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June 2013

Volume 10, No. 6

Strategies, analysis, and news for FX traders

A LAGGED PRICE-PATTERN STRATEGY FOR THE YEN P. 2

Down down under:

What the Aussieand kiwi dollarsell-offs mean p. 6

Five questions facingthe market p. 18

Major currenciesand the LIBOR

kerfufe p. 24

Central bank

missteps and marketswings p. 12

Too late to catchthe rally? p. 35

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2/352 June2013CURRENCY TRADER

CONTENTS

Contributors................................................. 4

Global Markets

Aussie and kiwi run with the bears ...........6

A sharp sell-off has some market watchers

predicting further losses, while others look for a

short-term bounce.

By Currency Trader Staff

On the Money

Central banks screw up...........................12

Missteps can roil markets, as shown by recent

moves in Japanese stock index, interest rates

and the dollar/yen pair.

By Barbara Rockefeller

Five questions facing the market ...........18

The Feds position, Japans high-stakes

condition, Europes zero-interest proposition,

and other market-shaping issues.

By Marc Chandler

Trading Strategies

USD/JPY lagged pattern strategy ...........20

Signals dont have to immediately follow the

conclusion of a price pattern. This strategyshows how entries that occur many several bars

after a price pattern can produce competitive

results.

ByDaniel Fernandez

Advanced Concepts

Major currencies and

the great LIBOR kerfufe ........................24

All major countries have engaged in currency,

interest rate, and stock-market manipulationsince 1999. Post-2008 LIBOR reporting

problems merely injected more bad data into the

equation.

By Howard L. Simons

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

Important dates for currency traders.

Events .......................................................30

Conferences, seminars, and other events.

Currency Futures Snapshot.................31

BarclayHedge Rankings........................31

Top-ranked managed money programs

International Markets............................ 32

Numbers from the global forex, stock, and

interest-rate markets.

Forex Journal ........................................... 35

Looking for an

advertiser?

Click on the company

name for a direct link to the

ad in this months issue.

Ablesys

EarnForex

eSignal

FXCM

Interactive Brokers

Ninja Trader

Questions or comments?Submit editorial queries or comments to

[email protected]
mailto:[email protected]:[email protected]

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CONTRIBUTORS

4 June2013CURRENCY TRADER

Editor-in-chief: Mark Etzkorn

[email protected]

Managing editor: Molly Goad

[email protected]

Contributing editor:

Howard Simons

Contributing writers:

Barbara Rockefeller,

Marc Chandler, Chris Peters

Editorial assistant and

webmaster: Kesha Green

[email protected]

President: Phil Dorman

[email protected]

Publisher, ad sales:

Bob Dorman

[email protected]

Classied ad sales: Mark Seger

[email protected]

Volume 10, Issue 6. Currency Trader is published monthly by TechInfo,Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2013 TechInfo,Inc. All rights reserved. Information in this publication may not be stored orreproduced in any form without written permission from the publisher.

The information in Currency Trader magazine is intended for educationalpurposes only. It is not meant to recommend, promote or in any way implythe effectiveness of any trading sys tem, strategy or approach. Traders areadvised to do their own research and testing to determine the validity of atrading idea. Trading and investing carry a high level of risk. Past perfor-mance does not guarantee future results.

For all subscriber services:www.currencytradermag.com

A publication of Active Trader

CONTRIBUTORS

qHoward Simons is president of Rose-

wood Trading Inc. and a strategist for BiancoResearch. He writes and speaks frequently

on a wide range of economic and nancialmarket issues.

qBarbara Rockefeller(www.rts-forex.com) is an

international economist with a focus on foreign exchange.She has worked as a forecaster, trader, and consultant at

Citibank and other nancial institutions, and currentlypublishes two daily reports on foreign exchange. Rockefel-

ler is the author ofTechnical Analysis for Dummies, SecondEdition (Wiley, 2011), 24/7 Trading Around the Clock, Around

the World (John Wiley & Sons, 2000), The Global Trader(John Wiley & Sons, 2001), The Foreign Exchange Matrix

(Harriman House, 2013), and How to Invest Internationally,published in Japan in 1999. A book tentatively titled How

to Trade FX is in the works. Rockefeller is on the board ofdirectors of a large European hedge fund.

qDaniel Fernandezis an active traderwith a strong interest in calculus, statistics,

and economics who has been focusing

on the analysis of forex trading strate-gies, particularly algorithmic trading andthe mathematical evaluation of long-term

system protability. For the past two yearshe has published his research and opinions on his blog

Reviewing Everything Forex, which also includes re-views of commercial and free trading systems and general

interest articles on forex trading (http://mechanicalforex.com). Fernandez is a graduate of the National University

of Colombia, where he majored in chemistry, concentratingin computational chemistry. He can be reached at dfernan-

[email protected].

q Marc Chandler([email protected])is the head of global foreign exchange

strategies at Brown Brothers Harriman andan associate professor at New York Univer-

sitys School of Continuing and ProfessionalStudies. Chandler has spent more than 20

years analyzing, writing, and speakingabout global capital markets. He is the author ofMaking

Sense of the Dollar: Exposing Dangerous Myths about Tradeand Foreign Exchange (Bloomberg Press, 2009).
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.rts-forex.com/http://mechanicalforex.com/http://mechanicalforex.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]://mechanicalforex.com/http://mechanicalforex.com/http://www.rts-forex.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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GLOBAL MARKETS

The currencies Down Under were simply downlast month. Both the Australian and New Zealand

dollars spiraled sharply lower vs. the U.S. dollar,etching stunning declines on their daily charts(Figures 1 and 2). In the month of May, the Aussiedollar (AUD) lost more than 8% of its valueagainst the U.S. dollar, while the New Zealandcurrency (NZD), or kiwi, fell a little more than7%. By the end of the month, the AUD/USD pairhad fallen below its June 2011 level to .9527 its lowest level since October 2011 while theNZD/USD was extending its losses on May 31,trading below .7950.

The moves represent the currencies sharpest

sell-offs in a year and, in the case of the AUD/USD pair, pushed toward the lower end of thelong-term consolidation dating back to 2011(Figure 3). The moves caught the attention of trad-ers and analysts alike. It was almost a perfectstorm of fundamental factors coinciding to trig-ger the sharp collapse.

The Australian dollar, New Zealand dollar,and other commodity currencies are at their mostvulnerable points since the 2008 crisis, saysSteven Englander, head of G10 FX Strategy at Citi.They are simultaneously facing a slowdown inphysical demand, price, direct investment, andportfolio investment. This is what traditionallymakes commodity currencies so volatile. Whenit rains, it pours on both the current accountand capital account. Australia, he adds, is alsovulnerable because of a potential pullback in itshousing sector.

Triggers

A combination of factors opened the selling flood-gates. First, there was the broad U.S. dollar rally

in recent weeks, which simply pressured the flip

Aussie and kiwirun with the bears

A sharp sell-off has some market watchers predicting further

losses while others look for a short-term bounce.

BY CURRENCY TRADER STAFF

FIGURE 1: AUSSIE DOLLAR

From April 30 through May 31 the Aussie dollar dropped more than

8% vs. the U.S. dollar.

Source for all figures: TradeStation

FIGURE 2: NEW ZEALAND DOLLAR

The kiwi also fell sharply against the dollar in May, but not quite as

much as the Aussie dollar.

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7/35CURRENCY TRADERJune2013

side of many major currency pairs. Weve seen a globaltrend of strength in the U.S. dollar across currencies

basically, a period when the U.S. dollar has been strongerthan the rest of the world [currencies], says Ankit Sahni,forex strategist at Nomura.

The U.S. appears to be coming out of recession earlierthan the rest of the industrialized world, which has helpedsupport the greenbacks rally, according to Sahni. Also,speculation has increased the U.S. Federal Reserve maybegin to taper its monthly asset purchases via quantita-tive easing, which currently total $85 billion in overallmonetary accommodation; traders will be monitoring Fedannouncements and minutes closely over the next severalmonths for any signals of a policy shift.

Nonetheless, the U.S. dollar began strengthening againin May (after a February rally and subsequent consolida-tion), partly on expectations of eventual reversal of theFeds monetary policy accommodation.

Another factor weighing on the Aussie dollarwas a surprise rate cut by the Reserve Bank ofAustralia (RBA) on May 7. The RBA cut rates inresponse to a slowing economic outlook, and econ-omists forecast additional rate reductions this year.The move clearly caught the market off guard.

The Reserve Bank of Australia cut the cash rateby 25 basis points (0.25%) at its May meeting to arecord low of 2.75%, says Katrina Ell, associateeconomist at Moodys Analytics.

Another factor contributing to the depreciationin both the Aussie and kiwi is a broad-baseddown move in key commodities, with some soft-ening in the China story, according to Bob Lynch,head of G-10 FX strategy, Americas at HSBC.

Australia and, to a lesser extent, New Zealand,are both commodity exporters with close trade tiesto China. Slower economic growth in China trans-lates into less demand for commodity exports.

Weve seen a massive increase in the supply of

base metals, and demand is not nearly as strong as it usedto be, says Alvise Marino, foreign exchange strategist at

Credit Suisse.In Australia, prices for a key commodity, iron ore, havefallen 12% in the past month and 22% since the beginningof the year, according to Ell. Iron ore prices have fallen12% in the past month and 22% since the start of 2013, shesays. Iron ore is Australias largest merchandise export,and China is the biggest market. So when theres weakersteel demand in China, Australia really feels it.

Credit Suisse analysts believe the current Australiandollar sell-off is more structural in nature, based in parton the mining outlook. In January this year, we turnedbearish on the Aussie, forecasting it would fall to 1.0200

in three months and 0.9500 in 12 months, the companywrote in a May 22 research note to clients. Fast forwardthree months, and rather than being too bearish, it hasbecome clear to us that, if anything, we have been too

FIGURE 3: THE BIG RANGE

The recent sell-off pushed the AUD/USD toward the lower end of a

consolidation dating back to 2011.
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GLOBAL MARKETS

timid. Mining investment is in the process of peaking, witha lower currency needed to rebalance growth boostingthe non-mining sector as the contribution to growth frommining fades.

Australian economic outlook

Australia, for the past several years, has been in one ofthe best economic positions among industrialized nations,even escaping official recession during the 2008 globalfinancial crisis. But recently its growth numbers have beenslowing. This year will likely mark Australias 22nd year

of uninterrupted growth, Ell says. We expect the econo-my to grow 2.8% in 2013 after growing 3.6% in 2012.Two factors are behind the 2013 contraction, according to

Ell. First, 2012 growth was above trend due to base effectsfrom flooding early 2011, so 2012s strong pace wasntso much about domestic strength as it was technical fac-tors, she says. Also, 2013 has been hurt by some softerprivate and government consumption, which we shouldsee improve over the year. The Australian economy is in atransition phase, with mining investment expected to peaklater in the year, so to keep growth at trend, the non-min-ing, interest-sensitive sectors need to improve further. The

latest rate cut will provide further stimulus for this.Sean Callow, senior currency strategist at Westpac

Institutional Bank, also cites the importance of the extentto which business investment outside mining recovers asresource investments peak. Consumption and housingconstruction look to be responding to the RBAs cuttingthe cash rate to 2.75%, he says. We expect the economyto continue to grow below trend, by around 2.5% in 2013and 2.3% in 2014, putting the pressure on the RBA to con-tinue to ease policy. Fiscal policy continues to be tightened,although the main wave of budget cuts is behind us.Westpac looks for the cash rate to fall as low as 2% by first

quarter 2014, Callow adds.Other analysts also expect the RBA easing cycle to con-

tinue. Marc Chandler, global head of currency strategy atBrown Brothers Harriman, expects another 25-basis-point(bp) rate cut in the third quarter and a second 25-bp cut inthe fourth quarter.

New Zealand outlook

New Zealands economy is a bit more circumscribed thanAustralias, with a high dependence on milk and dairyexports. The export sector should be aided by high dairyprices, offsetting lower volume from the recent drought,

Callow says.But the main driver is reconstruction from the earth-

quakes around Christchurch, which is estimated to havethe potential to boost growth by 2.8% in 2013 and 3.6% in2014. Housing and consumption are growing solidly indeed, house prices are becoming almost bubbly.

Moodys Analytics forecasts a 2.1% GDP growth rate forNew Zealand in 2013. The droughts toll on the economyearly this year has yet to be seen, but it remains a down-side risk to the outlook, says Fred Gibson, associateeconomist at Moodys. Record-low policy rates are fuel-

ing house price growth, reducing the central banks scopeto ease monetary settings.The Reserve Bank of New Zealands official monetary

policy rate currently stands at 2.5% and Moodys Analyticsexpects the central bank to remain on hold throughout2013.

Direct trade with Europe is only small, but a Europeanslump would flow through to weaker demand from NewZealands largest trading partners, such as China andAustralia, Gibson says. Recently, New Zealand ship-ments to China exceeded those sent to Australia. Thishighlights the strengthening bilateral trade relations

between New Zealand and China. The growing Chinesemiddle class will remain a strong driver of the dairy andmeat industry over the coming years.

Currency action

Opinions are divided about what will happen next for theAussie and kiwi. Some analysts expect the declines to con-tinue, while others see the potential for a corrective rally.But volatility has increased and these currencies remainvulnerable to large swings.

Credit Suisse analysts hold a bearish position, expectingthe AUD to fall to 0.9200 against the USD by late August

and to 0.8500 in the next year.Others, however, think the currencies recent sell-offs

set up the potential for short-term upside moves. Wethink they are oversold in the short term, says VassiliSerebriakov, forex strategist at BNP Paribas. These cur-rencies have weakened more than rate differentials wouldsuggest. They are oversold and should see a correction.

Callow also sees the potential for a rebound in theAussie dollar. Despite the RBAs ongoing easing bias tosupport a sluggish economy, AUD/USD should suffer onlylimited damage overall in coming months, he says. Wedo not believe the U.S. economy is yet on a strong enough

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9/35CURRENCY TRADERJune2013 9

footing for the Federal Reserve to start winding back itsQE program until at least [the end of] 2013. This shouldcap USD rallies, leaving AUD/USD around 0.9900 by [theend of] 2013, which is still historically strong. Nearer term,the Aussie should be quite volatile, but as long as the Fedand Bank of Japan easing is at full pace, it is probably a[case of buying] on dips, targeting 1.0100-1.0200 by, say,July.

Citis Englander expects weakness in the New Zealanddollar, but less so than in its Aussie counterpart. The NewZealand dollar is not as exposed as Australia and its set ofcommodities are not falling as fast, he says. Moreover,

we think the Reserve Bank of New Zealand will hesitateto cut, so while the New Zealand dollar will fall with theAustralian dollar, it will not fall as fast. The Australiandollar, he concludes, could be below 0.9000 before thisphase plays out, while the New Zealand dollar could pullback to 0.7500.

Waqas Adenwala, research assistant at 4Cast Inc., saysthe Aussie dollar is at historically high levels, and hisfirm expects further dips to 0.9390 in the coming weeks.The AUD is shaping up as the big loser amongst com-modity currencies, with much more room on the down-side, he says. We will have to keep a close eye onChina demand going forward.

RBNZ intervention

The Reserve Bank of New Zealand (RBNZ) has expressedconcerns about its currencys high level and resultingnegative impact on exports. Sahni notes the bank has taken

steps to slow the trend, most recently in May. The centralbank intervened it was selling kiwi, buying dollars, heexplains. The strong currency is bad for exports and badfor the economy.

Callow adds the RBNZ has made it clear it believes thekiwi is overvalued and that it reserves the right to inter-

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GLOBAL MARKETS

vene. But it and the finance ministry areaware that they do not have the firepower to turn

the tide on NZD, he says. Prime Minister (John)Key is a former FX trader who knows the powerof markets. The kiwi is likely to remain attrac-tive on a range of crosses. GDP growth shouldaccelerate and investors like its export basketslarge weighting for dairy products which will bein keen demand in China, regardless of ChinasGDP, he says.

Westpacs Callow adds his firms base case isfor the NZD/USD pair is to find buyers on dipsaround 0.7900-0.8000 and is eyeing a rebound to

0.8400-0.8500 later in the year.

Cross rate action

Callow advises watching the Australian dollar/Japanese yen (AUD/JPY) cross (Figure 4). Inrecent weeks, AUD/USD and USD/JPY haveoften been highly negatively correlated, withUSD/JPY gains boosting broad USD confidence,he says. But this should break down before toolong.

Speculative positioning has been a huge driverof the yen decline, Callow says, but it cant be the

main force for much longer. Japanese investorswill become vital once more. If they ramp up pur-chases of foreign bonds, then the AUD/JPY couldshoot through 105, he says. If not our basecase the risks are for a slide back to 0.9600-0.9700. Perhaps buying volatility is the best betafter an unusually quiet period.

Callow describes the likely action in the Aussie/kiwi pair (AUD/NZD, Figure 5) as lively, andbest seen as a sell on bounces to 1.2200-1.2300,looking for a fall to 1.1700-1.1800 by late 2013 asRBNZ tightening approaches.y

FIGURE 4: AUSSIE/YEN

The Aussie/Japanese yen pair (AUD/JPY) recently pulled back from

a high above 1.0500.

FIGURE 5: AUSSIE/KIWI

In recent weeks the AUD/NZD pair traded to its lowest levels since

2009.

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As the U.S. Memorial Day holiday was approaching, sev-eral markets each chose to have a crisis of nerves all atonce. Note the third week of any month is often the mostrisk-laden, usually because thats when many importanteconomic reports are released (PMI, IFO, etc.); the U.S.non-farm payrolls release on the first Friday on eachmonth is a key exception. This time the immediate causeof market turmoil was unclear messaging from not one,but two, major central banks. Fed chief Ben Bernanke toldCongress two things the markets interpreted as contradic-tory that tapering of QE could begin in the next few

months and that it would be premature to begin taperingany time soon. Then Bank of Japan (BOJ) chief HaruhikoKuroda said a rise in 10-year yields is only to be expectedin light of the improving economy and rising inflationexpectations, having said previously the BOJ wants yieldsto fall all along the yield curve. The yield on JapaneseGovernment Bonds (JGBs) rose from 0.33% in April to 1%on May 23.

Also, European Central Bank (ECB) chief Mario Draghisaid he could see tangible improvements in financial con-ditions in the form of narrower debt spreads only tohave them widen out substantially the next day.

The FedThe Feds position on tapering is only superficially confus-ing. Bernanke gave two messages in congressional testimo-ny that QE tapering could begin in the next few meetingsbut the Fed is wary of doing anything prematurely. Theproblem for markets was that Bernanke said wary beforehe said next few meetings. Separately, the minutes of thelast FOMC meeting indicate the members are not close toagreeing about timing, amounts, or composition.

The S&P fell 0.83% on the day Bernanke botched thecongressional testimony. The Fed places a high value onmaintaining market stability and on clarity of communi-

cation, so when the market gets jumpy and choppy as a

direct result of Fed communication, the Fed failed. Thelogical order of his comments would be yes, tapering, andmaybe in the next few meetings, but we are wary of beingpremature. By reversing the order and putting waryfirst, he created confusion that will persist at least until thenext Fed policy meeting (June 18-19) and probably beyond.This was a classical error by an ivory-tower mindset. Justabout any reasonably competent fund manager could haveadvised him on the proper order of the message compo-nents.

The twin messages are not all that complicated.

Bernanke affirmed the tapering process is on the drawingboard. What everyone has missed is the critical word if.He said, If we see continued improvement and we haveconfidence [that] is going to be sustained then, [in] thenext few meetings we could take a step down in the paceof purchases.

The word if tells you a set of conditions is coming.Bernanke is admitting the Fed is data-dependent, andincoming jobs data is the key. While Bernanke didnt namespecific levels, sane and reasonable analysts estimate theFed needs to see sustained and sustainable gains in jobgrowth, probably more than 200,000 per month, beforetapering talk gets really serious. Of secondary importance

are whether inflation is too low or the fiscal drag toostrong from a gridlocked Congress that has yet to pass afull-year budget, and the continuing resolution on the debtceiling. Its like an engineer drawing a beautiful bridge butwarning the math has to be done to ensure it can be builtwithout falling down the first time an 18-wheeler crosses it.

Now the question is whether markets will wake upto what Bernanke really said no tapering yet andrecover, especially equity markets. Market lore has it thatstock markets lead the economy, but its easy to arguestock markets are currently divorced from real economiesjust about everywhere, something we can blame on centralbanks. In Europe particularly there was no reason for equi-

On the Money


ON THE MONEY

Central banks screw upMissteps can roil markets, as shown by recent moves in the Japanese

stock index, interest rates and the dollar/yen pair.

BY BARBARA ROCKEFELLER

7/27/2019 Ctm 201306


ty indices to be putting in new highs with the Eurozoneeconomy in a confirmed recession (negative growth fortwo quarters).

The global equity rout that followed the Bernanke tes-timony may turn out to be a flash in the pan. But if not,repercussions could include a strong statement fromthe Fed that tapering is not imminent. This would be animplicit acknowledgement that Bernanke botched the tes-timony and also a nod to the power of stock markets as apublic sentiment indicator. The Fed

pretends the stock market is indepen-dent and that it doesnt even try tomeasure any market in terms of exces-sive price rises (irrationally exuberantbubbles), so it can hardly appear to bealtering policy when the market fallsback.

Meanwhile, in the bond market,the 10-year yield remains elevated inanticipation of tightening. Taperingis not tightening the Fed will stillbe buying notes and mortgage-backedsecurities, and all Fed asset buying

has to be deemed accommodative,but never mind. If the stock market isflighty, the U.S. bond market seems tohave only two speeds and no nuance.

The rise in U.S. 10-year yields iswidely seen as dollar-supportive,especially in the context of the rest ofthe world still embracing accommoda-tion. In early May the ECB cut ratesby 25 basis points, despite believinga rate cut would do almost nothingto boost economic activity. Japan will

soon be launching its massive QE, and

both Australia and Canada are thought to be contemplat-ing additional rate cuts. Its a big deal for the U.S. to bethe sole major power bucking the global accommodationtrend.

Figure 1, which shows the rise in the Reuters 10-yearyield index vs. the dollar index, seems to prove the rulethat capital flows to rising yields, even if the dollar indexrally started many months ahead of the yield rise. Butbeware rising yields do not always support the dollar.

FIGURE 1: DOLLAR INDEX VS. 10-YEAR NOTE YIELD INDEX (WEEKLY)

The rise in the Reuters 10-year yield index vs. the dollar index seems to prove

the rule that capital flows to rising yields, even if the dollar index rally started

many months ahead of the yield rise.

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The Fed pretends the stock market isindependent and that it doesnt even try to

measure any market in terms of excessive

price rises, so it can hardly appear to be

altering policy when the market falls back.

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ON THE MONEY

Figure 2 shows the yield and the dollar index can go inopposite directions for a long time. The 10-year note yield(red) rose from May 3, 2003 to Aug. 31, 2007 before break-ing support to the downside. At the same time, the dollarindex (black) was falling from July 31, 2001 to March 31,2008.

Clearly, yield is only one factor and it might not be wiseautomatically to associate tapering/yield increases with anever-rising dollar. Besides, unless employment data comesin really strong for the next three months, the bond marketwill get discouraged and see postponement of tapering toyear-end or beyond. Yields will fall.

Does that mean the dollar loses support from yield? The

correlations are not strong enough to give us predictivevalue.

Rationalizing risk in JapanThe Japanese do not have an exact equivalent for the wordrisk. They use risuku, but its a borrowed word and notwell understood. A natural Japanese word is kiken, whichmeans danger, but risk doesnt mean danger, exactly itmeans only the possibility of danger. Risk in English istwo-sided. You can get both favorable and unfavorableoutcomes by taking risk. Risk avoidance is common sensewhen your definition of risk is danger. Numerous financialanalysts have noted that Japanese investment managers

are exceptionally risk averse, and semantics may havesomething to do with it.

On Thursday, May 23, 2013, the Nikkei 225 stock indexfell 7.2% after having been down about 9%. The followingday, the Nikkei traded in a range of 1,026 points, closinghigher than the day before but still lower than the open(Figure 3). The May 23 drop was one of the largest in his-tory. Starting from 1980, it was in fact the seventh largest,surpassed by the drop on the 2011 earthquake, the Lehmanaftermath, and Black Monday (October 1987).

At the same time, the dollar/yen fell from a high of103.74 on Wednesday, May 22, the day before the Nikkeicrash, to a low of 100.84 on the day of the crash, and nearly

the same low the following day. Normally we think of theyen as driving the Nikkei for the perfectly logical reasonthat exporters benefit from a weaker yen, but this time thecausal direction was the other way around. The yen risingin sync is normal on the grounds that a falling tide low-ers all boats, and a drop in the Nikkei inspires risk aver-sion, which means flight to the home currency. The Nikkeinewswire, which reported the cause of the Nikkei fallingso hard was profit-taking by fast money managers andhedgers, predicted that position-adjustment would taperoff rapidly, and bargain hunting would support the stockindex before long.

But what if the Nikkei drop leads to a complete re-eval-

FIGURE 2: DOLLAR INDEX VS. 10-YEAR NOTE YIELD INDEX (MONTHLY)

Rising yields dont always support the dollar. The 10-year note yield rose

between May 3, 2003 to Aug. 31, 2007 before breaking support, while the dollar

index fell from July 31, 2001 to March 31, 2008.

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uation of Abenomics and, thus, to further stock marketdeclines and yen appreciation? A large Japanese bankreports that, in the week after 25 big stock market declinessince 1980, the Nikkei rallied an average of 3.8% in 75% ofthe cases. We need to acknowledge the current rally fromNovember 2012 has created an extraordinary environ-ment, and perhaps the average will not apply this time.Meanwhile, the dollar/yen pair moved lower by an aver-age of only 0.23%, and has actually rallied in 42% of cases.

Figuring out what is going on in the dollar/yen requireslooking at the Nikkei and at JGBs. The Nikkei 7% dropwas frightening enough, but even scarier in the contextof having just hit a five-and-a-half year high of 15,942.60

earlier the same day. Before the rout, the Nikkei was up53.4% year to date. The sell-off is most often attributed toBernanke having caused confusion instead of tapering clar-ity, but not everyone buys that. Until the rout, the Nikkeihad risen in 23 of 27 weeks since mid-November, when itbecame clear current Prime Minister Shinzo Abe wouldwin the election. Everyone expected aggressive reforminitiatives, and Abe has indeed delivered them. Surelythe Nikkei collapse and accompanying rise in the yenhas as much or more to do with judging the prospects forAbenomics than with the timing of Fed tapering.

A key may be the excessive volatility in both the Nikkeiand the yen, which may be a function of misunderstanding

risk. Thats almost certainly whats in play in the Japanesebond market. The 10-year JGB yield has risen from 0.33%in early April to 1%, with up-down volatility the BOJ hasbeen trying to tame by temporarily closing the bond mar-ket on two occasions and intervening by as much as 2 tril-lion on at least one day. The BOJs Kuroda pledged to curbvolatility, saying, Through dialogue with the market andmore flexible operations, we will ensure the stability offinancial and capital markets. Normally, mention of dia-logue with the market is chilling. It means strong-armingmarket players and therefore potential misallocations.

The tripling of 10-year yields is contrary to the govern-ments plan to bring yields down all along the yield curve,

and the volatility is especially worrisome because, as someanalysts fear, banks will start dumping JGBs. The FinancialTimes reported, According to the BOJ, a 100-basis-pointincrease in interest rates across all maturities would leadto mark-to-market losses equivalent to a fifth of tier onecapital for regional banks, and 10 per cent for the majorbanks. Rising yields are also threatening the Abenomicsplan, as Prime Minister Abe said to Parliament on May 24:Sharp increases in long-term interest rates could have agrave impact on the economy and the governments fiscalconditions.

Another worry is that relying on the central bank to buywhenever the yield nears 1% will damage liquidity and

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FIGURE 3: NIKKEI 225 STOCK INDEX

On May 23, 2013, the Nikkei 225 stock index fell 7.2% after having been down

about 9%.

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ON THE MONEY

destabilize the bond market. This, in turn, could cause thegovernment to retreat from the massive QE announced in

April that, in turn, underpins the rising dollar/falling yen which is, in turn, the support for the Nikkei. This is thesense in which Bernanke saying no tapering yet is yen-relevant. Evidently investors had a scenario of rising U.S.yields and a falling yen, and upsetting that apple cart sentthe Japanese bond gang into a tizzy.

Unfortunately, we still dont really know why Japaneseyields are rising. Earlier this month analysts said it wasnot a bad thing, if contrary to government plans, becauseit confirms inflation expectations are higher. After all, kill-ing deflation is the main goal of Abenomics, so a little risein yields is not a bad thing if inflation expectations are the

cause. The problem is that yields didnt rise only a little they tripled, andthey were volatilehour by hour andday by day, indicat-ing a lack of stability.It was not helpfulthat officials, includ-ing Kuroda, seemedto be talking out ofboth sides of theirmouths, saying ris-ing yields are OK

and then contra-dicting that stance,sometimes on thesame day. More thanone analyst said thefinancial leaders dont know what they are doing. Its morelikely that they dont understand why the market refusesto be herded.

One thing we do know about Japanese governmentfinancial management is that when a decision is made toachieve a particular benchmark, that determination can bemanifested in intervention. Its like bringing out the dogsand the whip when herding by voice and horse isnt work-

ing. That means we need to find out whether the dollar/yen at a low of 100 is indeed a line in the sand, alongwith 10-year yields under 1% and an ongoing rise in theNikkei. Remember, in past FX market interventions, theMinistry of Finance named excessive volatility as a justi-fication. They certainly have that today.

But intervention is like tornadoes and hurricanes: Theconditions that form them develop a hundred times forevery instance of an actual tornado or hurricane. To acertain extent, intervention now would signal a failure ofthe government to be effective herders without resortingto force. Voluntary participation in the plan is preferable,especially since the Abe administration (rightly) seeks to

nurture animal spirits. The problem, perhaps, is that tohave the right amount of animal spirits, you need first to

understand and be willing to embrace risk.

Mr. Draghi speaksIf peripheral-country sovereign yields are the correctbenchmark for judging the sufficiency of the Eurozoneinstitutional infrastructure, Draghi got lucky in April andMay. The Cyprus crisis fell off the front page and yields inItaly, Spain, Portugal, and Greece fell back to lows not seenin over two years.

But just as Draghi was congratulating himself for the fall-ing yields, they started to rise again. On April 23, the Italian10-year yielded 3.89%, the lowest since October 2010, and

on May 24, it was 4.16%, not enough to set your hair onfire but somethingto watch. Spains10-year was 4.24%on April 23, the low-est since November2010, from a recordhigh last July of7.69% at the heightof the banking-sectorcrisis. By May 24, theSpanish yield hadclimbed to 4.43%

again, not enough toraise hackles but notthe right direction fora stabilizing market,either. All it would

take for yields to start rising again would be a high windfrom an unforeseen direction. We should not assume eventrisk has fallen to zero.

Bottom line, markets become interrelated and self-reinforcing under crisis conditions, and produce odd out-comes. At a guess, the U.S. yield will continue to hover in arange near 2% and not retreat back to sub-1.75%. After all,the Fed will start tapering at some point and its unlikely

to raise QE from here although once tapering starts, theFed has reserved the right to raise it again if needed. TheJapanese will probably get better at herding traders, andif not, they will intervene. Draghi will probably get awaywith naming a narrowing of spreads as evidence of centralbank excellence. But on the whole, central banks need to

pull up their socks and stop making mistakes.yBarbara Rockefeller (www.rts-forex.com) is an international econo-

mist with a focus on foreign exchange, and the author of the new

book The Foreign Exchange Matrix (Harriman House). For more

information on the author, see p. 4.

One thing we do know about

Japanese government financial

management is that when the

decision is made to achieve a

particular benchmark, that decisioncan be manifested by intervention.

7/27/2019 Ctm 201306

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Five questions

facing the marketThe Feds position, Japans high-stakes condition, Europes

zero-interest proposition and other market shaping issues

BY MARC CHANDLER


ON THE MONEY

Whats the outlook for Fed policy?The dramatic market reaction on May 22 notwithstand-ing, Federal Reserve chief Ben Bernanke and the FOMCminutes were fairly clear. Bernanke essentially said noto calls from some committee members to consider scal-ing back on the banks long-term asset purchases at nextmonths meeting. He argued that its too early, and thathe and the majority of the FOMC needed several moremonths of data to make that determination.

Also, when that happens, its a matter of slowing thepace ofquantitative easing, not terminating it entirely. Inaddition, the Fed (and some economists) argue the accom-modation of QE lies in the stock of long-term assets the

central bank keeps off the market, not so much in the flowof purchases.

Its true QE will come to an end, which is partly whyreferences to QE-infinity were misplaced (purposely?),confusing indeterminate with permanent. Ceasing QEoperations is a delicate process one the Fed has beenengaged in twice before. The Feds guidance suggests itwill adjust monetary policy only on the basis of economicperformance. A slowing of QE and its eventual end likelymeans the economy is stronger. In addition, the faster-than-expected decline in the U.S. budget deficit meansnew net supply also will fall.

We continue to look for underlying U.S. dollar strength(Figure 1). But to the extent that some of the dollars recentgains are a reflection of a more hawkish reading of the

Feds stance than is likely the case, we worry the dollaris vulnerable to disappointment. Such a dollar pullbackwould provide medium-term investors with a

new opportunity to take on exposure.

Can Japanese officials

stabilize the bond market?There are high political and economic stakesput at risk by both the volatility and direction ofJapanee bonds.The Bank of Japan (BOJ) contin-ues to struggle to stabilize the market. In addi-tion to domestic sources of volatility, officialshave had to cope with rising long-term global

yields. Over the past month, Japans 10-yearyield has risen 24 basis points (bp), the U.S.s 36bp, Germanys 28 bp, and the UKs 28 bp.

The Abe government wants to have its cakeand eat it, too: It wants to take credit for the eco-nomic recovery (and the fastest-growing econ-omy in the G7), demonstrate its commitment toending deflation, and keep bond yields stableand low. With earnings bolstered by the transla-tion of foreign sales and income from foreigninvestment back into the weaker yen, corpora-tions appear to be benefiting from Abenomics.But they arent facilitating its agenda by raising

FIGURE 1: U.S. DOLLAR

To the extent some of the dollars recent gains reflect a more hawkish

reading of the Feds stance than is warranted by the facts, the dollar

may be vulnerable to disappointment.

Source: TradeStation
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7/27/2019 Ctm 201306

20/3520 October2010CURRENCY TRADER20 June2013CURRENCY TRADER

Most retail traders focus on developing setups based on

data up to and including the most recently closed price

bar. However, its incorrect to assume only setups of this

type can produce good forecasting results. Signals that uselagged data that is, those that do not use data from

the most recent price bars often generate historically

profitable setups.

Although this approach might sound counterintuitive,

many times signals are independent of the immediately

following price action and lead to a useful forecast only

after a predetermined lag.

Lets look at a strategy that embodies this concept a

signal in the U.S. dollar/Japanese yen pair (USD/JPY)

based on a lagged price pattern.

The strategy

The system well evaluate has two entry rules, which are

reversed to exit positions. Price direction is determined

from two points one that compares the difference

between a recent low and closing price, and another (much

more lagged) that determines directionality by comparing

a bars high to a previous weeks opening price. The rules

for the system are:

1. Go long, close short, or update long trade stop-loss

when:

a. the high 33 days ago is above the open 40 days ago.

b. the low three days ago is above the close six days ago.

2. Go short, close short, or update short trade stop-losswhen:

a. the high 33 days ago is below the open 40 days ago.

b. the low three days ago is below the close six days ago.

As simple formulas, these rules are:

1. Go long, close short, or update long trade stop-loss

when:

a. High[33] > open[40].

b. Low[3] > close[6].

2. Go short, close short, or update short trade stop-losswhen:

a. High[33] < open[40].

b. Low[3] < close[6].

where a [0] corresponds to the most recent closed daily

bar, 1 is one bar ago, 2 is two bars ago, etc.

The system controls risk using an un-optimized stop-loss

that is placed below (for long trades) or above (for short

trades) the entry price by an amount equal to the 20-day

TRADING STRATEGIESTRADING STRATEGIES

USD/JPY laggedpattern strategy

Signals dont have to immediately follow the conclusion of a price pattern. This strategy shows

how entries that occur several bars after a price pattern can produce competitive results.

BY DANIEL FERNANDEZ

7/27/2019 Ctm 201306


average true range (ATR), initially risk-

ing 2% of the available account balance

on each trade. If theres an open trade

and a new signal occurs in the same

direction, the stop-loss is adjusted to

reflect the current price. For example,

if a long trade was opened at 100.45

and the 20-day ATR value was 1.34,

the stop-loss would be placed at 99.11

(100.45-1.34). If a new long signal trig-

gered at 103.20 with an ATR of 1.20 thestop-loss would be moved to 102.00

(103.20-1.20).

The system can function as either a

trend-following or countertrend strat-

egy because the absence of an immedi-

ate reaction allows the system to react

to price bursts in either direction in a

way that might not necessarily align

with the last evident trend direction.

The system also benefits from updating

the stop-loss when new signals occur;

this often serves as a trailing stop that

allows the system to capture gains

more efficiently.

Figure 1 shows a sample trade from

spring 2012, with the two entry rules

highlighted. The system got a better

entry by using a lagged pattern; enter-

ing immediately after the pattern crite-

ria had been satisfied (if the rules were

shifted such that entries were made as

FIGURE 2: SYSTEM EQUITY CURVE

The different lines show the strategys performance hinges upon both entry rules.

Also, the strategys performance without the stop-loss highlights the importance

of its trailing effect.

FIGURE 1: SAMPLE TRADES

The system enters positions several days after the second of the two pattern

criteria (highlighted) has completed.
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22/35

soon as the second rules pattern was completed) would

have generated an instant loss.

Testing the system

The strategy was back-tested on daily USD/JPY price data

from Jan. 1, 1988 to Aug. 1, 2012. A trading cost of 3 pips

(0.03) per trade was also included, and the initial account

equity was set at $100,000.

A note on price data: The data used for the test had a

weekly opening at 4 GMT +1/+2 hours on Monday and aweekly close at 19 GMT +1/+2 on Friday, adjusted accord-

ingly for daylight savings time (+1 non-DST, October to

March, and +2 for DST). Because we are evaluating pat -

terns on the daily time frame, the weekly opening/closing

times directly affect the open/high/low/close values of

the bars used to obtain signals. Make sure you carry out

proper time corrections on your data when executing the

system.

Historical test results

Figure 2 shows the results (logarithmic scale) of the trad-

ing strategy (light green), along with results without

a stop-loss (dark red) and the results of trading only

using rule 1 (dark green) or rule 2 (blue) as entry/exit/

update signals. Together, the lines show the strategys

performance depends on both entry rules, not just one

of them. The strategys performance without a stop-loss

also suggests its trailing effect is fundamental; without it

the drawdown increased significantly (although the final

profit was almost exactly the same).


TRADING STRATEGIES

FIGURE 3: DRAWDOWN DISTRIBUTION

Many drawdowns lasted longer than 200 days.

TABLE 1: PERFORMANCE SUMMARY

Absolute profit 1510%

Avg. annual return 13.27%

Max. drawdown 24.09%

Profit factor 1.26

Reward/risk ratio 1.61Win% 44%

Max. drawdown (days) 910

Ulcer Index 9.06

No. of trades 1,025

Max. loss 5.51%

Avg. loss 1.62%

No. of years in test 24

The strategy had favorable reward/risk characteristics, with

its primary shortcoming being lengthy drawdowns.

7/27/2019 Ctm 201306


Table 1 shows the strategy is able to achieve good results

over the course of the 24-year test period, with an aver-

age annual return of 13.27% and a maximum drawdown

of 24.09%. The strategy had winning percentage of 44%,

which was offset by a favorable 1.61 reward-to-risk ratio.

The high total number of trades (1,025) translates into an

average of approximately eight trades every 10 weeks.

However, the strategys maximum drawdown length

was quite high (almost three years), as was the Ulcer Index(9.06). Figure 3 shows why. The distribution of drawdown

lengths (from a total of 29 drawdowns) shows the strategy

experienced several drawdowns of more than 500 days,

and even more that were longer than 200 days.

Figure 4 shows the strategy had several losing years

(nine) within the test period 37.5% of all years. However,

the much larger gains generated during the profitable years

more than compensated for these losses. For example, con-

secutive minor losing years in 2006 and 2007 (-0.9% and

-2.7%) were followed by 2008s big 41.8% return.

An alternative worth considering

Although its intuitive to use price patterns that incorpo-

rate the most recent data, this study shows strategies that

use lagged information dont have an inherent disad-

vantage. This strategy had some conspicuous drawbacks

a high Ulcer Index and maximum drawdown length

but these deficiencies might be improved by combining

lagged strategies in a system portfolio or designing lagged

strategies that produce historically profitable results acrossmultiple instruments.

Remember to always analyze rules independently to

assess their relative importance, and consider the use of

updating stop-losses to trail profitable trades.yDaniel Fernandez is an active trader focusing on forex strategy

analysis, particularly algorithmic trading and the mathematical

evaluation of long-term system protability. For more information

on the author, see p. 4.

FIGURE 4: ANNUAL RETURNS

There were relatively frequent losing years (nine of 24), but the winning years

were much larger, on average.

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TRADING STRATEGIESADVANCED CONCEPTS

There are times to be shocked this, however, is notone of them.

The revelations that members of the British BankersAssociation were making up the London InterbankOffered Rate (LIBOR) as they went along were report-ed by The Wall Street Journal in April 2008. The effectsthese made-up rates and illiquidity had on currency

markets were discussed here in March 2009 (see Thehidden cost of illiquidity). The maxim, You cannotcheat an honest man certainly applies when membersof a trade association are given the green light by thegovernments and regulators who have made themwards of the state, and who were more than willing tolook the other way.

This author has observed, with a heavy heart, howgovernment statistics mills tend to operate without theconvenience of economists, financial writers, analysts,and other worthy members of society in mind. Theproblem here is what early computer jocks used to callGIGO: garbage in, garbage out. If you suppress or mis-

Major currencies andthe great LIBOR kerfuffle

All major countries have engaged in currency, interest rate and stock-market manipulation since

1999. Post-2008 LIBOR reporting problems merely injected more bad data into the equation.

BY HOWARD L. SIMONS

The more central banks forced their shortest interest rates

toward 0% the steeper the FRR6,9 levels became.

FIGURE 1: MONEY-MARKET YIELD CURVES BEFOREAND AFTER BEAR STEARNS

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

ForwardRateRatios,Six-Nine

Months

USD

CAD

EUR

GBP

AUD

SEK

CHF

JPY

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report enough data, or you engage in conduct that makesthe veracity of those data questionable, sooner or later youwill: 1) make a policy error based on bad information; or2) lose all credibility. Financial writers arguably are facileenough to find something else to write about and side-step the bad data; those in positions of power lack such aluxury.

Bear Stearns, bear marketsBear Stearns was one of the first casualties of the great

financial crisis of 2008 and one of the more egregiousentries in the annals of the crony capitalism that followed.The firm was rescued by the Federal Reserve in a ques-tionable extension of its bank regulation authority, as BearStearns was an investment bank, not a commercial bank.It was offered $2 per share by J.P. Morgan Chase on March16, 2008; this buyout offer later was raised to $10.

The extension of commercial banks balance sheets torescue their foolish investment-banking cousins raisedinterbank credit risk considerably. The so-called TEDspread, or difference between three-month LIBOR andthree-month Treasury bills, rose from 78.5 basis points inmid-February 2008 to almost 204 basis points just after

Bear Stearns failure. Everyone wanted to get the crisis(thought to be containable at the time) behind them andget LIBOR under control by any means necessary. Banksdid not want to show their risk; governments did not wantthose risks to be shown. When the cops and the robbersfind themselves on the same side of the equation, what cango wrong?

Although LIBOR blew out further in September-October2008 and the aforementioned TED increased to more than460 basis points in October, the real damage to LIBOR

integrity occurred in March 2008. This can be demon-strated by mapping the money-market yield curves asmeasured by the forward-rate ratios between six and ninemonths (FRR6,9) for major currencies. This is the rate atwhich borrowing can be locked in for three months start-ing six months from now, divided by the nine-month rateitself. The more this ratio exceeds 1.00, the steeper theyield curve is.

The more various central banks forced their very short-est interest rates toward 0%, the steeper the FRR6,9 levelsbecame (Figure 1). The Swiss led the way with their driveto and through 0% in an effort to cap the franc at 1.20CHF/EUR (see The paradox of negative interest rates,

Pre-Bear Stearns, the CAD lost when its FRR6,9 was flatter

than the USDs and it showed relatively little stock market

linkage. After March 2008, the CAD lost after its stock market

outperformed, with a tilt toward situations where its FRR6,9was steeper than the USDs.

FIGURE 2: THREE-MONTH-AHEAD SPOTCURRENCY RETURNS, CAD

Prior to March 2008, the EUR tended to gain when its

FRR6,9 was steeper than the USD FRR6,9, following periods

when U.S. equities outperformed. After March 2008, the

relationship became episodic.

FIGURE 3: THREE-MONTH-AHEAD SPOTCURRENCY RETURNS, EUR

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ON THE MONEY


ADVANCED CONCEPTS

January 2013). Just as notable, though, is the extremequiescence of the JPY FRR6,9: It remained essentiallyunchanged from the beginning of 2011 onward.

Currencies before and afterCurrencies can trade off ofpurchasing power parity (PPP)or relative inflation, (see A parody of purchasing power,Currency Trader, December 2009), off of underlying physi-

cal trade flows (you are welcome to try to demonstratethis one), off of expected interest rate differentials, or offof relative asset returns. As the PPP model is laughablyinaccurate and trade flows scarcely scratch the surface onobserved currency movements, lets focus on the interestrate parity model and relative asset returns.

In a normal world, something we have not encounteredin a few years, a country whose FRR6,9 steepens relative tothe USD FRR6,9 should see its currency rise relative to theUSD, unless and this is a very important unless thenon-USD FRR6,9 is steepening bearishly and the prospectof higher short-term interest rates is leading capital out ofthe country. This last effect is why the Indian rupee was

under pressure in 2012.As most investors are trend-followers and chase perfor-

mance, higher stock market returns relative to U.S. stockmarket returns tend to lead capital inflows and push thecurrency higher unless those inflows are forestalled byrunaway money-printing, as in the Swiss case or in theJapanese case after November 2012.

With these two preambles in mind, lets map three-

month-ahead spot currency returns for a set of major cur-rencies as a function of [FRR6,9

Foreign - FRR6,9USD] and of

the trailing relative stock market returns as measured bythe MSCI index return in USD terms between the non-U.S.and U.S. markets. Maps for the January 1999 to March 2008and post-March 2008 periods will be displayed together inthe following charts. In all cases a positive three-month-ahead spot currency return will be depicted with a redbubble and a negative return with a purple bubble; thediameter of the bubbles corresponds to the absolute mag-nitude of the currencys return.

In the case of the CAD, behavior changed significantlybefore and after March 2008 (Figure 2). Prior to the Bear

Before March 2008, the pound had a strong bias to gain after

the GBP FRR6,9 was flatter than its U.S. counterpart.The

GBP alternated between bands of gain and loss as a state-

dependent function of the FRR6,9 differential, regardless ofstock-market differentials.

FIGURE 4: THREE-MONTH-AHEAD SPOTCURRENCY RETURNS, GBP

Before March 2008, the pattern of three-month ahead returns

demonstrated little systematic dependence on either the yield

curve or asset-return differentials. Afterwards, the pattern

appears as state-dependent as those for the EUR and GBP.

FIGURE 5: THREE-MONTH-AHEAD SPOTCURRENCY RETURNS, AUD
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Stearns takeover, the CAD lost when its FRR6,9 was flat-ter than the USD FRR6,9 and demonstrated relatively littlestock market linkage. After March 2008, the CAD lost afterits stock market outperformed, and with a pronounced tilttoward situations where its FRR6,9 was steeper than theUSD FRR6,9.

Now lets turn to the EUR (Figure 3). Prior to March2008, the EUR tended to gain when its FRR6,9 was steeper

than the USD FRR6,9 and with a tilt toward those periodswhen U.S. equities outperformed. After March 2008, thesituation became quite episodic, as both currencies werebuffeted about by erratic monetary policies and rollingcrises. Relative stock market returns were unimportant;relative money-market yield curves moved into and out ofzones of alternating future currency return.

The pattern for the GBP is different still (Figure 4). Priorto March 2008 the pound had a very strong bias to gainafter the GBP FRR6,9 was flatter than its U.S. counterpart.Afterwards the GBP demonstrated the same regime-depen-dent pattern seen for the EUR: Regardless of the stockmarket differentials, the GBP alternated between bands of

gain and loss as a state-dependent function of the FRR6,9differential.

The AUD also demonstrates something different. Thepattern of three-month-ahead returns bears little in theway of systematic dependence on either the dimensionof yield curve or asset-return differentials prior to March2008. Afterwards, the pattern looks as state-dependent asthose seen for the EUR and GBP.

If we shift to the SEK, we see another and even moreunique set of patterns (Figure 6). Before March 2008, thedistribution of returns was random except for an oddcluster of very positive three-month-ahead returns for theSEK during a period of high relative Swedish stock mar-ket returns. This cluster occurred in the final phase of thedot-com bubble of late 1999-early 2000. The Swedish stockmarket returned 91.5% in USD terms between mid-October1999 and the beginning of March 2000; if investors inSwedish equities sold at the peak and they most likelydid not they captured gains in the krona as well. Theone period after March 2008 with significant SEK weak-ness occurred during a period of strong relative Swedish

Before March 2008, the distribution of returns was random

except for an odd cluster of very positive three-month-ahead

returns for the SEK during a period of high relative Swedish

stock market returns.

FIGURE 6: THREE-MONTH-AHEAD SPOTCURRENCY RETURNS, SEK

Three-month-ahead returns were a state-dependent function

of relative stock market performance before March 2008, and

random afterwards.

FIGURE 7: THREE-MONTH-AHEAD SPOTCURRENCY RETURNS, CHF

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ON THE MONEY


ADVANCED CONCEPTS

stock market returns. So much for the Swedish stock mar-ket driving SEK rates.

The CHF, for all of its ceiling-associated drama, has beenone of the least interesting currencies as a function of thetwo independent variables involved (Figure 7). Three-month-ahead returns were a state-dependent function ofrelative stock market performance before March 2008, aturnabout from the EUR and GBP. Afterwards, the returnpatterns shifted to random, even dismissing the cluster ofpositive returns preceding the imposition of the franc ceil-ing in September 2011.

Finally, we come to the JPY. As this countrys interestrates have been near 0% since February 1999 and its stockmarket has been stuck in neutral since March 2008, we

should expect no visible patterns and we are not disap-pointed. The JPY has moved both higher and lower sinceJanuary 1999 in response to developments such as theunwinding of the yen carry trade, attempts to re-inflate,and even capital inflows associated with the 2011 earth-quake and tsunami. This is a currency that defies normalanalysis.

ConclusionWhile the suppression of short-term interest rates andskullduggery in their reporting certainly changed patternsin key currencies such as the EUR, CAD and GBP afterMarch 2008, we should not romanticize the period before.

The so-called currency wars are nothing new: All themajor countries have engaged in currency manipulation,interest rate manipulation, and even outright stock marketmanipulation since 1999. All the 2008 LIBOR reportingshift did was inject another element of bad data into theequation.

No one knows when the era of zero interest rates willend, how it will end, and what the eventual market struc-ture will look like when it does. What will remain con-stant, though, is the inability of generalized and simplifiedrules to describe what will drive currencies over time.Perhaps we should be grateful: Just as a messy election isthe sign of a functioning democracy, a messy market is one

people want to trade.A set of minor currencies will be examined using the

same construct next month.yHoward Simons is president of Rosewood Trading Inc. and a strate-

gist for Bianco Research.For more information on the author, see p.

4.

The currency that defies normal analysis has moved bothhigher and lower since January 1999 in response to a wide

range of developments.

FIGURE 8: THREE-MONTH-AHEAD SPOTCURRENCY RETURNS, JPY

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CPI: Consumer price index

ECB: European Central Bank

FDD(rstdeliveryday):Therst

day on which delivery of a com-modityinfulllmentofafutures

contract can take place.

FND(rstnoticeday):Also

knownasrstintentday,thisis

therstdayonwhichaclear-nghouse can give notice to abuyer of a futures contract that itntends to deliver a commodity in

fulllmentofafuturescontract.

The clearinghouse also informsthe seller.

FOMC: Federal Open MarketCommittee

GDP: Gross domestic product

ISM: Institute for supplymanagement

LTD(lasttradingday):Thenal

day trading can take place in a

futures or options contract.

PMI: Purchasing managers index

PPI: Producer price index

Economic Releaserelease (U.S.) time (ET)

GDP 8:30 a.m.

CPI 8:30 a.m.

ECI 8:30 a.m.

PPI 8:30 a.m.

SM 10:00 a.m.

Unemployment 8:30 a.m.

Personal income 8:30 a.m.

Durable goods 8:30 a.m.Retail sales 8:30 a.m.

Trade balance 8:30 a.m.

Leading indicators 10:00 a.m.

GLOBAL ECONOMIC CALENDAR

June

1

2

3 U.S.: May ISM manufacturing report

4 U.S.: April trade balance

5 U.S.: Fed beige book

6

Brazil: May PPIFrance: Q1 employment reportUK: Bank of England interest-rateannouncementECB: Governing council interest-rateannouncement

7

U.S.: May employment reportBrazil: May CPICanada: May employment reportMexico: May 31 CPILTD: June forex options; June U.S.dollar index options (ICE)

8

910

11 Japan: bank of Japan interest-rateannouncement

12

France: May CPIGermany: May CPIJapan: May PPIUK: April employment

13 U.S.: May retail salesAustralia: May employment report

14U.S.: May PPIHong Kong: Q1 PPIIndia: May PPI

15

16

17 LTD: June forex futures; June U.S.dollar index futures (ICE)

18

U.S.: May CPI and housing startsHong Kong: March-May employ-ment reportUK: May CPI and PPI

19

U.S.: FOMC interest-rate announce-mentSouth Africa: Q1 GDP and May CPFDD: June forex futures; June U.S.dollar index futures (ICE)

20

U.S.: May leading indicatorsBrazil: May employment reportGermany: May PPIHong Kong: Q1 GDP and May CPI

21 Canada: May CPI

22

23

24Mexico: May employment report,June15CPIandMayPPI

25 U.S.: May durable goods

26 U.S.: Q1 GDP (third)France: Q1 GDP

27

U.S.: May personal incomeGermany: May employment reportSouth Africa: May PPI

UK: Q1 GDP

28

Canada: May PPIFrance: May PPIJapan: May employment report andCPI

29

30 India: May CPI

31

July

1 U.S.: June ISM manufacturing repor

2

3 U.S.: May trade balance

4

UK: Bank of England interest-rateannouncementECB: Governing council interest-rateannouncement

5

U.S.: June employment reportBrazil: June CPI and PPICanada: June employment reportLTD: July forex options; June U.S.dollar index options (ICE)

The information on this page is sub-

ect to change. Currency Traderis

not responsible for the accuracy of

calendar dates beyond press time.

Event: The Trading Show ChicagoDate:June24-25

Location: Downtown Marriott, ChicagoFor more information: Go to www.terrapinn.com

Event: The MoneyShow San FranciscoDate:Aug.15-17

Location: San Francisco Marriott MarquisFor more information: Go to www.moneyshow.com

Event: CBOE Risk Management ConferenceDate: Sept. 30 - Oct. 3Location: PortugalFor more information: Go to www.cboermceurope.com

Event: The Trading Show West CoastDate: Oct. 21-22Location: San FranciscoFor more information: Go to www.terrapinn.com

EVENTS

7/27/2019 Ctm 201306


CURRENCY FUTURES SNAPSHOTas of May 31

The information does NOT constitute trade

signals. It is intended only to provide a brief

synopsis of each markets liquidity, direction,

and levels of momentum and volatility. See

the legend for explanations of the different

fields. Note: Average volume and open

interest data includes both pit and side-by-

side electronic contracts (where applicable).

LEGEND:

Volume: 30-day average daily volume, in

thousands.

OI: 30-day open interest, in thousands.

10-day move: The percentage price move

from the close 10 days ago to todays close.20-day move: The percentage price move

from the close 20 days ago to todays close.

60-day move: The percentage price move

from the close 60 days ago to todays close.

The % rank fields for each time window

(10-day moves, 20-day moves, etc.) show

the percentile rank of the most recent move

to a certain number of the previous moves of

the same size and in the same direction. For

example, the % rank for the 10-day move

shows how the most recent 10-day move

compares to the past twenty 10-day moves;

for the 20-day move, it shows how the most

recent 20-day move compares to the pastsixty 20-day moves; for the 60-day move,

it shows how the most recent 60-day move

compares to the past one-hundred-twenty

60-day moves. A reading of 100% means

the current reading is larger than all the past

readings, while a reading of 0% means the

current reading is smaller than the previous

readings.

Volatility ratio/% rank: The ratio is the short-

term volatility (10-day standard deviation

of prices) divided by the long-term volatility

(100-day standard deviation of prices). The

% rank is the percentile rank of the volatility

ratio over the past 60 days.

BarclayHedge Rankings:Top 10 currency traders managing more than $10 million

(as of April 30 ranked by April 2013 return)

Trading advisorApril

return2013 YTD

return

$ Undermgmt.

(millions)

1 24FX Management Ltd 12.70% 20.27% 71.6

2 Harness Investment Group (FX) 5.37% 9.74% 4228

3 Gedamo (FX Alpha) 5.08% 12.62% 29.6

4 A-Venture Capital 3.91% -0.71% 54.15 Rhicon Currency Mgmt (Sys. Curr.) 3.70% 8.36% 10

6 Gedamo (FX One) 2.88% 7.18% 40.5

7 FDO Partners (Emerging Markets) 2.85% 10.34% 2442

8 Regium Asset Mgmt (Ultra Curr) 2.74% 11.42% 23.7

9 Sequoia Capital Fund Mgmt (FX) 2.60% 1.66% 28

10 Cambridge Strategy (Asian Mrkts) 2.31% 2.12% 138

Top 10 currency traders managing less than $10M & more than $1M

1 SMILe Global (Mgmt FX) 8.77% 19.68% 5.1

2 Rhicon Currency Mgmt (Sys. Curr.) 3.70% 8.36% 10

3 Fornex (Foyle)3.48% 2.40%

2.1

4 Exclusive Returns (Viktory) 1.96% 9.44% 1.5

5 Hartswell Capital Mgmt (Apollo) 1.25% -3.21% 3.2

6 JP Global Capital Mgmt (Troika I) 1.04% 8.52% 1.2

7 Capricorn Currency Mgmt (FXG10 EUR) 0.95% 4.71% 2.6

8 MDC Trading 0.82% 8.13% 1.5

9 Valhalla Capital Group (Int'l AB) 0.79% 2.68% 2.3

10 Blue Fin Capital (Managed FX) 0.60% -0.32% 6

Based on estimates of the composite of all accounts or the fully funded subset method.

Does not reflect the performance of any single account.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

Market Sym Exch Vol OI10-day

move / rank

20-day

move / rank

60-day

move / rank

Volatility

ratio / rank

EUR/USD EC CME 262.7 231.5 0.57%/50% -0.60%/10% -0.10%/0% .29/57%

JPY/USD JY CME 190.1 213.1 1.38%/100% -2.70%/45% -6.57%/13% .19/67%

AUD/USD AD CME 125.6 175.7 -2.56%/42% -6.45%/95% -6.57%/100% .30/8%

GBP/USD BP CME 114.8 199.2 -0.80%/14% -2.24%/54% 0.93%/100% .21/53%

CAD/USD CD CME 74.1 144.8 -1.88%/50% -2.74%/90% -0.54%/13% .35/67%

MXN/USD MP CME 45.2 164.1 -4.33%/100% -4.80%/100% -0.64%/11% .73/100%

CHF/USD SF CME 43.9 56.3 0.16%/0% -2.58%/51% -1.25%/29% .42/42%

U.S. dollar index DX ICE 36.6 78.1 -1.17%/83% 1.47%/55% 1.56%/27% .25/43%

NZD/USD NE CME 15.6 40.0 -2.85%/50% -6.37%/100% -4.29%/100% .50/38%

E-Mini EUR/USD ZE CME 3.7 5.9 0.57%/

Documents

Ctm 201306