December 2005 - Strategies, News and Analysis

December 2005 • Strategies, News and Analysis for Forex Traders
Volume 2, No. 12
INTERVIEW WITH
Clarkson Jones,
Monarch Capital Management
THE DEATH OF FLOATING

EXCHANGE RATES
and the FX market of the future
CRUNCHING THE NUMBERS:

Yen outlook
MARKET CHARACTERISTICS:
Trading the U.S. forex session
THE RATE-HIKE SCENARIO:

Will the U.S. hold off while Europe steps up?
REFCO COLLAPSE
impacts forex traders
CONTENTS
Spot Check . . . . . . . . . . . . . . . . . . . .16

Dollar-yen
The dollar-yen rate has had an incredibly
bullish fall, gaining 10 percent from
September to November. Will it keep up
the pace?
By Currency Trader Staff
Advanced Concepts . . . . . . . . . . . .18

The dollar index and “firm”
exchange rates
It’s a question with huge implications for
currency traders: Is the floating exchange-
rate system destined for the historical dust
bin? And what will take its place if it is?
Contributors . . . . . . . . . . . . . . . . . . . . .6
By Howard Simons
Letters . . . . . . . . . . . . . . . . . . . . . . . . . .8
Currency Trader
Interview . . . . . . . . . . . . . . . . . . . . . . .26
Industry News Clarkson Jones: Art, science, and forex
FXCM rescues Refco’s retail This currency fund manager blends discre-
forex customers . . . . . . . . . . . . . . . . . .9 tionary judgment with a systematic base.
FXCM has reached a deal that will allow By Currency Trader Staff
Refco’s forex customers to access their funds.
Trading Strategies . . . . . . . . . . . . . .30

Global Markets Trading around the clock, part II
The end of the U.S. Is it advantageous to trade certain currency
rate-hike cycle? . . . . . . . . . . . . . . . . .10 pairs in specific trading periods? Find out how
A look at what the Fed might do next, the major currency pairs behave in the U.S.
and the likely impact on the dollar. trading session.
By Currency Trader Staff By Kathy Lien
ECB lets rate cat out of the bag . . . . .13

A look at the Euro in light of the ECB’s
decision to hike interest rates.
continued on p. 4
2 December 2005 • CURRENCY TRADER

CONTENTS
Global News Briefs . . . . . . . . . . . . .40

Currency System Analysis . . . . . . .34
Trend/countertrend system.
Events/New Products/Key Concepts
and Definitions . . . . . . . . . . . . . . . . .41
Currency Futures . . . . . . . . . . . . . . .36
Eurex U.S. posts tepid early volume numbers
in currency futures. Plus, pro currency man- Global Economic Calendar . . . . . . .42
agers look to end year on high note.
International
Market Summary . . . . . . . . . . . . . . .38
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Gain Capital Institute of Higher Earning

CONTRIBUTORS
CONTRIBUTORS
Kathy Lien is a chief strategist at FXCM, where

she is responsible for research and analysis for
DailyFX.com, including technical and fundamental
A publication of Active Trader ® research reports, market commentaries, and trading
strategies. She was an associate at JP Morgan Chase,
For all subscriber services: where she worked for more than three years in credit
www.currencytradermag.com
derivatives, cross markets, and foreign exchange trading. Lien’s expe-
Editor-in-chief: Mark Etzkorn rience encompasses trading both in and out of the forex market,
metzkorn@currencytradermag.com including interest rate derivatives, bonds, equities, and futures. She
has written for various industry publications and news outlets, includ-
Managing editor: Molly Flynn
mflynn@currencytradermag.com ing CBS MarketWatch, and she is frequently quoted on Bloomberg and
Reuters. She is also author of the forthcoming book Day Trading The
Associate editor: David Bukey
Currency Market (John Wiley & Sons).
dbukey@currencytradermag.com
Contributing editors: Jeff Ponczak

Howard Simons is president of Rosewood Trading, Inc., and a
jponczak@currencytradermag.com,
strategist for Bianco Research. He writes and speaks frequently on a
Editorial assistant and wide range of economic and financial market issues.
Webmaster: Kesha Green
kgreen@currencytradermag.com
Art director: Laura Coyle Thom Hartle is a private trader and president of
lcoyle@currencytradermag.com Market Analytics Inc. (www.thomhartle.com). In a
career spanning more than 20 years, Hartle has been a
President: Phil Dorman
pdorman@currencytradermag.com commodity account executive for Merrill Lynch, vice
president of financial futures for Drexel Burnham
Publisher, Lambert, trader for the Federal Home Loan Bank of
Ad sales East Coast and Midwest:
Bob Dorman Seattle, and editor for nine years of Technical Analysis of
bdorman@currencytradermag.com Stocks & Commodities magazine.
Ad sales
West Coast and Southwest only: José Cruset (jose@wealth-lab.com) is a private trader, software
Allison Ellis engineer, and trading system researcher. He holds an MBA and a
aellis@currencytradermag.com
NASD-Series 3 certificate and has worked many years in the banking
Classified ad sales: Mark Seger industry.
mseger@currencytradermag.com
Volume 2, Issue 12. Currency Trader is published monthly by TechInfo, Inc.,

150 S. Wacker Drive, Suite 880, Chicago, IL 60606. Copyright © 2005
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 pur-

poses 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.

LETTERS
Getting interest-rate
On the spot differential data
I O
’m a FX trader with five years experience and I’ve been utstanding magazine — the articles written by
a regular reader of Currency Trader magazine from its Kathy Lien are exceptionally insightful and
first issue. I notice you use the phrase “spot forex” in informative. I’m looking forward to her book. In
some articles. I know the word “spot” has a certain meaning the meantime I have a question. She has written about
if we refer to trading markets, but my fundamental question interest-rate differentials in various articles. I would like to
is this: Should this term be used for the retail foreign know where (i.e., from which data provider) I can down-
exchange market traded through many electronic plat- load historical daily interest-rate data so I can calculate the
forms? differentials in independent analysis.
My concern is caused by our Polish SEC interpretation, For example, she has shown charts of the AUD-USD and
which says FX trades are just one-day financial futures con- NZD-USD along with the respective five-year yield differ-
tracts and cannot be considered spot transactions. That has entials. I subscribe to Reuters DataLink’s worldwide
certain tax and legal implications here. Which approach is futures package, but they don’t have this type of data.
the correct one? Fundamental explanations would be high-
ly appreciated. —Joseph
Kathy Lien replies:
—Tom Symonowicz Typically, most traders get the historical data for interest rates
Poland from Bloomberg. However, the monthly cost is relatively high.
Alternately, historical currency interest rates are readily available
Although we obviously can’t comment on Polish trading regula- free of charge from central bank Web sites, but it sometimes
tions, when we use the word “spot,” we’re specifically referring to requires a bit of inventive Google keyword searching to find them.
currency transactions that are not conducted on regulated Here are the links for daily U.S., Australia and New Zealand
exchanges (such as the currency futures contracts traded at the rates. These should be updated daily and can be manually fed
Chicago Mercantile Exchange). into your charting package.
So, the “spot” designation covers both cash transactions in the
“interbank” market (the network of major currency trading bank- U.S.: www.federalreserve.gov/releases/h15/data.htm
ing institutions) as well as those transactions executed through
retail forex brokers (which might, in turn, be trading with mem- Australia:
bers of the interbank market). www.rba.gov.au/Statistics/AlphaListing/alpha_listing_i.html
The lines between futures and spot are fuzzy in the U.S., too: (under “Interest Rates and Yields > Money Market”)
The Commodity Futures Trading Commission (CFTC), which
regulates exchange-traded financial futures, has long sought to New Zealand:
extend its reach to spot forex trading. Recent court decisions have www.rbnz.govt.nz/statistics/1834998-08.html#P338_26909
hampered its progress in this regard, though. (under “Interest Rate”)
Three good tools for targeting customers . . .
— CONTACT —
Bob Dorman Allison Ellis Mark Seger
Ad sales East Coast and Midwest Ad sales West Coast and Southwest Account Executive
bdorman@activetradermag.com aellis@activetradermag.com mseger@activetradermag.com
(312) 775-5421 (626) 497-9195 (312) 377-9435

INDUSTRY NEWS
Free at last
FXCM rescues Refco’s retail forex customers
R etail customers of Refco’s

unregulated
exchange brokerage who
foreign
had their accounts frozen in the after-

math of Refco’s collapse could be in
placing money in a forex account for
fear of losing their funds.
“FXCM is protecting the reputation
of the online foreign exchange indus-
try by demonstrating that there are
exemption, the lawyers for Refco inter-
preted [the law] as a blanket license to
seize those assets. Jim Rogers is mak-
ing the argument that these are funds
that were held in trust and are not
for good news. strong, responsible forex firms able to assets of Refco.
Forex Capital Markets stabilize the indus- “Personally, I agree with Jim Rogers,
(FXCM), a New York- try in difficult but a court will decide it. This shows
based brokerage, has times,” Niv says. customers how important it is for their
signed a Memorandum of “We believe that funds to be in a regulated entity.”
Understanding with Refco our efforts to
agreeing to purchase Refco make these cus-
FX.com, the bankrupt bro- tomers whole
kerage’s retail foreign underlines that
exchange arm, for $110 commitment.”
million. Refco’s Capital
The deal still must be Market division
approved in bankruptcy primarily consists
court, which could happen at of hedge-fund cus-
any time, according to FXCM CEO tomers, and Niv has no intentions of
Drew Niv. taking over those accounts.
“The (bankruptcy) judge has Refco Capital Markets has been in
pushed the hearing back, but it could the news lately as hedge-fund legend
be as soon as the end of November,” Jim Rogers is claiming Refco moved
Niv says. $362 million in assets to the Capital
At the hearing, the judge will set the Markets arm, where it is currently
parameters for an auction, which will frozen.
last 20 days. At the end of the auction, “The problem with Refco Capital
the winning bidder gains control of Markets was that this was the entity
the accounts. Refco used as a bank for all other enti-
Niv says he has heard that a few ties,” Niv says. “It was the one that
other firms besides FXCM are interest- had the bank credit line, so all the trad-
ed in Refco’s forex accounts, but ing used Refco Capital Markets as a
nobody needs to make an official bid clearing firm. Because of that, some
until right before the auction. money from every entity was at Refco
Once the deal closes, Refco’s forex Capital Markets.
customers will have access to their “Refco is claiming all (Rogers’)
funds. money was in Capital Markets, and
“All retail foreign exchange cus- since that money was frozen, his
tomers that went through Refco money was frozen. This deal will free
FX.com will be made whole, and up all the retail customers, but
FXCM is buying back the 35 percent (Rogers) will have to win a lawsuit.
share that Refco owns of FXCM,” Niv I’m freeing the (retail) customers now
says. “(Refco is) using the proceeds of to avoid that.”
that to give customers their money.” A representative for Rogers
Niv says the deal is important for the declined comment.
foreign exchange industry, as the Refco “There is a gray area in the law,”
debacle has left many traders leery of Niv says. “Because there is no specific
December 2005 • CURRENCY TRADER 9

GLOBAL MARKETS
The end of
the U.S. rate-hike cycle?
The U.S. Fed’s streak of interest-rate hikes has been a boon for the U.S. dollar. However, analysts
think the tightening period is about to come to an end. Does that mean trouble for the buck?
BY CURRENCY TRADER STAFF
T he year 2005 has been a good one for the U.S.

dollar. The greenback rallied sharply
throughout the year, shrugging off a three-
year bear market. Many in the forex world
point to the steady rate increases by the Federal Reserve
throughout 2005 as a key factor sending the dollar spiraling
higher, especially against the Euro.
is how much higher can the funds rate go and what will it
mean for the dollar?
The Fed steadily hiked rates throughout 2005 while most
other central banks were holding monetary policy steady.
This increased the attractiveness of the U.S. currency to
global investors, as interest-rate differentials shifted signifi-
cantly in the dollar’s favor.
With the U.S. fed funds rate at 4 percent after 12 consec-
utive rate hikes by the Federal Open Market Committee Looking around the globe
(FOMC) since June 2004, the key question for forex traders The European Central Bank (ECB) has held rates steady at 2
percent while Japan has had a zero
interest-rate policy since 2001. For
FIGURE 1 — EURO/U.S. DOLLAR investors chasing yield, the shift to the
U.S. dollar was a no-brainer and
Increasing interest rates in the U.S. have helped the dollar strengthen vs. the
Euro to levels not seen since early 2004. helped propel the greenback to two-
year highs. The Euro was around $1.16
in mid-November (Figure 1). The dol-
lar has also rallied to its highest level
in 27 months vs. the yen, around
118.91 (Figure 2).
Some analysts are predicting the
hike-fueled dollar rally may be near-
ing its end, however.
“We are in the later innings of the
tightening cycle, compared to the
Europeans and the Japanese,” says Jim
Glassman, senior economist at J.P.
Morgan Chase.
Many economists agree the Fed’s cur-
rent tightening cycle may come to an
end early in 2006. Most market watchers
believe the Fed will kick up the funds
rate by another 25 basis points at each of
the next two meetings on Dec. 13 and
Source: eSignal
Jan. 31. That would leave the rate at 4.50

percent. From there, however, many speculate the Fed’s tight- TABLE 1 — 2006 FOMC MEETINGS
ening cycle may be over.
March 28 June 28-29 Sept. 20 Dec. 12
A wildcard will be incoming Fed Chairman Ben
May 10 Aug. 8 Oct. 24
Bernanke, who is expected to take office in early February.
Paul Kasriel, director of economic research at Northern
Trust Company, calls the new chairman “a complicating ing closer to 10-year T-note rates (especially if more rate
factor” in forecasting the funds-rate outlook. hikes occur), this could be additional impetus to slow down
“There is some feeling that he might have to push things the Fed.
a little higher to earn the respect of the markets,” Kasriel “The Fed is disinclined to invert the yield curve at this
says. He notes the markets have currently priced in short- juncture,” Glassman says. “If you go back over the past 50
term rates to about 4.75 percent.
Regardless, most analysts expect the
Fed to stop hiking by the spring of FIGURE 2 — U.S. DOLLAR/JAPANESE YEN
2006 when rates are between 4.5 or 5
Differing policies on interest rates between Japan and the U.S. have led to two-
percent. year highs for the dollar vs. the yen.
Factors to consider
Ethan Harris, chief U.S. economist at
Lehman Brothers, pointed to three
conditions that must occur for the Fed
to halt its current tightening cycle.
First, Harris says signs financial condi-
tions are tightening must emerge. He
specifically points to the housing mar-
ket.
“By spring it should be clear the
housing boom has ended,” he says.
Second, Harris says the Fed must
believe the economy is slowing down
a bit. Looking ahead, economists do
expect a moderate slowing. While
Harris forecasted a gross domestic
product (GDP) figure of 3.5 percent for
the first quarter of 2006, he expects Source: eSignal
growth to slow to around 2.5 percent
for the remaining three quarters of
next year. to 100 years, central banks don’t push short-term rates
Northern Trust’s Kasriel also expects a modest slowdown above long-term rates unless there is a clear and present
in the U.S. economy next year. Kasriel forecasts a 3-percent inflation danger.”
GDP measure for the fourth quarter of 2006 vs. 3.3 percent
for the same period in 2005. The inflation data
Finally, Harris says, the Fed must believe inflation is Most economists agree the spike in energy prices is the
under control in order to halt the recent series of rate hikes. main culprit behind the recent surge in headline inflation
Recent verbiage from the FOMC hasn’t hinted an end to data in the U.S. The Consumer Price Index (CPI) hit a 14-
rate hikes is imminent. But economists will be watching for year high at 4.7 percent in September. However, the core
changes in the wording of the FOMC minutes and monitor- rate (which excludes food and energy) for the month post-
ing growth and inflation reports closely in the weeks and ed a more moderate reading of 1.9 percent.
months ahead. “Almost nothing outside of energy looks that threaten-
ing,” notes Lehman’s Harris.
Inverted yield curve? What economists and the Fed will be watching for in the
Another factor that may slow down the Fed is the shape of coming months, however, are signs that higher energy costs
the U.S. Treasury yield curve. With short-term rates press- continued on p. 12
CURRENCY TRADER • December 2005 11

GLOBAL MARKETS continued
are being passed along as price increases in other areas FIGURE 3 — ENERGY RELIEF
of the economy.
Both unleaded gasoline and natural gas futures have dropped
Consumers have already seen some relief on the ener- significantly since their recent spike highs.
gy front as of mid-November, as both gasoline and nat-
ural gas prices had retreated off their September and
October highs (Figure 3), which could bode well for
inflation numbers into the New Year.
“Energy prices are unlikely to spike a lot higher,”
Kasriel says. “You’ll see inflation moderate going for-
ward.”
What could the end of rate hikes mean

for the dollar?
At this time last year, many forex analysts and traders
were fixated on the U.S. twin deficits (domestic and for-
eign) and how they would pressure the greenback in
2005. However, forex traders quickly shifted their focus
to the more bullish Fed story earlier this year.
Market watchers voice concern that an end to Fed rate
hikes in the U.S. could weigh on the overall dollar out-
look into 2006.
“While the Fed is nearing the end of its tightening
cycle, there could be other central banks that are going
to enter tightening cycles,” Kasriel says.
That could spell a narrowing of the positive interest rate
differentials that have recently been in the dollar’s favor.
Kasriel believes the ECB, the Bank of Japan, and pos-
sibly even the Bank of England could potentially tight-
en rates in 2006.
“The dollar might have some rate competition from
abroad,” he says. “I think the dollar will be weaker next
year.”
Lehman’s Harris agrees. Into the first quarter, Harris
sees potential for the dollar to remain strong “until
investors see the Fed moving to the sidelines,” he says.
“Sentiment around the dollar should shift and the mar-
ket should resume its longer-term decline.”
Harris and Kasriel both think the 2005 rally in the dol-
lar is a shorter-term correction in the overriding longer- Source: eSignal
term bearish trend. Harris sees potential for a 10-percent
drop in 2006. He points to the current account deficit, which was likely
to hit $700 or $800 billion on a yearly basis in 2006.
Bearish fundamentals “Investors will start to question the huge borrowing
Several economists warned that forex market focus could requirements the U.S. has,” Harris says. He calls this a
shift back to the bearish fundamental and structural situa- “chronic risk” to the currency.
tion seen in the U.S., which could weigh on the dollar. Kasriel agrees that forex traders could shift their focus
“It is important for investors not to get too swayed by back to this larger issue in 2006.
short-term trends in the currency markets,” Harris says. “Global investors are going to start to wonder just how
“There still is a fundamental imbalance in global economic the U.S. intends to pay interest and dividends on all this
affairs.” capital it is importing,” he says.

ECB lets rate cat out of the bag
Will the ECB’s new stance on interest rates shift the Euro-dollar dynamic?
A fter months of hawkish talk,

European Central Bank (ECB)
President Jean-Claude Trichet let
the cat out of the bag on Nov. 18.
“After two and a half years of maintaining
FIGURE 1 — EURO/U.S.DOLLAR, WEEKLY
The dollar sagged vs. the Euro in 2005, but rate hikes by the ECB
might favor the Euro.
historically and exceptionally low interest

rates...the governing council is ready to make a
decision,” Trichet said at a Frankfurt European
banking conference on Nov. 18.
The market and most currency analysts inter-
preted this as a clear sign an initial hike will
occur at the Dec. 1 policy meeting, with addi-
tional rate hikes following in 2006.
With higher energy prices pushing headline
inflation to uncomfortable levels for the infla-
tion-conscious ECB, officials have been warning
for months that a rate hike may be in the cards.
But ahead of the unexpected Nov. 18 comments
by Trichet, most analysts had expected the ECB
to wait until early 2006 to make their first poli-
cy move. The ECB has kept its key refinancing Source: TradeStation
policy rate unchanged at 2 percent since June
2003. Pulled In Two Directions
“The comments were a surprise — they came out of the The ECB is in a difficult position as it has a mandate for price
blue,” says Jamie Coleman, managing director at Thomson stability, yet growth numbers emerging from the Eurozone
Financial IFR. While these comments “practically cement” a remain extremely lackluster and sluggish. Eurozone head-
.25 basis point rate hike at the early December meeting, he line inflation has been steadily above the 2-percent target —
says, the question for currency traders is how much more 2.5 percent in October and 2.6 percent in September.
tightening can be expected — and can it reverse the recent Eurozone Finance Ministers have been speaking publicly
weakness seen in the Euro/U.S. dollar (Figure 1)? against the need for a rate hike by the ECB because they feel
it would not help the slow-growth scenario that continues
to unfold there. As of mid-November,
EURO / DOLLAR RATE AT A GLANCE the European Commission was fore-
casting gross domestic product (GDP)
Average daily range (past 40 days) 0.0112 growth of 1.3 percent for 2005.
Average weekly range (past 26 weeks) 0.0241 “The Eurozone is slowly recover-
52-week high/low 1.3666 / 1.1638 ing from pretty poor performance in
EUR U.S. the first half of the year,” said
Prevailing interest rates (%) 2.25 4.0 Charmaine Buskas, an economist at
Next central bank meetings Dec. 1, 2005 Jan. 12, 2006 Economy.com, ahead of Trichet’s
GDP Q3 2005* Q2 2005 Q1 2005 Nov. 18 comments. “This is a conun-
EUR U.S. EUR U.S. EUR U.S. drum for the ECB. Do they act to pro-
1.6 4.3 1.1 3.3 1.3 3.8 tect their price stability to keep it in
All data as of Dec. 1 *Estimates line with their mandate or do they
stand aside and allow growth to
continued on p. 14

GLOBAL MARKETS continued
FIGURE 2 — EURO/U.S.DOLLAR, DAILY
On the daily time frame, EUR/USD appeared to be holding its breath in

unfold organically?” mid-November to late November.
Trichet appeared to be keenly aware of the
political pressures from Eurozone Finance
Ministers. Trichet noted the ECB would “main-
tain moderation and accommodation and the
policy would remain accommodative.”
“This is the worst piece of central banking I’ve
ever seen,” says Thomson’s Coleman. “He says
we are going to hike, but not by much. To down-
play the impact of hikes before they even start
hiking takes away some of their credibility.”
Looking ahead at the Euro

David Powell, currency analyst at Ideaglobal,
says the “market is pricing in a 40-percent
chance of a 2.75-percent rate by March.” The
ECB is set to meet next on Jan. 12.
But, given the overall sluggish growth fore-
casts for the Eurozone into 2006 and the still- Source: TradeStation
negative interest-rate differential vs. the U.S.,
analysts are not turning wildly bullish on the European cur- in the Euro/U.S. dollar (EUR/USD) rate. As long as that
rency. resistance ceiling remains in place, he expects additional
In fact, some still see room for additional downside in the downside pressure on the Euro in the days and weeks ahead.
Euro in the weeks ahead, especially given the ECB’s mixed On the downside, he highlights $1.1590 as potential sup-
message that any future tightening could be “moderate.” port. That level represents a roughly 38.2-percent retrace-
ment of the lifetime range of the Euro from .8230-$1.3665, he
Key levels says (Figure 2). Declines under $1.1590 would open the
Thomson’s Coleman points to a key resistance area at $1.1865 door to the $1.1450 region.
Turning point
HIT YOUR MARK! Into 2006, while the U.S. Fed is expected
to ratchet up the Fed funds rate a few
Advertise in more times, most analysts acknowledge
the U.S. tightening cycle is nearing an
Active Trader and Currency Trader Magazines end. The persistent and consistent rate
hikes in the U.S. have been a main factor
supporting the U.S. dollar, especially vs.
Contact Bob Dorman the Euro, throughout 2005.
Ad sales East Coast
Once it becomes clear the Fed is
and Midwest
done with its tightening cycle, analysts
bdorman@activetradermag.com
(312) 775-5421 say the opportunity may exist for a
turning point in market sentiment and
market focus. In fact, forex players may
Allison Ellis become more focused on structural
Ad sales West Coast
problems within the U.S., including the
and Southwest
giant current account deficit, which
aellis@activetradermag.com
(626) 497-9195 could draw money flows away from
the greenback.
Mark Seger That in turn, could open the door for
Account Executive Euro strength, some analysts say.
mseger@activetradermag.com Ideaglobal’s Powell sees potential for
(312) 377-9435 the Euro to return to the $1.2200 zone
by the end of first half 2006.

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SPOT CHECK
Dollar-yen Rallies like the one the yen has enjoyed

recently have, in the past, shown
the potential for significant follow-through.
FIGURE 1 — ON THE RUN
The dollar-yen rate has rallied nicely since bouncing off its 1999
However, the numbers also suggest
low in late 2004 and early 2005. One the verge of topping 120,
the market's next obvious highs are above 135 and 145.
the possibility for at least a correction
on the not-too-distant horizon.
T
he last time we looked at the dollar-
yen (USD/JPY) rate in Spot Check in
the April 2005 issue, the currency pair
had (at the end of March) just complet-
ed a three-month bounce off a major support level
and was trading around 107.13. The price-pattern
analysis at the time indicated more upside move-
ment was likely, and in conclusion we noted, “If a
longer-term trend materializes, its viability will
depend on the larger factors that impact the dol-
lar[.]”
Source: TradeStation
A longer-term trend did, in fact, materialize, tak-
ing the dollar-yen another 10 percent higher by late
FIGURE 2 — FALL RALLY November (Figure 1). After a late-July to early-
September pause that brought the pair back down
After pulling back in July and August, the dollar-yen gained 10 to 108.76, the market took off on a virtually unbro-
percent in a furious September-November rally. ken uptrend that reached 119.92 on Nov. 28 — a
10.67 percent jump and the dollar-yen’s highest
level in more than two years (Figure 2).
We conducted a study to see what has happened
other times when the dollar-yen has gained 10 per-
cent or more, low to high, over a three-month peri-
od. There have been 23 such moves, but as is often
the case with this type of measurement, many of
these moves were part of larger moves — that is a
three-month 10-percent gain was followed by
another up month that completed a second (over-
lapping) 10-percent three-month gain, etc.
These 23 moves comprised 13 distinct market
runs, of which seven lasted only three months (i.e.,
a single, three-month 10-percent rally followed by
a decline of at least one month), four that lasted
four months, one that lasted five months and one
(ending in August 1998) that lasted eight months.
The most recent 10-percent, three-month rally coin-
cided with the spike high in May 2004 (Figure 1).
Table 1 shows the month-to-month closing
changes, as well as the largest up moves and down
moves, for the first six months after three-month,
Source: TradeStation
10-percent rallies. With the exception of month 2,

FIGURE 3 — POST-RALLY TENDENCIES
the market closed progressively lower
After three-month, 10-percent rallies, the dollar-yen’s largest average down
each month and the largest down
moves have been bigger than the currency pair's typical (benchmark) price
moves were generally bigger than the moves over the past 20 years. The difference is most notable in months 6 to 9.
largest up moves.
Figure 3 compares the post-pattern
close-to-close moves for months 1-6 to
the average (benchmark) close-to-close
price moves for each interval — that is,
the average of all the one-month close-
to-close moves over the analysis peri-
od, the average of all the two-month
close-to-close moves, and so on. This
provides an indication of how the price
action after the pattern compares to the
typical, or random, price action over
the same period.
The price action in the first three
months was even as bearish as the typ-
ical benchmark price movement, but
after month 4 the post-pattern moves
were almost always significantly larger
(to the downside) than the benchmark
price movement.
It is always difficult when analyzing
monthly data to get a useful number of pattern samples, a With the market on the doorstep of the 120.00 “round
problem that in this case was exacerbated by the overlap number” and the possibility of the U.S. rate-hike cycle com-
between many of the three-month, 10-percent rallies. The ing to an end early next year, dollar-yen traders have plen-
implications of the statistics must be judged accordingly. ty of food for thought.
TABLE 1 — THREE-MONTH, 10-PERCENT RALLIES

There have been 23 months since 1985 that have capped three-month, 10-percent rallies in the dollar-yen. Month 2 doesn't
fit the overall pattern, but there's an indication of weakness in the subsequent months.
Month 1 LUM LDM Month 2 LUM LDM Month 3 LUM LDM

Avg. -0.9065 2.8439 -3.8217 -0.5478 4.3235 -5.6952 -2.2343 4.7809 -7.5352
Med. -0.5400 2.2000 -3.1000 1.0200 3.0300 -5.0700 -0.2900 4.7500 -6.1800
Max. 6.5400 7.9800 0 9.6000 13.9700 0 11.9900 13.9700 0
Min. -8.1500 0 -9.5700 -22.9300 0 -25.1700 -29.0100 0 -31.2500
Std. 4.1331 2.4948 3.0438 6.8564 3.6958 5.8121 8.7620 3.7073 7.4474
%>0 43.48% 60.87% 43.48%
Month 4 LUM LDM Month 5 LUM LDM Month 6 LUM LDM

Avg. -5.0970 5.1313 -9.3787 -7.1078 5.5930 -12.0374 -8.2635 5.6530 -14.5865
Med. -3.0400 4.7500 -7.8500 -3.9500 4.7500 -8.1100 -6.8100 4.7500 -10.4300
Max. 11.8700 14.8400 0 11.3300 19.8500 0 17.8700 19.8500 0
Min. -25.7200 0 -31.2500 -31.8000 0 -32.2400 -28.9000 0 -36.5800
Std. 10.0746 4.1045 8.5180 12.3708 4.9927 10.2415 12.8916 4.9939 11.2398
%>0 30.43% 30.43% 26.09%
Legend:
LUM (largest up move): biggest up move from the closing price of the pattern to the highest high at each interval.
LDM (largest down move): biggest down move from the closing price of the pattern to the low at each interval.
Std: Standard deviation.
%>0: Percentage of patterns that closed higher than the closing price of the pattern at this interval.

ADVANCED CONCEPTS
The dollar index

and “firm” exchange rates
The vast majority of currency traders are familiar only with the current floating-rate system.
But are we about to enter a new “firm exchange rate” era dominated by the dollar and Euro?
BY HOWARD SIMONS
N o global exchange-rate system lasts forever.

Whether a pure gold standard, a single-cur-
rency dominated standard such as that
enjoyed by the British pound during the
19th century and the U.S. dollar during the Bretton Woods
system of fixed exchange rates after World War II, every
system ultimately falls under the weight of its internal
regard the past 30 years as a well-intentioned but ultimate-
ly failed experiment. The abandonment of this regime will
have significant implications for global yield curves, long-
term interest rate levels, and returns on assets.
Central banks are seldom ahead of the curve; they react
to events. Their behavior — and that of associated govern-
ments during the transition from the Bretton Woods regime
stresses and rigidities. A set of events eventually comes — is instructive in this regard. It will help guide us into the
along that causes the system to collapse. emerging world of two major currencies — the dollar and
This was true for the Bretton Woods system, the dollar- the Euro. We will also see why the New York Board of Trade
gold system created in 1944 which lasted until the early 70s, (NYBOT) dollar index (DXY) is and will remain the best
and is going on right now with the current system of float- instrument for tracking and managing the U.S. dollar’s
ing exchange rates. Future economic historians are likely to course in the years ahead.

The collapse of Bretton Woods
In the Bretton Woods system, gold was fixed at $35 per The notion that governments would
ounce and other currencies were valued at fixed rates rela-
tive to the dollar. By the late 60s, the persistent U.S. current
account deficit threatened the U.S. with an outflow of gold
allow currencies to float freely was
and the world with a loss of liquidity in its only reserve cur-
rency. As a result, in 1969 the International Monetary Fund
politically naïve in the extreme.
(IMF) was authorized by
member countries to create
Special Drawing Rights FIGURE 1 — CENTRAL BANKS BEHAVING BADLY
(SDRs), dubbed “paper gold,” The implementation of SDRs helped push the world’s reserves out of control. By August
to augment international 1971, reserves ex-gold were increasing at a 70-percent annual pace.
reserves. The SDRs constitut-
ed a kind of artificial reserve
currency used internally by
the IMF and were valued
according to a basket of inter-
national currencies.
No one could be certain of
SDR’s impact. At the time, the
only historic parallels of sud-
den reserve infusions came
with the discoveries of gold
deposits in places such as
California, Alaska, South
Africa, and Australia during
the gold-standard era, or to
the seizure of gold during
colonial conquests, such as
the Spanish takeover of
Mexico. Each of these
episodes led to outbursts of
inflation.
As it turned out, central Source: International Monetary Fund
banks could not handle the
new reserve tool and they let the world’s reserves explode and foreign exchange reserves. These outflows lead to a
out of control (Figure 1). By August 1971, reserves not reduced capacity to consume, which is detrimental both to
including gold were increasing at a 70 percent year-over- the deficit country and to all those exporting to it. In fact,
year clip — the very definition of a bubble. Reserves of cur- the IMF was created in the Bretton Woods agreement to
rencies plus gold, a less telling measure as the IMF still val- address the inevitable “balance of payments crises” associ-
ues its gold reserves at $35 per ounce (a tactic appropriate ated with growing economies importing too much.
for working inventory in a last-in/first-out accounting envi- Theoretically, floating exchange rates would address pay-
ronment but puzzling in this context), grew more than 35 ment imbalances by depreciating deficit countries’ curren-
percent. The decade following this burst of reserves was cies on the global market, thus reducing their purchasing
unarguably one of inflation and high interest rates. power. If, for example, the U.S. ran a trade deficit, it would
be pumping out additional dollars to exporters. Each new
The 70s New World Order dollar on the world market would have a smaller claim on
The premise behind allowing currencies to float was that it exporters’ resources and reduce the U.S.’s ability to import
would lead to self-correcting trade balances. In a fixed-rate more. Also, U.S. exports would become cheaper on global
regime such as Bretton Woods, countries in a deficit posi- markets and expand American exports.
tion (such as the U.S. in the late 60s) see an outflow of gold continued on p. 20

ADVANCED CONCEPTS continued
FIGURE 2 — TRADE WEIGHTS Second, many goods in international trade, including

crude oil and industrial metals, are priced in U.S. dollars
The weights of the Fed's trade-weighted dollar index change
annually, while the DXY has had a stable weighting scheme by all parties. These goods have exhibited little currency
since 1973 (the only change being the combination of the sensitivity over time. Third, other international trade
various components of the Euro into a single weight). goods, such as high-technology gear, military equipment,
and food tend to be fairly price-inelastic.
Floating exchange rates were ineffective at adjusting
trade imbalances because actual physical trade was no
longer necessary for currency trading to occur. Prior to the
early 70s, currency trading was a facilitation business con-
ducted by banks to clear bills of lading, or shipping
receipts, bankers’ acceptances, letters of credit and other
payment mechanisms for international trade. Once cur-
rencies began to float, traders discovered quickly they
were simply an interest-rate arbitrage between two coun-
tries. The principal trade — covered-interest arbitrage —
In the floating-rate system, the result

of a weaker currency was supposed
to be a move away from a deficit
condition, while the opposite was
supposed to occur with a stronger
currency. In practice, nothing of the
sort happened.
involves the following steps, using the Canadian dollar
(CAD) as an example against the U.S. dollar (USD):
Borrow USD
Sell USD and buy CAD at prevailing spot rate
Lend CAD
Unwind the trade in the forward market
As long as the interest-rate differentials between the

USD and the CAD permit, a trader can execute the trade
Source: Federal Reserve and NYBOT profitably until either U.S. rates rise, Canadian rates fall, or
the spot rate for selling the USD and buying the CAD falls.
The end result of a weaker currency was supposed to be This trade involves three unknown variables — the two
a move away from a deficit condition. The opposite was interest rates and the spot exchange rate — but has only one
supposed to occur with a stronger currency. equation and therefore lacks a single and exact solution.
In practice, nothing of the sort happened. First, the notion Because interest rates in both countries swing around for
that governments would allow currencies to float freely was reasons totally unrelated to trade balances, the exchange
politically naïve in the extreme. The U.S. engaged in poli- rate can reach any level, irrespective of trade, as long as the
cies designed to drive the dollar lower between 1985 and interest-rate differentials make the trade profitable. It is no
1988 and again from 2002 to 2005. Other countries, particu- wonder why each of the world’s major currencies have
larly the mercantilist exporters of East Asia such as Japan, endured at least one episode of violent movement over the
Taiwan, Korea, and China, have done much the same. past three decades.

FIGURE 3 — THIRTY YEARS OF A FLOATING DOLLAR
The dollar and trade The Fed's dollar index and the DXY have had a surprisingly close correlation (95.267
Let’s take a look at two dollar percent) since January 1973. The DXY rose faster than the Fed index during the two
bullish trends for the dollar, 1981-1985 and 1995-2002 — a result of traders selling the
indices: the Federal Reserve’s
more-liquid European currencies to buy the dollar.
trade-weighted dollar index
and the DXY. The weights of
the Fed dollar index change
annually after the end of the
year, which makes it useless
as a trading instrument. The
DXY has remained at a stable
weighting scheme since 1973;
the only change has been the
aggregation of the various
constituents of the Euro into a
single weight. The current
weights of both indices are
shown in Figure 2.
A long-term monthly com-
parison of these two indices
reveals a surprisingly close
correlation (95.267 percent)
since January 1973 (Figure 3).
The DXY rose faster than the
Fed index during the two
bullish trends for the dollar,
Source: Federal Reserve and NYBOT
1981-1985 and 1995-2002; this
reflects the impact of traders
selling the more liquid European currencies to buy the dol- ducing goods in the U.S.? Given the stability of the
lar. Given the impossibility of using the Fed index as a trad- Eurozone’s weight, we have to suspect factors other than
ing vehicle and the close relationship between a dynamic exchange rates are operating.
and a static index, we can feel quite confident the DXY is Has Mexico increased its importance in the U.S. import
representative of the dollar. mix by virtue of a near-continuous decline in the peso
Now with this picture of the dollar’s history in mind, let’s (MXN), or by virtue of its NAFTA status and its emergence
see whether the floating dollar had a material effect on the as a major petroleum exporter? Both the U.S. and Mexican
import and export weights of the Federal Reserve dollar governments have striven to put industrial production on
index. Figure 4 shows the major development on the import the Mexican side of the border — in maquiladora plants —
for reasons as diverse as immigration policies and environ-
mental regulations.
One of the best ways to keep The emergence of China in the U.S. import mix hardly
can be ascribed to its exchange rate. With only one minor
long-term interest rates low without move in the exchange rate between the yuan (CNY) and the
USD since 1994, and a burgeoning export industry, many in
igniting inflation is to keep currency the U.S. have contended the CNY is undervalued. Perhaps,
but with Chinese labor costs a fraction of those in the U.S.
and with virtually non-existent health, safety, and environ-
volatility low. This means moving mental costs in Chinese industry, it would be a stretch to say
there is any exchange rate that would bring Chinese costs to
toward firm exchange rates. U.S. levels.
The role of Mexico, China, Japan, and Canada in an
side has been the capture of Japanese market share by emerging USD bloc is part of the central thesis here — that
Mexico and China. Has this occurred because of the appre- these countries and several others will maintain a quasi-
ciation of the Japanese yen (JPY) over this period, or has it fixed or “firm” exchange rate to the USD. Others, such as
resulted from a combination of Japan’s increasingly high the UK, Switzerland, and the Nordic countries will form a
export prices, U.S. import barriers in industries such as firm relationship to the EUR.
autos, and a shift by Japanese firms from exporting to pro- continued on p. 22

FIGURE 4 — IMPORT/EXPORT WEIGHTS

The major development on the import side (top) has been the capture
derives from Fisher’s Law, which states nomi-
of Japanese market share by Mexico and China. The changes in nal interest rates (i.e., not adjusted for inflation)
export weights (bottom) have not been as dramatic. The weight for are real interest rates plus the expected rate of
Mexico has increased despite the long-term strengthening of the USD inflation. Yale economist Irving Fisher wrote in
against the MXN, and the weight for Japan has increased despite the the 20s and 30s — periods during which
long-term weakening of the USD against the JPY — both shifts being exchange rates were fixed — that he did not
contrary to what the floating exchange-rate system was intended to have to account for the effects of currency
accomplish. volatility. Nowadays, we have to take volatility
into account.
Fisher’s Law has profound implications for
currency traders. Let’s stipulate that for any
maturity worldwide there can be only one real
interest rate; if this were not the case, traders
could profit by borrowing in the lower real-
rate currency and lend in the higher real-rate
currency until the two became equal.
Therefore the difference in nominal interest
rates at any maturity between two currencies
has to be the difference between the two
expected rates of inflation.
Expected inflation is mostly, but not exclu-
sively, a monetary phenomenon. If central
banks lose control over the money supply, as
they most certainly did in the early 70s, infla-
tion will rise as more money chases goods and
services. A country whose money supply is
growing more rapidly than output will see its
expected inflation rise and by extension will
see its currency deteriorate on world markets,
all else held equal.
Figure 5 shows the long-term relationship
between the money supply and GDP growth
in the U.S. Periods in which money supply
growth greatly exceeded GDP growth, such as
the early 70s and the 2002-2003 period, corre-
spond to periods of dollar weakness.
Inflation and the yield curve

The spread between long-term and short-term
interest rates or liquidity premium needs to
Source: Federal Reserve compensate investors for the obvious risks of
lending money over a long period of time.
The changes in export weights have not been as dramat- Let’s use the spread between the 10-year T-
ic as those for imports. The weight for Mexico has increased note and the 90-day LIBOR as a proxy for the liquidity pre-
despite the long-term strengthening of the USD against the mium. How well has it matched inflationary expectations,
MXN, and the weight for Japan has increased despite the as measured by the spread between 10-year T-notes and 10-
long-term weakening of the USD against the JPY. Both shifts year inflation-protected Treasuries (TIPS)?
are the opposite of what floating exchange-rate advocates The history since the January 1997 advent of TIPS shows
told us to expect three decades ago. the relationship between expected inflation and the liquidi-
ty premium to be far looser than we might have imagined
Inflation, monetary policy, (Figure 6). For example, the explosive steepening of the yield
and currency management curve in 2001-2003 corresponded to a period of meandering
If the world is to move into a dollar-Euro, two-currency bloc, inflationary expectations and a stable dollar. Once it became
one of the subtle but very real benefits will be a lower spread apparent in April 2004 the Federal Reserve would have to
between long-term and short-term interest rates. This reverse its ultra-low interest-rate policy, the liquidity premi-

um narrowed precipitous- FIGURE 5 — MONEY/SUPPLY ECONOMICS GROWTH RELATIONSHIP
ly, but inflationary expec- Periods when money supply growth greatly exceeded GDP growth, (e.g., the early 70s and
tations did not fall apace. 2002-2003) correspond to periods of dollar weakness.
One explanation for
these periods of diver-
gence is relative economic
growth at the time. In-
flationary expectations in
2001-2002 fell partly be-
cause of slack capacity.
They failed to decline in
2004-2005 in large part
because this very same
global slack capacity began
to be absorbed by the
breakneck economic
growth of China and India.
Currency volatility
Declining currency vola-
tility helps explain the flat
liquidity premium ob-
served in 2004-2005. Just
as all investors need to be
compensated for higher
Source: Bloomberg
expected inflation, foreign
investors in U.S. securities
need to be compensated FIGURE 6 — EXPECTED INFLATION ONLY PART OF THE PUZZLE
for the currency risk they
Since the January 1997 advent of 10-year inflation-protected Treasuries (TIPS), the
are assuming. The greater
relationship between expected inflation and the liquidity premium has been far looser than
the volatility of the dollar,
might be expected.
the greater the probability
it will decline over the life
of the bond and the more
compensation will be
required.
Japan has acted in the
role of investor of last resort
in the U.S. securities market
by virtue of its massive and
perennial trade surplus
with the U.S. as well as its
willingness to sell yen and
buy dollars to prevent the
yen from strengthening
against other currencies in
the dollar bloc, including
China, South Korea, and
Taiwan. While these mas-
sive purchases have been
given credit for keeping
U.S. long rates lower and
the dollar firmer than they
would have been other- Source: Bloomberg
continued on p. 24

FIGURE 7 — U.S. SECURITIES PURCHASED BY JAPAN AND 10-YEAR YIELDS

While Japan's willingness to sell yen and buy dollars to prevent the yen from wise, we can see the trend of declining
strengthening against other currencies has been credited with keeping U.S. U.S. long-term rates was in place well
long-term interest rates lower and the dollar firmer than they would have been before the Bank of Japan went on its buy-
otherwise, the trend of declining U.S. long-term rates was in place well before ing spree (Figure 7).
the Bank of Japan implemented this policy.
If the Bank of Japan’s manic purchas-
es of U.S. Treasuries and other securi-
ties cannot account for the decline in
the liquidity premium, what can? The
answer appears to be declining curren-
cy volatility. If we map the liquidity
premium against the volatility of three-
month non-deliverable forwards on the
yen over this period, we see a conver-
gent decline marred only by the dol-
lar’s abrupt sell-off against the Euro in
the fourth quarter of 2004 (Figure 8).
The message is clear and has been
received by the central banks: One of the
best ways to keep long-term interest
rates low without igniting inflation is to
keep currency volatility low. This means
moving toward firm exchange rates.
The two blocs

If the world is in fact moving toward
Source: U.S. Treasury and Bloomberg
two currency blocs, we
should see a pattern of cor-
FIGURE 8 — DECLINING CURRENCY VOLATILITY relations moving toward
Declining currency volatility explains the decline in the liquidity premium. Mapping the 1.00 or -1.00 against the
liquidity premium vs. yen volatility shows a convergent decline interrupted only by the dollar's DXY over time. This does,
abrupt sell-off against the Euro in the Q4 2004. in fact, appear to be occur-
ring (Figure 9). If we take a
set of currencies in the
emerging U.S. dollar bloc,
such as the Japanese yen,
Canadian dollar, Mexican
peso, Taiwan dollar (TWD),
and Korean won (KRW),
we see some rather decisive
movements toward corre-
lations of -1.00 in the years
since the Euro was intro-
duced. Only the MXN has
diverged from this trend in
2005; the Mexican economy
has had problems handling
the surge of capital from
higher oil prices.
The picture of an emerg-
ing currency bloc is even
more compelling for the
Euro. Given the Euro’s sig-
nificant 57.6-percent weight
in the DXY, we should
Source: Bloomberg
expect it to be strongly neg-

atively correlated against the DXY over
the rolling 90-day windows, and it does FIGURE 9 — 90-DAY ROLLING CORRELATION AGAINST DOLLAR INDEX
not disappoint in this regard (Figure
In the years since the Euro was introduced, there has been movement toward
10). It diverged significantly only in the correlations of -1.00 in DXY component currencies such as the Japanese yen,
months leading up to the introduction Canadian dollar, Taiwan dollar (TWD) and Korean won (KRW). Only the MXN
of cash Euros, a period in which a num- has diverged from this trend in 2005.
ber of European citizens were thought
to be selling their legacy cash (lira,
French francs, deutschemarks, etc.) for
dollars to avoid taxes on these holdings.
The more interesting aspect of Figure
10 is the steady convergence of the
British pound (GBP) and the Swedish
krona (SEK) to the Euro. These coun-
tries have rejected all entreaties to join
the common currency, but their daily
movements against the DXY suggest
they are nonetheless caught in the
Euro’s gravitational field. Restated, the
British have a Euro proxy without a
seat on the European Central Bank.
All things must pass

One of the lessons of the floating
exchange regime was that constant
currency volatility raised the cost of
doing business internationally. Source: Bloomberg
Hedging is expensive when done cor-
rectly and is even more expensive FIGURE 10 — 90-DAY ROLLING CORRELATION AGAINST DOLLAR INDEX
when done incorrectly. Worse, the
chief selling point for floating The notion of an emerging currency bloc is even more compelling for the Euro.
exchange rates — self-correcting trade The steady convergence of the British pound (GBP) and the Swedish krona
balances — never came to pass. (SEK) to the Euro — despite their countries having rejected all entreaties to join
the common currency — suggest they are nonetheless caught in the Euro's
The world has been taking large
gravitational field.
steps to move away from free-floating
currencies. The Euro is nothing more
than a repudiation of the constant cur-
rency volatility of the 80s and early 90s.
Japan has moved to peg the yen to the
dollar and in doing so has succeeded in
keeping U.S. capital rates low even
though the Federal Reserve has raised
short-term interest rates. These are eco-
nomic benefits of the first order.
The result has been a world looking
ever more like the DXY: The dollar plus
the CAD and JPY on one side, and the
Euro and its proxies on the other. This
suggests the single trading instrument of
the DXY will grow to be the most useful
single measure of the currency exchange
volatility between the dollar and Euro in
our new firm exchange-rate world.
Source: Bloomberg
For information on the author see p. 6.

CURRENCY TRADER INTERVIEW
CLARKSON JONES:
Art, science, and forex
drawdown has been -21.86 percent), which was his first

down year since launching his program in Nov. 2001. Jones’
program posted annual returns of 78.23 percent and 164.15
percent in 2002 and 2003, respectively, and his fund’s total
return since its inception in Nov. 2001 is 633.43 percent (a
compound annual return of 64.56 percent).
Before trading full time, Jones, who turns 40 this month,
was a civil engineer and owner of a company (from January
1991 to January 2002) that sold construction-related prod-
ucts and services. He first entered the markets in 1994, trad-
ing stocks and some treasuries. He then branched into com-
modity futures, which he found “somewhat challenging.”
However, his research in this area led directly to his discov-
ery that “currencies leant themselves [more readily] to my
methods — maybe because they are so liquid,” he says.
“Other markets became less appealing once I discovered
currencies.”
Jones is relatively tight-lipped about many of the
specifics of his trading approach, but he has a diversified
trading methodology that blends multiple trading systems
triggered by both trend and countertrend signals on differ-
C larkson Jones is president of Charlotte, N.C.-

based Monarch Capital Management, a
forex money-management firm that trades
roughly $5 million in assets.
After gaining nearly 8 percent in both September and
October, Jones’ FX Multi-Strategy trading program was up
38.52 percent in 2005 (Table 1). So far, the year has been a
ent time frames in five different currency pairs.
He stresses that he blends discretionary judgment with
systematic trade execution. Jones studied music as well as
mathematics and physics in college, and he says these
seemingly disparate fields contribute to the way he
approaches the market.
“I had two different majors — engineering and fine arts,”
nice rebound from a 13.69-percent loss in 2004 (his largest he says. “One is left brain and one is right brain. I think

TABLE 1 —
MONARCH CAPITAL
that’s actually helped me to be more creative and a little CJ: Going through all the MANAGEMENT 2005
more, I guess, artistic with my approach to the market. hard knocks it takes to MONTHLY RETURNS
“I studied music and learned about pattern recognition become a trader, I started to Through October, Jones’
when learning how to read music,” he continues. “I also learn about the discipline FX Multi-Strategy pro-
studied physics and mathematics and excelled in those and psychology of trading, gram had six profitable
areas — it came very naturally to me — and I became a civil and I decided I wanted to months out of 10.
engineer. I started my own company and made quite a bit learn about system develop- Impressive back-to-back
gains in September and
money and started investing it for myself. I learned how to ment.
October helped push the
trade, and basically have evolved to where I am today.” I already had a pretty fund’s year-to-date return
extensive computer back- above 38 percent.
CT: Can you talk a little more about the connection you see ground and I started build-
between music and trading? ing systems for futures. I felt Month % Return
CJ: Music is full of symmetry, art is full of symmetry, I needed cash data to design Jan. -5.65%
nature is full of symmetry. Reading the natural world is the systems because there Feb. +7.06%
really what pattern recognition is all about. I studied jazz — were problems building sys- March -0.74%
I majored in the trumpet — and had been learning improv- tems using futures data, April +5.98%
isational playing since I was a kid. We’d play and study where the data had to be May -0.22%
chord structures that had “resolutional” feelings attached to seamed at the end of every June +4.36%
them as they climbed, climaxed, and descended. Market month (to construct a continu- July +8.77%
patterns are basically the same, but you need a method that ous price series out of individ- Aug. -1.17%
allows you to analyze them, manage the risk, and then ual contract months). You Sept. +7.95%
extract a profit from them. can’t build systems unless Oct. + 7.88%
you have clean data. I don’t YTD 38.52%
care who’s generating the
I found out that using just one system data; if it has to be seamed in
Sources:
Barclay Group and Monarch
a specific fashion, that will Capital Management
would work fine for a while, but lend itself to problems later
in system construction.
inevitably the market would fall out I was somewhat homegrown as far as doing this. I’m sure
there are people who know how to get around that [prob-
lem], but I didn’t, so I set futures aside for a while and start-
of sync with that system. ed doing a lot of research with cash markets.
I found the models I was developing really lent them-
I look for symmetry in several areas to determine the selves well to currencies, so I naturally gravitated toward
[musical] “key,” if you will, the market is currently playing. them because there was lots of liquidity and plenty of cash
It’s like there’s a current world view being established by data available. I started to do all my research in modeling
the patterns, and as a manager, I am taking opportunity currencies.
flow from those patterns. Once I have the current market
“key,” I apply the notes — the trades — and hopefully make CT: Did the data situation push you toward forex, or were
some music. there other things that attracted you to it?
I have to be flexible in my approach because although CJ: The availability of the data, but also the liquidity. I want-
patterns repeat, the outcomes are random. Art is flexible, ed to trade 24-hour markets because I thought it would give
music is flexible, nature is flexible. Everything is moving, me more opportunity for profit. I wanted something that had
flowing, ebbing, and running, and I am following that flow. some sort of pattern-recognition feature, and the currencies
are so huge and the liquidity is so deep, it just seemed like
CT: But you use a systematic approach to trade. How did there was less interference with some of the patterns.
you develop that part of your trading? continued on p. 28

CURRENCY TRADER INTERVIEW continued
CT: In terms of the hard knocks you took, what lessons did being left brain and one being right brain. I would have a
you try to address in developing your systems? systematic method that I could control [discreetly]. In other
CJ: I learned a lot about the psychological aspects of trad- words, I’d use the flexible left-brain energy to read the mar-
ing. Trying to trade from a discretionary base lends itself to ket from a macroeconomic perspective and look at how a
a lot of emotional decision making. You can have a good system is performing, and I would use the systems in a very
run for a while, but eventually, if you’re making decisions rigid, mechanical way to execute the trades themselves.
from an emotional place, you can get yourself in trouble. That’s what the FX multi-strategy has become — a hybrid
And I found that for me, day trading was not the way to strategy that is fully systematic, with my discretion applied
go. Making decisions from a long-term perspective was over the systems.
FIGURE 1 — MONARCH CAPITAL VALUE ADDED CT: How, then, does discretion come into play?
MANAGEMENT INDEX (VAMI) LINE CJ: I have six different programs that I run across
five different markets. I try to keep these engines
Monarch Capital Management’s performance is shown here (in
terms of an initial $1,000 investment) to the S&P 500 (blue line) and running so they fit the markets in the proper per-
the Barclay CTA Index (green line). The fund was launched in Nov. spective, relative to the currencies I’m trading.
2001. The systems running together create a portfolio
matrix with its own characteristics. I think this is
the neatest aspect of the program. Understanding
the individual pieces and the relationship to the
whole makes this method more of an art. It’s like a
painter who understands the relationships of
color, value, shape, and textures. Everything
comes together to make a fine [piece of] art.
In one currency I might trade one strategy for a
period of six weeks. On another currency I might
trade another strategy for a period of three weeks.
As the market evolves and the liquidity shifts
between currencies, I’m able to detect change in
that liquidity flow, from my macro-fundamental
approach to the market — which is all behavioral
finance by the way, and one of the elements I use.
The other element is pattern recognition — not
Source: The Barclay Group (www.barclaygrp.com)
necessarily pattern recognition of the market itself,
but pattern recognition of the systems I’m trading.
fine. I could be something of a long-term, macro trader — In other words, how a system is trading with a particular
using a buy-and-hold view. market.
Taking risk wasn’t a problem — I could always take risk,
and effectively manage it. The problem was day trading CT: Are you talking about managing a system’s equity
didn’t fit me, so I started developing models that would curve, to a certain extent — adjusting your trading depend-
handle the execution for me. Creating ideas and putting ing on whether a system is going through a relatively good
them together in a mathematical algorithm that would or bad phase?
express itself in the market was a fun challenge. CJ: Exactly. Basically I’m looking at the equity curves,
But I found out that using just one system would work excursion analysis, and a couple of other things that are
fine for a while, but inevitably the market would fall out of proprietary, but I’m looking at the behavior of how the sys-
sync with that system. That was frustrating. On the one tem is trading in a particular market to give me an indica-
hand, discretionary trading was problematic emotionally. tion of what’s next.
On the other hand, although I had learned that systematic
trading was fine if you could construct it in a way that CT: So you’re looking for signs that particular system may
always fit the market, it didn’t always fit the market. be getting out of sync with a market?
I ended up falling right in the middle — one approach CJ: Yes. And if you were just trading two markets you

might not have enough information to go on. I’m trading cution is better in futures. As an experienced trader, I’ll say
five markets that are all interrelated. futures aren’t liquid enough in the Globex session, which is
when we are trading, for what we’re doing. Futures used to
CT: Which ones do you trade? be much more tight than the spot market, but in the last few
CJ: I trade the four major pairs and the Euro-yen. I basi- years the depth and tightness of the spot market has made
cally have five confirmations of how a system is perform- it much more competitive that I think the futures are less
ing. attractive for what we do.
I have the systems trading live and trading a “dummy” For other people it may be different. If they want to be in
in the background on all the markets to give me the indica- the regulated exchanges for certain risk-related reasons,
tions as to how to set the rotation [among the systems]. that’s fine, but I think the spot market is far better for trading,
The systems themselves represent different ideas trading and I think most banks and fund managers would agree.
on different time frames. What’s unique is how I mix the
systems in a portfolio context. CT: Do you think that’s true for smaller traders, also?
CJ: On the retail level it may be a toss-up. When the
CT: What’s the range of holding periods? spreads get wide in the spot forex market, it might make
CJ: I’m out the losers pretty quick — usually in one day. sense for a small trader to use futures.
Winners will last as long as a week sometimes. The average
trade frequency is 2.8 days. CT: As far as market characteristics go, do you think trad-
ing currencies is any different than trading anything else?
CT: How many trades will you have on at a given time? CJ: I think a tradable market is a tradable market, as long
CJ: I’ll have five trades on all the time. I typically use four- as it’s liquid. I think our strategy in a couple years might
to-one leverage — five-to-one, max. lend itself to other markets. I don’t know for sure, yet — I’ll
have to see. I have my hands full right now trading curren-
CT: You’re never out of the market? cies.
CJ: We’re always in, long or short, in all five pairs. I might always be in currencies — that’s what I specialize
in. For now, I plan on remaining a specialist.
CT: What are your most important trading principles?
CJ: Years ago I talked to a lot of professionals — a lot of CT: If 2005 turns out to be a down year for currency man-
fund managers. I wanted to see what they were doing, agers, it will be the first since 1994. Why do you think it’s
because at the time I didn’t know if I was going to let them been so challenging?
manage my wealth or do it myself. CJ: I can’t speak for other traders, but it appears that most
The story I got back then, and the one I got a couple of of the [currency managers] are trend followers. The curren-
years ago, is that the most important thing is what you can cies have had some good trends, but those trends have
say you have right now in terms of profits. They look at occurred inside a very wide volatility envelope. They
consistency and monthly profits. In other words, just stay haven’t been able to capture those trends in their normal
profitable every month. So for me, I would say that’s modeling.
become the most important thing, along with keeping Rather than pursuing a trend, I’m pursuing liquidity.
drawdowns manageable. That’s my main objective — to pursue money flows, not
In June 2004 I de-leveraged the program by half to cut the necessarily to use the trends as an indication of that. I do
drawdowns to a manageable level. That’s the only major use some volume in my studies.
change I’ve made. I look for consistent profits every month This year [many currency managers] are out of sync. There
because that’s where I think investors are going to be. They are some quality traders out there, for whom I have a lot of
want “alpha,” but they also want to know they’re not losing admiration, that are having losing years. For them, I think it’s
money. Since we retooled in June 2004 my biggest draw- reversion to the mean for their programs. And I have a deep
down has been 5.75 percent. respect for reversion to the mean because I had some of that
myself in my program last year — and I didn’t like it.
CT: Do you ever use currency futures? I wanted to pull the volatility out and keep the focus on
CJ: No. We look at some data in the futures, but we trade staying profitable now — that’s what counts. [I’m only con-
spot only. A lot of people have an issue about whether a cerned with] making alpha this month. My next challenge is
trading program is better suited to futures and whether exe- to set and maintain a target volatility for the program.

TRADING STRATEGIES
Trading around the clock,

part II
In the second of two articles adapted from her new book, Day Trading the Currency Market,
Kathy Lien analyzes the characteristics of the U.S. trading session, as well as the European-U.S. and
Asian-European overlap sessions.
BY KATHY LIEN
Liquidity, geographical location, and macroeconomic fac- U.S. session (New York): 8 a.m. to 5 p.m. ET
tors impact a currency pair’s trading range. Knowing what New York is the second-largest forex marketplace, encom-
time of day a currency pair is the most or least volatile will passing 19 percent of total forex market volume turnover,
help you improve your capital allocation. “Trading around according to the 2004 Triennial Central Bank Survey of
the clock, part I” (Currency Trader, November 2005) ana- Foreign Exchange and Derivatives Market Activity pub-
lyzed the characteristics of the Asian and European trading lished by the Bank for International Settlements (BIS).
sessions. The following analysis outlines the typical trading It is also the financial center that guards the “back door”
activity of major currency pairs in the U.S. forex session. of the world’s forex market, as trading activity usually
Table 1 shows the average pip range for the different cur- winds down to a minimum from the U.S. afternoon trading
rency pairs during various time frames between 2002 and period until the opening of the Tokyo market the next day.
2004. All sessions are described in terms of U.S. Eastern The majority of transactions during the U.S. session are exe-
Standard Time (ET). cuted between 8 a.m. and noon, a period with relatively
TABLE 1 — CURRENCY PAIR RANGES

The numbers in each column represent the average pip range for each currency pair. Forex volatility is highest during the
European trading session, followed by the U.S. session. The two sessions overlap during the busy four-hour period from 8
a.m. to noon ET.
Asian session European session U.S. session U.S./Europe overlap Europe/Asia overlap
7 p.m.-4 a.m. 2 a.m.-noon 8 a.m.-5 p.m. 8 a.m.-noon 2-4 a.m.
EUR/USD 51 87 78 65 32
USD/JPY 78 79 69 58 29
GBP/USD 65 112 94 78 43
USD/CHF 68 117 107 88 43
EUR/CHF 53 53 49 40 24
AUD/USD 38 53 47 39 20
USD/CAD 47 94 84 74 28
NZD/USD 42 52 46 38 20
EUR/GBP 25 40 34 27 16
GBP/JPY 112 145 119 99 60
GBP/CHF 96 150 129 105 62
AUD/JPY 55 63 56 47 26
All times ET
Source: Day Trading the Currency Market by Kathy Lien. Courtesy of John Wiley & Sons.

FIGURE 1 — U.S. SESSION VOLATILITY
The British pound/U.S. dollar, U.S. dollar/Swiss franc, British pound/Japanese
yen, and British pound/Swiss franc pairs offer the most volatility during the U.S.
forex session.
higher liquidity because European

traders are still in the market.
For more risk-tolerant traders,
British pound/U.S. dollar
(GBP/USD), U.S. dollar/Swiss franc
(USD/CHF), British pound/Japanese
yen (GBP/JPY), and British
pound/Swiss franc (GBP/CHF) are
good choices for day traders because
their daily ranges average about 120
pips (Figure 1). Trading activities in
these currency pairs are particularly
active because these transactions FIGURE 2 — U.S.–EUROPEAN OVERLAP
directly involve the U.S. dollar.
Seventy percent of European session trading range and 80 percent of U.S.
session trading range occurs in this four-hour overlap.
Currency “translations”
When the U.S. equity and bond mar-
kets are open during the U.S. session,
foreign investors have to convert their
domestic currencies, such as Japanese
yen, Euros, and Swiss francs, into dol-
lar-dominated assets in order to carry
out their transactions. With the market
overlap, GBP/JPY and GBP/CHF
have the widest daily ranges. Most
currencies in the forex market are
quoted with the U.S. dollar as the base
and primarily traded against it before
translating into other currencies.
In the case of the GBP/JPY, for a
British pound to be converted into
Japanese yen, it has to be traded
against the dollar first, then into yen.
The U.S. trading session guards the Therefore, a GBP/JPY trade involves two different currency
transactions — GBP/USD and USD/JPY — and its volatili-
“back door” of the world’s forex market, ty is ultimately determined by the correlations of the two
derived currency pairs. Because GBP/USD and USD/JPY
as trading activity usually winds down have negative correlations (which means they move in
opposite directions), the volatility of GBP/JPY is amplified.
to a minimum from the U.S. afternoon Movement in USD/CHF can be explained similarly, but it
has a greater intensity.
trading period until the opening of the Trading currency pairs with high volatility can be lucra-
tive, but it is important to bear in mind the risk is very high
Tokyo market the next day. as well. Traders should continuously revise their strategies
continued on p. 32

TRADING STRATEGIES continued
FIGURE 3 — EUROPEAN–ASIAN OVERLAP

Because of its short duration and early hours, trade activity is lowest during the
in response to market conditions, European-Asian overlap period.
because abrupt moves in exchange
rates can easily stop out their orders
or nullify long-term strategies.
For more risk-averse traders, U.S.
dollar/Japanese yen (USD/JPY),
Euro/U.S. dollar (EUR/USD), and U.S.
dollar/Canadian dollar (USD/CAD)
appear to be good choices, because
these pairs combine decent trading
ranges with lower risk. They are high-
ly liquid, which allows an investor to
secure profits or cut losses promptly
and efficiently. The modest volatility of
these pairs also provides a favorable
environment for traders who want to
pursue long-term strategies.
European–U.S. overlap:
8 a.m.–12 p.m. ET
The forex market tends to be most
active when the hours of the world’s
two largest trading centers — Europe Related reading:
and the U.S. — overlap (Figure 2). The
period between 8 a.m. and noon ET Day Trading the Currency Market, by Kathy Lien
contains 70 percent of the total aver- John Wiley & Sons, 2005
age range of trading for all currency
pairs during the European trading Other articles by Kathy Lien:
hours and 80 percent of the total aver- “Trading around the clock, Part I”
age range of trading for all currency Currency Trader, November 2005
pairs during U.S. trading hours. A look at how different currencies behave in the Asian and European trading
These percentages are indication sessions.
enough that day traders who are look-
ing for volatile price action and cannot “Dollar-yen: The year’s hottest carry trade”
watch the screen all day should trade Currency Trader, August 2005
the European-U.S. overlap period. How the U.S. interest rate hike cycle offered the opportunity to go long the
dollar and short the yen.
Asian–European overlap:
2–4 a.m. ET “Volatility-based currency trading”
The trade intensity in the Currency Trader, February 2005
Asian–European overlap period is far How to use inside bars and volatility comparisons to spot trade opportunities.
lower than in any other session
because of the slow trading during the “Getting a lift from the carry trade”
Asian morning. Of course, the time Currency Trader, October 2004
period surveyed is relatively smaller, Explains the mechanics of the carry trade.
as well (Figure 3).
With trading extremely thin during “Forex Trading: Understanding the currency market”
these hours, risk-tolerant traders can Active Trader, July 2004
take a two-hour nap and risk-averse A review of how the foreign currency market works and the economic factors
traders can spend the time positioning that drive it.
themselves for a breakout move at the
European or U.S. open. You can purchase and download past articles at
www.activetradermag.com/purchase_articles.htm.
For information on the author see p. 6.

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CURRENCY SYSTEM ANALYSIS
Trend/countertrend system
FIGURE 1 — EXAMPLE TRADE
Note: Wealth-Lab's Dion Kurczek and Volker The system caught an uptrend in the British pound (beginning on Sept. 25,
Knapp will be hosting Wealth-Lab demonstra- 1997), and its countertrend rules also identified a profitable short-term reversal
tions at the Online Trading Expo in Las Vegas on Oct. 29.
on Dec. 14 and 15. Go to www.tradersexpo.com
for more information.
Market: Currencies.
System concept: This trading system

combines trend-following and coun-
tertrend rules and attempts to profit from
both long-term trends and short-term
reversals. Trend-following traders typical-
ly wait until a trend has been established
to enter the market, while countertrend
traders have a shorter-term outlook and
take advantage of brief reversals.
In an attempt to merge both methods,
the system uses a channel breakout rule to
detect long-term trends and then stays in
the market (up to several months) until
Source for all figures: Wealth-Lab Inc. (www.wealth-lab.com)
the trend changes. Also, the system’s
countertrend rules identify short-term
reactions to extreme moves. FIGURE 2 — EQUITY CURVE
Figure 1 shows an example in the British
The system performed well until early 2002 when it became volatile and
pound futures in which both parts of the sys- suffered sharp equity declines.
tem produce profitable trades. Its trend-fol-
lowing rules went long on Sept. 25, 1997
because price broke above the highest high of
the past 20 days. The system exited on Dec. 4,
when price dropped below the lowest low of
the last 20 days — a profit of $2,723 per con-
tract.
While the trend-following rules main-
tained the long position, the pound rallied
strongly on Oct. 29. Here, the countertrend
rules sold short and exited at that day’s close,
which added another $855 per contract.
Rules:
Trend-following:
1. Go long with a buy stop at the highest
high of the past 20 days.
2. Exit long and go short at stop at the lowest low of the at limit at the open plus 20 percent of the 10-day ATR.
past 20 days. Exit at the close.
3. Exit at stop loss at three times the average true range 2. If the open is below the previous day’s low, go long at
(ATR) of the past 10 days. limit at the open minus 20 percent of the 10-day ATR.
Exit at the close.
Countertrend rules:
1. If the open is above the previous day’s high, sell short Test data: The system was tested on the following currency

FIGURE 3 — DRAWDOWN CURVE
The system suffered an extended period of drawdowns from 1993 to 1997.
Its maximum drawdown (41.79 percent) occurred in 2003, and it has yet to
completely recover.
futures: British pound (BP), Euro (FX),

Japanese yen (JN), and Swiss franc (SF).
This test used ratio-adjusted data from
Pinnacle Data Corp.
(www.pinnacledata.com).
Test period: January 1990 to January

2005.
STRATEGY SUMMARY
Starting equity: Starting equity is
Long + Short Long Only Short Only
$1,000,000. Deduct $20 commission per
Starting capital ($) 1,000,000 1,000,000 1,000,000
round-trip trade per contract. Apply two ticks
Ending capital ($) 4,403,697 4,233,788 1,169,908
of slippage per stop order.
Net profit ($) 3,403,697 3,233,788 169,908
Net profit (%) 340.37 323.38 16.99
Money management: Risk a maximum of
Annualized gain (%) 10.38 10.09 1.05
three percent of current account equity per
Exposure 6.76% 4.37% 5.42%
trade.
Number of trades 400 187 213

Test results: Figure 2’s equity curve shows
Avg profit/loss ($) 8,509.24 17,292.99 797.69
steady gains until the beginning of 2002 when
Avg profit/loss (%) 0.29 0.55 0.06
it became more volatile and sharper equity
Avg bars held 31.26 33.01 29.73
declines appeared. Figure 3’s drawdown
curve confirms this pattern — the largest
Winning trades 154 71 83
drawdowns occurred near the end of the test
Winning % 38.50 37.97 38.97
period. Also, the system was flat for a long
continued on p. 37
Gross profit ($) 15,051,067.99 8,880,208.81 6,170,859.18
Avg profit ($) 97,734.21 125,073.36 74,347.70
Avg profit (%) 3.92 4.84 3.14
Avg bars held 52.09 56.58 48.25
LEGEND: Starting capital — Equity at the beginning of the sim-
ulation period • Ending capital — Equity at the end of the simu-
Max consecutive 4 7 8
lation period • Net profit — Profit at end of test period, less com-
mission • Net profit % — Profit at end of test period in percent of Losing trades 246 116 130
starting equity • Annualized gain % —Compounded annual
growth rate • Exposure — The area of the equity curve exposed to
Losing % 61.50 62.03 61.03
long or short positions, as opposed to cash • Number of trades — Gross loss ($) -11,647,370.92 -5,646,420.05 -6,000,950.87
The total number of round-trip trades plus open positions • Avg Avg loss ($) -47,347.04 -48,676.03 -46,161.16
profit/loss — The average profit/loss per trade in dollars • Avg
profit/loss % —The average percentage profit/loss per trade
Avg loss (%) -1.99 -2.08 -1.90
• Avg bars held — The average number of bars held per trade Avg bars held 18.22 18.58 17.91
• Winning trades — The total number of winning trades • Max consecutive 10 9 9
Winning % — The percentage of winning trades • Gross profit
— The total profit generated by the winning trades, minus com-
missions and slippage • Avg profit — The average profit per win- Max drawdown ($) -2,277,039.75 -1,511,766.13 -2,522,876.50
ning trade • Avg profit % — The average percentage profit per Max drawdown (%) -41.79 -60.86 -68.32
winning trade • Avg bars held — The average number of bars
held per winning trade • Max consecutive — The maximum
Max drawdown date 3/31/2003 4/8/2002 10/12/2004
number of consecutive winners • Losing trades — The total num- Sharpe ratio 0.53 0.46 0.17
ber of losing trades • Losing % — The percentage of losing trades
• Gross loss — The total loss generated by the losing trades,
minus commissions and slippage • Avg loss — The average loss Currency System Analysis strategies are tested on a portfolio basis (unless otherwise noted) using
per losing trade • Avg loss % — The average percentage loss per Wealth-Lab Inc.’s testing platform. If you have a system you’d like to see tested, please send the
losing trade • Avg bars held — The average number of bars held trading and money-management rules to editorial@currencytradermag.com.
per losing trade • Max consecutive — The maximum number of Disclaimer: Currency System Analysis is intended for educational purposes only to provide a
consecutive losers • Max drawdown — Largest decline in equity perspective on different market concepts. It is not meant to recommend or promote any trading
in dollars • Max drawdown % — Largest percentage decline in system or approach. Traders are advised to do their own research and testing to determine the
equity • Max drawdown date — Date on which the max draw-
validity of a trading idea. Past performance does not guarantee future results; historical testing
down was realized • Sharpe ratio — Annualized average return
may not reflect a system’s behavior in real-time trading.
divided by the annualized standard deviation of returns.

CURRENCY FUTURES
Slow going
Eurex U.S. currency totals lag
FIGURE 1 — EUREX U.S. NOVEMBER DAILY
C
urrency futures trading at Eurex U.S. continues to CURRENCY FUTURES VOLUME
crawl along, as average daily volume for Through Nov. 22, only five days had volume of 1,000 or
November through Nov. 22 was just short of 730 more contracts.
contracts (see Table 1). That’s a drop of almost 12 percent
from October, although November is traditionally a bad
month for volume because Veteran’s Day and the week of
Thanksgiving are historically slow.
Despite the numbers, Eurex CEO Rudolf Ferscha remains
optimistic.
“We had a decent start and we are seeing a positive
trend,” Ferscha says. “We need to broaden our distribution
and our participation, and we need to deepen our liquidity.
We have doubled the number of participating firms since
we launched (in late September), but we still have work to
do.”
Average daily volume for all currency futures at the
Chicago Mercantile Exchange for November was just less
than 300,000 contracts.
Source: Eurex U.S.
CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s
as of 11/28/05 liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.
Contract Pit Elec Exch Vol OI 10-day % 20-day % 60-day % Volatility

sym sym move rank move rank move rank ratio/% rank
Eurocurrency EC 6E CME 141.4 156.2 1.51% 100% -1.72% 41% -4.94% 57% .26 / 10%
Japanese yen JY 6J CME 46.2 180.4 -0.52% 0% -2.81% 49% -7.33% 97% .09 / 0%
British pound BP 6B CME 48.3 78.8 -0.46% 6% -2.27% 49% -5.50% 74% .25 / 7%
Swiss franc SF 6S CME 38.2 82.9 0.80% 75% -1.96% 43% -5.25% 61% .22 / 7%
Canadian dollar CD 6C CME 34.8 103.1 1.93% 100% 0.87% 33% 1.44% 9% .57 / 100%
Australian dollar AD 6A CME 19.5 67.5 1.87% 100% -0.74% 24% -2.64% 64% .35 / 32%
Mexican peso MP 6M CME 11.3 81.6 1.40% 65% 3% 89% 1.70% 22% .32 / 22%
U.S. dollar index DX NYBOT 4.3 33.6 -1.24% 100% 1.08% 19% 5.39% 70% .26 / 10%
Euro / Japanese yen EJ NYBOT 1.4 21.4 1.53% 67% 1.11% 51% 2.31% 61% .30 / 30%
Euro / Swiss franc RZ NYBOT 0.2 12.5 0.47% 67% 0.18% 38% 0.39% 35% .31 / 33%
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.
LEGEND: The “% rank” fields for each time window (10-day all the past readings, while a reading of 0% means the
Sym: Ticker symbol. moves, 20-day moves, etc.) show the percentile rank of current reading is lower than the previous readings.
the most recent move to a certain number of the previous These figures provide perspective for determining how
Vol: 30-day average daily volume, in thousands.
moves of the same size and in the same direction. For relatively large or small the most recent price move is
OI: 30-day open interest, in thousands. example, the % rank for 10-day move shows how the compared to past price moves.
10-day move: The percentage price move from the most recent 10-day move compares to the past twenty Volatility ratio/% rank: The ratio is the short-term volatil-
close 10 days ago to today’s close. 10-day moves; for the 20-day move, the % rank field ity (10-day standard deviation of prices) divided by the
20-day move: The percentage price move from the shows how the most recent 20-day move compares to long-term volatility (100-day standard deviation of prices).
close 20 days ago to today’s close. the past sixty 20-day moves; for the 60-day move, the % The % rank is the percentile rank of the volatility ratio
60-day move: The percentage price move from the rank field shows how the most recent 60-day move com- over the past 60 days.
close 60 days ago to today’s close. pares to the past one-hundred-twenty 60-day moves. A
reading of 100% means the current reading is larger than
This information is for educational purposes only. Currency Trader provides this data in good faith, but cannot guarantee its accuracy or timeliness. Currency Trader assumes
no responsibility for the use of this information. Currency Trader does not recommend buying or selling any market, nor does it solicit orders to buy or sell any market. There is
a high level of risk in trading, especially for traders who use leverage. The reader assumes all responsibility for his or her actions in the market.

Better late than never
Strong finish for currency fund managers?
C
urrency futures managers was up 1.51 percent for the Consultants Ltd.
continued to chip away at month through Nov. 25, (Forex), up 5.18 per-
their negative 2005 perform- and up .97 percent on the cent (25.93 percent
ance in recent weeks. year. year-to-date); and
Through Nov. 28, Barclay Group’s For the month of October, Alterama Inc.
(www.barclaygrp.com) Currency the top-five currency com- (Trendoscil Forex),
Traders Index was down 1.35 percent modity trading advisors up 5.01 percent
on the year — a little better than the - (CTAs) were: Monarch (16.00 percent year-
2.07 percent reading a month earlier. Capital Man-agement (FX to-date).
The Currency Trader’s index posted a Multi-Strategy), up 7.88 Click here for an
.60-percent gain for October (with percent (38.52 percent year- interview with
more than 91 percent of managers to-date); John W. Henry & Company, Clarkson Jones of Monarch Capital
reporting). Inc. (Dollar), up 6.29 percent (-27.70 Management. For an interview with
Barclay’s BTOP FX Index, which percent year-to-date); Alder Capital Mario Kelly of Wallwood Consultants,
reflects the performance of the largest (Alder Global 20), up 5.80 percent (7.01 see the November issue of Currency
currency managers on a daily basis, percent year-to-date; Wallwood Trader.
CURRENCY SYSTEM ANALYSIS continued
period between 1993-1997. Figure 3 shows drawdowns were 12 years posted gains of at least 10 percent.
small during these years, but it took four years to hit a new For comparison, we also tested the trend-following and
equity high, which is too long for most traders to tolerate. countertrend rules separately. Both individual systems gained
Moreover, the system was quite volatile over the past three ground and had annualized gains of 9.48 percent (trend-fol-
years. In 2003, the system hit a maximum drawdown of 41.79 lowing) and 0.78 percent (countertrend). But the combined sys-
percent, which is unacceptably high. However, Figure 4 shows tem had much higher annualized gains (10.38 percent).
only three of 15 years were losers, and seven of the remaining
Outcome: It is possible to combine two
FIGURE 4 — ANNUAL RETURNS seemingly contradictory concepts. While
trend-following rules profit from long-term
Overall, the system has posted only three losing years since 1990, and trends, countertrend rules can simultaneous-
seven of the remaining 12 years had double-digit gains. ly take advantage of short-term reversals,
even if both systems hold trades in opposite
directions. The key to merging these two sys-
tems is to use them on different time hori-
zons, which ensures two opposing trades
won’t cancel each other out.
—José Cruset of Wealth-Lab
To see how this system fared on a broad portfolio

of futures, see the February 2006 issue of Active
Trader magazine, on newsstands in January.

INTERNATIONAL MARKET SUMMARY
FOREX (vs. U.S. DOLLAR)
Current
price vs. 1-month 3-month 6-month 52-week 52-week Previous
Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank
1 South African 0.1533 2.22% -1.04% 1.30% 0.1783 0.1427 16

rand
2 Brazilian 0.4479 2.17% 7.01% 7.26% 0.4641 0.3587 4

real
3 Taiwanese 0.02984 0.34% -3.92% -7.34% 0.03253 0.02955 12

dollar
4 Singapore 0.591 0.02% -1.08% -1.93% 0.6186 0.5858 9

dollar
5 Hong Kong 0.129 0.00% 0.23% 0.39% 0.1291 0.128 5

dollar
6 Canadian 0.8537 -0.07% 2.25% 7.53% 0.8658 0.7851 11

dollar
7 Thai 0.02429 -0.91% -0.45% -2.26% 0.02621 0.02362 2

baht
8 New Zealand 0.6957 -0.96% 0.03% -1.98% 0.7464 0.6677 1

dollar
9 Russian 0.03474 -1.01% -1.24% -2.53% 0.03643 0.03456 6

rouble
10 Indian 0.02187 -1.69% -4.94% -5.30% 0.02317 0.0217 15

Rupee
11 Australian 0.737 -2.39% -2.61% -2.97% 0.7988 0.7259 10

dollar
12 Euro 1.1763 -2.61% -4.44% -6.39% 1.3667 1.1638 8
13 Swedish 0.1236 -2.67% -6.55% -10.03% 0.152 0.1206 13

krona
14 Swiss 0.7593 -2.69% -4.69% -6.53% 0.8879 0.7525 3

Franc
15 Japanese 0.008385 -2.96% -8.24% -10.55% 0.00983 0.00835 14

yen
16 British 1.7205 -3.13% -4.71% -5.80% 1.955 1.7062 7

pound
As of Nov. 27, 2005 *based on one-month gain/loss
INTEREST RATES
Rank Country Rate Nov. 27 1-month 3-month 6-month Previous
1 U.S. 10-year T-note 109.084 0.86% -1.93% -2.86% 4
2 Japan Government Bond 138.39 0.72% -0.37% -1.62% 3
3 Germany BUND 120.5 0.16% -2.42% -1.10% 5
4 Australia 3-year bonds 94.6 0.09% -0.31% -0.19% 2
5 UK Short sterling 95.49 0.03% -0.05% 0.24% 1

NON-U.S. DOLLAR FOREX CROSS RATES
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol Nov. 27 gain/loss gain/loss gain/loss high low Previous
1 Real / Pound BRL / GBP 0.2604 5.15% 11.21% 12.37% 0.2658 0.1868 14
2 Real / Yen BRL / JPY 53.4342 4.99% 14.08% 16.09% 54.6947 37.4618 2
3 Real / Euro BRL / EUR 0.3808 4.65% 10.95% 12.79% 0.3958 0.2702 12
4 Real / Aussie $ BRL / AUD 0.608 4.44% 9.37% 9.92% 0.6342 0.4615 9
5 Canada $ / Pound CAD / GBP 0.4963 2.96% 6.65% 12.61% 0.499 0.4162 19
6 Canada $ / Yen CAD / JPY 101.836 2.80% 9.67% 16.34% 102.318 83.2354 8
7 Canada $ / Euro CAD / EUR 0.7258 2.47% 6.38% 13.06% 0.7296 0.6008 18
8 Real / Canada $ BRL / CAD 0.5249 2.25% 4.88% -0.29% 0.5517 0.4299 7
9 Aussie $ / Pound AUD / GBP 0.4285 0.72% 2.01% 2.68% 0.4398 0.3916 17
10 Aussie $ / Yen AUD / JPY 87.9091 0.53% 5.17% 6.86% 88.15 76.95 6
11 Franc / Pound CHF / GBP 0.4414 0.43% 0.02% -0.70% 0.4642 0.4289 11
12 Euro / Yen EUR / JPY 140.309 0.34% 3.51% 3.77% 141.59 130.6 4
13 Aussie $ / Franc AUD / CHF 0.971 0.30% 1.99% 3.36% 0.9945 0.8635 20
14 Franc / Yen CHF / JPY 90.563 0.24% 3.25% 3.59% 91.6645 85.1568 1
15 Aussie $ / Euro AUD / EUR 0.6266 0.19% 1.74% 3.19% 0.6424 0.5666 16
16 Franc / Euro CHF / EUR 0.6455 -0.08% -0.23% -0.15% 0.6623 0.6382 10
17 Pound / Yen GBP / JPY 205.232 -0.17% 3.26% 4.29% 208.15 189.5 3
18 Pound / Euro GBP / EUR 1.4628 -0.51% -0.27% 0.53% 1.5124 1.4057 15
19 Aussie $ / Canada $ AUD / CAD 0.8636 -2.33% -4.98% -11.36% 0.9837 0.8609 13
20 Franc / Canada $ CHF/CAD 0.8897 -2.63% -7.10% -15.23% 1.0778 0.9064 5
GLOBAL STOCK INDICES

1-month 3-month 6-month 52-week 52-week
Rank Country Index Nov. 27 gain/loss gain/loss gain/loss high low Previous
1 India BSE 30 8,853.21 11.91% 13.25% 24.23% 8,863.93 6,029.82 8
2 Japan Nikkei 225 14,784.29 9.25% 15.86% 24.30% 14,866.99 10,721.59 3
3 Brazil Bovespa 31,920 8.73% 15.12% 20.88% 32,123 23,534 15
4 Mexico IPC 16,879.37 8.54% 14.42% 22.20% 17,014.79 11,727.51 7
5 Switzerland Swiss Market 7,498.7 7.72% 14.05% 17.84% 7,514.6 5,439.8 2
6 Germany Xetra Dax 5,194.27 7.47% 7.90% 14.43% 5,204.14 4,107.9 4
7 U.S. S&P 500 1,268.25 7.05% 4.98% 5.48% 1,270.64 1,136.15 5
8 Canada S&P/TSX composite 11,002.57 6.88% 4.71% 12.57% 11,146.12 8,952.79 14
9 UK FTSE 100 5,523.8 6.17% 5.35% 9.73% 5,539 4,675 11
10 Italy MIBTel 26,134 5.87% 2.80% 7.27% 26,969 22,331 12
11 France CAC 40 4,600.48 5.74% 5.60% 10.19% 4,651.11 3,735.55 6
12 Hong Kong Hang Seng 15,081.47 4.64% 0.65% 9.06% 15,508.57 13,320.53 13
13 Australia All ordinaries 4,592.5 4.43% 3.78% 11.29% 4,625.3 3,874.7 10
14 Singapore Straits Times 2,295.73 4.09% 0.40% 6.14% 2,399.75 1,999.14 9
15 Egypt CMA 2,052.56 3.46% 13.40% 20.84% 2,153.5 1,166.88 1
ACCOUNT BALANCE
Rank Country 2005 Ratio* 2004 2006+ Rank Country 2005 Ratio* 2004 2006+
1 Hong Kong 17.808 10.3 16.119 18.678 9 UK -40.981 -1.9 -42.086 -40.118
2 Taiwan 14.369 4.3 18.606 16.26 10 Spain -69.382 -6.2 -55.266 -80.067
3 Japan 153.101 3.3 172.07 140.484 11 U.S. -759.018 -6.1 -668.082 -805.179
4 Germany 121.064 4.3 103.828 121.937 12 New Zealand -7.946 -7.4 -6.141 -8.34
5 Canada 16.689 1.5 22.159 19.529 13 Australia -38.765 -5.7 -39.797 -35.419
6 Denmark 4.797 1.9 6.001 5.468 Totals in billions of U.S. dollars
+
*Account balance in percent of GDP Estimate
7 France -27.253 -1.3 -8.396 -31.022
Source: International Monetary Fund, World Economic Outlook
8 Italy -29.877 -1.7 -14.963 -24.394 Database, September 2005

GLOBAL NEWS BRIEFS MARKET SUMMARY
FOREX/INTERNATIONAL
EUROPE Japan’s economy grew 0.2 percent in Q3 from the pre-

vious quarter, according to preliminary data. The growth
France’s economy grew 0.7 percent in Q3 compared to rate was 3 percent compared to 2004. The country’s unem-
Q2, based on preliminary totals. The country’s National ployment rate for October fell 0.1 percent from September
Institute of Statistics and Economics Studies (INSEE) pre- to 4.2 percent — 0.4 percent lower than October 2004.
dicted that GDP growth would reach 1.5 percent in 2005
based on the year’s strong demand for household goods Singapore’s GDP for the third quarter rose 9.7 percent
and imports. The growth estimate is in line with the rest of compared to the same quarter in 2004.
the Eurozone.
France’s October unemployment rate dropped 0.1 per-

cent to 9.8 percent from the previous month and 0.2 percent AMERICAS
compared to October 2004.
Canada’s unemployment rate dropped 0.1 percent in
Germany’s third-quarter GDP increased 0.4 percent October to 6.6 percent, its lowest level in three decades.
from the quarter before and rose 1.5 percent from Q3 of The rate is 0.5 percent lower than a year ago. Private sec-
2004. The unemployment rate for October fell 0.2 percent tor employees provided the majority of the employment
from the previous month to 11 percent, a drop of 0.9 percent growth, while retail employment saw gains among youth
from the same month in 2004. and adult men.
Unemployment in the U.K. remained at 4.7 percent for The United States’ Federal Reserve said foreign central
October, an increase of 0.1 percent over the rate in October banks increased their holdings in U.S. debt in the sec-
2004. ond-to-last week of November. According to the Fed,
holdings increased by $7.866 billion for the week ending
Nov. 23 and now stand at just more than $1.5 trillion.
ASIA & THE SOUTH PACIFIC
Hong Kong’s jobless rate dropped 0.2 percent to 5.3 per- Inflation in G7’s crosshairs
cent in October, a four-year low. The rate represented a 1.4-
percent decrease from October 2004. “The unemployment A former Japanese finance official said the
situation improved further in August-October 2005, as December G7 meeting will likely focus on inflation.
employment growth continued to outstrip the labor force Zembei Mizoguchi said that because of the U.S. dol-
growth,” said a government spokesman in a press release. lar’s recent rise, currency concerns are not expected to
“New jobs were found not only in the service sectors such be a point of emphasis at the meetings in London on
as the import/export trades, transport, and miscellaneous Dec. 2-3. “There is a common view that inflation is con-
personal services, but also in the local manufacturing and tained at this point, and that the situation must be
construction sectors.” maintained,” Mizoguchi said.
Japan’s core consumer price index (CPI) for October The International Monetary Fund will begin a pro-
was unchanged from the previous month. This continues a gram that provides financial help to low-income
seven-year trend of CPI remaining unchanged or falling countries that suffer from natural disasters or have bal-
from the month earlier, and it could lead to the Bank of ance-of-payments problems because of surging oil
Japan ending its ultra-loose monetary policy. Japan is also prices. The new program, which will be called the
considering modifying its core CPI to exclude food and fuel. Exogenous Shocks Facility, will likely get a donation of
The existing index excludes only food. $750 million from each member country.
Australia’s October unemployment rate increased 0.1

percent to 9.8 percent from the previous month and was
unchanged from the same month a year earlier.
40 CURRENCY TRADER • December 2005

EVENTS
Event: Forex Systems Trading Workshop Event: The Traders Expo New York
Date: Dec. 12 Date: Feb. 18-21
Location: New York, N.Y. Location: Marriott Marquis Hotel, New York, N.Y.
Instructor: FX-Strategy’s Doug Schaff For more information: Call (800) 970-4355 or visit
www.tradersexpo.com
For more information: Visit www.fx-strategy.com
•
•
Event: National Association of Active Investment
Event: The Traders Expo Las Vegas
Managers (NAAIM) Annual Conference
Date: Dec. 13-16
Date: April 30-May 3
Location: Paris Resort, Las Vegas, Nev.
Location: The Ritz Carlton, Phoenix, Ariz.
For more information: Call (800) 970-4355 or visit
For more information: E-mail Susan Truesdale at
www.tradersexpo.com
naaim@mindspring.com or call (888) 261-0787
•
•
Event: Hedge Fund Incubation and Seeding Conference
Event: Operations Conference for Securities, Brokerage
Date: Jan. 30-31 & Trust
Location: The Harvard Club, New York, N.Y. Date: April 2-4
For more information: Visit www.frallc.com or call (800) Location: Omni Orlando Resort at ChampionsGate,
280-8440 Orlando, Fla.
• To Register: www.fwfinancial.org
NEW PRODUCTS
Barclay’s Capital is the latest bank to go live on also plans to go live on RTFX soon. Reuters Trading for
Reuters Trading for Foreign Exchange (RTFX). The Foreign Exchange allows banks and their customers to
Barclays RTFX service will initially be available in Asia. trade forex from their Reuters desktop. For information
Barclays Capital’s launch brings banks and other financial about Barclays Capital, visit www.barclayscapital.com; for
participants in Asia the ability to trade on all 68 currency Reuters, visit www.about.reuters.com.
pairs for which Reuters provides a service. Deutsche Bank
KEY CONCEPTS AND DEFINITIONS

Fed funds rate: The overnight interest rate at which U.S. bar — five-minute, hourly, daily, weekly, etc. The following
banks lend one another funds. discussion uses daily price bars for simplicity.
True range is the greatest (absolute) distance of the fol-
True range (TR): A measure of price movement that lowing:
accounts for the gaps that occur between price bars. This 1. Today’s high and today’s low.
calculation provides a more accurate reflection of the size of 2. Today’s high and yesterday’s close.
a price move over a given period than the standard range 3. Today’s low and yesterday’s close and.
calculation, which is simply the high of a price bar minus
the low of a price bar. The true range calculation was Average true range (ATR) is simply a moving average of
developed by Welles Wilder and discussed in his book New the true range over a certain time period. For example, the
Concepts in Technical Trading Systems (Trend Research, 1978). five-day ATR would be the average of the true range calcu-
True range can be calculated on any time frame or price lations over the last five days.

GLOBAL ECONOMIC CALENDAR DECEMBER/JANUARY
MONTH
Monday Tuesday Wednesday Thursday Friday Saturday
Legend 1 2 3
U.S.: ISM U.S.:
CPI: Consumer Price Index GDP: Gross Domestic
ECB: Governing Unemployment
ECB: European Central Product
council meeting Japan: Monetary
Bank ISM: Institute for Supply Japan: Account base
FOMC: Federal Open Management
balances Germany:
Market Committee PPI: Producer Price Index Australia: Index of Unemployment
commodity prices
5 6 7 8 9 10
Germany: Orders Great Britain: Great Britain: U.S.: Wholesale
received and man- Monetary policy Monetary policy inventories
ufacturing turnover committee meeting committee meeting
Germany: Production Germany: Foreign
Canada: Bank of Australia: Official index trade
Canada meeting reserve assets; New Zealand:
reserve bank meeting Reserve bank meeting
12 13 14 15 16 17
Japan: Balance of U.S.: FOMC U.S.: Trade balance U.S.: Retail Japan: Bank of
payments; meeting Japan: Monetary sales; CPI Japan meeting
corporate goods survey ECB: Governing
price index Canada: Leading Canada: council and Germany:
indicators Manufacturing survey general council Bankruptcies
Italy: Balance of meeting
payments Germany: CPI
19 20 21 22 23 24
Germany: PPI U.S.: PPI U.S.: GDP U.S.: Leading U.S.: Durable
indicators goods
Canada: Great Britain: Canada: Retail
Wholesale trade Capital issues trade Canada: Canada: GDP
Unemployment
Canada: CPI
26 27 28 29 30 31
Japan: Corporate Australia:
service price index International reserves
and foreign currency
liquidity
Italy: International
reserves and foreign
currency liquidity
2 3 4 5 6 7
U.S.: ISM Japan: Account Japan: Monetary U.S.:
balances base Unemployment
Australia: Index
of commodity
prices
The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.

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December 2005 • Strategies, News and Analysis for Forex Traders

THE DEATH OF FLOATING

CRUNCHING THE NUMBERS:

THE RATE-HIKE SCENARIO:

Spot Check . . . . . . . . . . . . . . . . . . . .16

Advanced Concepts . . . . . . . . . . . .18

Trading Strategies . . . . . . . . . . . . . .30

ECB lets rate cat out of the bag . . . . .13

2 December 2005 • CURRENCY TRADER

Global News Briefs . . . . . . . . . . . . .40

Have a question about something you’ve seen in

Looking for an advertiser?

4 December 2005 • CURRENCY TRADER

Kathy Lien is a chief strategist at FXCM, where

Contributing editors: Jeff Ponczak

Volume 2, Issue 12. Currency Trader is published monthly by TechInfo, Inc.,

The information in Currency Trader magazine is intended for educational pur-

6 December 2005 • CURRENCY TRADER

Three good tools for targeting customers . . .

8 December 2005 • CURRENCY TRADER

FXCM rescues Refco’s retail forex customers

R etail customers of Refco’s

had their accounts frozen in the after-

December 2005 • CURRENCY TRADER 9

BY CURRENCY TRADER STAFF

T he year 2005 has been a good one for the U.S.

10 December 2005 • CURRENCY TRADER

CURRENCY TRADER • December 2005 11

What could the end of rate hikes mean

12 December 2005 • CURRENCY TRADER

BY CURRENCY TRADER STAFF

A fter months of hawkish talk,

historically and exceptionally low interest

CURRENCY TRADER • December 2005 13

FIGURE 2 — EURO/U.S.DOLLAR, DAILY

On the daily time frame, EUR/USD appeared to be holding its breath in

Looking ahead at the Euro

14 December 2005 • CURRENCY TRADER

“Countertrend forex trading with TD Sequential”

You can download this free article as a PDF file by going to

Dollar-yen Rallies like the one the yen has enjoyed

BY CURRENCY TRADER STAFF

16 December 2005 • CURRENCY TRADER

TABLE 1 — THREE-MONTH, 10-PERCENT RALLIES

Month 1 LUM LDM Month 2 LUM LDM Month 3 LUM LDM

Month 4 LUM LDM Month 5 LUM LDM Month 6 LUM LDM

CURRENCY TRADER • December 2005 17

The dollar index

N o global exchange-rate system lasts forever.

18 December 2005 • CURRENCY TRADER

CURRENCY TRADER • December 2005 19

FIGURE 2 — TRADE WEIGHTS Second, many goods in international trade, including

In the floating-rate system, the result

As long as the interest-rate differentials between the

20 December 2005 • CURRENCY TRADER

CURRENCY TRADER • December 2005 21

FIGURE 4 — IMPORT/EXPORT WEIGHTS

Inflation and the yield curve

22 December 2005 • CURRENCY TRADER

CURRENCY TRADER • December 2005 23

FIGURE 7 — U.S. SECURITIES PURCHASED BY JAPAN AND 10-YEAR YIELDS

The two blocs

24 December 2005 • CURRENCY TRADER