Currency Trader March 2009

8/14/2019 Currency Trader March 2009

1/45

WEEKLY BOTTOMPATTERN:Time fora bounce? p. 16

CURRENCIESAND SOVEREIGNcredit risks p. 28

CME READIESnew Micro FX futuresp. 38

THE BRITISH POUNDSpounding p. 8

SWEDENS KRONA FACESfamiliar currencychallenge p. 12

RISK AVERSIONand the forex

market p. 20

March 2009

Volume 6, No. 3

Strategies, analysis, and news for FX traders


2/45

Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Global Markets

Has the bleeding stopped

for the pound? . . . . . . . . . . . . . . . . . . . . . . 8The British pound had backed off a bit from

its once-in-a-lifetime sell-off in February, but

few are betting the currency will stage adramatic recovery in the near future.

By Currency Trader Staff

Volatile times for krona . . . . . . . . . . . . . .12Regardless of whether this Nordic currency

can come out of its deep freeze, it is likely

to have a bumpy ride in the coming months.


Spot CheckPound/dollar . . . . . . . . . . . . . . . . . . . . . . 16A look at what the British pounds recent price

action hints about its future.


On the Money

Rational fear and the forex market . . . . .20Analysis of several intermarket relationships . .

suggests the role of risk aversion in the forex .

market is no cut-and-dried issue.

By Barbara Rockefeller

Advanced StrategiesSovereign credit risk and currencies . . .28Government actions are perversely rewarding

the guilty: As a nations credit rating deterio-

rates, its borrowing costs fall and its currency,

at least temporarily, rises.

By Howard L. Simons

CONTENTS

2 March 2009 CURRENCY TRADER

continued on p. 4


3/45
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4/454 March 2009 CURRENCY TRADER

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Concerns over the global

crisis remain the key

driver in the foreign

exchange market as

investors witness the continued dete-

rioration of economies around the

industrialized world. In February, the

British pound stabilized somewhat vs.

the U.S. dollar after dramatic losses in

recent months.Looking back to what seems now

like a lifetime ago, in November 2007

the pound/dollar pair (GBP/USD)

touched a high of $2.1159 (the highest

price since 1981) and was still trading

above $2.000 in July 2008 before

plunging to a late-January 2009 low of

$1.3500 (the lowest price since

1985), and more recently con-

solidating in the $1.4100-

1.5000 range (Figure 1).The British economy was

especially hard hit during the

fall months thanks to the

UKs strong reliance on bank-

ing and other financial servic-

es. Citing data from the

British Consular Office,

Charmaine Buskas, senior

economic strategist at TD

Securities in Toronto says,

10.7 percent of UK gross

GLOBAL MARKETS


Has the bleeding stoppedfor the pound?The UKs concentration in financial services

has compounded the problems for its economy and currency.

BY CURRENCY TRADER STAFF

BRITISH POUND/U.S. DOLLAR AT A GLANCE

Daily range (past 40 days): Average: .0326 Median: .0329

Weekly range (past 26 weeks): Average: .0828 Median: .0748

52-week high/low: 2.0395 1.3501

Prevailing interest rate, last change: UK U.S.

1%, -0.50% 0%, -0.50%

Next scheduled central bank meeting(s): March 5 March 17-18

GDP (% annualized): Q4 2008 Q3 2008 Q2 2008

UK U.S. UK U.S. UK U.S.

-1.8 -6.2 0.3 -0.5 1.7 2.8

All data as of 2/27/09

A little more than a year after making a 26-year high above 2.1100, the

pound/dollar fell to a nearly 24-year low in January 2009.

FIGURE 1 HOW THE MIGHTY HAVE FALLEN

Source: TradeStation


9/45CURRENCY TRADER March 2009 9

domestic product (GDP) comes from financial services. It

accounts for one in 30 jobs. They had the same troubles as

everyone else, but amplified and magnified.

Like the U.S., the UK also suffered a crash in its over-

leveraged housing market at the

same time the global financial crisis

began to hit.

The UK is suffering more than

some because of its financial and

housing sector exposure, says

Stephen Webster, chief European

economist at 4CAST Inc.

GDP freefall

Webster says the UKs economic

situation is dire in every sense.

Economically, the UK officially

slipped into recession as of the

fourth quarter 2008, he says.

Credit conditions remain tightand confidence weak.

Ruth Stroppiana, chief interna-

tional economist at Moodys

Economy.com adds: The ongoing

lending logjam and the associated

adverse impact on the availability

of credit to households and [corpo-

rations] will take a heavy toll on

the economy. Real GDP is expected

to sink by almost 4 percent from

peak to trough, almost double the

2-percent contraction of the early 1990s, but less than the

nearly 6-percent fall in the early 1980s following the winter

of discontent. The UK economy is about halfway through

continued on p. 10

The UK is suffering

more than some

because of its financial

and housing sector

exposure.

Stephen Webster,chief European economist

at 4CAST Inc.
http://www.esignal.com/offer/ct



its deepest recession in three decades.

Moodys Economy.com forecasts UK real GDP to con-

tract by 2.9 percent in 2009, following a mere 0.6 percent rise

in 2008. This compares with 4CAST Inc.s projection of a

3.5-percent 2009 decline and TD

Securities forecast of a 3.1-percent

decline.

BOE action

The Bank of England (BOE) has

aggressively stepped in to combat the

financial crisis. Since early October,

the BOE has slashed its key lending

rate from 5 percent to the current

record low of 1 percent.

Analysts expect the BOE to pull the

trigger on another rate cut at its

upcoming March 5 meeting. Another

0.50-percent easing is widely expect-

ed, which would take the key mone-tary policy rate to yet another record

low of 0.50 percent.

With the monetary policy rate rap-

idly approaching zero, Britains cen-

tral bankers are running out of room

to cut rates much further, Stroppiana

says. Dysfunctional credit markets

have blunted the effectiveness of traditional monetary

policy.

The government has granted the central bank unprece-

dented powers to buy up to 50 billionin corporate assets via the Asset

Purchase Facility. The purchase of

commercial paper and corporate

bonds is currently being financed by

the issue of Treasury bills rather than

by the creation of money. The next

step for Britains central bankers will

likely be to adopt a quantitative easing

policy creating central bank money

to boost money supply in a bid to

increase the availability of credit tohouseholds and corporations.

FX action

Into year-end, forex traders had

focused on the parity level in the

Euro/pound pair (EUR/GBP). On

Dec. 30, EUR/GBP touched the .9800

level intraday but subsequently pulled

back as far as .8600 in early February

before rebounding to around .8860

later in the month (Figure 2).

GLOBAL MARKETS continued

The Euro/pounds run to parity (1.00) came up short late last year, and the pair

subsequently retraced more than 10 percent over the next six weeks.

FIGURE 2 ALMOST, BUT NOT QUITE


The pound/dollar has managed to stay above its January low, but it has not

made a strong move to the upside.

FIGURE 3 TRYING TO STAY AFLOAT




There was a speculative push to achieve parity in

December, says Michael Woolfolk, senior currency strate-

gist at Bank of New York Mellon. We saw a pullback in

January from the speculative surge to buy the Euro vs. the

pound.

However, analysts are increas-

ingly bearish on the pair.

The UK has been more proac-

tive than the Eurozone in battling

the deteriorating economic condi-

tions, says Meg Brown, senior

currency strategist at Brown

Brothers Harriman. We think the

UK will follow the U.S. out of

recession earlier than Europe. But

we are not there yet.On a relative basis, EUR/GBP

could have more room on the

downside, according Woolfolk. He

and others highlight the

Eurozones exposure to Eastern

European banking woes.

Eastern Europe is imploding

right now, he says. These coun-

tries, such as Poland, the Czech

Republic, and Latvia, are members

of the European Union. They are insevere economic distress with no

positive outlook for the foreseeable

future.

The Eurozones exposure to

these weak links could ultimately

weigh on the Euro in the near

future. Bank of New York Mellon

forecasts a stiff decline in the

Euro/dollar (EUR/USD) toward

$1.15 in the months ahead. Into

year-end, they see an 82.00EUR/GBP target.

In recent weeks, the $1.35 level

has formed a minor bottom of sorts

in the pound/dollar pair (Figure

3). But, the jury is still out on

whether that will act as a strong

floor in the weeks ahead.

Over the coming quarter, the

U.S. dollar will not give up much

ground and the pound will come

under pressure, Brown says. She

advises pound traders to remain short or use pullbacks, to

say, $1.50, to short the pound.

For more analysis of the pound/dollar pair, see Spot check.
http://www.esignal.com/offer/ct


12/45


13/45

remains stressed, Li says. Followingthe demise of Lehman Brothers, theglobal wholesale funding market seizedup and Swedish banks became reluctantto lend to each other. In response, the

central bank has continued to pumpmassive liquidity into the sector, a totalof SEK 300 billion of loans denominatedin dollars and kronas.

Investors have recently been con-cerned about European banks exposureto emerging European markets, sheadds. Swedish banks have a particular-ly high exposure to the Baltic region.Western European banks are believed toaccount for 90 percent of the value of allbank loans made to Central and EasternEuropean countries.

Lehman Brothers September 2008bankruptcy filing was a watershed eventfor both the Swedish economy and itscurrency.

The collapse of Lehman Brothersconstitutes a turning point for thekrona, says Cecilia Skingsley, head offixed income and foreign exchangeresearch at Swedbank Markets inStockholm. The effect of the collapse

was a sharp increase in financial marketvolatility. This turned out to be hugelydetrimental to small currencies such asthe Swedish krona as investors rushedinto currencies such as the Japanese yen,U.S. dollar, and the Euro, which wereperceived as huge and safe. On top ofthis, a small export-dependent countrylike Sweden has a disadvantage whenthe global business cycle turns down.

The Riksbank

The Swedish central bank theRiksbank has been one of the moreaggressive central banks in the world,according to Swedbanks Skingsley. TheRiksbank began an easing cycle inOctober 2008 and has made four cutssince then, bringing the banks overnightrepo rate from 4.75 percent to 1 per-cent as of February 2009. Most Swedishanalysts agree further rate cuts are possi-ble, with room for another 50 basis point

CURRENCY TRADER March 2009 13

continued on p. 14
http://www.pfgbest.com/bt1



GLOBAL MARKETS continued

cut to a 0.50 percent official rate in thesecond quarter of this year.

Johan Javeus, chief forex strategistat SEB Trading offers a more aggres-

sive outlook.Our view is that the Riksbank will

cut rates to zero at the April 21 meet-ing and keep the repo rate at zero untilthe end of 2010, he says.

The Riksbank has a 2-percent infla-tion target with a tolerance band of+/- 1 percent around that target.While 2008 CPI inflation came in at 3.4percent, inflation is not even on the radar screen this year in fact, it has been plummeting. In December 2008, the CPIrose by 0.9 percent after hitting 4 percent in October 2008.But the Riksbank is forecasting a 0.5-percent decline thisyear in the nations consumer price index (CPI), and SEBforecasts a 0.9-percent CPI decline in 2009, followed by amodest rebound to a 0.4-percent rise in 2010.

The krona

Swedish citizens voted down entry into the EuropeanUnion in 2003 and chose to maintain their own sovereigncurrency the krona. For many years, the USD/SEK pairwas in a steady downtrend as the krona strengthenedagainst the dollar, falling from from 11.06 in July 2001 to

5.81 in April 2008. After winding in a trading range formuch of 2008, the krona made some explosive down movesagainst both the dollar and the Euro beginning in August2008. Again, like most smaller currencies around the world,the krona suffered as the financial panic unfolded.

Risk aversion has meant investors have been sellingrisky assets such as the krona, Li says. The U.S. dollar has been strengthening vs. the krona asrisk-averse investors have been mov-ing into safe havens such as the dol-lar.

From the 6.04 level in August 2008,

USD/SEK surged to 8.90 in lateFebruary 2009 (Figure 2), whileEUR/SEK blasted higher from 9.48 to11.40 in December 2008 before backingoff to 10.41 and then rallying again toa new high in late February (Figure 3).

Although the krona is punished intimes of financial risk aversion,according to Skingsley, the trend isno longer falling, but rather stabilizing[with] continued high volatility.EUR/SEK will be range bound for

another few months, but will recover in the course of thesecond half of 2009. We look for EUR/SEK at 10.00 by yearend.

Volatility will likely remain the name of the game in thenear term.

The Swedish krona will remain volatile against the Eurothis year given continued financial market turbulence, Lisays. The Euro will weaken to 9.40 against the krona bymid-year as investors price in worsening Eurozone eco-nomic fundamentals and further aggressive Eurozone mon-etary policy easing. Moodys Economy.com expects theEuro will finish the year at SEK 9.42 against the krona.

What does this mean in respect to the dollar?The U.S. dollar will continue to benefit in this shaky

global economic environment, partly due to continuedrepatriation flows, partly due to Euro problems stemmingfrom heavy EMU exposure to Eastern Europe, Skingsleynotes. We see USD/SEK at around 8.50 and the Euro willfall vs. both currencies.

SEB Trading expects USD/SEK at 8.75 in mid-2009.The risks are clearly on the upside, Javeus says.

The krona also lost ground against the Euro, which, after a pullback, pushed

above its December high in February.

FIGURE 3 EURO/KRONA

Source: ADVFN (http://www.advfn.com)

The dollar was pushing to new highs vs. the krona in late February.

FIGURE 2 THE BIG TURNAROUND

Source: ADVFN (http://www.advfn.com)
http://www.advfn.com/http://www.advfn.com/http://www.advfn.com/http://www.advfn.com/


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16/45

SPOT CHECK

When, during the weekending Oct. 24, 2008,the British pound/U.S.dollar pair (GBP/USD)

fell more than six percent below the pre-vious weeks low, it was the first timethe pound had dropped that much in

more than 16 years. To be precise, it had-nt fallen that far, that fast since the weekending Sept. 18, 1992 the week, infact, when George Soros was creditedwith breaking the Bank of Englandwith his massive short play against theBritish currency.

That the pound has taken weekly beatings of this magnitude only fourtimes in the past 20 years, and that threeof them have occurred in the past fivemonths (the weeks ending Oct. 24, Nov.12, and Jan. 23), is a testament to theextreme nature of the current market

upheaval. (The market has fallen 3 percent ormore on a weekly basis only 26 times in thepast 30 years, and seven of those drops haveoccurred since August 2008.)

Perhaps not coincidentally, reports surfacedin late January that Soros had been shorting thepound during the most recent sell-off, whichsaw the currency collapse from the 2.1159 highin November 2007 vs. the dollar to a 1.3501 lowin January 2009 (Figure 1). Soros was quoted inThe Daily Telegraph as saying he had foreseen

the drop in sterling, but that after the fall fromaround $2 to $1.40, the risk-reward balance isno longer compelling. Although he hesitatedto say the pounds sell-off was definitively fin-ished, the news was widely interpreted as asign the worst might be over, at least for thenear future.

But does that make it a buying opportunity?Has the bleeding stopped for the pound?reviews the economic and political challengesthe British currency faces as it tries to reboundfrom its most dramatic devaluation in more


Pound/dollar

The pound continued to struggle after the initial September-November

flush-out in financial markets.

FIGURE 2 GBP/USD, DAILY


The pound plummeted to a nearly quarter-century low in January before

stabilizing somewhat in February.

FIGURE 1 GBP/USD, MONTHLY


The British currencys implosion makes it difficult to find historical comparisons,

but one unfolding pattern hints at higher near-term prices, barring a new dollar surge.

BY CURRENCY TRADER STAFF

continued on p. 18


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18/45

than half a century. The price action itself isinconclusive.

More so than most markets, the pound/dol-lar pair has struggled to find its footing sinceOctober-November, moving sideways to lower before falling to a new low in late January(Figure 2). Its subsequent run-up formed from the week ending Jan. 16 to the week end-

ing Jan. 23 what likely caught the eye ofmany a chart watcher as a reversal pattern ofsome kind: A sharply lower weekly low thatclosed near the bottom of the weeks range, fol-lowed by a week that bottomed around thesame level but closed near the top of its range(Figure 3). Price initially bounced a little higher,then pulled back slightly over the next couple ofweeks.

However, several ways of modeling the pat-tern with any specificity produced too fewexamples from which to draw conclusions; the

drop from the low of the week ending Jan. 16 tothe following weeks low was, as men-tioned, exceptionally large. Taking intoaccount as many of the characteristicsof the two-week pattern while avoid-ing optimization led to the followingdefinition:

1. Last weeks low is at least 1percent lower than the previousweeks low.

2. Last weeks close was below lastweeks open.

3. The difference between thisweeks low and last weeks lowis less than 0.05 percent.

4. This weeks close is above lastweeks close.

5. This weeks close is in the upper25 percent of the weeks range.

As loose as the parameters are, theyproduced only 16 previous examplesdating back to February 1999. Figure 4compares the median price movement for the 12 weeks

after the pattern (measured from the close of the pattern tothe subsequent 12 weekly closes) to the median price actionfor all one- to 12-week periods during the 10-year analysisperiod.

There is an upside bias to the post-pattern behavior, espe-cially through week 8, but the price action in the first cou-ple of weeks is flat to lower which happens to be the paththe pair took after the most recent instance.

Going back another 20 years to 1979 produced 23 moreexamples, and the overall trajectory was roughly the same:The pair outperformed the market by the end of the reviewperiod, but this time price meandered for seven weeksbefore turning higher.

The evidence is scant, but the pattern analyzed here

points to the potential for some limited upside action in thepound/dollar pair, given the markets most recent movewas in keeping with the patterns historical performance.However, as of Feb. 27, the market had concluded weekfour of its post-pattern move and had already rallied asmuch as .0448 above the Jan. 30 close, much more than thetypical post-pattern move.

Also, its important to remember the other half of thispair is the U.S. dollar, which, although it faces its own prob-lems, has proved it is still something of a safe-haven intimes of turmoil. If the global markets begin to destabilizedramatically again, funds are likely to fly in the direction ofthe dollar, to the detriment of most other currencies.


The two-week pattern that appeared in mid-January was a relatively

rare event because of the size of the down move during the week

ending Jan. 16.

FIGURE 3 GBP/USD, WEEKLY


The pound/dollar pair outperformed the markets overall bias during two

different periods, but results were choppy. Also, relaxing the pattern parameters

significantly produced a total of only 39 examples since 1979.

FIGURE 4 POUND/DOLLAR WEEKLY PATTERN

SPOT CHECK continued


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20/45

The explanation for

every market move in

recent months has been

risk aversion. If risk

aversion rises, as symbolized by

declines in the Dow and S&P 500 stock

indices, the dollar goes up as traders

buy into the U.S. currency as a safe

haven. If risk aversion falls because of

some new government initiative to fix

the financial sector or the economy,

the dollar falters (Figure 1).

While its true risk aversion is a

powerful force, its really another way

of saying fear. There was irrationalexuberance on the way up, and now

we have fear on the way down, with

some people claiming this time the

fear is rational and based on authentic

risks of additional wealth destruction.

In short, we havent come up with

any new ideas about the behavior of

markets beyond fear and greed, a

phrase that surely has been around for

centuries.

ON THE MONEY

Prevailing wisdom holds that if risk aversion rises, the dollar goes up astraders buy into the U.S. currency as a safe haven. If risk aversion falls, the

dollar falters.

FIGURE 1 EURO/DOLLAR VS. S&P 500, DAILY


BY BARBARA ROCKEFELLER

Intermarket relationships arent

always what they seem.

It may seem as if the Euro led the S&P down in 1999-2001, but this

relationship has no basis in reality.

FIGURE 2 EURO/DOLLAR VS. S&P 500, WEEKLY

Source: data eSignal and Reuters Online; chart MetaStock

Rational

fear

and theforex market



21/45

The problem with risk aversion as

the explanation for everything is that

it is being tossed around like confetti.

One newspaper reports the Euro/yen

pair has a strong correlation with the

CBOE volatility index (VIX). A hedge-

fund manager says he is very con-cerned about the Euro/yen crossrate

being so strongly correlated with the

S&P 500 stock index. European ana-

lysts are tracking the relationship

between the Euro/dollar and the

Baltic Dry Index (BDI), a measure of

shipping rates and thus a proxy for

global economic activity.

Previously, we had the circular oil-

dollar logic: the dollar is up because

oil is down (on the theory that cheap

oil is good for the U.S. economy), or oil

is up because the dollar is down.

Finally, we have the perennial dollar

and gold relationship gold riseswhen the outlook for the dollar is

bleak. Gold is an alternative to money

as a store of value, even if it cant be

used as a unit of account or a transac-

tion medium (try paying for a quart of

milk or a tank of heating oil with a

chunk of gold).

To all of this we say, balderdash.

Market prices may appear to be corre-

lated, but correlation is not causation.

Market prices are set by two things

fundamentals (such as corporate earn-

ings for stock indices or jewelry

demand for gold) and market senti-

ment. When market sentiment is dom-

inated by fear, rational or irrational, all

prices will fall, but they fall in their

own way and to their own extent

because prices are set by human

traders and each market has a differ-ent trader profile.

Figure 2 shows the Euro and S&P

500 on a weekly basis. It appears the

continued on p. 22

The dollar/yen surging upward to nearly 100 while the S&P 500 is still falling

is a divergence the risk-aversion scenario cannot explain.

FIGURE 3 DOLLAR/YEN VS. S&P 500, DAILY



We havent come up with any new ideas about the

behavior of markets beyond fear and greed, aphrase that surely has been around for centuries.
http://www.tsunami-trade.com/


22/45

ON THE MONEY continued

Euro led the S&P down in 1999-2001,

but this has no basis in reality. The

Euro was the least of the reasons the

S&P fell in 2000. The real reason was

the tech wreck and the bursting of the

Internet bubble. The Euro was weak

for its own reasons at the time, or

rather we might say the dollar was

strong for its own reasons, having lit-

tle to do with stocks. We might say

the Euro fell because Euro-holders

were selling them to buy into the U.S.stock market, but the sums involved

do not support the thesis, tens of bil-

lions in portfolio investment vs. hun-

dreds of billions in actual Euro/dollar

positions. The tail does not wag the

dog.

We need to downplay the seeming

correlation for two reasons. First, we

want to avoid knee-jerk trading deci-

sions inspired by developments in

only marginally related markets. This

is called keeping your eye on the ball

and its a basic tenet of good manage-

ment. As management guru Stanley

Drucker advised, Stick to your knit-

ting. If you follow the dollar/yen

and your trading P&L depends on the

dollar/yen, you should not be look-

ing at the gold-oil relationship. A

corollary is that if the rest of the mar-

ket is bedazzled and befuddled byevents in another market, you may be

able to take advantage of it. At some

point they will wake up to the empti-

ness of their presumption, and if you

can predict their exit, you can get

there first.

The second reason is that you want

to have a clear head, uncluttered by

extraneous factors against the day

when your market really does make a


Starting in 2003, it looks like Euro/yen has been highly correlated with the S&P500, but neither currency has anything to do with the U.S. stock index.

FIGURE 4 EURO/YEN VS. S&P 500, WEEKLY


The yen and gold diverged dramatically in the fall of 2008.

FIGURE 5 DOLLAR/YEN (INVERTED) VS. GOLD (WEEKLY)



23/45

move. For example, the yen was said

to be a safe haven for the Japanese.

Risk aversion was causing retailinvestors to pull back from positions

in foreign assets. In the past year,

Japanese investors in overseas invest-

ment trusts saw a pullout of $118 bil-

lion. Despite Japan having the worst

economic performance among G7

countries, with GDP falling 12.7 per-

cent year-over-year in 2008, the yen is

the home currency for the Japanese

and thus their safe haven. Besides, a

new tax law coming into effect in Aprilwaives corporate taxes on repatriated

profits, possibly as much as 10-20 tril-

lion.

This scenario supposedly supports

the inverse correlation of the yen and

the U.S. stock markets. As the Dow

and S&P fall, the yen goes up on repa-

triation. This sounds plausible and

indeed the yen strengthened from

110.67 in August 2008 to 87.13 in

January 2009, or more than 21 percent

(Figure 3).

But now suddenly we have the dol-

lar/yen surging upward to nearly 100

while at the same time the S&P 500 is

still falling a divergence the risk-

aversion scenario simply cannot

explain. Logically, if world equity

assets are falling, risk aversion should be higher and the safe-haven yen

should be rising, not falling. Golly,

maybe the dollar is the safe haven,

after all.

continued on p. 24


The rise in gold and decline in oil forms a spike, but the Swiss franc fails to

follow.

FIGURE 6 DOLLAR/SWISS VS. GOLD/OIL (WEEKLY)


When market sentiment is dominated by fear,

rational or irrational, all prices will fall, but they fall

in their own way and to their own extent because

prices are set by human traders, and each market

has a different trader profile.
http://www.fx-knight.com/ct.html


24/45



rise in gold, coupled with the fall in

oil, delivering a spike while the Swiss

franc fails to follow. The Swiss franc is

regarded as a safe haven in times of

market turmoil and uncertainty and

the spike in gold/oil must spell

uncertainty in capital letters but it

would have been a mistake to buy

Swiss francs on this evidence.

One intermarket relationship that is

consistent and reliable is the one

between the yen and the Nikkei stock

index (Figure 7). This has logic behindit, because when the yen is weak

Japanese companies can sell more

overseas. This is the only time you can

use an intermarket correlation to your

trading advantage but you have to

be nimble. Figure 8 shows the same

relationship on a weekly basis. The

correlation is weaker, because there

are other, separate factors at work in

both markets, like actual earnings over

expected earnings. You cant dawdle

with this one.

Next, consider the Baltic Dry Index

as a proxy for true economic growth.

The BDI, which has been around since

1744, measures the price of shipping

raw materials on various routes

around the world. It takes a long time

to build a ship, so when demand for

shipping rises compared to the supply

of ships, we assume economic growthis good (Figure 9). The Euro seems to

track the index very closely to the May

2008 spike when the index hit a record

high.

By December 2008, the index had

lost all its 2005 gains. So why did the

Euro spike up in December to nearly

1.4600 when the index was still down

in the dumps? Logically, there is no

reason for the Euro to be more highly

correlated with world growth than

any other currency.

The BDI fell for many reasons, but

an important one was the loss of cred-

it that started last July and remains in

continued on p. 26
http://www.thewizard.com/



TRADING STRATEGIES continued

effect today. Shippers, shipbuilders,

and producers of raw materials

couldnt get credit as the financial

markets seized. Finally, raw materials

prices fell dramatically. The correla-

tion of raw material prices (represent-

ed by the Commodity Price Index in

Figure 10) to the BDI is more impres-

sive than the relationship between the

Euro against the index.

Finally, if we think fear is behind all

markets these days, lets measure fear

itself. That is achieved with the VIX,

which measures the implied volatility

of S&P 500 index options over the

upcoming 30-day period (Figure 11).

A high VIX means fear is really highand the market is likely to go up, on

the theory that an excess of fear will

exhaust itself. VIX spiked to its high-

est level in October 2008, crashed, and

then spiked again. As we know, the

S&P itself failed to deliver a rally

(Figure 1) while at the same time, the

Euro is diverging from VIX. Well, if

fear is what is dominating the curren-

cy market, the Euro should be lower

There is no reason for the Euro to be more highly correlated with world growth

than any other currency. The BDI fell for many reasons notably, the loss ofcredit that started last July.

FIGURE 9 EURO/DOLLAR VS. BALTIC DRY INDEX WEEKLY


The correlation of raw material prices to the BDI is more impressive than the

relationship between the Euro against the BDI in Figure 9.

FIGURE 10 COMMODITY PRICE INDEX VS. BALTIC DRY INDEX, WEEKLY


Its okay to consider that

one market influencesanother, like raw

materials prices

influence the BDI. But

its risky and a bit silly

to trade the Euro/dollar

by looking at the BDI

chart.



much lower. Evidently, risk aver-

sion in stocks is quantitatively and

qualitatively different from risk aver-

sion in currencies.

Context counts. Its okay to consid-

er that one market influences another,

like raw materials prices influence the

BDI. But its risky and a bit silly to

trade the Euro/dollar by looking at

the BDI chart. Dont trade one thing

while looking at something else.

Trade the thing youre looking at.

For information on the author see p. 6.

Competitive devaluations, the EMU, and the yen

Currency Trader, February 2009.

Currency devaluation never works in the long run just ask

Japan but that doesnt mean panicky governments wont

use it to try to stem the flow of blood in the near term.

The Euro: Prosperity or perdition?

Currency Trader, January 2009.

The belief the Euro sell-off has ended may be based on

some false assumptions about how the U.S. and Europe are

handling the economic crisis.

The six Ds of depression

Currency Trader, December 2008.

The buck has gotten a bounce from the recent financial

panic, but the longer-term picture isnt quite as bullish.

Euro and dollar at parity?

Currency Trader, November 2008.

A few short months ago the world was contemplating Euro$2. Now, the talk is all about Euro $1. What are the odds it

will happen?

Crisis of confidence, Currency Trader, October 2008.

As Wall Street and Washington prove themselves equally

inept, the dollar suffers.

The dollar-oil connection

Currency Trader, September 2008.

As oil broke, so did the Euro/dollar pair. What can we learn

from analyzing bursting bubbles?

Horizontal patterns in foreign exchange

Currency Trader, August 2008.

The Euros price action lends itself well to dissection with

the Darvas Box.

Are the summer doldrums here?Currency Trader, July 2008.

If market myth is true, the season will bring a sideways

market. But the myth warrants some analysis.

Manias and crashes: Where will oil lead the dollar?

Currency Trader, June 2008.

Although some analysts argue a falling dollar is helping to

push up oil prices, it might be the other way around. The

question is, when will the bubble-go-round stop?

Is the Euro going to the moon?

Currency Trader, May 2008.

A look at the Euros recent gravity-defying performance.

Whats really driving the dollar?

Currency Trader, April 2008.

Signs of a potential turnaround in the buck can be found in

an unexpected place.

Why is the yen trending higher?

Currency Trader, March 2008.

The yens rise seems to defy logic. Find out whats behind it.

Other Barbara Rockefeller articles:

You can purchase and download past articles athttp://store.activetradermag.com.

The VIX spiked to its highest level in October 2008, crashed, and then spiked

again without a big rally in the S&P. At the same time, the Euro is diverging

from VIX.

FIGURE 11 EURO/DOLLAR (INVERTED) VS. VIX (DAILY)

http://store.activetradermag.com/http://store.activetradermag.com/


28/45

ADVANCED STRATEGIES

O

ne witticism circulat-ing about the Internetendlessly and by

fax previously, forthose of you old enough to remem-ber when the fax machine was trschic is the six phases of a project.These are, in chronological order:enthusiasm, disillusionment, panic,search for the guilty, punishment ofthe innocent, and praise and honorsfor non-participants.

This process must be scale-inde-pendent, for it applies to global cen-tral banks and finance ministries,

operating both as separate entitiesand in coordination with each other,as well as to small groups withincompanies.

How else can we explain the phe-nomenon increasingly observ-able in 2008 that once a countryssovereign credit rating deteriorates,its borrowing costs fall and its cur-rency, at least temporarily, rises?

If this is not a perverse rewardingof the guilty, then what is?

Sovereign credit risk

Credit default swaps (CDS) areinsurance contracts wherein thewriter agrees to pay the investor thefull (par) value of the bond in theevent of a default. Think of them asput options on bonds.

They are quoted in basis points,or 0.01-percent units of the dollaramount being insured, usually aminimum of $10 million. The com-


The credit crisis was global and clearly affected German bunds as much if not more

than American bonds.

BY HOWARD L. SIMONS

FIGURE 1 FIVE- AND 10-YEAR CDS COSTS ON U.S. AND GERMAN BONDS

VS. NORMALIZED YIELD SPREAD

Sovereign credit riskand currencies

The policy failures of 2007-2008 are likely to lead to greater government intervention.


29/45

bination of a risky bond plus a CDS,therefore, is a synthetic call option onthe bond. The arbitrage is conceptu-ally simple: A holder of a risky bond

should be willing to pay as much asthe spread over Treasury or othersovereign yields in CDS protection.

What happens when the underly-ing bond itself is a sovereign creditrisk, such as a U.S. Treasury, aGerman bund or a Japanese govern-ment bond (JGB)? The default risk of

any of these instruments involvessomething pretty apocalyptic, on theorder of the issuing governmentceasing to exist and honor its obligations. That happens, asanyone who dabbles in Tsarist or Confederate bonds in any-

thing other than the scripophily market can attest. And ifthat event comes about, it would be pretty pointless toreceive payment for a defaulted U.S. Treasury bond in U.S.dollars. Therefore, the CDS quotes here always are in unitsof another currency; Euros for U.S. bonds and dollars forGerman and Japanese bonds.

Rising CDS costs on various sovereign credit risksbecame an increasing fact of life after the onset of the cred-it crunch in 2007. Governments everywhere (in the U.S. andUK in particular) felt the appropriate response to banksreaping the consequences of their own bad bets and riskmanagement was to bail them out by a combination of neg-

ative real short-term interest rates, acceptance of all hard-to-value securities as collateral, implicit backstops of rescue

plans for entities such as Bear Stearns, the de facto nation-alization of Fannie Mae and Freddie Mac, and the creationof a bewildering array of lending facilities managed bysome combination of the Treasury and the Federal Reserve.

Each one of these steps reduced, in the case of the FederalReserve, the quantity of Treasury securities on its balancesheet. Central banks portfolios held securities of increas-ingly dubious quality, so much so the Federal Reserve hasrefused to disclose the garbage it has accepted as collateraldespite a Freedom of Information Act inquiry.

All this chicanery produced higher inflation and, ironi-continued on p. 30


This parallel example observed for American and Japanese bonds confirms an

emerging principle of sovereign credit risk: Governments are being rewarded with

lower borrowing costs as investors flee risk.

FIGURE 2 CREDIT RISK OF JAPANESE FIVE- AND 10-YEAR BONDS

REMAINS ELEVATED

Restated, as credit risks

increased in general,

investors fled riskier

assets for the perceived

safety of sovereign debt

a flight-to-quality only

if you assume quality

and printing press are

interchangeable.


30/45

ADVANCED STRATEGIEScontinued

cally, higher credit costs for bothcorporate borrowers and for resi-dential mortgages without the off-setting benefit of rising asset

prices. As far as complete failureswith catastrophic long-term conse-quences go, you would be hard-pressed to beat this.

Praise and honors for the non-participants might be a Pyrrhicvictory given the damage pro-duced by the participants. Did wemention Timothy Geithner, pres-ent (as the president of the NewYork Federal Reserve) at thedestruction of Lehman Brothersand the draconian rescue of AIG,was rewarded with the TreasurySecretary?

Its important to remember thegovernments AAA credit ratingderives from 1) its taxation author-

Yen implied volatility jumped during the August 2007 panic, well ahead of any increas-

es in CDS costs, and peaked simultaneously with these costs in the January, March,

and September-October 2008 panics. Yen volatility remained elevated along with

these CDS costs.

FIGURE 3 YEN VOLATILITY ROSE WITH SOVEREIGN CREDIT RISK
http://www.ibfx.com/transfer


31/45

ity and 2) its printing presses, notnecessarily in that order. Whilethe federal government can tax100 percent of your money (true

statement: under the due processclauses of the fifth and 14thAmendments, all that is requiredis for Congress to pass a law), it isunlikely to do so, and we saw bythe dollars collapse early in 2008that international creditors mightissue a collective cease-and-desistorder on the printing presses. Ifthe markets sense the govern-ments balance sheet consists ofdefunct mortgage securities, acredit deterioration will occur.

Trans-Atlantic trade

Lets map two different CDScosts, those for German bunds

continued on p. 32

Over the past year, the yen and five-year CDS costs have moved in tandem. Higher

credit risk leads to both lower funding costs and a stronger currency for the govern-

ment at the expense of higher funding costs for everyone else.

FIGURE 4 YEN STRENGTHENED AS SOVEREIGN CREDIT RISK ROSE
http://www.ibfx.com/transfer


32/45

priced in dollars and those forAmerican bonds priced in Euros, attwo different maturities, five and 10years (Figure 1). The jump in CDScosts for the U.S. during various phas-es of the 2008 credit crisis and the gov-

ernments response thereto is quiteapparent, as is the ratchet nature oftheir climb: Once the market priced ina lower credit rating for the U.S., itremained elevated until the nextjump.

What about the CDS costs for theGerman bunds priced in dollars?

While they are at lower basis-pointlevels than their American counter-parts, their path has paralleled U.S.CDS costs. The credit crisis was as aglobal affair and clearly affected theGerman bunds as much if not morethan it did the American bonds.

Lets overlay the normalized yieldspreads between the German andAmerican bonds; this is the yield dif-ferential between the German andAmerican bonds, divided by the


Related reading:Other Howard Simons articles

Minor trends make minor friends

Currency Trader, February 2009.

Do minor currencies offer trading opportunities the majors dont? Find

out what the numbers say.

Let the trend be your friend: The majors

Currency Trader, January 2009.

If currencies trend so much, why do trend followers usually have such blah

performance? This and other questions are answered in this study of currency

trends.

The rupee and emerging markets

Currency Trader, December 2008.

Analysis suggests Indias status as a global economic power is no accident.

Nordic currency confusion

Currency Trader, November 2008.

Get a handle on the dynamics of the Northern European

currencies.

The Swiss francs commodity connection

Currency Trader, October 2008.

How can the Swiss currency be, of all things, a commodity currency?

Franc-ly, my dear, I dont give a carry

Currency Trader, September 2008.

Investigating the Swiss franc carry trade, and what might change its dynamics.

The short, awful life of the dollar carry trade

Currency Trader, August 2008.

The implications of the weak-dollar policy and the dollars roles as a funding currency.

Currencies and commitments

Currency Trader, June 2008.

Find out what COT data conveys about forex price action.

Getting carried away with the kiwi

Currency Trader, July 2008.

Whats driving the New Zealand dollar, and how long is it likely to last?

Currencies and stock index performance

Currency Trader, April 2008.

Find out how stock indices relate to the performance of their

currencies.

Whats down with the Australian dollar?

Currency Trader, March 2008.

Traders have many assumptions about the nature of the Australian dollar, but only one

of these preconceptions appears to have any impact on the currency.

Currencies and U.S. stock-sector returnsCurrency Trader, January 2008.

This exhaustive analysis challenges some common assumptions about the relationship

between currency moves and stocks.

Interest-rate shocks and currency moves

Currency Trader, October 2007.

Short-term interest rates are typically cited as the prime catalyst of currency moves.

This study puts that idea to the test.

Howard Simons: Advanced Currency Concepts, Vol. 1

A discounted collection that includes many of the articles listed here.

You can purchase and download past articles athttp://store.activetradermag.com

ADVANCED STRATEGIEScontinued

Moral hazard: Banks

learned they can force

governments hands

by failing on a grand

scale, and governments

learned their power rises

and their funding costs

fall when they extend

the full faith and credit of

their national treasuries

to wayward financiers.
http://store.activetradermag.com/http://store.activetradermag.com/



American yield itself. This normalizedyield spread began to move stronglylower in mid-July 2008, but then shothigher into December 2008, especiallyat the five-year horizon, as investorsfled into U.S. Treasuries.

This was a rather bizarre phenome-non; as the U.S. abandoned all pre-tense of fiscal and monetary sobrietyand began to borrow $100 billionchunks as if they were $5 bills, U.S.Treasury yields collapsed. ByDecember 2008, four-week Treasury bills were yielding 0.0000 percent atauction and three-month bills wereactually being sold at a premium topar for a negative yield to maturity.

Restated, as credit risks increased ingeneral, investors fled riskier assets forthe perceived safety of sovereign debt.It is a flight-to-quality only if youchoose to use quality and printingpress interchangeably.

Yes, it was time to punish the inno-cent with rising costs for mortgagesand corporate debt, and reward theguilty with declining funding costs forsovereign debt even as the sovereignwas trying desperately to inflate its

way out of every problem, real andimagined.

The expansion of moral hazard wascomplete; banks learned they can forcethe hand of government by failing on agrand scale, and governments learnedtheir power rises and their fundingcosts fall when they extend the fullfaith and credit of their national treas-uries to wayward financiers.

Trans-Pacific trade

One of the downsides of the U.S.-German example is its short life; theCDS series for the Treasuries begins inApril 2008, and that simply is too smallof a data sample to draw any mean-ingful conclusions between credit riskand currencies.

However, if we look across thePacific to Japan, we can find CDS on JGBs trading back to 2003. Lets seewhether these instruments confirm theprinciple suggested here that

money flows into mismanaged gov-ernment coffers.

Five- and 10-year CDS costs on JGBspriced in USD exploded higher between November 2007 and theMarch 2008 Bear Stearns panic low

(Figure 2). They retreated betweenMarch and June 2008 and hit a reactionlow in early June, marked on bothcharts with a green vertical line, andthen rose sharply during theSeptember-October crisis.

The normalized yield spreadbetween Japanese and American five-and 10-year bonds started to rise after June 2008. Japanese yields fell fasterthan American yields even though thecredit risk for Japanese bonds rose at afaster rate and the yen weakenedagainst the dollar.

This was a temporary phenomenon,however. By the time the FOMCannounced its anything goes mone-tary policy on Dec. 16, 2008, the yenwas at a thirteen-year high, and short-term American rates were below their Japanese counterparts in what somemay regard as a violation of the lawsof financial gravity.

This is completely parallel to thephenomenon observed for Americanand European bonds and thus con-firms an emerging principle of sover-eign credit risk: Governments arebeing rewarded with lower borrowingcosts as investors flee risk.

Impact on the yen

Now lets turn this longer historytoward the Japanese currency. If wemap the implied volatility on three-

month non-deliverable forwards onthe yen against five-year CDS costs,we see how this volatility jumped dur-ing the August 2007 panic, well aheadof any increases in CDS costs (Figure3). It peaked simultaneously withthese costs in the January, March, andSeptember-October 2008 panics (yes,there are a lot of panics to enumerate).Volatility on the yen remained elevat-ed along with these CDS costs.

If we strip out the intermediary of

volatility and substitute the yen itself,we see this principle emerge quiteclearly (Figure 4). Over the past year,the yen and five-year CDS costs havemoved in tandem. The circle has beenclosed: Higher credit risk leads to both

lower funding costs and a strongercurrency for the government at theexpense of higher funding costs foreveryone else.

We have to consider another, grim-mer scenario. If the Great Depressionwas prolonged and deepened by poli-cy errors, did the world move awayfrom greater centralized planning? No,the opposite occurred. The era initiat-ed a half-century of ever-greater gov-ernment interference in the economy.

Past performance does not predictfuture results, but what else can weuse? Expect the massive policy failuresof 2007-2008 to lead to greater govern-ment intervention.

For information on the author see p. 6.
http://www.rsofhouston.com/


34/45

INTERNATIONAL MARKETS

Currentprice vs. 1-month 3-month 6-month 52-week 52-week Previous

Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank

1 British pound 1.45017 4.99% -3.19% -21.76% 2.0397 1.3501 10

2 South African rand 0.09981 1.66% 3.29% -23.87% 0.1391 0.0841 12

3 Hong Kong dollar 0.12898 0.02% -0.03% 0.66% 0.129 0.1279 5

4 Chinese yuan 0.14645 0.02% -0.17% -0.05% 0.1466 0.1395 3

5 Swiss franc 0.85894 -0.97% 4.26% -5.69% 1.0375 0.813 15

6 Australian dollar 0.64528 -1.40% 1.64% -25.56% 0.9849 0.6005 11

7 Canadian dollar 0.80105 -1.42% 1.03% -16.16% 1.0297 0.768 4

8 Indian rupee 0.02001 -1.57% 0.30% -13.34% 0.03974 0.01843 8

9 Singapore dollar 0.65432 -1.69% -0.35% -7.62% 0.7434 0.6489 13

10 Euro 1.27509 -1.86% 0.48% -13.83% 1.6038 1.2329 14

11 Taiwanese dollar 0.02881 -2.93% -3.81% -9.69% 0.03335 0.02865 9

12 Brazilian real 0.41999 -3.35% -0.07% -32.14% 0.6414 0.3751 2

13 New Zealand dollar 0.51066 -3.55% -4.94% -28.01% 0.8214 0.4959 16

14 Thai baht 0.02825 -4.98% -1.60% -4.85% 0.03373 0.0262 6

15 Japanese yen 0.01047 -7.10% 0.19% 15.18% 0.01148 0.00904 1

16 Swedish krona 0.11294 -7.25% -7.92% -28.54% 0.1718 0.1111 7

17 Russian ruble 0.02786 -10.01% -23.42% -32.08% 0.04334 0.0271 17

CURRENCIES (vs. U.S. DOLLAR)

ACCOUNT BALANCE

Rank Country 2007 Ratio* 2006 2008+

1 Singapore 41.395 27 36.288 42.2082 Switzerland 65.534 15.8 58.708 64.1063 China 379.162 11.7 249.866 453.1464 Hong Kong 22.796 11.2 20.586 20.4565 Netherlands 55.891 7.4 8.6 6.76 Taiwan 25.402 6.8 24.661 28.3657 Sweden 25.903 6 27.707 25.5848 Russia 72.543 5.9 95.322 49.1819 Germany 175.371 5.4 147.134 174.13710 Japan 195.904 4.5 170.437 195.14511 Canada 25.603 1.8 20.792 17.909

12 Brazil 10.253 0.8 13.276 4.299

As of Feb. 25 *based on one-month gain/loss


Rank Country 2007 Ratio* 2006 2008+

13 Mexico -6.368 -0.7 -2.425 -10.58814 France -39.363 -1.6 -27.712 - 48.88515 India -23.131 -2.1 -9.503 -32.30116 UK -96.687 -3.5 -77.236 -105.14417 Australia -50.816 -5.7 -41.49 -52.98818 U.S. -784.341 -5.7 -811.483 -788.29319 South Africa -18.495 -6.7 -16.608 -19.23720 Spain -138.916 -9.8 -106.399 -154.849

Totals in billions of U.S. dollars*Account balance in percent of GDP +EstimateSource: International Monetary Fund,

World Economic Outlook Database, October 2008



NON-U.S. DOLLAR FOREX CROSS RATES

GLOBAL STOCK INDICES

GLOBAL BOND RATES

Country Interest rate Rate (%) Last change Aug. 08 Feb. 08

U.S. Fed funds rate 0-0.25 0.5 (Dec. 08) 2 3Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.5 0.5Eurozone Refi rate 2 0.5 (Jan. 09) 4.25 4UK Repo rate 1 0.5 (Feb. 09) 5 5.25Canada Overnight funding rate 1 0.5 (Jan. 09) 3 4Switzerland 3-month Swiss Libor 0.5 0.5 (Dec. 08) 2.75 2.75 Australia Cash rate 3.25 1.00 (Feb. 09) 7.25 6.75

New Zealand Cash rate 3.5 1.50 (Jan. 09) 8 8.25Brazil Selic rate 12.75 1.00 (Jan. 09) 13 11.25Korea Overnight call rate 2.5 0.5 (Jan. 09) 5.25 5Taiwan Discount rate 1.25 0.25 (Feb. 09) 3.625 3.375India Repo rate 5.5 1.00 (Jan. 09) 9 7.75South Africa Repurchase rate 10.5 1.00 (Feb. 08) 12 11

GLOBAL SHORT-TERM INTEREST RATES

1-month 3-month 6-month 52-week 52-weekRank Country Index Feb. 25 gain/loss gain/loss gain/loss high low Previous

1 Brazil Bovespa 38,232.00 -0.72% 9.82% -29.82% 73,920.00 29,435.00 12 India BSE 30 8,902.56 -1.13% 2.38% -38.39% 18,137.30 7,697.39 83 Hong Kong Hang Seng 13,005.08 -1.14% 0.98% -38.38% 26,387.40 10,676.30 144 Japan Nikkei 225 7,461.22 -2.88% -10.36% -42.07% 14,601.30 6,994.90 125 Australia All ordinaries 3,281.50 -3.27% -8.22% -35.53% 6,059.50 3,201.50 46 South Africa FTSE/JSE All Share 18,817.56 -6.64% -7.13% -29.53% 33,232.89 17,814.42 77 Mexico IPC 18,200.70 -7.06% -5.68% -31.10% 32,292.90 16,480.00 158 Canada S&P/TSX composite 7,932.30 -8.37% -6.05% -40.31% 15,154.80 7,566.32 29 Singapore Straits Times 1,616.79 -8.45% -2.21% -93.95% 3,269.88 1,473.77 3

10 UK FTSE 100 3,849.00 -8.55% -7.73% -29.64% 6,377.00 3,665.20 611 U.S. S&P 500 764.90 -8.57% -10.79% -39.62% 1,440.24 741.02 5

12 France CAC 40 2,696.92 -8.75% -15.97% -38.09% 5,142.10 2,662.73 1113 Germany Xetra Dax 3,846.21 -11.11% -15.66% -38.92% 7,231.86 3,790.79 1314 Italy MIBTel 12,494.00 -11.92% -18.90% -42.01% 26,458.00 12,349.00 1015 Switzerland Swiss Market 4,702.50 -13.19% -14.16% -33.42% 7,802.60 4,660.90 9

Currency 1-month 3-month 6-month 52-week 52-weekRank pair Symbol Feb. 25 gain/loss gain/loss gain/loss high low Previous

1 Pound / Yen GBP/JPY 138.564 13.07% -3.38% -32.08% 215.863 118.782 152 Pound / Euro GBP/EUR 1.13748 6.94% -3.67% -9.24% 1.3304 1.0195 43 Franc / Yen CHF/JPY 82.08369 6.58% 4.07% -18.13% 105.071 74.698 204 Aussie $ / Yen AUD/JPY 61.65867 6.07% 1.44% -35.39% 104.448 55.1876 175 Canada $ / Yen CAD/JPY 76.5369 6.04% 0.84% -27.25% 108.96 70.6656 136 Euro / Yen EUR/JPY 121.84 5.62% 0.29% -25.19% 169.958 112.045 197 Real / Yen BRL/JPY 40.12818 3.96% -0.26% -41.12% 69.3981 36.0109 108 Franc / Euro CHF/EUR 0.67369 0.90% 3.75% 9.44% 0.6992 0.6106 129 Franc / Canada $ CHF/CAD 1.07277 0.42% 3.16% 12.44% 1.1583 0.9135 18

10 Aussie $ / Euro AUD/EUR 0.5061 0.39% 1.15% -13.67% 0.6268 0.4725 711 Canada $ / Euro CAD/EUR 0.62829 0.39% 0.54% -2.76% 0.6785 0.5799 212 Aussie $ / Canada $ AUD/CAD 0.80592 -0.02% 0.57% -11.26% 0.9833 0.7568 1413 Aussie $ / Franc AUD/CHF 0.75145 -0.50% -2.52% -21.13% 1.0095 0.712 314 Real / Euro BRL/EUR 0.32941 -1.58% -0.55% -21.29% 0.4197 0.2941 115 Real / Canada $ BRL/CAD 0.52455 -1.99% -1.12% -19.10% 0.6719 0.4726 916 Real / Aussie $ BRL/AUD 0.65112 -2.09% -1.71% -8.90% 0.7391 0.5991 517 Franc / Pound CHF/GBP 0.59238 -5.67% 7.67% 20.51% 0.661 0.4658 1618 Aussie $ / Pound AUD/GBP 0.44509 -6.13% 4.97% -4.89% 0.4902 0.3786 1119 Canada $ / Pound CAD/GBP 0.55253 -6.15% 4.34% 7.12% 0.5918 0.4874 820 Real / Pound BRL/GBP 0.28969 -7.99% 3.21% -13.29% 0.339 0.2441 6

Rank Country Rate Feb. 25 1-month 3-month 6-month High Low Previous

1 Germany BUND 125.82 2.05% 4.13% 9.75% 126.53 109.65 12 Australia 10-year bonds 95.765 -0.14% 0.47% 1.62% 96.16 93.18 43 UK Short sterling 98.13 -0.37% 1.47% 4.14% 98.705 93.595 24 Japan Government Bond 139.2 -0.42% 0.04% 0.69% 141.9 132.09 55 U.S. 10-year T-note 121.63 -1.84% 0.38% 4.13% 128.65 111.15 3



Unemployment

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

AMERICAS

Argentina Q4 2/25 7.3% -0.5% -0.2% 4/27 ASIA AND SOUTH PACIFICBrazil Jan. 2/20 8.2% 1.4% 0.2% 3/26 Australia Jan. 2/12 4.8% 0.3% 0.7% 3/12

Canada Jan. 2/6 7.2% 0.6% 1.4% 3/13 Hong Kong Nov.-Jan. 2/17 4.6% 0.5% 1.2% 3/17

EUROPE Japan Jan. 2/27 4.1% -0.2% 0.3% 3/31

France Q3 12/4 7.7% 0.1% -0.5% 3/5 Singapore Q4 1/30 2.6% 0.4% 0.9% 4/30

Germany Jan. 2/26 7.3% 0.1% -0.4% 3/31

UK Oct.-Dec. 2/11 6.3% 0.5% 1.1% 3/18

Gross Domestic Product*

Release 1-year Next Release 1-year NextPeriod date Change change release Period date Change change release

AMERICAS AFRICA

Argentina Q3 12/18 -5.1% 19.1% 3/18 S. Africa Q4 2/24 0.8% 11.0% 5/26

Brazil Q3 12/9 1.8% 6.8% 3/10

Canada Q3 12/1 1.2% 6.3% 3/2 ASIA AND SOUTH PACIFIC

EUROPE Australia Q3 12/3 0.1% 1.9% 3/4France Q4 2/13 -0.9% 0.9% 5/15 Hong Kong Q4 2/25 1.5% -2.6% 5/15

Germany Q4 2/13 -1.2% 0.6% 5/15 India Q4 2/27 11.1% 14.0% 5/29

UK Q3 12/23 -0.3% 2.3% 3/27 Japan Q4 2/16 -1.7% -6.6% NLT 5/20

Singapore Q4 2/27 -0.5% -5.6% NLT 5/22

* Final estimates, at current prices, seasonally adjusted

CPI


AMERICAS AFRICA

Argentina Jan. 2/11 0.6% 0.5% 3/11 S. Africa Jan. 2/25 0.4% 8.1% 3/25

Brazil Jan. 2/6 0.5% 5.8% 3/11

Canada Jan. 2/20 -0.3% 1.1% 3/19 ASIA AND SOUTH PACIFIC

EUROPE Australia Q4 1/28 -0.3% 3.7% 4/23

France Jan. 2/20 -0.4% 0.7% 3/12 Hong Kong Jan. 2/23 0.4% 3.1% 3/20

Germany Jan. 2/11 -0.5% 0.9% 3/10 India Jan. 2/27 0.7% 10.4% 3/31

UK Jan. 2/17 -0.7% 3.0% 3/24 Japan Jan. 2/27 -0.6% 0.0% 3/27

Singapore Jan. 2/23 -0.1% 2.9% 3/23

PPI


AMERICAS AFRICA

Argentina Jan. 2/11 -0.1% 7.9% 3/11 S. Africa Jan. 2/26 -0.7% 9.2% 3/26

Brazil Jan. 2/7 -0.3% 8.3% 3/7

Canada Jan. 2/27 -0.1% 1.2% 3/31 ASIA AND SOUTH PACIFIC

EUROPE Australia Q4 1/27 1.3% 6.4% 4/20

France Dec. 1/4 -1.4% 0.0% 3/5 Hong Kong Q3 12/12 -1.2% 5.5% 3/13

Germany Dec. 1/21 -1.0% 4.3% 3/6 India Jan. 2/13 -0.2% 5.3% 3/13

UK Jan. 2/6 0.1% 3.5% 3/6 Japan Jan. 2/12 -1.0% -0.2% 3/11

Singapore Jan. 2/27 1.2% -17.7% 3/27

INTERNATIONAL MARKETS continued

LEGEND:

Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

As of Feb. 27



GLOBAL ECONOMIC CALENDAR

Legend

CPI: Consumer price index

ECB: European Central Bank

FDD (first delivery day): The

first day on which delivery of a

commodity in fulfillment of a

futures contract can take place.

FND (first notice day):Also

known as first intent day, this isthe first day on which a clearing-

house can give notice to a buyer

of a futures contract that it

intends to deliver a commodity in

fulfillment of a futures contract.

The clearinghouse also informs

the seller.

FOMC: Federal Open Market

Committee

GDP: Gross domestic product

ISM: Institute for supply

management

LTD (last trading day): The final

day trading can take place in afutures or options contract.

PMI: Purchasing managers

index

PPI: Producer price index

MARCH/APRIL

March

1

2 U.S.: February ISM; Januarypersonal income

Canada: Q4 GDP

3 Canada: Bank of Canada

interest-rate announcement

4 U.S.: Fed. beige bookAustralia: Q4 GDP

5 France: Q4 employment report;January PPI

UK: Bank of England interest-rate

announcement

ECB: Governing council

interest-rate announcement

6 U.S.: February employment report

Germany: January PPI

LTD: March U.S. dollar index

options (ICE); March currency

options

7 Brazil: February PPI

8

9 Mexico: February PPI; Feb. 28 CPI

10 Brazil: Q4 GDPGermany: February CPI

11 Japan: February PPI

12 U.S.: February retail salesAustralia: February employment

report

France: February CPI

13 U.S.: January trade balanceCanada: February employment

report

Hong Kong: Q4 PPI

India: February PPI

14

15

16 LTD: March U.S. dollar index futures(ICE); March currency futures

17 U.S.: February PPI and housingstarts

Hong Kong: Dec.-Feb. employment

report

FND: March U.S. dollar index

futures (ICE)

18 U.S.: FOMC interest-rateannouncement; February CPI

Japan: Bank of Japan interest-rate

announcement

FDD: March U.S. dollar index

futures (ICE); March currency

futures

19 U.S.: February leading indicatorsCanada: February CPI

20 Germany: February PPIHong Kong: Q4 GDP;

February CPI

21

22

23

24 U.S.: February durable goodsMexico: February employment

report; March 15 CPI

S. Africa: Q4 employment report

25 S. Africa: February CPI

26 Brazil: February employmentreport

S. Africa: February PPI

27 Japan: February CPI

UK: Q4 GDP

28

29

30

31 Canada: February PPIGermany: February employment

report

India: February CPI

Japan: February employment

report

April

1 U.S.: March ISM

2 France: February PPI

3 U.S.: March employment reportLTD:April U.S. dollar index (ICE);

April currency options

Economic Release time

release (U.S.) (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 a.m.

The information on this page issubject to change. CurrencyTrader is not responsible for

the accuracy of calendar datesbeyond press time.

APRIL 2009

29 30 31 1 2 3 4

5 6 7 8 9 10 11

12 13 14 15 16 17 18

19 20 21 22 23 24 25

26 27 28 29 30 1 2

MARCH 2009

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 28

29 30 31 1 2 3 4


38/45

FOREX NEWS

On Feb. 18, the CME Groupannounced it would beginoffering currency futures contracts of

one-tenth the size of its standard con-

tracts. These E-Micro forex contracts

are scheduled to launch on March 22

for six currency pairs.

The Euro/U.S. dollar (EUR/USD),British pound/U.S. dollar

(GBP/USD), and Australian

dollar/U.S. dollar (AUD/USD) E-

Micro contracts will be fully fungible

with their full-sized counterparts, with

margins and exchange fees propor-

tionally scaled down to one-tenth of

the full-contract cost. The three

remaining contracts, U.S.

dollar/Japanese yen (USD/JPY), U.S.

dollar/Swiss franc (USD/CHF), andU.S. dollar/Canadian dollar

(USD/CAD), cannot be directly offset

because of the reversal of the base and

quote currencies from the full-contract

convention.

The CME Group says it hopes to

attract the retail crowd with its new

contracts, not only with its small-trad-

ing size, but also by offering an alter-

native to the interbank, over-the-

counter (OTC) forex market with cen-tralized clearing and guaranteed coun-

terparty credit by trading on CMEs

Globex electronic platform.

This is the opposite direction the

IntercontinentalExchange (ICE) went

with its ICE Millions FX Futures,

launched in November 2008. These

contracts represent a million units of

the base currency 10 times the size

of its standard forex futures contracts.

Because an E-Micro contract repre-

sents only one-tenth of the currency

units of a standard contract, a one-tick

move represents the gain or loss of a

much smaller amount. For example,

for the CMEs standard Australian dol-

lar/U.S. dollar futures contract (AD),

which represents 100,000 Australian

dollars, a single tick is 0.0001, or $10


Average daily volume for forex futures on the CME and ICE has fallen recently.Despite the ICEs new currency contracts ICE Millions the exchanges

year-over-year forex volume dropped by more than 40 percent for three months

in a row.

FIGURE 1 YEAR-OVER-YEAR FX FUTURES VOLUME

Two exchanges, two approaches to new FX futuresAs currency futures volume slumps, the CME and ICE hope to entice investors with new products.

A few of the contracts, which represent 10 times as many units of currency astheir standard counterparts, saw a burst of interest in their first month of trading,

but quickly fell off over the following months.

TABLE 1 ICE MILLIONS MONTHLY VOLUME TOTALS

Currency Futures Feb.

pair symbol (through 25th) Jan. Dec. Nov. Total

EUR/USD IEO 552 852 722 4,082 6,208

GBP/USD IMP 13 8 44 283 348

USD/CAD ISV 0 0 0 0 0USD/JPY ISN 684 590 305 1,478 3,057

USD/CHF IMF 1 0 2 47 50

USD/SEK IKX 0 0 0 0 0

EUR/GBP IGB 0 0 0 0 0

EUR/CAD IEP 27 0 0 0 27

EUR/JPY IEJ 2 0 0 0 2

EUR/SEK IRK 0 0 0 0 0

EUR/CHF IRZ 0 0 0 0 0

AUD/USD IAU 0 0 1 2 3


39/45

LEGEND:

Volume: 30-day average daily volume, in thousands.

OI: 30-day open interest, in thousands.

10-day move: The percentage price move from the

close 10 days ago to todays close.20-day move: The percentage price move from the

close 20 days ago to todays close.

60-day move: The percentage price move from the

close 60 days ago to todays close.

The % rank fields for each time window (10-day

moves, 20-day moves, etc.) show the percentile rank

of the most recent move to a certain number of the

previous moves of the same size and in the same

direction. For example, the % rank for 10-day move

shows how the most recent 10-day move compares to

the past twenty 10-day moves; for the 20-day move,

the % rank field shows how the most recent 20-day

move compares to the past sixty 20-day moves; for

the 60-day move, the % rank field shows how the

most recent 60-day move compares to the past one-

hundred-twenty 60-day moves. A reading of 100%

means the current reading is larger than all the past

readings, while a reading of 0% means the current

reading is lower than the previous readings.

Volatility ratio/% rank: The ratio is the short-term

volatility (10-day standard deviation of prices) divided

by the long-term volatility (100-day standard deviation

of prices). The % rank is the percentile rank of the

volatility ratio over the past 60 days.

CURRENCY FUTURES SNAPSHOTas of Feb. 27

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each marketsliquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.

Market Symbol Exchange Volume OI 10-day move/% rank 20-day move/% rank 60-day move/% rank Volatility ratio/rank

Eurocurrency EC CME 199.6 142.8 -0.58% / 6% -1.98% / 23% 0.22% / 7% .21 / 45%

Japanese yen JY CME 91.5 106.4 -7.60% / 88% -8.28% / 95% -4.67% / 100% .58 / 98%

British pound BP CME 78.1 80.6 0.94% / 0% 0.10% / 0% -3.93% / 4% .10 / 7%

Canadian dollar CD CME 33.9 62.7 -1.23% / 25% -3.72% / 71% -2.46% / 20% .21 / 75%

Swiss franc SF CME 33.6 29.8 -0.15% / 6% -1.44% / 14% 2.87% / 67% .16 / 18%

Australian dollar AD CME 32.3 45.1 -0.14% / 0% -1.35% / 21% -0.31% / 0% .25 / 73%

Mexican peso MP CME 9.1 37.9 -3.17% / 74% -5.93% / 93% -10.27% / 39% .22 / 100%

U.S. dollar index DX ICE 4.7 18.2 2.11% / 73% 1.95% / 31% 1.13% / 9% .26 / 58%

E-Mini eurocurrency ZE CME 2.6 2.4 -0.58% / 6% -1.98% / 23% 0.22% / 7% .21 / 45%

New Zealand dollar NE CME 1.5 12.1 -2.10% / 50% -1.76% / 10% -5.72% / 12% .15 / 35%

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

This information is for educational purposes only.Currency Traderprovides this data in good faith, but

assumes no responsibility for the use of this infor-

mation. Currency Traderdoes not recommend buy-

ing or selling any market, nor does it solicit orders to

buy or sell any market. There is a high level of risk

in trading, especially for traders who use leverage.

The reader assumes all responsibility for his or her

actions in the market.


per contract. However, for the E-Micro

equivalent, a single tick would beworth only $1 per contract. By con-

trast, a single tick for an ICE Millions

contract, which is set at 0.0005, is

equivalent to $500.

Figure 1 shows the year-over-year

changes in monthly average daily cur-

rency volume (ADV) for the CME

Group and ICE. ICE volume began to

decline in mid-2008. Despite the

launch of the new Millions contracts in

November, the exchanges monthlyADV dropped by more than 40 per-

cent in November, December, and

January.

Table 1 shows the total monthly vol-

ume for the ICE Millions contracts

through Feb. 25. Five contracts in the

Millions suite had yet to trade by that

date, and four of the contracts had yet

to see more than 50 contracts change

hands. The Euro/U.S. dollar contract

(IEO), by far the most popular, traded

more than 4,000 contracts in its first

month, but has been unable to rivalthat number in subsequent months.

However, because of its inflated

size, each ICE Millions trade repre-

sents 10 times the volume of a trade in

a standard-sized contract. For exam-

ple, total January volume for the ICEs

standard Euro/U.S. dollar futures

contract (EO) was 10,615, with each

contract representing 100,000 units of

currency. In the same month, 552 IEO

contracts traded, but because eachrepresents a million currency units,

volume was equivalent to 5,520 trades

in the EO contract.

While the demand for currency

products from the CME Group hasnt

suffered as much as ICEs, the

exchange still posted year-over-year

drops in excess of 20 percent in both

November and December following

mostly steady growth throughout

much of 2008.
http://www.iohe.org/ctm


40/45

Following their most recent sum-mit in Phuket, Thailand, theAssociation of Southeast AsianNations plus the East Asian nations ofChina, Japan, and Korea (ASEAN+3)announced on Feb. 22 their intentionto increase their combined monetarystabilization fund from $80 billion to$120 billion.

While we note that the Asian

economies are in a better position toface challenges due to the structuralreforms undertaken since the Asianfinancial crisis, we recognize that theregional economy is now facing greatchallenges, the groups announced intheir joint statement.

The stabilization fund, called theMultilateralised Chiang Mai Initiative(CMIM), which began in 1997 follow-

ing the Asian financial crisis thatseverely damaged the currencies ofthe ASEAN member nations, providesfunding for a multilateral currencyswap scheme intended to combatshort-term liquidity issues, similar tothe International Monetary Fund(IMF).

The finance ministers of the 13

countries involved in the agreementwill make the final decisions for theincrease when they meet again inMarch 2009. China, Japan, and SouthKorea are expected to foot a large por-tion of the bill.

Currencies in the region fell hard vs.the dollar in early 2009. The Singaporedollar lost 6.9 percent in 2009 throughFeb. 25 (Figure 1). The Thai bhat,which collapsed during the 1997 crisis,fell 3 percent in the same period, whilethe Japanese yen lost 7.4 percent.


INDUSTRY NEWS continued

Managed money: Barclay Trading Groupscurrency trader rankings for January 2009

Top 10 currency traders managing more than $10 million

as of Jan. 31, ranked by January 2009 return.

2009 $ Under Rank Trading January YTD mgmt.

advisor return return (millions)

1. Goldman Sachs (Fund. Currency) 6.47% 6.47% 306.8

2. Alder Cap'l (Alder Global 20) 5.20% 5.20% 170.0

3. Rhicon Currency Mgmt (4XiM) 4.71% 4.71% 20.04. Dominion Capital Mgmt. (FX) 4.08% 4.08% 10.0

5. IKOS G10 Currency Fund 3.79% 3.79% 719.7

6. Alder Cap'l (Alder Global 10) 2.90% 2.90% 36.0

7. Geo Economic Mgmt. System Ltd 2.66% 2.66% 44.7

8. IKOS Currency 2.31% 2.31% 719.7

9. JB Currency Hedge (Discr Seg Port) 2.28% 2.28% 20.4

10. Capricorn Advisory Mgmt (FXG10) 2.15% 2.15% 11.8

Top 10 currency traders managing less than $10 million and more than

$1 million as of Jan. 31, ranked by January 2009 return.

1. Quant Trading (FX Quant 11) 8.00% 8.00% 1.0

2. Informed Funds (Trend Strategies) 6.94% 6.94% 7.23. Mellon Capital Mgmt (Currency Opp) 5.64% 5.64% 9.0

4. Zone Cap'l FX Managed Account 4.11% 4.11% 1.0

5. Wealth Builder FX Group 3.70% 3.70% 1.1

6. M2 Global Mgmt (5X) 3.27% 3.27% 1.0

7. Putnam Currency Alpha Fund 3.24% 3.24% 1.8

8. Blue Fin Capital (Managed Currency) 3.11% 3.11% 1.3

9. Capricorn Advisory Mgmt (fxMT Growth) 1.71% 1.71% 1.0

10. Aspect Capital (Gl. Currency) 1.66% 1.66% 5.0

Source: BarclayHedge (http://www.barclayhedge.com). Based on estimates of the composite of all

accounts or the fully funded subset method. Does not reflect the performa

Currency Trader March 2009

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Transcript of Currency Trader March 2009