ireland, not to mention Canada tended to diminish over time; it takes a bigger differential and the UK, should want a devalued currency. to get a lesser flow. In addition, Bernanke could have pointed out that dollar
13
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Barbara Rockefeller Currency Trader Mag March 2013 Figure 1. Brazilian Real (Black, Inverted) vs. Bovespa Stock Index
FIGURE 1: BRAZILIAN REAL (BLACK, INVERTED) VS. BOVESPA STOCK

7200 1.50 1.55 1.60 1.65 1.70 1.75 1.80 1.85 1.90 1.95 2.00 2.05 2.10 2.15 7100 7000 6900 6800 6700 6600 6500 6400 6300 6200 6100 6000 5900 5800 5700 5600 5500 5400 5300 5200 5100 5000 4900 4800 4700 4600 x10 2010 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 M
From December 2011 to June 2012 Brazils Bovespa stock index was weakening along with the real, but elsewhere the relationship between the two is weak.
Source: Chart Metastock; data Reuters and eSignal
devaluation harms incoming capital flows. Foreign direct investment (FDI) in the U.S. fell from about $94 billion in the first half of 2011 to $57 billion in the first half of 2012. Even China had a drop in FDI, from $62 billion to $59 billion. Brazils drop was smaller, $30 billion from $33 billion. The World Bank reports that over a longer period, Brazil got $50.7 billion in FDI in 2008, rising to $71.5 billion in 2011, while the U.S. showed a drop from $332.7 billion in 2008 to $275.5 billion in 2011. These are absolute dollar amounts, and really should be expressed as a percentage of GDP. In the U.S., FDI is only 1.5% of GDP (1.6% in China), but in Brazil, its 2.7%. Then theres investment in equity markets. The Treasury International Capital System (TICS) report shows global equity investors seem to respond far more to changes in equity index levels than to changes in the dollar. Meanwhile, inflows to Brazilian equities are robust and only sometimes correlated to the real again, as Bernanke said, a function of high growth and expectations of a positive growth differential (Figure 1). From December 2011 to June 2012, as the real was weakening, so was the Bovespa stock index. Elsewhere the relationship is wobbly. In the most recent period, as shown by the linear regression lines, the real is falling while the Bovespa is rising. Net-net, a consistent cause-and-effect relationship cant be deduced. If foreign investors consider the currency a factor in deciding to invest in Brazilian equities, its not the top-most factor.
14
Where it is a top-most factor is Japan. In fact, the only longstanding and consistent stock market-currency relationship is between the Nikkei and the yen, a tribute to the export orientation of the big Japanese companies. Generally, the direction of causality is from the yen to equity prices; the Nikkei rises in lockstep with the dollar/yen rate (Figure 2). Now heres a chart showing that policymakers have a logical reason to consider the level of their currency as having a direct effect on the wealth of their citizens.
Denials
One reason the currency war story fizzled after Mantegas G20 comments in 2010 was cooler heads prevailed. But then Japan held an election in December 2012, and incoming Prime Minister Shinzo Abe made it clear from the very beginning the linchpin of all policy would be aggressive stimulus using quantitative easing and deficit spending. In the early days of Abes regime, his political allies and newly appointed officials told the press the goal was to weaken the yen and get the Nikkei to 13,000 (from about 10,000). Abe threatened the independence of the Bank of Japan, which, in a rare joint statement, dutifully agreed to double its inflation target. The governor agreed to resign early, too. As Figure 2 shows, anticipation of the Abe electoral victory and nearly daily comments from Tokyo about the yen was very effective in creating and maintaining the dollar
FIGURE 2: USD/JPY (BLACK) VS. THE NIKKEI STOCK INDEX

96.0 95.5 95.0 94.5 94.0 93.5 93.0 92.5 92.0 91.5 91.0 90.5 90.0 89.5 89.0 88.5 88.0 87.5 87.0 86.5 86.0 85.5 85.0 84.5 84.0 83.5 83.0 82.5 82.0 81.5 81.0 80.5 80.0 79.5 79.0 78.5 78.0 77.5 77.0 76.5 76.0 75.5 75.0 74.5 74.0 2011 Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Nov 1170 1160 1150 1140 1130 1120 1110 1100 1090 1080 1070 1060 1050 1040 1030 1020 1010 1000 990 980 970 960 950 940 930 920 910 900 890 880 870 860 850 840 830 820 810 800 790
x10
Barbara Rockefeller Currency Trader Mag March 2013 Figure 2..USD/JPY (Black) vs. the Nikkei Stock Index
Dec 2013 Feb M
The stock market-currency relationship between the Nikkei and the Japanese yen is a tribute to the export orientation of big Japanese companies. Generally, the Nikkei rises in step with the dollar/yen rate.
uptrend/yen downtrend, about 13% from mid-November to mid-February. The Japanese yen depreciated to 94.46 per dollar on Feb. 11, the weakest level in almost three years By the time of the G20 meeting in Moscow in midFebruary, complaints were becoming more raucous that Japan was starting a currency war. In an unprecedented move, the G7 issued a statement two days before the G20 meeting that was interpreted as meaning the G7 was satisfied Japans policy actions were not directed specifically at devaluation, and therefore Japan was not to blame for starting a currency war: We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market-determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate. The G7 statement was a warning to the G20 not to single out Japan, or even use the phrase currency war, and indeed thats exactly what the G20 did. There is a certain amount of sympathy for Japans economic plight more than two decades of deflationary recession, punctuated by the occasional short-lived recovCURRENCY TRADER March 2013
ery. The trade surplus has gone to a deficit, too. The IMF reports Japanese growth from 1994 to 2003 averaged a mere 0.9%, or about one-third the growth rate of advanced countries and that includes occasional bouts of yen weakness of more than 10% in 1996-1997 and 2000-2001. One analyst estimates a 10% drop in the yen will produce a 0.6% gain in GDP if it can be sustained. Economists admit they dont have any policy prescription other than QE and stimulus spending. If it devalues the currency, so be it. One idea still floating around within the Japanese government is that it buy foreign bonds as well as its own JGBs. Surely buying foreign government bonds would violate the G7 commitment to seeking domestic objectives using domestic instruments and may yet cause some fireworks. Japan dodged the bullet this time but no one has any doubt if sentiment were to come down on the side of QE and stimulus failing (as it has done before), this time the yen will be restrained from returning to too-strong levels, presumably by outright intervention. After all, theres a limit to how much words can achieve alone, isnt there?
Words count
Floating currency countries cannot arbitrarily decree devaluation, but words count. A phrase may not be an actual command, but it can still have the same effect. The FX market responds instantly to comments like the one from Japanese Finance Minister Akira Amari that, golly,
15
ON THE MONEY
FIGURE 3: AUD/USD WIDE RANGE, HIGH VOLATILITY

1.06 1.06 1.06 1.06 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.01
Barbara Rockefeller Currency Trader Mag March 2013 Figure 3..AUD/USD Wide Range, High Volatility
013
14
21
28
4 February
11
18
25
4 March
The Australian dollar swung in a wide range in February on virtually daily comments about whether the Reserve Bank will cut rates to tame the currency.
he hadnt expected the yen to move so far, so fast. Yen shorts covered, only to restore the position the next day when a different comment was published. The CFTC Commitments of Traders Report shows speculative accounts had a net yen short position of 65,891 contracts as of Feb. 19, from 61,306 contracts the week before. Traders had a bigger short position on the Dec. 11 report, 94,401 contracts. This was the biggest number since 188,077 contracts on June 26, 2007. The implication is there are plenty of fence-sitters waiting to short the yen if this move turns out to be more than a flash in the pan. Japan is not the only country to speak out about currency levels. Bank of England Governor Mervyn King recently said real recovery would be much aided by a weaker pound. French Finance Minister Pierre Moscovici called for an ECB exchange rate policy, and President Francois Hollande, evidently jealous of Japans success, demanded coordinated action to push the Euro lower so it better represented fundamental values. Bundesbank chief Jens Weidmann shot back within hours that exchangerate policy to specifically weaken the Euro would lead to higher inflation in the end. He also said the ECB would not consider a rising Euro alone in considering a rate cut. Besides, calling for exchange rate system changes simply diverts attention from the need to make their economies more competitive. Only governments can solve these problems, the central banks cannot. In this respect, the discussion about a supposed overvaluation of the Euros
16
exchange rate simply deviates from the real challenges. Austrian Finance Minister Maria Fekter agrees with Weidmann. Eurogroup chief Jean-Claude Juncker said Europe must not be nave on currencies. Even the president of the Swiss National Bank which set a cap for the Swiss franc in the Euro-Swiss cross and intervened to get it, denies a currency war, saying central banks monetary policies are internal programs. And ECB chief Mario Draghi denounced chatter about currency wars as either inappropriate or fruitless, in all cases self-defeating. Effective exchange rates are near their long-term averages and besides, Draghi says, The exchange rate is not a policy target but important for growth and price stability. Draghi seemingly used a little currency war rhetoric himself when he added the ECB would still have to assess the economic impact of the Euros strength, and he is concerned a stronger Euro will be a drag on growth and may cause inflation to drop too far, i.e., deflation. The Euro fell 120 points in under an hour. The charitable interpretation of Draghis drag remark is that he couldnt resist being an economist. At the time, the remark made him appear two-faced and, at a guess, he wont do it again. The Australian dollar gyrated up and down in a wide range (1.0222 to 1.0375) during February on comments almost every day about whether the Reserve Bank will cut rates to tame the AUD (Figure 3). Reserve Bank Governor Glenn Stevens said the Australian dollar remains stronger
than expected and a relevant factor in setting interest rates: As we have noted repeatedly, the exchange rate remains somewhat higher than one might have expected given the decline in export prices so far observed. This has been a relevant factor in the setting of interest rates. A cut in the rate would not be aimed at achieving a particular response in the exchange rate, but rates are being set with a recognition of the exchange rates effect on the economy. Also, New Zealand central bank Governor Graeme Wheeler said, The kiwi is not a one-way bet. Speaking to a conference, he said he was prepared to intervene to influence the kiwi. The NZD fell 1% in response. Other countries are making grumbling noises, too South Korea, Taiwan, even Norway, which may choose to cut interest rates to counter the krones strength. Central bankers in the Philippines and Indonesia have spoken out about policy changes to address currency levels. The Japanese are now refraining from mentioning the yen in the same breath as comments about stimulating the economy, but other countries are blatantly referencing their currencies when they speak of interest rate policy. Australia and New Zealand are the latest cases, but Switzerland and Norway deserve mention, too. This is a far cry from the G7 statement and G20s acquiescence. In a nutshell, plenty of countries are, indeed, engaging in influencing currency markets. Newcomers to the FX market may not know it, but this is an unwelcome return to conditions during the 1970s and 1980s when comments from officials and summits were the main fodder for traders to choose positions. For example, after Black Monday in 1987, the G7 issued a communiqu on Dec. 23 (called the Christmas Communiqu), saying a further decline in the dollar would be counterproductive. As usual, the G7 was a day late and a dollar short. (Black Monday was Oct. 19 so the Christmas Communiqu was about two months late.) To read the early history of the FX market, replete with hundreds of interventions and market-moving comments and communiqus, check out Volcker and Gyohten, Changing Fortunes, 1992. We dont know when, exactly, keeping quiet about FX became the norm. We think it was Treasury Secretary Rubin during the Clinton Administration, circa 1995, who declined to say anything other than the now-famous Rubin mantra a strong dollar is in the U.S. best interests. Whoever started it, we do know who put the final nail in the coffin of officials making FX comments it was the
first ECB chief Wim Duisenberg, who misspoke so often during the first year after the Euro launch (1999) that silence on FX matters became the preferred stance. Increasing numbers of comments about currency levels from top officials seem to back up the idea that governments are deliberately trying to manipulate currencies with rhetoric and the occasional interest rate change. But not a single country has proposed an actual trade war in the form of the hard actions tariffs, quotas, and subsidies. The real trade war participant, China, is actually relaxing its measures. So far the currency war is just hot air. Moreover, G7 and G20 are blowing smoke, too. Their communiqus dont even mention trade and focus instead on the intent of interest rate policy as directed solely to the domestic economy. This is a feint. G7 and G20 seem to be hoping that by defending a sovereigns right to manage its own economy, nobody will notice the real implications of currency war that its really trade war. The Fed and the ECB are not part of the currency war gang, but with so many other countries engaged in currency war talk, this is going unnoticed. But we should notice; it implies that unless someone escalates to real trade war measures, this currency war talk will fizzle just like it did in 2011. The odd part is that no country ever depreciated its way to prosperity and we all know that. Small advantages from higher exports get dissipated and even overwhelmed by other effects, such as imported inflation or global investors fleeing your equity market. The current spate of comments from finance ministers and central bankers is a symptom of lack of discipline among top officials and an absence of leadership from the U.S. or the G7. We need somebody important to stand up and call a halt to it, whereupon we can all go back to second-guessing central bank intentions. The obvious candidate is new Treasury Secretary Jack Lew, but he is a budget expert rather than an international markets guy, and he lacks the stature Rubin brought to the job on day one. Who will save us from currency war officials? We propose Bernanke and Draghi have tea and issue an ultimatum. y Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange, and the author of the new book The Foreign Exchange Matrix (Harriman House). For more information on the author, see p. 4.
17
SPOT CHECK
Dollar dance
A markets phase will dictate the performance of a price pattern. What mode is the dollar currently in?
BY CURRENCY TRADER STAFF
FIGURE 1: DXY FOUR-WEEK RUNS, 2005-MARCH 2013
Most of the instances of four consecutive weeks of higher highs and closes during this period were followed by bearish price action.
FIGURE 2: WEEKLY PATTERN PERFORMANCE, 2005-MARCH 2013
Performance after the four-week runs was a little more bearish than the market benchmark in the first three weeks.
The U.S. dollar index (DXY) rallied around 4.5% between the first day of February and the first day of March, posting four consecutive weeks of higher highs and closes. The run-up swept the short-side implications of the 20-day low breakdown analysis featured in last months Spot Check out the window. (The article also included analysis of DXYs behavior after new 20-week lows; the market failed to trade below its September 2012 low and trigger that signal, however.) Feb. 1, in fact, turned out to be the low of the early2013 down swing, marking just two days of downside follow-through after making a new 20-day low on Jan. 30. By Feb. 18, DXY had swung far enough to the upside to establish a 20-day high, and two days later on Feb. 20 it made a new 63-day (three-month) high the first of several over the next couple of weeks. Figure 1 highlights the 12 most recent instances of four-week runs of higher highs and higher closes, the last one occurring the week ending March 1. The examples date back to 2005; there have been a total of 55 four-week (or longer) runs since March 1973. Of the 11 previous instances in Figure 1, all were followed by a lower close the following week, seven were followed immediately by two- to four-week down moves, a couple were followed by declines two or three weeks later, and only a couple others (the most notable occurring in Q3 2009) were followed by significant upswings.
March 2010 2013 CURRENCY TRADER October
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FIGURE 3: WEEKLY PATTERN PERFORMANCE, 1973-2013
Ignoring for a moment the fact there were only 11 examples in the past eight years, Figure 2 shows the performance after these four-week higher-high, higherclose (HH/HC). The blue lines represent the average and median moves from the close of the final week of the pattern to the closes of the subsequent 12 weeks; the red lines represent the average and median performance for all oneto 12-week moves during the analysis period, and reveal DXYs downside bias during this period. The performance after four-week runs was a little more bearish than the market benchmark in the first three weeks, peaked (sometimes above the benchmark) into week 7, and then turned back down. Overall and especially given the performance after the most recent examples in Figure 1, and the fact that all examples were followed by a lower close the following week a trader might be tempted to look for selling opportunities after four-week runs of higher highs and higher closes. However, Figure 3 shows the performance after all 54 previous examples dating back to 1973. Even though it incorporates the marginally bearish data from Figure 2, here the post-pattern performance is unambiguously bullish, with positive average and median returns at all intervals. The big difference between the two data sets is that DXY has been dominated by a general downtrend and consolidation (with some sharp counter-rallies in 2008 and 2010) since 2002. The preceding period included the dollars monster rally from 1980 to 1985 and the somewhat smaller uptrend from 1995 to 2002 periods during which four weeks of consecutive higher highs and higher closes were more often than not followed by additional up weeks. Faced only with this conflicting information a longterm history that implies upside follow-through and the most recent data suggesting the possibility of weakness what would a trader do?
The price action after all 54 examples of the pattern is clearly bullish, with positive average and median returns at all intervals.
FIGURE 4: AFTER 63-DAY HIGHS, 1973-2013
Overall, DXY continued to rally after making a new 63-day high.
FIGURE 5: RECENT 63-DAY HIGHS
The daily time frame: Three-month highs
Figure 4 shows DXYs performance from March 1973 to March 2013 in the 12 days after making new 63-day highs. The dollar index made a new 63-day high 772 times during this period, prior to the six most recent instances shown in Figure 5. Figure 4 suggests, other factors notwithstanding, expecting DXY to continue to rally after making a new 63-day high was a good bet. The percentage of higher closes was lowest (at around 53%) at day 2 and climbed to 58-59% at continued on p. 25
The upside follow through after the initial 63-day highs shown here is in keeping with the signals statistics over the past 40 years.
19
TRADING STRATEGIES ADVANCED CONCEPTS
The interest rate price of a currency union

Until it abandons its separate national histories and adopts a common fiscal policy, the Eurozone will suffer the consequences of its fundamental contradiction.
BYHOWARD L. SIMONS
Certain acts define desperation. These include cubicledwellers self-identifying as contrarian, paying tuition for a course on entrepreneurship, subscribing to any diet plan and, of course, repeating any management buzz-phrase such as thinking outside of the box. When you hear the latter term, replace it with thinking with a childs natural curiosity and be done with it. Lets take the subject of a currency union, please. Having witnessed the construction of the Berlin Wall and its toppling a mere 28 years FIGURE 1: GLOBAL CURRENCY SWAP EXPANSION STEEPENED later, I wonder if the Euro will endure for YIELD CURVES Yield Curves Since November 30, 2011 longer than that tribute to human oppression. You can conceive of the Euro as a 1.28 single entity or you can think of it as a 1.25 set of fixed exchange rates between all 1.23 of its members. As there are 17 members 1.20 of the Eurozone in early March 2013, the 1.18 Euro actually converts 136 currency pairs 1.15 [(172 17)/2] into a set of 17 national cur1.13 rencies trading at fixed rates to each other 1.10 and at a floating rate to the rest of the 1.08 world. This type of network economics 1.05 is why centralized nodes, including stock 1.03 and commodity exchanges, have such cost 1.00 efficiency in sharing information. 0.98 Two asides are in order: While the 0.95 United Nations, an organization never 0.93 known as a bastion of efficiency in any0.90 thing, settled on a small set of official languages (just six at last count), the European Union insists on simultaneous translations into all member languages Portugal, Spain, and Italy have the flattest yield curves, while stronger credits during its proceedings; this may strike such as Germany, Finland, and the Netherlands have the steepest. notoriously mono-lingual Americans who
Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12
Portugal Italy Spain Belgium France Austria Netherlands Finland Germany
Sep-12
Oct-12
Forward Rate Ratio, 2-10 Years
20
FIGURE 2: TWO-YEAR ZERO-COUPON IMPLIED VOLATILITY SINCE NOV. 30, 2011
1000%
Forward Rate Ratio, 2-10 Years
are impressed with Europeans multilingual skills as unnecessary, and it certainly is cumbersome. The second is the move to the Euro was devastating to the large population of oddball currency traders at European banks and money-changers: Some people actually made their living trading the Finnish markka against the Portuguese escudo, or some-such, regardless of its general flouting of the principles of economic utility. But there is a significant downside to fixing currency rates, and that is a country can fix its short-term interest rates or it can fix its currency exchange rates, but it cannot fix both simultaneously. Thus, if Greece, just to take the prime example of the whole 2009-2012 European sovereigndebt mess, has a de facto fixed exchange rate against Germany, all macroeconomic adjustments have to be achieved through higher short-term interest rates as opposed to a combination of higher shortterm interest rates and a weaker currency.
100%
Implied Volatility
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
The flood of money into the short-term paper of the higher-quality credits, such as Germany, drove volatility higher.
FIGURE 3: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: PORTUGAL
1.14 1.12 1.10 1.08 1.06 1.04 1.02 1.00 0.98 0.96 0.94 0.92 0.90 0.88 0.86 0.84 0.82 Oct-11 Feb-11 Aug-11 Dec-11 Feb-12 Oct-12 Apr-11 Jun-11 May-10 Sep-10 Aug-12 Nov-10 Dec-10 Dec-12 Feb-13 Apr-12 Jun-12 Jul-10 0.80
Yield Curve Volatility
Ireland
Portugal
Oct-12
Netherlands
Aug-12
Sep-12
Belgium
Austria
Germany
10%
Jul-12
130% 125% 120% 115% 110% Two-Year Zero-Coupon Volatility Led 13 Weeks
105% 100% 95% 90% 85% 80% 75% 70% 65% 60%
Consequences of the fix
Accordingly, we should expect the weaker credits within the Eurozone to have higher short-term interest rates and flatter yield curves than they would have otherwise, and the stronger credits within the Eurozone to have lower short-term interest rates and a steeper yield curve than they would have otherwise. A second consequence is the interest rate distortion makes the common currency weaker than it would be otherwise for the stronger credits and stronger than
Here, and in Figures 4-8, the FRR2,10 tends to lead two-year zero-coupon implied volatility by 13 weeks. These charts show how the one variable allowed to operate in a currency union, short-term interest rates, drives volatility and the cost of insuring financial risk.
21
ON THE MONEY ADVANCED CONCEPTS
FIGURE 4: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: SPAIN
1.15 1.14 1.13 Forward Rate Ratio, 2-10 Years 1.12 1.11 1.10 1.09 1.08 1.07 1.06 1.05 1.04 1.03 Oct-11 Feb-11 Aug-11 Dec-11 Feb-12 Oct-12 Apr-11 Jun-11 May-10 Sep-10 Aug-12 Nov-10 Dec-10 Dec-12 Feb-13 Apr-12 Jun-12 Jul-10 1.02 55% 50%
100% 95% 90% 85% 80% 75% 70% 65% 60%
FIGURE 5: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: ITALY
1.17 1.16 1.15 1.14 1.13 Forward Rate Ratio, 2-10 Years 1.12 1.11 1.10 1.09 1.08 1.07 1.06 1.05 1.04 1.03 1.02 1.01 1.00 0.99 Oct-11 Feb-11 Aug-11 Dec-11 Feb-12 Oct-12 Apr-11 Jun-11 May-10 Sep-10 Nov-10 Aug-12 Dec-10 Dec-12 Feb-13 Apr-12 Jun-12 Jul-10 0.98 39%
93% 87% 81% 75% 69% 63% 57% 51% 45%
it would be otherwise for the weaker credits. The third consequence is a bit stranger. The implied volatility of any short-term interest rate viewed as artificially low and at the anchor end of a yield curve steeper than it would be otherwise rises. The reason is devilishly simple: The market knows once the suppression of short-term interest rates ends, those yields will snap higher and flatten the yield curve in consequence. If we sum these effects, we see lose-lose propositions all the way around: Weaker credits have to struggle with higher short-term interest rates and a stronger currency, while stronger credits have to deal with higher implied volatility and a steeper yield curve. As improperly valued currencies affect all segments of an economy, and as interest rates equilibrate current and future consumption, the mechanics of a currency bloc create a large and differing number and distribution of winners and losers in its member states as the price of avoiding those extra trading pairs.
Two-Year Zero-Coupon Volatility Led 13 Weeks
Two measures over time
Lets illustrate the distortions of the Eurozone currency bloc across two dimensions. The first is the sovereign yield curve as measured by the forward rate ratio between two and 10 years (FRR2,10). This is the rate at which borrowing can be locked in for eight years starting two
22
years from now, divided by the 10-year rate itself. The more this ratio exceeds 1.00, the steeper the yield curve is. (As an aside, neither the Greek FRR2,10, nor the Irish FRR2,10 are shown. Greece defaulted in March 2012 and restructured; Ireland similarly stopped issuing 10-year notes. Both yield curves had moved into and out of inversion. The second dimension is the implied volatility of two-year zero-coupon sovereign debt.) How have these measures traded since the expansion of currency swaps into the Eurozone at the end of November 2011? First, the weakest remaining member of the former PIIGS quintet, Portugal, was the last country to have an inverted yield curve (Figure 1). However, Portugal, Spain, and Italy have the flattest yield curves, while stronger credits such as Germany, Finland, and the Netherlands have the steepest yield curves. Next, the picture for two-year zerocoupon implied volatility is as expected as well (Figure 2). The weaker credits (Greece after its March 2012 restructuring excepted) have the lowest volatility for the counterintuitive reason the market does not consider them accidents waiting to happen. The flood of money into the short-term paper of the higher-quality credits, such as Germany, drove volatility higher, with deleterious consequences for insuring against interest rate volatility.
FIGURE 6: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: GERMANY
1.28 1.27 1.26 1.25 1.24 Forward Rate Ratio, 2-10 Years 1.23 1.22 1.21 1.20 1.19 1.18 1.17 1.16 1.15 1.14 1.13 1.12 1.11 Oct-11 Feb-11 Apr-11 Aug-11 Jun-11 Dec-11 Feb-12 May-10 Sep-10 Apr-12 Aug-12 Jul-10 Nov-10 Dec-10 Jun-12 1.10
710% 660% Two-Year Zero-Coupon Volatility Led 13 Weeks 610% 560% 510% 460% 410% 360% 310% 260% 210% 160% 110% Dec-12 Feb-13 60%
FIGURE 7: EUROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: NETHERLANDS
1.265 1.255 1.245 1.235 Forward Rate Ratio, 2-10 Years 1.225 1.215 1.205 1.195 1.185 1.175 1.165 1.155 1.145 1.135 1.125 Oct-11 Feb-11 Apr-11 Jun-11 Aug-11 Dec-11 Feb-12 May-10 Apr-12 Sep-10 Nov-10 Dec-10 Jun-12 Jul-10 1.115
Oct-12
375% 350% Two-Year Zero-Coupon Volatility Led 13 Weeks 325% 300% 275% 250% 225% 200% 175% 150% 125% 100% 75% Dec-12 Feb-13 50%
National histories
Now lets step back and look at the selectCURRENCY TRADER March 2013 23
Aug-12
Oct-12
ON THE MONEY ADVANCED CONCEPTS
FIGURE 8: E UROZONE COUPON YIELD CURVE AND TWO-YEAR SOVEREIGN VOLATILITY: FINLAND
1.265 1.255 1.245 1.235 Forward Rate Ratio, 2-10 Years 1.225 1.215 1.205 1.195 1.185 1.175 1.165 1.155 1.145 1.135 1.125 Feb-11 Aug-11 Dec-11 Feb-12 May-10 Sep-10 Nov-10 Dec-10 Apr-12 Aug-12 Oct-12 Apr-11 Jun-11 Oct-11 Jul-10 Dec-12 Feb-13 Jun-12 1.115
440% 400% 360% 320% 280% 240% 200% 160% 120% 80% 40%
ed paths of various strong and weak credits. The FRR2,10 tends to lead twoyear zero-coupon implied volatility across a number of markets by 13 weeks, or one calendar quarter. This is consistent with the quarterly expiration and debt issuance cycles in many countries. These are presented in Figures 3-8 without further comment as they show us how the one variable allowed to operate in a currency union short-term interest rates drives volatility and the cost of insuring financial risk.
A country can fix its short-term interest rates or it can fix its currency exchange rates, but it cannot fix both simultaneously.
Kick that bloc
As Keynes noted famously, The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of
24
some defunct economist. The world of currency trading has been driven by the ideas of several Nobel laureates, including Milton Friedman, who espoused floating exchange rates as a way of getting to self-correcting current account balances, and Robert Mundell, the real architect of the Euro. Both floating exchange rates and the Euro were designed to replace existing regimes found wanting and in perpetual crisis mode, and both went on to create their own rolling and somewhat quasi-permanent crises. Until the Eurozone both abandons its separate national histories and adopts a common fiscal policy, it will suffer at the interest rate cost defined by its internally fixed exchange rates. That is quite simply a given. y Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. For more information on the author, see p. 4.
SPOT CHECK
FIGURE 6: AFTER 63-DAY HIGHS, 1993-2013
Instances of 63-day highs that took place between March 1993 and Feb. 19, 2013 were followed by much more bearish action than that shown in Figure 4.
FIGURE 7: 63-DAY HIGHS W/ HIGH CLOSE, 1985-1993
After 63-day highs that closed strongly (within 0.06 of the days high), the DXY tended to rally.
FIGURE 8: 63-DAY HIGHS W/ HIGH CLOSE, 1993-2013
days 10-12. Figure 6, however, shows the DXYs performance after the 349 instances of 63-day highs that took place the most recent 20 years, March 1993 to Feb. 19, 2013 (again, prior to the examples shown in Figure 5). Now the post-pattern performance looks more bearish, although until day 10 it was mostly a more volatile version of the DXYs downside bias; it was only at day 11 that the post-pattern performance was clearly more negative than the benchmark performance. The same phenomenon apparent in the weekly analysis is evident here: The patterns performance is notably determined by the markets mode or trend at the time. When DXY is trending higher, a four-week run of higher highs and higher closes or a new 63-day high presages additional buying; when DXY is in a downtrend, these patterns both tend to be signs of exhaustion. Figures 7 and 8 provide some final perspective on this dichotomy: The former shows the 1985 to March 1993 performance after 63-day highs that closed within 0.06 of the days high (as was the case on March 1, 2013), while the latter shows this patterns performance from March 1993 to March 2013. The difference between the two is more extreme than in previous examples: The bullish trajectory in Figure 7 is strong than that in Figure 4, while Figure 8 is more clearly bearish than Figure 6.
Right here, right now
Over the past 20 years, strongly closing 63-day highs were followed by more selling than buying.
As of March 4, the dollar index had rallied to nearly 82.50 and was poised to challenge the resistance of its 2012 high around 84 (refer to Figure 1). The question is, does the recent run mean the dollar is in a new uptrend, or is the prevailing environment still sideways/down, which would imply selling into strength will offer a chance to profit on a pullback? DXY certainly rallied smartly off the support zone defined in the final four months of last year, which was discussed at length last month. But on a longer-term basis, the DXY has been trendless for the better part of four years. The Forex Trade Journal details a trade based partially on this analysis. y
25
GLOBAL ECONOMIC CALENDAR

CPI: Consumer price index ECB:European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. FND (first notice day): Also known as first intent day, this is the first day on which a clearinghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillment of a futures contract. The clearinghouse also informs the seller. FOMC:Federal Open Market Committee GDP: Gross domestic product ISM: I nstitute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: P urchasing managers index PPI: P roducer price index Economic release (U.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m.
1 2 3 4 5 6
U.S.: February ISM manufacturing report Brazil: Q4 GDP Canada: Q4 GDP Japan: January employment report and CPI
March
19
20
8 9 10 11 13 14 15 16 17
U.S.: Fed beige book Australia: Q4 GDP Brazil: February PPI Canada: Bank of Canada interestrate announcement U.S.: January trade balance France: Q4 employment report Japan: Bank of Japan interest-rate announcement Mexico: February PPI and Feb. 28 CPI UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: February employment report Brazil: February CPI Canada: February employment report LTD: March forex options; March U.S. dollar index options (ICE)
21 22
23 24 25 26 U.S.: February durable goods 27 UK: Q4 GDP 28

Canada: February CPI
U.S.: February housing starts Hong Kong: Q4 GDP UK: February CPI and PPI FND: March U.S. dollar index futures (ICE) U.S.: FOMC interest-rate announcement Germany: February PPI South Africa: February CPI UK: February employment report FDD: March forex futures U.S.: February leading indicators Hong Kong: February CPI FDD: March U.S. dollar index futures (ICE) Mexico: February employment report and March 15 CPI
29
The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.
12 Japan: February PPI
Germany: February CPI U.S.: February retail sales France: February CPI U.S.: February PPI Australia: February employment report Hong Kong: Q4 PPI India: February PPI U.S.: February CPI
30 31 India: February CPI April 1 2 3 4
U.S.: Q4 GDP (third) Brazil: February employment report Canada: February PPI Germany: February employment report South Africa: February PPI U.S.: February personal income France: February PPI Japan: February employment report and CPI
U.S.: March ISM manufacturing report
18 employment report
Hong Kong: December-February LTD: March forex futures
Japan: Bank of Japan interest-rate announcement UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: March employment report and February trade balance Canada: March employment report LTD: April forex options; April U.S. dollar index options (ICE)
26
CURRENCY FUTURES SNAPSHOT as of Feb. 28
Market EUR/USD JPY/USD GBP/USD AUD/USD CAD/USD CHF/USD MXN/USD U.S. dollar index NZD/USD E-Mini EUR/USD
Sym EC JY BP AD CD SF MP DX NE ZE
Exch CME CME CME CME CME CME CME ICE CME CME
Vol 307.0 217.3 134.9 96.4 75.1 36.2 35.8 29.1 15.6 5.2
OI 229.3 210.9 173.9 175.7 145.1 42.2 177.2 51.3 35.9 7.8
10-day move / rank -2.87% / 100% 0.83% / 60% -2.36% / 70% -1.05% / 53% -2.72% / 100% -2.05% / 80% -0.22% / 9% 1.82% / 80% -1.49% / 100% -2.87% / 100%
20-day move / rank -3.72% / 100% -1.62% / 2% -3.90% / 100% -1.61% / 69% -2.71% / 100% -2.78% / 100% 0.13% / 7% 3.51% / 100% -0.37% / 17% -3.72% / 100%
60-day move / rank 0.50% / 2% -11.11% / 70% -5.31% / 95% -1.94% / 85% -3.61% / 100% -1.02% / 100% 1.49% / 33% 2.97% / 100% 0.94% / 17% 0.50% / 2%
Volatility ratio / rank .51 / 85% .09 / 13% .51 / 62% .46 / 53% .78 / 83% .45 / 48% .33 / 45% .86 / 90% .74 / 80% .51 / 85%
Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts. The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each markets liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable). LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to todays close. 20-day move: The percentage price move from the close 20 days ago to todays close. 60-day move: The percentage price move from the close 60 days ago to todays close. The % rank fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.
BarclayHedge Rankings: Top 10 currency traders managing more than $10 million
(as of Jan. 31 ranked by January 2013 return) January return 7.51% 5.82% 5.44% 5.27% 4.16% 4.10% 3.96% 3.80% 3.80% 3.71% 8.41% 6.61% 4.23% 3.80% 3.77% 3.60% 2.77% 2.54% 2.15% 2.03% 2013 YTD return 7.51% 5.82% 5.44% 5.27% 4.16% 4.10% 3.96% 3.80% 3.79% 3.71% 8.41% 6.61% 4.23% 3.80% 3.77% 3.60% 2.77% 2.54% 2.15% 2.03% $ Under mgmt. (millions) 340 13.4 64.7 18.4 15 55 112 10 2716 38.7 2.4 1.2 3.3 10 5.3 2.4 1.5 1.4 1.4 10
Trading advisor 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Hathersage (Long Term Currency) Iron Fortress FX Mgmt INSCH Capital Mgmt (Kintillo X3) Vortex FX Gables Capital Mgmt (Global FX) Blacktree Investment Partners (CIS) Titanium Capital Partners (FX Macro) ROW Asset Mgmt (Currency) FDO Partners (Emerging Markets) Quantica Capl (Diversified FX) Swiss Seagull (Crossfire II - Prop) JP Global Capital Mgmt (Troika I) Hartswell Capital Mgmt (Apollo) ROW Asset Mgmt (Currency) JarrattDavis (Managed FX) FxProTech MDC Trading Fornex (FxDirect) MFG (Bulpred USD) Rhicon Currency Mgmt (Sys. Curr.)
Top 10 currency traders managing less than $10M & more than $1M
Based on estimates of the composite of all accounts or the fully funded subset method. Does not reflect the performance of any single account. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.
27
INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency Brazilian real South African rand Thai baht Chinese yuan Hong Kong dollar Swedish krona Singapore dollar Swiss franc Indian rupee New Zealand dollar Japanese yen Taiwan dollar Australian Dollar Russian ruble Canadian dollar Euro Great Britain pound Feb. 27 price vs. U.S. dollar 0.50412 0.11317 0.033515 0.159025 0.128905 0.154575 0.80698 1.073825 0.01848 0.83056 0.01087 0.033685 1.025535 0.03268 0.97466 1.306985 1.516565 1-month gain/loss 2.32% 1.23% 0.34% -0.01% -0.04% -0.24% -0.36% -0.53% -0.59% -0.82% -1.18% -1.46% -1.61% -1.91% -1.97% -2.92% -4.02% 3-month gain/loss 5.01% 0.45% 2.82% -0.21% -0.10% 2.38% -1.35% -0.26% 2.64% 0.91% -10.61% -1.96% -1.89% 1.40% -3.18% 0.82% -5.34% 6-month gain/loss 2.15% -4.98% 4.41% 0.68% -0.01% 2.10% 0.92% 3.06% 2.33% 2.39% -14.48% 0.91% -1.44% 3.96% -3.31% 4.46% 0.00% 52-week high 0.586 0.1338 0.0336 0.1608 0.129 0.159 0.8213 1.1154 0.0203 0.8491 0.0129 0.0345 1.08 0.0345 1.0334 1.3639 1.6286 52-week low 0.4674 0.1102 0.0311 0.1566 0.1287 0.1374 0.7732 1.0074 0.0174 0.7504 0.0106 0.0329 0.9681 0.0291 0.9601 1.2099 1.5132 Previous 6 16 1 9 10 7 12 14 3 2 17 11 8 5 13 4 15
GLOBAL STOCK INDICES

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
28
Index Nikkei 225 All ordinaries S&P 500 FTSE 100 Swiss Market Straits Times S&P/TSX composite Xetra Dax CAC 40 FTSE/JSE All Share Bovespa Hang Seng IPC BSE 30 FTSE MIB
Feb. 27 11,253.97 5,053.10 1,515.99 6,325.90 7,485.00 3,261.12 12,732.40 7,675.83 3,691.49 39,275.37 57,274.00 22,577.01 43,772.89 19,152.41 15,827.00
1-month gain/loss 3.97% 2.90% 1.05% 0.50% 0.01% -0.39% -0.65% -2.01% -2.36% -3.31% -4.59% -4.63% -4.66% -4.73% -11.57%
3-month gain/loss 19.43% 12.96% 8.37% 9.07% 11.52% 8.27% 5.13% 4.68% 5.41% 3.89% 1.82% 3.36% 4.80% 1.65% 2.24%
6-month gain loss 23.87% 15.55% 7.48% 9.53% 15.31% 7.12% 5.67% 8.92% 6.60% 9.41% -1.44% 14.03% 9.51% 8.34% 5.42%
52-week high 11,662.50 5,123.00 1,530.94 6,412.40 7,635.10 3,319.19 12,830.60 7,871.79 3,793.26 40,892.65 68,970.00 23,944.70 46,075.00 20,203.70 17,897.40
52-week low 8,238.96 4,033.40 1,266.74 5,229.80 5,712.10 2,712.31 11,280.60 5,914.43 2,922.26 32,887.45 52,213.00 18,056.40 36,756.10 15,749.00 12,362.50
Previous 8 10 3 4 2 14 9 13 6 11 15 7 5 12 1
Japan Australia U.S. UK Switzerland Singapore Canada Germany France South Africa Brazil Hong Kong Mexico India Italy
NON-U.S. DOLLAR FOREX CROSS RATES

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair Canada $ / Yen Franc / Canada $ Euro / Pound Franc / Yen New Zeal $ / Yen Aussie $ / Canada $ Aussie $ / Yen Aussie $ / New Zeal $ Euro / Canada $ Aussie $ / Franc Euro / Aussie $ Euro / Yen Pound / Canada $ Euro / Franc Pound / Aussie $ Pound / Yen Yen / Real Pound / Franc Aussie $ / Real Canada $ / Real Euro / Real Symbol CAD/JPY CHF/CAD EUR/GBP CHF/JPY NZD/JPY AUD/CAD AUD/JPY AUD/NZD EUR/CAD AUD/CHF EUR/AUD EUR/JPY GBP/CAD EUR/CHF GBP/AUD GBP/JPY JPY/BRL GBP/CHF AUD/BRL CAD/BRL EUR/BRL Feb. 27 89.685 1.10174 0.86181 98.805 76.42 1.052195 94.365 1.234755 1.34096 0.95503 1.27444 120.26 1.55599 1.217125 1.478805 139.545 0.021555 1.412305 2.034305 1.933395 2.5926 1-month gain/loss 15.78% 1.47% 1.15% 0.70% 0.42% 0.36% -0.39% -0.81% -0.97% -1.09% -1.32% -1.72% -2.09% -2.40% -2.44% -2.82% -3.49% -3.51% -3.85% -4.19% -5.13% 3-month gain/loss 8.36% 3.02% 6.51% 11.63% 12.94% 1.33% 9.80% -2.78% 4.14% -1.64% 2.77% 12.84% -2.22% 1.08% -3.51% 5.95% -14.92% -5.09% -6.58% -7.80% -3.99% 6-month gain loss 13.10% 6.58% 8.91% 20.57% 19.75% 1.93% 15.28% -3.75% 8.03% -4.36% 5.98% 22.21% -0.81% 1.35% -2.69% 12.22% -16.31% -6.93% -3.51% -5.34% 2.26% 52-week high 93.95 1.1151 0.8727 102.90 79.32 1.0725 96.79 1.3061 1.3607 1.0328 1.3107 126.88 1.6162 1.2479 1.6123 146.94 0.0262 1.5434 2.2253 2.1463 2.7714 52-week low 74.85 1.0128 0.7779 78.81 58.78 0.9951 75.6 1.2175 1.2164 0.9238 1.1614 94.65 1.5485 1.2003 1.4686 119.75 0.0209 1.4062 1.8242 1.7067 2.2777 Previous 4 14 6 5 1 11 3 18 9 10 12 2 17 8 20 7 21 16 15 19 13
GLOBAL CENTRAL BANK LENDING RATES

Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate Rate 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3 2.5 7.25 2.75 1.875 7.75 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) 0.25 (Jan. 13) 0.5 (July 12) August 2012 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3.5 2.5 8 3 1.875 8 5 February 2012 0-0.25 0-0.1 1 0.5 1 0-0.25 4.25 2.5 10.5 3.25 1.875 8.5 5.5
29
INTERNATIONAL MARKETS
GDP AMERICAS
Argentina Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore
Period
Q3 Q4 Q4 Q3 Q4 Q3 Q3 Q3 Q4 Q4 Q4 Q4
Release date
12/21 3/1 3/1 12/28 2/14 12/21 12/6 12/5 2/27 2/28 2/14 2/22
Change
-2.5% 6.5% 0.8% 0.5% -0.3% 1.8% 2.0% 0.2% 6.2% 12.4% -0.1% 0.7%
1-year change
0.7% 7.2% 2.5% 1.8% 1.6% 2.3% 8.0% 1.9% 7.2% 12.0% -0.4% 1.5%
Next release
3/22 5/29 5/31 3/27 5/15 3/27 3/12 3/6 5/10 5/31 5/16 5/24
EUROPE AFRICA ASIA and S. PACIFIC
Unemployment AMERICAS
Period
Q4` Jan. Jan. Q3 Jan. Oct.-Dec. Jan. Oct.-Dec. Jan. Q4
Release date
2/19 2/26 2/8 12/6 2/28 2/20 2/7 1/17 3/1 1/31
Rate
6.9% 5.4% 7.0% 9.9% 5.9% 7.8% 5.4% 3.1% 4.2% 1.8%
Change
-0.2% 0.8% -0.1% 0.1% 0.6% 0.0% 0.0% -0.3% -0.1% -0.1%
1-year change
0.2% -0.1% -0.5% 0.7% -0.5% 0.2% 0.2% -0.2% -0.3% -0.2%
Next release
5/20 3/28 3/8 3/7 3/28 5/20 3/14 4/30 3/29 4/30
EUROPE
ASIA and S. PACIFIC CPI
Period
Argentina Jan. Jan. Jan. Jan. Jan. Jan. Jan. Q4 Jan. Jan. Jan. Jan. Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore
Release date
2/15 2/7 2/22 2/20 2/20 2/12 2/20 1/23 2/22 2/28 3/1 2/25
Change
1.1% 0.9% 0.1% -0.5% -0.5% -0.5% 0.3% 0.2% 0.2% 0.9% 0.0% 0.2%
1-year change
11.1% 6.2% 0.5% 1.2% 1.7% 2.7% 5.4% 2.2% 3.0% 11.6% -0.3% 3.6%
Next release
3/13 3/8 3/27 3/13 3/12 3/19 3/20 4/24 3/21 3/31 3/29 3/25
AMERICAS
EUROPE AFRICA ASIA and S. PACIFIC
PPI AMERICAS EUROPE AFRICA ASIA and S. PACIFIC

Argentina Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore
Period
Jan. Jan. Jan. Jan. Jan. Jan. Q4 Q3 Jan. Jan. Jan.
Release date
2/15 2/28 2/28 2/20 2/12 2/28 2/1 12/13 2/14 2/13 2/28
Change
1.0% 0.0% 0.5% 0.8% 0.2% -0.1% 0.2% 0.3% 0.4% 0.4% 2.1%
1-year change
13.2% -0.2% 1.4% 1.7% 1.0% 5.2% 1.0% -1.5% 6.6% -0.2% -3.9%
Next release
3/13 3/28 3/29 3/20 3/19 3/5 5/3 3/14 3/14 3/12 3/28
As of March 1 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
30
FOREXTRADE JOURNAL
Dollar analysis prompts Euro trade.
TRADE
Date: March 1. Entry: Long the Euro/U.S. dollar pair (EUR/USD) at 1.3018. Reason for trade/setup: As explained in this months Spot Check, the U.S. dollar index (DXY) triggered a couple of signals on March 1: It marked the fourth straight week of higher weekly highs and closing prices, and it was also a new 63-day high that closed strongly (in this case, exactly at the March 1 high). Prior to 2002 (when the dollar had stronger and longerlasting bull phases), both patterns tended to be followed by additional buying, but they have since been more bearish. Specifically, all the most recent 12 instance of four consecutive weeks with a higher high and higher close have been followed by a lower weekly close. Although the DXY may be preparing for a run at its 2012 high, it is still in a longer consolidation/downtrend, which favors interpreting the patterns in a bearish rather than bullish context. This near-term short-dollar scenario implies a long EUR/USD position. Also, the Euro is poised for a bounce for a bit of a rebound after a sharp sell-off (triggered by the Italian elections) in late February. Finally, the EUR/USDs recent sell-off has taken the pair down to a test of the whole-number price of 1.3000. The initial stop will be placed relatively nearby, as any significant drop below the entry day implies the Euro will challenge its November 2012 low around 1.2700. Initial stop: 1.2929. Initial target: 1.3186.
TRADE SUMMARY Date 3/1/13 Currency pair EUR/USD Entry price 1.3018 Initial stop 1.2929 Initial target 1.3186 IRR 1.89 Exit 1.3046 Date 3/5/13 P/L point
0.0028
Source: TradeStation
RESULT
Exit: Trade still open on March 5. Profit/loss: +.0004, marked to market at 1.3046 around 8:55 a.m. ET on March 5. Outcome: The Euro formed a narrow inside day the first day after entry (closing slightly higher), and rallied modestly in the early part of the March 5 session. We were hoping for a more energetic reversal to start out the week, but at least the trade wasnt knocked out of the box immediately. The stop will be raised to breakeven on a move above 1.3100, but an exceptionally weak close on March 5 might be reason to exit the trade early. 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.
% 0.22%
LOP 0.0056
LOL
-0.0036
Trade length 2 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.
31

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GAUGING A EURO REBOUND P.

March 2013 Volume 10, No. 3

Contributors..................................................4 Global Markets Has the loonie lost its luster?.....................6

Global Economic Calendar......................... 26

Currency Futures Snapshot.................. 27 BarclayHedge Rankings......................... 27

On the Money Rules of FX engagement.......................... 10

Straight talk about currency wars........... 12

Spot Check Dollar dance.............................................. 18

Looking for an advertiser?

Advanced Concepts The interest rate price of a currency union.................................. 20

How Do You Turn Trading Possibilities into Profit?

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A publication of Active Trader

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March 2013 CURRENCY TRADER

Has the loonie lost its luster?

BY CURRENCY TRADER STAFF

Economy: A shaky housing market

The U.S. connection and exports

FIGURE 2: NEARING RESISTANCE

Central bank policy

Dollar/Canada near resistance?

AbleTrend T2 Stops Can Help

For Stocks, Futures FOREX & Options

3. T2 stops helps to define the retracements

4. T2 stops helps to define the reversal

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Arbitrary nature of rules

Easing market tensions

On the Money ON THE MONEY

Straight talk about currency wars

March 2013 CURRENCY TRADER

TABLE 1: TRADE AS PERCENTAGE OF GDP 2011

CURRENCY TRADER March 2013

FIGURE 1: BRAZILIAN REAL (BLACK, INVERTED) VS. BOVESPA STOCK

FIGURE 2: USD/JPY (BLACK) VS. THE NIKKEI STOCK INDEX

Dec 2013 Feb M

FIGURE 3: AUD/USD WIDE RANGE, HIGH VOLATILITY

FIGURE 1: DXY FOUR-WEEK RUNS, 2005-MARCH 2013

FIGURE 2:  WEEKLY PATTERN PERFORMANCE, 2005-MARCH 2013

FIGURE 3:  WEEKLY PATTERN PERFORMANCE, 1973-2013

FIGURE 4: AFTER 63-DAY HIGHS, 1973-2013

Overall, DXY continued to rally after making a new 63-day high.

FIGURE 5: RECENT 63-DAY HIGHS

The daily time frame: Three-month highs

TRADING STRATEGIES ADVANCED CONCEPTS

The interest rate price of a currency union

Forward Rate Ratio, 2-10 Years

March 2013 CURRENCY TRADER

FIGURE 2:  TWO-YEAR ZERO-COUPON IMPLIED VOLATILITY SINCE NOV. 30, 2011

Forward Rate Ratio, 2-10 Years

Consequences of the fix

ON THE MONEY ADVANCED CONCEPTS

100% 95% 90% 85% 80% 75% 70% 65% 60%

93% 87% 81% 75% 69% 63% 57% 51% 45%

Two-Year Zero-Coupon Volatility Led 13 Weeks

Two-Year Zero-Coupon Volatility Led 13 Weeks

Two measures over time

FIGURE 2: WEEKLY PATTERN PERFORMANCE, 2005-MARCH 2013

FIGURE 3: WEEKLY PATTERN PERFORMANCE, 1973-2013

FIGURE 2: TWO-YEAR ZERO-COUPON IMPLIED VOLATILITY SINCE NOV. 30, 2011