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Profissional Documentos
Cultura Documentos
November 2006
Volume 3, No. 11
Industry News
CME, CBOT join forces . . . . . . . . . .28
The Chicago Mercantile Exchange and
the Chicago Board of Trade announced a
merger in late October, creating what would
be the world’s largest derivatives exchange.
Contributors . . . . . . . . . . . . . . . . . . . .6
Lawsuit latest twist
in RefcoFX saga . . . . . . . . . . . . . . . .29
Global Markets . . . . . . . . . . . . . . . . . .8 After twice having deals for the company
Dollar doldrums fall through and seeing RefcoFX cease
The buck outlook: Will the dull dollar operations, customers of the brokerage
limp into a new year, or is it poised are filing suit to regain lost account balances.
for a new trend? Perhaps the economic
data holds some clues. Competition gives collegians
By Currency Trader Staff early entry into forex trading . . . . . .29
Finance students from 15 colleges took
part in a forex trading contest.
Trading Strategies . . . . . . . . . . . . .12
Breaking down the euro continued on p. 4
Currency Futures
FX futures hit
new volume highs . . . . . . . . . . . . . .32
Forex futures at the Chicago Mercantile
Exchange post record volume in September.
Index of advertisers
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tem developer, and researcher for more
Editor-in-chief: Mark Etzkorn
metzkorn@currencytradermag.com than 20 years. His diverse background
Contributing editors: Jeff Ponczak National Hockey team, and president of VTAD (the
(jponczak@currencytradermag.com),
David Bukey (dbukey@currencytradermag.com) German branch of the International Federation of
Art director: Laura Coyle Rosewood Trading Inc. and a strategist for
lcoyle@currencytradermag.com
Bianco Research. He writes and speaks fre-
President: Phil Dorman
pdorman@currencytradermag.com quently on a wide range of economic and
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Allison Ellis
aellis@currencytradermag.com
Dollar doldrums
The dollar has been in a coma, despite a raft of notable economic and geopolitical catalysts.
Any number of events could eventually breathe life back into the market, but given past performance,
it’s difficult to conclude when the patient might come off life support.
Sidewinder
A look at a daily EUR/USD chart (Figure 3) shows the pair
comfortably ensconced in a range between roughly $1.30
and $1.2450 since mid-May.
“The guys whose profits depend on movement in
exchange rates are really struggling,” says Bob Lynch, head
of G-10 FX strategy-Americas for HSBC. “We saw a big
hedge fund blow up, as well as geopolitical events, and yet
they have not done anything to generate a breakout in the
dollar.”
Three-month statistical volatility is below 6 percent for
EUR/USD, the lowest on record since the euro was
launched in January 1999, notes Sean Callow, senior cur-
rency strategist at Westpac Institutional Bank.
The U.S. dollar index has chopped up and down in 2006 after establishing a
European finance ministers busy “jawbon- yearly low in May.
ing” the currency down from that level.
However, it is not just the Europeans
who seek to keep the U.S. dollar within
recent ranges.
“Various central banks have been
actively selling euros above $1.28 and
buying euros around $1.24 to 1.25,” Dolan
says.
IFR’s Coleman says the euro/dollar sta-
bility reflects a structural change. China
and other Asian central banks have a vest-
ed interest in U.S. dollar stability.
“If they are going to be long a trillion
dollars, they’d rather not see it appreciate
or depreciate rapidly,” he says.
Chinese reserves of U.S. dollars totaled
around $769 billion as of the end of
September, but speculation is rampant
that it will quickly hit the $1 trillion mark.
Source: TradeStation
At the polls
Most market watchers expect the Nov. 7 U.S. FIGURE 2 — DIFFERENT TIME FRAME, SAME STORY
midterm elections to come and go without a The monthly dollar index chart is, interestingly, similar to the daily
blip on forex screens. Analysts say the markets chart: A sell-off followed by a consolidation. The congestion in Figure
are priced for the Democrats to regain control of 1 is simply part of a larger consolidation dating back to 2004.
one or both of the houses in Congress. But the
likely resulting deadlock between a Republican
president and a democratic congress makes the
scenario a non-event for the forex markets.
“The surprise would be if Republicans main-
tained control,” says Jim Glassman, senior econ-
omist at JP Morgan Chase. But even that, he
says, is not likely to spark currency action.
“The markets just view it as a gridlocked gov-
ernment,” he says.
FIGURE 3 — EURO/DULLER
Finstrom, senior financial futures analyst
The EUR/USD’s extended range has dropped volatility readings (bottom) at Citigroup.
to their lowest levels since the euro’s launch in 1999. The main culprit behind the slowdown?
Analysts say the restrictive monetary poli-
cy sparked a retreat within the housing
sector.
“Housing will have a strong and nega-
tive ripple affect on the rest of the econo-
my,” says Paul Kasriel, chief economist at
Northern Trust & Co. “A large portion of
jobs created in this expansion were in
housing. House prices are falling now.
Home ‘ATM machines’ are no longer refill-
ing. Housing is contracting and consumer
spending has slowed.”
Kasriel believes the U.S. economy is in
for a number of quarters of growth below
3.0 percent, even 2.5 percent or less. He
says recession worries will bring Fed rate-
cut talk to the FOMC table over the next
several months.
Source: TradeStation High crude oil prices have also been a
key factor for the economy. November
in 2007, the dollar could come off strong. crude oil futures have plummeted from
“The euro/dollar could challenge $1.30,” he says. over $80 per barrel in mid-July to below $60 per barrel as of
late October. However, some believe the benefits may be
U.S. economic overview muted.
A distinct economic slowdown has been recorded in recent “Even though $60 is better than $80, it is not like the ener-
quarters in the U.S. After a whopping 5.6 percent gross gy drop has given a huge shot in the arm to the economy,”
domestic product (GDP) reading in the first quarter of 2006, says Ken Goldstein, economist at The Conference Board in
readings tapered off to 2.6 percent in the second quarter, New York City. “We will end the year with consumer confi-
with preliminary readings for the third quarter scheduled dence that has cooled off considerably.”
for release on Nov. 29. Briefing.com forecasts a 2.0 percent
Q3 reading. Factors to watch
“The big question is the status of the U.S. slowdown and As always, there are potential wildcards that could shake
if we see a recovery into late 2006 and 2007,” says Lisa up U.S. dollar action. The U.S. housing market still looms
large. While prices have decelerated in
some parts of the U.S., if an all-out
plunge were to occur, that could poten-
HIT YOUR MARK! Contact Bob Dorman
Ad sales East Coast
tially force the U.S. Federal Reserve to
Advertise in and Midwest
consider cutting U.S. interest rates,
Active Trader Magazine bdorman@activetradermag.com which generally is considered a bearish
(312) 775-5421 factor for the greenback.
Allison Ellis
Also, traders should keep on an eye
Ad sales West Coast on upcoming trade deficit data. The
and Southwest latest numbers available in late
aellis@activetradermag.com October revealed a $69.9 billion deficit
(626) 497-9195 in August, up from July’s $68 billion
Mark Seger deficit. However, Tim Mazanec, senior
Account Executive foreign exchange strategist at
mseger@activetradermag.com Investor’s Bank & Trust, says falling
(312) 377-9435 crude oil prices could help narrow the
Breaking down
the euro
How far can the euro drop and still close higher on the day? If you’re trading the EUR/USD rate,
this is just one of the stats you should have at your fingertips.
Intraday analysis
The intraday analysis was based on 60-minute price bars,
using use a 24-hour clock referencing Central Time (CT).
Each Friday, the market closes at 15:00 (3:00 p.m. CT) and
reopens at 16:00 (4:00 p.m.) on Sunday. On the other days
of the week, the close occurs at 23:59 (11:59 p.m.) and the
market reopens at 0:00 (12:00 a.m.). Figures 9 and 10 are
60-minute bar charts of the euro.
Visual inspection suggests a pattern of short-term but
dramatic moves followed by trading ranges. To determine
which periods, if any, are more likely to trend, the high- Source: CQGNet (www.cqg.com)
low range of each 60-minute bar was calculated and both
BY HOWARD L. SIMONS
Function 1:
Function2:
The HLC volatility is calculated from the same N-day critical trend speed. This
historical volatility has the advantage of incorporating both intraday true price
NewsTrader Pro
range and interday change into its calculation. A revolutionary new software
As a market meanders in a trading range, intraday range dominates interday product for Forex Traders
change and volatility rises. As a market moves in a strong directional trend, that trade economic
interday price change dominates intraday range and volatility (uncertainty) news releases.
falls.
Function 3:
Volatility does not exist in a vacuum, however. If we view the options market as
a form of insurance, we can readily see how forward-looking option implied
Historical price action
volatility needs to be placed into context against backward-looking HLC volatil-
for 7 major currency pairs and
ity. It is the excess of price insurance against a historic relative frequency meas-
ure that counts — similar to comparing flood insurance costs between coastal 30 U.S. economic indicators.
and upland regions. Yes, it costs more to buy flood insurance near the water, but Charts, detailed data analysis
relative to the actual risk, the price of the insurance itself may be cheap. We will and more.
use the ratio of implied volatility to HLC volatility to measure the fair value of
insurance in a market. More information,
screen shots
Case study 1: and a demo are at
The Canadian dollar
Over the available data sample, the CAD has undergone one secular trend http://www.wincorp.net
continued on p. 22
trend oscillator (Figure 5). The increase in insurance costs is cannot conclude the sentiment of JPY traders is symmetri-
relatively symmetrical between strong uptrends and strong cal. The six-month rolling skew of JPY returns remains
downtrends. The market senses, correctly, that the Japanese strongly biased toward positive values, indicating the yen
official policy will be to prevent emergence from the range. call option and cap buyers are the more anxious to seek
protection (Figure 6). The large quantities of JPY borrowed
Despite this symmetrical distribution of volatility, we during the 2001-2005 quantitative easing campaign created
a large number of traders with short
JPY positions. The JPY they borrowed
FIGURE 7 — POUND VOLATILITY UNRESPONSIVE TO PRICE had to be repaid at some point, which
biases the distribution of returns to
With the exception of a few episodes (e.g., the January 1999 euro introduction
the upside.
and the 2003-early 2004 uptrend), the pound’s volatility vs. the dollar has been
generally unaffected by price level.
Even with this positive skew, the
distributions of returns remain fairly
normally distributed around the
mean. Just as was the case for the
CAD, the key date remains mid-1999,
six months after the introduction of
the euro. Prior to 1999, JPY returns
clustered about the six-month rolling
means with little deviation. Traders
sensed there was a right place to be in
this market, and everyone sensed it at
once.
Volatility’s lesson
Too many technicians persist in treat-
ing markets symmetrically. They say
each one is “just numbers” with a
smugness designed to hide their own
laziness. The lesson from volatility,
though, is each market has its own
unique characteristics and rhythms.
Trading a single system on them as if
they are substitutes is an approach
destined to end in failure.
Related reading
Other Howard Simons articles:
“Currencies and conventional U.S. investments” “The index approach to currency risk management”
Currency Trader, October 2006. Currency Trader, April 2006.
The financial media often reports on moves in the stock and Using dollar index futures to hedge non-dollar investments.
bond markets vis-à-vis currency fluctuations, but these rela-
“The yen stands alone”
tionships might not be what you expect.
Currency Trader, March 2006.
“What does the dollar really affect?” The usual rules of the currency world haven’t necessarily applied
Currency Trader, September 2006. to the Japanese yen. Will that continue to be the case?
Find out how stocks, gold, and other markets actually respond
“Remember the forgotten currency”
to changes in the dollar.
Currency Trader, February 2006.
“The dollar and its hidden risks” It’s often labeled a “commodity currency,” but the Canadian dollar
Currency Trader, August 2006. tends to be ruled by other factors. Here’s a look at the factors
A look at the dollar in light of its recent performance vs. the impacting Canadian dollar movements.
yen and the euro.
“What drives the dollar index?”
“Of commodities and currencies” Currency Trader, January 2006.
Currency Trader, July 2006. Market watchers often point to deficits and interest-rate
Analyzing historic market relationships reveals some differentials to explain the dollar’s behavior, but analysis shows
interesting facts about movements in many so-called these factors might not be in the driver’s seat after all.
“commodity currencies.”
“The dollar index and ‘firm’ exchange rates”
“The yen carry trade, currencies, and U.S. bonds” Currency Trader, December 2005.
Currency Trader, June 2006. The majority of currency traders are familiar only with the current
The latest source of anxiety for bond traders has some sur- floating-rate system. Are we about to enter a new “firm exchange
prising connections to the currency market. Find out the story rate” era dominated by the dollar and euro?
behind U.S. Treasuries, the Japanese yen, and the Chinese
yuan. Note: A special “Howard Simons: Advanced Currency
Concepts, Vol. 1” article collection will be on sale until Dec. 3
“The euro index: The dollar index meets its match” through the Active Trader store.
Currency Trader, May 2006.
A look at the development of a viable — and tradable — euro You can purchase and download past articles at
index. www.activetradermag.com/purchase_articles.htm.
Futures central
Here we go again!
Back to school
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 Oct. 26 liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.
ACCOUNT BALANCE
Rank Country 2006 Ratio* 2005 2007+ Rank Country 2006 Ratio* 2005 2007+
1 Singapore 38.029 28.5 33.269 39.461 13 Mexico -0.478 -0.1 -4.789 -1.592
2 Switzerland 50.737 13.3 50.709 52.852 14 France -38.648 -1.7 -33.577 -40.111
3 Russia 120.128 12.3 83.558 124.368 15 India -17.569 -2.1 -11.9 -25.109
4 Hong Kong 16.431 8.7 20.276 15.665 16 UK -55.943 -2.4 -48.332 -57.963
5 Netherlands 50.091 7.6 39.986 55.997 17 South Africa -14.002 -5.5 -10.118 -12.889
6 China 184.172 7.2 160.818 206.478 18 Australia -41.397 -5.6 -42.247 -42.325
7 Sweden 21.895 5.8 21.57 22.846 19 U.S. -869.129 -6.6 -791.504 -959.109
8 Taiwan 20.68 5.8 16.116 22.04 20 Spain -100.577 -8.3 -83.001 -115.08
9 Germany 120.579 4.2 114.896 120.688 Totals in billions of U.S. dollars
10 Japan 167.273 3.7 165.69 162.871
*Account balance in percent of GDP +Estimate
11 Canada 25.48 2.0 26.261 25.422
Source: International Monetary Fund, World Economic Outlook
12 Brazil 5.808 0.6 14.193 4.43
Database, September 2006
EUROPE
Australia’s September unemployment rate was Canada’s September jobless rate fell 0.1 percent to 6.4
unchanged from the month before at 4.8 percent — a 0.3- percent, a decline of 0.3 percent from September 2005.
percent drop from September 2005.
Event: The Options Intensive Event: The Traders Expo Las Vegas
Dates: Nov. 9-10 Date: Nov. 16-19
Time: 8 a.m -5 p.m. Location: Mandalay Bay Hotel & Casino,
Las Vegas
Location: The Options Institute at the CBOE,
Chicago For more information: Visit www.tradersexpo.com
For more information: Call (877) THE-CBOE •
• Event: 22nd Annual Futures & Options Expo
Event: Futures Trading Summit Date: Nov. 28-30
Date: Nov. 15-16 Location: Hyatt Regency Chicago
Location: Palms Hotel, Las Vegas For more information: Visit
www.futuresindustry.org/conferen-2156.asp
For more information: Visit www.fts.cme.com
•
•
Event: FXCM’s Currency Trading Expo
Event: Second Annual MARHedge Trading Forum
Date: Dec. 9-10
Date: Nov. 16
Location: MGM Grand, Las Vegas
Location: Stamford, Conn.
For more information: Visit
For more information: Visit www.marhedge.com
www.fxcmexpo.com
•
Carry trades involve buying (or lending) a currency with CMO = ((up-day movement – down-day movement)/
a high interest rate and selling (or borrowing) a currency (up-day movement + down-day movement)) * 100
with a low interest rate. Traders looking to “earn carry” will
buy a high-yielding currency while simultaneously selling An oversold condition is typified by a CMO value of
a low-yielding currency. below -50, while an overbought level is 50 or higher. For
more information on this indicator, see The New Technical
Chande Momentum Oscillator: The Chande Trader by Tushar Chande and Stanley Kroll. Also, the
Momentum Oscillator is calculated by dividing the differ- “Trading System Lab” in the December 2003 issue of Active
ence between up-day and down-day activity by the sum of Trader incorporated the CMO.
up-day and down-day activity over a given period. The This system trades from the long side only, entering
result is multiplied by 100 to create an indicator that oscil- when the indicators signal price is in an oversold condition.
lates between -100 and 100.
Using daily data as an example, if today’s price (close) is Volatility: The level of price movement in a market.
above yesterday’s price, today is an up day, the up-day Historical (“statistical”) volatility measures the price fluctua-
activity is the difference between today’s price and yester- tions (usually calculated as the standard deviation of closing
day’s price, and the down-day activity is zero. The opposite prices) over a certain time period — e.g., the past 20 days.
is true when today’s price is lower than yesterday’s price. Implied volatility is the current market estimate of future
volatility as reflected in the level of option premiums. The
higher the implied volatility, the higher the option premium.
GLOBAL ECONOMIC CALENDAR NOVEMBER/DECEMBER
MONTH
1 2 3 4
U.S.: ISM Japan: Monetary base U.S.:
Japan: Account ECB: Governing Unemployment
balances council meeting
Australia: Index of Germany:
commodity prices Unemployment
Norway: Central bank Philippines: Central
meeting bank meeting
6 7 8 9 10 11
Germany: Germany: Production Great Britain: U.S.: Wholesale Brazil: CPI
Orders index; insolvencies Monetary inventories; trade
received and Australia: Official reserve policy balance
manufacturing assets; reserve bank meeting committee Great Britain: Monetary
turnover Brazil: Monthly survey of meeting policy committee meeting
mining and manufacturing Germany: Korea: Reserve bank
physical production Foreign trade meeting
13 14 15 16 17 18
Japan: Balance of U.S.: Japan: Monetary U.S.: CPI Brazil:
payments; corporate Retail sales; survey; monetary policy Japan: Monetary policy meeting Monthly
goods price index PPI meeting ECB: Governing council survey of
Australia: Statement Great Britain: Great Britain: meeting trade
on monetary policy CPI Unemployment Brazil: Domestic federal public
Italy: Balance of Germany: Canada: Manufacturing debt and open market
payments CPI survey operations
20 21 22 23 24 25
U.S.: Leading indicators Canada: Retail Canada: Germany: Brazil:
Great Britain: Capital trade; leading CPI National accounts Monetary policy
issues indicators announcement
Germany: PPI Brazil: Monetary
Canada: Wholesale trade policy and credit
Hungary: Central bank operations; unem-
meeting ployment
27 28 29 30 1
Japan: U.S.: Durable goods U.S.: GDP Germany: Retail turnover; unemployment U.S.: ISM
Corporate service Canada: Canada: Trade Canada: GDP
price index Unemployment balance Australia: International reserves and Japan: Account
Brazil: Fiscal Poland: National Poland: National foreign currency liquidity balances
policy bank meeting bank meeting Italy: International reserves and foreign
Israel: National Slovakia: National currency liquidity Australia: Index of
bank meeting bank meeting Czech Republic: National bank meeting commodity prices
4 5 6
Japan: Canada: Interest rate Great Britain: Monetary Legend
Monetary announcement Policy Committee meeting CPI: Consumer Price GDP: Gross domestic
base Australia: Reserve bank Germany: Orders received Index product
meeting and manufacturing turnover ECB: European Central ISM: Institute for Supply
Brazil: Monthly survey of Brazil: Monthly survey of Bank Management
mining and manufacturing mining and manufacturing FOMC: Federal Open PPI: Producer Price Index
physical production physical production Market Committee
The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.
TRADE
Trade executed according to plan? Yes. Note: Last month’s long trade in the September 2006 euro futures
was stopped out at 1.2751 on Sept. 7 for a 0.0074 loss.
Outcome: As of Oct. 30, the trade was still open. Like
much of the forex market, NZD/USD has been mired in a
Note: Initial trade targets are typically based on things such as the his-
trading range for weeks — conditions that have persisted
on and off in 2006 and made it a challenging year for cur- torical performance of a price pattern or trading system signal.
rency traders. The trade almost reached its maximum prof- However, because individual trades are dictated by immediate circum-
itability the day after entry, but it has since gone in and out stances, price targets are flexible and are often used as points at which
of the money a few times; most recently, the price action has to liquidate a portion of a trade to reduce exposure. As a result, initial
been to the upside and the market looks to be making a run (pre-trade) reward-risk ratios are conjectural by nature.
TRADE SUMMARY
Date Currency Entry Initial Initial IRR MTM Date P/L LOP LOL Trade
stop target length
10/6/06 NZD/USD 0.6581 0.6713 0.6433 1.12 0.6656 10/30/06 -0.0075 (1.1%) 0.0049 -0.0111 16 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 (an open posi-
tion’s profit or loss at the current market price).
1discount
45% off regular price