CAPITALIZING ON THE CANADIAN DOLLARS BIAS P.

14
Strategies, analysis, and news for FX traders

May 2012 Volume 9, No. 5

Middle East FX: The Israeli shekel p. 22 Gauging the Euro crisis p. 10 A new phase for the Aussie dollar? p. 6 Pattern trading the Euro/pound p. 31

CONTENTS

Contributors .................................................4 Global Markets Cooling Aussie economy weighs on currency ...................................6
Its a favorite currency of trend followers, but for now signs point to continued choppiness in the Australian dollar. By Currency Trader Staff

Currency Futures Snapshot ................. 27 Managed Money Review ....................... 27

Top-ranked managed money programs

International Markets ............................ 28

N umbers from the global forex, stock, and interest-rate markets.

On the Money Is the Eurozone too big to fail? .............. 10

The presence of the IMF in the European debt crisis underscores an uncomfortable reality. By Barbara Rockefeller

Forex Journal ...........................................31

Trade signal indicates potential for two-way trade in the EUR/GBP pair.

Trading Strategies Trading the Canadian bias ...................... 14

Different short-side setups produce related profit profiles in the dollar/Canada pair. By Currency Trader Staff

Looking for an advertiser?

Click on the company name for a direct link to the ad in this months issue. Dallas Traders Expo eSignal FXCM Nadex The Trading Congress

Advanced Concepts A currency of biblical proportions ......... 22

If you want to profit in the Israeli currency, keep your eyes on equities and interest rates. By Howard L. Simons

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

Important dates for currency traders.

Events .......................................................26
Conferences, seminars, and other events.

Questions or comments?
Submit editorial queries or comments to webmaster@currencytradermag.com
2 May 2012 CURRENCY TRADER

CONTRIBUTORS
CAPITALIZING ON THE CANADIAN DOLLARS BIAS P. 14
Strategies, analysis, and news for FX traders

A publication of Active Trader

May 2012 Volume 9, No. 5

For all subscriber services:

www.currencytradermag.com

Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag.com Managing editor: Molly Goad mgoad@currencytradermag.com Contributing editor: Howard Simons

Middle East FX: The Israeli shekel p. 20 Gauging the Euro crisis p. 10 A new phase for the Aussie dollar? p. 6 Pattern trading the Euro/pound p. 29

Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag.com

President: Phil Dorman pdorman@currencytradermag.com Publisher, ad sales: Bob Dorman bdorman@currencytradermag.com Classified ad sales: Mark Seger seger@currencytradermag.com

q Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on a wide range of economic and financial market issues.

Volume 9, Issue 5. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2012 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.

q Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund.

May 2012 CURRENCY TRADER

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GLOBAL MARKETS

Cooling Aussie economy weighs on currency

Surprise rate cut keeps pressure on Australian dollar.
BY CURRENCY TRADER STAFF
The Australian dollar, long the darling of the carry put the brakes on the decade-long bull trend in the Aussie trade, has lost some of its zing over the past several dollar that has been interrupted, dramatically but briefly, months. After sliding to a 13-month low last October, the only by the 2008-2009 financial collapse (Figure 2). Since Australian dollar/U.S. dollar (AUD/USD) rates late-2011/ 2001, the Australian dollar has climbed from 0.47 vs. the early-2012 upswing failed to rally the pair to its July 2011 U.S. dollar to its peak at $1.10 in July 2011. peak, and in April the Aussie dollar subsequently dropped Economic performance was hampered in 2011 by the to a nearly three-month low (Figure 1). devastating floods across the northeastern portion of the As of late April, the Australian dollar ranked as the seccountry. Overall GDP came in at 2 percent last year, and ond worst performing major currency vs. the U.S. dollar in there appears to be carryover into 2012. 2012, trailing only the Japanese yen. Year-to-date through We have revised our 2012 GDP forecast to 3.4 percent April 24, the Aussie had gained .90 percent against the from 4 percent in 2012 due to weaker conditions in the greenback, well behind the first-place performer (and close non-mining sectors of the economy, says Katrina Ell, assoneighbor) the New Zealand dollar, which was up 4.54 perciate economist at Moodys Analytics. cent. During the same period, the Norwegian krone gained In an April 17 research note, Ell wrote: The value of 4.30 percent vs. the U.S. dollar, the British pound gained new business loans slumped 8.4 percent m/m in February, 3.8 percent, and the Canadian dollar climbed 3.34 percent. falling to its lowest level in over a year, while personal The yen, the only major currency to register a decline vs. finance fell nearly 4 percent. Lending data a good proxy the U.S. dollar, fell 5.27 percent. A slowing economy, concerns over FIGURE 1: LOWER HIGHS FOR THE AUSSIE DOLLAR Chinese economic health (Australias primary export market), and a fresh interest rate easing cycle threatens to keep a lid on new highs for the foreseeable future. The Reserve Bank of Australia (RBA) shocked forex markets May 1 with a larger than expected cut in official interest rates. Traders accustomed to lengthy and profitable trends in the Aussie may need to plan for more choppy range trading.

Economy: Down, by no means out

Make no mistake, Australia remains in an almost enviable position compared to other major industrialized nations. Its economy suffered only one quarter of negative economic growth during the Great Recession, and it never experienced the same type of banking and fiscal dilemmas that plagued other advanced economies. Nonetheless, some slowdown is occurring in the Australian economy, which could
6

After sliding to a 13-month low last October, the Australian dollar/U.S. dollar rates (AUD/USD) subsequent rally failed to match the pairs July 2011 peak.

May 2012 CURRENCY TRADER

FIGURE 2: THE BIG RALLY for demand add weight to the argument that Australias expansion has lost some steam, as caution drags on activity. She isnt the only analyst to cite the split between a relatively healthy mining industry and the rest of the economy. Sean Callow, senior currency strategist at Westpac Institutional Bank, notes, The Australian economic outlook mainly focuses on the sharp divergence between the booming mining sector and the rest of the economy, which is mostly sluggish. Australia has famously avoided recession since the early 1990s but GDP growth has been below trend estimated to be around 3.25 percent four straight years. Westpac looks for 3-percent growth in 2012 after 2 percent in 2011, with the key driver being huge investment in the mining sector. Recent sentiment numbers reflect the overall economic contraction. In April, Australian consumer confidence fell by 1.6 percent month over month, the second consecutive decline. Callow also highlights a twist on the fiscal front that could contribute to a slowdown. Another key factor to watch for is the governments determination to produce a tiny budget surplus in the fiscal year ending June 30, 2013, he says. In the May 8 budget, [Australian treasurer] Wayne Swan will have to outline how he will move the budget from a deficit of at least -2.5 percent/GDP in 2011-12 to surplus. This is a severe drag on growth that Reserve Bank of Australia easing may not offset. As always, commodities loom large in Australias economic picture. The country is a major commodity exporter, sending coal, iron ore, wool, and other raw materials primarily to China and Japan. As of 2010 (the latest data available), 25 percent of Australian exports head to China and 19 percent to Japan, according to Tim Quinlan, economist at Wells Fargo. Strong commodity prices and robust exports have traditionally supported the Aussie dollars rallies. High prices for Australias key commodities have kept the Aussie dollar at
CURRENCY TRADER May 2012

The Aussie dollars long-term uptrend over the past decade has been derailed only once dramatically but briefly due to the 2008-2009 financial collapse.

FIGURE 3: SAGGING COMMODITIES

The Aussie dollars path often tracks commodities, which have been declining overall since mid-2011.

GLOBAL MARKETS

historically very high levels, placing immense pressure on trade-exposed sectors such as tourism, Callow says. Australians are deserting local tourist destinations in favor of overseas trips, while inbound tourism has flattened out. Another correlation traders might want to keep an eye on is the Thomson Reuters/Jefferies CRB Index, a benchmark commodity index (Figure 3). That index is currently comprised of a total of 19 different commodity markets. The CRB Index has been winding down and the Aussie is a large commodity exporter, says Michael Woolfolk, managing director of BNY Mellon. The CRB Index hit a recent top in April 2011, and it has been trending lower since. More recently, a renewed downtrend phase began in late February this year.

China trade

Given its major trade ties with China, increased speculation about an economic slowdown there has impacted Australias outlook. Broadly speaking, China is its largest export market, Quinlan says. The slowdown in China is not good news. Woolfolk notes the Australian dollar is very sensitive to economic growth in China and draws attention to Chinas disappointing Q1 numbers. First-quarter GDP in China came in below market expectations at 8.1 percent, down from 8.9 percent in the fourth quarter 2011. If Chinese demand declines, then Australian exports decline, Woolfolk says. We all know [the Chinese economy is slowing], but the level is the big question. Moodys Analytics forecasts a soft landing for the Chinese economy, but says its forecast of 8.4 percent GDP growth for the full year may be reduced by as much as 0.2 percentage points, according to an April 13 research note. A drop in Chinese resource demand would hit Australias economy hard, prompting businesses to shelve investment plans, with spillovers to weaker growth, employment, income, and spending, Ell says. That said, easing inflation allows Beijing to pursue pro-growth policies and engineer a soft landing, boosting resource demand.

Monetary policy

Moderating growth and inflation has opened the door to a new monetary policy easing cycle. In the first quarter, the Australian consumer price index (CPI) increased by only 0.1 percent vs. pre-report expectations of a 0.6 percent increase. This dramatically reduced the year-over-year rate from 3.1 percent in the fourth quarter 2011 to 1.6 percent. That also opened the door for an RBA rate cut. On May 1, the RBA slashed its official monetary policy rate by 0.50 percent, bringing it down to 3.75 percent this was a surprise to the markets as most forecasters had only expected a 0.25-percent cut. After the Great Recession,
8

the RBA had hiked rates to the 4.75 percent mark, but lowered them in October and December 2011 by 0.25 basis points on both occasions. Its obviously more aggressive than expected, Vassili Serebriakov, currency strategy at Wells Fargo, says of the RBAs May 1 move. It appears the RBA sees the economy weaker than expected. This is a clear negative for the Aussie dollar to the extent that the door is open to further rate cuts. The rationale for the move was that with inflation lower, there is scope to support domestic demand, and given that domestic lending rates have edged higher relative to policy rates in recent months, 50bp was needed to make sure monetary conditions were more accommodative than three months ago. That doesnt sound terribly dovish on the surface but this is a domestically inspired move. If domestic inflation and demand conditions now warrant easier policy, any further loss of regional momentum will increase the desire to see a softer currency. AUD looks vulnerable, Societe Generale analysts wrote in a May 1 FX Strategy research note. Views are mixed on whats ahead in terms of monetary policy. Andrew Cox, currency strategist at Citi says that interest rate markets are being overly aggressive and are pricing in too much accommodation from the RBA in the coming months. There is approximately 20 basis points of easing priced in for the next meeting on June 6. Absent a significant deceleration of global economic growth or further deterioration in domestic financial conditions, I expect the RBA will remain on hold, Cox explains.

Weathering challenges

In addition to the threat of future rate cuts, other black clouds remain on the horizon for the Australian dollar. The main risks to Australias growth outlook are external, Ell says. Europes debt woes pose the largest potential threat, though we expect Europe to muddle through. In any event, the effects of subdued global growth on Australias real economy have been marginal up to now. That said, Australian lenders rely heavily on offshore funding, which could dry up if Europes debt crisis deepens,
May 2012 CURRENCY TRADER

FIGURE 4: AUSSIE DOLLAR/JAPANESE YEN

weighing on credit availability. In this scenario, further RBA rate cuts may not be passed on by banks as they grapple with higher funding costs. However, Ell is optimistic that Australia is well positioned to weather potential storms. If these or any other downside risks materialize, Australian policymakers themselves have scope to bolster demand, she says. Unlike Europe or the U.S., Australia has a low debt burden and sound fiscal management, which gives it The AUD/JPY pair may be a good shorting candidate in light of Aussie dollar the capacity to provide a fiscal stimulus if weakness. required. Thanks to Australias endowment of natural resources, Ell notes, its economy is in good shape is softness to parity by mid-year, then grinding back up to compared to other G10 nations. 1.04 by Q4. While there are soft patches in the non-mining sectors This doesnt add up to a lot of excitement for trendof the economy, looser monetary settings will breathe life following currency traders. into these sectors, she says. Since Feb. 29, a downtrend has unfolded and the AUD/ USD rate has slipped from $1.08 to $1.02. The pair has been flirting with the 200-day moving average (MA), Price action watched by many technical traders as a proxy for the longDespite economists projections the underlying economy term trend. As of May 1, the 200-day MA was around $1.03 remains relatively sound in Australia, currency traders and the pair was just below it. are taking a slightly different view. People are graduMore attractive trading opportunities may lie on the ally becoming less positive on the Australian dollar, says AUD cross rates. A better trade might be short AUD/JPY Charles St-Arnaud, FX strategist at Nomura. (Figure 4), with USD/JPY looking too reliant on speculaThe Aussie/dollar sold off sharply in the wake of the tive demand and the Bank of Japan likely to disappoint May 1 RBA announcement from a peak at $1.047 on April expectations of aggressive further easing, Callow says. 30 to the $1.03 zone. Short-term, the AUD/USD could be Sub-80 levels seem realistic. Were also interested in short vulnerable. It looks like we could retest the $1.0225 level. AUD/CAD, but this is contingent on the U.S. economy We could see the Aussie closer to parity over the next few not weakening too much, given the lack of diversity in months if [economic] numbers are weaker and encourage Canadas export destinations. expectation of further easing, Serebriakov says. Given Australias overall economic health and still (hisOur case is for the AUD/USD to chop slightly lower torically) strong currency, sideways to lower price action into mid-year, largely due to offshore factors such as our may be mostly a natural pendulum swing, driven in the below-consensus view on U.S. and European growth, near term by lower interest rates. Despite all the ecoplus some softness in commodities such as iron ore prices nomic concerns and the mildly bearish currency action, where inventories are very high, and underlying Asian Australia is still a standout example among industrialgrowth cooling, Callow says. We see AUD/USD around ized economies of the world and will continue to expand, 1.00 by the end of June. Quinlan says. Nonetheless, he adds that risks in the AUD lie in both Despite the absence of forecasts for the AUD to decline directions which argues for a range-trading environsignificantly, theres still the need for a catalyst to drive it ment. Should the Fed conduct QE3, AUD would be one out of its current doldrums and propel it to new highs. For of the key beneficiaries, opening up a return to 1.08, he now, there isnt one on the horizon. Choppy trading may says. Major financial dislocation most likely in Europe could see AUD/USD as weak as 0.95. But our base case prevail for a while. y
CURRENCY TRADER May 2012 9

On THE MONEY ON the Money

Is the Eurozone too big to fail?

The presence of the IMF in the European debt crisis underscores an uncomfortable reality.

BY BARBARA ROCKEFELLER

A catastrophe in one market or country is not necessarily a catastrophe for other markets or the forex market as a whole. In fact, it usually takes a shift in world view for a local catastrophe to go global something that hasnt occurred for the European sovereign debt crisis so far. But its not difficult to argue that it should, and that the Euro should suffer as a result. It seems to be escaping notice that the expected International Monetary Fund (IMF) participation in European sovereign debt bailouts this year is a crisis that amounts to a catastrophe. The IMF is summoned when a countrys ability to manage its finances has failed. And when Greek 10-year notes are yielding 21 percent and Greece is unable to tap the capital markets, we say it has failed. But we dont say the Eurozone as an entity has failed, even though only four members (out of 17) continue to have triple-A bond ratings. Accepting loans from the IMF, alongside those from the two Eurozone bailout funds (one of which the European Stability Mechanism comes into existence in July), is not seen as particularly disgraceful or a sign of failure except for the specific country taking the loans. Defenders of the status quo say it is a fallacy of composition to tar the whole Eurozone with the brush of a few wayward members. However, the very presence of the IMF at every discussion of the Eurozones future stinks of failure. The IMF, which claims to have evolved from its founding at Bretton Woods after WW II, publishes a long list of goals, includ10

ing facilitating trade and reducing poverty. But the organization has never relinquished its original nature as a lender of last resort to countries with unsustainable trade deficits and an inability to pay their debts. It is of some historic interest that France was the first borrower from the IMF (in 1947) and Argentina is the only country to fail to repay the IMF. (The IMF itself says it has been almost continuously involved with Argentina since 1991.) The funds that countries contribute to the IMF are, technically, loans from the existing reserves of member countries, and the IMF pays interest. IMF contributions are not, technically, deposits, but the IMF acts as a bank under many definitions of the word. Remember, the European Central Bank (ECB) is specifically prohibited from acting as a lender of last resort to a member sovereign (last years purchases of distressed debt notwithstanding), but European leaders are willing to substitute the IMF as a lender of last resort. Some critics call this hypocritical and also a con job, and they are not wrong. IMF chief Christine Lagarde announced in April that several countries, including Japan, the UK, and the Nordic countries, agreed to contribute larger sums to the IMF for future bailouts, with Europe in mind if not named outright. The IMF originally aimed to raise $500 billion in new reserves, but later reduced that number to $400 billion. As of early May, it has raised $430 billion, but Brazil, India, and China postponed raising their contributions. Out of the BRICs (Brazil, Russia, India, and China), only Russia has agreed and for a small sum ($10 bilMay 2012 CURRENCY TRADER

Barbara Rockefeller Currency Trader Mag May 2012 Figure 1. Thai Baht

FIGURE 1: THAI BAHT

59 58 57 56 55 54 53 52 51 50 49 48 47 46 45 44 43 42 41 40 39 38 37 36 35 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201

The Thai baht devalued from 24.70 vs. the USD in June 1997 to 53.50 by January 1998. The currency stabilized by 2001 and by 2003 Thailand had repaid its IMF bailout.
Source: Chart Metastock; data Reuters and eSignal

lion). Japan offered the biggest amount ($60 billion). The U.S. has declined to contribute more, and Canada has proposed stricter IMF standards for the next recipient of IMF reserves. The IMF has already contributed to bailouts for Iceland, Greece, Ireland, Portugal, Hungary, and others. Big economies like Spain and Italy may be next, with another bailout for Greece a possibility. How much money is available for future European bailouts? The number is not entirely clear, especially because each entity, including the IMF, reserves some funds but then leverages the rest. It seems to be on the order of more than 1 trillion.

Asia 1997

Historically, the IMF has been involved in emerging markets, not developed countries. And prior to a decade ago, the IMFs standard policy prescription consisted of just a few initiatives: float and devalue the currency, raise interest rates, and slash government spending, all in the context of free markets and with the explicit goal of restoring investor confidence and foreign capital inflows. But, the 1997 Asian crisis that spread to Latin America and Russia brought forth tens of billions in IMF lending, although its virtually impossible to find the exact amounts. (Its astonishing that barely 15 years after this first global exercise in moral hazard, the cost cant readily be found.) The $57 billion for South Korea was the biggest at the time and possibly more than half of a total estimate of $100 billion. Contrast that with the cost of the European
CURRENCY TRADER May 2012

bailouts to date (about 400 billion), and the 1 trillion European war chest. The European bailouts already far exceed the 1997-98 Asian crisis costs, and theyre not done yet. The Asian financial crisis started when Thailand was forced to float the baht in July 1997 because the reserves coffer was bare; Thailand could no longer support a fixed exchange rate. Moreover, foreign debt was already more than 100 percent of GDP and investors fled for the exits, making it clear more would not be forthcoming. As the crisis spread, we heard about contributing causes, including government overspending, crony capitalism, exportdependence, and real estate bubbles. Thailand was not alone in taking an IMF bailout others included South Korea, Indonesia, the Philippines, and Malaysia, whose leader famously blamed speculators for the attack on the ringgit and imposed capital controls for a year. There was blood in the streets: Stock markets crashed, businesses failed in droves, economies contracted, and unemployment was high. Figure 1 depicts the devaluation of the Thai baht in one fell swoop, from 24.70 vs. the USD in June 1997 to 53.50 by January 1998. Note the baht stabilized by 2001 and Thailand repaid the IMF by 2003, four years ahead of schedule. In a nutshell, devaluation plus other reforms, including fiscal austerity, were effective in fixing the crisis. But devaluation comes first. In recent years, the IMF has retreated from the austerity approach and is now willing to entertain capital controls,
11

ON THE MONEY

such as when it approved of Brazil imposing controls on inflows that were making the Brazilian real overly strong.

Europe 2012

European indebtedness is not as high as Thailands. Eurostat reported in late April the collective 2011 Eurozone debt was 87.2 percent of GDP, up from 85.3 percent the year before. The Stability Pact called for debt not to exceed 60 percent of GDP, but only five Eurozone members qualify on that basis Estonia, Luxembourg, Slovenia, Slovakia, and Finland. Greece has the worst profile, at 165.3 percent of GDP, followed by Italy with 120.1 percent of GDP. Even powerhouse Germany has a debt-to-GDP ratio of 81.2 percent, although its situation had improved from the year before (83 percent). Ironically, Spain was technically in better shape than Germany, with debt-toGDP at 61.2 percent in 2010 and 68.5 percent in 2011, but that excludes the indebtedness of the 17 regions. In addition, Europe is not like Thailand its reserves are hardly exhausted. In fact, the Eurozone countries with the highest reserve levels are actually quite rich, with nine of the 17 Eurozone countries holding almost $800 billion (Table 1). The question of reserves is a thorny one. Reserves are a

TABLE 1: FX AND GOLD RESERVES OF SELECT EUROZONE COUNTRIES

Country Germany Italy France Spain Netherlands Portugal Austria Finland Greece U.S. millions 249,260 187,298 185,040 49,178 56,080 24,019 27,624 10,941 7,146

Nine of the 17 Eurozone countries hold almost $800 billion in reserves.

Source: IMF

nations collective savings. In theory, they can be pledged, either implicitly or explicitly, as collateral for a loan. This is never actually done and would presumably cause a political uproar, but Eurozone member nations technically have another $800 billion before they absolutely need to go to the IMF with hat in hand. Thailand, in contrast, had no choice reserves had dwindled to almost nothing as the central bank intervened to prop up the baht in the face of massive withdrawals from the banking system (and equities). Europe has some leeway, but demonstrates an unwillingness to spend its savings. On another front, the government of Indonesia fell as a result of the Asian financial crisis. So far in Europe, governments have fallen and been replaced in Greece, Ireland, Portugal, Spain, and the Netherlands, with France possibly next after the May 6 election and Greece also in play again with elections on the same date. Government changes have been mostly orderly and under established laws and norms, even if Italy had to do some tap-dancing to install current prime minister Mario Monti. The Eurozone is unwilling to take the recommendations of economists and economic historians everywhere: devalue the Euro. How, exactly, do you do that when the currency is floating? You cut interest rates below everyone elses, which today means zero. But the ECB is unwilling to cut rates because Eurozone inflation today at about 2.3-2.4 percent, though falling is above the desired range, which is capped at 2 percent. Germany opposes a Eurobond, another confidence-building idea. One reason not to devalue the Euro is hardly spoken of: European banks have to deleverage and sell assets to the tune of about 2.8 trillion in the coming few years to meet new capital requirements. Who will buy an asset denominated in a falling currency or invest in banks whose chief asset is iffy sovereign bonds, especially those financed by the ECB for only three years? And thats without considering contracting economies that should raise non-performing loans by a large amount in some countries, especially Greece and Spain. Eurozone leaders, including some central bank governors like Austrias Ewald Nowotny, tell us Spain will not need a bailout and that interest rates are already low enough which is the same thing as denying there is a crisis, let alone a catastrophe. To a certain extent, we all
May 2012 CURRENCY TRADER

12

Barbara Rockefeller Currency Trader Mag May 2012 Replacement chart Fig 2 Euro (Weekly)

FIGURE 2: EUR/USD, WEEKLY

1.60

1.55

1.50

1.45

1.40

1.35

1.30

1.25

1.20

1.15

2006

2007

2008

2009

2010

2011

2012

2013

2014

The nearly horizontal line is the linear regression line from June 2006 to April 2012. A downside breakout of the triangle would be required to suggest the market is devaluing the Euro.
Source: Chart Metastock; data Reuters and eSignal

suffer from crisis fatigue; it takes too much energy to be fearful of so many potential negative developments. Some people say Spain is not Greece, and we could extend this logic to say the Eurozone is not Thailand. In fact, lets just consider the Eurozone too big to fail.

TBTF

Many international financial analysts are becoming increasingly unwilling to buy into too big to fail. There is also a note of exasperation creeping into the discussion. The Europeans know what to do devalue and they wont do it. The Europeans wont spend their savings, and they would rather borrow from others than make any politically dangerous sacrifices. And the size of the problem is not trivial. The combined Eurozone and IMF bailout funds of about 1 trillion are more than 10 times what the Asian crisis cost. Theres no reason to suppose the economic contraction will be any smaller than the one that occurred in enterprising and energetic Thailand, which took five years to recover to precrisis levels. And just as the Asian crisis jumped the Pacific to Latin America and then the Atlantic to Russia, we dont know what regions European contagion might reach this time. China, perhaps. Why would the market not force a devaluation on the Euro if thats what it takes to restore balance? This may seem like a nifty idea but traders are profit-maximizers,
CURRENCY TRADER May 2012

not economic optimizers. The nearly horizontal line in Figure 2 is the linear regression from June 2006 to present (or seven years) at 1.3750. The red lines are hand drawn support and resistance that form a nearly perfect symmetrical triangle. A big-picture breakout to the downside would be required to suggest the market is obeying some natural instinct to devalue the Euro, and that doesnt happen until about 1.2930 and would not be confirmed until the previous lowest low (from May 2010) at 1.2143. This is what should happen, not what will happen, for the greater good of the European and global economy. The European crisis has generated only a few instances of outright panic and mass selling of one asset or another, including equities. The world is, bizarrely, sanguine about the future of the Eurozone, without having real justification for it. Denying there is a problem and then belatedly coming up with a half-baked solution that kicks the can down the road has so far sufficed to keep the Euro afloat near its long-term (seven-year) linear regression trendline. But refusing to call a spade a spade doesnt make it any less a spade. The Eurozone is failing. The presence of the IMF proves it. Refusing to name it a failure doesnt make it any less an authentic one. Presumably well see the Euro whipsaw in ever narrower ranges as the apex of the triangle draws near but not until June 2014. y For information on the author, see p. 4.
13

TRADING STRATEGIES

Trading the Canadian bias

Different short-side setups produce related profit profiles in the dollar/Canada pair.
BY CURRENCY TRADER STAFF

A monthly chart of the U.S. dollar/Canadian dollar pair (USD/CAD) shows that, with the notable exception of the 2008 financial crisis, the U.S. buck has been losing ground to its Canadian counterpart since the first month of 2002 (Figure 1). Although a trend can end at any time many analysts have no doubt called the bottom in the dollar/ Canada rate several times over the past several years it is plain that shorting the pair has been the path of least resistance over the past decade. Also, although steepness of the dollar/Canada downtrend has eased over the past two years, there is no reason FIGURE 1: THE BIG SHORT

to trade against that bias. As a result, a shorter-term trading approach would logically seek to identify relative high points that offer the opportunity to enter the market on the short side in the expectation of a downside reversal and resumption of the long-term bias. As is always the case, though, finding regularly repeating patterns that offer an edge and that fit within relatively constrained risk limits can be a challenge. Figure 2 shows a daily chart of USD/CAD between December 2011 and late April 2012, when the pair initially traded lower, then sideways; the red arrows mark a halfdozen bars identified by related patterns based on the activity during a single bar and up to five bars. Lets see what type of price action these patterns represent, and whether they offer any kind of consistent advantage in capitalizing on the USD/CADs short-side bias. All the analysis was conducted on daily data from April 13, 1998 through April 23, 2012 (3,646 trading days). The departure point for the patterns in Figure 2 was noticing a somewhat common-looking and intuitive pattern: a day with a conspicuously higher high with a weak close, a pattern that is often (in one form or another) referenced in various key reversal setups. Several examples suggested the setup was often followed by at least a few days of selling. But because conspicuous and weak are in the eye of the beholder (subjective observa May 2012 CURRENCY October 2010 CURRENCY TRADER

Fading spike highs

The U.S. dollar has lost ground to the Canadian dollar for the majority of the past decade.

14

FIGURE 2: PICKING OUT HIGHS tions), its necessary to create some objective definitions for these terms to avoid confusing our preconceptions and market biases with objective pattern identification. For example, we might consider a higher daily high that interrupts a string of lower highs conspicuous, while overlooking a more significant high-to-high move because it occurs within a larger run of higher highs. In this case, well define our conspicuous high as a day with: 1. A high that is at least 0.35 percent above the previous days high. 2. A high above the highs of the previous five days. 3. A close in the bottom third of the days range. As formulas, these rules are: 1. High[0]-High[1])/High[1]>=0.0035 ( 2. (High[0]>Max(High[5]:High[1]) 3. Close[0]-Low[0])/(High[0]( Low[0])<=0.33 Where 0, 1, 2, etc., represent today, one day ago, two days ago, etc. In Figure 2, this pattern identifies the two highlighted bars in February, both of which were followed by two days of additional selling (the second setup more so than the first). Of course, because we know the USD/CAD pair has had an inherent downside bias for more than 10 years, finding a setup that is followed by couple of days of selling is hardly noteworthy; the question is whether the selling after these setups is more significant, and reliable, than the markets bias.
CURRENCY TRADER May 2012

The marked bars identify relative highs with the potential to offer advantageous short-selling points.

FIGURE 3: PATTERN 1

The basic relative high pattern ultimately produced a more negative profile than the USD/CADs natural downtrend, but the biggest difference (other than the first four days) didnt emerge until after day 10.

15

TRADING STRATEGIES

Figure 3 sheds some light on the issue. It shows the median close-to-close percentage moves from the final day of the pattern to the closes of the next 10 days, as well as 15 and 20 days later (red line). For comparison, the median close-to-close changes for all 1 to 10-, 15-, and 20-day periods in the analysis window are included as a benchmark (blue line). There were 76 instances of this pattern during the analysis period. The USD/CADs downward bias is evident in the blue lines gradual decline. Dollar/Canadas median one-day benchmark move was -0.02 percent, its five-day benchmark move was -0.06 percent, its 10-day move was -0.13 percent, and its 20-day move was -0.27 percent. The post-pattern price action was much more volatile. There was an initial down move (with the exception of day 2) in the first four days, followed by an upswing that peaked at day 7 (at which point the post-pattern decline was smaller than the benchmark decline), followed by another decline that dropped the median post-pattern

move to -0.34 percent or more by days 8 to 10, -0.87 percent by day 15, and -1.11 percent by day 20. Overall, you could say the pattern offered downside potential above and beyond the markets natural downtrend, but you had to wait a while to enjoy the lions share of it. Experimenting a bit with the pattern criteria may help reveal whether these basic results have any significance, and if they can point us toward more promising patterns or pattern variations.

Figure 4 shows the performance after two variations of the pattern that required the high day to be above the highs of only the previous two days or three days (green and red lines, respectively). There is little difference between the two lines, each of which represent around 120 pattern examples, and both follow the same general trajectory as pattern 1 from Figure 3: an initial decline to day 4, followed by a rebound to day 7, followed by another downturn. In fact, the day 4 down move is about the same FIGURE 4: PATTERNS 2 AND 3 size as it was for pattern 1, and the day 7 rebound is less extreme. Figure 5 shows the performance after a variation that loosens some of the pattern criteria but tightens the conspicuous high portion that is, how much higher the high of the final bar must be above the preceding high. In this variation, the high must be above the previous four highs, the close must be in the lower 44.9 percent of the days range, and the high must be at least 0.05 percent above the previous days high (approximately twice the median positive high-to-high move during the analysis period). This reduced the number of examples to 67, but resulted in more consistently negative post-pattern performance. The initial post-pattern down move extended to day Reducing the higher high component from five days to three or two days 6 and the (still present) peak at day 7 was increased the number of signals by approximately 50 percent, but didnt significantly alter the profit profile. below the benchmark decline at that interMay 2012 CURRENCY TRADER

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16

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17

TRADING STRATEGIES

FIGURE 5: PATTERN 4 LARGER HIGH-TO-HIGH MOVE

Increasing the minimum size of the final high-to-high move to 0.05 percent resulted in a more consistent post-pattern down move.

FIGURE 6: PATTERN 5 RELAXING THE PATTERN

Liberalizing all the pattern parameters increased the number of signals to 220, but the results still suggest a certain amount of downside outperformance.
18

val; the remaining downturn took the pair 1.07 percent lower by day 20. Figure 6 shows the results of relaxing (to different degrees) all the patterns parameters to see if the basic profit profile remains intact. In this case, the high was above the previous four highs, the close was in the bottom 44.99 percent of the days range, and the high was required to be only 0.015 percent or more above the preceding high (an amount smaller than the median positive high-to-high change during the analysis period). Using these settings dramatically increased the number of signals, to 220 (including the Jan. 9 and April 23 signals in Figure 2), but overall the results resemble the previous pattern variations, in diluted form: The relative peak at day 7 remains intact, as does the longer-term downside acceleration to day 20; the magnitude of the decline throughout is smaller, though. As a whole, the different variations suggest the patterns basic profit profile is not a fluke, and that it offered a measure of downside outperformance. Increasing the magnitude of the high-to-high move i.e., the size of the spike high appeared to generate the biggest advantage among the variations, but tightening this parameter will also result in fewer trade signals. (One variation not depicted in the preceding charts is requiring the close to be more toward the bottom of the days range. Doing this produced no clear performance benefits and also limited the number of signals.)
May 2012 CURRENCY TRADER

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TRADING STRATEGIES

During the financial crisis

Although the basic pattern appeared to outperform the USD/CADs downside bias, its fair to ask what performance was like during a notably bullish period. Figure 7 shows the price action after the 28 instances of pattern 4 (see Figure 5) that occurred during the big run-up in USD/CAD pair between November 2007 and March 2009. Although the red pattern line doesnt imply much of a down move (it turns marginally positive by day

20), it stands in stark contrast to the blue benchmark line, which is positive at every interval and has a median gain of a little more than 1 percent at day 20. At the very least, the results suggest the patterns downside edge doesnt completely disappear during a bullish phase, which would help minimize drawdowns during these periods.

Finally, Figure 8 shows the performance after 57 instances of a related, but even simpler pattern: a day with a higher high that both opens FIGURE 7: PERFORMANCE DURING BULLISH PERIOD and closes in the bottom 25 percent of the days range (see the Jan. 30 signal in Figure 2). The very volatile results are nonetheless more negative than the benchmark and bear more than a passing resemblance to the previous performance charts. (The day 7 peak in all patterns was mostly the result of a small number of big up moves that occurred during the financial crisis rally.) Here, however, the results are more consistently negative in the first six days. One interesting characteristic not shown in Figure 8 is the differences that resulted from the positioning of the open and close prices. The patterns During the USD/CADs rally between late 2007 and early 2009, pattern 4s were almost evenly divided between downside bias is still evident, although noticeably weakened. those with a close above the open and those with a close below the open; the FIGURE 8: PATTERN 6 ONE-BAR PATTERN former were followed by more significant and more immediate downside price action than the latter. Taken in whole, these two basic patterns suggest building pattern-based signals around relative highs could provide an edge for trading the downside in the USD/CAD. Of course, to a certain extent this outlook is predicated on the pair continuing its long-term bearish bias, but Figure 7 indicates such an approach has the potential to weather bull phases, and possibly profit during them. Furthermore, these patterns are only two of many ways to model the types of shorting opportunities highlighted in Figure 2; related patterns could be combined to create a The performance after days with a higher high that closed in the bottom 25 more active trading strategy. y
percent of the days range was volatile but ultimately more negative than the benchmark.

One-bar pattern

20

May 2012 CURRENCY TRADER

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21

ADVANCED CONCEPTS TRADING STRATEGIES

A currency of biblical proportions

If you want to profit in the Israeli currency, keep your eyes on equities and interest rates.
BY HOWARD L. SIMONS

Most of us have heard at some point in our lives the bumblebee should be incapable of flying. As few of us are versed in aerodynamics, we sort of shrug, note the bumblebee does in fact fly, and give the matter little further thought.

The Israeli economy is a bumblebee of sorts. The country has been forced to maintain an outsized military, is saddled with a large and growing self-imposed obligation to support ultra-orthodox religious scholars, has an opendoor policy to absorb Jewish immigrants, is one of the last vestiges of a mid-20th century labor socialism that never works FIGURE 1 well, and, as the old joke goes, was settled by people who wandered for 40 years in the desert only to come to the only spot in the Middle East without oil. This last part is not as true as it once was: As soon as large natural gas deposits were found offshore in the Mediterranean, the country promptly decided to tear up its 1952 energy policy and impose stiff new taxes. Deflation has not been a problem in Israel over its history. Offsetting these handicaps is one of the worlds most vibrant technology centers, a booming tourism industry, a large and persistent current account surplus, After the ILS entered a long-term bull market in early 2003, excess volatility fell and and large external transfer payhas since been negative more often than not. ments.
May 2012 CURRENCY TRADER

22

The shekel

As befitting a country doubling as an open-air archaeological site, the Israeli shekel (ILS) has a very long history; the name itself derives from a Hebrew word meaning, He weighed. Monetary terms around the world often originate from neighboring empires; the shekel appears to be of Babylonian origin. How captivating. Just as many of the Asian currencies we have examined have an important cross-rate to the Japanese yen, the ILS has an important cross-rate to the Euro; we will examine this rate along with the spot rate vs. the USD. First, lets look at the ILS against the USD, overlaid with its excess volatility, which is the ratio of the implied volatility for three-month non-deliverable forwards to high-low-close (HLC) volatility, minus 1.00, as a measure of the markets demand for insurance. HLC volatility is defined as:

not. This is one of the more prominent investor skews in currency option volatility we have seen. The picture is different for the cross-rate against the EUR (Figure 2). Here the ILS bear market persisted well into the origins of the global financial crisis in 2007, and option traders were perfectly fine with that. Once an option market on the ILS for EUR holders arose in 2003, negative excess volatility has been associated not with a strong ILS but rather a weak one. Indeed, the spikes higher in excess volatility have occurred during times of a strong shekel.

Interest rate expectations

[
N i=1

[.5* (ln( max(H, C ) ))

min(L, Ct1 )
t1

.39 * (ln(

C 2 )) ]* 260 1/ 2 Ct1

Normally, we should expect a currency to strengthen when its anticipated interest rate advantage increases. However, the move toward money-printing in the U.S. in 2008 led to an environment of perma-expectations that ultra-low short-term interest rates were not sustainable and had to rise quickly. This pushed the forward rate ratio between six and nine months (FRR6,9) for USD and other currencies deposits to historic levels of steepness. The FRR6,9 is

Where N is the number of days between 4 and 29 that minimizes the function:

FIGURE 2

1 N N * * | (P MA) | * | MA | N i=1 Vol 2

The ILS has had one major downturn since the introduction of the EUR in January 1999, and that was during the dot-com bust of 2000-2002 (Figure 1). Israel was the third-largest country of domicile for stocks listed on the Nasdaq during that period. Excess volatility surged as traders bought insurance against further downturns. Once the ILS entered what proved to be a long-term bull market in early 2003, excess volatility fell and has been negative more often than
CURRENCY TRADER May 2012

Since 2003 negative excess volatility has been associated with a weak shekel. Excess volatility spike highs have occurred during times of a strong shekel.

23

ADVANCED CONCEPTS ON THE MONEY

FIGURE 3

Once the U.S. began printing money (green line), higher interest rate expectations for the USD were accompanied by a stronger ILS.

FIGURE 4

the rate at which borrowing can be locked in for three months starting six months from now, divided by the nine-month rate itself; the more it exceeds 1.00, the steeper the yield curve is. The effect on the ILS is quite visible. (Figure 3). Once the U.S. began printing money, marked with the green line, higher interest rate expectations for the USD were accompanied by a stronger ILS. We should expect the normal relationship to reassert itself if and when the U.S. returns to a more normal monetary policy. The same phenomenon took place with respect to the cross-rate against the EUR (Figure 4). Here the magic moment in time was the onset of the European sovereigndebt crisis in October-November 2009, marked with a green line. In both the USD and EUR cases, the ILS has strengthened not so much on an absolute basis as on a relative basis against the two major currencies.

Asset returns
Since the onset of the European sovereign-debt crisis in October-November 2009 (green line), the ILS has strengthened not so much on an absolute basis as on a relative basis against the USD and EUR.

The Israeli stock market has been one of the stronger ones globally since the March 2009 low, and indeed was able to make a new all-time high in USD terms in April 2010. Israels performance relative to the
May 2012 CURRENCY TRADER

24

FIGURE 5

U.S. had paralleled the spot currency rates between 2000 and 2007, which suggested part of the currencys movement was attributable to capital flows into and out of the Israeli stock market (Figure 5). The two markets diverged once the global financial crisis took hold. It began to reconverge by the end of 2010. We should expect a strong linkage between the stock markets relative performance and the ILS if for no other reason than the countrys small size makes even minor capital flows count. The same phenomenon is visible with the relative performance of Israel to the MSCI index for Eastern Europe, the Middle East and Africa (Figure 6). Capital flows into and out of the Israeli market had a great effect on the exchange rate against the EUR, the base currency around which this region fluctuates. The strong linkage of the stock market and the inverted linkage seen for interest rate expectations suggest the best way to approach trading the shekel is to track the Israeli stock market. In the common parlance, both might be a good way to make a few shekels. y For information on the author, see p. 4.
CURRENCY TRADER May 2012

Israels performance relative to the U.S. had paralleled the spot currency rates between 2000 and 2007, but the two markets diverged once the global financial crisis took hold. It began to reconverge by the end of 2010.

FIGURE 6

Capital flows into and out of the Israeli market had a great effect on the exchange rate vs. the Euro, the base currency around which Eastern Europe, the Middle East, and Africa fluctuate.

25

GLOBAL ECONOMIC CALENDAR

CPI: Consumer price index ECB: European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. FND (first notice day): Also known as first intent day, this is the first day on which a clearinghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillment of a futures contract. The clearinghouse also informs the seller. FOMC: Federal Open Market Committee GDP: ross domestic product G ISM: nstitute for supply I management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: urchasing managers index P PPI: roducer price index P Economic release (U.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m.

1 2 3 4 5 6 7 8 9 10

May
U.S.: April ISM manufacturing report Germany: March employment report ECB: Governing council interest rate announcement U.S.: April employment report LTD: May forex options; May U.S. dollar index (ICE)

20 21

22 UK: April CPI

Hong Kong: April CPI Japan: Bank of Japan interest rate South Africa: April CPI U.S.: April durable goods Brazil: April employment report Mexico: Q1 GDP and May 15 CPI Japan: April CPI Mexico: April employment report

23 announcement 24 25

11 12 13

Brazil: April PPI Brazil: April CPI Mexico: April 30 CPI and April PPI U.S.: March trade balance Australia: April employment report UK: Bank of England interest rate announcement U.S.: April PPI Canada: April employment report Germany: April CPI Hong Kong: Q1 GDP UK: April PPI

26 27 28

29 South Africa: Q1 GDP 30 Canada: April PPI 31

Japan: April employment report

U.S.: Q1 GDP France: April PPI Germany: April employment report India: Q1 GDP and April CPI South Africa: Q1 employment report and April PPI U.S.: April personal income, May employment report, and ISM manufacturing report Brazil: Q1 GDP Canada: Q1 GDP

June

14 Japan: April PPI 15 16 17 18 19

India: April PPI

U.S.: April CPI and retail sales France: April CPI Germany: Q1 GDP U.S.: April housing starts UK: April employment report U.S.: April leading indicators Hong Kong: February-April employment report Japan: Q1 GDP Canada: April CPI Germany: April PPI

1 2 3 4 5 6

The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.

Canada: Bank of Canada interest rate announcement U.S.: Fed beige book Australia: Q1 GDP Brazil: May CPI and PPI EBC: Governing council interest rate announcement

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26

May 2012 CURRENCY TRADER

CURRENCY FUTURES SNAPSHOT as of April 30

10-day move / rank 0.78% / 50% 0.77% / 56% 2.08% / 94% 0.85% / 19% 1.25% / 73% 1.46% / 67% 0.80% / 50% -1.11% / 91% -0.27% / 40% 0.78% / 50% 20-day move / rank -0.72% / 62% 0.14% / 4% 1.21% / 55% 2.95% / 74% 0.22% / 13% -2.15% / 33% -0.50% / 63% -0.15% / 3% -0.76% / 17% -0.72% / 62% 60-day move / rank 0.67% / 18% -3.42% / 77% 2.55% / 73% -4.04% / 60% 0.60% / 6% -2.83% / 45% 1.16% / 19% -0.43% / 31% -2.34% / 41% 0.67% / 18% Volatility ratio / rank .29 / 65% .24 / 55% .44 / 72% .21 / 30% .35 / 77% .17 / 45% .25 / 35% .42 / 80% .16 / 37% .29 / 65%

Market EUR/USD AUD/USD GBP/USD JPY/USD CAD/USD MXN/USD CHF/USD U.S. dollar index NZD/USD E-Mini EUR/USD

Sym EC AD BP JY CD MP SF DX NE ZE

Exch CME CME CME CME CME CME CME ICE CME CME

Vol 234.0 119.8 95.3 89.5 84.4 38.2 39.5 20.0 11.0 3.5

OI 266.8 150.7 151.3 143.9 119.4 171.3 41.4 47.5 20.7 8.2

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each markets liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable). LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to todays close. 20-day move: The percentage price move from the close 20 days ago to todays close. 60-day move: The percentage price move from the close 60 days ago to todays close. The % rank fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.

BarclayHedge Rankings: Top 10 currency traders managing more than $10 million
(as of March 31 ranked by March 2012 return) March return 8.00% 4.20% 4.15% 3.73% 2.82% 2.67% 2.57% 2.40% 1.91% 1.45% 5.56% 2.21% 2.00% 1.81% 0.23% 0.10% -0.03% -0.05% -0.49% -0.70% 2011 YTD return 37.89% 2.80% 9.80% 6.60% 1.47% 5.51% 1.18% 0.43% -16.31% 5.15% -5.08% 10.03% 0.55% 6.54% -11.82% -0.86% -0.04% -0.22% -0.89% -7.18% $ Under mgmt. (millions) 18.6 2700.0 45.0 30.8 25.4 127.6 135.0 19.5 24.6 20.0 6.5 1.1 1.8 6.8 4.0 1.8 3.5 4.0 5.8 5.3

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

Based on estimates of the composite of all accounts or the fully funded subset method. Does not reflect the performance of any single account. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

CURRENCY TRADER May 2012

27

INTERNATIONAL MARKETS

CURRENCIES (vs. U.S. DOLLAR)

Rank Currency 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Great Britain pound Singapore dollar Canadian dollar Japanese yen Taiwan dollar Hong Kong dollar Chinese yuan Swedish krona Swiss franc Russian ruble Euro New Zealand dollar Thai baht South African rand Australian dollar Indian rupee Brazilian real April 26 price vs. U.S. dollar 1.613585 0.803 1.014185 0.01229 0.033920 0.128875 0.15836 0.14849 1.0988 0.03405 1.32045 0.812915 0.03235 0.12865 1.03297 0.01876 0.53104 1-month gain/loss 1.68% 1.26% 1.20% 1.19% 0.15% 0.12% 0.03% -0.03% -0.22% -0.39% -0.49% -0.64% -0.71% -1.17% -1.31% -2.22% -3.60% 3-month gain/loss 3.42% 1.78% 1.47% -4.21% 1.56% 0.02% -0.23% 0.42% 2.05% 4.66% 1.45% 0.42% 2.02% 2.42% -1.68% -4.82% -6.61% 6-month gain/loss 0.88% 1.43% 2.07% -6.50% 2.17% 0.21% 0.86% -2.74% -3.29% 3.92% -5.11% 1.37% -0.29% 1.56% -1.25% -6.08% -6.80% 52-week high 1.6702 0.832 1.059 0.0132 0.03510 0.129 0.1589 0.1662 1.3779 0.0366 1.4842 0.8797 0.0336 0.1518 1.1028 0.0226 0.65 52-week low 1.5308 0.7606 0.9467 0.0119 0.032 0.1281 0.1532 0.1427 1.0459 0.0303 1.2657 0.7397 0.031 0.1166 0.9478 0.0181 0.5288 Previous 3 7 1 12 4 5 6 15 9 2 10 14 11 8 13 16 17

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Australia South Africa Mexico Hong Kong India Singapore U.S. Switzerland UK Canada Japan Germany Brazil France Italy

Index All ordinaries FTSE/JSE All Share IPC Hang Seng BSE 30 Straits Times S&P 500 Swiss Market FTSE 100 S&P/TSX composite Nikkei 225 Xetra Dax Bovespa CAC 40 FTSE MIB

April 26 4,445.00 34,251.43 39,212.16 20,809.71 17,130.67 2,981.47 1,399.98 6,122.40 5,748.70 12,145.85 9,561.83 6,739.90 62,198.00 3,229.32 14,509.96

1-month gain/loss 2.06% 1.74% 0.90% 0.68% 0.46% 0.23% -1.17% -2.56% -2.61% -3.41% -4.56% -4.79% -6.73% -7.79% -12.69%

3-month gain/loss 2.22% 0.55% 5.29% 1.81% -0.60% 3.01% 6.19% 0.36% -0.80% -2.56% 8.05% 3.06% -1.20% -3.98% -9.94%

6-month gain loss 3.35% 7.92% 9.47% 9.14% -0.91% 7.64% 12.72% 7.40% 3.52% -0.33% 9.30% 12.03% 8.84% 4.07% -9.72%

52-week high 5,012.30 34,426.74 39,963.60 24,132.10 19,619.70 3,227.28 1,422.38 6,604.50 6,103.70 14,089.10 10,255.20 7,600.41 68,970.00 4,137.97 22,575.30

52-week low 3,829.40 28,391.18 31,659.30 16,170.30 15,135.90 2,521.95 1,074.77 4,695.30 4,791.00 10,848.20 8,135.79 4,965.80 47,793.00 2,693.21 13,115.00

Previous 9 11 4 13 14 5 3 6 12 15 1 2 7 10 8

28

May 2012 CURRENCY TRADER

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Currency pair Yen / Real Canada $ / Real Euro / Real Pound / Aussie $ Aussie $ / Real Pound / Franc Euro / Aussie $ Pound / Canada $ Pound / Yen Canada $ / Yen Euro / Franc Aussie $ / New Zeal $ Aussie $ / Franc Franc / Canada $ Franc / Yen Euro / Canada $ Euro / Yen New Zeal $ / Yen Euro / Pound Aussie $ / Canada $ Aussie $ / Yen Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa

Symbol JPY/BRL CAD/BRL EUR/BRL GBP/AUD AUD/BRL GBP/CHF EUR/AUD GBP/CAD GBP/JPY CAD/JPY EUR/CHF AUD/NZD AUD/CHF CHF/CAD CHF/JPY EUR/CAD EUR/JPY NZD/JPY EUR/GBP AUD/CAD AUD/JPY

April 26 0.02315 1.90981 2.486545 1.562085 1.945195 1.468495 1.278305 1.59102 131.265 82.505 1.20172 1.270655 0.94009 1.083435 89.39 1.301985 107.42 66.135 0.81833 1.018525 84.03

1-month gain/loss 5.04% 4.98% 3.22% 3.03% 2.37% 1.90% 0.83% 0.47% 0.43% -0.03% -0.27% -0.67% -1.09% -1.40% -1.42% -1.67% -1.69% -1.85% -2.13% -2.39% -2.51% 2011 56.989 70.645 89.103 41.27 62.929 36.294 205.449 10.08 26.505 120.241 0.177 -0.632 -46.469 -33.001 -48.815 -6.348 -473.439 -70.089 -55.349 Rate 0-0.25 0-0.1 1 0.5 1 0-0.25 4.25 2.5 9 3.25 1.875 8 5.5

3-month gain/loss 2.59% 9.75% 8.63% 5.19% 5.28% 1.34% 3.18% 0.91% 7.96% 6.99% -0.58% -2.10% -3.65% -0.43% 6.53% -1.01% 5.91% 4.83% -1.90% -4.07% 2.64% Ratio 21.932 14.607 14.009 8.84 7.488 6.743 5.744 4.143 2.375 2.049 0.081 -0.123 -1.922 -2.217 -2.811 -2.949 -3.137 -3.188 -3.706

6-month gain loss 0.41% 9.61% 1.90% 2.16% 6.04% 4.32% -3.91% -1.16% 7.88% 9.16% -1.88% -2.59% 2.11% -5.25% 3.42% -7.03% 1.47% 8.41% -5.94% -3.25% 5.59% 2010 55.509 51.878 82.419 39.873 51.283 29.007 199.92 12.385 29.394 195.856 1.01 6.864 -75.089 -35.422 -49.375 -5.993 -470.898 -72.59 -64.226

52-week high 0.0246 1.90981 2.5367 1.626 1.9461 1.4753 1.4011 1.6354 136.21 86.09 1.2933 1.3637 0.99 1.3569 105.79 1.4316 121.13 68.81 0.9038 1.0755 89.09 2012 58.892 74.25 75.236 38.473 65.75 16.566 180.325 8.206 22.203 130.037 1.994 -1.372 -42.324 -73.183 -48.345 -4.402 -509.911 -45.878 -29.956

52-week low 0.0191 1.5997 2.204 1.4637 1.6402 1.1778 1.2188 1.5302 117.58 72.63 1.0376 1.2354 0.7477 1.0676 80.46 1.2917 97.22 57.23 0.8163 1.001 72.72

Previous 3 1 2 6 4 8 9 16 7 5 13 12 17 19 11 20 10 15 18 21 14

Account balance Singapore Norway Switzerland Taiwan Province of China Netherlands Sweden Germany Hong Kong SAR Korea Japan Ireland Belgium United Kingdom Australia Canada Czech Republic United States Italy Spain Interest Rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate

Source: International Monetary Fund, World Economic Outlook Database, April 2012

Last change 0.5 (Dec 08) 0-0.1 (Oct 10) 0.25 (Dec 11) 0.5 (March 09) 0.25 (Sept 10) 0.25 (Aug 11) 0.25 (Dec 11) 0.5 (March 11) 0.75 (Apr 12) 0.25 (June 11) 0.125 (June 11) 0.5 (Apr 11) 0.5 (Nov.10)

October 2011 0-0.25 0-0.1 1.5 0.5 1 0-0.25 4.75 2.5 11.5 3.25 1.875 8.5 5.5

April 2011 0-0.25 0-0.1 1.25 0.5 1 0.25 4.75 2.5 12 3 1.75 6.75 5.5
29

CURRENCY TRADER May 2012

INTERNATIONAL MARKETS
GDP AMERICAS Argentina Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore Period Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Period Release date 3/26 3/6 3/2 3/28 2/15 3/27 3/29 3/7 2/1 2/29 2/13 2/24 Release date Rate Change 5.0% 4.2% 1.5% 0.2% 0.0% 0.6% 3.3% 0.4% 3.0% 12.0% -0.6% 3.8% Change 1-year change 15.6% 6.5% 5.4% 1.7% 2.6% 2.9% 10.3% 2.8% 6.5% 14.2% -2.3% 3.8% 1-year change Next release 6/1 6/1 6/29 5/15 6/28 6/21 6/6 5/11 5/31 5/17 5/25 Next release

EUROPE AFRICA ASIA and S. PACIFIC

Unemployment AMERICAS

EUROPE

ASIA and S. PACIFIC CPI AMERICAS

Q4 March March Q4 Feb. Dec.-Feb. March Jan.-March March Q1

Period

2/22 4/26 4/5 3/1 3/29 4/18 4/12 4/19 4/27 4/30

6.7% 6.2% 7.2% 9.4% 7.2% 8.3% 5.2% 3.4% 4.5% 2.1%

-0.5% 0.5% -0.2% 0.1% -0.2% -0.1% 0.0% 0.0% 0.0% 0.1%
Change

-0.6% -0.3% -0.4% 0.1% -0.4% 0.5% 0.2% -0.1% -0.2% 0.2%
1-year change

5/24 5/11 6/7 5/2 5/16 5/16 5/17 5/29 7/31

Next release

Release date

EUROPE AFRICA ASIA and S. PACIFIC

Argentina Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore Argentina Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

March March March March March March March Q1 March March March March
Period

4/13 4/5 4/20 4/12 4/13 4/17 4/18 4/24 4/23 4/30 4/27 4/23
Release date

0.9% 0.2% 0.4% 0.8% 0.3% 0.3% 1.1% 0.1% 0.5% 0.1% 0.5% 0.8%
Change

9.8% 5.2% 1.9% 2.3% 2.1% 3.5% 6.0% 1.6% 4.9% 8.6% 0.5% 5.2%
1-year change

5/9 5/18 5/15 5/11 5/22 5/23 7/25 5/22 5/31 5/25 5/23
Next release

PPI AMERICAS EUROPE AFRICA ASIA and S. PACIFIC

As of April 30 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate. 30

March March March March March March Q1 Q4 March March March

4/13 4/30 4/27 4/20 4/13 4/26 4/23 3/13 4/16 4/12 4/27

1.0% 0.2% 0.5% 0.6% 0.6% -0.1% -0.3% 0.2% 0.3% 0.6% 1.7%

12.7% 0.9% 3.7% 3.3% 3.6% 7.2% 1.4% 6.5% 6.9% 0.6% 4.1%

5/30 5/31 5/18 5/11 5/31 7/23 6/14 5/14 5/25 5/29

May 2012 CURRENCY TRADER

FOREX TRADE JOURNAL

Trade signal indicates potential for two-way trade in the EUR/GBP pair.

TRADE
Date: Thursday, April 26, 2012. Entry: Short the Euro/British pound pair (EUR/GBP) at .8174. Reason for trade/setup: The spike high on April 25 (the first spike in the daily chart inset) was a little less than 0.04 percent above the highs of the days immediately preceding and succeeding it. Analysis of more than two dozen previous spike highs with similar characteristics showed these events were followed by declining prices in the EUR/ GBP pair a few days after the final day of the pattern: The median decline four days after the close of the day following the spike-high day (which in this case was April 26) was -0.46 percent. Also, in early April the pair broke out of the downside of

the consolidation that began at the beginning of the year, clearing a path to test the 2010 low at .8066, and potentially the support zone defined by the 2008 consolidation (around .7950). Initial stop: .8219. Initial target: .8070, a little above the 2010 low of .8066.

RESULT
Exit: Trade still open. Profit/loss: +.0024, marked to market at 11:07 a.m. on May 1. Outcome: The trade got off to a promising start, trading down to around .8120 early on April 30 before jumping higher again on May 1 (the second spike high in daily chart inset). After trading nearly to .8200, the pair tumbled to an intraday low by noon, however, setting up the possibility (depending on the price action on May 2) that another daily spike-high pattern would form. As of May 1, the position was still open; a move below .8100 will trigger a lowering of the stop to the breakeven level. y
Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.

Source: TradeStation TRADE SUMMARY Date 4/26/12 Currency pair EUR/GBP Entry price .8174 Initial stop .8219 Initial target .8070 IRR 2.08 MTM .8150 Date 5/1/12

P/L point .0024 % 0.29%

LOP .0052

LOL -.0023

Trade length 3 days

Legend IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade). MTM: marked-to-market the open trade profit or loss at a given point in time.

CURRENCY TRADER May 2012

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