Forex Currency trader

7/30/2019 Forex Currency trader

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October 2012

Volume 9, No. 10

Strategies, analysis, and news for FX traders

Q4 FOREX: WHERE THE ACTION WILL BE P. 6

Europe and the Euro

battle reality p. 12

How to test your supportand resistance levels p. 16

Understanding importprices and the dollar p. 20


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CONTENTS

Contributors................................................. 4

Global Markets

FX in Q4 .......................................................6 Although all eyes seem to be on the Euro,

another currency is attracting analyst interest in

Q4.

By Currency Trader Staff

On the Money

The uncertainty principle ........................12

How long can the Euro defy logic?

By Barbara Rockefeller

Trading Strategies

Testing the signicance of

support and resistance ...........................16

This technique will allow you to determine if your

methodofdeningsupportorresistancehas

anypredictivevalue.

By Friedhelm Düsterhöft and Daniel Fernandez

Advanced Concepts

The dollar and non-petroleum

import prices ............................................20

Anupdateonthestrange—andoverlooked—

consequencesofU.S.monetarypolicies.

By Howard L. Simons

Global Economic Calendar ........................24

Importantdatesforcurrencytraders.

Currency Futures Snapshot.................25

Managed Money Review .......................25

Top-rankedmanagedmoneyprograms

International Markets............................ 26

Numbersfromtheglobalforex,stock,and

interest-ratemarkets.

Forex Journal ........................................... 30

Early entry for a swing trade in the Euro.

Looking for an

advertiser?

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nameforadirectlinktothe

ad in this month’s issue.

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FXCM

FXCMExpo

TheInternationalTradersExpo

Questions or comments?Submit editorial queries or comments to

[email protected]

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CONTRIBUTORS

4 October2012•CURRENCY TRADER

Editor-in-chief:MarkEtzkorn

[email protected]

Managing editor: Molly Goad

[email protected]

Contributing editor:

Howard Simons

Contributing writers:

BarbaraRockefeller,

Marc Chandler, Chris Peters

Editorial assistant and

webmaster: Kesha Green

[email protected]

President: Phil Dorman

[email protected]

Publisher, ad sales:

Bob Dorman

[email protected]

Classifed ad sales: MarkSeger

[email protected]

Volume9,Issue10.CurrencyTraderispublishedmonthlybyTechInfo,Inc.,POBox487,LakeZurich,Illinois60047.Copyright©2012TechInfo,Inc.Allrightsreserved.Informationinthispublicationmaynotbestoredorreproducedinanyformwithoutwrittenpermissionfromthepublisher.

TheinformationinCurrencyTradermagazineisintendedforeducationalpurposesonly.Itisnotmeanttorecommend,promoteorinanywayimplytheeffectivenessofanytradingsystem,strategyorapproach.Tradersareadvisedtodotheirownresearchandtestingtodeterminethevalidityofatradingidea.Tradingandinvestingcarryahighlevelofrisk.Pastperfor-mance does not guarantee future results.

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CONTRIBUTORS

qHoward Simons is president of RosewoodTrading Inc. and a strategist for Bianco Research.

He writes and speaks frequently on a wide range

of economic and nancial market issues.

qBarbara Rockefeller (www.rts-forex.com) is an international

economist with a focus on foreign exchange. She has worked as a

forecaster, trader, and consultant at Citibank and other nancial

institutions, and currently publishes two daily reports on foreign

exchange. Rockefeller is the author of Technical Analysis for Dum-

mies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock,

Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally , pub-

lished in Japan in 1999. A book tentatively titled How to Trade FX

is in the works. Rockefeller is on the board of directors of a large

European hedge fund.

qDaniel Fernandez is an active trader with a

strong interest in calculus, statistics, and eco-

nomics who has been focusing on the analysis of

forex trading strategies, particularly algorithmic

trading and the mathematical evaluation of long-

term system protability. For the past two years

he has published his research and opinions on his

blog “Reviewing Everything Forex,” which also includes reviews

of commercial and free trading systems and general interest ar-

ticles on forex trading (http://mechanicalforex.com). Fernandez

is a graduate of the National University of Colombia, where he

majored in chemistry, concentrating in computational chemistry.

He can be reached at [email protected].

qFriedhelm Düsterhöft is an active FX

trader and one of the major contributors to the

Asirikuy community founded by Daniel Fernan-

dez. His main interests are quantitative nancemethods and applications. He previously worked

as a mathematical technical assistant with a focus

on statistics, operations research, and program-

ming. He can be reached at [email protected].







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http://clk.atdmt.com/FXM/go/368876004/direct/01/



GLOBAL MARKETS

Heading into the fourth quarter, the global financial mar-

kets remain gripped by uncertainty. Big-picture questions

remain regarding the stability of the Euro, the pace of

Chinese economic slowdown, and the potential impact (if

any) of massive central bank quantitative easing programs.

Meanwhile, the U.S. is mired in full-time politicking

ahead of its November elections, putting the fiscal cliff on

the back burner until the lame-duck congressional session.

Will the threatened spending cutsand tax increases actually go

into effect, and what will hap-

pen if they do?

China jitters,

Euro quivers

BethAnn Bovino, deputy chief

economist at Standard & Poor’s,

says domestically, the fiscal cliff

issue makes it difficult for the

U.S. economy to gain traction inthe near term.

“The fiscal cliff has been driv-

ing the worries U.S. businesses

and consumers are facing,” she

says. “Will there be new taxes

in the forefront? Will consumers

no longer be able to claim the

mortgage tax deduction? It is

keeping people more cautious

on spending.”

FX in Q4

Although all eyes seem to be on the Euro,

another currency is attracting analyst interest in Q4.

BY CURRENCY TRADER STAFF

FIGURE 1: EURO/AUSSIE

Some analysts like the EUR/AUD pair as a short Euro play in the fourth quarter.

http://www.currencytradermag.com/index.php/c/Key_Concepts





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Bovino also points out the larger dampening effects of the global macroeconomic picture. “There are still a lot of

worries about what could happen to [Eurozone] members

who ask for additional assistance, and is the slowdown in

China turning into a hard landing?” she says, noting a sig-

nificant amount of Chinese exports head to the Eurozone,

and a sharper recession in the Eurozone could impact

Chinese growth.

China also factors into the perspective of Greg

Anderson, North American head of FX strategy at Citi

Group. He says his favorite trade is to “sell the Euro for

the fourth quarter,” and he sees the Euro/Aussie cross(EUR/AUD) as a way to play that outlook (Figure 1). “The

market has gotten very bearish on China and, as a result,

the Aussie has suffered,” Anderson explains.

The EUR/AUD rallied to 1.25 on Sept. 18 off its early-

August low, and Anderson sees potential for the Euro/

Aussie cross to retest the early August low around 1.16.

“The bet is the [China slowdown] is not as bad as what

is priced in,” Anderson says. “There probably won’t be any

RBA (Reserve Bank of Australia) cuts and the data will make

people more comfortable on China heading into 2013.”

On the other side of the cross, Anderson believes “themarket has gotten too complacent on Europe. Look for bad

economic numbers out of Europe and more rate cuts.”

Canada in the mix

Anderson also puts in a word for shorting the Euro/

Canada (EUR/CAD) cross in the fourth quarter (Figure 2).

If you expect U.S. economic data to continue to be better

than Europe’s, he argues, using the Canadian dollar in the

cross allows traders the “benefit of North America without

the credit risk.” He explains that, because the U.S. has yet

to craft solutions to its long-term fiscal and debt issues,there are worries U.S. debt could face future downgrades.

The Canadian picture is much different.

“The Bank of Canada is not implementing quantitative

easing, so that’s not a drag on the currency,” Anderson

says.

The bullish CAD perspective also reflects a certain out-

look on Asia. “If you believe Asian growth will see a bit

of a rebound, that’s good for commodity prices, and you

do get some benefit on CAD from that as well,” Anderson

notes. He sees a potential Q4 EUR/CAD target of 1.21.

FIGURE 2: EURO/CANADA

The EUR/CAD pair offers a short Europe/long North America trade, without U.S.

dollar risk.



GLOBAL MARKETS

Mexico in the spotlight

Nick Bennenbroek, head of currency strategy at Wells

Fargo, also calls for a short Euro play in the fourth quarter, but he suggests the Mexican peso (MXN) as the other side

of the cross. Mexico boasts solid economic trends, and both

industrial and retail activity are picking up, according to

Bennenbroek.

“Generally, it has a favorable set of fundamentals,” he

says. “Their central bank is on hold and not easing. The

peso would clearly gain if we were to see an improvement

in the European debt situation.”

A key to the peso’s outlook could be the current state of

risk sentiment or risk aversion. “The peso shows a rela-

tively high sensitivity to global equity market swings,”he says. “It tends to be a risk-sensitive currency.” Looking

ahead, Bennenbroek sees potential for the peso to move

toward 12.20 vs. the dollar. As of early October, the USD/

MXN rate was trading around 12.85.

“I’m looking to go long the Mexican peso on the crosses

vs. the Euro or the dollar,” Bennenbroek says. “It makes

sense in the fourth quarter.”

The bullish Mexican peso theme echoed among other

currency analysts. “I think that short Euro makes sense

since the structural issues in Europe are far from fixed and

we could still have some periods of high tensions,” says

Charles St-Arnaud, FX strategist at Nomura. “However, I

don’t think the trade should be done against the U.S. dol-

lar. I would prefer to do it in crosses like the GBP (British pound), SEK (Swedish krona), and MXN. The MXN peso is

particularly attractive given our positive view of Mexico.”

Nomura says the EUR/MXN pair (Figure 3) has the poten-

tial to retest the August lows around 16.10.

Alvise Marino, foreign exchange strategist at Credit

Suisse, also picks the Mexican peso as one of his favored

fourth-quarter plays. “Mexico is an undervalued currency

with good yield,” he says. “It is exposed to one of the

regions of the world with one of the better growth rates —

the U.S. — and from a valuation standpoint, Mexico is of

the cheapest currencies in the FX spectrum.”Marino also highlights growth differentials, noting

“Europe has a massive recession and Asia is slowing”

while the U.S. has “some momentum.” Mexico has large

trade ties to the U.S. and benefits from a growing outlook

here.

Enrique Alvarez, head of Latin American research at

Ideaglobal, cites the positive growth and yield differential

outlook for the Mexican economy and currency. He fore-

casts a 3.5-4% GDP growth rate for Mexico in 2012. “It’s a

solid growth rate with a large growth differential to devel-

oped markets,” he says.

FIGURE 3: EURO/PESO

After bouncing off its June-July lows, the EUR/MXN pair began to sag again in mid-

August.



http://clk.atdmt.com/FXM/go/416656061/direct/01/



GLOBAL MARKETS

Looking at Mexican growth, Alvarez explains that muchof it is export driven, but domestic demand and consump-

tion are coming back. “There is flexibility to pump the

consumer side if something happens to the external side,”

he says.

Currently, the central bank lending rate is at 4.5%, which

is wildly attractive compared to the U.S., Europe, and

Japan. Overall, Mexico’s monetary policy outlook is stable,

Alvarez says, although he sees the potential for higher

rates in the second half of 2013 contingent on how the

inflation outlook plays out.

A monthly chart of the peso shows the Mexican currency

remains above pre-Lehman Brothers collapse levels vs. the

dollar (Figure 4). In August 2008, the peso was trading as

low as 9.85, but it then shot up to 15.58 in March 2009 and

has since remained above 11.00.

Alvarez says the Mexican authority’s willingness to

allow the currency to appreciate is a key factor driving the

current peso fascination.

“The Mexican authorities have an inflation problem

generated by higher import prices for food stuffs, such as

corn,” he says. “You have to pay for these items in dollars,

but as the currency appreciates, the local cost in pesos is

smaller.”Alvarez compares the peso’s recent trend to the situation

in the Brazilian currency, the real (BRL). “Brazil is busy

intervening in the market, but Mexico is letting their cur-

rency appreciate,” he explains. “That’s one of the major

reasons the peso is on the preferred side. Mexico is using

it as a buffer against imported inflation. It creates a clearer

path for investors to go long the peso.”

Also, while the Mexican economy is heavily linked to

the U.S., Alvarez notes the country has been diversifying

its export destinations in recent years, including significant

inroads into Latin America, which would help buffer the

Mexican economy in the event of a downturn in the U.S.

Another twist that benefits Mexico in this regard: “Every

time the U.S. slows, they offshore more production into

Mexico to take advantage of the cost basis,” Alvarez says.

“Every time you see a plant close in Michigan or Ohio, a

lot of that work gets done in Mexico.”

Peso targets

Alvarez expects additional peso appreciation into year-

end, with an initial USD/MXN target at 12.50 and a

break off that level opening the door to a move to 12.30.

FIGURE 4: DOLLAR/PESO

In September the USD/MXN pair approached its 2012 lows.


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“[Mexican authorities] are going to let the currency go atleast until they get to 12.00,” he says. “It helps them to

control inflation.”

On the crosses, Alvarez describes a long MXN/BRL

trade as an “intervention story,” explaining the BRL is

locked in a range because the Brazilian authorities have

“made it very clear they don’t want the currency to appre-

ciate more than two to the dollar.”

Alvarez also argues for long Mexican peso plays vs. the

Chilean and Colombian pesos. “Those currencies have

strengthened so much it has undercut their export sectors,”

he explains. Bottom line? “Long MXN on all three sides,”

he concluded.

Back to the U.S.

Of course, there’s bound to be action in the balance

between the U.S. dollar and the Euro (Figure 5). “We are

bullish on the U.S. dollar vs. the Euro — that’s our number

one call,” says Michael Woolfolk, managing director at

BNY Mellon. “We think the Euro has become overvalued

recently. We don’t think the Euro appreciation was fully

justified by the fundamentals. We expect further down-

ward adjustment to the economic outlook for Europe and

we still think there is a material chance for a Greek exit.”Woolfolk, who says he sees a better than 50% chance

of a Greek exit from the Eurozone by year-end, points to

the 1.25 level for the EUR/USD pair as an initial objective,

with the potential for additional losses.

Offering a divergent view, Bob Lynch, head of G-10 FX

strategy Americas HSBC, says his firm expects the Euro to

move up to 1.35. “We think the dollar is going to be weak-

er on the back of renewed concerns on the fiscal backdrop

highlighted by post-election negotiations,” he says. That

contrasts with Lynch’s expectation of “a more stable back-

drop in the Eurozone.”

On the U.S. side of the equation, Lynch says how the

U.S. manages the fiscal cliff is key.

“We don’t necessarily see it as a positive for the dollar

in any scenario,” he says. “If it hits, we could see further

Fed easing. If it is postponed, we could see better growth

prospects but government sovereign credit ratings could

be at risk.”

There are many conflicting forces at play as the year

winds to a close. Jeremy Lawson, senior U.S. economist at

BNP Paribas says his firm sees the fourth quarter as a chal-

lenge for the global economy as a whole. y

FIGURE 5: EURO/DOLLAR

Most analysts foresee a weaker Euro vs. the dollar in Q4, although there are some

divergent opinions.



More than 70% of financial professionals surveyed byState Street Global Advisors believe that over the next yearwe will get a “tail-risk event,” known to regular folks asa shock, that triggers a sell-off and possibly poses a realthreat to the financial system. In other words, Lehmanredux.

The list of tail-risk events includes: global recession,Eurozone breakup, bank insolvency, China hard-landing,oil prices, and new asset bubbles arising from central bank stimulus. Notice the survey respondents fear a cyclicalevent (recession) as much as they do on a structural one

(Eurozone breakup).And, according to the 300 elite global managers sur-

veyed, currency markets are most at risk.Poppycock. First of all, a true tail-risk event is really a

Black Swan — something that has not been imagined. Butwe can imagine these possibilities, so they can’t be trueBlack Swans. Also, we have experienced most of theseevents before, even a Eurozone breakup if we extrapolatefrom the demise of its two predecessors. A hard landing inChina is the only one that would be new.

As for currency markets: Every currency cannot beattacked at the same time — when you are selling one, youare buying another. Maybe the currency market is purport-

edly the most at risk because if investors are exiting theEurozone and emerging markets, they must be buying dol-lars (or gold). For this group of survey respondents, this isa bad outcome, since they bought into the gospel of assetdiversification several decades ago. A strong dollar overany extended period invalidates all that work. As PaulVolcker said after the Plaza Accord and before the LouvreAccord, it’s a funny world in which a strong dollar is a badthing.

Lehman taught us two things: Fair value has no meaningwithout liquidity, and hedges are always imperfect, some-times fatally so. Throughout the 2007-2009 crisis there wasnever a systemic shortage of liquidity in the FX market.

Forex forwards and options continued to serve as hedgeswith exactly the same efficacy as they did before the crisis.

The rise in uncertainty is a mixed blessing. It can beviewed as a good thing because of the observer effect —the idea that the act of observing a process can changethe process being observed. If we’re worried about banksfailing or China having a hard landing, perhaps banks andChina will take better care to avoid the thing that is feared.On the other side of the coin, though, listing the thingsto be feared risks neglecting other things that should beequally feared.

It’s easy to draw up a list of neglected fears, or ones thatcould just as easily have been included in the State Streetsurvey:

1. The U.S. Congress does not address the fiscal cliff andthe U.S. does indeed go into recession.

2. QE3 does not work, as Philadelphia Fed PresidentCharles Plosser believes. Fed chief Ben Bernankecomes to think the unemployment situation in the U.S.is structural, and the Fed declares itself out of tools.

3. Mitt Romney wins the election and ratings agenciesdowngrade U.S. debt on the grounds an unrealisticdeficit-cutting plan will not work and will insteadresult in never-ending and ever-rising public sector

deficits.4. The U.S. and Israel go to war with Iran and/or Hugo

Chavez departs the political scene in Venezuela. In both cases, the price of oil goes ballistic.

5. Massive fraud is uncovered at a bank, broker, or met-als dealer, including counterfeiting of gold bars. (Inheaven, Newton laughs.)

6. The European Stability Mechanism is leveraged byfour times to €2 trillion, but it’s still not enough tocontain a run on Spanish and Italian bonds, whoseyields rise above 7%. Governments fall repeatedly,street riots become the norm, and nothing gets done.Catalonia secedes and civil war ensues.

On the Money


ON THE MONEY

The uncertainty principle

How long can the Euro defy logic?

BY BARBARA ROCKEFELLER






7. The Bank of Japan introduces yet another round of quantitative easing but the dollar/yen rate continuesto intervention-zone levels around 70-75; Japan impos-es capital controls to halt FX market speculation.

Again, if we can imagine these events, they are not reallyBlack Swans. For what it’s worth, a reasonable judgmentwould be that Obama wins a second term, the fiscal cliff isfixed, QE3 does work, and recovery in real estate leads theU.S. into a sustainable recovery. War with Iran is avoidedthrough diplomacy. The Japanese clench their teeth and

live with an overvalued yen.We might even consider the possibility that the othertail — the favorable one — willexperience an Event, e.g., theincreasing energy indepen-dence of the U.S. liberates poli-cy-makers and diplomats fromrestraint in Middle Easternaffairs out of economic self-interest.

That leaves the EuropeanStability Mechanism (ESM),leveraged or not, and the abil-

ity of troika officials to herdpoliticians and the public intothe “right” courses of action— meaning, those courses thatvalidate the viability of theEuro. Spain is the current focus.Spanish bond yields are rising again as Prime MinisterMariano Rajoy delays applying for a formal sovereign bailout. The top three northern countries against freeload-ers — Germany, Finland, and the Netherlands — jointlysuggested the €100 billion promised for the Spanish bank-ing sector bailout may not be forthcoming after all, since itcan be used as a “back door” to a sovereign bailout. To get

a sovereign bailout, Spain has to apply and become subjectto as-yet unspecified conditions.

Some analysts suggest conditions have to get a lot worsein Spain before Rajoy can sell a bailout to the public. Inother words, Rajoy is not playing a cat-and-mouse gamewith European Central Bank (ECB) chief Mario Draghi —he is playing it with domestic politicians, labor leaders,and the Spanish public. Others postulate Spain is drag-ging its heels and trying to lure Italy into its orbit because,together, they would have greater resistance to conditional-ity. This means some analysts are watching the Spain-Italyyield spread and not just the Spain-Bund and Italy-Bundspread. (Oh, good, another spread to watch.)

In any case, there are wheels within wheels here. It’scomplicated, it’s destabilizing, and it distracts attentionfrom the real job, which is to improve competitivenessthrough structural reform. If you can’t devalue your cur-rency, you need to devalue the cost of labor. Of the meansof production (land, labor, and capital), labor is the onlyone that politicians can affect. Spanish and Italian unionsare all too aware they are the focus. (Gains in labor pro-ductivity across the Eurozone have been very poor overthe past decade, with Spain outperforming Italy and bailed-out Ireland near the top of the list.)

But as market commentators constantly remind us, for-get the economic facts; what counts is the perception of the facts. Someone who appreci-ates this point is German FinanceMinister Wolfgang Schaeuble,who says Spain is doing betterthan markets are acknowledging.Spain, he says, needs to regaininvestor confidence, also noting“ending speculation is crucial.”Spain needs to communicate tothe market how wonderfullyplanned reforms will work. The

German finance minister cheeringon the Spanish prime minister issomething of an unlikely sight.For his part, Rajoy said the pur-pose of the Spanish banking sec-tor bailout is to prove the Euro is

not reversible: “We are a club.”Well, no. The purpose of the Spanish banking sector bail-

out is to bail out the Spanish banks and prevent wholesaleimpoverishment of Spanish citizens and businesses. Still,the appearance of goodwill is Euro-favorable.

In fact, it’s Euro-favorable any time Europeans facefacts. One that must be faced is both Spain and Italy will

need massive reform in terms of both fiscal sustainabilityand competitiveness. If a sovereign bailout crisis is whatit takes to get the public to accept fiscal and structuralreform, so be it.

Schaeuble and others would prefer Spain refrain fromprovoking a crisis in order to get domestic approval of a bailout — in other words, show backbone and leadership.A skillful politician should be able to convince the publicof a good course of action without invoking a crisis. Of course, politicians invoke and invite crises all the time ingridlocked political environments. (And those of us wholive in glass houses should not throw stones.)

The problem is not that shocks could become real, it’s

Every currency cannot

be attacked at the same

time — when you are

selling one, you are

buying another.



ON THE MONEY

that markets are so numb tothem they no longer respondappropriately and proportion-ately. For example, from July

25 to Sept. 17 the Euro rosefrom 1.2054 to 1.3172 on hopesa methodology was found torescue the European peripher-als from Greece’s fate (defaultand possible exit). The highpoint was ECB chief Draghiasserting he would do “what-ever it takes” to preserve theEurozone, including buy sovereign bonds, over the grim-faced objection of Germany’s Bundesbank.

As the Spanish situation deteriorated in late September,however, the Euro dipped only about 25%. You have to

ask whether 25% is the appropriate amount. It seems thatwishful thinking is providing Euro support despite theprospect of Rajoy deliberately aiming for a crisis.

But maybe wishful thinking is warranted. To be fair,Europe is feeling its way through these crises as theydevelop. In the absence of a viable institutional infrastruc-ture — mostly a pan-EMU treasury that issues Eurobondsand a pan-EMU transfer mechanism for unemploymentand pension benefits — it’s only natural developmentsoccur by fits and starts. The institutional shortcomings of the Eurozone practically mandate this mode of operation— kicking the can down the road only a few feet furtherwhile bureaucrats and politicians struggle to fill in the

blanks.A perfect case is Draghi inventing a €100 billion Spanish

bank sector bailout — but only after the European bank-ing system is brought under a single regulator. This clevermove implies the needed infrastructure can be put in placeon an evolutionary basis instead of a revolutionary basis,which we might consider the U.S. model. In practice, theU.S. model was not invented in one fell swoop, either.Recall the messy and uneven process by which a national bank was established; we didn’t get the Federal Reserveuntil 1913.

Call it nation-building by serial crises. It’s a dangerous

methodology, but markets are growing accustomed to it.

In this light, the Euro’s periodicupward corrections are not irra-tional. When uncertainty rises toomuch and the Euro (accordingly)

falls sharply, the stewards of theevolving institutional framework come up with whatever newremedy will get the Eurozone onemore kick down the road.

Aside from the drawback of depending on crises to get prog-ress, the fits-and-starts processof building a sovereign can tend

toward overdoing centralization and standardization. Thisis the criticism of Czech president Vaclav Klaus, who saysGreece should be happy to escape the straightjacket of theEMU, which is victimizing the Greeks. Klaus is the author

a new book titled Europe: The Shattering of Illusions. Theshift toward concentration of power in central bureaucra-cies is a big drawback to joining the EMU, and the CzechRepublic accepts these conditions only reluctantly.

In fact, Klaus is in no hurry to formalize admission tothe EMU, which was approved in 2004 but has no imple-mentation date. The Czechs can wait until 2074, as far ashe is concerned. This way the Czech Republic gets some of the benefits of unification (such as trade advantages) butnone of the responsibility (such as contributing to the ESMor ECB capital requirements). Bloomberg reports the Czechkoruna was the world’s best performer against the Euro inthe decade ending December 2010, up 40% in the period.

The koruna is up about 2% so far this year. And Czech10-year koruna debt costs a mere 2.4%, compared to 4.8%for Poland and 7.2% for Hungary (two other countriesawaiting admission). The days when countries such asCyprus rushed to join the Euro empire are over. Of the sixnon-Euro member states (Sweden, Poland, Czech Republic,Hungary, Romania, and Bulgaria), Sweden’s currency has been a stellar performer, from 11.064 against the dollarin July 2001 to 5.8171 in April 2008 (and 6.545 as of mid-September).

The logical deduction is the elimination of transactionalfriction that comes with a single currency does not out-

weigh the disadvantages of convergence to the point of

The institutional

shortcomings of the

Eurozone practically

mandate kicking the

can down the road

while bureaucrats andpoliticians struggle to

fill in the blanks.



conformity — and costly conformity, too. This should bethe real issue when considering the Euro’s level, not thestage of whatever crisis we happen to be in at a givenmoment. Traders and investors are all too aware that evo-lution is not always progress.

Overall, the market is unhappy with endless crises andlagging decision-making. The Euro has been on a declin-ing big-picture trend since the July 2008 high at 1.6038. Thelowest low since then is 1.1877 from the week of June 11,2010 (Figure 1). This low surpasses the 50% retracement of the up move from October 2000, but the low was fleetingand wasn’t matched at the next big bump down in July2012 (1.2144). It’s possible the 50% retracement is a true

floor. It’s also possible that magical thinking can carry theEuro back up to the resistance line — 1.4360 by year-end2012 and 1.3990 by year-end 2013. But an equally likelyscenario could see the Euro dip to the November 2005 low(horizontal line at 1.1672) or worse, the support line of 1.0792 at year-end 2012. This is a very wide range.

Current forecasts see the Euro oscillating between 1.2000and 1.3000 to year-end, with a bias to the downside. Whatwe need to worry about the most is traders acting asthough the background environment is normal and par-ing back short positions when they become extreme, evenif the true condition consists of serial emergencies being badly addressed and the rational thing to do would be to

continue selling.FX market acceptance of the perpetual crisis mode is notdoing Eurozone leaders any favors. To a certain extent, theFX market, together with the bond market, is the stewardof sane analysis. We cannot expect leaders to do a better job of sovereign-building unless they are pushed to thewall by market prices. It’s especially discouraging to hearthe German finance minister complain about speculation.Schaeuble should recognize that he needs the FX and bondmarket speculators to give him accurate feedback on thecrisis process.

As the fourth quarter progresses, consensus is buildingthat a Grexit will occur just after the new year. In the usual

perverse way of the FX market, a Grexit is Euro-favorable,as would be Spain’s application for a sovereign bailout,anticipated to take place before Greece leaves the EU. So,while conventional thinking may point toward a continu-ation of the downtrend, there is a very real possibility of the Euro spiking to — but not beyond — the resistance linearound 1.4360.

It seems the Euro “should” go downward out of sheerdisapproval of the management-by-crisis process, but wehave to worry about the market becoming immune to tail-risks as they become “normal.”y

For information on the author, see p. 4.

FIGURE 1: THE EURO’S UNCERTAIN PATH

Despite its sharp upswings, the EUR/USD pair is in a longer-term decline dating

back to its 2008 peak.

Source: Chart — Metastock; data — Reuters and eSignal

99 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.600.0%

23.6%

38.2%

50.0%

61.8%

100.0%


http://slidepdf.com/reader/full/forex-currency-trader 16/3016 October2010•CURRENCY TRADER16 October2012•CURRENCY TRADER

The idea that some price levels have more importancethan others is a long-standing belief in trading and analy-sis. Such levels, commonly called support and resistance(S&R), help traders find and predict areas of increasing ordecreasing demand, according to how price behaved in thepast.

However, the often vague and obscure definitions given by many traders and analysts make it difficult to evalu-ate the true efficacy of support and resistance levels, andwhether these levels have any statistical significance.

Here we’ll outline an algorithmic approach for definingsupport and resistance and evaluate whether its results arestatistically meaningful. However, the process used to testthe significance of these levels can be applied to any S&Rdefinition to determine how predictive the levels are likelyto be — that is, whether they are likely to act as reversalpoints in the future.

Evaluation methodThe first step in the process is to define S&R level predic-tions, the relevance of which is determined by counting breakout and bounce patterns that occur at each level dur-ing a given test period. The breakout-bounce analysis con-sists of checking where each price bar in the test period isrelative to a defined S&R level, as follows:

1. If the bar’s low is above the upper edge of the S&Rzone, record a “1.”

2. If the bar’s high is below the lower edge of the S&Rzone, record a “-1.”

3. Record a “0” in all other cases.

After all price bars are analyzed, assign the followingpattern designations to the price action in the test period:

1. -1/0/-1 = “bounce below” (a downturn off the bottomof a support-resistance zone).

2. 1/0/-1 = “cross down” (downside breakout of a sup -

port-resistance zone).3. 1/0/1 = “bounce above” (a bounce off the top of asupport-resistance zone).

4. -1/0/1 = “cross up” (upside breakout of a support-resistance zone).

Figure 1 shows examples of these four patterns basedon an S&R zone between .8781 and .8791 in the Euro/U.S.dollar pair (EUR/USD). The bottom panel shows each bar’s designation as either 1, -1, or zero, based on whetherprice bounces off of or breaks through the S&R zone.

The evaluation process consists of a few simple steps.

First, you must establish an S&R definition methodol-ogy. Next, make predictions based on applying those S&Rzones in one time period — for example, make predic-tions for 2001 using data from 2000. In this case, 2000 will be the evaluation period and 2001 will be the test period.Then count the number of bounce-breakout patterns inthe test period using the previously outlined definitions.Finally, you must establish whether these counts are statis-tically distinguishable from those derived from randomlyassigned S&R levels.

This methodology facilitates the evaluation of narrowS&R zones in which price is expected to bounce withina range (as in the example in Figure 1), rather than S&R

TRADING STRATEGIESTRADING STRATEGIES

Testing the significance of

support and resistance

This technique will allow you to determine if your method of

defining support or resistance has any predictive value.

BY FRIEDHELM DÜSTERHÖFT AND DANIEL FERNANDEZ





defined by a very specific price level.This is useful in the currency markets, because the differences in price datafrom different providers can poten-tially result in slightly different S&Rlevels, depending on the method usedto define them.

Defining S&R as

high-low levels

In the forex market, support and resis-tance can be thought of as zones wherethe demand for one of the currenciesin a pair has faded. For example, in theEUR/USD pair the high of a bar witha close below the high can be thoughtof as a level at which demand for EURwas scarcer, forming resistance in theEUR/USD rate. Similarly, the lows of bars that close above the low can bethought of as levels where demand forUSD has dried up, serving as support

for the EUR/USD rate.Extending this logic, we can definean S&R methodology whereby therelevance of a particular S&R level isestablished by how frequently high orlow prices hit that level. We can usethe following process to define S&Rzones in this manner:

1. Note the highest and lowest pricelevels achieved during a givenevaluation period (for example,

the year 2000).2. For each one-tick (0.0001) pricelevel between these values,determine the number of lowsand highs that were +/- 10 ticks(0.0010) from each level. Thisnumber is the level’s score.

3. Normalize the scores by divid-ing each price-level’s score by thehighest score for the year.

Figure 2 illustrates this high-lowanalysis for 2009 in the EUR/USD pair.

FIGURE 1: BOUNCES VS. BREAKOUTS

The four patterns were used to evaluate whether price bounced or broke through

a defined support-resistance zone.

FIGURE 2: DEFINING HIGH-LOW SUPPORT AND RESISTANCE

Support-resistance zones were defined according to how frequently daily highs

or lows came within 10 ticks (pips) of each .0001 price increment.



The predictive value of these levels can then be objec-tively tested in a future period. After obtaining the S&R-zone predictions for the test period, we can now apply thepreviously described analysis to see whether the results arestatistically relevant when compared to randomly definedS&R levels.

Each predicted S&R zone is tested over the forecasthorizon, searching for all breakout-bounce patterns thatoccur within this period. Because there are two support/resistance (bounce) and two breakout (cross) patterns, fourcounts are obtained for each touched zone (one for eachpattern; if price does not touch a zone, nothing is record-ed). From these counts the percentage of resistance pat-terns relative to all patterns is calculated, which is definedas the “resistance ratio” for each zone.

The more frequently a bounce pattern occurs (i.e., if

the zone functions as support or resistance and turns back price), the closer to 1.00 the ratio gets. Conversely, if only breakout patterns occur, the ratio is 0. For example,if a particular S&R zone was associated with 12 bouncepatterns and eight breakout patterns, its resistance ratiowould be 0.60, or 60%. A frequency histogram can be usedto show which ratios are the most frequent. In this case,the average resistance ratio was 57%, which means price bounced more often at these levels than it crossed them,suggesting they might have some statistical edge in fore-casting future support or resistance.

Comparison to random

standard and resistance

To determine if there is a true statistical edge, however,we must perform the same analysis on randomly drawnS&R levels, which we can generate through the followingprocedure:

1. Note the highest and lowest price levels achieved dur-ing an evaluation period (for example the year 2000).

2. Calculate a random number between 0 and 1.3. Multiply this number by the range (the difference

between highest high and lowest low obtained in step1) and add it to the lowest low. This gives the lower boundary of a support and resistance zone for the fol-lowing year.

4. Add one tick to the lower edge to get the upper

boundary (alternately, add four ticks).5. Repeat all steps 1,000 times for each year to predict.

Figure 3 compares the frequency distribution of theresistance ratios for the randomly generated S&R zones(using both one and four ticks) to the ratios from the high-low method. Some immediate observations: The peaksare close together, indicating the average resistance ratiosare very similar regardless of which method, random orhigh-low, is used. Also, the highest point of the resistanceratio distribution moves to the right as the random zonewidth is increased, suggesting the shift of the high-low


TRADING STRATEGIES

FIGURE 3: RESISTANCE RATIO FREQUENCY DISTRIBUTION

Comparing the resistance ratio distributions of randomly generated S&R levels

and those defined by the high-low method showed there was little difference

between the two approaches.



peak (with an average width of 2.6 ticks) is caused only by the increase in the average zone size. This suggestszone width has an influence on the resistance ratios.

Overall, however, the distributions are very similar,casting doubt on the hope that the high-low predictionmethod offers a superior forecast.

Score

The next thing to look at is the score, which shouldprovide an estimation of how “hard” a zone is. Thecloser the resistance ratio gets to 1, the less price hascrossed a zone, which should result in a diagonal linewhen plotting prediction scores against resistancepercent — i.e., the higher a zone’s score, the higher itsresistance ratio should be if it is functioning as support orresistance.

Figure 4’s x/y plot of the data shows a wide cloud of values with a nearly horizontal orientation. The linearregression ( blue line) has a minor downward slope with avery low R² value. In line with the previous findings, the

center of the cloud is around 58%.The low R² implies there is a low linear correlation

between the score magnitude and the resistance ratio (if a high score was related to a high resistance ratio, the R²value would be 1). Overall, the analysis shows the scoredoes not provide a meaningful indication about the quality

of a resistance level forecasted bythe high-low method.

Evaluating the quality

of S&R predictions

The process outlined here offers anobjective way to evaluate whethera given S&R-defining methodologycan, in fact, be a predictive tool foridentifying future price bouncesand breakouts.

In this example, the high-lowmethod proved to have no edgeover randomly drawn levels; it doesnot have a statistical edge in pre-dicting future levels at which priceis likely to bounce or break out.

Does your manual or algorithmicmethod for defining S&R have anytrue predictive power? Now youhave a tool to find out.y

For information on the authors, see p. 4.

FIGURE 4: SCORE VS. RESISTANCE RATIO

There’s no evident correlation between a zone’s score and the resistance ratio.

Related reading

Daniel Fernandez Currency Strategy CollectionThis20-articlesetcontainsforextradingstrategyarticleswritten by Currency Trader contributorDanielFernandezbetweenNovember2009andDecember2011.Thesearticlescovertradingideasandsystemsbasedoneverythingfrompricepatternsandindicatorstoseasonaltendenciesandmarketrelationships.

Calculating the signicance of support and resistance Active Trader , March 2007The“signicanceindicator”usestheadvantagesofthemedianpricetoprovideobjectivesupport-resistanceanalysis.

Implied volatility: An overlookedtool for stock and futures traders

Active Trader ,April2006Impliedvolatilityisn’tjustforoptionplayers—itcanprovideusefulmarketestimatesandforward-lookingsupportandresistancelevelsforalltraders.

Trading support and resistance zones Active Trader ,August2006Whenitcomestorealtrading,it’shelpfultodenesupportandresistanceintermsofzonesratherthanpreciselevels.












TRADING STRATEGIES ADVANCED CONCEPTS

The author has stated for years none of the advances in

financial theory and practice have emanated from winning

traders. This is a modification of an earlier assertion that

all advances are made by the losers; the logic behind sucha misanthropic outlook is winning traders go home or to

a bar, or to a bar and then home, or to a bar and someone

else’s home, while the losers sit around stewing about

what went wrong until they come up with a reason.

The reason for the modification is simple: As machines,not people, increasingly make trading decisions and the

programming may be done by

people who never have traded for

their own account in their lives,

they cannot be counted among

the winning traders.

The results can be confusing.

High-frequency and algorith-

mic trades are not designed to

capture underlying economic

relationships, only small statisti-

cal perturbations. They do not

capture actual relationships so

much as they do perceived sta-

tistical relationships in fashion at

the moment. Consider the two

intraday charts from June 15,

2011, a day otherwise unnotable

save for a strong downturn in the

Euro on one of the many days

during that period when a bailout

The dollar andnon-petroleum import prices

An update on the strange — and overlooked — consequences of U.S. monetary policies.

BY HOWARD L. SIMONS

The S&P 500 quickly followed the Euro lower, registering an r2 of 0.97 for the day.

FIGURE 1: YOU, TOO, CAN BE AN ALGORITHMIC TRADER

99.000%

99.125%

99.250%

99.375%

99.500%

99.625%

99.750%

99.875%

100.000%

100.125%

99.000%

99.125%

99.250%

99.375%

99.500%

99.625%

99.750%

99.875%

100.000%

100.125%

100.250%

100.375%

100.500%

8 : 3 0

8 : 4 0

8 : 5 0

9 : 0 0

9 : 1 0

9 : 2 0

9 : 3 0

9 : 4 0

9 : 5 0

1 0 : 0 0

1 0 : 1 0

1 0 : 2 0

1 0 : 3 0

1 0 : 4 0

1 0 : 5 0

1 1 : 0 0

1 1 : 1 0

1 1 : 2 0

1 1 : 3 0

1 1 : 4 0

1 1 : 5 0

1 2 : 0 0

1 2 : 1 0

1 2 : 2 0

1 2 : 3 0

1 2 : 4 0

1 2 : 5 0

1 3 : 0 0

1 3 : 1 0

1 3 : 2 0

1 3 : 3 0

1 3 : 4 0

1 3 : 5 0

1 4 : 0 0

1 4 : 1 0

1 4 : 2 0

1 4 : 3 0

1 4 : 4 0

1 4 : 5 0

E ur o , 0 8 3 0 C S T =1 0 0 %

S e p .

S & P 5 0 0 E - M i n i F u t u r e s ,

0 8 3 0 C S T = 1 0 0 %

SPX

EUR

r 2 = .970



of Greece appeared at risk (Figures 1 and 2). The pricesfor September 2011 E-Mini S&P 500 futures (ESU11), July

2011 crude oil (CLN11), and the cash price for the Euro are

re-indexed to 0830 CST and are displayed at one-minute

intervals.

Once the Euro broke lower, the S&P 500 followed

quickly (Figure 1). Over the day, the r2 — or percentage of

variance explained — of the two markets was an astound-

ing 0.97; any practicing econometrician starts to wonder if

there is something wrong with either the data or the analy-

sis at that point.

The relationship was not quite as strong between the

Euro and crude oil (Figure 2); crude oil lagged the Euro

for about two hours intraday, as if the memo had been

delayed in transit. Even so, the r2 here is a still-high 0.86.

All the tools and technology available to high-frequency

traders could be distilled to saying, “If the Euro breaks, sell

both crude oil and the S&P 500.” You really don’t need an

advanced degree for that, do you?

Another good theory come and gone

All this brings us to the actual topic: the relationship

between non-petroleum import prices and the dollar. Youmay be surprised to learn the U.S. maintains an index for

non-petroleum import prices, but this is in keeping with

such oddities as core inflation, which excludes categories

such as food and energy no one seems to buy, and is part

of the great government excuse-making factory: “See, if it

were not for petroleum prices shooting higher, we would

not have seen import prices rise.”

Macroeconomic theorists have, for years, operated on

the notion a weaker currency should lead to higher prices

for imports and greater demand for exports; this was part

of the original argument for floating exchange rates made

in the late 1960s and early 1970s. It is a crying shame this

theory has yet to work on a broad and consistent basis (see

“Currencies and federal reserve trade weights,” July 2007).

It has, as we will see here, worked for some currency pairs

over some periods of time; if gravity worked with the

same consistency, we would all be flying about randomly.

First, let’s compare the import index to two different

measures of the U.S. dollar, the IntercontinentalExchange’s

dollar index (DXY) and the Federal Reserve’s broad trade-

weighted dollar index (TWD, not to be confused with the

Crude oil lagged the Euro for roughly two hours intraday, but the r 2 for the pair still

came in at 0.86.

FIGURE 2: CRUDE OIL AND THE EURO

99.000%

99.125%

99.250%

99.375%

99.500%

99.625%

99.750%

99.875%

100.000%

100.125%

95.50%

95.75%

96.00%

96.25%

96.50%

96.75%

97.00%97.25%

97.50%

97.75%

98.00%

98.25%

98.50%

98.75%

99.00%

99.25%

99.50%

99.75%

100.00%

100.25%

100.50%

100.75%

101.00%

101.25%

101.50%

8 : 3 0

8 : 4 0

8 : 5 0

9 : 0 0

9 : 1 0

9 : 2 0

9 : 3 0

9 : 4 0

9 : 5 0

1 0 : 0 0

1 0 : 1 0

1 0 : 2 0

1 0 : 3 0

1 0 : 4 0

1 0 : 5 0

1 1 : 0 0

1 1 : 1 0

1 1 : 2 0

1 1 : 3 0

1 1 : 4 0

1 1 : 5 0

1 2 : 0 0

1 2 : 1 0

1 2 : 2 0

1 2 : 3 0

1 2 : 4 0

1 2 : 5 0

1 3 : 0 0

1 3 : 1 0

1 3 : 2 0

1 3 : 3 0

1 3 : 4 0

1 3 : 5 0

1 4 : 0 0

1 4 : 1 0

1 4 : 2 0

1 4 : 3 0

1 4 : 4 0

1 4 : 5 0

E ur o , 0 8 3 0 C S T =1 0 0 %

J u l y C r u

d e O i l F u t u r e s ,

0 8 3 0 C S T = 1 0 0 %

CLN

EUR

r 2 = .862



ON THE MONEY


ADVANCED CONCEPTS

Taiwan dollar). The six-member

DXY’s weights have been fixed

since inception; the TWD’s

weights are recalculated annually

as part of the Federal Reserve’s

H10 report on foreign exchange

rates.

Figure 3 shows an inverse

relationship between the import

index (led three months) and the

TWD through 1994 and then a

direct relationship thereafter. For

the DXY, what had been no rela-

tionship through 1994 turned into

a direct relationship thereafter.

We should ask, therefore, what

magical event or events occurred

at the start of 1995 to justify this

switch to index conformance.Three developments come to

mind: This is the period when

NAFTA was starting to affect

trade patterns, when China fixed

the yuan, and when the conse-

quences of the Mexican peso’s

collapse led the Clinton Treasury

Department to look after the

interests of wayward bankers.

The Federal Reserve ended

its period of rate hikes at thestart of 1995 and began a long

series of what became known

as “Greenspan puts” followed

by Bernanke puts: Each time

the financial markets let out a

bleat, they were sated with more

money until we arrived at 0%

interest rates in December 2008

and outright money-printing in

March 2009.

The Euro (EUR) and the Canadian dollar (CAD) had unstable relationships vs. the

import index until the Fed began aggressively lowering rates after the dotcom bust. By

May 2003 those relationships were strong and direct.

FIGURE 4: NON-PETROLEUM IMPORT PRICES AND KEY CURRENCIES

70%

75%

80%

85%

90%

95%

100%

105%

110%

115%

120%

125%

130%

135%

95

97

99

101

103

105

107

109

111

113

115

117

119

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

E ur oAn d C an a d i anD ol l a

r ,D e c.1 9 8 8 =1 0 0 %

I m p o r t P r i c e s E x

- P e t r o l e u m ,

2 0 0 0 = 1 0 0

L e d

3 M o n t h s

Imports Ex-Petr.

EUR

CAD

The TWD and the import index had an inverse relationship through 1994 and a direct

relationship after. The DXY and the import index had no relationship through 1994 and

a direct relationship after.

FIGURE 3: NON-PETROLEUM IMPORT PRICES AND THE DOLLAR

60

65

70

75

80

85

90

95

100

105

110

115

120

125

130

13595

97

99

101

103

105

107

109

111

113

115

117

119

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

I C E

& F e d er al R e s er v eD ol l a

r I n d ex ,I nv er s e S c al e

J an.1 9 9 7 =

1 0 0

I m p o r t P r i c e s E x - P e t r o l e u m ,

2 0 0 0 = 1 0 0

L e d 3 M o n t h s

Imports Ex-Petr.

DXY

FRB Broad TWD

http://www.federalreserve.gov/releases/h10/Weights/

http://www.federalreserve.gov/releases/h10/Weights/



Because the TWD is non-tradable, it must remain a

laboratory curiosity for now. If we delve into the trad-

able DXY, we find only two of the six currencies involved

have a leading relationship to the non-petroleum import

price index — the Euro (EUR) and the Canadian dollar

(CAD). In both of these cases, the relationship was incon-

sistent and unstable until the Federal Reserve became very

aggressive in lowering interest rates in the aftermath of

the dotcom bust. By May 2003, a month whose importance

will be revisited shortly, the relationship between the EUR,

the CAD, and non-petroleum import prices became strong

and direct (Figure 4).

A reversal of sign

Now let’s switch from an absolute to a relative frame of

reference and normalize non-petroleum import prices to

the Producer Price index (PPI). A remarkable and indeed

unacceptable change in pattern emerges after the afore-

mentioned May 2003 date (Figure 5). Before May 2003,

the date when the Federal Reserve began its first war on

deflation, import prices rose faster than the PPI as the dol-

lar weakened. This, to the joy of some we are sure, was

expected behavior.

After May 2003, however, normalized non-petroleum

import prices fell as the dollar weakened. This is the exact

opposite of what you might expect. The post-May 2003 era

of loose money stimulated the U.S. consumer as intended,

but this consumer demand increasingly was met by for-

eign producers in the dollar bloc, such as China. The prices

of producer goods, the denominator in our fraction of

normalized import prices, were pulled higher. The prices

of consumer goods exported to the U.S. faced downward

pressure, and that pushed the numerator lower.

This mechanism, by which the prices of non-petroleum

imports fell relative to the PPI, was the direct result of

American monetary policies. It also had the odd effect of

making exporters to the U.S. accept lower margins and

become one of the few losers in the war on deflation.

Look hard in a textbook on international economics for a

theory calling this shot in advance. You will not find it.y

For information on the author, see p. 4.

Before May 2003, when the Federal Reserve began its first war on deflation, import

prices rose faster than the PPI as the dollar weakened.

FIGURE 5: EXPORTERS TO U.S. LOST WAR ON DEFLATION

Rel. Price = -0.0049 * FRTWD + 1.46

R2 = 0.917

Rel. Price = 0.0036 * FRTWD + 0.389

R2 = 0.714

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

8 7 .

5

9 2 .

5

9 7 .

5

1 0 2 .

5

1 0 7 .

5

1 1 2 .

5

1 1 7 .

5

1 2 2 .

5

1 2 7 .

5

1 3 2 .

5

R e l a t i v e

P r i c e I n d e x , N o n . P e t r . I m p o r t s : P P I

J a n . 1 9 9 5 = 1 0 0 %

Federal Reserve Trade-Weighted Dollar

Jan. 1995 - May 2003

Jun. 2003 - May 2012



CPI:Consumerpriceindex

ECB:EuropeanCentralBank

FDD(rstdeliveryday):Therstdayonwhichdeliveryofacom-modityinfulllmentofafutures

contractcantakeplace.

FND(rstnoticeday):Alsoknownasrstintentday,thisistherstdayonwhichaclear-inghousecangivenoticetoabuyer of a futures contract that itintendstodeliveracommodityinfulllmentofafuturescontract.The clearinghouse also informs

the seller.

FOMC:FederalOpenMarketCommittee

GDP:Grossdomesticproduct

ISM:Instituteforsupply management

LTD(lasttradingday):Thenaldaytradingcantakeplaceinafuturesoroptionscontract.

PMI: Purchasing managers index

PPI:Producerpriceindex

Economic Releaserelease(U.S.) time(ET)

GDP 8:30 a.m.CPI 8:30 a.m.ECI 8:30 a.m.PPI 8:30 a.m.ISM 10:00 a.m.

Unemployment 8:30 a.m.Personal income 8:30 a.m.Durable goods 8:30 a.m.Retail sales 8:30 a.m.Trade balance 8:30 a.m.Leading indicators 10:00 a.m.

GLOBAL ECONOMIC CALENDAR

October

1U.S.: SeptemberISMmanufacturingreportCanada: August PPI

2

3

4

UK: BankofEnglandinterest-rateannouncementECB: Governingcouncilinterest-rateannouncement

5

U.S.: SeptemberemploymentreportBrazil: SeptemberCPI

Canada: SeptemberemploymentreportJapan: BankofJapaninterest-rateannouncement

LTD: Octoberforexoptions;OctoberU.S.dollarindexoptions(ICE)

6

7

8 Brazil: SeptemberPPI

9Mexico: Sept.30CPIand

SeptemberPPI

10 U.S.: Fedbeigebook

11

U.S.: August trade balanceAustralia: Septemberemploymentreport

France: SeptemberCPIGermany: SeptemberCPI

12U.S.: SeptemberPPIJapan: SeptemberPPI

13

14

15U.S.: SeptemberretailsalesIndia: SeptemberPPI

16U.S.: SeptemberCPIUK: SeptemberCPIandPPI

17U.S.: Septemberhousingstarts

UK: Septemberemploymentreport

18U.S.: SeptemberleadingindicatorsHong Kong: July-September

employmentreport

19

Canada: SeptemberCPIGermany: SeptemberPPI Mexico: Septemberemploymentreport

20

21

22 Hong Kong:SeptemberCPI

23Canada: BankofCanadainterest-rate announcement

24

U.S.: FOMCinterest-ratedecisionAustralia: Q3CPI

Mexico: Oct.15CPISouth Africa: SeptemberCPI

25

U.S.: SeptemberdurablegoodsBrazil: SeptemberemploymentreportSouth Africa: SeptemberPPI

26U.S.: Q3GDP(advance)Japan: SeptemberCPI

27

28

29 U.S.: Septemberpersonalincome

30

Canada: SeptemberPPIGermany: Septemberemploymentreport Japan: Septemberemploymentreport

31France: August PPIIndia: SeptemberCPISouth Africa: Q3employmentrepor

November

1U.S.: October ISM manufacturingindex

2 U.S.: OctoberemploymentreportAustralia: Q3PPICanada: Octoberemploymentrepor

3

4

5

6

7 Brazil: October CPI and PPI

8

U.S.: SeptembertradebalanceAustralia: Octoberemploymentreport

Mexico: Oct.31CPIandOctoberPPIUK: BankofEnglandinterest-rate

announcementECB:Governingcouncilinterest-rateannouncement

9

Germany: October CPILTD:Novemberforexoptions;NovemberU.S.dollarindexoptions

(ICE)

Theinformationonthispageissub-

ecttochange.Currency Trader is

notresponsiblefortheaccuracyof

calendardatesbeyondpresstime.



CURRENCY FUTURES SNAPSHOT as of Sept. 28

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

LEGEND:Volume: 30-day average daily volume, inthousands.OI: 30-day open interest, in thousands.10-day move: The percentage price move

from the close 10 days ago to today’s close.20-day move: The percentage price movefrom the close 20 days ago to today’s close.60-day move: The percentage price movefrom the close 60 days ago to today’s close.The “% rank” fields for each time window(10-day moves, 20-day moves, etc.) showthe percentile rank of the most recent moveto a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day moveshows how the most recent 10-day movecompares to the past twenty 10-day moves;for the 20-day move, it shows how the most

recent 20-day move compares to the pastsixty 20-day moves; for the 60-day move,it shows how the most recent 60-day movecompares to the past one-hundred-twenty60-day moves. A reading of 100% meansthe current reading is larger than all the pastreadings, while a reading of 0% means thecurrent reading is smaller than the previousreadings.Volatility ratio/% rank: The ratio is the short-term volatility (10-day standard deviationof prices) divided by the long-term volatility(100-day standard deviation of prices). The% rank is the percentile rank of the volatilityratio over the past 60 days.

BarclayHedge Rankings:Top 10 currency traders managing more than $10 million

(as of Aug. 31 ranked by August 2012 return)

Trading advisor Augustreturn

2012 YTDreturn

$ Under mgmt.

(millions)

1. 24FX Management Ltd 4.95% 17.12% 50.3

2. Gedamo(FXAlpha) 4.51% 13.32% 19.6

3. Gedamo(FXOne) 2.61% 7.46% 31.9

4. RhiconCurrencyMgmt(Strategic) 1.90% -1.63% 280.05. JWPartners(FXMacro) 1.78% 1.94% 18.9

6. INSCHCapitalMgmt(KintilloX3) 1.48% 9.77% 60.8

7. Olsen(OlsenInvest-AF) 1.42% 3.05% 30.0

8. SilvaCapitalMgmt(Cap.Partners) 1.06% 6.79% 18.4

9. CapricornCurrencyMgmt(FXG10CHF) 1% 8.48% 14.0

10. CambridgeStrategy(EmergingMkts) 0.87% 3.27% 57.0

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

1. KMJCapital(Currency) 3.11% 13.65% 5.0

2. ValhallaCapitalGroup(Int'lAB) 2.47% 7.70% 1.5

3. JarrattDavis(ManagedFX) 2.40% 15.27% 4.9

4. HartswellCapitalMgmt(Apollo) 2.25% 27.81% 3.2

5. BBK(RESCOL/SFX) 1.97% -2.61% 3.3

6. FourCapital(FX) 1.39% -0.01% 1.5

7. Iron Fortress FX Mgmt 1.36% -4.40% 9.5

8. CapricornCurrencyMgmt(FXG10USD) 1.05% 7.17% 9.5

9. GAMCurrencyHedge(USD) 0.21% 6.22% 6.7

10. TridentAssetMgmt.(Gl.Currency) 0.03% 0.10% 7.0

Based on estimates of the composite of all accounts or the fully funded subset method.

Does not reflect the performance of any single account.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE .

Market Sym Exch Vol OI10-day

move / rank

20-day

move / rank

60-day

move / rank

Volatility

ratio / rank

EUR/USD EC CME 255.4 268.7 -1.95%/100% 2.82%/59% 3.72%/85% .32/68%

AUD/USD AD CME 126.1 171.6 -2.47%/91% 0.18% / 0% 0.77% / 10% .14 / 2%

GBP/USD BP CME 100.5 130.0 -0.54%/100% 2.22%/73% 3.96%/91% .14/5%

JPY/USD JY CME 90.3 132.1 0.47%/38% 0.90%/38% 2.43%/57% .60/90%

CAD/USD CD CME 86.4 161.4 -1.53%/100% 0.77%/15% 3.03%/47% .19/23%

MXN/USD MP CME 41.7 185.8 -1.88%/100% 3.21%/70% 3.87%/30% .10/15%

CHF/USD SF CME 38.0 46.6 -1.29%/100% 2.23%/54% 3.07%/85% .27/65%

U.S. dollar index DX ICE 19.6 55.7 1.31%/100% -1.47%/37% -4.23%/92% .23/32%

NZD/USD NE CME 16.0 28.0 -0.65%/56% 3.27%/92% 2.94%/26% .14 / 8%

E-MiniEUR/USD ZE CME 4.5 5.8 -1.95% /100% 2.82%/59% 3.72%/85% .32 /68%

Note:Averagevolumeandopeninterestdataincludesbothpitandside-by-sideelectroniccontracts(whereapplicable).Priceactivityis

basedonpit-tradedcontracts.



INTERNATIONAL MARKETS


CURRENCIES (vs. U.S. DOLLAR)

Rank CurrencySept. 27price vs.

U.S. dollar

1-monthgain/loss

3-monthgain/loss

6-monthgain/loss

52-weekhigh

52-weeklow

Previous

1 Indianrupee 0.018775 3.96% 7.16% -1.83% 0.0203 0.0174 10

2 Euro 1.2874 2.89% 3.00% -3.09% 1.4168 1.2099 3

3 GreatBritainpound 1.617435 2.29% 3.66% 1.78% 1.6261 1.5308 7

4 Swiss franc 1.0647 2.18% 2.31% -3.40% 1.1599 1.0074 2

5 South African rand 0.121475 2.01% 2.79% -7.02% 0.1338 0.1159 15

6 Taiwan dollar 0.034015 1.90% 1.92% 0.65% 0.0343 0.032 17

7 Russian ruble 0.03201 1.83% 5.87% -6.73% 0.0345 0.0291 4

8 Singaporedollar 0.81217 1.57% 3.96% 2.36% 0.8193 0.7606 12

9 NewZealanddollar 0.82103 1.21% 3.92% 0.28% 0.8415 0.7397 6

10 Japaneseyen 0.01286 1.18% 2.27% 6.37% 0.0132 0.0119 16

11 Canadian dollar 1.018035 1.00% 4.57% 1.39% 1.0334 0.9467 5

12 Thai baht 0.032265 0.51% 2.56% -0.85% 0.0329 0.031 8

13 Swedishkrona 0.15172 0.21% 7.20% 0.00% 0.1572 0.1374 1

14 Hong Kong dollar 0.12897 0.04% 0.07% 0.19% 0.129 0.1282 14

15 Chinese yuan 0.1578 -0.10% -0.25% -0.32% 0.1589 0.1557 9

16 Brazilianreal 0.49211 -0.28% 1.66% -10.80% 0.5917 0.4801 13

17 Australian Dollar 1.03605 -0.43% 3.22% -1.18% 1.0808 0.9478 11

GLOBAL STOCK INDICES

Country Index Sept. 271-monthgain/loss

3-monthgain/loss

6-monthgain loss

52-weekhigh

52-weeklow

Previo

India BSE30 18,579.50 5.09% 9.50% 7.66% 18,866.90 15,135.90 5

2 Hong Kong Hang Seng 20,762.29 4.87% 7.72% -1.35% 21,760.30 16,170.30 9

3 Brazil Bovespa 60,240.00 3.66% 13.43% -8.78% 68,970.00 49,433.00 8

4 Germany Xetra Dax 7,290.02 3.44% 17.03% 2.98% 7,478.53 5,125.44 4

5 Italy FTSE MIB 15,450.14 2.91% 16.14% -6.36% 17,158.70 12,295.80 1

6 U.S. S&P500 1,447.15 2.60% 8.66% 2.45% 1,474.51 1,074.77 13

7 Canada S&P/TSXcomposite 12,338.85 2.41% 8.13% -1.38% 12,788.60 10,848.20 11

8 Mexico IPC 40,729.70 1.89% 3.14% 4.55% 41,600.60 32,258.40 15

9 Switzerland SwissMarket 6,545.90 0.84% 9.16% 4.41% 6,620.10 5,307.80 12

0 Australia All ordinaries 4,402.80 0.68% 7.81% 0.26% 4,515.00 3,905.20 6

1 Singapore Straits Times 3,059.43 0.49% 7.67% 1.34% 3,088.45 2,521.95 14

2 UK FTSE 100 5,779.40 0.06% 4.63% -1.54% 5,989.10 4,868.60 10

3 South Africa FTSE/JSEAllShare 35,616.60 -0.42% 5.54% 5.19% 36,550.08 29,688.89 7

4 France CAC 40 3,439.32 -0.68% 12.28% -0.87% 3,600.48 2,793.22 3

5 Japan Nikkei225 8,949.87 -1.49% 2.51% -12.73% 10,255.20 8,135.79 2



NON-U.S. DOLLAR FOREX CROSS RATES

Rank Currency pair Symbol Sept. 27 1-monthgain/loss

3-monthgain/loss

6-monthgain loss

52-weekhigh

52-weeklow

Previou

1 Euro / Aussie $ EUR/AUD 1.24262 3.34% -0.21% -1.93% 1.3943 1.1614 7

2 Euro / Real EUR/BRL 2.616095 3.19% 1.32% 8.65% 2.651 2.2481 5

3 Pound / Aussie $ GBP/AUD 1.561155 2.73% 0.43% 2.99% 1.626 1.4637 10

4 Euro / Canada $ EUR/CAD 1.264595 1.88% -1.49% -4.41% 1.4082 1.2164 13

5 Euro / Yen EUR/JPY 100.09 1.71% 0.70% -8.93% 110.83 94.65 2

6 Yen / Real JPY/BRL 0.026135 1.48% 0.60% 19.28% 0.0262 0.021 17

7 Canada $ / Real CAD/BRL 2.068725 1.28% 2.86% 13.66% 2.0827 1.6917 8

8 Pound / Canada $ GBP/CAD 1.588785 1.28% -0.86% 0.39% 1.6354 1.5515 16

9 Franc / Canada $ CHF/CAD 1.04584 1.17% -2.16% -4.72% 1.1553 1.0128 12

10 Pound / Yen GBP/JPY 125.75 1.12% 1.35% -4.35% 132.81 117.58 6

11 Franc / Yen CHF/JPY 82.78 1.01% 0.02% -9.22% 91.90 78.81 112 Euro / Franc EUR/CHF 1.209165 0.69% 0.68% 0.32% 1.2406 1.2003 15

13 Euro / Pound EUR/GBP 0.79596 0.59% -0.64% -4.78% 0.8799 0.7779 11

14 Pound / Franc GBP/CHF 1.519145 0.11% 1.32% 5.36% 1.5434 1.3877 18

15 NewZeal$/Yen NZD/JPY 63.835 0.03% 1.61% -5.76% 68.81 57.23 4

16 Aussie $ / Real AUD/BRL 2.10533 -0.14% 1.53% 10.79% 2.1525 1.7221 14

17 Canada $ / Yen CAD/JPY 79.15 -0.19% 2.23% -4.72% 84.49 72.63 3

18 Aussie $ / Canada $ AUD/CAD 1.017695 -1.41% -1.28% -2.53% 1.0755 0.9981 20

19 Aussie $ / Yen AUD/JPY 80.55 -1.60% 0.91% -7.13% 88.31 72.72 9

20 Aussie$/NewZeal$ AUD/NZD 1.26187 -1.64% -0.67% -1.46% 1.3229 1.2557 19

21 Aussie $ / Franc AUD/CHF 0.97309 -2.55% 0.89% 2.30% 1.0328 0.8729 21

GLOBAL CENTRAL BANK LENDING RATES

Country Interest rate Rate Last change March 2012 Sept. 2011

United States Fed funds rate 0-0.25 0.5(Dec08) 0-0.25 0-0.25

Japan Overnightcallrate 0-0.1 0-0.1(Oct10) 0-0.1 0-0.1

Eurozone Refi rate 0.75 0.25(July12) 1 1.5

England Reporate 0.5 0.5(March09) 0.5 0.5

Canada Overnightrate 1 0.25(Sept10) 1 1

Switzerland 3-monthSwissLibor 0-0.25 0.25(Aug11) 0-0.25 0-0.25

Australia Cash rate 3.5 0.25(June12) 4.25 4.75

NewZealand Cash rate 2.5 0.5(March11) 2.5 2.5

Brazil Selic rate 7.5 0.5(Aug12) 9.75 12

Korea Korea base rate 3 0.25(July12) 3.25 3.25

Taiwan Discount rate 1.875 0.125(June11) 1.875 1.875

India Reporate 8 0.5(Apr12) 8.5 8.25

South Africa Repurchaserate 5 0.5(July12) 5.5 5.5



INTERNATIONAL MARKETS

GDP Period Release date Change 1-year change Next release

AMERICAS

Argentina Q2 9/21 21.2% 15.0% 12/21

Brazil Q2 8/31 6.6% 5.6% 11/30

Canada Q2 8/31 0.1% 3.5% 11/30

EUROPE

France Q2 9/28 0.0% 0.5% 12/28

Germany Q2 8/14 0.7% 1.7% 11/15

UK Q2 9/27 1.0% 2.2% 12/21

AFRICA S. Africa Q2 9/11 1.2% 8.3% 12/6

ASIA and S.PACIFIC

Australia Q2 9/5 1.0% 3.2% 12/5

Hong Kong Q2 8/10 -1.5% 3.6% 11/16

India Q2 8/31 3.4% 12.0% 11/30

Japan Q2 8/13 0.3% 1.4% 11/12

Singapore Q2 8/24 -0.5% 4.1% 11/23

Unemployment Period Release date Rate Change 1-year change Next release

AMERICAS

Argentina Q2 8/21 7.2% 0.1% -0.1% 11/19

Brazil Aug. 9/20 5.3% -0.1% -0.7% 10/25

Canada Aug. 9/7 7.3% 0.0% 0.0% 10/5

EUROPE

France Q2 9/6 9.7% 0.1% 0.6% 12/11

Germany Aug. 9/27 5.4% -0.4% -0.6% 10/30

UK May-July 9/12 8.1% 0.0% 0.1% 10/17

ASIA andS. PACIFIC

Australia Aug. 9/6 5.2% 0.0% 0.0% 10/11

Hong Kong June-Aug. 9/18 3.2% 0.0% 0.0% 10/18

Japan Aug. 9/28 4.2% -0.1% -0.2% 10/30

Singapore Q2 7/31 2.0% -0.1% -0.2% 10/31

CPI Period Release date Change 1-year change Next release

AMERICAS

Argentina Aug. 9/12 0.9% 10.0% 10/12

Brazil Aug. 9/5 0.4% 5.2% 10/19

Canada Aug. 9/21 0.2% 1.2% 10/19

EUROPEFrance Aug. 9/12 0.7% 2.1% 10/11

Germany Aug. 9/12 0.4% 2.1% 10/11

UK Aug. 9/18 0.5% 2.5% 10/16

AFRICA S. Africa Aug. 9/19 0.2% 5.0% 10/24

ASIA andS. PACIFIC

Australia Q2 7/15 0.5% 1.2% 10/24

Hong Kong Aug. 9/20 0.0% 3.7% 10/22

India Aug. 9/28 1.0% 10.3% 10/31

Japan Aug. 1/9 0.1% -0.4% 10/26

Singapore Aug. 9/24 0.7% 3.9% 10/23

PPI Period Release date Change 1-year change Next release

AMERICAS Argentina Aug. 9/12 1.0% 12.8% 10/12

Canada Aug. 10/1 -0.1% -0.3% 10/30

EUROPE

France Aug. 9/28 1.2% 2.6% 10/31

Germany Aug. 9/20 0.5% 1.6% 10/19

UK Aug. 9/7 0.5% 2.2% 10/16

AFRICA S. Africa Aug. 9/27 0.7% 5.1% 10/25

ASIA andS. PACIFIC

Australia Q2 7/23 0.5% 1.1% 11/2

Hong Kong Q2 9/13 1.5% -0.7% 12/13

India Aug. 9/14 1.1% 7.6% 10/15

Japan Aug. 9/12 0.3% -1.8% 10/12

Singapore Aug. 9/28 2.4% 2.0% 10/29

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


http://slidepdf.com/reader/full/forex-currency-trader 29/30CURRENCY TRADER•September2010 29

http://www.lasvegastradersexpo.com/





TRADE

Date: Monday, Oct. 1, 2012.

Entry: Long the Euro/U.S.dollar pair (EUR/USD) at1.2898.

Reason for trade/setup: This paper trade was basedon pattern analysis thatindicated the down swingas of Oct. 1 had better-than-average odds of beingfollowed by a three-day orlonger rally. The patternconsisted of a day with alow at least .0020 lower thanthe previous 10 lows that close higher.

Past setups that “worked” basically fell into two camps:those that were followed by one- to three-day up swings before another downturn emerged, and those that werefollowed by sustained, longer-term (e.g., 20 or more days)up moves. Those that lost significantly tended to be losersquickly, trading immediately and significantly below the

entry day’s low. Accordingly, an initial modest target will be established to take advantage of the initial expectedrebound, with a second, more distant target a little belowthe mid-September high.

The trade was entered around noon ET when pricepulled back from its early session high of 1.2938 becausea bullish ISM report that morning had triggered a strongstock market rally and a dollar sell-off. The early entry isin expectation of a rally to a new intraday high and a closenear the high of the day. A close below the previous day’sclose of 1.2849 would negate the setup and prompt anearly exit.

Initial stop: 1.2781.

Initial target: 1.3006; take partial profits and raise stop toprotect remainder of position. Second target: 1.3141.

RESULT

Exit: Trade still open.

Profit/loss: -.0006, marked to market at 1:30 p.m. ET onOct. 1.

Outcome: Although there was a mild bounce after thetrade entry, the market subsequently pulled back moresignificantly (as low as 1.2882), although by 2:30 p.m. ET(after the end of the London FX session but before the NewYork close) the trade was bouncing around a little below breakeven.

The wisdom of the early entry is debatable, since thepattern’s probabilities were based on the position of theclosing price. Anticipating the level of the close introduced

another degree of uncertainty into the trade.y

Note: Initial trade targets are typically based on things such as the historical per-

formance of a price pattern or a trading system signal. However, because individ-

ual trades are dictated by immediate circumstances, price targets are exible and

are often used as points at which to liquidate a portion of a trade to reduce expo -

sure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.

Early entry for a swing

trade in the Euro.

TRADE SUMMARY

DateCurrency

pair Entryprice

Initialstop

Initialtarget

IRR MTM DateP/L

LOP LOLTradelengthpoint %

10/1/12 EUR/USD 1.2898 1.2781 1.3006 0.92 1.2892 10/1/12 -.0006 -0.05% .0009 -.0016 1 day

FOREXTRADEJOURNAL

Source: TradeStation

Forex Currency trader

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