Strategies, analysis, and news for FX Traders

October 2007
Volume 4, No. 10

DO CURRENCIES
REALLY TREND
more than
other markets? p. 24

INTEREST-RATE
SHOCKS:
How different
currencies respond p. 18

LATIN AMERICAN
currency update p. 8

DOLLAR DIVES
to record lows p. 32

THE CONFOUNDING YEN

p. 12
 CONTENTS

Is forex a “trendy” market? . . . . . . .24

Think currencies trend better than other
markets? This analysis may surprise you.
By Currency Trader Staff

Spot Check
Contributors . . . . . . . . . . . . . . . . . . . . .6 Dollar index . . . . . . . . . . . . . . . . . . . .32
Analysis of the dollar index’s current
price patterns.
Global Market By Currency Trader Staff
Latin currencies rebound
from August sell-off . . . . . . . . . . . . . . .8 Industry News
What’s next for Latin America’s two top The U.S. dollar index limbo —
currencies — the Brazilian real and the how low can it go? . . . . . . . . . . . . . .34
Mexican peso? As the euro and the Canadian dollar
By Currency Trader Staff make all-time highs against the
greenback, the U.S. dollar index drops
On the Money to an all-time low.
Helicopter Ben
and the Japanese yen . . . . . . . . . . . .12 Currency fund manager
The American and Japanese economies, performance. . . . . . . . . . . . . . . . . . . .34
and the fate of the confounding yen.
By Barbara Rockefeller

Trading Strategies continued on p. 4

Interest-rate shocks
and currency moves . . . . . . . . . . . . .18
Short-term interest rates are typically
cited as the prime catalyst of currency
moves. This study puts that idea
to the test.
By Howard L. Simons

2 October 2007 • CURRENCY TRADER

 CONTENTS

FXMarketSpace reaches
milestone . . . . . . . . . . . . . . . . . . . . . .35
In its fifth full month, FXMarketSpace
averaged more than $1 billion in
daily volume.

Currency Futures
Forex choices increasing
at PBOT, CME . . . . . . . . . . . . . . . . . . .36
The Philadelphia Board of Trade will
trade an increased number of currency
futures while the Chicago Mercantile Key Concepts . . . . . . . . . . . . . . . . . . . .40
Exchange is putting certain currency
options on its electronic trading system. New Products and Services . . . . . . . . .41

Global News Briefs . . . . . . . . . . . . .37 Global Economic Calendar . . . . . . . . .42

Key dates for currency traders.
International Market Summary . .38
Forex Trade Journal . . . . . . . . . . . .44
Events . . . . . . . . . . . . . . . . . . . . . . . . . .40 Overconfidence leads to fading
Conferences, seminars, and other events. a strongly trending currency.

Have a question about something you’ve seen in

Currency Trader?
Submit your editorial queries or comments to
webmaster@currencytradermag.com.

Looking for an advertiser?

Consult the list below and click on the company name for a direct link to the ad in this month’s
issue of Currency Trader.

Advertising index

CMS Forex Market Technicians Assoc.

eSignal MetaStock
Forex.com NewsTrader Pro
FXCM Robbins Trading
InterbankFX TradeGuider
Las Vegas Trader’s Expo Trade Tech
MB Trading

4 October 2007 • CURRENCY TRADER

 CONTRIBUTORS
CONTRIBUTORS

A publication of Active Trader ®

Howard Simons is president of Rosewood

For all subscriber services: Trading Inc. and a strategist for Bianco Research.
www.currencytradermag.com He writes and speaks frequently on a wide range
of economic and financial market issues.

Editor-in-chief: Mark Etzkorn

metzkorn@currencytradermag.com
Barbara Rockefeller (http://www.rts-forex.com) is an

Managing editor: Molly Flynn international economist with a focus on foreign exchange. She
mflynn@currencytradermag.com
has worked as a forecaster, trader, and consultant at Citibank

Senior editor: Jeff Ponczak and other financial institutions, and currently publishes two
jponczak@currencytradermag.com
daily reports on foreign exchange. Rockefeller is the author of
Contributing writers: Technical Analysis for Dummies (For Dummies, 2004), 24/7
Barbara Rockefeller,
Howard Simons, Marc Chandler Trading Around the Clock, Around the World (John Wiley & Sons,
2000), The Global Trader (John Wiley & Sons, 2001), and How to
Editorial assistant and
Webmaster: Kesha Green Invest Internationally, published in Japan in 1999. A book tenta-
kgreen@currencytradermag.com
tively titled How to Trade FX is in the works. Rockefeller is on the
Art director: Laura Coyle board of directors of a large European hedge fund.
lcoyle@currencytradermag.com

President: Phil Dorman

Thom Hartle (http://www.thomhartle.com) is director of
pdorman@currencytradermag.com
marketing for CQG and a contributing editor to Active Trader
Publisher,
Ad sales East Coast and Midwest:
magazine. In a career spanning more than 20
Bob Dorman years, Hartle has been a commodity account
bdorman@currencytradermag.com
executive for Merrill Lynch, vice president of
Ad sales financial futures for Drexel Burnham Lambert,
West Coast and Southwest only:
Allison Ellis trader for the Federal Home Loan Bank of
aellis@currencytradermag.com
Seattle, and editor for nine years of Technical
Classified ad sales: Mark Seger Analysis of Stocks & Commodities magazine. Hartle also
mseger@currencytradermag.com
writes a daily market blog called hartle & flow
(http://www.hartleandflow.com).
Volume 4, Issue 10. Currency Trader is published monthly by TechInfo, Inc.,
150 S. Wacker Drive, Suite 880, Chicago, IL 60606. Copyright © 2007
TechInfo, Inc. All rights reserved. Information in this publication may not be
stored or reproduced in any form without written permission from the publisher.

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

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

6 October 2007 • CURRENCY TRADER

 GLOBAL MARKETS

Latin currencies
rebound from August sell-off
Emerging markets have bounced back after this year’s market whiplash,
and two Latin currencies are poised to profit — with a couple of caveats.

BY CURRENCY TRADER STAFF

L
atin America may have a new story to tell. After be the star of Latin America, and its currency has appreci-
years of debt-ridden governments with poor fis- ated strongly this year. The dollar/real rate (USD/BRL)
cal discipline, market watchers say the region is began 2007 around 2.13, but by mid-July real strength and
looking stronger and healthier than ever. dollar weakness had pushed the pair down to the 1.85 level
Structural changes may account in part for the recent (Figure 1).
bounce-back in Latin American currencies — particularly Huge capital inflows from foreign direct investment sup-
the Brazilian real (BRL) — following the global credit- ported the real throughout much of 2007, as global players
crunch panic in August, which saw the liquidation of many flocked to Brazil’s high interest rate, robust growth, and
emerging-market positions. strong current account picture.
As of Sept. 25, the Brazilian currency had returned to its “Then came the jitters from the credit crunch crisis and
mid-July levels in the wake of the August global money the real depreciated because of risk aversion, hitting 2.09 on
shift away from risk. Aug. 16,” says Italo Lombardi, emerging market economist
Brazil is considered by many global money managers to at Ideaglobal. “Portfolio managers did with Brazil what
they’ve done with all emerging mar-
kets and higher beta trades — they
FIGURE 1 — BRAZILIAN REAL liquidated and went to safe-haven.”
However, by Sept. 28 the real had
The real’s rally vs. the U.S. dollar was halted in July and August, but by the end
of September it had retraced most of its losses. retraced most of its August losses and
was trading below 1.84.

The current stability

“The one interesting and important
dichotomy within the Latin American
region today vs. 10 years ago is that
the economies are so much more sta-
ble,” says Charmaine Buskas, senior
economic strategist at TD Securities in
Toronto. Of the mid-August global
financial jitters she says, “the Latin
American markets sold off but it was-
n’t the type of aggressive sell-off you
would have seen 10 years ago. It is a
testament to how far they’ve come in
the last decade.”
Lombardi agrees.
“The currency did not lose that
Source: ADVFN (www.advfn.com)
much,” he says. “In the old days it

8 October 2007 • CURRENCY TRADER

would have been much worse. In general, emerging Latin Brazil: The Latin star
countries have better buffers. They have higher interna- Market watchers note Brazil has captured the number-one
tional reserves and their response to an international crisis spot in foreign investment within Latin America this year,
is much better.” aided by its extremely high interest-rates. The official inter-
Alfredo Coutino, senior economist Latin America at est rate in Brazil — the selic rate — currently stands at 11.25
Moody’s Economy.com says, “[It’s] a different situation percent, making the Brazilian real a popular leg in the glob-
than [10 years ago]. Back then, the region was not prepared continued on p. 10
to weather external shocks.”
Over the past decade, Latin govern-
ments have worked hard to strengthen
their economies and implement need-
ed economic reforms. Coutino says the
regional economy is now more resist-
ant to external shocks.
Most economists cite 2003 as the
start of the latest Latin American
expansion cycle, after a two-year
recession in 2001-02. Coutino says the
region is benefiting from favorable
external conditions, particularly in the
global commodity markets. However,
he adds that recent growth also has
been fueled by domestic consumption
and investment.
Coutino forecasts gross domestic
product (GDP) growth of nearly 5 per-
cent for Latin America as a whole in
2007, vs. a 5.6-percent reading in 2006.
“We are seeing a mild moderation
in growth driven by adjustment in the
commodity prices in the international
market,” he says. “[However], the
region is doing very well and extend-
ed its fourth year of continuous
growth without major inflation.”
Enrique Alvarez, head of Latin
American research at Ideaglobal,
agrees the region has been doing
exceptionally well. Amid strong world
demand, the area’s large commodity
export base, which includes mining,
agriculture, and petroleum, has been a
bullish factor in recent years.
“[However], domestic demand has
been kicking in a large portion of over-
all growth,” Alvarez adds. “There has
been an increase in acquisition power
throughout these economies.
Corporations and the upper socioeco-
nomic level have been doing very
well.”

CURRENCY TRADER • October 2007 9

 GLOBAL MARKETS continued

FIGURE 2 — MEXICAN PESO

The dollar/peso pair has traded in a somewhat narrow range for most of 2007, Mexico: Tied to the U.S.
although analysts see the peso strengthening in the near term. Mexico — another major player in the
region — may see some challenges
ahead because of its close ties with the
U.S.
“Mexico is clearly a U.S. driven
story,” TD Securities’ Buskas says.
“That is its greatest upside, but also
its downside.”
“Mexico is much more linked to
U.S. dynamics,” BNP Paribas’ de la
Fuente says. “We are not all that opti-
mistic regarding the U.S. economy
and think it will underperform — and
consequently, Mexico will suffer.”
However, Mexico is a large petrole-
um exporter and the latest rise in
global crude oil prices (at 81.50 on
Sept. 28) should help underpin the
Source: ADVFN (www.advfn.com) economy.
“Forty percent of government rev-
al yen carry trade. enues are generated by oil,” Coutino says, pointing out that
crude oil represents roughly 17 percent of Mexico’s total
Monetary policy outlook export picture.
The selic rate has come down significantly in recent years, Mexico’s second-largest source of foreign income
from a peak reading of 19.75 percent in September 2005. remains remittances from abroad — immigrants sending
The BCB hiked rates to that dramatic level amid hyperin- home funds to family members still in Mexico. Coutino
flation, high government debt, and other short-term macro- notes that to-date remittances total $23 billion in 2007, vs.
economic problems. $22 billion in 2006.
However, in recent years, the government has “cleaned “Remittances have surpassed foreign direct investment
house” according to Lombardi, which has allowed for a since 2003 for Mexico,” he says.
reduction in rates. The trend remains toward lower rates,
with analysts expecting additional cuts this year. Lombardi Political cycle
expects a 0.25-basis point cut in the selic rate at the next BCB Coutino forecasts a 2.7-percent GDP reading for Mexico this
meeting on Oct. 17. year, down sharply from 2006’s 4.8-percent figure. But he
also expects a quick recovery in 2008 to 4 percent. Coutino
Further gains ahead blames this year’s dip on the country’s political cycle.
Most currency watchers remain optimistic the real can con- “Since 1976, every six years in Mexico, which coincides
tinue to chalk up additional gains between now and year- with new governments, has had a recession or at least a
end, with the potential for more appreciation in 2008. slowdown of economic activity,” he says.
Lombardi sees the potential for the real to hit 1.75 by This year is proving to be no different than it has been for
year-end. Lombardi also expects Brazil to earn investment- other new political administrations.
grade ratings by the first quarter of 2008, which should “At the end of each administration, the government uses
make the country even more attractive as an investment fiscal policy to spend more and generate transitory eco-
destination and would probably push the currency even nomic growth,” Coutino says. “The next President has to
higher. Lombardi looks for the real to hit 1.65 by mid-2008. start with budget restrictions and cut the federal budget.
Rafael de la Fuente, chief Latin American economist at Public spending contracts during the first six months of
BNP Paribas, also has a bullish outlook, pointing to the 1.75 each new presidency.”
level as a target.
“Just about everyone in the market sees the real as an Risk toward higher rates
appreciation play,” he says. The overnight interest rate in Mexico currently stands at

10 October 2007 • CURRENCY TRADER

7.25 percent. The central bank held rates steady at its latest “The risks are located on the external landscape,” agrees
meeting in late September, despite some expectations of a Ideaglobal’s Alvarez. “If growth begins to slow you could
hike. see some pass-through to Latin America.”
Rising inflation pressures suggest a rate increase could He also says the current concerns that China may be
occur later this year. August headline CPI data came in at overheating could lead to a bubble bursting.

4.03 percent. The central bank is cur-
rently maintaining a tightening bias,
as inflation is a smidgen above the
upper end of its inflation target at
4.0 percent.

Peso outlook
The Mexican peso has been relative-
ly stable throughout 2007 and is cur-
rently trading around 11 (Figure 2).
Analysts say the currency could
enjoy modest appreciation near
term.
“As risk appetite comes back, we
could see it trade to 10.90,” de la
Fuente speculates.
Coutino adds that recent U.S. rate
cuts actually increase the margin in
the bullish interest-rate differential
between Mexico and the U.S., which
should allow strengthening in the
peso toward 10.90.

Clouds
Overall, the Latin American region
is performing strongly and no major
black clouds are on the horizon.
However, analysts say it will be
important to keep an eye on infla-
tion in the major economies amid
recent increases in food and energy
on the global marketplace, as this
could translate into higher con-
sumer inflation in the region. Also,
analysts underscore the region
remains closely tied to the global
economy, especially amid demand
from China and India for raw com-
modities.
“The biggest concern for Latin
America is the health of the global
economy,” BNP Paribas’ de la
Fuente says. “It is ultimately what
happens to global growth and the
export picture for commodity prices
that matters.”

CURRENCY TRADER • October 2007 11

 ON THE MONEY

Helicopter Ben
and the Japanese yen
The yen is confusing traders with its recent stagnant trading.
Is it playing possum while a new paradigm shift occurs?

BY BARBARA ROCKEFELLER

T he Japanese yen is trading in a very strange

manner these days. After rising in July and
early August, it has since been trading in a very
wide and choppy range from roughly 112 to
116 (Figure 1, inverted scale).
Nobody understands the yen today. It is being whip-
sawed between risk aversion and risk seeking, the latter
prime problem in the high-yielding currency targets of the
carry trade (even the euro) and preferred to hold dollars as
the safe alternative. Having to buy back yen shorts was a
costly experience for many, including Japanese retail
investors (who have an astonishingly large position).
Stage 2 is the period just after the Fed cut rates by a dra-
matic 50 basis points on Sept. 18. Gridlock in credit markets
including the yen as the funding currency in carry-trades. eased and the dollar lost its safe-haven status. The euro hit
In Stage 1, as the sub-prime crisis appeared, the yen carry- new record highs. The yen initially returned to its down-
trade lost its allure because risk aversion raised its ugly ward trajectory — but after only a few days, it was spiking
head. Speculators feared a worse fallout from the U.S. sub- both up and down.
What’s going on? First, we
always have to worry when
FIGURE 1 — HARD-TO-FATHOM YEN
the dollar is falling against
After embarking on a strong up move in late June, the yen (shown here with an inverted both the European currencies
scale vs. the dollar) has been stuck in a range for several weeks. and the yen. It means senti-
ment is universally dollar-
negative. The bias means good
news is ignored and bad news
is exaggerated.
But we also have to wonder
what some traders are seeing
that we may be missing.
Perhaps “new fundamentals”
are overriding the old carry
trade orthodoxy.

A different paradigm
The first new fundamental is
the perception the 50-basis-
point Fed rate cut in
September (with two more
being built in for the Oct. 31
and Dec. 11 Fed meetings) will
cause inflation. This is why
the prices of oil and gold are
rising so dramatically.
Behind the scenes, however,
Source: Data — Reuters DataLink; charts — MetaStock
one of the real fears at the Fed

12 October 2007 • CURRENCY TRADER

is deflation. The bursting of an asset bubble and a subse- father of monetarism (“Inflation is always and everywhere
quent recession always has the potential to become defla- a monetary phenomenon”).
tionary, and nobody knows it better than Fed chief Ben It’s one of the dirty little secrets of central banking that
Bernanke, an expert on the Great Depression of the 1930s. economists, for all their sophisticated models, honestly do
That’s one of the reasons the rate cut was double the expect- not know how inflation and deflation come about. We don’t
ed amount — Bernanke wanted to shock the markets. understand the role of expectations, and it’s pretty certain

When the dollar is falling against both the European currencies and the yen,
it means sentiment is universally dollar-negative — good news is ignored
and bad news is exaggerated.
Mr. Bernanke got a bad rap when journalists started call- that former Fed chairman Alan Greenspan’s explanation of
ing him “Helicopter Ben” after he suggested that deflation the failure of inflation to appear in the early 2000s — the
could be whipped by “throwing cash out of helicopters” — productivity miracle — was his usual smoke and mirrors. In
i.e., increasing the money supply. Deflation was considered fact, touting his new book on talk shows in late September,
a possible outcome of recession in 2002, and Bernanke was he admitted that central bankers do not understand infla-
arguing the Fed could cure it via the money supply. This is tion any better today than they did 50 years ago.
a generally accepted concept by economists. The idea of a We don’t want to overstate the possibility of deflation in
helicopter drop actually came from Milton Friedman, the continued on p. 14

CURRENCY TRADER • October 2007 13

 ON THE MONEY continued

FIGURE 2 — BIGGER PICTURE, BIGGER RANGE gold bars that shaken and rat-
The yen is currently near the middle of a multi-year range, with the 2006 high looming as tled consumers bought. Banks
the next conspicuous upside target. would not lend to just anyone;
only the most triple-A of triple-
A borrowers. The banking sec-
tor seized up and in the end,
had to be bailed out with injec-
tions of government capital.
Even today, money supply
growth is less than 3 percent
and lending growth is anemic
at 1-2 percent. During the late
1990s, the Japanese government
even tried a helicopter drop —
it gave every adult citizen a
spending voucher, with an
expiration date, worth about
$240. Some 40 percent of the
vouchers were never spent.
The current U.S. gridlock in
the market for collateralized
debt obligations, including sub-
prime mortgages, is somewhat
parallel to the Japanese banking
sector woes in the early 1990s.
Source: Data — Reuters DataLink; charts — MetaStock An important difference is that
most financial institutions have
the U.S., but the probability is not zero. good balance sheets, since toxic assets were off-loaded to
third parties, many of them outside the U.S. Therefore,
Japanese parallels untangling good paper from bad paper will not require out-
The only country that has experienced true deflation since right government bailouts of banks.
the 1930s is Japan, and there are a few parallels in the U.S. Again, the U.S. is not Japan. Americans are not savers like
today to the Japanese situation since 1990. In Japan, the the Japanese, but spenders.
bubble that burst was the stock market; in the U.S., it’s In Japan the financial sector problems were structural,
house prices. In Japan, the Nikkei peaked at 38,951 in early while in the West today we like to think they are cyclical —
January 1990. It fell to its lowest low, 7,604, in May 2003. At the institutions have solid balance sheets and it’s just a few
around 16,000 today, the Nikkei has regained less than one- bad apples here and there that made too-risky loans on too
third of the lost ground. little evidence of credit-worthiness. But as in Japan, it’s
In the U.S., house prices bubbled up much like the Nikkei going to take a fair amount of time for the sand to be
had done, doubling in most places and more than doubling worked out of the gears. All the rate cuts in the world can’t
in the hottest markets (California, Nevada, and Florida). make possibly toxic paper less toxic, or investors — includ-
Now house prices are falling. So far it’s a modest decline of ing those investing in pension funds, mutual funds, and
less than 5 percent nation-wide, but with foreclosure rates hedge funds — more trusting of issuers and their rating
more than double from a year ago, prices are sure to fall fur- agencies.
ther. Yale Professor Robert Shiller, who invented the phrase
“irrational exuberance,” says in some places house prices U.S. housing crisis
will drop as much as 50 percent, and a decline of 20 percent- General credit gridlock means housing is not the whole
plus nationwide is likely. Trillions of dollars in home prices story, but it’s the center of the maelstrom. Speaking at the
will be lost. Even Greenspan warns of “double-digit” Kansas City Fed’s annual shindig at Jackson Hole,
declines. Wyoming in late August, Fed Governor Frederic Mishkin
The key institutional factor in the prolonged recession looks at the current housing problem in the U.S. as throw-
and deflation that followed the Nikkei crash was the failure ing sand in the transmission of money supply as a determi-
of banks. Bank balance sheets were rotten with bad debts. nant of economic activity. Mishkin even titled his paper
Japanese depositors withdrew funds to put into their mat- “Housing and the Monetary Transmission Mechanism.”
tresses. Banks ran out of safety deposit boxes to hold all the Mishkin said the effect of a monetary shock on housing is

14 October 2007 • CURRENCY TRADER

not well understood. Even though residential investment policy is less effective in restoring an economy to health.
accounts for only 5 percent of GDP, Fed modeling indicates Mishkin thinks the argument for the central bank to
the housing sector is three times more responsive to mone- respond to a housing bubble being burst is weaker than for
tary policy in the short run than is overall spending. In fact, other asset prices, but once a bubble is seen to be bursting,
“exceptionally unfavorable conditions in the housing sector the central bank has to act fast.
have the potential to create instability in the financial sys- In Japan’s case, the Bank of Japan (BOJ) failed to ease
tem — instability that could magnify problems for the over- monetary policy fast enough and by a big enough amount,
all economy…. A breakdown in financial stability occurs and the government acted too slowly to bail out the bank-
when shocks to the financial system cause disruptions to ing sector. Mishkin says “The lesson that should be drawn
the credit intermediaries that are so severe that the system from Japan’s experience is that the task for a central bank
can no longer channel funds fluidly to creditworthy house- confronting a bubble is not to stop it but rather to respond
holds and businesses with productive investment opportu- quickly after it has burst. As long as the monetary authori-
nities. Without access to financing, individuals and firms ties watch carefully for harmful effects stemming from the
must cut their spending, which will have consequences for bursting bubble and respond to them in a timely fashion,
overall economic activity.” then the harmful effects can probably be kept to a manage-
Any asset price collapse can create financial market insta- able level.”
bility, and that is exactly what the sub-prime problem may Mishkin didn’t mention deflation in the speech, and in
be doing in the U.S., where real estate is worth about $20 fact argues for central banks to respond to other factors
trillion. A 20-percent drop in its face value would be some (such as falling production) rather than house prices direct-
$5 trillion, which in turn is almost a third of U.S. GDP. This ly. But to anyone familiar with monetarist theories, the
kind of phrasing is to mix a stock (housing) with a flow implication is there — like Japan, the U.S. could be vulner-
(GDP), but never mind — the potential disruption is huge. able to deflation if falling house prices cause the consumer
Mishkin warns that we have a lot of uncertainty about to withdraw into his shell.
how house price declines affect consumer behavior and the
overall economy, but once a bubble has burst, monetary continued on p. 16

CURRENCY TRADER • October 2007 15

 ON THE MONEY

Other Barbara Rockefeller articles:

“The dollar’s “sub-prime” future”
Uncertain times Currency Trader, September 2007.
This line of reasoning — the parallels between The fallout from the U.S. housing and mortgage meltdown may be far
Japan in the 1990s and the U.S. in 2007-2008 — is from over, and how things unfold will have a big impact on the forex
very much on the minds of some traders, includ- market.
ing Japanese traders. Uncertainty is unbearably “The rising yen — here we go again”
high. If conventional wisdom is right and the U.S. Currency Trader, August 2007.
is going into an inflationary period, the forex The yen has been on the rise vs. the dollar. Find out if it’s a reversal
market will punish the dollar with relentless sell- or just a correction.
ing. This means the carry trade may be okay for
“The hammer and the yen”
some other currency pair, but not dollar/yen. The Currency Trader, July 2007.
yen will rise alongside everything else. Recent statements by Japan’s Ministry of Finance hint at big things
On the other hand, the U.S. may be going into on the horizon for the yen.
a deflationary period. Recession and deflation
“Too big to fail”
imply a lot less demand for Japanese goods in the
Currency Trader, June 2007.
U.S. — and more importantly, demand for
If the dollar is poised to rebound, it might be getting help where it
Japanese capital goods (like machinery) in the least expects it.
emerging market suppliers to the U.S. like China,
Japan’s biggest overseas customer. Thus, the yen “Do stocks hold the key to currency levels?”
should fall as economic growth subsides from the Currency Trader, May 2007.
recent robust 4 percent level to 1-2 percent. Japan The correlation between stock market and currency prices isn’t what
many people think.
will not only remain deflationary, it will become
more so, and the legacy of January 1990 will live “The coming commodity boom”
on. Such an outcome is yen-negative. Currency Trader, April 2007.
Now look at Figure 2. It shows the dollar/yen Commodities are already having an impact on global economies.
from 1998 to today, with a linear regression chan- “The yen: Canary in the currency coal mine”
nel starting in the middle of the Long-Term Currency Trader, March 2007.
Capital crisis of 1998. It also has four big “cycle” Keep an eye on capital flows and the yen — they could be telling you
lines superimposed. Today the dollar/yen is right more about the dollar than first meets the eye.
in the center of a horizontal linear regression
“Indicator failure and scientific analysis”
trendline. Yes, we cheated in selecting the starting
Currency Trader, February 2007.
point of the channel, but it was to illustrate the This discussion of market biases and fallacies provides a more rigor-
point that having retraced some 65 percent of the ous way to think about trading.
previous move, the yen could now be headed
upward, back toward the channel top near 100. “Reserve diversification, Part II”
The critical level is the mid-2006 spike at 109 (cir- Currency Trader, January 2007.
What is the U.S. doing to ensure the Chinese government will not
cle). As we all know, once the price convincingly
alter the $700 billion it has in U.S. dollar reserves?
surpasses a previous high, it’s a breakout and
trend-followers should get on board. “Charts are not enough”
We think the inflation argument has more Currency Trader, December 2006.
weight than the deflation argument, but the Breaking down price action in light of the news.
recent tendency of the yen to rise against the dol- “When will the yen go to the moon?”
lar is bothersome. The conclusion: you can no Currency Trader, October 2006.
longer sell the yen against everything on raw The fundamentals are all pointing toward an up move in the
interest rate differentials. You may be able to sell Japanese yen. So what’s it waiting for?
it against stable high-yielders like the Australian
“Why is everybody losing money in forex?”
dollar, but not the dollar and pound, since Britain Currency Trader, September 2006.
has a housing bubble that may be bursting, too. Despite unprecedented liquidity, professional currency managers
And if Fed and Bank of England central bankers have had a rough go of it in 2005 and 2006. Has something changed
take Mishkin’s advice, they will be throwing in the forex world?
money out of helicopters — i.e., cutting rates —
You can purchase and download past articles at
for many months to come.

http://www.activetradermag.com/purchase_articles.htm.
For information on the author see p. 6.

16 October 2007 • CURRENCY TRADER

 TRADING STRATEGIES

Interest-rate shocks
and currency moves
Pay attention: The currency moves triggered by big interest-rate changes aren’t mirages.

BY HOWARD L. SIMONS

L ast month’s article (“Stock shocks and the

dollar,” Currency Trader, September 2007)
examined how currencies react to shocks in
U.S. equities. The article concluded:

market so much as a market of currencies.

in the New York afternoon, while most extreme moves in curren-
cies are in place by mid-day in London.
If we move to the next-day reactions, which are highly tradable,
we see same-direction reactions in the CAD, and rallies in the
other currencies only in reaction to big down days in U.S. stocks.
To toss in one more Wall Street cliché, we do not have a currency By the time we get to the one-week horizon, the same-direction
pattern for the CAD remains, as do the rallies for the DEM/EUR
The same-day reactions in currencies may not be particularly and JPY following U.S. stock market sell-offs.
tradable, given that most extreme moves in U.S. equities develop Those who wish to trade currencies on the basis of anticipated
changes in U.S. monetary policy following
a stock market shock in either direction are
FIGURE 1 — EURODOLLAR’S DISTRIBUTION OF RETURNS: advised to be highly selective. Only two
JANUARY 1973 ONWARDS patterns really emerge from the data: Trade
Since January 1973 the eurodollar has had average daily returns of 0.000014 the CAD in the same direction as the stock
percent, plus or minus a standard deviation of 0.04167 percent, which puts market shock, and buy the EUR when U.S.
the 95-percent confidence bands at 0.081687 percent and -0.081660 percent
(green vertical lines). Moves outside these bands represent interest rate stocks fall.
shocks.
As is often the case in scientific
inquiries, this study raised other ques-
tions. After all, if currencies react to
short-term interest-rate changes and
therefore, expectations, we should
expect to see some very statistically
significant reactions to extreme moves
in short-term interest rates.

The study: The eurodollar

rate vs. currencies
To test this hypothesis, the one-, two-,
and five-day price moves in four cur-
rencies (vs. the U.S. dollar) were ana-
lyzed respective to short-term U.S.
interest-rate “shocks.”

18 October 2007 • CURRENCY TRADER

FIGURE 2 — SAME-DAY RETURNS ON EXTREME EURODOLLAR DAYS

When U.S. rates jump,

go with the dollar’s
rally for another day,
and vice-versa for
a downward shock
in short-term interest
rates.
The short-term interest rate was
represented by the three-month
eurodollar (ED3) rate (as maintained
by the Federal Reserve and converted
into a price index). The four curren-
cies were the same from last month’s
article: the Canadian dollar (CAD),
British pound (GBP), Japanese yen
continued on p. 20

CURRENCY TRADER • October 2007 19

 TRADING STRATEGIES continued

FIGURE 3 — NEXT-DAY RETURNS ON EXTREME EURODOLLAR DAYS

(JPY), and the Deutsche mark, both as

an independent currency and as part
of the euro (EUR). The analysis period
spanned January 1973 to present,
using daily data.
Each market was converted into
daily returns and mapped against the
sorted ED3 returns. Since January
1973, the ED3 has had average daily
returns of 0.000014 percent, plus or
minus a standard deviation of 0.04167
percent, which means the 95-percent
confidence band lies at daily returns
of 0.081687 percent and -0.081660 per-
cent. These thresholds are the green
vertical lines in Figure 1. The focus
will be on the two, 2.5-percent slices of
large down and up days to the left and
right of these boundaries rather than
the large section between them, which

20 October 2007 • CURRENCY TRADER

FIGURE 4 — ONE-WEEK RETURNS ON EXTREME EURODOLLAR DAYS

contains 95 percent of the observa-

tions.
There were 204 large ED3 down
days and 238 large up days in the
sample. This was somewhat surpris-
ing given the natural skittishness of
the interest-rate market; we might
have expected a skew toward large
down days.
Three comparisons of currency
returns on the extreme days will be
made: those for the same day of an
ED3 shock, those for the same day
plus the next day, and those for the
following week. The latter two com-
parisons are made to see how interest-
rate shocks are absorbed over time in
the currency markets.

continued on p. 22

CURRENCY TRADER • October 2007 21

 TRADING STRATEGIES continued

TABLE 1 — SAME-DAY TESTS

There is an almost 100-percent certainty the same-day returns for the currencies on extreme ED3 days are different from
the returns on normal days — with the glaring exception of the JPY's variance on days when the ED3 has an extreme sell-
off (row 2).

CAD DEM GBP JPY

Probability large down mean = remainder mean 0.0% 0.0% 0.0% 0.0%
Probability large down variance = remainder variance 0.0% 0.2% 18.5% 99.1%

Probability large up mean = remainder mean 3.5% 0.0% 0.0% 0.0%

Probability large up variance = remainder variance 0.0% 0.0% 20.2% 0.0%

Same-day results are the same as the mean of the remainder of the currency
The question of whether currency reactions to rate shocks returns in the analysis period. Second, the F-test is used to
are statistically significant can be answered two ways. First, compare the small samples’ variances against those of the
the “Student’s T-test” can be used to assess the probability remainder of the population.
the means of a small sample of a dataset are the same as the Table 1 shows the results of the T-test and F-test. The first
means for the remainder of the set — in this case, the prob- and third rows (“Probability large down/up mean =
ability the mean of currency returns on the ED3’s big days remainder mean”) show the T-test results for ED3’s big up

TABLE 2 — TWO-DAY TESTS

Unlike many market reactions that quickly fade, currency reactions to interest rate shocks persist. One day after a big
eurodollar move, up or down, the means of the currency returns are different from those of the rest of the population with a
high degree of confidence. The same is true for the currency variances as well.
CAD DEM GBP JPY
Probability large down mean = remainder mean 0.0% 0.0% 0.0% 0.0%
Probability large down variance = remainder variance 0.0% 0.0% 25.0% 9.2%

Probability large up mean = remainder mean 1.1% 5.0% 4.4% 7.1%

Probability large up variance = remainder variance 0.0% 0.0% 1.3% 0.0%

TABLE 3 — ONE-WEEK TESTS

Although the means of currency returns are significantly different one week after large eurodollar down moves (i.e., large
upward interest-rate moves), the relationship is not symmetrical. One week after a large down move in the eurodollar, the
odds the DEM/EUR and GBP means have converged back to those of their populations as a whole are 85.2-percent and
50.7-percent, respectively. The variances are the same.
CAD DEM GBP JPY
Probability large down mean = remainder mean 0.7% 0.0% 0.0% 0.3%
Probability large down variance = remainder variance 0.0% 0.0% 8.9% 0.0%

Probability large up mean = remainder mean 3.3% 85.2% 50.7% 20.6%

Probability large up variance = remainder variance 0.0% 0.0% 0.7% 0.0%

22 October 2007 • CURRENCY TRADER

days and down days, respectively. The ments were nothing more than pure
smaller the number, the lower the interest-rate arbitrage, the results are
probability the currency returns on exactly what we should expect. What
these days are the same as the curren- we cannot discern from the data, how-
cy returns on all the other days. ever, is causality: We have no idea
The second and fourth rows whether the ED3’s movements lead,
(“Probability large down/up variance lag, or occur nearly simultaneously
= remainder variance”) contain the F- with the currencies’ movements.
test results for ED3’s big up and down
days. These rows show whether the Next-day results
variability of the currency returns on What happens when we add a second
these days was the same as variability day to the test? Table 2 shows that
on all the other days. after a big move in the ED3, either up
Table 1 shows there is an almost or down, the means of the currency
100-percent certainty the same-day returns remain different from those of
returns for the currencies on extreme the rest of the population with a very
ED3 days are different from the high degree of confidence.
returns on normal days — with one Interestingly, the same can be said
glaring exception: the JPY’s variance for the currency variances as well;
on days when the ED3 has an extreme even the JPY’s variance after the sec-
sell-off (row 2). On those days, the ond day of an interest-rate shock is
equation is reversed — that is, we can different from the population as a
say with 99.1-percent certainty the whole.
JPY’s variance is the same as on all This is extraordinarily useful infor-
other days. If you sensed intuitively mation. Unlike many market reactions
the JPY had different drivers than that dissipate quickly, we can confirm
other currencies, you are correct on that currency reactions to interest-rate
this one count on a same-day basis. shocks persist. When U.S. rates jump,
Analyzing the same-day returns for go with the dollar’s rally for another
currencies on ED3 big down days (red day, and vice-versa for a downward
markers in Figures 2-4) and the ED3 shock in short-term interest rates.
big up days (blue markers) reveals a
yield-dependent shift pattern. One-week results
Whenever U.S. short-term rates jump All trading systems can be classified
by the threshold amount, currencies as either trending or mean-reverting
decline. The opposite is true as well; in nature. Suffice to say most currency
whenever U.S. short-term rates traders treat their markets as trending,
decline by the threshold amount, cur- and with good reason. The expected
rencies rise. Within the up and down movements in relative short-term
clusters, however, there are no internal interest rates, relative returns on
patterns, such as a linear or exponen- assets, and macroeconomic trends all
tial relationship between the curren- tend to be persistent.
cy’s returns and the ED3’s returns. Let’s see if this is true for currencies
Nothing in these same-day reac- one week after a short-term interest-
tions is surprising. If currency move- continued on p. 24

CURRENCY TRADER • October 2007 23

 TRADING STRATEGIES continued

Related reading
Other Howard Simons articles:
rate shock. For large down moves in
“Stock shocks and the dollar”
the ED3 price — that is, large upward
Currency Trader, September 2007.
interest-rate moves — the means of
Want to know what really happens to currencies after big stock market moves?
currency returns are significantly dif-
“Currencies and Federal Reserve trade weights” ferent one week later (Table 3).
Currency Trader, July 2007. This relationship is not symmetric,
The theory that a weaker dollar makes U.S. goods and services more competi- however. One week after a large
tive abroad sounds nice, but the facts argue otherwise. downward movement in the ED3
price, there are 85.2-percent and 50.7-
“Why currency traders should be humbler”
percent probabilities the DEM/EUR
Currency Trader, May 2007.
A close look at the historical returns of professional currency traders is not for the and GBP means, respectively, have
feint of heart. converged back to those of the popu-
“The stronger real: Don’t blame it on Rio” lation as a whole. The variances are
Currency Trader, April 2007. the same.
Lessons from past markets shed light on the possible future of Brazil’s high-flying This is a way of saying the currency
currency. market understands that down moves
“Comparing the major euro cross rates” in U.S. short-term interest rates are
Currency Trader, March 2007. going to be limited. There is good
Europe’s two major non-euro currencies — the British pound and the Swiss franc resistance at zero percent, and it takes
— reflect the growing new currency regime.
exponentially more effort for short-
“Mexican peso: Who’s your padre?” term rates to achieve each additional
Currency Trader, February 2007. basis point lower in yield.
The peso is one of several “emerging currencies” that have been gaining
popularity. Find out about the key factor that has propped up the currency —
which could disappear in a flash. Surprise — no surprise
Traders may be accustomed to hear-
“The new iron cross”
Currency Trader, January 2007. ing ambiguous answers or refutations
The long history of the D-mark/pound and now the euro/pound offers many to commonly held beliefs. And com-
lessons about economic policies and currency fluctuations. mentators enjoy producing them:
“The pros make it look hard” After all, who wants to engage in a
Currency Trader, December 2006. discourse proving the sky is blue on a
Are currency traders making life unnecessarily difficult for themselves? sunny day?
“Currency trends and volatility” That is why it is surprising, at least
Currency Trader, November 2006. to this writer, that the results of these
Interesting insights come from putting currency volatility under a microscope. tests prove currencies move in the
“Currencies and conventional U.S. investments” direction dictated by short-term inter-
Currency Trader, October 2006. est-rate shocks on the same day, the
The financial media often reports on moves in the stock and bond markets next day, and the one-week time
vis-à-vis currency fluctuations, but these relationships might not be what you
frame for upward short-term rate
expect.
shocks. Downward moves in yield
“The dollar index and ‘firm’ exchange rates” produce tradable results a week later,
Currency Trader, December 2005.
but the effect is not as strong.
The vast majority of currency traders are familiar only with the current floating-
rate system. But are we about to enter a new “firm exchange rate” era dominated The next time you see a strong
by the dollar and euro? move in short-term interest rates and
an expected reaction in the currencies,
“Howard Simons: Advanced Currency Concepts, Vol. 1”
go with it. It’s real — and isn’t that a
A discounted collection that includes many of the articles listed here.
surprise?

You can purchase and download past articles at
http://www.activetradermag.com/purchase_articles.htm. For information on the author see p. 6.

24 October 2007 • CURRENCY TRADER

 Why are
you losing
up to $30
on every trade
you make?
MB Trading Futures, Inc. (MBTF) offers Direct access trading without the expense of a deal desk. Since we operate
an ECN (Electronic Communication Network), we do not control the spreads, as low as 0-1 pip on the majors.
We utilize STP (Straight Through Processing) to route your orders directly to various bank quotes, increasing the
possibility for price improvements.
We encourage all trading styles even scalping. The trading style that you choose is your decision and we will
not interfere. We want your business to be successful!

MBTF Commission R/T

Spread per 100,000
MBTF (Variable: 0+)/ Deal Desk (based on current Cost per trade
Symbol (Fixed) exchange rates) MBTF / Deal Desk MBTF Savings*
USD/CHF 1 pip / 5 pips $10.00 $20.00 / $50.00 $30.00
USD/CAD 1 pip / 5 pips $10.00 $20.00 / $50.00 $30.00
GBP/JPY 4 pips / 9 pips $20.12 $60.12 / $90.00 $29.88
AUD/USD 1 pip / 4 pips $8.28 $18.28 / $40.00 $21.72
USD/JPY 1 pip / 4 pips $10.00 $20.00 / $40.00 $20.00
GBP/USD 1 pip / 5 pips $20.12 $30.12 / $50.00 $19.88
EUR/USD 1 pip / 3 pips $13.64 $23.64 / $30.00 $6.36
*Results may vary.

With our narrow spreads and extremely low commissions, your cost of trading is potentially lower than with most
forex brokerage firms. The MBT Navigator integrates with eSignal, QCharts, 4xMadeEasy, and TopGun software.

Visit www.mbtrading.com/fx for more information

or call us, toll free, at 1-866-558-3342
Securities products are offered through MB Trading, member FINRA, SIPC. MB Trading Futures, Inc. (MBTF) and 3DForex, LLC are CFTC registered FCMs and
members of NFA. MBTF offers execution and settlement services for futures based products, as well as offer off-exchange foreign currency (forex) products
through MB Trading. 3DForex, LLC offers forex products only to institutional customers. Trading in futures, options and forex is speculative in nature and not
appropriate for all investors. Investors should only use risk capital when trading futures, options and forex because there is always the risk of substantial loss.
Account access, trade executions and system response may be adversely affected by market conditions, quote delays, system performance and other factors.
©2005, All Rights Reserved.
 TRADING STRATEGIES

Is forex
a “trendy” market?
FIGURE 1 — EUR/USD PAIR

People often heap praise on

currencies for their ability to
trend, but crunching
the numbers shows this aspect
of the forex market might be
overrated — or imaginary.

BY CURRENCY TRADER STAFF

B
ecause identifying basic
market characteristics
Source: CQGNet (http://www.cqg.com)
lays the groundwork
for developing a sound-
trading plan, determining a market’s
tendency to trend should be one of the
first steps a trader takes in deciding
which assets to trade.
An endlessly repeated claim about
the forex market is that currencies
tend to trend more, or “better,” than
other markets. The roots of this asser-
tion go back to the 1970s and 1980s
when currency futures trading
enjoyed their first heyday and many
currencies did, in fact, embark on sig-
nificant trends. But is this really the
case today?
To answer that question, let’s ana-

26 October 2007 • CURRENCY TRADER

 FIGURE 2 — GBP/USD PAIR

lyze weekly closing forex prices

— the euro/U.S. dollar
(EUR/USD), British pound/U.S.
dollar (GBP/USD), and U.S. dol-
lar/Japanese yen (USD/JPY)
pairs — and compare them to the
S&P 500 index (SPX), the 10-year
T-note yield (TY), and one NYSE-
listed stock, Boeing (BA). The goal
will be to see which instruments
show the highest degree of trend.
The review period is January 1996 Source: CQGNet (http://www.cqg.com)
through September 2007.
To determine the degree a mar-
ket trends, the analysis uses a 10-
week rolling correlation coeffi-
cient of the weekly closes relative
to time. Because time advances at
a fixed rate, if the weekly closes
are climbing or falling at a consis-
tent rate relative to time, the cor-
relation between the two series —
price and time — will be high (i.e.,
closer to +1.00 or -1.00).
A correlation coefficient of
+1.00 represents perfect, positive
correlation — the two series are
moving in lock-step in the same
direction. A correlation coefficient
of -1.00 represents perfect nega-
tive correlation — the two series are moving in direct oppo- are persistently more random, the correlation reading will
sition to each other. (In this case the former represents the be closer to zero — that is, little or no trend is exhibited. The
highest degree of uptrend and the latter represents the second part of the analysis determines how often each
highest degree of downtrend.) If the weekly closing prices continued on p. 28

CURRENCY TRADER • October 2007 27

 TRADING STRATEGIES continued

FIGURE 3 — USD/JPY PAIR

number of times the correlation

coefficients fell within different
ranges. The horizontal axes in the
frequency distribution charts
show correlations in 0.10 incre-
ments — the bar labeled “0.20”
shows how many correlations
were between +0.11 and +0.20, the
bar labeled “0.30” shows how
many were between +0.21 and
Source: CQGNet (http://www.cqg.com) +0.30, and so on.
For the first five years of the
review period, the EUR/USD was
in a downtrend and then in an
uptrend for the next six years
(Figure 1). Interestingly, the fre-
quency distribution chart shows
more correlation readings between
-0.90 and -1 than readings between
+0.90 and +1. This indicates there
were more consistent downside
trend moves than upside moves.
The pound/dollar rate traded in
a choppy sideways trend until
2001, at which point it went on a
bull run (Figure 2). The frequency
distribution reflects this with the
low number of readings between -
instrument had especially strong correlation readings — 0.90 and -1 and the high number of readings above +0.80.
that is, greater than +0.70 or less than -0.70. The dollar/yen has been swinging from up to down in
three- to four-year runs (Figure 3). Compared to the
Trend correlation euro/dollar and pound/dollar pairs, the frequency distri-
Figures 1 through 6 show weekly charts of each instrument bution readings are less clustered at the extremes.
along with their frequency distributions, which shows the The S&P 500 had two bull moves separated by a bear

28 October 2007 • CURRENCY TRADER

 FIGURE 4 — S&P 500 INDEX

Correlation
coefficient
The correlation coefficient,
sometimes referred to simply as
“correlation,” refers to the
degree of similarity between two
variables. In the markets, corre-
lation is typically used to meas-
ure how close the relationship is
between two price series (e.g.,
two distinct stocks or markets),
between an individual stock (or
trading fund) and an index, and
so on.
Correlation coefficients range
Source: CQGNet (http://www.cqg.com) between -1.00 and +1.00, with
+1.00 representing perfect posi-
tive correlation — i.e., two vari-
ables moving precisely in tan-
dem; -1.00 represents perfect
negative correlation — i.e., two
variables moving exactly oppo-
site to one another. A correlation
coefficient of zero means the
two variables have no dis-
cernible relation.
The Web site http://davidm-
lane.com/hyperstat/index.html
offers relatively easy-to-digest
definitions of this and other sta-
tistical terms.

trend (Figure 4). The two bull trends skewed the frequency During most of the review period, the yield on the 10-
distribution readings to the right. year Treasury note has fallen (Figure 6). The frequency dis-
Like the S&P 500, Boeing has been in a bull trend since tribution chart shows the higher number of negative corre-
2003 (Figure 5). The higher readings on the right side of the lations (reflecting the downtrend) on the left-hand side of
frequency distribution chart reflect the influence of this the chart.
trend. continued on p. 30

CURRENCY TRADER • October 2007 29

 TRADING STRATEGIES continued

FIGURE 5 — BOEING

Comparing the stats

Table 1 shows the number of cor-
relation coefficient readings
greater than +0.70 or less than -
0.70 for each instrument, as well
as the sum of both high-positive
and high-negative readings.
Only the EUR/USD pair had
more total readings (291) above
+0.70 or less than -0.70 than the
S&P 500 index, Boeing stock, and
the 10-year T-note yield. Looking
at the individual statistics, the
Source: CQGNet (http://www.cqg.com) S&P 500 showed the highest ten-
dency to trend higher, followed
by Boeing — and both beat all
three currency pairs. The 10-year
T-note yield showed a higher ten-
dency to trend to the downside
compared to the forex instru-
ments. Overall, the dollar-yen
pair showed the least tendency to
trend — it was second from the
bottom for both high-positive and
high-negative correlation read-
ings.

Wisdom not so wise

The popular wisdom that curren-
cies trend more than other mar-
kets does not seem so wise. Both
TABLE 1 — CORRELATION COMPARISON the S&P 500 index and Boeing
Of the three currencies, only the EUR/USD pair had more total readings greater than stock showed higher counts of
+0.70 or less than -0.70 than the S&P 500, Boeing stock, and 10-year T-note yield. extreme correlation coefficients
(because of their uptrends) than
EUR/USD GBP/USD USD/JPY S&P 500 BA 10-year
>70 132 146 136 195 176 111 the forex instruments. The same is
<-70 159 105 102 86 110 162 true for the 10-year yield in that
Total 291 251 238 281 286 273 its count for high correlation read-
ings during the downtrend are

30 October 2007 • CURRENCY TRADER

FIGURE 6 — 10-YEAR T-NOTE YIELDS

Related reading
“New Zealand dollar
trading numbers”
Currency Trader, June 2007.
Detailed analysis of the “kiwi” dollar’s
trading tendencies and characteris-
tics.
“Dollar-yen trading tendencies”
Currency Trader, April 2007.
The dollar-yen’s trading characteris-
tics are examined on daily and intra-
day time frames.
“Deciphering the British pound”
Source: CQGNet (http://www.cqg.com) Currency Trader, March 2007.
The British pound has been a volatile
— and mostly bullish — currency in
recent months. Find out how it trades
from day to day.
“Dollar-Canada by the numbers”
Currency Trader, January 2006.
As the only purely North American
major currency pair, the dollar-
Canada rate occupies a unique posi-
tion. We break down its short-term
performance to reveal daily and intra-
day tendencies.
“Euro/yen: Tips and tendencies”
Currency Trader, December 2006.
Euro/yen by the numbers: Stats and
tendencies for short-term forex play-
ers.
“Breaking down the euro”
Currency Trader, November 2006.
Studying the euro’s daily and intraday
performance statistics offers guide-
larger than the currencies’ uptrend or er review period may be more appropri-
lines for systematic and discretionary
downtrend counts. ate. Nevertheless, from this longer-term traders.
However, the choice of a different perspective, there’s no basis from which
You can purchase and download
window for measuring the correlations to argue these currencies have better
articles at
may yield different results. A 10-week trend characteristics than the represen- http://www.activetradermag.com/pur-
rolling correlation window might be too tative instruments they were tested chase_articles.htm
long for some traders; selecting a short- against.

CURRENCY TRADER • October 2007 31

 SPOT CHECK

FIGURE 1 — ALL-TIME LOW

The dollar index recently made record lows after coming under
renewed pressure in September.
Dollar index
The dollar got battered in September,
but price-pattern analysis points to more
downside action, even if a near-term
bounce is in store.

BY CURRENCY TRADER STAFF

T
he dollar’s renewed plunge in late
September brought the U.S. dollar index
(DXY) to record lows (see “The U.S. dol-
lar index limbo — how low can it go?”),
raising speculation of whether the buck is due for a
bounce or is more likely to make fresh lows in the
Source: TradeStation near future.
The dollar index was actually consolidating while
making incrementally lower lows and closes as it
TABLE 1 — DOLLAR INDEX PATTERN COMPARISON “made history” between Sept. 21 and 25; it formed an inside
The price action for the first six weeks after all three pat- day with a higher close on Sept. 26 (Figure 1). Finally, it closed
tern models was more volatile — and more bearish — out the month with another sharp decline.
than the market’s typical price action shown in Table 2. Three tests of weekly patterns that matched the dollar
index’s condition as of Sept. 26 pointed to more downside
Week LUM LDM %>0 action in the weeks to come. The pattern criteria were:

Pattern 1 Pattern 1 (46 prior examples from 1997-present): Three

1 0.66 -0.70 39.13% consecutive weeks with lower lows and lower closes, fol-
2 0.82 -1.06 34.78% lowed by a fourth week with a lower low (the week end-
3 0.97 -1.55 43.48% ing Sept. 28).
4 1.03 -1.93 39.13%
5 1.18 -2.13 41.30% Pattern 2 (85 prior examples from 1997-present): The
6 1.29 -2.21 45.65% decline from the high three weeks ago to the current low
is 3.5 percent or larger.
Pattern 2
1 0.78 -0.89 41.18% Pattern 3 (55 prior examples from 1997-present): The
2 0.97 -1.24 42.35% decline from the high three weeks ago to the current low
3 1.18 -1.70 42.35% is 3.5 percent or larger AND the current low is below the
4 1.52 -1.95 41.18% lowest low of the previous 12 weeks.
5 1.69 -2.08 42.35%
6 1.72 -2.21 47.06% Table 1 shows what happened in the first six weeks after
each of these patterns. The figures represent the median val-
Pattern 3 ues for: the largest up move (LUM), largest down move
1 0.78 -0.77 42.86% (LDM), and the percentage of times the week closed above the
2 0.95 -1.23 37.50% close of the last week of the pattern (% > 0). The LUM and
3 1.00 -1.87 42.86% LDM values represent the moves from the close of the last
4 1.22 -2.19 35.71% week of the pattern to the high and lows, respectively, of each
5 1.65 -2.20 37.50% of the following six weeks.
6 1.66 -2.24 39.29% The table shows the odds were never better than 48 percent
that the closing price of a given week would be above the clos-

32 October 2007 • CURRENCY TRADER

 FIGURE 2 — DOWNSIDE BIAS

Since the mid-1980s, the dollar's story has mostly been one of selling.

ing price of the close of the final week of the

pattern, although the probabilities for all six
weeks after pattern 2 were greater than 40
percent. Also, except for one instance (week
1 of pattern 3) the LDMs were all bigger
than their corresponding LUMs, implying
there was more downside price action than
upside action. Finally, the sizes of the moves
after all the patterns are comparable.

Analyzing the dollar index from a month-

ly perspective is more difficult because the
number of patterns shrinks. However, the
following pattern produced 39 previous
examples from 1977 to 2007:

1. This month’s low is 1.8 percent or

more below last month’s low;
2. This month’s close is 2.4 percent or Source: TradeStation
more below last month’s low;
3. This month’s close is the bottom 20
percent of the monthly range.

The dollar index closed September at its low of the

month — the new all-time low of 77.82.
The price action in the first six months after this
pattern was also skewed to the downside, although
not as much as the weekly patterns: The odds of a
close higher than the pattern’s close were between 44
and 49 percent, and the median LDMs were larger
than the median LUMs, except for month 5.
However, the dollar index has had a long-term
downward bias over its lifetime (Figure 2), so it’s not
surprising certain patterns would reflect this bias.
Table 2 shows the median LUMs and LDMs for all
one- to six-week periods from September 1997 to
September 2007. All three of the weekly patterns had
larger median LUMs than the market’s overall per-
formance, but the
TABLE 2 — ONE- TO LDMs were often
SIX-WEEK MEDIAN LUMS larger as well
AND LDMS, 1997-2007 (reflecting higher
volatility).
Week LUM LDM
As of Sept. 28, the
1 0.66 -0.64
dollar index looked
2 0.94 -1.02 poised for a bounce,
3 1.16 -1.20 but its long-term
4 1.33 -1.36 bias and current
5 1.55 -1.52 pattern still pointed
6 1.73 -1.69 to more selling.

CURRENCY TRADER • October 2007 33

 CURRENCY NEWS

Beating up on the buck

The U.S. dollar index – how low can it go?

FIGURE 1 — GOING DOWN

T
he U.S. dollar index
A rough ride for the U.S. dollar index in 2007 was made even worse in late
(DXY) continued to take a
September, when the index fell to an all-time low.
beating in late September,
setting consecutive all-time lows
on Sept. 24 and 25.
The DXY fell intraday to 78.31
on Sept. 24, besting the previous
low of 78.33 set in September 1992.
Although the index rallied to close
at 78.42, it traded as low as 78.10
the next day (Figure 1).
While the British pound was the
main culprit earlier in the year,
trading at an almost 30-year-high
of 2.0654 in late July, the euro and
the Canadian dollar (CAD) were
most responsible for the latest Source: eSignal
DXY decline.
The euro hit an all-time high of Managed money: Barclay Trading Group’s
1.4154 on Sept. 25 amid continuing concerns about the currency trader rankings for August 2007
U.S. economic outlook. The euro has gained 7.25 per- Top 10 currency traders managing more than $10 million
cent on the greenback since the beginning of 2007. as of August 31, ranked by August 2007 return
The Canadian dollar had already set decade-old 2007
Rank Trading August YTD $ Under
highs when it traded above 0.91 in May, but the big (millions) advisor return return mgmt.
news occurred on Sept. 20, when the CAD reached 1. Harmoney Invest. Mgrs. (ProFund FX) 14.27 17.43 50.4M
1.00 vs. the buck — the first time ever the two curren- 2. KMJ Capital (Currency) 14.07 13.37 56.0M
3. Friedberg Comm. Mgmt. (Curr.) 8.62 -2.43 54.1M
cies were equal in value.
4. MIGFX Inc (Institutional) 6.51 18.73 26.5M
While not considered in the calculation of the DXY, 5. H3 Global Advisors (Currency) 5.91 34.65 12.8M
the Australian (AUD) and New Zealand (NZD) dol- 6. Cambridge Strategy (Asian Mrkts) 3.79 11.4 25.0M
lars also have made big gains against the U.S. dollar. 7. Rhicon Currency Mgmt (4XiM) 3.72 -9.29 58.0M
Although both currencies are well off their 2007 highs 8. IPM Global Currency Fund (C) 3.62 13.02 137.0M
9. 24FX Management Ltd 2.90 28.92 19.0M
(set at the end of July), the AUD has gained 13 percent 10. King's Crossing Cap'l (FX Model) 2.76 11.27 122.0M
on the dollar since mid-August and the Kiwi has
climbed more than 11 percent in the same time period. Top 10 currency traders managing less than $10 million and more than
The dollar index is comprised of six currencies — $1 million as of August 31, ranked by August 2007 return
the euro, the Japanese yen, the Canadian dollar, the 1. New World Cap'l Mgmt (MS Currency) 28.51 150.58 1.3M
British pound, the Swedish krona, and the Swiss franc. 2. MIGFX Inc (Retail) 14.11 34.78 8.3M
Each currency is given a different weight in the 3. Metro Forex Inc (Tri Gl FX) 6.19 32.20 6.5M
4. Ketch Capital Management (Tack Fund) 5.64 12.50 5.1M
index’s calculation, with the euro having the most
5. Overlay Asset Mgmt. (OAM Short Term) 5.56 4.73 5.4M
influence. 6. Forex Cap'l Mkts (Sentiment Fund) 4.43 14.60 2.2M
The DXY began in 1973 based on a level of 100. With 7. Skibo Asset Mgmt (FX) 3.06 -2.04 3.0M
the index trading around 78, that indicates the dollar 8. Trimmer Cap'l Mgmt (Devrim) 2.84 23.57 1.5M
9. Alt-FX Limited (AMF 1) 2.61 0.64 5.1M
has lost 22 percent of its value since it began. The
10. Lambay Capital Limited (Short-term ) 2.54 8.17 3.6M
DXY’s 2007 high is 85.25, reached on Jan. 26. The last
Source: The Barclay Group (www.barclaygrp.com)
time the index closed above 100 was April 15, 2003.

Based on estimates of the composite of all accounts or the fully funded subset
method. Does not reflect the performance of any single account.
For analysis of the dollar index, see “Spot Check” on p. 32. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

34 October 2007 • CURRENCY TRADER

Billion with a “B”

FXMarketSpace reaches milestone

A
busy month in the foreign exchange market, FIGURE 1 —MOVING ON UP
sparked by a financial crisis that caused the Despite a lackluster July, FXMarketSpace rebounded in August
exit of many forex positions, allowed to post its first month of average daily volume of more than $1
billion.
FXMarketSpace to average more than $1 billion worth
of volume per day in August.
The joint venture between Reuters and the Chicago
Mercantile Exchange (CME) had an average daily vol-
ume of $1.09 billion per day, more than doubling July’s
average volume and continuing an upward volume
trend that was temporarily halted in July.
July average daily volume was only $540 million, a
big dropoff from June’s average of $990 million.
However, average volume has tripled since April,
MarketSpace’s first full month, when the venture aver-
aged just more than $330 million per day
(Figure 1).
The euro/U.S. dollar pair (EUR/USD) has been the
most popular on MarketSpace, averag-
ing more than $290 million per day in
August and $220 million per day since
trading began. In August, though, the
euro/Japanese yen pair (EUR/JPY)
accounted for almost half of
MarketSpace’s volume, as carry trade
concerns pushed volume for the pair
to an average of $497 million per day.
Since April, the euro/yen has aver-
aged $181.8 million per day. The U.S.
dollar/Japanese yen ($103.2 million),
U.S. dollar/Swiss franc ($70.4 million),
and British pound/U.S. dollar ($67.6
million) round out the top five in aver-
age daily trading volume since April.
While MarketSpace has made sig-
nificant gains in volume, it’s still a
long way from the top. EBS, one of the
busiest forex trading systems, set a
record on Aug. 16 when it handled
$456 billion worth of trades. Its aver-
age daily volume is about $155 billion.
FXMarketSpace has customers in 28
countries and allows clients to trade in
the spot forex market on an exchange
platform. Generally, spot forex trans-
actions occur in the unregulated inter-
bank market.

CURRENCY TRADER • October 2007 35

 CURRENCY FUTURES
Currency traders trying
It’s good to have (futures and) options to hang on to gains
Forex choices increasing at PBOT, CME The Barclay’s Currency Trader Index
(CTI) is on track to avoid an unprece-
The Philadelphia Board of Trade (PBOT) and the Chicago Mercantile Exchange dented third-straight losing year —
(CME) expanded their forex offerings in late August. but not by much.
The PBOT added four World Currency Futures to its lineup — the Australian The CTI fell 0.06 percent in
dollar (AD9), Canadian dollar (CA9), Japanese yen (JY9), and Swiss franc (SF9). September and is up just 0.76 percent
The British pound (BP9) and euro (EU9) began trading earlier this year. for the year. Started in 1987, the CTI,
The new futures are U.S. dollar-denominated and represent 10,000 units of the which is comprised of 114 managed
underlying currency (1 million for the yen), the same size as World Currency money programs (currency futures
Options already traded at the PBOT. Daniel Carrigan, Philadelphia’s vice presi- and spot forex), is coming off back-to-
dent of new product development, says creating “mirror” contracts between back down years.
futures and options allows customers to trade foreign exchange in either a secu- This year has been a struggle for all
rities or futures account. of Barclay’s seven indices, as only
The CME began trading weekly currency options on its Globex electronic three are in the black for 2007. The
trading platform in early September. Weekly options on the euro, Japanese yen, benchmark CTA Index is down 0.55
British pound, Swiss franc, Canadian dollar, and Australian dollar — all trading percent; the Discretionary Traders
against the U.S. dollar — are now available virtually 24 hours per day. The Index leads the way with a gain of
options have American-style expiration, meaning they can be exercised at any 2.11 percent.
time. The Barclay BTOP FX Index, which
“The tremendous growth we have seen this year in CME Group’s FX options tracks the largest investable currency
volume reflects the market’s interest in an effective and efficient electronic exe- trading programs and accounts for at
cution platform for FX options,” says Derek Sammann, managing director of FX least half of the investable assets of all
products for CME Group. programs tracked by Barclay, gained
Sammann says that in August, 49 percent of forex options traded electronical- 0.79 percent in September to increase
ly, compared to 12 percent in August 2006. Also, electronic trading of all options its yearly gains to 1.61 percent.
in August 2007 was six times greater than it was a year earlier, and total options The index closed September at
volume increased 102 percent. 1,024.13, its highest point of the
The CME intends to begin electronic trading of quarterly forex options in late month, but still off 2.8 percent from
September. The exchange will also allow electronic trading of Horizontal and the all-time high of 1,053.60 set in late
Risk Reversal strategies on Globex for the most actively traded options.
July.

CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s
as of Sept. 27 liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.

Contract Pit Elec Exch Vol OI 10-day % 20-day % 60-day % Volatility

sym sym move rank move rank move rank ratio /% rank
Eurocurrency EC 6E CME 141.6 181.0 1.89% 60% 3.75% 93% 3.87% 79% .50 / 55%
Japanese yen JY 6J CME 133.7 178.1 -0.51% 11% 0.55% 4% 5.75% 72% .16 / 3%
British pound BP 6B CME 67.6 95.0 -0.20% 0% 0.37% 15% 0.37% 3% .39 / 38%
Swiss franc SF 6S CME 50.2 84.5 1.07% 22% 2.75% 72% 3.64% 83% .39 / 35%
Canadian dollar CD 6C CME 44.7 113.2 3.05% 68% 6.14% 97% 5.86% 50% .50 / 87%
Australian dollar AD 6A CME 41.6 72.9 4.77% 94% 7.69% 100% 2.88% 13% .69 / 83%
Mexican peso MP 6M CME 16.1 69.9 1.56% 83% 1.11% 79% -1.57% 50% .55 / 70%
New Zealand dollar NE 6N CME 3.7 21.9 4.93% 62% 6.41% 100% -4.07% 35% .48 / 65%
U.S. dollar index DX NYBOT 4.2 24.9 -1.34% 45% -3.11% 93% -3.77% 90% .42 / 47%
E-Mini eurocurrency ZE CME 1.5 2.0 1.89% 60% 3.75% 93% 3.87% 80% .50 / 52%
Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.
LEGEND: past sixty 20-day moves; for the 60-day move, the % rank field shows how the most recent
60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100%
Sym: Ticker symbol.
means the current reading is larger than all the past readings, while a reading of 0% means
Vol: 30-day average daily volume, in thousands. the current reading is lower than the previous readings.
OI: 30-day open interest, in thousands. Volatility ratio /% rank: The ratio is the short-term volatility (10-day standard deviation of
10-day move: The percentage price move from the close 10 days ago to today’s close. prices) divided by the long-term volatility (100-day standard deviation of prices). The %
20-day move: The percentage price move from the close 20 days ago to today’s close. rank is the percentile rank of the volatility ratio over the past 60 days.
60-day move: The percentage price move from the close 60 days ago to today’s close. This information is for educational purposes only. Currency Trader provides this data
The “% rank” fields for each time window (10-day moves, 20-day moves, etc.) show the in good faith, but assumes no responsibility for the use of this information. Currency
percentile rank of the most recent move to a certain number of the previous moves of the Trader does not recommend buying or selling any market, nor does it solicit orders to
same size and in the same direction. For example, the % rank for 10-day move shows buy or sell any market. There is a high level of risk in trading, especially for traders
how the most recent 10-day move compares to the past twenty 10-day moves; for the 20- who use leverage. The reader assumes all responsibility for his or her actions in the
day move, the % rank field shows how the most recent 20-day move compares to the market.

36 October 2007 • CURRENCY TRADER

 GLOBAL NEWS BRIEFS
Interest Rates
EUROPE

Germany’s August unemployment rate fell 0.1 percent from the  The Swiss National Bank increased
previous month to 8.8 percent, representing a 1.7-percent drop from the same its 3-month Swiss Libor 0.25 percent in
month last year. September to 2.75 percent. The increase is
the 10th 25-basis point rise since the end of

France’s July unemployment rate remained at 8 percent from the previous 2003, and the third in 2007.
month, a drop of 0.9 percent from July 2006.
 The Swedish Risbank raised its repo

Parliamentary elections in Greece ushered in a new government, primari- rate 0.25 percent in September to 3.75 per-
ly consisting of the New Democracy party led by Prime Minister Costas cent. The rate has been raised nine times
Karamanlis. The center-right party and Karamanlis have promised faster eco- since January 2006.
nomic reforms.
 The Central Bank of Taiwan in-
creased its discount rate 0.125 percent in
ASIA & AUSTRALIA September to 3.25 percent. The discount
rate stood at 1.375 percent in December

Japan’s July jobless rate edged downward 0.1 percent from the
2003 but has more than doubled after 12
previous month to 3.6 percent, 0.5 percent lower than the rate in July 2006.
rate hikes.

India’s second-quarter GDP increased a robust 15 percent on a year-over- 
year basis. The Central Bank of Brazil dropped
its Selic rate 0.25 percent in September to

Preliminary data showed a 0.1-percent increase in Hong Kong’s June- an all-time low 11.25 percent, continuing a
August unemployment rate compared to the previous three-month period to loosening cycle that began two years ago.
4.2 percent. The rate dropped 0.6 from the same period in 2006. “In tandem In August of 2005, the Selic stood at 19.75
with sustained economic growth, total employment hit another record high of percent, but 18 cuts in 25 months have
over 3.5 million in June to August 2007,” said a government spokesperson in slashed the rate.
a press release. 
The Central Bank of Chile raised its

Australia’s second-quarter economy grew 0.9 percent from the previous discount rate 0.25 percent for the third-
quarter and increased 4.3 percent year-over-year. The country’s unemploy- straight month, boosting the rate to 5.75
ment rate for the second quarter was unchanged from the first quarter at 4.3 percent in September. With the exception
percent compared to Q1 2007, a drop of 0.4 percent from Q2 in 2006. of a 0.25-percent cut in January, the dis-
count rate has been increased 15 times
since 2004.
AMERICAS 
The Czech National Bank raised its

Canada’s August unemployment rate remained unchanged from two-week repo rate 0.25 percent in late
the previous month at 6 percent, a drop of 0.4 percent from August 2006. August to 3.25, remaining in a tightening
Employment continued to rise in the construction area and among older work- cycle that included three rate hikes in four
ers and students. months.

Brazil’s Q2 GDP rose 0.8 percent on Q1 and increased 5.4 percent on an 

The Central Bank of Turkey lowered
annual basis. The economy was boosted by a 1.3-percent contribution from the its overnight borrowing rate for the first
industry sector. time since 2006, dropping it 0.25 percent to
17.25 percent in September. The rate had a

Guatemala’s presidential elections in early September resulted in a runoff huge, 4-percent jump in June 2006 that
between businessman Alvaro Colom and conservative ex-general Otto Perez. preceded another 0.25-percent move in
Colom, running for president for the third time, has vowed to minimize the
July.
extreme poverty in many parts of Guatemala. Perez’s platform focused on
cracking down on crime. The runoff is set for Nov. 4.
 The National Bank of Hungary drasti-
cally cut its two-week deposit rate by
AFRICA 0.75 percent in September to 7.0 percent.
The rate was hiked from 6 percent to start

South Africa’s Q2 GDP increased 4.5 percent from the previous 2006 to 8 percent by year’s end, but the big
quarter, with the main contribution — 1.5 percent — coming from the finance, September move follows a quarter-point
real estate, and business services industry. drop in June.

CURRENCY TRADER • October 2007 37

 INTERNATIONAL MARKET SUMMARY
FOREX (vs. U.S. DOLLAR)
Current
price vs. 1-month 3-month 6-month 52-week 52-week Previous
Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank

1 Brazil real 0.536 5.76% 3.94% 10.56% 0.5432 0.4362 14

2 Swedish krona 0.1538 5.27% 5.70% 7.55% 0.1539 0.1344 12

3 Canadian dollar 0.9973 4.87% 6.72% 15.72% 1.0065 0.842 2

4 Australian dollar 0.8666 4.70% 2.13% 7.60% 0.887 0.7413 15

5 Indian rupee 0.02515 3.33% 2.82% 9.63% 0.02515 0.2169 11

6 Euro 1.4099 3.06% 4.72% 6.10% 1.4154 1.2482 5

7 Russian ruble 0.04 2.70% 3.55% 4.22% 0.04007 0.03702 7

8 New Zealand dollar 0.7405 2.59% -3.32% 4.06% 0.8106 0.6485 16

9 Swiss franc 0.8543 2.53% 4.96% 4.09% 0.859 0.7829 3

10 Thai baht 0.03157 2.14% 1.32% -0.57% 0.03384 0.02651 17

11 South African rand 0.1432 1.92% 2.21% 2.58% 0.1471 0.1253 13

12 Japanese yen 0.008724 1.54% 7.93% 3.00% 0.00896 0.00805 1

13 Singapore dollar 0.6665 1.31% 2.48% 1.09% 0.6678 0.6281 8

14 Chinese yuan 0.1333 0.76% 1.45% 2.93% 0.1335 0.1261 6

15 Hong Kong dollar 0.1287 0.39% 0.55% 0.55% 0.1288 0.1264 4

16 Taiwanese dollar 0.03036 0.13% -0.49% 0.36% 0.03098 0.02983 9

17 British pound 2.0158 0.05% 0.84% 2.74% 2.0653 1.8516 10

As of September 26 *based on one-month gain/loss

ACCOUNT BALANCE
Rank Country 2007 Ratio* 2006 2008+ Rank Country 2007 Ratio* 2006 2008+
1 Singapore 39.644 27.1 36.288 41.939 13 Mexico -9.197 -1 -1.475 -13.461
2 Switzerland 68.511 17.6 69.825 68.139 14 France -51.972 -2.2 -46.304 -58.5
3 China 303.651 10 238.536 356.617 15 India -23.768 -2.4 -19.298 -24.568
4 Hong Kong 19.449 9.6 19.388 19.924 16 UK -81.402 -3.1 -68.122 -87.983
5 Netherlands 55.176 7.7 46.989 58.007 17 Australia -46.24 -5.6 -40.856 -46.743
18 U.S. -834.623 -6.1 -856.661 -866.145
6 Taiwan 25.924 7.1 25.187 27.875
19 South Africa -17.418 -6.4 -16.415 -17.385
7 Sweden 28.06 6.6 28.447 30.096 20 Spain -127.459 -9.4 -108.019 -142.416
8 Russia 72.902 6.2 95.6 67.797
9 Germany 161.938 5.3 146.361 164.71 Totals in billions of U.S. dollars
10 Japan 166.586 3.9 170.355 159.142 *Account balance in percent of GDP +Estimate
11 Brazil 8.939 0.8 13.648 3.26 Source: International Monetary Fund, World Economic Outlook
12 Canada 9.351 0.7 21.464 7.612 Database, April 2007

38 October 2007 • CURRENCY TRADER

 NON-U.S. DOLLAR FOREX CROSS RATES
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol Sept. 26 gain/loss gain/loss gain/loss high low Previous
1 Real / Pound BRL/GBP 0.266 5.68% 3.10% 7.61% 0.2683 0.2339 8
2 Canada $ / Pound CAD/GBP 0.4948 4.76% 5.82% 12.58% 0.4967 0.4271 1
3 Aussie $ / Pound AUD/GBP 0.43 4.62% 1.30% 4.70% 0.4303 0.3932 11
4 Real / Yen BRL/JPY 61.4497 4.08% -3.72% 7.27% 65.8319 52.6124 19
5 Canada $ / Yen CAD/JPY 114.325 3.20% -1.14% 12.26% 117.849 98.32 9
6 Aussie $ / Yen AUD/JPY 99.3462 3.07% -5.38% 4.40% 107.715 85.975 20
7 Real / Euro BRL/EUR 0.3802 2.54% -0.78% 4.14% 0.3932 0.3474 13
8 Franc / Pound CHF/GBP 0.4238 2.44% 4.08% 1.29% 0.4292 0.4005 2
9 Aussie $ / Franc AUD/CHF 1.0147 2.06% -2.70% 3.31% 1.0684 0.9288 17
10 Canada $ / Euro CAD/EUR 0.7074 1.68% 1.89% 9.00% 0.7106 0.639 4
11 Aussie $ / Euro AUD/EUR 0.6148 1.55% -2.47% 1.37% 0.646 0.5727 15
12 Euro / Yen EUR/JPY 161.608 1.45% -2.99% 2.97% 168.96 147.7 12
13 Real / Aussie $ BRL/AUD 0.6187 0.91% 1.74% 2.65% 0.6359 0.5859 3
14 Franc / Yen CHF/JPY 97.9181 0.89% -2.78% 0.98% 101.852 92.152 10
15 Real / Canada $ BRL/CAD 0.5377 0.79% -2.61% -4.49% 0.5695 0.5046 14
16 Aussie $ / Canada $ AUD/CAD 0.8693 -0.21% -4.29% -7.06% 0.9493 0.8321 18
17 Franc / Euro CHF/EUR 0.6059 -0.54% 0.22% -1.93% 0.6346 0.5948 5
18 Pound / Yen GBP/JPY 231.082 -1.51% -6.59% -0.30% 251.095 219.288 16
19 Franc / Canada $ CHF/CAD 0.8569 -2.28% -1.64% -10.09% 0.9751 0.853 6
20 Pound / Euro GBP/EUR 1.4299 -3.00% -3.72% -3.24% 1.5296 1.4243 7
GLOBAL STOCK INDICES
1-month 3-month 6-month 52-week 52-week
Rank Country Index Sept. 26 gain/loss gain/loss gain/loss high low Previous
1 India BSE 30 16,921.39 17.31% 16.69% 28.93% 17,073.87 12,160.58 10
2 Hong Kong Hang Seng 26,430.29 15.31% 21.22% 33.72% 26,667.24 17,277.75 1
3 Brazil Bovespa 59,714.83 12.67% 10.89% 30.83% 59,768.17 34,972.15 5
4 South Africa FTSE/JSE All Share 29,812.38 8.87% 3.89% 10.20% 30,046.29 21,811.33 7
5 Singapore Straits Times 3,650.09 8.33% 3.55% 13.90% 3,685.15 2,522.66 14
6 Australia All ordinaries 6,491.40 6.64% 2.43% 8.82% 6,515.20 4,945.10 6
7 Germany Xetra Dax 7,804.15 3.95% -0.72% 14.28% 8,151.57 5,926.55 4
8 Canada S&P/TSX composite 14,034.97 3.81% 2.72% 5.50% 14,646.82 11,407.27 12
9 UK FTSE 100 6,433.00 3.42% -1.93% 2.24% 6,754.10 5,813.20 9
10 U.S. S&P 500 1,525.42 3.11% 2.18% 6.12% 1,555.90 1,325.30 2
11 Mexico IPC 30,303.18 2.86% -3.86% 7.61% 32,564.35 21,479.07 11
12 France CAC 40 5,690.77 2.18% -4.41% 2.05% 6,168.15 5,176.65 13
13 Japan Nikkei 225 16,435.74 1.15% -9.02% -6.20% 18,300.39 15,262.10 15
14 Switzerland Swiss Market 8,859.71 0.96% -2.35% -1.62% 9,548.10 8,291.00 3
15 Italy MIBTel 31,079.00 0.22% -4.69% -3.27% 34,369.00 29,007.00 8

GLOBAL SHORT-TERM INTEREST RATES

Country Interest rate Rate Last change April 07 Oct. 06
U.S. Fed Funds Rate 4.75 0.5 (Sept. 07) 5.25 5.25
Japan Overnight call rate 0.5 0.25 (Feb. 07) 0.5 0.25
Eurozone Refi rate 4 0.25 (June 07) 3.75 3.25
England Repo rate 5.75 0.25 (July 07) 5.25 4.75
Canada Overnight funding rate 4.5 0.25 (July 07) 4.25 4.25
Switzerland 3-month Swiss Libor 2.75 0.25 (Sept. 07) 2.25 1.75
Australia Cash rate 6.5 0.25 (Aug. 07) 6.25 6
New Zealand Cash rate 8.25 0.25 (July 07) 7.75 7.25
Brazil Selic rate 11.25 0.5 (Sept. 07) 12.5 13.75
Korea Overnight call rate 5 0.25 (Aug. 07) 4.5 4.5
Taiwan Discount rate 3.25 0.125 (Sept. 07) 2.875 2.5
India Reverse repo rate 6.5 0.5 (March 07) 6.5 6
South Africa Repurchase rate 10 0.5 (Aug. 07) 9 8.5
GLOBAL BOND RATES
Rank Country Rate Sept. 26 1-month 3-month 6-month High Low Previous
1 U.S. 10-year T-note 109.015 0.74% 3.74% 0.78% 110.31 103.21 2
2 UK Short sterling 93.86 0.10% 0.01% -0.40% 94.76 93.27 5
3 Australia 10-year bonds 93.815 -0.24% 0.06% -0.33% 94.52 93.705 4
4 Japan Government Bond 134.79 -0.38% 2.29% 0.57% 136.39 130.96 3
5 Germany BUND 112.35 -1.08% 1.59% -2.60% 118.91 109.92 1
All data as of Sept. 26

CURRENCY TRADER October 2007 39

 EVENTS

Event: Wealth Expo Event: FIMA 2007

Date: Oct. 19-21 Date: Nov. 5-7
Location: New York City Location: Olympia Exhibition Centre, London
For more information: http://www.thewealthexpo.com For more information: http://www.fima-europe.com

Event: FIA Asia Derivatives Conference Event: 20th Annual IFTA Conference
Date: Oct. 10-12 Date: Nov. 8-11
Location: Taipi, Taiwan Location: Sharm el Sheikh, Egypt
For more information: For more information: Visit
http://www.futuresindustry.org.asia http://www.ifta.org/events/next-conference/

Event: TradeStation Futures Symposium Event: The Traders Expo Las Vegas
For more information: Dates and locations are listed Date: Nov. 15-18
here or visit http://www.tradestation.com/strategy Location: Mandalay Bay Resort and Casino, Las Vegas
For more information: Visit
Date: Oct. 18-20
http://www.tradersexpo.com
Location: Costa Mesa, Calif.
Date: Dec. 6-8
Event: ETFs 2007
Location: Hallandale, Fla.
Date: Nov. 27
Location: Cafe Royal, London
Event: FXstreet’s International Traders Conference For more information: http://www.wbr.co.uk/ETF
Date: Oct. 25-27
Location: Barcelona Event: 23rd Annual Futures & Options Expo
For more information: Date: Nov. 27-29
http://www.traders-conference.com Location: Hyatt Regency Chicago
For more information: Go to
http://www.futuresindustry.org and click on “Conferences.”

KEY CONCEPTS

Carry trades involve buying (or lending) a currency number in the group from the group’s mean value, divided
with a high interest rate and selling (or borrowing) a cur- by the number of elements in the group. For example, for
rency with a low interest rate. Traders looking to “earn the numbers 8, 9, and 10, the mean is 9 and the variance is:
carry” will buy a high-yielding currency while simultane-
ously selling a low-yielding currency. {(8-9)2 + (9-9)2 + (10-9)2}/3 = (1 + 0 + 1)/3 = 0.667

Confidence interval (“confidence band”): The Now look at the variance of a more widely distributed set
probability associated with a certain value falling within a of numbers: 2, 9, and 16:
given range of values in a dataset, based on a sample that
estimates the mean and the standard error. For example, if {(2-9)2 + (9-9)2 + (16-9)2}/3 = (49 + 0 + 49)/3 = 32.67
the 95-percent confidence intervals for a market's daily
range are 1.00 points and 3.00 points, we would expect 95 The more varied the prices, the higher their variance —
percent of all daily range values to fall within these bound- the more widely distributed they will be. The more varied
aries and only five percent to be larger or smaller. a market’s price changes from day to day (or week to week,
etc.), the more volatile that market is.
Variance and standard deviation: Variance meas- A common application of variance in trading is standard
ures how spread out a group of values are — in other deviation, which is the square root of variance. The stan-
words, how much they vary. Mathematically, variance is dard deviation of 8, 9, and 10 is: .667 = .82; the standard
the average squared “deviation” (or difference) of each deviation of 2, 9, and 16 is: 32.67 = 5.72.

40 October 2007 • CURRENCY TRADER

 NEW PRODUCTS & SERVICES

Track Data has released version
Interbank FX (IBFX) has across all 10 economic sectors and
9.0 of AIQ Trading Expert Pro, featur- expanded its offerings to include its nearly 150 sub-industries. It also pro-
ing a Chart Pattern Recognition mod- Mini Monitor tool, which is one of vides rankings across small-cap, mid-
ule that identifies well-known pat- nine free tools Interbank FX offers cap and large-cap segments.
terns, automatically draws them on traders in the off-exchange retail for- MarketGrader incorporates data from
charts, and also alerts users when a eign currency (forex) market. IBFX- each company’s financial reports into
pattern is broken. In addition, this Mini Monitor customizes key techni- a grading system the same day the
module allows users to build trading cal indicators. Through research and information becomes publicly avail-
systems based on specific chart pat- feedback from traders, IBFX found able. For more information, visit
terns and provides the ability to back- these four key technical indicators are http://www.tradeking.com.
test individual patterns. The chart for- the most widely used for monitoring
mations identified include triangle, and projecting: moving average con- Note: New Products and Services is a forum for
ascending triangle, descending trian- vergence-divergence (MACD), industrybusinesses to announce new products
gle, channel down, channel up, falling Awesome Oscillator (AO), Relative and upgrades. Listings are adapted from
wedge, rising wedge, rectangle, head- Strength Index (RSI), and stochastics. press releases and are not endorsements or rec-
and-shoulders, inverted head-and- Mini Monitor helps traders design a ommendations from the Active Trader
shoulders, triple top, triple bottom, custom program capable of monitor- Magazine Group. E-mail press releases to
flag, pennant, double top, and double ing each indicator. IBFX-Mini Monitor editorial@currencytradermag.com. Publication
bottom. Additional information on watches each of these indicators and is not guaranteed.
AIQ Systems and Chart Pattern posts the results on traders’ charts.
Recognition can be found at The tool adds a table to the top of
http://www.aiqsystems.com or by charts reflecting its focus on six
calling (800) 332-2999. charting time frames and notifies
the trader of indicator projections

BusinessDictionary.com is a across each time frame. Custom
new resource for traders containing an inputs can be applied to each indi-
integrated search tool, more than cator as well. IBFX-Mini Monitor is
20,000 definitions, and more than available as a free download at
150,000 links between related terms. http://www.interbankfx.com. In
Access to the site is free and includes order to use the tool, traders must
42 different subject areas, ranging have either a live account (full IBFX-
from accounting and auditing to cus- Mini Monitor functionality) or a
tomer relations and services. The dic- demo account (limited IBFX-Mini
tionary is designed for all skill levels. Monitor functionality).
BusinessDictionary.com is operated by
InvestorGuide.com, a financial
TradeKing has added high-
Internet company providing free performing stock research reports
access to financial and business infor- from MarketGrader to its brokerage
mation. The company operates a fami- site, free of charge to all TradeKing
ly of financial Web sites that also clients. MarketGrader analyzes
includes InvestorWords.com, a com- 5,600 U.S. exchange-listed compa-
prehensive financial and investing nies and takes into account four cat-
glossary, and WiserAdvisor.com, egories of indicators: growth, value,
a service for locating financial profes- profitability, and cash flow. It is
sionals. For additional information, designed to identify pricing imper-
visit http://www.investorguide.com fections in the market relative to
or call (703) 865-7218. each company’s financial picture.
MarketGrader provides rankings

CURRENCY TRADER • October 2007 41

 GLOBAL ECONOMIC CALENDAR OCTOBER/NOVEMBER
MONTH
October 18 U.S.: Leading indicators
Great Britain: Capital issues; retail
1 U.S.: ISM
sales
Legend Japan: Account balances

CPI: Consumer price index 2 Japan: Monetary base

19 Great Britain: GDP
Germany: PPI
ECB: European Central Bank Germany: Retail turnover; orders
Canada: CPI
FOMC: Federal open market received and manufacturing turnover
committee Australia: Index of commodity prices; 20
GDP: Gross domestic product Reserve bank meeting
ISM: Institute for supply
21
management 3 Great Britain: Monetary Policy
22
PPI: Producer price index Committee meeting
23 Canada: Retail trade
4 ECB: Governing council meeting
Poland: Monetary policy council meeting
Economic Release time Great Britain: Monetary Policy
release (U.S.) (ET) Committee meeting 24
GDP 8:30 a.m. Philippines: Monetary board meeting 25 U.S.: Durable goods
CPI 8:30 a.m.
5 U.S.: Employment ECB: Governing council meeting
ECI 8:30 a.m.
Japan: Corporate service price index
PPI 8:30 a.m. 6
ISM 8:30 a.m. New Zealand: Official cash rate
Unemployment 8:30 a.m. 7 announcement
Personal income 8:30 a.m. Czech Republic: Czech National Bank
8 Great Britain: PPI
Durable goods 8:30 a.m. board meeting
Australia: Official reserve assets
Retail sales 8:30 a.m.
Trade balance 8:30 a.m. 9 Germany: Production index; foreign
26 Canada: Employment
Leading indicators 10 a.m. trade 27 Mexico: Monetary policy announcement
10 U.S.: Wholesale inventories 28
Japan: Monetary policy meeting
OCTOBER 2007 29 Israel: Announcement of changes in the
Germany: Bankruptcies
30 1 2 3 4 5 6 interest rate
South Africa: Monetary policy
7 8 9 10 11 12 13
committee meeting 30
14 15 16 17 18 19 20 Thailand: Monetary policy council 31 U.S.: FOMC meeting; GDP
21 22 23 24 25 26 27 meeting Japan: Monetary policy meeting
28 29 30 31 1 2 3 Canada: GDP
11 U.S.: Trade balance
Japan: Balance of payments; monetary Australia: International reserves and
NOVEMBER 2007 policy meeting foreign currency liquidity
28 29 30 31 1 2 3 South Africa: Monetary policy Norway: Monetary policy meeting
committee meeting Poland: Monetary policy council meeting
4 5 6 7 8 9 10
11 12 13 14 15 16 17 12 U.S.: Retail sales; PPI November
18 19 20 21 22 23 24 Japan: Corporate goods price index 1 U.S.: ISM
25 26 27 28 29 30 1 13 Japan: Account balances
Australia: Index of commodity prices
14
2 U.S.: Employment
15 Japan: Monetary survey
Japan: Monetary base
Canada: Leading indicators
Germany: Orders received and
16 Germany: CPI manufacturing turnover
Great Britain: CPI
3
Canada: Manufacturing survey; interest
rate announcement 4
Brazil: Monetary policy committee 5
meetings
6 Australia: Reserve bank meeting
17 U.S.: CPI
7 U.S.: Wholesale inventories
The information on this page is Great Britain: Employment
Great Britain: Monetary Policy
subject to change. Currency Canada: Wholesale trade
Committee meeting
Trader is not responsible for Brazil: Monetary policy committee
the accuracy of calendar dates Germany: Production index
meetings
beyond press time. Australia: Official reserve assets

42 October 2007 • CURRENCY TRADER

 FOREX TRADE JOURNAL

Ill-considered trade illustrates

the dangers of getting too cute
with the markets.

TRADE

Date: Wednesday, Sept. 19.

Entry: Short the euro/U.S. dollar pair

(EUR/USD) at 1.3958.

Reason(s) for trade/setup: Expected

exhaustion after the market’s robust rally
off the Aug. 16 low, capped by a wide-range
day on Sept. 18. At least a minor pullback
should occur before the next upswing.

Source: TradeStation
Initial stop: 1.4026, enough to let the mar-
ket blow off a little steam if it eclipses 1.4000.
take some short-side profits instead of just waiting for the
Initial target: 1.3830, just above the previous day’s low. next long trade?
But with the big, fat, round-number target of 1.4000
looming just above the entry price, this was an ill-advised
time to try to pick a high. (Secretly, we thought the euro
RESULT would trick traders by taking a nosedive just after getting
everyone excited by a move near 1.4000.) The trade was
Exit: 1.4133. mostly the result of hubris, rationalized by a string of
(small) winning long trades that preceded it.
Profit/loss: -0.0175 (1.2 percent). Predictably, we were frozen on the big up day on Sept. 20
and held the position too long — it seemed impossible that at
Trade executed according to plan? No. least a small pullback wouldn’t occur that could get us out
at a better price than the original stop — ultimately cover-
Outcome: This trade is a good example of overconfidence ing a mere 20 ticks from the euro’s (new) all-time high on
and trying to outsmart the market. With the dollar making Sept. 25.

record lows and the euro making record highs, we had no
intention of taking a serious countertrend position against Note: Initial trade targets are typically based on things such as the
historical performance of a price pattern or trading system signal.
the trend — in fact, we had been operating from the long
However, because individual trades are dictated by immediate cir-
side since Aug. 16 and thought the trend would likely con- cumstances, price targets are flexible and are often used as points at
tinue. But we fully expected a pullback (which would pro- which to liquidate a portion of a trade to reduce exposure. As a result,
vide the next long entry point), and in that case, why not initial (pre-trade) reward-risk ratios are conjectural by nature.

TRADE SUMMARY
Date Contract Entry Initial Initial IRR Exit Date P/L LOP LOL Trade
stop target length

9/19/07 EUR/USD 1.3958 1.4026 1.3830 1.88 1.4133 9/25/07 -0.0175 (1.25%) +0.0009 -0.0195 4 days

Legend: IRR — initial reward/risk ratio (initial target amount/initial stop amount); LOP — largest open profit (maximum available profit
during lifetime of trade); LOL — largest open loss (maximum potential loss during life of trade).

44 October 2007 • CURRENCY TRADER

THIS MONTH’S ADVERTISERS

Click on these boxes to link directly

to these advertiser’s web sites
ADVERTISERS continued

NewsTrader Pro
Historical price action for 7 major currency pairs
and over 40 U.S. and International economic indicators.
Charts, detailed data analysis and more.
More information, screen shots
and a demo are at
www.NewsTraderPro.com