FX Strategies

Global FX Strategy
JPMorgan Securities Ltd.

London, August 8, 2008
Alternatives to standard carry and momentum in FX
INVESTMENT STRATEGIES: NO. 47

• Carry and momentum are the most commonly followed trading strategies in
currency markets, and probably in any asset class.
• While standard approaches are profitable, they suffer several shortcomings.
Carry incurs high drawdown, particularly when volatility rises. The
drawdown on momentum strategies is also high, and returns are poor in
range-trading markets. Minor modifications to each strategy can improve
performance by better exploiting the interest rate/FX relationship.
• This paper proposes three such alternatives. (1) Forward Carry positions on
changes in expected cash rate spreads rather than current cash rate
differentials. (2) Forward Carry Overlay uses these spread movements to
time entry into and exit from traditional carry trades. (3) Forward
Momentum Overlay uses Forward Carry to time standard spot momentum
trades.
• As a stand-alone strategy, Forward Carry delivers similar risk-adjusted
returns to standard carry strategies (IR of approximately 0.8) but offers two
advantages. Returns are positively correlated with changes in volatility and
the drawdown is 1/4th to 1/2 that of traditional approaches.
• Using Forward Carry as an overlay on standard carry and momentum
baskets also reduces drawdown by half, and improves the performance of
momentum models in range-trading markets.
• Recommendations from these models and performance statistics are
reported regularly in the Investable Indices & Alpha Strategies section of
John NormandAC
JPMorgan’s FX Markets Weekly. (44-20) 7325-5222
john.normand@jpmorgan.com
J.P. Morgan Securities Ltd.
Simple enhancements to conventional approaches Kartikeya Ghia

Carry and momentum are the most widely-followed trading strategies in cur- (44-20) 7325-9865
kartikeya.s.ghia@jpmorgan.com
rency markets, and probably in any asset class. Indeed, these approaches
inform the majority of rule-based investment styles outlined in the Investment
Strategies series launched by JPMorgan in 2001 (see page 24). In currencies,
the standard carry model positions on libor differentials (buying high vs low Contents
yielders), while the standard momentum model positions on recent spot trends
Simple enhancements to conventional approaches 1
(buying the currency which has appreciated). While still profitable, these
Forward Carry 2
strategies come with pitfalls. Carry suffers high drawdown, particularly when
Forward Carry Overlay 5
volatility rises. Momentum strategies perform better in high-volatility environ-
Forward Momentum Overlay 7
ment but still incur sizable drawdown. In addition, trend-following systems
Conclusions 10
perform poorly when the dollar range trades.
Appendix tables 15
The certifying analyst is indicated by an AC. See page 23 for analyst www.morganmarkets.com
certification and important legal and regulatory disclosures.
J.P. Morgan Securities Ltd. Global FX Strategy
John Normand (44-20) 7325-5222 Alternatives to standard carry and momentum in FX
john.normand@jpmorgan.com August 8, 2008
This paper outlines three alternatives which improve Chart 1: Correlaton between currency manager returns and carry
strategies in G-10 and emerging markets
performance without much additional complexity.
Manager returns based on Barclay Currency Trader Index, monthly data,
rolling 12-mo window
• Forward Carry trades currencies based on changes in 1.0
expected cash rates rather than on current cash rate
0.8
differentials;
0.5
• Forward Carry Overlay uses Forward Carry to time the 0.3

entry into and exit from standard carry strategies; and 0.0
-0.3
• Forward Momentum Overlay uses Forward Carry to time correlation with G10 carry
standard spot momentum trades. -0.5 correlation with EM carry
-0.8
As suggested by the initial descriptions, all strategies 98 00 02 04 06 08
modify traditional approaches by incorporating rate
Source: JPMorgan
expectations. Some of these strategies such as Forward
Carry and Forward Carry Overlay were introduced in earlier
JPMorgan research1 and are refined in this paper. Forward • All models include robustness checks around alternative
Momentum Overlay draws on previous Investment Strate- parameters to the baseline model. These results are
gies papers on momentum trading in FX, fixed income and included in the main text and in the Appendix tables on
commodities (see page 24). page 15-19.
Backtesting for all models follows common guidelines: • Returns are reported for three currency blocs: (1) USD
pairs, (2) Most-liquid G-10 pairs and (3) Major G-10
• Results are calculated over the longest available sample pairs. The USD pairs are EUR/USD, GBP/USD, USD/CHF,
period, which is 1992 based on daily datasets captured in USD/NOK, USD/SEK, USD/CAD, AUD/USD, NZD/USD
JPMorgan’s Dataquery and on Bloomberg. We divide the & USD/JPY. Most-liquid G-10 pairs are the previous nine
dataset into two parts – parameter estimation is carried out USD pairs plus the five euro crosses of EUR/GBP, EUR/
during the in-sample period (1992 - 2006), with 2007- Q2 CHF, EUR/SEK, EUR/NOK and EUR/JPY. Major G-10
2008 used to test out-of-sample performance. Figures are pairs are the 14 Most-liquid G-10 pairs plus other com-
also reported for the first and second half of the in-sample monly-traded crosses such as AUD/CAD, CAD/JPY,
period (1992 - 98 and 1998 - 2006) as an additional robust- NOK/SEK, NOK/JPY, GBP/JPY, AUD/NZD, AUD/JPY and
ness check. NZD/JPY (22 pairs in total).
• Strategy returns are carry-adjusted based on 1-mo libor More detailed results by individual currency are available on
rates, such that the investor pays or earns the funding request.
rate on all trades.
1. Forward Carry
• Returns include transaction costs, which are calculated as Judging from its correlation with currency manager returns,
the average bid-ask spread each year of the sample period. the carry trade has been the industry’s mainstay for the past
These adjustments range from 0.02% per trade for USD/ five years, first in G-10 pairs and more recently in emerging
JPY to 0.05% on NZD/USD. Given the lack of daily bid- markets (chart 1). Carry’s popularity stems from three
offer data during the early 1990s, we backfill those years sources: the trading rule is simple (buy high vs low-
using 1995 spreads as a proxy. yielders); the inefficiency is persistent (the forward rate
bias); and the returns have been high over the past decade
• Since signals are based on end-of-day data, trades are (return-to-risk of 0.8 to 1.2 on G-10 and emerging markets
assumed to be executed the following day. baskets). Yet the negative returns on G-10 carry since mid-
1. See JPMorgan’s FX Barometer, J. Normand, Sep 2004 and Currencies in 2008: Is there anything but 2007 and on emerging markets baskets in early 2008 also
carry?, J. Normand, Nov 2007, both available on www.morganmarkets.com.
2
Kartikeya Ghia (44-20) 7325-9865 Alternatives to standard carry and momentum in FX
kartikeya.s.ghia@jpmorgan.com August 8, 2008
highlight the strategy’s chief pitfall: returns tend to move Chart 2. Returns on standard carry strategy vs FX volatility, 2006 - 08
inversely with volatility (chart 2), so are vulnerable to based on (1) annual returns for carry basket using Most-liquid G-10 pairs and
(2) annual changes in G-10 implied volatility as measured by JPMorgan VXY
cyclical and policy shocks such as recession and central
bank surprises. Drawdown is often significant, at some 20% 10%
Annual return on Standard Carry basket

for a typical carry basket. 8%
6%
Intuition: FX responds to rate changes as much as
4%
rate levels
Regardless of its long-term profitability, trading currencies 2%
only on carry ignores the other link between interest rates 0%

and FX: currencies respond as much to changes in rates as -2%
they do to current rate differentials. Rising rates relative to -4%
the rest of the world usually signals cyclical strength which -6%
draws capital inflows and sponsors currency appreciation, -4 -2 0 2 4 6
even for low-yielders. When rate spreads are stable, the Annual change in FX vol (VXY)
traditional carry dynamic tends to dominate, leading high
Source: JPMorgan
yielders to appreciate versus low-yielders.
There are numerous examples of this interplay in practice Chart 3: USD/JPY vs US - Japanese libor differentials
throughout the G-102. USD/JPY’s appreciation from mid-2006 0 80
to mid-2007, even as US - Japan libor spreads were stable
-100 90
(chart 3), illustrated the dominance of carry. The dollar’s
subsequent fall from mid-2007 to Q1 2008 as spreads nar- -200 100
rowed, even as the US remained the high-yielder, highlighted
-300 110
the dominance of spread changes. EUR/USD has responded
exclusively to spread changes over the past few years; rising -400 120
versus the dollar since 2006 as spreads narrowed, even
-500 130
though the US retained a rate advantage until early 2008 Japan - US libor
USD/JPY
(chart 4). -600 rates, bp 140
Strategy: trade FX in the direction of spread -700 150

98 99 01 03 05 07
changes
Source: JPMorgan
A simple strategy to capture this spread dynamic would be
to buy the currency in whose favor rates had moved over
some defined period, and to sell the currency when that rate Chart 4: EUR/USD vs Euro - US libor differentials
momentum reversed. This rule would apply regardless of 200 1.8
Euro - US libor
whether the focus currency were a high or a low-yielder, rates, bp
since funding currencies can rally as their yield deficit 1.6
90
diminishes. Since the strategy is based on the expected cash
rate differential, we call this approach Forward Carry, a term 1.4
-20
introduced in the 2004 publication JPMorgan’s FX Barom-
1.2
eter (J. Normand, Sep 2004).
-130
1
-240
0.8
EUR/USD
2 By contrast in emerging markets, rising rates relative to core markets typically represents a risk premium
for macroeconomic instability. Hence this trading rule generates decent returns (IR of 0.5 to 1) over long -350 0.6
sample periods for currencies where the policy framework has converged towards G-10 (Taiwan,
98 99 01 03 05 07
Poland, Mexico), but poor results (negative IR) for countries exhibiting less convergence (South Africa,
Hungary, Turkey). Source: JPMorgan
3
The model involves three parameters: Table 1. Performance of Forward Carry, 1992 - 2008
Sensitivity to FX volatility measured as correlation of strategy return with
• The reference interest rate is used to capture monetary change in JPMorgan’s VXY index of G-10 3-mo implied vol.
policy expectations over the near term. We test three Drawdown defined as deviation of index from its historic level high.
tenors: 1-month rates 1 month forward, 1-month rates 3
Forward carry
months forward and 3-month rates 3 months forward.
Standard carry
Most-liquid Major G-10
basket: carry-to- USD pairs
G-10 pairs pairs
• The lookback period is the interval over which the change risk (USD pairs)
1992 - 2006 (full sample)
in spread is measured. We test four possibilities: the Annualised return 5.6% 4.0% 3.7% 4.3%
change over the past 1, 3, 6 and 12 months. In general, Volatility 6.9% 5.1% 3.3% 3.8%
shorter lookback periods generate stronger results. IR 0.81 0.80 1.10 1.13
Correlation with trade-weighted USD -0.19 -0.13 -0.21 -0.27
Correlation with VXY -0.17 0.16 0.14 0.19
• The rebalancing frequency indicates how often the
change in spreads is calculated and trades executed – 1992 - 1998 (1st half)
Annualised return 2.2% 4.6% 4.3% 5.7%
daily, weekly or monthly. Given transaction costs, the
Volatility 6.9% 5.5% 3.6% 3.9%
choice of rebalancing frequency involves a tradeoff IR 0.31 0.84 1.20 1.47
between greater nimbleness/high turnover costs (daily) Correlation with trade-weighted USD 0.25 0.24 0.23 0.18
Correlation with VXY -0.41 0.40 0.35 0.30
and less flexibility/lower transaction costs (monthly
model). 1999 - 2006 (2nd half)
Annualised return 8.7% 3.6% 3.2% 3.1%
Volatility 6.7% 5.1% 3.2% 3.5%
Performance: comparable returns, less drawdown
IR 1.28 0.70 0.97 0.88
As a baseline case, consider a daily model using changes in Correlation with trade-weighted USD -0.18 -0.11 -0.23 -0.41
1-month rates 3 months forward over a 1-month lookback Correlation with VXY 0.14 0.03 0.05 0.19
period. Applied to a basket of nine USD pairs, the strategy

2007 - Q2 2008 (out of sample)
has generated a return-to-risk near 0.80 net of transaction Annualised return -0.1% 13.2% 9.0% 7.9%
costs since 1992, with good consistency across sub-periods Volatility 5.2% 6.0% 4.2% 4.2%
IR -0.01 2.21 2.17 1.89
(1992 - 98, 1999 - 2006) and larger currency blocs (Most-
Correlation with trade-weighted USD 0.06 -0.74 -0.92 -0.69
liquid G-10 pairs and Major G-10 pairs). For all three blocs, Correlation with VXY -0.13 0.60 0.84 0.50
performance has been particularly strong since 2007,
# transactions per month 0.5 15 25 39
highlighting the yield-centric nature of most currency
Max gain (monthly) 5.3% 4.1% 3.0% 3.3%
movements over the past two years. Drawdown is only a Max loss (monthly) -6.5% -4.1% -2.8% -2.0%
quarter the size of the traditional carry strategy (-7% on Max drawdown -17.6% -7.0% -4.4% -5.8%
Forward Carry) owing to the model’s ability to be long or Source: JPMorgan

short high-yield currencies depending on the direction of
spread momentum.
Chart 5. Foward Carry vs Standard Carry: excess returns index

For comparison, Table 1 also presents returns for the
index level, calculated for basket of Most-liquid G-10 pairs
standard carry strategy of simply buying high-yielders 200
versus low yielders. JPMorgan’s carry methodology differs
slightly from the conventional approach in that we rank 180 Standard Carry basket (carry-to-risk)
currencies by their carry-to-risk ratio (libor differential
160
divided by annualised spot FX vol) and hold a basket of the Forward Carry
top four pairs, rebalancing monthly (see JPMorgan’s FX 140
Barometer, Sep 2004). As is the case with carry models in
other asset markets, returns on the FX carry strategy have 120
tended to move inversely with volatility. This is illustrated
100
by the negative correlation between the standard carry
basket and aggregate FX volatility as measured by 80
JPMorgan’s VXY (see Introducing the JPMorgan VXY & 92 94 97 00 02 05 08
EM-VXY, J. Normand and A. Sandilya, Dec 2006). Source: JPMorgan
4
By contrast, all of the Forward Carry baskets tend to be weekly or monthly rebalancing results in weaker performance
positively correlated with implied volatility (Table 1 and chart (0.50 for USD pairs). Using longer lookback periods (3, 6 or
6), a characteristic which makes the approach an attractive 12 months also worsens performance (IR of 0.19 - 0.42 for
complement to traditional carry baskets. This patterns stems USD pairs).
from two sources. First, Forward Carry can be long or short
the high-yielders, depending on recent movements in rates 2. Forward Carry Overlay
spreads. Second, rate spreads have more momentum when Trying to time the entry into and exit from carry trades is
central bank uncertainty is high, a backdrop which is also nothing new. The traditional approach employs so-called risk
bullish for FX vol. Consequently, maximum monthly losses appetite measures, which are composites – and often
and maximum drawdown are much lower with Forward Carry
than with standard carry. Table 2. Forward Carry performance using other reference interest
rates, lookback periods and rebalancing frequencies
Information ratios based on 1992 - 2008 sample period for the three currency
One constraint with Forward Carry is that it generates more blocs of USD pairs, Most-liquid G-10 pairs and Major G-10 pairs
transactions per month than a standard carry basket, which Reference interest Rebalancing
has very little turnover. For a basket of nine USD pairs, rate frequency Lookback period IR
Forward Carry generates roughly 15 signals/trades per USD pairs
month, compared to an average of 1 trade per month with a 1 mo in 1 mo Daily 1 mo 0.77
standard carry model. (Turnover is low with standard models 1 mo in 3 mos Daily 1 mo 0.97
since pair selection is based on the rank-order of libor rates, 3 mos in 3 mos Daily 1 mo 0.87
which changes little from month to month). But even net of 1 mo in 3 mos Daily 1 mo 0.97
transaction costs, the strategy still generates high absolute 1 mo in 3 mos Weekly 1 mo 0.50
and risk-adjusted returns. 1 mo in 3 mos Monthly 1 mo 0.48
1 mo in 3 mos Daily 1mo 0.97
As a robustness check, Table 2 provides a heatmap indicat- 1 mo in 3 mos Daily 3mos 0.42
ing risk-adjusted performance as the three key parameters – 1 mo in 3 mos Daily 6mos 0.19
reference interest rate, lookback period and rebalancing 1 mo in 3 mos Daily 12mos 0.30
frequency – change. The baseline model is daily and trades

Most-liquid G-10 pairs
off changes in 1-month rates 3 months forward over the past
1 mo in 1 mo Daily 1 mo 1.04
month. This strategy generates an IR of 0.97 (outlined in
1 mo in 3 mos Daily 1 mo 1.29
table 2). Using alternative interest rates with a daily model
3 mos in 3 mos Daily 1 mo 1.13
and 1-month lookback does not alter performance much for
1 mo in 3 mos Daily 1 mo 1.29
any of the three currency blocs. Moving from daily to 1 mo in 3 mos Weekly 1 mo 0.43
1 mo in 3 mos Monthly 1 mo 0.41
Chart 6. Forward Carry vs Standard Carry: Correlation of annual 1 mo in 3 mos Daily 1mo 1.29
returns with FX volatility
based on (1) annual returns for on each strategy using Most-liquid G-10 pairs 1 mo in 3 mos Daily 3mos 0.43
and (2) annual changes in G-10 vol as measured by level changes in 1 mo in 3 mos Daily 6mos 0.28
JPMorgan VXY index. 1 mo in 3 mos Daily 12mos 0.42
1.0 Standard Carry
0.8 Forward Carry Major G-10 pairs
0.6 1 mo in 1 mo Daily 1 mo 1.07
0.4 1 mo in 3 mos Daily 1 mo 1.23
0.2 3 mos in 3 mos Daily 1 mo 1.21
0.0 1 mo in 3 mos Daily 1 mo 1.23
-0.2 1 mo in 3 mos Weekly 1 mo 0.53
-0.4 1 mo in 3 mos Monthly 1 mo 0.51
-0.6 1 mo in 3 mos Daily 1mo 1.23
-0.8 1 mo in 3 mos Daily 3mos 0.40
-1.0 1 mo in 3 mos Daily 6mos 0.28
95 98 01 04 07
1 mo in 3 mos Daily 12mos 0.58
Source: JPMorgan Source: JPMorgan
5
jumbles – of volatility, credit spreads and sometimes com- Chart 7. Constructing carry baskets with Forward Carry Overlay
modity prices. While good at characterizing current market Step 1
sentiment — bullish (bearish) on carry when spreads and Rank all currency pairs in descending order of risk-adjusted carry
volatility are below (above) average — these indicators have (carry-to-risk ratio)
two shortcomings. Firstly, they are often overfitted,
including a factor associated with every previous carry trade Step 2
unwind over the past decade (e.g. corporate distress, equity Eliminate pairs with carry-to-risk ratio < 0.2
market collapse, an emerging markets default). Secondly,
they can reverse frequently during market turbulence –
imposing high turnover.
Standard Carry Forward Carry Overlay
Intuition: rate cycles are easier to model than
Step 3a Step 3b
crises
Select top 4 pairs for For eligible pairs, calculate the
Rather than model the last crisis to anticipate the next carry inclusion in carry basket direction of spread momentum
unwind, an alternative would be to focus on more regular on the day prior to rebalancing.
cyclical shifts which undermine carry trades too. That is, if
currencies show an empirical tendency to rise and fall with Step 4a Step 4b
changes in spread momentum – the conclusion from the Rebalance monthly If spread momentum moving
against high-yielder, eliminate.
previous Forward Carry analysis – the riskiest carry trades
are those which hold high-yielders where cyclical conditions Step 5b
are softening, the central bank easing and interest rates Repeat until 4 eligible pairs
falling. The safest trades would be holding the high-yielders identified. Invest equally in each.
where the economy is accelerating and/or rates rising. Risks If < 4 pairs qualify, invest
would be balanced in a high-yielder where rates are stable. If equally in those.
Source: JPMorgan
this intuition is correct, Forward Carry could provide a useful
overlay to the standard carry framework. dropped and the process continues until four pairs are
identified. If four pairs do not qualify, the model equally
Strategy: condition carry trades on spread allocates capital amongst those pairs which fulfill the criteria.
movements This process is described in steps 1 - 5b. In its simplest form,
A simple application of this principle is to hold high yield the model applies the same forward carry rule developed in
currencies only where rates are rising, and to close exposure the previous section – the change in 1-month rates 3 months
when rate spreads move against the investment currency. forward over the past month. This overlay could be applied
Consider the example outlined in chart 7. The standard daily or monthly, but given that Forward Carry performs
approach to constructing carry baskets is to rank currency better as a daily than a monthly model – even adjusted for
pairs each month by rate differential and to buy the top- higher transaction costs – the performance of the overlay
yielding currencies versus the lowest-yielding ones. Our model should follow a similar pattern.
carry-to-risk framework ranks currencies by risk-adjusted
carry and invests only in those pairs offering a yield-to-vol Performance: higher returns, less drawdown
ratio of 0.2 or higher, as we find that imposing some modest Table 3 compares the performance of daily and monthly
threshold for inclusion in the carry basket tends to generate overlay models and that of the standard carry basket. During
stronger performance than imposing no threshold. Baskets the in-sample period (1992 - 2006) the daily overlay model
typically hold four pairs for diversification and are applied to the nine USD pairs generates comparable absolute
rebalanced monthly, since the rank order of currency pairs returns (5.9% p.a.) but has a higher volatility and slightly
does not change frequently. This process is illustrated in lower risk-adjusted return (0.73 vs 0.81 on the standard
steps 1 - 4a of the diagram. basket). Higher volatility results from greater concentration
risk with the overlay model, which sometimes invests in only
Forward Carry Overlay adds an additional filter which only one or two pairs if only that subset meets the inclusion
holds those currencies where spreads are widening in the criteria. However, since these pairs have more fundamental
high-yielder’s favour. If the pair lacks spread momentum, it is strength – they are high-yielders where rates are rising – the
6
strategy’s return distribution avoids the negative skew of a liquid G-10 pairs (10.4% vs 20.8%). Daily and monthly
standard carry basket’s returns. Thus, drawdown on the overlay strategies also raise the return correlation with
daily overlay model is half that of the standard carry basket volatility, which makes them more conservative carry
(-8.1% vs -17.6%). Note that we can mitigate the concentra- strategies. This characteristic also accounts for the
tion issue by expanding the universe of currencies from the underperformance of the overlay vs standard carry strate-
nine USD pairs to the 14 Most-liquid G-10 pairs. On this gies during the second half of the sample period (1999 -
broader basket, volatility is comparable to the standard carry 2006) when volatility was on a trend decline.
strategy (5.7%), but absolute and risk-adjusted returns are
higher (IR of 0.98). Drawdown is half that of the standard 3. Forward Momentum Overlay
basket (-9.6%). Momentum is the empirical tendency of outperforming
assets to outperform again in the future. In FX, the tradi-
Applying the overlay only once per month has mixed results. tional approach trades in the direction of previous spot
The overlay does not improve absolute or risk-adjusted movements – buy the currency pair which has rallied – as
performance for a basket of USD pairs, but it does lower determined by some filter or moving average rule. Despite
drawdown meaningfully for the broader universe of Most- the tendency to dismiss these frameworks as overly simplis-
Table 3. Performance of Forward Carry Overlay vs Standard Carry basket, 1992 - 2008
Sensitivity to FX volatility is correlation of strategy return with change in JPMorgan’s VXY index. Drawdown is deviation of index from its historic level high.
USD pairs Most-liquid G-10 pairs
Standard Carry Standard Carry with Standard Carry with Standard Carry Standard Carry with Standard Carry with
(carry-to-risk) daily overlay monthly overlay (carry-to-risk) daily overlay monthly overlay

Annualised return 5.6% 5.9% 5.0% 4.4% 5.6% 5.5%
Volatility 6.9% 8.1% 8.7% 5.6% 5.7% 7.1%
IR 0.81 0.73 0.58 0.77 0.98 0.77
Correlation with trade-weighted USD -0.19 -0.22 -0.07 -0.17 -0.11 -0.15
Correlation with VXY -0.17 0.13 0.13 -0.08 0.12 0.17
1992 - 1998 (1st half)

Volatility 6.9% 5.6% 6.4% 6.5% 3.2% 5.9%
IR 0.31 1.17 0.99 0.33 2.09 1.04
Correlation with trade-weighted USD 0.25 0.38 0.34 0.25 0.68 0.52
Correlation with VXY -0.41 0.00 -0.05 -0.13 -0.02 0.04
1999 - 2006 (2nd half)

Volatility 6.7% 10.2% 10.6% 4.7% 7.4% 8.3%
IR 1.28 0.52 0.36 1.33 0.63 0.58
Correlation with trade-weighted USD -0.18 -0.55 -0.40 -0.41 -0.66 -0.65
Correlation with VXY 0.14 0.29 0.32 0.14 0.21 0.30

Annualised return -0.1% 9.2% 8.6% -1.8% 4.9% 6.6%
Volatility 5.2% 9.7% 10.5% 5.3% 7.1% 8.1%
IR -0.01 0.95 0.81 -0.34 0.69 0.81
Correlation with trade-weighted USD 0.06 -0.70 -0.59 0.86 0.22 0.09
Correlation with VXY -0.13 0.60 0.51 -0.93 -0.41 -0.27
Transactions per month 0.5 2.9 0.9 1.0 6.0 2.0

Max gain (monthly) 5.3% 6.5% 6.5% 4.2% 5.3% 6.0%
Max loss (monthly) -6.5% -3.9% -4.9% -9.1% -4.0% -5.7%
Max drawdown -17.6% -8.1% -17.1% -20.8% -9.6% -10.4%
Source: JPMorgan
7
tic, the profits from such a strategy have been decent. The Chart 8. Foward Overlay vs standard carry: excess returns index
index level, calculated for basket of Most-liquid G-10 pairs
simple moving average crossover rules proposed in our FX
260 Standard Carry with daily Forward Carry
Barometer four years ago have generated a return-to-risk of Overlay
0.6 net of transaction costs over the past decade, with no Standard Carry with monthly Forward
deterioration in performance in the four years since the Carry Overlay
model was launched in 2004.3 This section proposes 200 Standard Carry
alternatives based on subsequent JPMorgan research on
momentum strategies (see Investment Strategies list, page
24) and on principles from the Forward Carry model just 140
outlined.
Intuition: investors consistently underreact, creat- 80

ing trends 92 95 98 01 04 07
Source: JPMorgan
In principle, no trend-following strategy should generate
consistent profitability if markets are efficient. However,
even the strongest proponents of market efficiency acknowl- Chart 9. Forward Overlay vs standard carry: Correlation of annual
edge its limitations due to market segmentation (which returns with FX volatility
based on (1) annual returns for each strategy using Most-liquid G-10 pairs and
impedes capital flows into mispriced markets) or behavioural
(2) annual changes in G-10 vol as measured byJPMorgan VXY
biases (which impede instantaneous responses to new
1.0 Standard Carry with daily Forward Carry Overlay
information). Momentum strategies benefit from two, well-
0.8 Standard Carry
documented behavioural biases of underreaction and
0.6
overreaction. Underreaction reflects investors inability or 0.4
unwillingness to adjust views and positions quickly; either 0.2
because they await fuller information to make a decision, or 0.0
because they are reluctant to appear non-consensus. -0.2
Accordingly, prices adjust slowly towards a market’s -0.4
fundamental value, in the process producing short-term -0.6
trends. Overreaction is also based on cognitive biases. -0.8
Although most investors adjust their expectations fully, -1.0
95 98 01 04 07
some extrapolate this positive news into the future, thus
Source: JPMorgan
leading prices to overshoot fundamental value.
Though both behavioural biases are well-known, they In practice, forecasts move incrementally – by roughly a
persist. As an example of underreaction, consider the manner quarter point per month over several months – before fully
in which economists adjust macro forecasts. Each month the discounting the new cyclical scenario (chart 10). Serial
Blue Chip survey publishes Wall Street economists’ consen- correlation in forecast changes is so strong that a down-
sus estimate on key macro variables such as growth, grade to growth forecasts this month has a 70% likelihood of
inflation and the Fed funds rate. Economists’ forecasts are being followed by another downgrade the following month
reasonable proxies for investors’ views since both camps (Table 4). An upgrade to growth forecasts have a 67%
employ similar frameworks in their decision-making. If likelihood of being followed by a similar move the next
economists/investors indeed reacted instantaneously to new month. Since incremental changes in views typically prompt
information (such as the impact of a credit crunch), their incremental changes in positions, this tendency to
projections would move in a stepwise fashion, perhaps from underreact creates trends in asset markets. (For a fuller
a forecast of 3% growth this year to a forecast of 1% growth. discussion of the relationship between expectational shifts
on macro variables and asset markets, see Which Trade?
3. Following standard approaches, the crossover rule calculated a short-term moving average for each Choosing tactical positions across asset classes, J.
currency pair (between 5 and 60 days) and a long-term moving average (10 and 200 days). It also
imposed a four-week filter rule which compared the daily close (London 5PM price) to spot’s four-week Normand, Jan 2004).
high and low. The trading rule was to open a position when two conditions are met: buy (sell) when 1)
the shorter-term moving average is above (below) the longer-term moving average; and 2) the 4-week
high (low) is exceeded.
8
The simple strategy Chart 10: Monthly changes in consensus estimate for US growth in
the year ahead, 1990 - 2007
Momentum in expectations provides the theoretical under-
0.5%
pinning for trend-following strategies; the issue is how best
to model it. Typical frameworks involve two parameters: the 0.3%
momentum measure (simple price momentum, exponentially- 0.1%
weighted moving average) and the rebalancing frequency.
-0.1%
• The momentum measure can be based on simple -0.3%
momentum, which calculates performance over a previous
-0.5%
lookback period, or an exponentially-weighted moving
average, which places more emphasis on recent observa- -0.7%
tions. We test four lookback periods for simple price
89 91 93 95 97 99 01 03 05 07
momentum (the past 1, 3, 6 and 12 months) and their
Source: JPMorgan, Blue Chip Economic Indicators monthly survey
equivalent decay factor for exponentially-weighted
moving averages.
• The rebalancing frequency can be of any length – intra-

Table 4: Conditional probabilities on consensus forecast revisions for
day, daily, weekly, monthly. For simplicity, and to fit the US growth and inflation, 1990 - 2007
approach of most investment managers, we focus on daily, probability of forecast revision in period t+1 given change in period t
weekly and monthly models rather than on intra-day ones Growth Period t+1
more common to algorithmic accounts. Period t Up Down
Up 0.67 0.33
The underlying return series can be based on spot or total Down 0.31 0.69
returns. Spot momentum is easiest to observe, so is most-
widely referenced in technical models. Total return momen-
Inflation Period t+1
tum – spot return plus accrued carry over the same horizon –
Period t Up Down
is not used by FX technicians but is commonly referenced in
Up 0.65 0.35
momentum models in other asset markets. The rationale is
Down 0.17 0.83
that high-performing assets often attract investor flows, thus
Source: JPMorgan, Blue Chip Economic Indicators monthly survey
extending trends. An FX momentum model which only tracks
spot returns thus ignores a key driver of realised return – the
accrued carry – which may motivate flows and additional
spot gains. most consistent performance to be based on medium-term
trends (see Momentum in Commodities, Ribeiro, Loeys
Applying these parameters to a basket of nine USD pairs and Normand, September 2006).
suggests the following:
• Momentum in total returns barely outperforms momen-
• Simple price momentum still generates a decent return- tum in spot returns for most combinations of rebalancing
to-risk over various sample periods but mainly if based on frequencies and lookback periods (chart 12 and table 6).
medium-term trends (longer lookbacks). For example with The degree of outperformance is small but is consistent
spot momentum, IRs tend to rise with the lookback with the view that trends in total return are a better
horizon for daily and monthly models, with the highest IR predictor of future performance, as they capture the
(0.60) realised for models based on price trends measured attraction of carry for some investors.
over the past year (table 5 and charts 11). There are
notable exceptions such as the performance trend of the • We find no evidence that exponentially-weighted moving
weekly model, but the generalisation still holds. This averages outperform simple price momentum measures,
finding is consistent with previous JPMorgan research on whether applied to spot or total returns (performance
momentum in commodities which found the strongest and tables available on request).
9
Refinements on the simple strategy: Condition by more due to lack of diversification, leading to a decline
price momentum on rate momentum in IR to 0.5 (charts 13 and 14, Appendix tables 1 and 2).
As refinements on the simple strategy, we examine three Performance improves, however, if we choose the top
additional parameters: pair selectivity, weighting scheme three or four pairs (IR of 0.7), suggesting some benefit
and overlay. from selectivity.
• Pair selectivity would trade only those currencies which Results are similar whether we rank currencies by absolute
exhibit the most momentum, rather than all pairs within a or risk-adjust returns, and whether we use spot or total
give universe (nine USD pairs or 14 most-liquid G-10 pairs, returns as the underlying series. Choosing top performers
for example). A simple rule would buy only the top one, from even broader baskets of the 14 most-liquid G-10 pairs
two or three currencies based on their performance over or the 22 major G-10 pairs also generates higher risk-
the lookback period. Currencies could be ranked by adjusted returns than trading the entire basket (Appendix
absolute or risk-adjusted performance, the latter to avoid tables 3 -6).
systematically choosing high-vol pairs.
• The is little evidence that optimised weights within a
• Weighting scheme refers to capital allocation within the basket of top performers improves risk-adjusted returns.
basket of chosen currencies. Equal capital allocation is the IRs are roughly comparable with both methods (figures
simplest approach, but previous JPMorgan research has available on request).
found that using Markowitz (optimised) weights improves
performance in commodities markets (see Optimizing • Overlaying price momentum with rate spread momentum
Commodities Momentum, Ribeiro and di Pietro, April improves performance materially. The simple strategy of
2008). buying a pair only when it exhibits both positive price
momentum and rate spread momentum – the Forward
• Overlay is a conditioning variable used to confirm an Carry principle – raises absolute returns, lowers volatility
initial price momentum signal. In technical analysis, the and raises risk-adjusted returns for almost all spot and
overlay typically comes from either a filter rule (breaking a total return momentum models (Appendix tables 7 and 8).
new high or low) or shorter-term moving average As a summary, consider charts 15 and 16, which trace out
(confirming a long-term trend), such as those used in the the IR for various momentum models with and without the
FX Barometer price momentum model. In this paper we overlay. For a daily spot model, IRs rise from a range of 0 -
explore a more fundamental overlay of Forward Carry. This 0.60 to a range of 0.50 to 0.96 (chart 15). For a daily total
trading rule would buy a currency only when it exhibits return model, IRs rise from a range of 0.12 to 0.61 to a
positive price momentum and when forward interest rate range of 0.54 to 1.06 (chart 16).
spreads are moving in the direction of the appreciating
currency. The objective is to counterbalance the noise of • The overlay strategy also outperforms traditional momen-
price signals with fundamental information from the rates tum strategies in range-trading markets. During periods
market. when the dollar is in a range – defined by a monthly move
of +/-1% in the trade-weighted USD – a basic spot
Applying these refinements to the nine USD pairs leads to momentum strategy generates profits in only 54% of those
several initial conclusions. months (chart 17). Using the overlay, which allows for no
position-taking unless rate momentum confirms spot
• Selectivity improves performance. As noted in the momentum, the percentage of profitable months during
previous section, a decent baseline model trades curren- range-trading environments rises to 60% (chart 18).
cies based on momentum over the past 12 months. Such a
model applied to spot returns for the nine USD pairs and Conclusions
rebalanced daily or monthly generates a return-to-risk of The enhancements discussed are hardly revolutionary. They
close to 0.6 (tables 4 and 5). If we rank each pair from are simple modifications to conventional approaches which
highest to lowest momentum and choose only the top one leverage the other key relationship between FX and interest
or two pairs, absolute performance rises but volatility rises rates: that currencies respond as much to spread changes as
10
Chart 11. Price momentum: Spot returns for USD pairs, 1990 - 2006 Chart 12. Price momentum: Total returns for USD pairs, 1990 - 2006
0.8 0.8
0.6
0.6
IR
0.4
0.4
IR
0.2
0.2
0.0
0.0 1mo 3mos 6mos 12mos

-0.2
1mo 3mos 6mos 12mos lookback period
lookback period Total return, daily rebalance
Spot, daily rebalance Total return w eekly rebalance
Spot, w eekly rebalance Total return, monthly rebalance
Spot, monthly rebalance
Chart 13. Best-of momentum baskets, USD pairs 1990 - 2006 Chart 14. Best-of momentum baskets, Most-liquid G-10 pairs 1990 - 2006
1.0 1.0
0.8 0.8
IR
0.6 0.6
IR
0.4 0.4
0.2 0.2
All 1 2 3 4 5 All 1 2 3 4 5
number of pairs number of pairs
Spot momentum (absolute)
Spot momentum (absolute)
Spot momentum (v ol-adjusted) Spot momentum (v ol-adjusted)
Total return momentum (absolute) Total return momentum (absolute)
Total return momentum (v ol-adjusted) Total return momentum (v ol-adjusted)
Chart 15. Forward Momentum Overlay on spot returns, USD pairs, Chart 16. Forward Momentum Overlay on total returns, USD pairs,
1990 - 2006 1990 - 2006
1.0 1.0
0.8 0.8
0.6 0.6
IR
IR
0.4 0.4
0.2 0.2
0.0
0.0
-0.2 1mo 3mos 6mos 12mos
1mo 3mos 6mos 12mos
lookback period lookback period
Spot momentum (daily ) Total return momentum (daily )
Spot momentum w ith ov erlay (daily ) Total return momentum w ith ov erlay (daily )
Spot momentum (w eekly ) Total return momentum (w eekly )
Spot momentum w ith ov erlay (w eekly ) Total return momentum w ith ov erlay (w eekly )
Source: JPMorgan
11
12
Table 5. Price momentum: Based on spot returns for USD pairs with various rebalancing frequencies (daily, weekly, monthly) and lookback periods (1mo, 3mo, 6mo, 12mo)
FX Barometer method Daily rebalance Weekly rebalance Monthly rebalance

(moving average Lookback horizon Lookback horizon Lookback horizon
crossover) 1 mo 3 mos 6 mos 12 mos 1 mo 3 mos 6 mos 12 mos 1 mo 3 mos 6 mos 12 mos
Annualised return n.a. 0.6% 0.1% 0.2% 3.9% 1.6% 3.2% 1.8% 0.0% 3.4% 1.5% 1.2% 3.6%
Volatility n.a. 5.5% 5.4% 6.1% 6.7% 4.5% 5.0% 6.0% 6.0% 5.6% 4.3% 5.2% 6.4%
John Normand (44-20) 7325-5222
IR n.a. 0.11 0.01 0.02 0.59 0.37 0.65 0.30 -0.01 0.60 0.34 0.24 0.56
Correlation with trade-weighted USD n.a. 0.10 -0.09 -0.16 -0.04 -0.12 -0.06 0.08 0.17 0.12 -0.19 -0.14 -0.09
Correlation with VXY n.a. 0.31 0.31 0.20 0.39 -0.09 0.55 0.49 0.37 0.25 0.25 0.35 0.41
1992 - 1998 (1st half)

Annualised return n.a. -0.2% 0.8% -0.6% 4.6% 2.9% 2.6% -0.3% -2.0% 4.5% 1.1% 0.8% 3.7%
Volatility n.a. 3.9% 4.7% 4.7% 3.7% 4.2% 2.7% 4.8% 3.4% 5.5% 2.6% 4.8% 3.4%
IR n.a. -0.05 0.17 -0.13 1.25 0.69 0.95 -0.06 -0.61 0.82 0.44 0.16 1.10
Correlation with trade-weighted USD n.a. 0.39 0.01 -0.40 0.13 -0.12 -0.06 0.08 0.17 0.12 0.03 -0.11 0.25
Correlation with VXY n.a. 0.40 0.42 0.00 0.57 -0.09 0.55 0.49 0.37 0.49 0.41 0.35 0.60
1999 - 2006 (2nd half)

Annualised return 2.3% 1.3% -0.6% 0.8% 3.3% 0.5% 3.8% 3.7% 1.7% 2.3% 1.8% 1.6% 3.5%
Volatility 7.7% 6.8% 6.2% 7.4% 8.7% 4.6% 6.5% 6.6% 7.3% 5.8% 5.6% 5.8% 8.5%
IR 0.30 0.19 -0.09 0.11 0.37 0.11 0.58 0.56 0.24 0.41 0.31 0.28 0.42
Correlation with trade-weighted USD -0.43 0.14 -0.32 -0.26 -0.18 -0.08 -0.37 -0.26 -0.39 0.01 -0.28 -0.28 -0.20
Correlation with VXY 0.13 0.35 0.24 0.40 0.38 -0.19 0.33 0.18 0.19 0.08 0.24 0.45 0.45

Annualised return 7.8% -0.9% -2.6% 4.9% 6.6% -6.8% 5.5% 3.2% 5.6% 0.5% 2.4% 8.3% 8.3%
August 8, 2008
Volatility 6.4% 5.7% 5.5% 6.0% 6.8% 5.1% 4.5% 5.5% 5.1% 4.1% 3.5% 5.2% 5.5%
Global FX Strategy
IR 1.21 -0.16 -0.47 0.83 0.98 -1.33 1.24 0.59 1.10 0.12 0.71 1.60 1.51
Correlation with trade-weighted USD -0.96 0.23 -0.40 -0.96 -0.92 0.63 -0.47 -0.85 -0.93 -0.69 -0.56 -0.96 -0.95
Correlation with VXY 0.89 -0.30 0.26 0.93 0.84 -0.67 0.29 0.79 0.85 0.73 0.59 0.93 0.90
Transactions per month 2.1 18.6 10.8 7.8 4.4 7.7 4.2 3.0 1.8 4.3 2.4 1.6 0.9
Max gain (monthly) 5.1% 5.5% 4.9% 4.5% 6.4% 3.5% 3.7% 4.5% 3.7% 5.3% 4.6% 4.6% 6.5%
Max loss (monthly) -11.4% -4.7% -4.2% -4.4% -6.0% -4.2% -4.2% -4.0% -4.4% -4.5% -5.3% -4.9% -5.7%
Max drawdown -14.1% -14.1% -14.2% -17.1% -15.9% -17.2% -9.3% -11.3% -14.8% -9.5% -16.0% -16.0% -10.9%
Source: JPMorgan
Table 6. Price momentum: Based on total returns for USD pairs with various rebalancing frequencies (daily, weekly, monthly) and lookback periods (1mo, 3mo, 6mo, 12mo)
FX Barometer method Daily rebalance Weekly rebalance Monthly rebalance

(moving average Lookback horizon Lookback horizon Lookback horizon
crossover) 1 mo 3 mos 6 mos 12 mos 1 mo 3 mos 6 mos 12 mos 1 mo 3 mos 6 mos 12 mos
Annualised return n.a. 1.1% 0.8% 0.7% 4.1% 1.8% 3.5% 0.8% -0.4% 3.3% 1.9% 1.7% 3.7%
Volatility n.a. 5.7% 5.7% 6.2% 6.7% 4.5% 5.2% 5.9% 5.1% 5.1% 4.3% 5.5% 6.6%
Kartikeya Ghia (44-20) 7325-9865
IR n.a. 0.19 0.14 0.12 0.61 0.41 0.68 0.14 -0.07 0.64 0.44 0.31 0.56
Correlation with trade-weighted USD n.a. 0.15 -0.02 -0.17 -0.03 -0.09 0.05 -0.16 0.08 0.14 -0.10 -0.16 -0.08
Correlation with VXY n.a. 0.27 0.38 0.27 0.33 0.00 0.55 0.33 0.31 0.26 0.21 0.31 0.33
1992 - 1998 (1st half)

Annualised return n.a. 0.1% 1.5% 0.4% 4.4% 3.2% 3.2% -1.7% -1.6% 4.3% 1.7% 1.2% 3.8%
Volatility n.a. 3.9% 3.7% 4.4% 3.5% 4.8% 3.3% 4.3% 1.3% 4.8% 2.9% 4.6% 3.3%
IR n.a. 0.02 0.42 0.08 1.27 0.66 0.95 -0.40 -1.25 0.90 0.57 0.25 1.15
Correlation with trade-weighted USD n.a. 0.45 0.01 -0.15 0.10 -0.09 0.05 -0.16 0.08 0.22 -0.02 -0.11 0.15
Correlation with VXY n.a. 0.37 0.48 0.15 0.48 0.00 0.55 0.33 0.31 0.53 0.31 0.25 0.42
1999 - 2006 (2nd half)

Annualised return 2.3% 2.0% 0.2% 1.1% 3.7% 0.7% 3.9% 3.1% 0.7% 2.3% 2.1% 2.2% 3.6%
Volatility 7.7% 7.0% 7.3% 7.7% 8.9% 4.2% 6.7% 6.3% 6.9% 5.4% 5.4% 6.5% 8.9%
IR 0.30 0.29 0.03 0.14 0.42 0.16 0.58 0.49 0.10 0.43 0.38 0.34 0.41
Correlation with trade-weighted USD -0.43 0.24 -0.18 -0.31 -0.18 -0.14 -0.33 -0.32 -0.50 0.02 -0.19 -0.27 -0.22
Correlation with VXY 0.13 0.30 0.38 0.46 0.34 -0.19 0.37 0.18 0.16 0.08 0.21 0.45 0.41

Annualised return 7.8% -1.3% -3.1% 5.0% 6.8% -7.6% 4.0% 2.4% 8.2% 1.2% 2.4% 8.3% 8.2%
August 8, 2008
Volatility 6.4% 5.8% 5.5% 6.3% 7.0% 5.3% 4.5% 5.6% 5.6% 4.2% 3.4% 5.2% 5.4%
Global FX Strategy
IR 1.21 -0.22 -0.57 0.80 0.97 -1.44 0.90 0.43 1.46 0.29 0.69 1.59 1.51
Correlation with trade-weighted USD -0.96 0.34 -0.20 -0.93 -0.90 0.55 -0.60 -0.82 -0.92 -0.52 -0.77 -0.95 -0.94
Correlation with VXY 0.89 -0.42 0.06 0.88 0.82 -0.61 0.45 0.74 0.82 0.54 0.77 0.92 0.89
Transactions per month 2.1 17.5 10.1 7.1 3.9 7.6 4.2 3.3 1.8 4.2 2.3 1.5 0.9
Max gain (monthly) 5.1% 5.5% 4.9% 4.5% 6.4% 3.5% 4.2% 4.5% 3.6% 5.0% 4.6% 4.6% 6.5%
Max loss (monthly) -11.4% -4.9% -3.5% -4.7% -6.0% -4.2% -4.2% -3.9% -4.4% -4.5% -5.3% -4.9% -5.7%
Max drawdown -14.1% -13.6% -15.2% -15.8% -23.8% -17.1% -7.8% -15.7% -15.7% -8.3% -14.4% -13.4% -12.2%
Source: JPMorgan
13
to spread levels, given the cyclical factors captured by Chart 17. Return on spot momentum vs moves in trade-weighted USD
monthly data
spread moves. As a stand-alone strategy, Forward Carry’s
chief advantages over carry is its lower drawdown and 8%
momentum model (monthly returns)

positive correlation with changes in volatility. These same 6%
advantages extend to its use as an overlay to basic carry and 4%
momentum models, both of which have traditionally relied on
2%
complicated risk-appetite filters or additional (and endog-
enous) price filters to time entry and exit. 0%
-2%
Some of these strategies have been previewed in previous
-4%
JPMorgan research, and this paper provides more compre-
hensive backtesting across a range of parameters and -6%
currency blocs. Recommendations from these models and -4% -2% 0% 2% 4% 6%
performance statistics are reported regularly in the
Trade-w eighted USD (monthly returns)
Investable Indices & Alpha Strategies section of Source: JPMorgan
JPMorgan’s FX Markets Weekly.
Chart 18. Returns on spot momentum with overlay vs moves in

trade-weighted USD
monthly data
8%
momentum model (monthly returns)
6%
4%
2%
0%
-2%
-4%
-6%
-4% -2% 0% 2% 4% 6%
Trade-w eighted USD (monthly returns)

Source: JPMorgan
Related publications on www.morganmarkets.com
JPMorgan Tradeable Currency Indices (TCIs),

J. Normand July 2, 2007.
Bloomberg ticker ALLX JPMQ
Introducing the JPMorgan VXY™ & EM-VXY™,

J. Normand and A. Sandilya, Dec 11, 2006.
Bloomberg tickers JPMVXYG7 and JPMVXYEM
14
Appendix tables
Appendix Table 1. Baskets of top performers based on spot momentum for USD pairs
12-mo lookback, monthly rebalancing, equal weights on each pair
Absolute price momentum baskets (number of pairs shown in Vol-adjusted price momentum baskets (number of pairs shown
Aggregate basket (9
column) in column)
USD pairs)
1 2 3 4 5 1 2 3 4 5
Annualised return 3.6% 5.3% 3.7% 4.2% 4.5% 4.5% 5.9% 5.3% 4.8% 4.0% 4.3%
Volatility 6.4% 11.7% 7.5% 6.0% 6.3% 6.6% 10.4% 7.6% 6.6% 6.5% 7.0%
IR 0.56 0.46 0.50 0.69 0.71 0.67 0.56 0.70 0.73 0.61 0.63
Correlation with trade-weighted USD -0.09 -0.28 -0.35 -0.15 -0.05 -0.09 -0.20 -0.27 -0.13 -0.09 -0.07
Correlation with VXY 0.41 0.19 0.34 0.37 0.43 0.47 0.19 0.37 0.41 0.44 0.46
1992 - 1998 (1st half)

Volatility 3.4% 6.5% 4.2% 2.9% 2.6% 3.1% 7.7% 4.9% 3.8% 3.4% 3.3%
IR 1.10 0.71 0.53 1.16 1.94 1.57 0.86 1.01 1.29 1.29 1.45
Correlation with trade-weighted USD 0.25 -0.09 -0.07 0.06 0.09 0.12 -0.21 -0.07 0.12 0.11 0.09
1999 - 2006 (2nd half)

Volatility 8.5% 15.3% 9.6% 8.0% 8.6% 9.0% 12.9% 9.6% 8.6% 8.6% 9.4%
IR 0.42 0.39 0.53 0.62 0.46 0.46 0.41 0.57 0.55 0.42 0.43

Annualised return 8.3% -1.1% 0.6% 4.0% 5.3% 7.6% 4.4% 2.0% 6.3% 8.7% 8.5%
Volatility 5.5% 12.1% 11.1% 9.9% 8.3% 7.5% 12.1% 9.5% 7.2% 7.3% 7.3%
IR 1.51 -0.09 0.07 0.55 0.73 1.05 0.37 0.21 0.87 1.19 1.17
# transactions per month 0.9 0.4 0.7 0.8 0.9 1.0 0.4 0.7 0.9 1.0 1.0
Max gain (monthly) 6.5% 7.2% 8.2% 7.3% 6.5% 7.4% 7.2% 6.9% 6.4% 6.4% 7.4%
Max loss (monthly) -5.7% -9.9% -8.9% -8.9% -8.1% -6.2% -8.5% -6.5% -5.9% -6.2% -5.8%
Max drawdown -10.9% -25.4% -16.7% -14.8% -15.0% -13.2% -20.5% -14.5% -14.1% -13.5% -14.9%
Appendix Table 2. Baskets of top performers based on total return momentum, USD pairs
Aggregate basket (9
column) in column)
USD pairs)
1 2 3 4 5 1 2 3 4 5
Volatility 6.6% 10.2% 7.4% 5.7% 6.2% 6.6% 10.3% 7.0% 5.4% 6.8% 6.5%
IR 0.56 0.36 0.60 0.77 0.76 0.65 0.61 0.90 0.99 0.66 0.71
1992 - 1998 (1st half)

Volatility 3.3% 5.7% 4.1% 3.3% 1.4% 2.2% 8.7% 2.7% 2.5% 3.2% 2.0%
IR 1.15 0.02 0.58 1.13 2.94 1.88 0.54 1.69 1.91 1.18 2.49
Correlation with trade-weighted USD 0.15 -0.13 0.00 0.09 -0.06 0.00 -0.31 -0.19 0.06 0.04 0.04
1999 - 2006 (2nd half)

Volatility 8.9% 12.3% 9.2% 7.4% 8.7% 9.1% 11.9% 9.2% 7.2% 9.0% 9.0%
IR 0.41 0.55 0.67 0.68 0.62 0.49 0.65 0.86 0.81 0.55 0.48

Volatility 5.4% 12.0% 10.3% 9.7% 8.1% 7.2% 11.8% 8.7% 7.1% 7.1% 7.2%
IR 1.51 0.05 0.53 0.69 1.14 1.20 0.66 0.30 0.81 1.46 1.30
Correlation with VXY 0.89 0.07 0.25 0.22 0.45 0.66 0.55 -0.13 0.42 0.59 0.69
# transactions per months 0.9 0.4 0.7 0.8 0.9 1.0 0.4 0.7 0.8 0.9 1.0
Max gain (monthly) 6.5% 7.2% 8.2% 7.3% 6.5% 6.4% 7.1% 6.9% 6.4% 6.4% 6.4%
Max loss (monthly) -5.7% -15.3% -9.1% -8.9% -8.1% -6.2% -8.5% -7.9% -5.6% -6.6% -6.7%
Max drawdown -12.2% -22.8% -17.3% -16.0% -13.8% -13.8% -19.2% -13.7% -12.6% -13.6% -11.8%
Source: JPMorgan
15
Appendix tables
Appendix Table 3. Baskets of top performers based on spot momentum, 14 Most-liquid G-10 pairs
Aggregate basket (14 most-
column) in column)
liquid G-10 pairs)
1 2 3 4 5 1 2 3 4 5
Volatility 4.2% 11.7% 7.9% 6.0% 6.1% 6.1% 10.7% 7.9% 6.5% 5.7% 5.7%
IR 0.61 0.47 0.56 0.65 0.67 0.75 0.46 0.59 0.70 0.67 0.70
1992 - 1998 (1st half)

Volatility 1.8% 7.4% 3.5% 3.3% 3.6% 3.8% 6.3% 4.0% 2.8% 1.5% 2.4%
IR 1.72 0.48 0.95 0.86 1.07 1.23 0.72 1.04 1.55 2.90 2.11
Correlation with trade-weighted USD 0.06 0.17 0.05 0.07 0.14 0.09 0.11 -0.15 -0.07 -0.10 0.03
1999 - 2006 (2nd half)

Volatility 5.7% 14.7% 10.6% 7.7% 8.0% 7.9% 14.0% 10.5% 8.8% 7.9% 7.6%
IR 0.36 0.49 0.51 0.61 0.55 0.57 0.38 0.50 0.54 0.42 0.40

Volatility 4.0% 12.1% 10.9% 9.9% 8.4% 7.6% 11.2% 8.9% 6.9% 6.7% 6.6%
IR 1.26 -0.10 0.16 0.52 0.72 1.13 0.20 0.39 0.87 1.13 1.39
Max gain (monthly) 4.1% 7.9% 8.2% 7.3% 6.5% 7.4% 7.9% 6.4% 5.4% 6.4% 5.8%
Max loss (monthly) -3.9% -9.9% -8.9% -8.6% -10.4% -8.2% -7.7% -6.5% -5.9% -5.9% -5.7%
Max drawdown -8.5% -25.3% -17.8% -14.8% -17.2% -15.8% -27.3% -17.2% -13.9% -14.4% -13.8%
Appendix Table 4. Baskets of top performers based on total return momentum, 14 Most-liquid G-10 pairs
14 Most-liquid G-10 pairs, 12-mo lookback, monthly rebalancing, equal weights on each pair
Aggregate basket (14 most-
column) in column)
liquid G-10 pairs)
1 2 3 4 5 1 2 3 4 5
Volatility 4.3% 10.7% 8.1% 6.2% 6.2% 6.0% 10.7% 6.9% 5.9% 5.7% 5.4%
IR 0.62 0.36 0.61 0.79 0.72 0.72 0.44 0.70 0.87 0.80 0.82
1992 - 1998 (1st half)

Volatility 2.4% 7.2% 4.8% 5.1% 4.5% 3.1% 5.9% 1.6% 1.5% 3.4% 3.0%
IR 1.18 0.12 0.57 0.66 0.73 1.36 0.66 2.41 3.49 1.23 1.33
Correlation with trade-weighted USD 0.05 0.17 0.11 0.09 0.18 0.04 0.04 -0.12 -0.08 -0.05 0.05
1999 - 2006 (2nd half)

Volatility 5.7% 12.8% 10.0% 7.1% 7.5% 8.0% 14.0% 9.5% 8.3% 7.4% 7.0%
IR 0.44 0.52 0.70 0.89 0.73 0.55 0.39 0.61 0.64 0.66 0.68

Volatility 3.7% 12.0% 10.1% 9.9% 8.7% 7.2% 10.9% 8.3% 6.3% 6.4% 6.6%
IR 1.46 0.08 0.40 0.84 1.18 1.34 0.51 0.17 0.74 1.00 1.20
Correlation with trade-weighted USD -0.93 -0.35 -0.24 -0.31 -0.58 -0.66 0.15 0.08 -0.33 -0.57 -0.72
Correlation with VXY 0.87 0.19 0.04 0.10 0.38 0.48 -0.37 -0.28 0.15 0.41 0.57
Max gain (monthly) 4.6% 7.9% 8.2% 7.3% 6.5% 6.4% 7.1% 5.9% 5.4% 6.4% 5.8%
Max loss (monthly) -3.9% -8.4% -7.9% -8.6% -10.4% -7.9% -7.9% -7.9% -5.6% -6.6% -6.7%
Max drawdown -10.7% -22.2% -16.1% -15.5% -16.7% -15.9% -22.1% -14.0% -11.8% -13.5% -12.5%
Source: JPMorgan
16
Appendix tables
Appendix Table 5. Baskets of top performers based on spot momentum, 22 Major G-10 pairs
Aggregate basket (22
column) in column)
major G-10 pairs)
1 2 3 4 5 1 2 3 4 5
Volatility 3.3% 9.8% 9.1% 8.5% 7.4% 7.1% 9.4% 8.1% 7.5% 5.9% 5.6%
IR 0.75 0.56 0.54 0.44 0.60 0.68 0.69 0.58 0.70 0.93 0.87
Correlation with trade-weighted USD -0.04 -0.14 -0.06 -0.05 0.01 0.01 0.12 0.15 -0.01 0.04 0.03
1992 - 1998 (1st half)

Volatility 3.1% 11.0% 9.1% 8.7% 6.8% 6.0% 7.5% 4.1% 5.7% 4.8% 3.9%
IR 0.84 0.45 0.70 0.40 0.73 0.91 1.03 1.70 1.06 1.26 1.21
Correlation with trade-weighted USD -0.07 -0.05 -0.25 -0.13 -0.10 -0.10 0.01 -0.12 -0.15 -0.20 -0.12
1999 - 2006 (2nd half)

Volatility 3.7% 9.5% 9.5% 9.0% 8.4% 8.4% 11.2% 10.4% 9.2% 7.1% 7.1%
IR 0.64 0.63 0.38 0.44 0.49 0.52 0.48 0.26 0.50 0.71 0.71
Correlation with trade-weighted USD -0.09 -0.15 -0.19 -0.12 -0.06 -0.02 0.17 0.01 -0.05 0.05 0.11

Volatility 5.0% 14.1% 13.2% 12.3% 11.0% 10.4% 13.3% 10.9% 9.0% 8.7% 8.1%
IR 0.46 -0.03 0.07 0.24 0.45 0.56 0.35 0.10 0.39 0.50 0.92
Correlation with trade-weighted USD -0.65 0.21 -0.36 -0.27 -0.62 -0.55 -0.65 -0.29 -0.59 -0.35 -0.73
Correlation with VXY 0.47 -0.39 0.20 0.07 0.45 0.35 0.53 0.13 0.44 0.18 0.59
Max gain (monthly) -4.3% -11.5% -8.7% -8.8% -10.7% -7.4% -7.7% -8.7% -7.1% -7.0% -6.6%
Max loss (monthly) 3.3% 9.8% 8.3% 7.3% 8.5% 7.5% 9.8% 6.3% 6.2% 6.4% 5.8%
Max drawdown -8.5% -27.7% -19.2% -23.4% -19.5% -16.2% -22.1% -26.9% -18.6% -15.8% -15.5%
Appendix Table 6. Baskets of top performers based on total return momentum, 22 Major G-10 pairs
22 Major G-10 pairs, 12-mo lookback, monthly rebalancing, equal weights on each pair
Aggregate basket (22
column) in column)
major G-10 pairs)
1 2 3 4 5 1 2 3 4 5
Volatility 3.6% 8.0% 8.1% 7.5% 7.4% 7.4% 9.3% 7.5% 6.5% 5.2% 5.7%
IR 0.79 0.72 0.62 0.62 0.68 0.72 0.63 0.71 0.79 1.16 0.80
Correlation with trade-weighted USD -0.04 -0.10 -0.05 -0.01 0.08 0.08 -0.01 0.11 -0.03 0.00 0.00
1992 - 1998 (1st half)

Volatility 3.5% 7.9% 9.1% 8.0% 7.7% 7.6% 8.1% 5.7% 4.3% 4.5% 4.4%
IR 0.70 0.62 0.52 0.50 0.54 0.57 0.63 1.21 1.21 1.35 1.03
Correlation with trade-weighted USD -0.02 -0.03 -0.10 -0.06 0.15 0.11 0.05 -0.19 -0.13 -0.19 -0.14
Correlation with VXY -0.15 -0.06 -0.06 -0.06 -0.09 -0.10 0.37 0.28 0.32 0.18 0.07
1999 - 2006 (2nd half)

Volatility 3.8% 8.6% 7.8% 7.5% 7.7% 7.6% 10.8% 9.0% 8.2% 6.0% 6.9%
IR 0.83 0.75 0.68 0.70 0.76 0.81 0.61 0.44 0.61 0.99 0.65
Correlation with trade-weighted USD -0.11 -0.13 -0.11 -0.05 0.04 0.05 0.05 -0.05 -0.15 -0.01 -0.06

Volatility 4.8% 14.2% 12.6% 12.5% 11.5% 10.5% 14.3% 11.4% 8.7% 8.8% 8.0%
IR 0.73 0.00 0.31 0.40 0.68 0.80 0.55 0.16 0.30 0.47 0.84
Correlation with trade-weighted USD -0.58 0.61 -0.12 -0.04 -0.16 -0.16 -0.45 0.20 0.38 0.40 -0.32
Correlation with VXY 0.40 -0.76 -0.09 -0.17 -0.07 -0.08 0.29 -0.39 -0.57 -0.59 0.12
Max gain (monthly) -4.2% -9.7% -8.7% -9.3% -10.7% -11.8% -9.7% -8.7% -7.1% -7.0% -6.6%
Max loss (monthly) 3.3% 9.8% 8.2% 7.3% 6.5% 6.3% 7.5% 6.3% 6.2% 5.9% 5.9%
Max drawdown -11.0% -18.2% -21.8% -25.5% -24.2% -22.2% -17.9% -17.7% -14.4% -13.4% -15.4%
Source: JPMorgan
17
18
Appendix Table 7. Forward Momentum Overlay applied to spot returns, USD pairs
Daily rebalancing Weekly rebalancing Monthly rebalancing
Spot momentum Spot momentum with overlay Spot momentum Spot momentum with overlay Spot momentum Spot momentum with overlay
1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos
Annualised return 0.6% 0.1% 0.2% 3.9% 2.1% 2.2% 2.0% 3.8% 1.6% 3.2% 1.8% 0.0% 2.3% 2.1% 2.3% 3.3% 3.4% 1.5% 1.2% 3.6% 3.0% 2.0% 2.0% 3.3%
Volatility 5.5% 5.4% 6.1% 6.7% 4.2% 4.1% 4.4% 4.0% 4.5% 5.0% 6.0% 6.0% 4.4% 4.4% 3.7% 4.4% 5.6% 4.3% 5.2% 6.4% 5.3% 4.7% 4.0% 5.0%
IR 0.11 0.01 0.02 0.59 0.50 0.54 0.46 0.96 0.37 0.65 0.30 -0.01 0.52 0.47 0.63 0.75 0.60 0.34 0.24 0.56 0.57 0.43 0.49 0.66
John Normand (44-20) 7325-5222
Correlation with trade-weighted USD 0.10 -0.09 -0.16 -0.04 0.03 -0.03 -0.14 -0.05 -0.12 -0.06 0.08 0.17 0.12 -0.21 -0.23 0.18 0.12 -0.19 -0.14 -0.09 0.19 -0.02 0.01 0.04
Correlation with VXY 0.31 0.31 0.20 0.39 0.33 0.34 0.31 0.47 -0.09 0.55 0.49 0.37 0.51 0.39 0.28 0.53 0.25 0.25 0.35 0.41 0.51 0.45 0.55 0.62
Appendix tables
1992 - 1998 (1st half)

Annualised return -0.2% 0.8% -0.6% 4.6% 2.0% 3.4% 2.0% 4.4% 2.9% 2.6% -0.3% -2.0% 4.4% 3.5% 3.2% 4.6% 4.5% 1.1% 0.8% 3.7% 5.4% 3.5% 3.4% 5.2%
Volatility 3.9% 4.7% 4.7% 3.7% 3.5% 3.5% 3.0% 3.5% 4.2% 2.7% 4.8% 3.4% 3.2% 3.6% 2.9% 3.4% 5.5% 2.6% 4.8% 3.4% 6.3% 4.9% 3.5% 4.8%
IR -0.05 0.17 -0.13 1.25 0.59 0.97 0.66 1.27 0.69 0.95 -0.06 -0.61 1.36 0.96 1.12 1.38 0.82 0.44 0.16 1.10 0.85 0.72 0.99 1.09
Correlation with trade-weighted USD 0.39 0.01 -0.40 0.13 0.31 0.12 -0.13 0.20 -0.12 -0.06 0.08 0.17 0.31 0.02 -0.20 0.06 0.12 0.03 -0.11 0.25 0.27 0.35 0.15 0.29
1999 - 2006 (2nd half)

Annualised return 1.3% -0.6% 0.8% 3.3% 2.2% 1.2% 2.0% 3.3% 0.5% 3.8% 3.7% 1.7% 0.4% 0.8% 1.6% 2.2% 2.3% 1.8% 1.6% 3.5% 1.0% 0.7% 0.7% 1.7%
Volatility 6.8% 6.2% 7.4% 8.7% 5.0% 4.6% 5.5% 4.6% 4.6% 6.5% 6.6% 7.3% 4.1% 4.3% 4.3% 4.7% 5.8% 5.6% 5.8% 8.5% 3.4% 4.4% 4.2% 4.9%
IR 0.19 -0.09 0.11 0.37 0.43 0.26 0.37 0.73 0.11 0.58 0.56 0.24 0.11 0.19 0.36 0.46 0.41 0.31 0.28 0.42 0.30 0.17 0.17 0.34
Correlation with trade-weighted USD 0.14 -0.32 -0.26 -0.18 -0.04 -0.32 -0.32 -0.31 -0.08 -0.37 -0.26 -0.39 -0.20 -0.35 -0.43 -0.49 0.01 -0.28 -0.28 -0.20 -0.38 -0.48 -0.53 -0.47

Annualised return -0.9% -2.6% 4.9% 6.6% 5.6% 4.7% 8.6% 9.5% -6.8% 5.5% 3.2% 5.6% 2.3% 1.6% 5.5% 6.2% 0.5% 2.4% 8.3% 8.3% 3.9% 4.7% 7.6% 7.3%
Volatility 5.7% 5.5% 6.0% 6.8% 4.7% 5.0% 5.4% 5.9% -6.8% 4.5% 5.5% 5.1% 4.8% 5.2% 5.5% 5.9% 4.1% 3.5% 5.2% 5.5% 3.9% 3.6% 4.5% 4.4%
IR -0.16 -0.47 0.83 0.98 1.18 0.94 1.59 1.62 -1.33 1.24 0.59 1.10 0.48 0.31 1.00 1.05 0.12 0.71 1.60 1.51 1.00 1.30 1.68 1.64
Correlation with trade-weighted USD 0.23 -0.40 -0.96 -0.92 -0.81 -0.92 -0.95 -0.94 0.63 -0.47 -0.85 -0.93 -0.61 -0.77 -0.94 -0.91 -0.69 -0.56 -0.96 -0.95 -0.90 -0.90 -0.95 -0.94
August 8, 2008
Correlation with VXY -0.30 0.26 0.93 0.84 0.72 0.84 0.92 0.88 -0.67 0.29 0.79 0.85 0.50 0.65 0.89 0.83 0.73 0.59 0.93 0.90 0.88 0.88 0.91 0.90
Global FX Strategy
Transactions per month 18.6 10.8 7.8 4.4 15.2 12.2 10.8 9.4 7.7 4.2 3.0 1.8 4.0 2.0 2.0 4.0 4.3 2.4 1.6 0.9 4.3 2.4 1.6 0.9
Max gain (monthly) 5.5% 4.9% 4.5% 6.4% 4.2% 3.9% 3.9% 3.9% 3.5% 3.7% 4.5% 3.7% 2.7% 3.3% 3.3% 3.3% 5.3% 4.6% 4.6% 6.5% 4.7% 5.3% 5.3% 5.3%
Max loss (monthly) -4.7% -4.2% -4.4% -6.0% -5.1% -3.2% -2.0% -2.6% -4.2% -4.2% -4.0% -4.4% -2.9% -2.9% -2.9% -2.9% -4.5% -5.3% -4.9% -5.7% -2.7% -2.9% -2.7% -3.0%
Max drawdown -14.1% -14.2% -17.1% -15.9% -9.3% -7.0% -7.3% -6.0% -17.2% -9.3% -11.3% -14.8% -9.4% -9.2% -9.4% -6.0% -9.5% -16.0% -16.0% -10.9% -5.1% -11.9% -10.6% -5.7%
Source: JPMorgan
Appendix Table 8. Forward Momentum Overlay applied to total returns, USD pairs
Daily rebalancing Weekly rebalancing Monthly rebalancing
Total return momentum Total return with overlay Total return momentum Total return with overlay Total return momentum Total return with overlay
1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos 1mo 3mos 6mos 12mos
Annualised return 1.1% 0.8% 0.7% 4.1% 2.4% 2.7% 2.5% 4.2% 1.8% 3.5% 0.8% -0.4% 2.3% 2.1% 2.6% 3.7% 3.3% 1.9% 1.7% 3.7% 2.9% 2.2% 2.3% 3.4%
Volatility 5.7% 5.7% 6.2% 6.7% 4.4% 4.2% 4.5% 3.9% 4.5% 5.2% 5.9% 5.1% 4.2% 4.6% 3.9% 4.2% 5.1% 4.3% 5.5% 6.6% 5.0% 4.5% 4.2% 4.8%
IR 0.19 0.14 0.12 0.61 0.54 0.66 0.56 1.06 0.41 0.68 0.14 -0.07 0.54 0.46 0.66 0.87 0.64 0.44 0.31 0.56 0.57 0.49 0.56 0.70
Kartikeya Ghia (44-20) 7325-9865
Correlation with trade-weighted USD 0.15 -0.02 -0.17 -0.03 0.07 0.02 -0.12 -0.01 -0.09 0.05 -0.16 0.08 0.09 -0.16 -0.06 0.16 0.14 -0.10 -0.16 -0.08 0.19 0.02 0.00 0.05
Correlation with VXY 0.27 0.38 0.27 0.33 0.30 0.41 0.33 0.44 0.00 0.55 0.33 0.31 0.52 0.42 0.31 0.51 0.26 0.21 0.31 0.33 0.52 0.44 0.52 0.54
Appendix tables
1992 - 1998 (1st half)

Annualised return 0.1% 1.5% 0.4% 4.4% 2.1% 4.0% 2.9% 4.9% 3.2% 3.2% -1.7% -1.6% 4.2% 3.6% 3.8% 5.1% 4.3% 1.7% 1.2% 3.8% 5.1% 3.7% 3.9% 5.3%
Volatility 3.9% 3.7% 4.4% 3.5% 3.8% 2.8% 3.4% 2.9% 4.8% 3.3% 4.3% 1.3% 2.9% 4.0% 3.2% 2.7% 4.8% 2.9% 4.6% 3.3% 6.0% 4.6% 3.3% 3.9%
IR 0.02 0.42 0.08 1.27 0.56 1.42 0.86 1.67 0.66 0.95 -0.40 -1.25 1.43 0.88 1.19 1.89 0.90 0.57 0.25 1.15 0.84 0.80 1.20 1.36
Correlation with trade-weighted USD 0.45 0.01 -0.15 0.10 0.38 0.10 0.02 0.21 -0.09 0.05 -0.16 0.08 0.28 0.06 -0.08 0.00 0.22 -0.02 -0.11 0.15 0.35 0.33 0.14 0.26
Correlation with VXY 0.37 0.48 0.15 0.48 0.37 0.57 0.32 0.54 0.00 0.55 0.33 0.31 0.53 0.47 0.29 0.48 0.53 0.31 0.25 0.42 0.73 0.61 0.57 0.67
1999 - 2006 (2nd half)

Annualised return 2.0% 0.2% 1.1% 3.7% 2.5% 1.6% 2.2% 3.6% 0.7% 3.9% 3.1% 0.7% 0.6% 0.9% 1.5% 2.5% 2.3% 2.1% 2.2% 3.6% 1.0% 0.9% 1.0% 1.7%
Volatility 7.0% 7.3% 7.7% 8.9% 5.1% 5.0% 5.5% 4.8% 4.2% 6.7% 6.3% 6.9% 4.1% 4.3% 4.2% 4.7% 5.4% 5.4% 6.5% 8.9% 3.2% 4.2% 4.6% 5.1%
IR 0.29 0.03 0.14 0.42 0.50 0.32 0.40 0.75 0.16 0.58 0.49 0.10 0.14 0.20 0.36 0.53 0.43 0.38 0.34 0.41 0.31 0.21 0.21 0.33
Correlation with trade-weighted USD 0.24 -0.18 -0.31 -0.18 0.04 -0.26 -0.35 -0.31 -0.14 -0.33 -0.32 -0.50 -0.14 -0.35 -0.44 -0.49 0.02 -0.19 -0.27 -0.22 -0.38 -0.44 -0.51 -0.47

Annualised return -1.3% -3.1% 5.0% 6.8% 5.4% 4.4% 8.7% 9.6% -7.6% 4.0% 2.4% 8.2% 2.1% 2.1% 5.8% 6.1% 1.2% 2.4% 8.3% 8.2% 4.1% 4.6% 7.5% 7.2%
Volatility 5.8% 5.5% 6.3% 7.0% 4.8% 4.9% 5.5% 6.0% 5.3% 4.5% 5.6% 5.6% 4.8% 5.2% 5.6% 5.9% 4.2% 3.4% 5.2% 5.4% 3.9% 3.6% 4.5% 4.4%
IR -0.22 -0.57 0.80 0.97 1.13 0.90 1.58 1.61 -1.44 0.90 0.43 1.46 0.44 0.41 1.04 1.03 0.29 0.69 1.59 1.51 1.06 1.30 1.68 1.63
August 8, 2008
Correlation with trade-weighted USD 0.34 -0.20 -0.93 -0.90 -0.80 -0.89 -0.95 -0.94 0.55 -0.60 -0.82 -0.92 -0.63 -0.83 -0.94 -0.88 -0.52 -0.77 -0.95 -0.94 -0.88 -0.91 -0.94 -0.94
Global FX Strategy
Correlation with VXY -0.42 0.06 0.88 0.82 0.71 0.80 0.90 0.88 -0.61 0.45 0.74 0.82 0.52 0.73 0.88 0.79 0.54 0.77 0.92 0.89 0.85 0.88 0.90 0.90
Transactions per month 17.5 10.1 7.1 3.9 15.1 12.0 10.7 9.2 7.6 4.2 3.3 1.8 2.0 1.0 1.0 1.0 4.2 2.3 1.5 0.9 4.2 2.3 1.5 0.9
Max gain (monthly) -4.9% -3.5% -4.7% -6.0% -5.2% -2.8% -2.1% -2.7% -4.2% -4.2% -3.9% -4.4% -2.9% -2.9% -2.9% -2.9% -4.5% -5.3% -4.9% -5.7% -2.7% -2.9% -3.0% -3.0%
Max loss (monthly) 5.5% 4.9% 4.5% 6.4% 4.4% 3.9% 3.9% 3.8% 3.5% 4.2% 4.5% 3.6% 2.7% 3.0% 3.3% 3.3% 5.0% 4.6% 4.6% 6.5% 4.7% 5.3% 5.3% 5.3%
Max drawdown -13.6% -15.2% -15.8% -23.8% -10.4% -6.2% -7.6% -4.6% -17.1% -7.8% -15.7% -15.7% -10.0% -8.7% -8.8% -6.2% -8.3% -14.4% -13.4% -12.2% -4.5% -10.1% -9.2% -6.7%
Source: JPMorgan
19
Appendix charts
Appendix Chart 1. Annual returns on Standard Carry, USD pairs and Appendix Chart 2. Annual returns on Forward Carry, USD pairs and
Most-liquid G-10 pairs Most-liquid G-10 pairs
30% 20% USD pairs
25% USD pairs Most-liquid G-10 pairs
15%
20% Most-liquid G-10 pairs
15% 10%
10%
5%
5%
0% 0%
-5%
-5%
-10%
-15% -10%
92 94 96 98 00 02 04 06 08 92 94 96 98 00 02 04 06 08
Appendix Chart 3. Annual returns on Forward Carry Overlay (daily Appendix Chart 4. Annual returns on Forward Carry Overlay (monthly
model), USD pairs and Most-liquid G-10 pairs model), USD pairs and Most-liquid G-10 pairs
30% 30%
USD pairs USD pairs
25% 25% Most-liquid G-10 pairs
Most-liquid G-10 pairs
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
-10% -10%
92 94 96 98 00 02 04 06 08 92 94 96 98 00 02 04 06 08
Appendix Chart 5. Annual returns on spot momentum, 12-mo Appendix Chart 6. Annual returns on spot momentum with overlay,
lookback, daily model, USD pairs and Most-liquid G-10 pairs 12-mo lookback, daily model, USD pairs and Most-liquid G-10 pairs
20% US pairs 12% US pairs
Most-liquid G-10 pairs 10% Most-liquid G-10 pairs
15%
8%
10%
6%
5% 4%
2%
0%
0%
-5%
-2%
-10% -4%
92 94 96 98 00 02 04 06 08 92 94 96 98 00 02 04 06 08
Appendix Chart 7. Annual returns on total return momentum, 12-mo Appendix Chart 8. Annual returns on total return momentum with overlay,
lookback, daily model, USD pairs and Most-liquid G-10 pairs 12-mo lookback, daily model, USD pairs and Most-liquid G-10 pairs
20% US pairs 12% US pairs
Most-liquid G-10 pairs Most-liquid G-10 pairs
10%
15%
8%
10%
6%
5% 4%
2%
0%
0%
-5%
-2%
-10% -4%
92 94 96 98 00 02 04 06 08 92 94 96 98 00 02 04 06 08
20
Source: JPMorgan
Appendix Table 9. Model summary for USD pairs
Carry model Forward Carry models Momentum models
Spot momentum (12-mo Spot momentum (12-mo Best-of basket (top 3 Forward Momentum Forward Momentum
Forward Carry Forward Carry
Standard carry Forward Carry lookback, daily lookback, monthly pairs, 12-mo lookback, Overlay (12-mo lookback, Overlay (12-mo lookback,
Overlay, daily Overlay, monthly
rebalance) rebalance) monthly rebalance) daily rebalance) monthly rebalance)

Annualised return 5.6% 4.0% 5.9% 5.0% 3.9% 3.6% 4.2% 3.8% 3.3%
Volatility 6.9% 5.1% 8.1% 8.7% 6.7% 6.4% 6.0% 4.0% 5.0%
IR 0.81 0.80 0.73 0.58 0.59 0.56 0.69 0.96 0.66
Correlation with trade-weighted USD -0.19 -0.13 -0.22 -0.07 -0.04 -0.09 -0.15 -0.05 0.04
Correlation with VXY -0.17 0.16 0.13 0.13 0.39 0.41 0.37 0.47 0.62
1992 - 1998 (1st half)

Volatility 6.9% 5.5% 5.6% 6.4% 3.7% 3.4% 2.9% 3.5% 4.8%
IR 0.31 0.84 1.17 0.99 1.25 1.10 1.16 1.27 1.09
Correlation with trade-weighted USD 0.25 0.24 0.38 0.34 0.13 0.25 0.06 0.20 0.29
Correlation with VXY -0.41 0.40 0.00 -0.05 0.57 0.60 0.48 0.55 0.75
1999 - 2006 (2nd half)

Volatility 6.7% 5.1% 10.2% 10.6% 8.7% 8.5% 8.0% 4.6% 4.9%
IR 1.28 0.70 0.52 0.36 0.37 0.42 0.62 0.73 0.34
Correlation with trade-weighted USD -0.18 -0.11 -0.55 -0.40 -0.18 -0.20 -0.19 -0.31 -0.47
Correlation with VXY 0.14 0.03 0.29 0.32 0.38 0.45 0.41 0.39 0.55

Annualised return -0.1% 13.2% 9.2% 8.6% 6.6% 8.3% 4.0% 9.5% 7.3%
Volatility 5.2% 6.0% 9.7% 10.5% 6.8% 5.5% 9.9% 5.9% 4.4%
IR -0.01 2.21 0.95 0.81 0.98 1.51 0.55 1.62 1.64
Correlation with trade-weighted USD 0.06 -0.74 -0.70 -0.59 -0.92 -0.95 -0.53 -0.94 -0.94
# transactions per month 0.5 15 2.9 0.9 4.4 0.9 0.8 9.4 0.9
Max loss (monthly) 5.3% 4.1% 6.5% 6.5% 6.4% 6.5% 7.3% 3.9% 5.3%
Max gain (monthly) -6.5% -4.1% -3.9% -4.9% -6.0% -5.7% -8.9% -2.6% -3.0%
Max drawdown -17.6% -7.0% -8.1% -17.1% -15.9% -10.9% -14.8% -6.0% -5.7%
Appendix Table 10. Model summary for Most-liquid G-10 pairs

Carry model Forward Carry models Momentum models
Spot momentum (12-mo Spot momentum (12-mo Best-of basket (top 3 Forward Momentum Forward Momentum
Forward Carry Forward Carry
Standard carry Forward Carry lookback, daily lookback, monthly pairs, 12-mo lookback, Overlay (12-mo lookback, Overlay (12-mo lookback,
Overlay, daily Overlay, monthly
rebalance) rebalance) monthly rebalance) daily rebalance) monthly rebalance)

Volatility 5.6% 3.3% 5.7% 7.1% 4.8% 4.2% 6.0% 2.6% 3.6%
IR 0.77 1.10 0.98 0.77 0.54 0.61 0.65 1.01 0.61
Correlation with trade-weighted USD -0.17 -0.21 -0.11 -0.15 -0.02 -0.06 -0.15 -0.14 0.05
1992 - 1998 (1st half)

Volatility 6.5% 3.6% 3.2% 5.9% 2.5% 1.8% 3.3% 1.7% 3.1%
IR 0.33 1.20 2.09 1.04 1.36 1.72 0.86 1.78 1.21
Correlation with trade-weighted USD 0.25 0.23 0.68 0.52 -0.04 0.06 0.07 0.11 0.34
Correlation with VXY -0.13 0.35 -0.02 0.04 0.37 0.43 0.41 0.42 0.69
1999 - 2006 (2nd half)

Volatility 4.7% 3.2% 7.4% 8.3% 6.3% 5.7% 7.7% 3.3% 3.7%
IR 1.33 0.97 0.63 0.58 0.30 0.36 0.61 0.71 0.24
Correlation with trade-weighted USD -0.41 -0.23 -0.66 -0.65 -0.20 -0.20 -0.22 -0.40 -0.49
Correlation with VXY 0.14 0.05 0.21 0.30 0.38 0.48 0.42 0.41 0.55

Annualised return -1.8% 9.0% 4.9% 6.6% 3.3% 5.1% 3.6% 5.9% 4.5%
Volatility 5.3% 4.2% 7.1% 8.1% 5.1% 4.0% 9.9% 4.2% 3.2%
IR -0.34 2.17 0.69 0.81 0.66 1.26 0.52 1.38 1.44
Correlation with trade-weighted USD 0.86 -0.92 0.22 0.09 -0.81 -0.93 -0.34 -0.89 -0.93
Correlation with VXY -0.93 0.84 -0.41 -0.27 0.69 0.87 0.12 0.79 0.88
# transactions per month 1.0 25 6.0 2.0 8.3 1.7 0.9 15.8 1.8
Max loss (monthly) 4.2% 3.0% 5.3% 6.0% -3.9% 4.1% 7.3% -2.9% -2.6%
Max gain (monthly) -9.1% -2.8% -4.0% -5.7% 4.1% -3.9% -8.6% 3.0% 2.8%
Max drawdown -20.8% -4.4% -9.6% -10.4% -11.1% -8.5% -14.8% -3.8% -5.0%
Source: JPMorgan
21
Investable Indices & Alpha Strategies is available on

Global FX Strategy
John NormandAC (44-20) 7325-5222
www.morganmarkets.com, by subscription and in FX
June 27, 2008
Kartik Ghia (44-20) 7325-9865

Markets Weekly.
Index & Alpha Strategy Update
• Currency indices 10 carry basket is down 3% while the G-10 overlay and EM
During the week G-10 implied vol rose 0.2% in contrast to
EM vol which fell 0.1%. YTD the G-10 vol index is roughly
carry baskets are up 3.6% and 1.9% respectively. The
forward carry indices had contrasting performances last This weekly publication provides performance statistics on
flat while the EM index up 0.9%. week; The USD pairs index declined 0.4% and is now up
JPY was the strongest performing currency last week -

8.8% YTD while the Major pairs index rose 0.1% and is up
4.9% YTD.
JPMorgan’s passive/benchmark products in currencies and
commodities, and recommendations from alpha strategies.
gaining 0.6% (up 2.1% YTD). Following weak economic
data, this week’s weakest performer was NZD which fell • Commodity indices
0.7%. GBP remains the largest decliner YTD (-5.4%) . The aggregate index gained 2.2% last week following the
The report has six components:

rise in energy and is up 37.9% YTD.
• Currency alpha strategies
All three carry baskets rose last week; the G-10 carry • Commodity alpha strategies
basket gained 0.2% and both the G-10 carry with overlay The long-only momentum index fell 0.7% last week but is
basket and the EM carry basket were up 0.3%. YTD the G- up 23.8% YTD. The Optimax (market neutral) index rose
0.8% and is up 1.3% YTD. 5
1.
1 List of index products on implied volatility for G-10 and
Table 1. Performance of indices and alpha strategies in currencies and commodities
Current Change (VXY, EM-VXY) or Returns (all others)
Product Positions level 1W 1M 3M 12M YTD
FOREIGN EXCHANGE
Indices/Benchmarks
G-10 implied volatility VXY
TM
TM
3 NA 10.1% 0.2% -0.1% -2.3% 3.9% 0.1%
emerging markets (VXYTM, VXY-EMTM); carry-adjusted,
trade-weighted currency indices (Tradeable Currency
EM implied volatility EM-VXY NA 9.3% -0.1% -0.9% -1.3% 2.5% 0.9%
1 USD trade-weighted*
EUR trade-weighted
USD TCI
EUR TCI
NA
NA
79.4
143.1
-0.4%
0.5%
0.4%
0.6%
0.5%
0.7%
-8.4%
10.6%
-3.6%
5.1%
Indices); and commodity markets (JPMorgan Commodity

GBP trade-weighted* GBP TCI NA 92.3 -0.2% -0.1% 0.1% -11.6% -5.4%
JPY trade-weighted JPY TCI NA 83.9 0.6% -1.8% -6.8% 9.4% 2.1%
AUD trade-weighted AUD TCI NA 136.9 0.3% -0.1% 6.3% 6.1% 6.5%
NZD trade-weighted* NZD TCI NA 131.8 -0.7% -3.4% -4.4% -9.2% -5.3%
CNY trade-weighted CNY TCI
TCIs also available for NOK, CHF, CAD, SEK, MXN, HKD, KRW, SGD & TWD.
NA 103.9 -0.1% 1.5% 4.5% 3.2% 3.5%
Curve Index).
Alpha strategies
G-10 carry IncomeFX Long GBP/USD, NZD/USD, EUR/CHF, AUD/USD 98.8 0.2% -0.6% 1.1% -13.2% -3.0%
G-10 carry with Forward Overlay NA Long EUR/USD, EUR/CHF and EUR/JPY 4 294.4 0.3% 0.2% 0.8% -0.5% 3.6%
Emerging Markets carry IncomeEM Short USD/PHP, USD/TRY and USD/MXN; Long USD/HKD and 109.6 0.3% 2.6% 7.2% 8.7% 1.9% 2.
2 List of alpha strategies such as carry (G-10 and EM),
2
USD/CNY
Forward Carry, Forward Carry Overlay and Momentum

Forward Carry (USD pairs) NA Short USD vs CAD and EUR; Long USD vs NOK, GBP, SEK, CHF, 240.3 -0.4% -0.6% 1.9% 15.3% 8.8%
AUD, JPY and NZD
Forward Carry (Major pairs) NA As above, plus long EUR vs NOK, GBP SEK, CHF and JPY; Short 244.2 0.1% 1.0% 3.0% 6.4% 4.9%
JPY vs CAD, NOK, GBP, AUD and long JPY vs NZD; Long AUD vs
CAD, NZD; long NOK/SEK
COMMODITIES
Indices/Benchmarks
Aggregate (35 commodities)
Alpha strategies
Momentum - Long only
JPMCCI
C-IGAR Brent, WTI, Gas Oil, Gasoline, Heating Oil, Silver, Gold, Copper,
NA 367.7
163.3
2.2%
-0.7%
7.4%
5.8%
20.8%
10.0%
55.2%
43.4%
37.9%
23.8%
3.
3 JPMorgan investable products giving access to indices
and alpha strategies, where available.
Soybean, Red Wheat, Corn, Cocoa
Momentum - Long/Short C-IGAR L/S Long as above, plus short Zinc, Nickel, Lead, Aluminium, Sugar, 151.2 0.9% 6.9% 11.5% 35.2% 21.9%
Feeder Cattle
Momentum - Optimax (Market Optimax Long Brent,WTI,Gas Oil,Silver,Lead,Copper,Lead,Coffee; Short 103.04 0.8% 0.6% 4.3% 7.5% 1.3%
Neutral) Gasoline,Heating Oil,Natural Gas,Gold,Zinc,Nickel,
Aluminium,Wheat,Sugar
4.
4 Current recommendations for alpha strategies.
* Although TCI returns in the table assume the investor is long the index, the product can also be sold to express a bearish view on the currency against major trading partners.
Source: JPMorgan
www.morganmarkets.com
The certifying analyst is indicated by an AC. See page 3 for analyst certification and important legal and regulatory disclosures.
5.
5 P&L for each index and alpha strategy. For indices, P&L
assumes the investor is long, though each of the indices
can also be sold short for bearish trades.
John Normand (44-20) 7325-5222 Index & Alpha Strategy Update
Kartik Ghia (44-20) 7325-9865

6 Metrics and performance charts for indices and strategies.

6.
Chart 1. Carry-to-risk rankings for G-10 currencies Chart 4. Performance of FX alpha strategies
Carry-to-risk = 1mo libor differentials/annualised daily spot vol over past 12 YTD performance
months. First currency listed is the long leg.
110
0.5
0.4 105
6 0.3 100
0.2 95
G-10 carry
0.1 Emerging markets carry
90
G-10 carry with Forward Overlay
0 Forward Carry
EUR vs JPY
USD vs JPY
EUR vs CHF
USD vs CHF
GBP vs USD
NZD vs USD
AUD vs USD
NOK vs USD
NOK vs EUR
EUR vs USD
SEK vs USD
GBP vs EUR
CAD vs USD
SEK vs EUR
85
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08
Chart 2. Carry-to-risk rankings for Emerging Markets currencies Chart 5. JPMCCI vs Commodity IGAR (Long-only, Long/Short and
Carry-to-risk = 1-mo implied rate differential from NDF or forward/annualised Conditional Long/Short momentum)
daily vol of forward outright rate over past 3 months. First currency listed is indexed, Jan 2008 = 100, excess returns
the long leg.
2.0 130
125
120
1.5
115
110
1.0 105
100
95 JPMCCI
0.5 C-IGAR Long-only
90
C-IGAR L/S
85 Optimax (Market Neutral)
0.0 80
$ vs HKD
$ vs CNY
PHP vs $
TRY vs $
BRL vs $
ZAR vs $
HUF vs $
RUB vs $
PLN vs $
ARS vs $
CLP vs $
SKK vs $
CZK vs $
$ vs TWD
MXN vs $
INR vs $
COP vs $
SGD vs $
ILS vs $
KRW vs $
Source: JPMorgan Chart 6. JPMCCI sector returns

Chart 3. VXYTM vs EM-VXYTM indices of implied volatility indexed, Jan 2008 = 100, excess returns
%, based on 3mo ATMF options
160
16
150 Energy Precious metals
VXY
14 Industrial metals Agriculture
EM-VXY 140
12 130
120
10
110
8
100
6 90
80
4
Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08
22
Analyst certification: The research analyst(s) denoted by an “AC” on the cover of this report (or, where multiple research analysts are primarily responsible for this report, the research
analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that:
(1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s
compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Explanation of Ratings:
Ratings System: JPMorgan uses the following sector/issuer portfolio weightings: Overweight (over the next three months, the recommended risk position is expected to outperform
the relevant index, sector, or benchmark), Neutral (over the next three months, the recommended risk position is expected to perform in line with the relevant index, sector, or benchmark),
and Underweight (over the next three months, the recommended risk position is expected to underperform the relevant index, sector, or benchmark). JPMorgan’s Emerging Market
research uses a rating of Marketweight, which is equivalent to a Neutral rating. Valuation & Methodology: In JPMorgan’s credit research, we assign a rating to each issuer
(Overweight, Underweight or Neutral) based on our credit view of the issuer and the relative value of its securities, taking into account the ratings assigned to the issuer by credit
rating agencies and the market prices for the issuer’s securities. Our credit view of an issuer is based upon our opinion as to whether the issuer will be able service its debt obligations
when they become due and payable. We assess this by analyzing, among other things, the issuer’s credit position using standard credit ratios such as cash flow to debt and fixed charge
coverage (including and excluding capital investment). We also analyze the issuer’s ability to generate cash flow by reviewing standard operational measures for comparable
companies in the sector, such as revenue and earnings growth rates, margins, and the composition of the issuer’s balance sheet relative to the operational leverage in its business.
Analysts’ Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy
of research, client feedback, competitive factors and overall firm revenues. The firm’s overall revenues include revenues from its investment banking and fixed income business units.
Other Disclosures: JPMorgan is the global brand name for J.P. Morgan Securities Inc. (JPMSI) and its non-US affiliates worldwide. Options related research: If the information
contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the
Option Clearing Corporation’s Characteristics and Risks of Standardized Options, please contact your JPMorgan Representative or visit the OCC’s website at http://
www.optionsclearing.com/publications/risks/riskstoc.pdf. Legal Entities Disclosures: U.S.: JPMSI is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member
of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL)
is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office
125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong:
J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong.
Korea: J.P. Morgan Securities (Far East) Ltd, Seoul branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888
011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with
the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities
and Futures Bureau. India: J.P. Morgan India Private Limited is a member of the National Stock Exchange of India Limited and The Stock Exchange, Mumbai and is regulated by the
Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance
and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Jakarta Stock Exchange and Surabaya Stock Exchange and is regulated
by the BAPEPAM. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission.
Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P.
Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission.
Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [mica (p) 207/01/2008 and Co. Reg. No.: 199405335R]
which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A.,
Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd
(18146-x) which is a Participating Organization of Bursa Malaysia Securities Bhd and is licensed as a dealer by the Securities Commission in Malaysia. Pakistan: J. P. Morgan
Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Country and Region Specific
Disclosures: U.K. and European Economic Area (EEA): Issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been
prepared in accordance with JPMSL’s Policies for Managing Conflicts of Interest in Connection with Investment Research which outline the effective organisational and admin-
istrative arrangements set up within JPMSL for the prevention and avoidance of conflicts of interest with respect to research recommendations, including information barriers,
and can be found at http://www.jpmorgan.com/pdfdoc/research/ConflictManagementPolicy.pdf. This report has been issued in the U.K. only to persons of a kind described in
Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as “relevant persons”). This
document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant
persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their
home jurisdiction Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd. Frankfurt Branch and JPMorgan Chase Bank, N.A., Frankfurt Branch who are
regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Australia: This material is issued and distributed by JPMSAL in Australia to “wholesale clients” only. JPMSAL
does not issue or distribute this material to “retail clients.” The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent
of JPMSAL. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Hong
Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for persons licensed by or
registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two
months’ prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider for derivative warrants issued by J.P. Morgan International Derivatives Ltd and listed on The
Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Japan: There is a risk that a loss may occur due
to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading,
JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which
was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local
Finance Bureau (kinsho) No. [82] Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been
edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Singapore: JPMSI and/or its affiliates may have a holding in any of the
securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Legal Disclosures section above. India: For private
circulation only not for sale. Pakistan: For private circulation only not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons
whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute
this material to members of “the public” as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party
or outside New Zealand without the prior written consent of JPMSAL. General: Additional information is available upon request. Information has been obtained from sources
believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively JPMorgan) do not warrant its completeness or accuracy except with respect to any
disclosures relative to JPMSI and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities
discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not
indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do
not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to
particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the
U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific
developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a JPMorgan
subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. “Other Disclosures” last revised June 30, 2008. Copyright 2008 JPMorgan Chase & Co.
All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of JPMorgan. 23
Investment Strategies Series

This series aims to offer new approaches and methods on investing and trading profitably in financial markets.
1. Rock-Bottom Spreads, Peter Rappoport, Oct 2001 24. Trading Credit Volatility, Saul Doctor and Alex Sbityokov,
2. Understanding and Trading Swap Spreads, Laurent August 2006
Fransolet, Marius Langeland, Pavan Wadhwa, Gagan 25. Momentum in Commodities, Ruy Ribeiro, Jan Loeys and
Singh, Dec 2001 John Normand, September 2006
3. New LCPI trading rules: Introducing FX CACI, Larry 26. Equity Style Rotation, Ruy Ribeiro, November 2006
Kantor, Mustafa Caglayan, Dec 2001 27. Euro Fixed Income Momentum Strategy, Gianluca Salford,
4. FX Positioning with JPMorgan’s Exchange Rate November 2006
Model, Drausio Giacomelli, Canlin Li, Jan 2002 28. Variance Swaps, Peter Allen, November 2006
5. Profiting from Market Signals, John Normand, Mar 29. Relative Value in Tranches I, Dirk Muench, November
2002 2006
6. A Framework for Long-term Currency Valuation, 30. Relative Value in Tranches II, Dirk Muench, November
Larry Kantor and Drausio Giacomelli, Apr 2002 2006
7. Using Equities to Trade FX: Introducing LCVI, Larry 31. Exploiting carry with cross-market and curve bond
Kantor and Mustafa Caglayan, Oct 2002 trades, Nikolaos Panigirtzoglou, January 2007
8. Alternative LCVI Trading Strategies, Mustafa 32. Momentum in Money Markets, Gianluca Salford, May
Caglayan, Jan 2003 2007
9. Which Trade, John Normand, Jan 2004 33. Rotating between G-10 and Emerging Markets Carry,
10. JPMorgan’s FX & Commodity Barometer, John John Normand, July 2007
Normand, Mustafa Caglayan, Daniel Ko, Nikolaos 34. A simple rule to trade the curve, Nikolaos Panigirtzoglou,
Panigirtzoglou and Lei Shen, Sep 2004 August 2007
11. A Fair Value Model for US Bonds, Credit and Equi- 35. Markowitz in tactical asset allocation, Ruy Ribeiro and
ties, Nikolaos Panigirtzoglou and Jan Loeys, Jan 2005 Jan Loeys, August 2007
12. JPMorgan Emerging Market Carry-to-Risk Model, 36. Carry-to-Risk for Credit Indices, Saul Doctor and Jonny
Osman Wahid, February 2005 Goulden, September 2007
13. Valuing cross-market yield spreads, Nikolaos 37. Learning Curves – Curve Trading Using Model Signals,
Panigirtzoglou, January 2006 Jonny Goulden and Sugandh Mittal, October 2007
14. Exploiting cross-market momentum, Ruy Ribeiro and 38. A Framework for Credit-Equity Investing, Jonny
Jan Loeys, February 2006 Goulden, Peter Allen and Stephen Einchcomb, November
15. A cross-market bond carry strategy, Nikolaos 2007
Panigirtzoglou, March 2006 39. Hedge Fund Alternatives, Ruy Ribeiro and Vadim di
16. Bonds, Bubbles and Black Holes, George Cooper, Pietro, March 2008
March 2006 40. Optimizing Commodities Momentum, Ruy Ribeiro and
17. JPMorgan FX Hedging Framework, Rebecca Vadim di Pietro, April 2008
Patterson and Nandita Singh, March 2006 41. Momentum in Global Equity Sectors, Vadim di Pietro and
18. Index Linked Gilts Uncovered, Jorge Garayo and Ruy Ribeiro, May 2008
Francis Diamond, March 2006 42. Cross-momentum for EM equity sectors, Vadim di Pietro
19. Trading Credit Curves I, Jonny Goulden, March 2006 and Ruy Ribeiro, May 2008
20. Trading Credit Curves II, Jonny Goulden, March 2006 43. Trading the US curve, Grace Koo and Nikolaos
21. Yield Rotator, Nikolaos Panigirtzoglou, May 2006 Panigirtzoglou, May 2008
22. Relative Value on Curve vs Butterfly Trades, Stefano 44. Momentum in Emerging Markets Sovereign Debt, Gerald
Di Domizio, June 2006 Tan and William Oswald, May 2008
23. Hedging Inflation with Real Assets, John Normand, 45. Active Strategies for 130/30 Emerging Markets
July 2006 Portfolios, Gerald Tan and William Oswald, June 2008
24 46. Hedging Illiquid Assets, Peter Rappoport, July 2008

FX Strategies

Enviado por

Dados do documento

Descrição original:

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

FX Strategies

Enviado por

Direitos autorais:

Formatos disponíveis

Global FX Strategy

JPMorgan Securities Ltd.

Alternatives to standard carry and momentum in FX

INVESTMENT STRATEGIES: NO. 47

Simple enhancements to conventional approaches Kartikeya Ghia

• Forward Carry Overlay uses Forward Carry to time the 0.3

Annual return on Standard Carry basket

only on carry ignores the other link between interest rates 0%

Strategy: trade FX in the direction of spread -700 150

period. Applied to a basket of nine USD pairs, the strategy

Forward Carry) owing to the model’s ability to be long or Source: JPMorgan

Chart 5. Foward Carry vs Standard Carry: excess returns index

frequency – change. The baseline model is daily and trades

USD pairs Most-liquid G-10 pairs

1992 - 2006 (full sample)

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

Transactions per month 0.5 2.9 0.9 1.0 6.0 2.0

Intuition: investors consistently underreact, creat- 80

• The rebalancing frequency can be of any length – intra-

0.0 1mo 3mos 6mos 12mos

FX Barometer method Daily rebalance Weekly rebalance Monthly rebalance

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

FX Barometer method Daily rebalance Weekly rebalance Monthly rebalance

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

momentum model (monthly returns)

Chart 18. Returns on spot momentum with overlay vs moves in

Trade-w eighted USD (monthly returns)

Related publications on www.morganmarkets.com

JPMorgan Tradeable Currency Indices (TCIs),

Bloomberg ticker ALLX JPMQ

Introducing the JPMorgan VXY™ & EM-VXY™,

Bloomberg tickers JPMVXYG7 and JPMVXYEM

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

Daily rebalancing Weekly rebalancing Monthly rebalancing

1992 - 1998 (1st half)

1999 - 2006 (2nd half)

2007 - Q2 2008 (out of sample)

Daily rebalancing Weekly rebalancing Monthly rebalancing

1992 - 1998 (1st half)