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					                  FX WINNERS AND LOSERS p. 6

                                 Strategies, analysis, and news for FX traders




January 2011
Volume 8, No. 1




  Currency drivers             Testing “classic” technical
  for the new year p. 14       indicator entries p. 16

  A surprising outlook         The evolution of
  for the Euro p. 10           the Euro p. 22
           CONTENTS


               Contributors ...................................................... 4   Advanced Concepts
                                                                                         The Euro-dollar rate:
               Global Markets                                                            Another thing made in China? .................. 22
                  2011 forex themes ......................................6              Analyzing China’s integral role in the balance
                  Developing economies and currencies could                              between the Euro and the dollar.
                  have an edge in 2011. Among the majors, look                           By Howard L. Simons
                  for continued pressure in the Eurozone, and
                  renewed bullish action down under.                                     Global Economic Calendar ........................ 27
                  By Currency Trader Staff                                               Important dates for currency traders.


               On the Money                                                            Currency Futures Snapshot ................. 28
                  Sovereignty, hegemony, and
                  the fate of the Euro/dollar ....................... 10               International Markets ............................ 30
                  Strange economic and political bedfellows could                        Numbers from the global forex, stock, and
                  actually make the Euro the reserve currency                            interest-rate markets.
                  many people thought it could never really be.
                  By Barbara Rockefeller                                                 Events .......................................................33
                                                                                         Conferences, seminars, and other events.
                  The dollar and the Euro
                  in the New Year ........................................ 14
                  A look at the policies and market forces that will
                  shape the U.S. and European currencies as
                                                                                                          Looking for an
                  2011 gets under way.
                  By Marc Chandler                                                                         advertiser?

                                                                                                   Click on the company name for a
               Trading Strategies
                                                                                                   direct link to the ad in this month’s
                  Edge-ratio analysis of “classic”                                                                  issue.
                  indicator entry rules ............................... 16
                  The value of classic technical indicator signals
                                                                                                                      eSignal
                  is evaluated across four forex major currency
                                                                                                                      FXCM
                  pairs.
                  By Daniel Fernandez                                                                             MetaTrader5
                                                                                                                  Ninja Trader




Questions or comments?
 Submit editorial queries or comments to
 webmaster@currencytradermag.com

2	                                                                                                           January	2011	•	CURRENCY TRADER
                                                                                     CONTRIBUTORS


                                                                                                    q Howard Simons is president of Rose-
                                                                                                    wood Trading Inc. and a strategist for Bianco
                                                                                                    Research. He writes and speaks frequently on
                                                                                                    a wide range of economic and financial market
                    A publication of Active Trader ®                                                issues.

            For all subscriber services:                                                              q Daniel Fernandez is an active trader
                  www.currencytradermag.com                                                         with a strong interest in calculus, statistics,
                                                                                                    and economics who has been focusing on the
                                                                                                    analysis of forex trading strategies, particularly
                 Editor-in-chief: Mark Etzkorn
                                                                                                    algorithmic trading and the mathematical eval-
               metzkorn@currencytradermag.com                                                       uation of long-term system profitability. For the
                                                                                    past two years he has published his research and opinions on
                 Managing editor: Molly Goad                                        his blog “Reviewing Everything Forex,” which also includes
                 mgoad@currencytradermag.com                                        reviews of commercial and free trading systems and general
                                                                                    interest articles on forex trading (http://fxreviews.blogspot.
                                                                                    com). Fernandez is a graduate of the National University of
                      Contributing editor:
                                                                                    Colombia, where he majored in chemistry, concentrating in
                            Howard Simons                                           computational chemistry. He can be reached at dfernandezp@
                                                                                    unal.edu.co.
                     Contributing writers:
                                                                                    q Barbara Rockefeller (www.rts-forex.com) is an inter-
                         Barbara Rockefeller,
                                                                                    national economist with a focus on foreign exchange. She has
                    Marc Chandler, Chris Peters
                                                                                    worked as a forecaster, trader, and consultant at Citibank and
                                                                                    other financial institutions, and currently publishes two daily
                    Editorial assistant and                                         reports on foreign exchange. Rockefeller is the author of Tech-
                   webmaster: Kesha Green                                           nical Analysis for Dummies (For Dummies, 2004), 24/7 Trading
                 kgreen@currencytradermag.com                                       Around the Clock, Around the World (John Wiley & Sons, 2000),
                                                                                    The Global Trader (John Wiley & Sons, 2001), and How to Invest
                                                                                    Internationally, published in Japan in 1999. A book tentatively
                     President: Phil Dorman                                         titled How to Trade FX is in the works. Rockefeller is on the
               pdorman@currencytradermag.com                                        board of directors of a large European hedge fund.


                       Publisher, ad sales:                                                         q Marc Chandler (marc@terrak.com) is
                                                                                                    the head of global foreign exchange strategies
                              Bob Dorman
                                                                                                    at Brown Brothers Harriman and an associate
               bdorman@currencytradermag.com
                                                                                                    professor at New York University’s School of
                                                                                                    Continuing and Professional Studies. Chan-
              Classified ad sales: Mark Seger                                                       dler has spent more than 20 years analyzing,
                 seger@currencytradermag.com                                        writing, and speaking about global capital markets. He has
                                                                                    worked for several consulting firms and banks as well as a
                                                                                    hedge fund in the early 1990s. Chandler appears regularly on
                                                                                    CNBC and Bloomberg Television. He is the author of Making
Volume 8, Issue 1. Currency Trader is published monthly by TechInfo, Inc.,          Sense of the Dollar: Exposing Dangerous Myths about Trade and
PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2011 TechInfo, Inc. All
rights reserved. Information in this publication may not be stored or reproduced    Foreign Exchange (Bloomberg Press, 2009).
in any form without written permission from the publisher.

The information in Currency Trader magazine is intended for educational
purposes only. It is not meant to recommend, promote or in any way imply the
effectiveness of any trading system, strategy or approach. Traders are advised
to do their own research and testing to determine the validity of a trading idea.
Trading and investing carry a high level of risk. Past performance does not
guarantee future results.




4	                                                                                                               January	2011	•	CURRENCY TRADER
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            GLOBAL MARKETS




                        2011 forex themes
       Developing economies and currencies could have an edge in 2011. Among the majors,
        look for continued pressure in the Eurozone and renewed bullish action down under.


                                          BY CURRENCY TRADER STAFF




Heading into year-end, the Japanese yen (JPY), Australian      divergence between developed and developing countries
dollar (AUD), and South African rand (ZAR) were the            will continue, and sees the U.S. dollar, yen, Euro, and
biggest currency gainers vs. the U.S. dollar in 2010. With     British pound underperforming emerging- and minor-
global growth back on track, where will currency traders       economy currencies, while the Australian dollar, Swiss
find strong trends in 2011? Let’s take a look at economic      franc, Norwegian krone, and Swedish krona are likely to
forecasts and key themes likely to drive trade in the forex    outperform the majors.
arena this year.
   Global gross domestic product (GDP) grew at an approx-      Economic contraction for 2011?
imately 4.7-percent pace in 2010 — not bad, given the          This year may see global economic growth pull back a
dismal performance in 2009, which saw global GDP actu-         bit, analysts agree, as developing countries attempt to
ally decline by 0.7 percent (the first decline in 40 years).   cool potentially overheating economies. Credit Suisse, for
However, there was a wide gap in the growth of older           example, expects global GDP to downtick to a 4.4-percent
industrialized economies vs. developing economies.             pace this year.
   For example, Credit Suisse economists estimate 2010           Wells Fargo global economist Jay Bryson says slightly
GDP at 2.7 percent for the U.S., 1.7 percent for the           slower growth in China and India is possible (on the order
Eurozone, 1.8 percent for the UK, and 3.5 percent for          of a percentage point or two) because the major develop-
Japan. Compare that to the 8.9-percent estimate for the        ing economies, including China and India, are raising
non-Japan Asia, with China leading the charge at 9.8 per-      interest rates.
cent and India not far behind at 8.4 percent. Latin America      That ties into one of Bryson’s expected themes for 2011:
also performed well, posting a roughly 6.1-percent growth      a pickup in inflation in the developing world, including
rate in 2010.                                                  recent data showing higher-than-expected inflation in
   Analysts anticipate the split between developed and         China.
emerging economies to persist in 2011, and expect for this       “If you start to see rising inflation in the developing
difference to be a major driver of currency action.            world, does it mean these guys have to slam on the brakes
   “I think the prevailing theme will be the dichotomy of      [and tighten monetary policy]?” Bryson says. “That could
how the developed countries grapple with disinflation and      mean slower growth.”
loose monetary policy vs. how emerging markets continue          Mary Nicola, currency strategist at BNP Paribas agrees
to grapple with inflation and tightening policy,” says inde-   “Asian inflation” will likely be a dominant theme driving
pendent global markets strategist Charmaine Buskas.            FX action in 2011.
   Brian Dolan, chief strategist at Forex.com, agrees the        “Much of what has helped growth over the past year is


6	                                                                                      	January	2011	•	CURRENCY TRADER
liquidity from central banks,” she says. “Now that infla-       tite for the Euro. As of mid-December, we’re looking at
tion has become a significant threat, we should see further     Euro/dollar (EUR/USD) at 1.3300, and I think it could go
policy tightening from Asia.”                                   as low as 1.2500 or even possibly 1.2000.”
   Rate hikes, in turn, would support Asian FX markets,            Looking at the Euro’s technical situation, analysts at
Nicola notes.                                                   Credit Suisse noted the currency’s vulnerability in their
   “Asian currencies in general will be a big focus next        Dec. 8 “Investment Themes for 2011” research note: “The
year,” she says. “I do think Asian currencies will appreci-     aggressive EUR/USD plunge through the critical trendline
ate vs. the dollar in 2011.”                                    off the June low into late November reinforced the prior
   Like many other analysts, Nicola is suspect of the U.S.      violation of the key 1.3381/65 area for an extremely nega-
dollar’s performance.                                           tive long-term chart setup. This activity alongside the vio-
   “The U.S. stimulus and resulting deficits are both a posi-   lation of the 200-day moving average has signaled a more
tive and a negative for the dollar,” she says. “[But] deficit   aggressive negative tone into at least year-end and first
concerns could come back to weigh on the dollar.”               quarter 2011 with a bearish ’outside’ November pattern
                                                                just completed. Moreover, the succession of lower lows
EZ questions                                                    and highs since the 2008 peak, alongside the May 2010
Uncertainty over European sovereign-debt issues is likely       violation of secular support foundations, indicates a more
to continue to loom large over the Eurozone and its cur-        significant topping process, which has negative implica-
rency in 2011.                                                  tions well into 2011.”
   “We are only in the third or fourth inning of the debt          Credit Suisse analysts anticipate a 2011 decline closer to
issue,” Bryson says. “Where does the European debt crisis       the 61.8-percent retracement of the Euro’s entire 2000-2008
go from here? If it rears its ugly head again will the Euro     rally, to around 1.1210, with interim levels at the 61.8-per-
sell off?”                                                      cent retracement of the second-half 2010 advance (1.2795),
   Just as the Greek crisis was beginning to fade from          the August swing low (1.2588), the 2010 trough (1.1876),
memory and the Euro was rebounding, Ireland defaulted,          and the 2005 low at 1.1640 (Figure 2).
pushing the currency down again (Figure 1). Now, most              On the other side of the coin is the potential for a rally in
observers fear similar episodes in Spain and Portugal may       the British pound vs. the dollar (Figure 3).
be only a matter of time.
   “Peripheral Europe is having a            FIGURE: 1 EURO PRESSURE
significant impact on the markets,”
Nicola says. “Watch data from Spain
— it’s the fourth-largest economy in
the Eurozone and there’s a lot of talk
about it being under significant pres-
sure. We could see a double-dip reces-
sion in Spain, which could be a drag
on sentiment in the Eurozone.”
   All of which would keep pressure on
the Euro.
   “I see ongoing problems for the
Euro in the next year,” Buskas notes.
“The situation with the peripherals
isn’t going to get better any time soon
— and it’s structural, not cyclical, and
therefore it’s going to be a long-term
issue that will weigh on the Euro. Add
to that the fact that France is losing its
clout in the Eurozone, which puts a lot
of the burden on Germany to bail out
the problem-makers, and you have a           More bad debt news from Portugal and especially Spain could drive the Euro
recipe for investors to pare their appe-     lower again.


CURRENCY TRADER	•	January	2011		                                                                                                   7
     GLOBAL MARKETS



 FIGURE 2: THE GRAND RETRACEMENT?                                                    at £109 billion. If the government
                                                                                     can begin to deliver on its promise,
                                                                                     it should help both the currency and
                                                                                     stock markets. I think given where
                                                                                     sterling/dollar is now (around 1.5400
                                                                                     at the end of December), we could see
                                                                                     sterling rise as high as 1.7500 vs. the
                                                                                     U.S. dollar in the next year.”
                                                                                        However, others are more bear-
                                                                                     ish on the pound. Dolan, pegged the
                                                                                     range for the GBP/USD pair between
                                                                                     1.5000 and 1.6000 in the first quarter
                                                                                     2011, with a risk to the downside.
                                                                                        “A break under 1.500 would target
                                                                                     1.4300,” he says.
                                                                                        Nicola adds: “We ‘re pretty bearish
                                                                                     on sterling. The fiscal austerity mea-
                                                                                     sures will have a significant impact on
                                                                                     the economy and the currency. High
                                                                                     inflation is preventing the Bank of
                                                                                     England from easing and the economy
 Some analysts anticipate the Euro will approach an approximately 62-percent         is significantly weak.”
 retracement of its 2000-2008 bull move.                                                She targets a bottom for the pound/
                                                                                     dollar at 1.46 by Q3 2011.

  “For most of 2010, the UK has spent a lot of time and           Nordic strength
effort getting its fiscal and economic houses in order,”          One patch of anticipated strength is in Scandinavia.
Buskas says. “The coalition government has pledged to              “We’re pretty bullish on the Scandia currencies like
increase taxes and implement spending cuts, which should          Norway’s krone (NOK),” Nicola says.
go a long way to eliminating a structural deficit estimated        Norway has a strong balance sheet overall, and because
                                                                                     it’s an oil-producing nation, the NOK
 FIGURE 3: BRITISH POUND                                                              also benefits from higher oil prices.
                                                                                      The currency tends to “do well in a
                                                                                      risk-off environment” and has “defen-
                                                                                      sive” qualities, according to Nicola.
                                                                                         Credit Suisse analysts were also
                                                                                      bullish on the NOK. One trade idea
                                                                                      from Credit Suisse’s “Investment
                                                                                      Themes for 2011”: “Long NOK against
                                                                                      the EUR, with a target at 7.80.” The
                                                                                      analysts cited a favorable growth
                                                                                      environment in Norway’s main trad-
                                                                                      ing partners, including Germany and
                                                                                      Sweden, which should support export
                                                                                      growth.

                                                                                     Aussie dollar
                                                                                     After surging more than 13 percent
                                                                                     vs. the U.S. dollar in 2010, traders will
                                                                                     continue to eye the Australian dollar
                                                                                     as a potential winner in the new year
                                                                                     (Figure 4).
 The pound outlook is mixed, with calls for a modest rally but looming risk of a
                                                                                       “We like the Aussie/dollar (AUD/
 reversal to lower levels because of UK austerity measures.
                                                                                     USD) on dips,” says Sean Callow,


8	                                                                                         January	2011	•	CURRENCY TRADER
                                              FIGURE 4: AUSSIE INTEREST-RATE EDGE

senior currency strategist at Westpac
Institutional Bank. “AUD/USD has
come under pressure in recent weeks
(through mid-December) from two fronts.
Risk appetite has deteriorated while
yield spreads have also worked against
AUD/USD, both via the rise in U.S.
yields since early November and lower
Australian yields after a run of softer
economic data. We see these factors
lessening in early 2011, meaning that
AUD/USD dips to the .9500-.9600
area in coming weeks would provide
attractive levels to build longs targeting
1.0100-1.0200.”
   In terms of risk appetite, Callow
notes the AUD/USD’s daily correla-
tion with the S&P 500 was around 0.82
from November into mid-December,
showing a tighter relationship than             The Australian dollar posted a big rally vs. the U.S. dollar in 2010, and despite
was present for much of 2010. But he            the potential for a dip, most anticipate further upside in 2011.
doesn’t expect European sovereign
debt-jitters to be a key influence on AUD/USD in the first              “From the AUD yield side, markets are currently not
half of this year.                                                    fully priced for an RBA rate rise until third quarter 2011,”
   “While the fiscal challenge facing many Eurozone                   Callow says. “We regard risks to this profile as skewed to
nations will remain pressing throughout the year, its influ-          the side of higher yields and retain our call for a 5-percent
ence on Aussie dollar pricing should wane,” he says.                  cash rate by mid-2011. The Australian economy should
   As a supplier of many raw commodities, Australia has               recover from its current soft patch by first-quarter 2011.”
been a major beneficiary of China’s economic growth, so
a Chinese contraction could negatively impact the Aussie              Stabilization
currency, although Callow sees the downside as limited.               Following several years of crisis, recession, and volatility,
   “China’s moves to deal with inflation and capacity con-            another theme emerging in 2011 may be more stabilization
straints via further monetary tightening pose a more sub-             across financial markets.
stantial risk to AUD,” he says. “But while announcements                “We’ve seen shocks to the global financial markets
of fresh steps — increases in reserve ratios or interest              having progressively smaller impacts,” says Vassili
rates, for instance — will hurt AUD at times, overall we              Serenbriakov, currency strategist at Wells Fargo, who
see the China-tightening headwind as a source of occa-                adds the Eurozone debt crisis news in May 2010 had a
sional volatility rather than a sustained negative. As long           much larger impact on markets than the similar October-
as there’s no policy mistake in China (over-tightening), then         November news.
Australia’s terms of trade should remain at historically                “The negative impact from financial market shocks are
very high levels and commodity export volumes should                  becoming less pronounced and should support commodity
help produce ongoing trade surpluses.”                                currencies [and other high-risk appetite trades],” he says.
   Should China raise rates, Dolan expects setbacks in the              Serenbriakov says volatility index (VIX) readings sup-
commodity currencies, but nothing that will last very long. port his case.
   “Any market reaction is likely to be a short-tem blip —              “When Lehman Brothers collapsed in October 2008, risk
look for those to be buying opportunities,” he says. Dolan            aversion was high and the VIX was near 90. It didn’t really
also sees the Aussie dollar as a good buy against the Euro            fall back below 30 until May 2009,” he notes. “In 2010,
and British pound.                                                    the VIX peaked near 50 in May and now has fallen back
   With the cash rate currently at 4.75 percent, bullish              below 30 on a sustained basis. The peaks are getting pro-
interest-rate differentials are likely to continue to underpin        gressively smaller. It’s sending a message that markets are
demand for the Australian dollar. Credit Suisse analysts              becoming more resilient to negative shocks, which should
forecast a continued tightening cycle by the Reserve Bank             help risk appetite.”
of Australia (RBA), with additional hikes seen in the cash              His advice for traders: “Stick with commodity currencies
rate to 5.5 percent by year-end 2011.                                 and those that provide positive carry.” y


CURRENCY TRADER	•	January	2011		                                                                                                 9
             On THE MONEY
            ON the Money




      Sovereignty, hegemony, and
       the fate of the Euro/dollar
               Strange economic and political bedfellows could actually make the Euro the
                       reserve currency many people thought it could never really be.



                                             BY BARBARA ROCKEFELLER



A quick review of the history of sovereignty might yield       social contract. The sovereign can do pretty much anything
the unhappy conclusion the Eurozone experiment may             he likes to the subjects, including tax them or behead them,
be failing, primarily for a lack of a single component — a     with varying degrees of restraint and moderation from
treasury. Meanwhile, the top-dog sovereign, the U.S., is       constitutions and legal systems. A sovereign state holds
perceived to be circling the drain because of over-indebt-     a hoard of national wealth it can spend on guns or but-
edness.                                                        ter. The sovereign always protects itself against invasion
   Neither deduction is correct, but examining the two         or control by other states and maintains military forces to
cases from a historical foreign-affairs perspective offers     protect itself.
some insights — and a shocking forecast for the new year.         Currencies are issued by sovereign states, although a
   The European Monetary Union (EMU) can be consid-            country can be a sovereign without necessarily issuing
ered an experiment in sovereignty, with the EMU picking        its own currency. For example, many countries, including
a single criterion from the sovereignty list and ignor-        India, Argentina, and the countries of French West Africa,
ing all the others. Europe had plenty of time to train the     have used the British pound, pre-EMU French franc, or
world to think it could invent a new, limited version of       U.S. dollar as their home currencies. The Australian dollar
sovereignty. It started small and ended big, evolving from     (AUD) as we know it today was created only in 1966 when
the European Coal and Steel Community (1951), to the           the country gave up the Australian pound, introduced
European Economic Community (Treaty of Rome, 1957), to         in 1910 and fixed to the British pound. The AUD came
the Maastricht Treaty (1992). Then the Euro was launched       more than 50 years after the Commonwealth of Australia
in January 1999.                                               was established in 1901 as an independent country, equal
   Notice the EMU didn’t build a wall around member            to Great Britain and other commonwealth countries and
states and arm itself with sentries, a departure from sov-     united with them in allegiance to the crown. Australians
ereignties of centuries past. It also did not name a head of   would argue their country is entirely its own sovereign,
state or impose a sovereign-wide tax on its “citizens.”        although no one doubts that if the queen asked, Australia
   The only real outward evidence of sovereignty is a com-     would send troops.
mon currency, and the main institution within this new             In summary, a sovereign state owns and protects a fixed
sovereign is the central bank. Tellingly, the only other       territory, exercises control (including taxation) over its citi-
institution with any clout is the Competition Commission.      zens, maintains a national treasury, and defines and issues
(“Tellingly,” because promoting and controlling commerce       money.
for its own benefit is a characteristic of successful sover-
eigns — think the British East India Company.)                 The EMU difference
   Nobody had ever heard of a sovereign like this before.      In contrast, the EMU does only one of these things — it
Normally a sovereign state is one in which you actually        defines and issues money. No sovereign treasury, no pan-
have a sovereign head who has exclusive jurisdiction with-     EMU taxation, no standing army, no beheadings. Even the
in a specific geographic area, whether by divine right or      geographical scope is flexible, with new territories merging


10	                                                                                        January	2011	•	CURRENCY TRADER
into the main body all the time, including tiny Malta (but       is coy about whether it has made this promise or not. Some
powerhouse Turkey still waiting hopefully in the wings),         press reports have it that China is willing to buy European
a bit like colonies hoping to be conquered. And, unprec-         paper in return for a big trade-off in some other areas, such
edented in all of history, each member of the EMU contin-        as an end to the arms embargo — an entirely plausible
ues to assert all the other bits of sovereignty, like taxation   idea.
and punishment of crime, while depending for defense                Why would China want to invest its reserves in states
against invaders on a different sovereign on a nearby            that cannot defend themselves? If you consider that a sov-
island (UK) and another continent (U.S.). The EMU could          ereign state is one that seeks above all else to maximize
not get away with designating itself a sovereign without         its power in order to survive, financial power may be a
external defense by third parties.                               fine substitute for military power as long as the state has
   Why do third parties accept this moral and financial bur-     someone else to protect it. Japan eyes China warily, and
den? To keep the collective member states from warring           every year or so an “incident” occurs, but nobody expects
with one another, as they have been wont to do for a thou-       outright war. Once the Cold War ended with the downfall
sand years and more.                                             of the Soviet Union in 1991, Europe was no longer threat-
   Clearly sovereignty is a fluid and evolving concept.          ened by the Russian Bear. NATO, more than 50-percent
The financial world is willing to accept the old criteria are    funded by the U.S., was seen as sufficient. In the old days,
outdated, but many worry the EMU has not adequately              of course, military power and financial power went hand-
defined the new criteria, let alone demonstrated itself          in-hand, as amply demonstrated by Great Britain ruling
capable of satisfying them. That’s because an essential          the seas and the global financial system from the mid-18th
component of a sovereign’s ability to act is its ability to      century to World War I (or World War II, depending on
manage the affairs of the state — i.e., manage the treasury      how you want to measure things). Great Britain was more
and not go bankrupt. But the EMU is not a state in the           than the superpower of its day — it had hegemony.
usual sense of the word. It has felt no shame in accept-
ing bailout money from the rest of the world (i.e., the          Sovereignty and hegemony
International Monetary Fund), just as it feels no shame in       Hegemony is a word not used much outside academic cir-
declining to engage in military activities, such as Kosovo.      cles, but is quite useful for understanding a new world in
   (As a side note, remember that the most hideous sover-        which the definition of “sovereign” is shifting. Hegemony
eign bankruptcy and squandering of sovereign power of            comes from the Greek word for leadership and refers to a
all time was by Spain, which plundered New World gold            dominant force that exercises power through means other
and other riches and lost it all in two generations. The tra-    than brute military force. The leadership can be in the
ditional connection between military power and sovereign         form of economic ideas, cultural norms, language, or many
rank is illustrated by the Anglo-Spanish war that culmi-         other aspects of life. Thus, English is the most spoken sec-
nated in the defeat of the Spanish Armada in 1588.)              ond language on the planet.
   But who needs a fat treasury in a world without war?             To date, the U.S. is the sole military superpower and
The EMU chose not to have a treasury. It doesn’t have            single largest issuer of sovereign debt, and is thus the top
access to the individual treasuries of its member states,        sovereign state and the top global hegemon, distribut-
either, except by tapping them occasionally for specific         ing its cultural norms (Coca-Cola, McDonalds, Playboy,
ends, such as raising the capital of the European Central        Michael Jackson), as well as its legal contracts and cur-
Bank, which it did in December 2010.                             rency, worldwide. The hegemon is often resented, even if
   One of the key issues in the foreign exchange market is       it’s not engaging in awful behavior, such as imperial colo-
whether China will diversify its $2.65 trillion reserve stash    nialism and opium wars. Sentiment against the hegemon,
out of dollars and into Euros. Japan is in a similar situ-       or anti-Americanism, doesn’t need to be based on outright
ation, with $1.101 trillion in reserves as of Dec. 7, 2010),     bad acts of the state — it can be based on minor things
although Japan is thought to prefer dependence on the            such as the prevalence of obesity or too much sex and vio-
U.S. for external defense over the hassle of changing its        lence in movies and games. Unhappily, sentiment against
Constitution (whose Article 9 prohibits any act of war)          the hegemon contributes, albeit to a varying and unquan-
and ramping up its own self-defense department. After            tifiable extent, to a periodic but persistent anti-dollar bias
all, renunciation of war for oneself doesn’t say anything        apparent since the dollar’s devaluation in 1971 and its float
about producing armaments for others — and Japan is              in 1974.
the fourth-largest arms producer in the world. Still, while         If the U.S. is the top sovereign state as well as the global
Japan could presumably vastly enlarge its self-defense           hegemon, what is Europe’s place? Here the thinking gets
forces, and quickly, it continues to rely on the U.S.            a little murky. Europe presents a somewhat disorganized
   Some European officials say China is promising to buy         “third way” that rejects both full-bore raw capitalism and
large amounts of European peripheral sovereign bonds,            communism but is sensitive to the welfare — standard of
such as Portugal’s, and later to buy bonds issued by the         living — of its citizens. Jobs are a right. Health care is a
European Financial Stability Facility, due in late January.      right. Higher education is a right. Environmental cleanli-
These officials decline to be named in the press and China       ness is a right. Preventing excessive inequality of incomes


CURRENCY TRADER	•	January	2011		                                                                                              11
      ON THE MONEY




(as in the U.S.) is a widely accepted social goal, hence lim-     (EFSF) to a size that covers all contingencies. Some offi-
its on corporate bonuses. So far only the UK has embarked         cials, including Luxembourg Prime Minister and Finance
on an examination of Bhutan’s concept of “gross national          Minister Jean-Claude Juncker and Italian Finance Minister
happiness,” but the European mentality is wide open to            Giulio Tremonte, want an E-bond guaranteed by each
the idea. Ideologically, Europe wants to have its cake and        EMU state. However, Germany opposes both enlarging the
eat it, too: socialistic ideals implemented in the context of     EFSF and issuing an E-bond. That means any future bail-
a mostly free-market environment. Every American tourist          out of a European state will be on the Irish model — some
to France or Italy returns with an appreciation of a superi-      EFSF funds, a chunk from the IMF, and maybe a little extra
or way of life (better manners and certainly better cuisine),     from concerned parties such as the UK. In Ireland’s case,
but without accepting European leadership in these mat-           Denmark and Sweden ponied up a little lending, too.
ters as something that must be acted upon right away.                Wait a minute. Go back and consider that the IMF,
   Europe’s claim to hegemony lies not in standards of            whose biggest single contributor is the U.S., is an integral
humaneness, courtesy, and good food, but rather its princi-       part of the European bailout equation. That means the
ple that national debt should not exceed 60 percent of GDP        Eurozone depends on the U.S. for external defense and
and the state’s top goal is to prevent inflation. EMU fiscal      on the U.S. for bailout funding. What kind of sovereign
principles are like a new religion, as former British Prime       is this? More to the point, what kind of sovereign would
Minister Gordon Brown said. The absence of this fiscal rule       agree to do this for a fellow semi-sovereign, one that
can be said to have toppled many an empire, and threatens         would not return the favor if the tables were turned? This
many existing regimes today. As for controlling inflation,        is a deal that is too good to be true: The Eurozone gets its
this is the No. 1 priority of all savers and fixed-income         longed-for reserve currency status from China, and does it
investors throughout history. The EMU has devised the             on the back of the U.S.
gold standard of sovereign financial governance.                     The China bailout story is like the bishop and the show-
   Turn the picture to the other side. Imagine the U.S.           girl — the principle has been accepted and now it’s a ques-
adopting an unbreakable law — a Constitutional amend-             tion of price. China may have been seeking an end of the
ment, maybe — requiring national debt to not exceed 60            arms embargo and won’t get it, so now it will turn to some
percent of GDP and the central bank to manage inflation to        other goodie that is in Europe’s interest to offer.
within a specific range. (In practice, we have the inflation         If any party with less gravitas tried to pull this stunt, the
mandate, but it’s a policy choice of the current Fed board,       world would laugh. But the entirely sober Germans back
not a law.). Given the U.S.’s superpower status and hege-         up the fiction, and so we take the whole charade very seri-
mon status, the dollar would be nearly as well supported          ously indeed. So here’s the status: A fly-by-night self-des-
as if it were put back on the real gold standard. After all, as   ignated entity that is not really a sovereign state depends
President Herbert Hoover told Franklin D. Roosevelt, “We          on the UK and U.S. for external defense (OK, NATO, but in
have gold because we cannot trust governments.” While             practice it’s the UK and U.S.). It also depends on the U.S.
some people imagine gold would save us from overspend-            for backstop financing via the IMF. Now it is luring China
ing and from inflation. In fact, adopting a gold standard         into buying the very paper that is backstopped by the U.S.
would be a disaster on a par with California falling into         and getting reserve-currency status in the process. What a
the sea. We have so little gold ($300 billion) compared to        shell game!
money supply ($8 trillion), the economy would have to
contract drastically. Instead, why not adopt the EMU’s            Implications
“gold standard”?                                                  Is the world going to let Europe get away with it? Is the
   If Europe can emerge from austerity with its fiscal prin-      U.S.? Alas, the answer is probably yes. The EMU founders
ciples in working order, why would China not be lured             wanted the union as an economic growth mechanism and
into investing its trillions in Euro-denominated reserves?        also as a way to prevent any future wars. That has always
This is an increasingly enticing prospect the longer the U.S.     been explicit. These are the countries that started two
fails to adopt the “gold standard,” even if it’s not about to     world wars in a single century. Now they are holding the
face its own ratings-agency downgrades and sovereign-             U.S. hostage to that history, demanding not only external
debt crisis, or excessive inflation. In sum, Europe’s “gold       defense at low or no cost, but also emergency financing.
standard” has the hegemonic power to rule international              The forecast for 2011, therefore, is for the Eurozone to
finance for the next century or more. It may not matter if a      continue to “kick the can down the road” — i.e., avoid
state or two has to fall by the wayside and out of the union      restructuring or default by a member state while raising
(presumably Greece and possibly Ireland).                         funding from the Chinese, who will go along with invest-
   Economists and armchair observers alike think the best         ing in this odd pretend-sovereign because China doesn’t
way for Europe to pull itself out of the sovereign-debt           cling to old-fashioned ideas about what constitutes a sov-
crisis is to enlarge the European Financial Stability Fund        ereign. It will get 1) some commercial advantage yet to be

12	                                                                                           January	2011	•	CURRENCY TRADER
                                            Barbara Rockefeller
                                            Currency Trader Mag Jan 11
                                            Figure 1: Euro as Reserve Currency
                                           FIGURE 1: A NEW HIGH IN 2011?
determined, 2) decent yields, and 3)                                             Euro	(1.29810,	1.34980,	1.29710,	1.30960,	+0.01170)
                                                                                                                                                                1.85
the ability to poke the U.S. in the eye                                                                                                                         1.80
with a sharp stick. Sometime in 2011, as                                                                                                                        1.75

details emerge about this deal, the Euro                                                                                                                        1.70

will be seen as the new reserve curren-                                                                                                                         1.65

cy and will rally strongly. The perenni-
                                                                                                                                                                1.60
                                                                                                                                                                1.55
ally out-of-favor dollar will be doubly                                                                                                                         1.50
dumped because of the unpopularity                                                                                                                              1.45

of the cultural hegemony — in a word,                                                                                                                           1.40

Coca-Cola.                                                                                                                                                      1.35

   Naming a number is virtually impos-
                                                                                                                                                                1.30
                                                                                                                                                                1.25
sible, but we all know how FX market                                                                                                                            1.20
participants like to jump on a band-                                                                                                                            1.15

wagon. The new Euro high would                                                                                                                                  1.10

surely exceed the last high (1.5745 from                                                                                                                        1.05


July 2008) and the high before that
                                                                                                                                                                1.00
                                                                                                                                                                0.95
(1.6019 from April 2008). The hand-                                                                                                                             0.90
drawn channel in Figure 1 indicates a                                                                                                                           0.85

high by year-end 2011 at a shocking                                                                                                                             0.80

1.7564 — but since this would be a his-    1995      1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 201

toric geopolitical event, that estimate    Extending the Euro’s long-term trend channel projects a new record high by
could be too low. y                        year-end 2011.
                                           Source: Chart — Metastock; data — Reuters and eSignal
For information on the author, see p. 4.




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CURRENCY TRADER	•	January	2011		                                                                                                                                    13
              On THE MONEY
             ON the Money


                The dollar and the Euro
                    in the new year
                        A look at the policies and market forces that will shape the U.S.
                                 and European currencies as 2011 gets under way.


                                                     BY MARC CHANDLER

Note: For the extended version of the article, which includes in-   from the Bank for International Settlements suggested debt
depth analysis of China and the Japanese yen, as well as observa-   levels in the periphery of Europe were such that it was not
tions on the British pound and Latin American currencies, see       a liquidity but a solvency issue. I did not see the political
the February issue of Active Trader magazine, on newsstands         will to address this, and watched with concern as periph-
in January.                                                         eral banks continued to rely heavily on the ECB’s liquidity
                                                                    provisions to mask their problems, despite the results of
On a trade-weighted basis against the major foreign cur-            the July stress tests that (incidentally) did not cite a single
rencies, the dollar recorded a historic low in mid-March            Irish bank, although Irish banks were borrowing funds
2008. The dollar’s bull market will be roughly “middle-             from the ECB that were consistently in excess of 50 percent
aged” at the end of the first quarter of 2011. I believe it         of GDP.
has more room to run, and that 2011 will still see a further           In August and September there were clear signs inves-
extension of the dollar’s advance.                                  tors were becoming more concerned about the risks of
  As anticipated, the fourth quarter of 2010 is best under-         the periphery of Europe. Premiums over German bunds
stood as consisting of two distinct halves. In the first half       and the price of insurance in the credit default swaps
of the quarter, the dollar fell as the market priced in a           market were rising. Irish, Portuguese, and many Spanish
resumption of the Federal Reserve’s long-term asset pur-            banks found themselves largely locked out of the whole-
chases and the European Central Bank’s (ECB) continued              sale funding market. Even through October, however, the
normalization of monetary policy.                                   debate over QE2 and the negative implications for the dol-
  In the second half, some of the uncertainty has been              lar dominated in the forex market and influenced attitudes
removed from the U.S. side of the equation. The Obama               toward risk-taking assets.
Administration and Congress reached a compromise that
would extend the 2001 and 2003 tax cuts, and the Federal            The EMU future
Reserve announced the details of what has been dubbed               Despite Europe’s continued sovereign-debt issues, calls of
QE2 — its second round of asset purchases since the                 the dissolution of the European Monetary Union (EMU)
2008-2009 financial crisis. The U.S. economy appears to             are misplaced — although what once seemed absurd
have improved after the Q2 lull.                                    now seems simply unlikely. The economic cost of leaving
                                                                    for small countries such as Greece, Ireland, or Portugal
Q4 2010                                                             would be great: the economic downturn would be more
The dollar’s relentless decline was the market discount-            severe, and interest rates higher. Whatever competitive
ing the signal by Federal Reserve leadership of the need to         gains were achieved through devaluation would quickly
provide additional monetary stimulus: positions became              be surrendered to inflation, and the political elite would be
stretched, sentiment was nearly wholly dollar negative,             discredited.
and signals from the options market warned that dollar                Calls for Germany to leave the union are similarly off
shorts were increasingly nervous. Most importantly, in the          base. Germany has succeeded under the conditions of
past there have been other episodes during which uncon-             monetary union better than any other country, and the
ventional Federal Reserve measures (mid-December 2008               traditional means by which Germany’s competitive edge
and again in mid-March 2009) triggered a U.S. dollar rally.         were dulled by its neighbors, currency devaluation, had
   The European situation hinged on an unresolved under-            effectively been blocked.
lying problem that had been smoldering since the institu-             The ECB will have a new president in late 2011 when
tional reform and policy initiatives, including extraordi-          Jean-Claude Trichet’s term expires. There was speculation
nary provisions of liquidity, climaxing in late May. Data           Bundesbank President Axel Weber’s vocal objection to


14	                                                                                             January	2011	•	CURRENCY TRADER
                                             FIGURE 1: TOUGH CHALLENGES FOR EURO


the sovereign-bond purchase plan (as
well as a number of impolitic remarks)
would cost him his bid to replace
Trichet. Although possible, this appears
unlikely. Between Weber’s likely ascen-
sion to the helm of the ECB and the
fiscal tightening planned for 2011, the
policy headwinds will be formidable.
Some have suggested a strong Euro
(weak dollar) causes strain in Europe,
but analysis suggests the currency mar-
ket is aggregating a plethora of macro-
economic conditions and expected tra-
jectories, and perhaps what observers
are really detecting is EMU is not an
optimal currency zone.
   Tightening of ECB policy, as occurred
recently and back in July 2008 when
the Euro was at near-record highs,            Facing formidable policy headwinds, the Euro is poised to return to its Greek-
                                              crisis lows around $1.1800-$1.2000.
causes investor discomfort, and under-
mines the weaker growing and heav-
ily indebted peripheral countries. The                            data had already been improving prior to the Fed’s deci-
current monetary setting is too easy for Germany; inflation sion in early November to buy more Treasuries: Money
pressures are already evident, and money supply and               supply had already begun improving, the St. Louis Fed’s
private-sector lending appears to be improving. The ECB           money multiplier was turning higher, and senior loan-offi-
has already hinted it may raise interest rates before ending      cer surveys revealed an easing of lending conditions.
all its extraordinary measures. Nonetheless, it is likely the        Also, the Institute for Supply Management (ISM) sur-
Euro will return to the lows seen during the Greek crisis,        veys pointed to a strengthening economy. Retail sales
in the $1.18-$1.20 area (Figure 1).                               showed the American consumer was not comatose and
                                                                  auto sales were improving. Agricultural and manufactur-
QE2                                                               ing exports were rising. Corporate America’s balance sheet
The Fed has argued its mandates of full employment and            was strong and profits were at record levels. In Q2 2010,
stable prices may not be achieved in a reasonable time            the nominal U.S. GDP had surpassed pre-crisis levels.
period. Therefore, given the current spare capacity (i.e., a      Making conservative assumptions, in Q1 2011 the real U.S.
low risk of fueling overwhelming price pressures), addi-          GDP will likely surpass its pre-crisis peak.
tional monetary stimulus is needed. Because the Fed funds            There are numerous signs an important turn is taking
rate is already near zero, the Fed must resort to uncon-          place in the U.S. labor market. As disappointing as U.S. job
ventional methods — buying U.S. Treasury bonds. QE2               growth has been, it is better than the previous two cycli-
appears to have been among the most controversial U.S.            cal recoveries. The four-week moving average of weekly
economic actions in more than a generation. Outside of a          initial jobless claims is at its lowest level since September
few foreign central bankers, it was widely panned in the          2008. Forty-one states reported a net increase of jobs in
halls of the G20. Domestic critics were also numerous, but        October, the highest number in five months. Nevada
appeared to fall along party lines. Ironically, Fed Chairman and Michigan have been exceptionally hard hit during
Ben Bernanke, who was initially appointed by George W.            the crisis. In October, Nevada reported its first decline in
Bush, appears to have been abandoned by the Republican            unemployment in five years and Michigan reported its
Party.                                                            first decline below 13 percent in more than two and a half
   If the Fed’s mandate is the compelling factor driving          years.
QE2, it is not immediately clear how much unemployment               Fiscal policy is going to be a drag on Q4 2010 and the
needs to fall or how much prices must increase to rule out        first half of 2011 GDP as the stimulus spending is com-
QE2. It is this uncertainty that may return as an important       pleted. The expiration of the Make Work Pay withholding
factor in late Q1 2011. At the same time, there is risk in the    tax break at the end of the year is going to feel like a tax
other direction as well: that the Fed will not complete its       hike at the start of 2011. The decline in after-tax wages will
current $600 billion operation. The opt-out would be if the       likely dampen consumption, but the continued gradual
economy had improved and inflation expectations had               improvement in the labor market may blunt the impact.y
risen sufficiently.
   Indeed, a number of important financial and real-sector        For information on the author, see p. 4.



CURRENCY TRADER	•	January	2011		                                                                                              15
            TRADING STRATEGIES




          Edge-ratio analysis of
      “classic” indicator entry rules
                                 The value of classic technical indicator signals is
                                 evaluated across four major forex currency pairs.

                                                BY DANIEL FERNANDEZ


“Classic” technical indicators are almost always introduced       Stochastic oscillator crossover. Go long when the fast
with some general guidelines explaining how they can              (%K) line crosses above the slow (%D) line; go short on
be used to “successfully” enter the markets — methods             the opposite cross.
typically developed 30 to 50 years ago to trade the stock         Moving Average Convergence Divergence (MACD). Go
and futures markets on the daily time frame. For example,         long when the 12-26-9 MACD histogram crosses above
the notion that the 14-period Relative Strength Index (RSI)       zero; go short when the MACD histogram crosses below
should be used to enter a short trade when the indicator          zero.
line falls below 70 is what many would describe as a “clas-       Parabolic SAR (PSAR). Go long when the PSAR (using
sical indicator guideline.”                                       a 0.02 acceleration factor) switches to above yesterday’s
   Many traders fail to use classical indicators successfully     close; go short when the PSAR switches to below yester-
in modern forex trading precisely because they are out of         day’s close.
context. The application of these indicators on time frames        Price-SMA crossover. Go long if yesterday’s close was
and markets different from the ones for which they were            above the 50-day simple moving average (SMA) and
originally designed reduces their validity. As a result we         yesterday’s open was below it. Go short when the oppo-
need to ask ourselves: Do traditional indicators “work” in         site occurs.
forex trading? Do any of these classical guidelines lead to
any tradable long-term statistical edges?                         These rules were applied to four major currency pairs:
                                                                Euro/U.S. dollar (EUR/USD), U.S. dollar/Swiss franc
Studying the classics                                           (USD/CHF), British pound/U.S. dollar (GBP/USD), and
We will attempt to answer these questions by analyzing six      U.S. dollar/Japanese yen (USD/JPY). All analysis was con-
classic indicator entry rules in four major currency pairs.     ducted using the Metatrader 4 platform on daily price data
This analysis will tell us if there is any value to these old   from June 1, 2000 to June 1, 2010.
signals in the forex market, and if they could lend them-
selves to mechanical trading strategies. There are long and     Edge-ratio analysis
short rules for each indicator.                                 To evaluate the potential of a given entry rule in the
                                                                absence of a full trading strategy (no position sizing or
  Relative Strength Index (RSI). Go long when the 14-day        exits), we will use a technique called “edge ratio” analysis.
  RSI crosses above 30; go short when the indicator crosses     This technique measures the amount the market moves for
  below 70.                                                     or against the position as a percentage of a given volatility
  Stochastic oscillator overbought-oversold. Go long            adjusted benchmark over a certain holding period after
  when the 14-day stochastic oscillator crosses above 20;       trade entry.
  go short when the indicator crosses below 80.                   To do this we first choose a volatility benchmark (in this


16	                                                                                        	October	2010	•	CURRENCY TRADER
                                                                                           	January	2011	•	CURRENCY
                                            Related reading
 case, the 14-day average true range,       By Daniel Fernandez:
 ATR) and fixed holding period (e.g.,
 20 days). Then, for each entry we cal-     Daily pivot breakouts
 culate the maximum move in favor           Currency Trader, December 2010
 of the trade (the maximum favorable        When attempting to trade mechanically defined intraday support and resistance
 excursion, MFE) and the maximum            levels, don’t forget the time element.
 move against it (the maximum
 adverse excursion, MAE) as a per-          Multiple average trend-following
 centage of the 14-day ATR.                 Currency Trader, November 2010
   For example, suppose a long entry        Translating a multi-moving average technique into a mechanical forex-trading
                                            system highlights the benefits of simplicity and diversification.
 occurs in the EUR/USD at 1.3560 and
 we want to apply this analysis to the
                                            Validating candlestick patterns with tick volume
 20 days after the signal. If the highest
                                            Currency Trader, October 2010
 high after entry was 1.3580, the low-      A “double-doji” breakout strategy gets a boost from a tick-volume filter.
 est low was 1.3520, and the 14-day
 ATR was 0.0080, the MFE is:                Taking advantage of the Asian trading session
                                            Currency Trader, June 2010
   (1.3580-1.3560)/0.0080	=	.25,	or	        Breaking down the range characteristics of the Asian forex session produces
   25 percent of the ATR                    some surprisingly reliable trading statistics.

   The MAE is:
                                            FIGURE 1: SAMPLE RSI SIGNAL ANALYSIS
   (1.3560-1.3520)/0.0080	=	.50,	or	50	
   percent of the ATR

   The edge ratio of the position is
 simply the ratio of the MFE and MAE,
 in this case .25/.50 = 0.5. A “good”
 entry — that is, one followed by
 more favorable price action than
 adverse price action — will have an
 edge ratio greater than 1.00. Figure 1
 shows an example in the USD/CHF
 pair using the 14-day RSI long entry
 rule.
   To evaluate if a given entry signal
 can predict future price direction in
 any meaningful way, this analysis was
                                            A potentially useful entry rule will have an edge ratio greater than 1.00.
 conducted over the 10-year test period


CURRENCY TRADER	•	January	2011		                                                                                            17
      TRADING STRATEGIES




to determine if the strategy has an edge in the long-term.      30 … 100 days were tested for all entry rules.
The signal’s potential to become the basis of a mechani-          Another important factor we evaluated is the value of
cal trading system (by virtue of identifying an exploitable     the edge ratio for both long and short rules. Traders often
inefficiency) is categorized as those with an average edge      are fooled into believing a strategy can be profitable in
ratio greater than 1.00. Because an entry rule might work       the long term if long and short rules are evaluated with-
in different conditions, many holding periods were tested       out distinction, because a strategy can be profitable sim-
to ensure both short-term and long-term expectations are        ply because it happened to follow the prevailing market
covered. For this reason, holding periods of 1, 2, 5, 10, 20,   direction, which makes the odds of introducing hindsight
                                                                                  extremely high. For this reason, the test
TABLE 1: MACD ZERO LINE HISTOGRAM CROSS                                            evaluated long and short rules separately
                                                                                   to consider only those rules that have
                                                                                   positive 10-year edge ratios for long and
                                                                                   short trades independently.
                                                                                      Also, if a rule has an edge ratio below
                                                                                   1.00 for both longs and shorts, the oppo-
                                                                                   site rule must have an edge ratio above
                                                                                   1.00, which means the opposite rule
                                                                                   might be suitable for a trading system.
                                                                                   Entry rule sets that do not have any
                                                                                   potential for a given period have either
                                                                                   longs or shorts with an edge ratio above
                                                                                   1.00 and the other below 1.00.

                                                                                  Analysis results
 Legend: Above 1 edge ratio for both long and short. Below 1 edge ratio           Tables 1 through 6 are color coded to
 for both long and short (above 1 for the opposite rule). Below 1 edge            show whether or not the edge ratio for
 ratio. Above 1 edge ratio.                                                       a given entry rule was above or below
                                                                                  1.00. Dark red and tan colors have also
                                                                                  been used to highlight the long and short
TABLE 2: RSI 30/70 CROSS
                                                                                  rules when both were either above or
                                                                                  below 1.00, marking these as possible
                                                                                  trade system candidates.
                                                                                     The first interesting aspect of the table
                                                                                  is that, overall, the rules perform very
                                                                                  differently on the various currency pairs.
                                                                                  For example, the edge-ratio analysis indi-
                                                                                  cates the MACD rule has very limited
                                                                                  potential in the GBP/USD and USD/JPY
                                                                                  pairs, with only a few results showing
                                                                                  the opposite rule might be useful to cap-
                                                                                  ture longer-term moves on these pairs.
                                                                                  Conversely, the MACD rule shows the
                                                                                  potential to capture short-term moves
                                                                                  in the EUR/USD and USD/CHF pairs,
 Legend: Above 1 edge ratio for both long and short. Below 1 edge ratio           with positive edge ratios for symmetrical
 for both long and short (above 1 for the opposite rule). Below 1 edge            long/short rules for the two-day, five-
 ratio. Above 1 edge ratio.
                                                                                  day, and 10-day holding periods in the

18	                                                                                         January	2011	•	CURRENCY TRADER
EUR/USD.                                     TABLE 3: STOCHASTIC %K/%D CROSS
  Overall, the USD/CHF and EUR/
USD appear similar, while the GBP/
USD and USD/JPY also tend to
share comparable results. This is
clearly shown in the case of the RSI
overbought-oversold entry, which
suggests the potential to exploit the
opposite entry rules (i.e., going short
when the RSI crosses above 30, and
going long when the indicator crosses
below 70) in the EUR/USD and USD/
CHF for short holding periods, while
for the GBP/USD and the USD/JPY
this potential is apparent only for
longer holding periods. This means
                                             Legend: Above 1 edge ratio for both long and short. Below 1 edge ratio
entering retracements on RSI extreme         for both long and short (above 1 for the opposite rule). Below 1 edge
values (which equates to following           ratio. Above 1 edge ratio.
the prevailing trend rather than tak-
ing a trade contrary to it) in the EUR/
USD and the USD/CHF forecasts                TABLE 4: STOCHASTIC 20/80 CROSS
short-term price movements in favor
of the trade, while in the GBP/USD
and the USD/JPY it forecasts price
movement only in the longer term.
  This implies the EUR/USD and
USD/CHF tend to retrace to a lesser
extent than the other two currency
pairs, which tend to retrace and then
resume the trend. Of particular sig-
nificance is the fact that the classic RSI
rule seems to show potential in the
GBP/USD for short holding periods,
which suggests this pair has the stron-
gest retracements amongst the four
instruments.                                 Legend: Above 1 edge ratio for both long and short. Below 1 edge ratio
  Another interesting conclusion             for both long and short (above 1 for the opposite rule). Below 1 edge
                                             ratio. Above 1 edge ratio.
comes from a search for a “global sta-


CURRENCY TRADER	•	January	2011		                                                                                      19
   TRADING STRATEGIES




tistical edge” — i.e., a given entry rule set with the abilitydoing the same thing on 60, then the classic rule on 70, etc.,
to exploit inefficiencies in all four currency pairs. Althoughimplying that entries with either signal may be exploited
no single rule set accomplishes this, a few do show poten-    effectively depending on the extent of such oscillations
tial. For example, Table 4 shows the opposite of the clas-    (with longer holding periods implying larger oscillations).
sic Stochastic 20/80 rule has potential to signal moves in    This behavior is also shown in the USD/JPY to a certain
the four pairs in the short term (five to 10 days), while     extent.
the original rule seems to successfully signal reversals in     The SMA cross rule also offers a significant global
the USD/JPY in the longer term. It is also interesting to     opportunity. For example, this rule has a positive edge
see how the rules that show potential in the GBP/USD          in the GBP/USD, USD/JPY and USD/CHF pairs for the
“switch.” This pair appears to function in a very back-and-   30-day holding period (and the 10-day holding period in
forth manner, with the classic rule successfully forecasting  the EUR/USD), implying that when building a system for
price direction in, say, 50 periods, then the opposite rule   this portfolio of currency pairs, a price-moving average
                                                                                 crossover idea might be a good option.
TABLE 5: PARABOLIC                                                                 It is also surprising to see the currency
                                                                                 pairs are different enough that a given
                                                                                 entry rule can have a positive edge in
                                                                                 one pair and a totally opposite edge in
                                                                                 another, meaning the classic rule might
                                                                                 work for a given holding period in one
                                                                                 pair while for the same holding period
                                                                                 the opposite rule might work in another
                                                                                 pair.
                                                                                   This is especially apparent for the
                                                                                 PSAR rule, which shows contrasted
                                                                                 “grouping” between the GBP/USD and
                                                                                 USD/JPY pairs vs. the USD/CHF and
                                                                                 EUR/USD pairs. The classic PSAR rule
                                                                                 signaled price direction accurately for 10-
 Legend: Above 1 edge ratio for both long and short. Below 1 edge ratio
                                                                                 to 30-day holding periods in the EUR/
 for both long and short (above 1 for the opposite rule). Below 1 edge
                                                                                 USD and the USD/CHF pairs, while the
 ratio. Above 1 edge ratio.
                                                                                 opposite rule was accurate for the GBP/
                                                                                 USD and USD/JPY pairs.
TABLE 6: SMA CROSS
                                                                                 Trade horizon,
                                                                                 currency important
                                                                                 This study suggests some classic indica-
                                                                                 tor rules (or their inversions) can provide
                                                                                 an edge, but success depends on treating
                                                                                 individual currency pairs and holding
                                                                                 periods as distinct entities. Using tables
                                                                                 like the ones in this article makes it easier
                                                                                 to construct frameworks for potential
                                                                                 systems — either for specific pairs, pair-
                                                                                 couples, or multiple instrument portfo-
                                                                                 lios — and provides significant insight
                                                                                 into how different pairs behave and the
                                                                                 differences between them. y
 Legend: Above 1 edge ratio for both long and short. Below 1 edge ratio
 for both long and short (above 1 for the opposite rule). Below 1 edge           For information on the author, see p. 4.
 ratio. Above 1 edge ratio.


20	                                                                                          January	2011	•	CURRENCY TRADER
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                            Stocks | Futures | Forex
CURRENCY TRADER	•	Decemer	2010		                                                                21
         ADVANCED CONCEPTS
         TRADING STRATEGIES



      The Euro-dollar rate:
  Another thing made in China?
          Analyzing China’s integral role in the balance between the Euro and the dollar.


                                                BY HOWARD L. SIMONS


      One of the happier aspects of currency markets             scape for years, but the adoption of quantitative
      over the years has been the relatively mechanical          easing by the U.S., UK and Switzerland of quan-
      nature of the dollar/Euro trade; along with the            titative easing made them a part of the broader
      Canadian and Australian dollars, the Euro both             financial market environment (see “No man is an
      has trended (see “Let the trend be your friend: The        island, but the UK is” August 2010). The second
      majors,” January 2009) and has followed differen-          was the development of some obvious schisms
      tials in interest rate expectations. The importance        between the stronger and weaker credits within
      of this orderly behavior cannot be overstated as           the European Monetary Union (EMU). Milton
      the central thesis in this series over the past five       Friedman had forecasted the Euro would not
      years has been the currency world is divisible into        survive its first serious recession, and while that
      the dollar bloc and the Euro bloc.                         extreme forecast proved too dire, it did in fact con-
         Two developments starting in 2009 and continu-          firm centuries of experience indicating the Greeks,
      ing with a vengeance into 2010 started to erode            Portuguese, Spanish, Irish and Italians tended
      this neat behavior. The first was the development          to run their domestic affairs differently than the
      of persistent ultra-steep money market yield               Germans. It is amazing sometimes how people let
      curves; these had been part of the Japanese land-          themselves get surprised by the obvious.


       FIGURE 1: THE EURO’S HIGH-LOW-CLOSE VOLATILITY OVER TIME




       The euro’s HLC volatility expanded during the 2008 financial crisis and then contracted during the euro’s
       March-November 2009 rally.



22	                                                                                           	January	2011	•	CURRENCY TRADER
          A third development in the U.S. in 2010, the            29 that minimizes the function
       manic insistence the country would be better off
       if only it made its currency worthless, helped
       save the Euro from its near-death experience in
       April-May. Those fleeing the Euro realized they
       had nowhere else to go, and those fleeing the dol-            where Vol is the N-day high/low/close volatil-
       lar surely felt the same way. All agreed the world         ity, defined as
       would be better off if China strove to make the
       yuan more expensive while they made their cur-
       rencies cheaper; the guiding principle is someone
       else’s currency manipulation is bad.

       The Euro and its indicators
       First, as the world moved in and out of vari-
       ous degrees of financial crisis, we could expect
       implied and historic volatility measures both to
       measure the degrees of insurance purchased and               where H, L, and C are high, low, and close,
       price uncertainty, respectively. Implied volatility        respectively.
       is derived from the options markets; the historic
       volatility used will be a high-low-close (HLC)               The HLC volatility has the consistent property
       volatility. First, a number of days between 4 and          of expanding not when the market is putting on


        FIGURE 2: IMPLIED VOLATILITY TRACKING SPOT RATE




        The implied volatility of three-month non-deliverable USD forwards for a EUR holder fell during the euro’s long
        secular bull market between 2001 and 2007, only to shoot higher in 2008 and then fall once again in 2009.


CURRENCY TRADER	•	January	2011		                                                                                          23
      ADVANCED CONCEPTS
      ON THE MONEY




          large interday changes in one direction, as is true          one hand clapping; if implied volatility rises
          for standard close-to-close volatility measures, but         when actual HLC volatility justifies such a move,
          rather when intraday ranges dominate interday                then it is not the market reacting irrationally and
          changes over a given period. The euro’s HLC                  fearfully but rather the opposite. If we take the
          volatility expanded during the 2008 financial crisis         ratio of implied to HLC volatility, dubbed excess
          and then contracted during the euro’s March-                 volatility, we see how it has budged only slightly
          November 2009 rally (Figure 1). Once uncertainty             through all of the currency’s sharp ups and downs
          accelerated following the downgrades of lesser               in recent years (Figure 3). This stability suggests
          Eurozone credits in November and December                    the options market has learned to take all of the
          2009, HLC volatility expanded once more into                 machinations in stride and is in synch with the
          June 2010, and after a retreat rose following the            euro’s movements.
          Federal Reserve’s pledge to start printing dollars
          more quickly in August.                                      Short-Term Interest Rate Expectations
             The implied volatility of three-month non-deliv-          If the volatility markets have lost a simple
          erable USD forwards for a EUR holder fell during             mechanical explanation, so too have the short-
          the euro’s long secular bull market between 2001             term interest rate markets. The normal pattern for
          and 2007, only to shoot higher in 2008 and then              years was the currency with the steeper money
          fall once again in 2009 before rising and falling            market curve as measured by the forward rate
          in rhythm with the European sovereign debt and               ratio between six and nine months (FRR6,9) would
          Federal Reserve money-printing escapades noted               be the stronger currency, all else held equal. The
          earlier (Figure 2). The degree to which this volatil-        FRR6,9 is the rate at which we can lock in borrow-
          ity has tracked the dollar/Euro rate in recent years         ing for three months starting six months from
          indicates a rising Euro is accompanied by the                now, divided by the nine-month rate itself. The
          belief the U.S. is acquiescing in the dollar’s fall.         more the FRR6,9 exceeds 1.00, the steeper the yield
          The U.S. can say it has a strong-dollar policy; the          curve.
          market clearly believes otherwise.                              The USD FRR6,9 exploded higher in 2009 and
             Any volatility taken by itself is the sound of            again in 2010 as the U.S. adopted quantitative eas-

          FIGURE 3: THE EURO’S EXCESS VOLATILITY IN NORMAL RANGE




          If we take the ratio of implied to HLC volatility, dubbed excess volatility, we see how it has budged only slightly
          through all of the currency’s sharp ups and downs in recent years



24	                                                                                                 January	2011	•	CURRENCY TRADER
       ing. The difference between it and the EUR FRR6,9          ods of time.
       moved to a record level, which is an accomplish-              Now let’s look at the relative total returns in
       ment considering how the EUR FRR6,9 had moved              USD terms of U.S. and Eurozone stocks as mea-
       to a record steepness itself through April 2010.           sured by the MSCI total return indices. The gen-
       Moreover, while the differential used to lead              eral trend has been a stronger Euro is correlated
       movements in the Euro itself by anywhere from              quite strongly with American underperformance.
       three to six months, it lost any stable lead time          Indeed, a glance at Figure 6, where relative stock
       after the financial crisis began. Figure 4 depicts         index performance is plotted inversely, makes it
       the two measures without any lead or lag between           appear as if international diversification between
       them. The only conclusion we can reach is once             the U.S. and the Eurozone is nothing other than an
       the financial crisis moved monetary policy out of          expensive way of trading the Euro.
       the realm of sanity in 2008-2009, relative monetary           If we were to apply the transitive property of
       policies ceased to affect currency rates in the nor-       equality to these relationships, we would have
       mal fashion. This statement is as outrageous as            to say falling relative note-horizon interest rates
       saying selected laws of physics no longer applied          in the U.S. leads to a weaker USD and a weaker
       after a certain point in time.                             USD is accompanied by American stock outper-
                                                                  formance, so the relatively falling interest rates in
       Capital Market Horizons                                    the U.S. are a good thing for American equities on
       The impact of longer-term interest rate differen-          a relative basis. This argument has been made by
       tials is different, however. If we plot the rate gaps      many in the form of “a weaker dollar is good for
       between the U.S. two-, five- and ten-year notes            (American) stocks.”
       and their Eurozone counterparts, divided by the               This action cannot persist indefinitely, how-
       USD rates themselves, we see a negative interest           ever. It increasingly appears the dollar/Euro rate
       rate gap, one where European rates are higher              is being bounded, with one explanation being
       than American rates, correlates to a rising Euro           Chinese shifting its vast reserves about to main-
       (Figure 5). This is equivalent to saying relatively        tain both the CNY/USD rate and by extension the
       lower rates in the U.S. are insufficient compensa-         USD/EUR rate (see “Robin Hood carry: The yuan
       tion for Euro-domiciled investors to hold dollar/          as a funding currency,” July 2010). That bound
       denominated assets over these note-horizon peri-           appears to be 1.20 – 1.40 USD per EUR at the time



        FIGURE 4: SHORT-TERM RATE “PERMA-EXPECTATIONS” FALSELY SUPPORTIVE OF DOLLAR




         Once the financial crisis moved monetary policy out of the realm of sanity in 2008-2009, relative monetary
         policies ceased to affect currency rates in the normal fashion.



CURRENCY TRADER	•	January	2011		                                                                                          25
      ADVANCED CONCEPTS
      ON THE MONEY



        of this writing. The intriguing possibility arises          China can and indeed are bounding the USD/
        that Chinese purchases of dollars or euros will be          EUR rate.
        used to maintain the exchange rate and shift the               One of the oldest and truest observations
        burden of adjustment in the currency market to              about such throw-your-weight-around trading
        the two sets of interest rates, American and bench-         is you can put it there, but you cannot keep it
        mark European. This will serve to keep currency             there. Eventually even the largest bully fails and
        volatility in line, as seen above, while decoupling         the market goes back to normal and in this case
        the exchange rate from the traditional, mechanical          mechanical relationships. That adjustment will be
        interest rate differential drivers.                         violent when it happens, probably in the form of
          As an aside and as a disclaimer, while the use            a significantly weaker dollar and a significantly
        of conspiracy theories and external super-actors            stronger yuan. y
        should be avoided at all costs, previous Chinese
        actions in pegging the yuan force us to allow for           For information on the author, see p. 4.
        the possibility that massive capital flows from


         FIGURE 5:THE EURO AND NOTE-RATE DIFFERENTIALS




         Plotting the rate gaps between the U.S. two-, five-, and ten-year notes and their Eurozone counterparts, divided
         by the USD rates themselves, shows a negative interest rate gap where European rates are higher than
         American rates, correlates to a rising euro.

         FIGURE 6: TRANS-ATLANTIC EQUITIES: STILL ALIGNED WITH CURRENCY IN TIME




         Plotting relative stock index performance inversely makes it appear as if international diversification between the
         U.S. and the Eurozone is only an expensive way of trading the euro.


26	                                                                                                     January	2011	•	CURRENCY TRADER
                GLOBAL ECONOMIC CALENDAR


CPI: Consumer price index                          January                           UK: November employment
                                                                                19 report
ECB: European Central Bank             1
FDD	(first	delivery	day):	The	first	                                                 U.S.: December leading
day on which delivery of a com-        2                                             indicators
modity	in	fulfillment	of	a	futures	                                             20   Germany: December PPI
                                            U.S.: December ISM
contract can take place.               3    manufacturing report                     Hong Kong: December CPI
FND	(first	notice	day):	Also	
                                            Germany: November                        Mexico: December employment
known	as	first	intent	day,	this	is	
                                       4                                        21   report
the	first	day	on	which	a	clear-             employment report
inghouse can give notice to a
                                       5    Brazil: November PPI                22
buyer of a futures contract that it
intends to deliver a commodity in      6    Brazil: December PPI                23
fulfillment	of	a	futures	contract.	         U.S.: December employment                Australia: Q4 PPI
The clearinghouse also informs                                                  24 Mexico: Jan. 15 CPI
                                            report
the seller.
                                            Brazil: December CPI                     Australia: Q4 CPI
FOMC: Federal Open Market
                                            Canada: December employment              Canada: December CPI
Committee                                                                       25   Japan: Bank of Japan interest-
GDP: Gross domestic product                 report
                                       7    Mexico: Dec.	31	CPI	and	                 rate announcement
ISM: Institute for supply
management                                  December PPI                             U.S.: FOMC interest-rate
LTD	(last	trading	day):	The	final	          LTD: January forex options;         26   announcement
day trading can take place in a             January U.S. dollar index options        South Africa: December CPI
futures or options contract.                (ICE)                                    U.S.: December durable goods
PMI: Purchasing managers index                                                       Brazil: December employment
                                        8                                       27
PPI: Producer price index                                                            report
                                        9
                                                                                     South Africa: December PPI
Economic              Release          10
release	(U.S.)	       time	(ET)                                                      U.S.:	Q4	GDP	(advance)
GDP                      8:30 a.m.     11                                       28   Japan: December employment
CPI                      8:30 a.m.     12                                            report and CPI
ECI                      8:30 a.m.          U.S.: December PPI and              29
PPI                      8:30 a.m.          November trade balance
ISM                     10:00 a.m.                                              30
                                            Australia: December
Unemployment             8:30 a.m.                                                   U.S.: December personal income
                                            employment report
Personal income          8:30 a.m.
                                       13   France: December CPI
                                                                                31 Canada: December PPI
Durable goods            8:30 a.m.                                                   India: December CPI
Retail sales             8:30 a.m.          UK: Bank of England interest-
Trade balance            8:30 a.m.          rate announcement                           February 2011
Leading indicators      10:00 a.m.          ECB: Governing council interest-         U.S.: January ISM manufacturing
                                            rate announcement                        report
                                                                                1    Germany: December
                                            U.S.: December CPI and retail
                                            saels                                    employment report
         January 2011
                                            Germany: December CPI               2
	26	 27	 28	 29	 30	 31          1     14   India: December PPI                      ECB: Governing council interest-
 2   3     4     5    6     7    8          Japan: December PPI                 3    rate announcement
	 9	 10	 11	 12	 13	 14	 15	                UK: December PPI                         U.S.: January employment report
	16	 17	 18	 19	 20	 21	 22	           15                                            Canada: January employment
	23	 24	 25	 26	 27	 28	 29	           16                                            report
                                                                                4    LTD: February forex options;
	30	 31	 1	      2	   3	    4	   5     17
                                                                                     February U.S. dollar index
                                            Canada: Bank of Canada
The information on this page is                                                      options	(ICE)
subject to change. Currency Trader          interest-rate announcement
is not responsible for the accuracy    18   Hong Kong: Oct.-Dec.
of calendar dates beyond press              employment report
time.
                                            UK: December CPI




CURRENCY TRADER	•	January	2011		                                                                                      27
               CURRENCY FUTURES SNAPSHOT as of Dec. 30

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the
legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).

                                                                                           10-day                   20-day                     60-day                  Volatility
 Market                           Sym          Exch          Vol            OI
                                                                                         move / rank              move / rank                move / rank              ratio / rank

 EUR/USD                            EC         CME          329.8         165.6         -1.29%	/	31%              1.55%	/	27%               -3.42%	/	48%                 .11	/	2%
 JPY/USD                            JY         CME          109.1         109.3         2.47%	/	100%              2.52%	/	53%                2.14%	/	17%               .56	/	100%
 GBP/USD                            BP         CME           94.7          79.2         -1.69%	/	47%               -0.44%	/	8%              -2.05%	/	68%                .33	/	47%
 AUD/USD                            AD         CME           87.1         109.7          1.97%	/	80%              5.13%	/	80%                5.14%	/	20%                .28	/	88%
 CAD/USD                            CD         CME           77.2          96.4          0.52%	/	21%              2.41%	/	96%                2.23%	/	51%                .42	/	40%
 CHF/USD                            SF         CME           41.6          40.5          1.30%	/	18%              6.12%	/	97%                2.82%	/	22%                .28	/	63%
 U.S. dollar index                  DX          ICE          19.6          26.8          0.52%	/	24%              -1.44%	/	30%               2.74%	/	78%                 .13	/	7%
 MXN/USD                           MP          CME           27.7         126.0          -0.16%	/	0%               0.16%	/	0%                1.61%	/	19%                 .13	/	0%
 NZD/USD                            NE         CME            7.1          26.9         1.93%	/	100%              2.50%	/	28%                3.34%	/	41%                .39	/	75%
 E-Mini	EUR/USD                     ZE         CME            5.4          4.3          -1.29%	/	31%              1.55%	/	27%               -3.42%	/	48%                 .11	/	2%
 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.


                                                                                                  BarclayHedge Rankings
   LEGEND:
   Volume: 30-day average daily volume, in                                          (as of Nov. 30 ranked by November 2010 return)
   thousands.                                                                Top 10 currency traders managing more than $10 million
   OI: 30-day open interest, in thousands.
   10-day move: The percentage price move                                                                                                                                   $ Under
                                                                                                                                  November              2010 YTD
   from the close 10 days ago to today’s close.                     Trading Advisor                                                                                          Mgmt.
   20-day move: The percentage price move                                                                                          Return                Return
                                                                                                                                                                           (Millions)
   from the close 20 days ago to today’s close.
   60-day move: The percentage price move                  1.       24FX Management Ltd                                               7.89%              60.64%                49.5
   from the close 60 days ago to today’s close.            2.       Premium	Currency	(Curr.	Plus)                                     4.01%               -5.17%              135.3
   The “% rank” fields for each time window
   (10-day moves, 20-day moves, etc.) show
                                                           3.       Gables	Capital	Mgmt	(Global	FX)                                   3.67%              10.15%                32.0
   the percentile rank of the most recent move             4.       JCH	Capital	Mgmt	(Global	Currency)                                2.45%              -12.50%               28.0
   to a certain number of the previous moves of
                                                           5.       DynexCorp	Ltd.	(Currency)                                         2.40%               4.22%                52.5
   the same size and in the same direction. For
   example, the % rank for the 10-day move                 6.       Capricorn	Currency	Mgmt	(fxST	MAP)                                2.19%               5.96%                52.0
   shows how the most recent 10-day move                   7.       Alder	Cap'l	(Alder	Global	20)                                     2.00%               9.07%               457.0
   compares to the past twenty 10-day moves;
   for the 20-day move, it shows how the most              8.       Anello	Asset	Mgmt	(Isis	FX)                                       1.78%              14.48%                10.0
   recent 20-day move compares to the past                 9.       Rhicon	Currency	Mgmt	(Strategic)                                  1.66%               0.57%               345.0
   sixty 20-day moves; for the 60-day move,
   it shows how the most recent 60-day move               10.       Floyd	Cap'l	Mgmt	(Currency)                                       1.13%               -1.26%               25.0
   compares to the past one-hundred-twenty                          Top 10 currency traders managing less than $10M & more than $1M
   60-day moves. A reading of 100% means
   the current reading is larger than all the past         1.       Sagacity	(HedgeFX100)                                             9.78%               3.85%               1.0M
   readings, while a reading of 0% means the               2.       CenturionFx	Ltd	(6X)                                              7.26%              66.06%               3.5M
   current reading is smaller than the previous
   readings.                                               3.       GTA	Group	(FX	Trading)                                            6.54%              21.80%               1.9M
   Volatility ratio/% rank: The ratio is the short-        4.       Rove	Capital	(Dresden)                                            4.54%              17.98%               2.2M
   term volatility (10-day standard deviation
   of prices) divided by the long-term volatility          5.       Vaskas	Capital	Mgmt	(Global	FX)                                   2.06%               -2.88%              3.6M
   (100-day standard deviation of prices). The             6.       Basu	and	Braun	(Everest)                                          1.63%               11.57%              1.6M
   % rank is the percentile rank of the volatility
   ratio over the past 60 days.
                                                           7.       KMJ	Capital	(Currency)                                            1.33%               -1.00%              5.0M
                                                           8.       CenturionFx Ltd                                                   1.21%              10.06%               7.5M
                                                           9.       Aurapoint	Asset	Mgmt	(QV)                                         1.09%              18.69%               2.0M
                                                          10.       Marek	D.	Chelkowski	(Forex)                                       0.95%               0.26%               3.5M
                                                         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.


28	                                                                                                                                     	October	2010	•	CURRENCY TRADER
                                                                                                                                         January	2011	•	CURRENCY
CURRENCY TRADER	•	January	2011		   29
                 INTERNATIONAL MARKETS


                                                       CURRENCIES (vs. U.S. DOLLAR)
                                          Dec. 29
                                                         1-month       3-month         6-month          52-week    52-week
      Rank Currency                       price vs.                                                                             Previous
                                                         gain/loss     gain/loss       gain/loss          high       low
                                         U.S. dollar
           1    South African rand       0.149305         6.74%            4.53%           13.09%       0.1504      0.1233         11
           2    New Zealand dollar       0.753585         6.30%            2.43%           6.33%        0.7975      0.6561          7
           3    Swiss franc              1.049275         5.28%            2.94%           14.12%       1.0598       0.853         12
           4    Australian Dollar         1.00924         4.58%            4.82%           15.55%         1.033     0.8069          3
           5    Russian ruble             0.03301         3.61%            0.76%           2.39%        0.03459     0.03077        10
           6    Brazilian real             0.5929         2.60%            1.35%           5.50%        0.6075      0.5076         13
           7    Swedish krona             0.14663         2.53%            0.09%           13.46%       0.1542      0.1227          4
           8    Japanese yen              0.01214         2.02%            2.02%           8.49%        0.01246     0.01053         1
           9    Canadian dollar           0.99691         1.76%            2.85%           3.17%        1.0068      0.9217         15
           10   Singapore dollar         0.770745         1.70%            1.73%           6.85%          0.78       0.702          9
           11   Indian rupee             0.021915         0.87%            -1.11%          1.15%        0.02274     0.02089         5
           12   Taiwan dollar              0.0329         0.67%            3.38%           5.45%        0.03376     0.03074         8
           13   Chinese yuan              0.15092         0.62%            1.00%           2.53%        0.15092     0.1461         14
           14   Thai baht                0.033135         0.21%            1.33%           7.32%        0.03386     0.02938         6
           15   Hong Kong dollar         0.128515         -0.23%           -0.29%          0.02%          0.129     0.1281         16
           16   Euro                      1.31953         -0.40%           -2.25%          6.99%        1.4579      1.1891          2
           17   Great Britain pound       1.54345         -1.00%           -2.39%          2.40%        1.6457      1.4235         17




                                                           GLOBAL STOCK INDICES
                                                               1-month         3-month        6-month         52-week        52-week
     Country           Index                     Dec. 29                                                                                   Previous
                                                               gain/loss       gain/loss      gain loss         high           low
1    UK                 FTSE 100                5,996.40           8.02%           7.67%       22.02%         6,021.46       4,790.00         9
2    France             CAC 40                  3,890.65           6.98%           4.11%       13.33%         4,088.18       3,287.57        10
3    U.S.               S&P 500                 1,259.78           6.06%        10.05%         20.99%         1,262.60       1,010.91         6
4    Italy              FTSE MIB                20,471.01          5.99%           0.48%        6.42%        24,058.80       18,044.50        7
5    South Africa       FTSE/JSE	All	Share     	32,123.40	         4.58%        10.50%         20.32%        32,123.40       25,793.06        4
6    Germany            Xetra Dax               6,995.47           4.44%        11.98%         17.53%         7,087.84       5,433.02         3
7    India              BSE	30                  20,256.03          4.39%           1.50%       15.52%        20,297.58       15,652.00       14
8    Canada             S&P/TSX	composite	      13,449.17          3.83%           8.61%       19.40%        13,449.81       10,990.40        5
9    Mexico             IPC                     38,230.20          3.63%        15.20%         21.47%        38,532.40       29,926.10        1
10   Australia          All ordinaries          4,871.60           3.50%           3.78%       11.46%         5,048.60       4,194.40        13
11   Switzerland        Swiss Market            6,566.60           2.64%           4.04%        6.87%         6,990.70       5,935.00         11
12   Japan              Nikkei 225              10,344.54          2.16%           8.21%        8.09%        11,408.20       8,807.41        15
13   Singapore          Straits Times           3,207.91           1.57%           3.28%       13.34%         3,212.79       2,648.15        12
14   Brazil             Bovespa                 68,952.00          1.54%        -0.40%         11.25%        71,989.00       57,634.00        8
15   Hong Kong          Hang Seng               22,969.30         -0.85%           2.64%       13.43%        22,981.52       18,971.50        2


     30	                                                                                                   	January	2011	•	CURRENCY TRADER
                                                NON-U.S. DOLLAR FOREX CROSS RATES
                                                                  1-month          3-month       6-month           52-week   52-week
Rank     Currency pair             Symbol         Dec. 29                                                                              Previous
                                                                  gain/loss        gain/loss     gain loss           high      low

 1      Aussie	$	/	New	Zeal	$       AUD/NZD       1.339215            4.09%         2.33%         8.70%            1.3506     1.2088      9

 2      Franc	/	Canada	$            CHF/CAD       1.05217             3.42%         0.05%         10.57%           1.0657     0.8989     10

 3      Franc	/	Yen                 CHF/JPY           86.445          3.20%         0.92%         5.23%            91.028     76.36      18

 4      Aussie	$	/	Canada	$         AUD/CAD       1.01237             2.77%         1.91%         12.00%           1.0172     0.8643      4

 5      Aussie	$		/	Yen             AUD/JPY           83.14           2.53%         2.72%         6.55%            88.048    72.0981     14

 6      Aussie	$	/	Real             AUD/BRL       1.702225            1.93%         3.42%         9.54%            1.7459     1.4954      6

 7      Euro	/	Pound                EUR/GBP       0.854915            0.62%         0.14%         4.48%            0.9147     0.8065      1

 8      Canada	$	/	Yen              CAD/JPY           82.13           -0.23%        0.83%         -4.87%           94.1955   78.9222     19

 9      Yen	/	Real                  JPY/BRL       0.02047             -0.61%        0.64%         2.76%            0.02127   0.01838      2

 10     Aussie	$	/	Franc            AUD/CHF       0.961845            -0.66%        1.83%         1.26%            1.0079     0.8949      8

 11     Canada	$	/	Real             CAD/BRL       1.681425            -0.82%        1.48%         -2.24%           1.8244     1.6399     12

 12     New	Zeal	$	/	Yen            NZD/JPY           62.08           -1.51%        0.40%         -1.99%           68.8751   58.9096     16

 13     Euro	/	Canada	$             EUR/CAD       1.32362             -2.12%        -4.96%        3.70%            1.5183     1.2502      3

 14     Euro	/	Yen                  EUR/JPY           108.71          -2.34%        -4.17%        -1.34%           134.365   105.404     13

 15     Pound	/	Canada	$            GBP/CAD       1.548235            -2.71%        -5.10%        -0.74%           1.7208     1.4894     15

 16     Euro	/	Real                 EUR/BRL       2.225575            -2.92%        -3.55%        1.42%            2.6379     2.1772      5

 17     Pound	/	Yen                 GBP/JPY       127.155             -2.94%        -4.32%        -5.59%           150.704   126.082     21

 18     Euro	/	Aussie	$             EUR/AUD       1.307475            -4.65%        -6.74%        -7.41%           1.6271     1.2956      11

 19     Pound	/	Aussie	$            GBP/AUD       1.529315            -5.34%        -6.88%       -11.38%            1.814     1.5296     20

 20     Euro	/	Franc                EUR/CHF       1.257565            -5.36%        -5.04%        -6.25%           1.4917     1.2437      7

 21     Pound	/	Franc               GBP/CHF       1.47096             -5.95%        -5.18%       -10.27%           1.7112     1.4554     17




                                                 GLOBAL CENTRAL BANK LENDING RATES
             Country            Interest Rate                  Rate             Last change            June-10               Dec-09
              United States     Fed funds rate                 0-0.25           0.5	(Dec.	08)             0-0.25             0-0.25
              Japan             Overnight call rate            0-0.1            0.1	(Oct.	10)                0.1              0.1
              Eurozone          Refi rate                        1             0.25	(May	09)                 1                 1
              England           Repo rate                       0.5            0.5	(March	09)                0.5              0.5
              Canada            Overnight funding rate           1             0.25	(Sept	10)                0.5              0.25
              Switzerland       3-month	Swiss	Libor            0.25            0.25	(March	09)             0.25               0.25
              Australia         Cash rate                      4.75             0.25	(Nov	10)                4.5              3.75
              New Zealand       Cash rate                        3              0.25	(July	10)             2.75               2.5
              Brazil            Selic rate                     10.75            0.5	(July	10)              10.25              8.75
              Korea             Korea base rate                 2.5            0.25	(Nov.	10)              2.25                2
              Taiwan            Discount rate                  1.25            0.25	(Feb.	09)              1.375              1.25
              India             Repo rate                      6.25             0.25	(Nov	10)                5.5              4.75
              South Africa      Repurchase rate                  6              0.5	(Sept.10)                7                 7



       CURRENCY TRADER	•	January	2011		                                                                                                  31
     INTERNATIONAL MARKETS


     Unemployment                                  Period             Release date              Rate          Change        1-year change   Next release
                              Argentina             Q3                      11/22               7.5%            -0.4%            1.6%           2/22
     AMERICAS                   Brazil             Nov.                     12/17               5.7%            -0.4%           -1.7%            1/7
                               Canada              Nov.                      12/3               7.6%            -0.3%           -0.8%            1/7
                               France               Q3                       12/2               9.3%             0.0%            0.1%            3/3
     EUROPE                   Germany              Oct.                     11/30               6.7%             0.0%           -0.8%            1/4
                                 UK              Aug.-Oct.                  12/15               7.9%             0.1%            0.0%           1/19
                              Australia            Nov.                      12/9               5.3%             0.1%           -0.3%           1/13
     ASIA and                Hong Kong           Sept.-Nov.                 12/16               4.2%            -0.1%           -0.9%           1/18
     S. PACIFIC                 Japan              Nov.                     12/28               5.1%             0.0%           -0.2%           1/28
                             Singapore              Q3                      10/29               2.1%            -0.1%           -1.2%           1/31

     GDP                                                 Period              Release date                 Change            1-year change   Next release
                                Argentina                   Q3                     12/17                   -2.8%                15.5%           3/18
     AMERICAS                     Brazil                    Q3                      12/9                    0.5%                 5.6%            1/7
                                 Canada                     Q3                     12/23                    0.7%                 6.3%           2/28
                                 France                     Q3                     11/30                    0.4%                 1.5%           2/15
     EUROPE                     Germany                     Q3                     11/12                    0.7%                 4.2%           2/15
                                    UK                      Q3                     12/22                    0.9%                 5.2%           3/29
     AFRICA                     S. Africa                   Q3                     11/30                    0.6%                 9.7%           2/22
                                Australia                   Q3                      12/1                    0.6%                 2.8%            3/2
                               Hong Kong                    Q3                     11/12                    7.8%                 6.8%           2/23
     ASIA and S.                   India                    Q3                     11/30                   18.7%                21.7%           2/28
     PACIFIC
                                  Japan                     Q3                     11/15                    0.9%                 3.9%           2/14
                               Singapore                    Q3                     11/26                    1.6%                12.5%         NLT	2/25

     CPI                                                 Period              Release date                 Change            1-year change   Next release
                                Argentina                  Nov.                    12/15                    0.7%                11.0%           1/14
     AMERICAS                      Brazil                  Nov.                     12/8                    0.8%                5.6%            1/6
e
                                Canada                     Nov.                    12/21                     0.1%               2.0%            1/25
                                 France                    Nov.                    12/14                     0.1%               1.6%            1/13
     EUROPE                     Germany                    Nov.                     12/9                     0.1%               1.5%            1/14
                                   UK                      Nov.                    12/14                     0.4%               3.3%            1/18
     AFRICA                     S. Africa                  Nov.                    12/14                     0.2%               3.6%            1/19
                                Australia                  Q3                      10/27                     0.7%               2.8%            1/25
                               Hong Kong                   Nov.                    12/21                     0.4%               2.9%            1/20
     ASIA and
                                  India                    Oct.                    11/30                     1.1%               9.7%           12/31
     S. PACIFIC
                                 Japan                     Nov.                    12/28                    -0.3%               0.1%            1/28
                               Singapore                   Nov.                    12/23                     0.4%               3.8%            1/24

      PPI                                               Period              Release date                 Change             1-year change   Next release
                               Argentina                  Nov.                    12/15                     1.0%               14.9%            1/14
      AMERICAS
                                Canada                    Oct.                    11/29                     0.5%                2.3%             1/5
                                France                    Nov.                    12/23                     0.4%                4.5%            1/14
      EUROPE                   Germany                    Nov.                    12/20                     0.2%                4.4%            1/20
                                   UK                     Nov.                    12/10                     0.3%                3.9%            1/14
      AFRICA                   S. Africa                  Nov.                    12/15                     0.2%                3.6%            1/20
                               Australia                  Q3                      10/25                     1.3%                2.2%            1/24
                              Hong Kong                   Q4                      12/13                     6.5%                0.6%            3/11
      ASIA and                    India                   Nov.                    12/14                     0.3%                5.6%            1/14
      S. PACIFIC
                                 Japan                    Nov.                    12/10                    10.0%                0.9%            1/14
                              Singapore                   Nov.                    12/29                     1.1%               -0.2%            1/28
    As of Dec. 30, 2010 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

    32	                                                                                                                     January	2011	•	CURRENCY TRADER
          EVENTS


Event: The World MoneyShow Orlando 2011           Event: London Traders Expo
Date:	Feb.	9-12                                   Date:	April	8-9
Location: Gaylord Palms Resort, Orlando           Location: Queen Elizabeth II Conference Centre
Show focus: Asia & Emerging Markets               For more information: Go to www.tradersexpo.com
For more information: Go to
www.moneyshow.com/twms/?scode=013104              Event: Dallas Traders Expo
                                                  Date: June 15-18
Event: New York Traders Expo                      Location: Hyatt Regency Dallas at Reunion
Date: Feb.	20-23                                  For more information: Go to www.tradersexpo.com
Location: Marriott Marquis Hotel, New York City
For more information: Go to www.tradersexpo.com   Event: The World MoneyShow Vancouver 2011
                                                  Date:	July	7-9
Event: 2011 CBOE Risk Management Conference       Location: Vancouver Convention Centre
Date: Feb. 27–March 1                             For more information: Go to
Location: St. Regis Monarch Beach resort,         www.moneyshow.com/vcms/?scode=013104
Dana Point, Calif.
For more information: Go to www.cboeRMC.com




CURRENCY TRADER	•	January	2011		                                                                    33

				
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