BRITISH POUND: REAL RALLY OR JUST ANOTHER SWING? P. 6 Strategies, analysis, and news for FX traders
November 2013 Volume 10, No. 11
Risk reversal in the minor currencies p. 20
The Fed waiting game and FX action p. 12
Trading the EUR/CHF floor p. 16
Aussie dollar update p. 32
CONTENTS
Contributors..................................................4
Currency Futures Snapshot.................. 27
Global Markets British pound bumps up against barriers......................................6
BarclayHedge Rankings......................... 27
It’s been a good run, but analysts warn not to
Top-ranked managed money programs
International Markets............................. 28
expect too much more from the pound vs. the
Numbers from the global forex, stock, and
dollar.
interest-rate markets.
By Currency Trader Staff
On the Money Three times and out ................................. 12
Forex Journal............................................32 Waiting for an Aussie rebound to go short.
Navigating the tapering delay and other market minefields. By Barbara Rockefeller
Trading Strategies Profiting from the EUR/CHF floor ........... 16 It’s a high-risk trade, but the SNB’s Euro/Swiss floor presents a unique opportunity. By Daniel Fernandez
Advanced Concepts Going forward with reversals: The minors................................................ 20
Looking for an advertiser? Click on the company name for a direct link to the ad in this month’s issue.
Smaller and less-developed currency option markets appear to have cleaner relationships to their carry returns vs. the USD than do major currencies. By Howard L. Simons
Global Economic Calendar...................... 26 Important dates for currency traders.
Ablesys eSignal FXCM Interactive Brokers Las Vegas Traders Expo The Trading Show New York
Events ....................................................... 26 Conferences, seminars, and other events.
Questions or comments? Submit editorial queries or comments to
[email protected] 2
November 2013 • CURRENCY TRADER
CONTRIBUTORS
A publication of Active Trader ®
For all subscriber services: www.currencytradermag.com
Editor-in-chief: Mark Etzkorn
[email protected] Managing editor: Molly Goad
[email protected] Contributing editor: Howard Simons
Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green
[email protected]
President: Phil Dorman
[email protected] Publisher, ad sales:
q Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on a wide range of economic and financial market issues. q Daniel Fernandez is an active trader with a strong interest in calculus, statistics, and economics who has been focusing on the analysis of forex trading strategies, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. 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 articles 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]. q Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), The Foreign Exchange Matrix (Harriman House, 2013), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund.
Bob Dorman
[email protected] Classified ad sales: Mark Seger
[email protected]
Volume 10, No. 11. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2013 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.
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GLOBAL MARKETS
British pound bumps up against barriers It’s been a good run, but analysts warn not to expect too much more from the pound vs. the dollar. BY CURRENCY TRADER STAFF
Over the past four months, the British pound has rocketed higher vs. the U.S. dollar, nearly reaching the level of the dollar/pound (GBP/USD) pair’s 2012-2013 highs around 1.6300-1.6400 (Figure 1). A bevy of better-than-expected UK economic data has underpinned the rally, which has pushed the GBP/USD 9.5% higher from early July into late October. Whether the pound can continue to gain will depend on whether the improvement in the UK economy is an aberration or a trend that is likely to continue. Another element is FIGURE 1: THE RECENT RALLY
The pound staged a strong rally vs. the dollar in recent months. Source: TradeStation
6
the role the Bank of England (BOE) will play in the months ahead. Also, it is important to keep in mind that, as robust as the recent rally has been, the pound is still within the longer-term trading range that has persisted for the better part of four years (Figure 2).
A bright patch in stormy skies
The UK economy has generally limped along since the 2008 financial crisis and subsequent recession, posting lackluster gross domestic product numbers, in part because of the fiscal austerity measures imposed by the government, and also because of Britain’s close trade ties to a struggling Eurozone. The UK boasted a 3.4% GDP growth rate in 2007, but it’s been all downhill since then. In 2008, the rate came in at -0.8%, which was followed by an even deeper 5.2% contraction in 2009. In 2010 the economy posted a modest recovery with a tepid-but-positive 1.7% GDP reading, followed by 1.1% in 2011 and a marginal 0.2% in 2012. Nomura estimates 2013 GDP growth to come in at 1.3%. However, recent months contained several stronger-than-expected economic data releases. “The UK has been firing on all cylinders,” says Vassili Serebriakov, currency strategist at BNP Paribas. “We’ve seen a significant pickup in growth since the second quarter.” According to Wells Fargo, Britain’s preliminary Q3 GDP estimate met consensus expectations with a 0.8% reading, which translates to 3.2% annualized rate. Observing this was the third consecutive quarter of positive GDP November 2013 • CURRENCY TRADER
FIGURE 2: LONGER-TERM RANGE
The pound/dollar has been in an extended trading range for the past few years. Source: TradeStation
growth, Wells Fargo analysts noted the possibility “the United Kingdom may be entering into a self-sustaining recovery.” Wells Fargo global economist Jay Bryson says the UK consumer has been a key factor in the recent rebound. He explains that, similar to the U.S., consumer spending drives roughly two-thirds of the UK economy. “Like in the U.S., consumer’s balance sheets in the UK got beat up in the Great Recession,” he says. “Their balance sheets are starting to improve. Consumers are starting to feel better about the housing market, which has helped consumer confidence. We have seen the personal savings rate trend lower over the last year, which gives them the extra wherewithal to spend.” The UK’s economic improvement has been fairly broadbased. Melanie Bowler, economist at Moody’s Analytics, says the good news has been spread across a wide range of economic data. “The closely watched purchasing managers’ indexes (services, manufacturing, and construction) are at multi-year highs, indicating expansion,” she says. “Current account data shows improving external demand. Meanwhile, domestic demand is also improving, and consumer confidence is at a six-year high.” Bowler notes the boost to household sentiment has been fueled by several factors, including evidence the economy is on an increasingly solid recovery path, a strong pickup in house prices, record low borrowing costs, and the pledge by the Bank of England to hold interest rates steady until 2016. The housing surge has been a boon to the economy as a whole, but it also has its dark side. “The recent surge in house prices has been identified as a driver of construction and consumer spending,” says Stephen Webster, director of TopEcon. However, rising home prices have some econCURRENCY TRADER • November 2013
omists warning about a possible housing bubble.
Unemployment and interest rates
In the meantime, the BOE, now headed up by former Bank of Canada head Mark Carney, has initiated forward guidance similar to that used by the U.S. Federal Reserve. In August the BOE announced it plans to maintain its lending rate at 0.5% until unemployment falls to 7%, unless inflation expectations exceed 2.5%. The BOE doesn’t expect the unemployment rate to drop to the 7% level until 2016 (the most recent number came in at 7.7%). The UK faces some stubborn issues on the labor front, and few seem to expect a sharp decline in unemployment. “Both long-term and youth unemployment are higher than a year earlier, and wage growth remains particularly weak,” Moody’s Bowler says. “The public sector is still shedding jobs, and welfare benefits and pension reforms could push up the unemployment rate as more people move back into the labor force and inactivity rates decline.” She says her firm doesn’t expect the unemployment rate to hit its threshold before the end of 2015. Webster notes the UK’s 7.7% jobless unemployment rate is still high relative to, say, Germany at 6.9%, although it’s nowhere near the 12% Eurozone number, which includes Greece at 27.6% and Spain at 26.2%. Some analysts anticipate a rate hike sometime in 2015. Bryson says his firm anticipates a hike in mid-2015, while Charles St-Arnaud, executive director, foreign exchange research and economics at Nomura, has an even more optimistic outlook, based on a sooner-than-expected move to 7% unemployment. “We see that in late 2014 or early 2015, which will allow the BOE to start hiking in early 2015,” he says. “In general, most market participants have moved their expectations for the first rate hike from 2016 to 2015.” 7
GLOBAL MARKETS
FIGURE 3: EURO/POUND
The pound may be at a disadvantage to the Euro in coming months. Source: TradeStation
Overall, Kevin Chau, FX strategist at Ideaglobal, says it will be important for currency traders to pay attention to what BOE chief Carney has to say about the economy. “The BOE is taking a pretty cautious approach vs. what the market is pricing in,” he says.
The deficit
More so than many other nations, the UK attempted to deal with its high levels of debt and deficit through a program of relative fiscal austerity. Has it been worth it? “They have not hit their deficit numbers because the economy has been weaker, so you end up with less tax revenues and a higher deficit,” Wells Fargo’s Bryson says. Bowler says data from Eurostat shows that last year the UK had the sixth-worst budget deficit out of the 28 European Union countries. “Only Spain, along with bailedout countries Ireland, Greece, Portugal, and Cyprus, had worse,” she says. “The deficit is forecast to come in at 6.8% of GDP this year, and debt will continue to rise.” Bowler adds fiscal tightening will be the norm in the UK for at least another three years. “With households bearing the brunt of austerity, prolonged fiscal tightening risks hindering continued strong economic growth,” she says. “Following earlier steps such as a VAT hike to 20% in 2011, the welfare benefit system is being broadly reformed, with a cap on household benefits. Treasury estimates suggest those with incomes in the bottom quintile will be hit hardest by benefit changes, while those in the top quintile bear the burden of tax hikes.” Webster says the total public debt was £1.21 trillion in September, or 75.9% GDP. “It is currently seen hitting 79.2% GDP by the end of 2013, but is on course to under8
shoot — closer to 77%,” he says.
Currency action
The pound/dollar pair climbed from a low around 1.4810 in early July to a high around 1.6260 in early and late October. “You went from one extreme, where everyone was very pessimistic and bearish, to more positive views on the currency,” Nomura’s St-Arnaud says. And he warns all or most of the good news might already be priced into the market, limiting further upside potential. “I think we could probably go to 1.6500 in coming months, but it will be harder to go much higher,” St-Arnaud says. Chau pegs an upside target and resistance zone around 1.6350. Serebriakov agrees further upside from late-October levels could be limited. “Short-term, it could extend the rally vs. the dollar by a few more percentage points, but then there will be a correction,” he says. “The markets have heightened expectations for UK data. More likely than not they will be disappointed. It will probably test 1.63001.6400, but by the first quarter it will fall back below 1.600 as the markets begin to expect Fed tapering.” One risk facing the UK is its close ties to the U.S. Analysts are still trying to gauge how much the October U.S. government shutdown actually cost the economy. “The UK’s strong trade and financial linkages with the U.S. leave it exposed to problems there,” Bowler explains. “Around 15% of UK goods exports and a fifth of services exports are destined for the U.S., and stronger pound makes UK exports less competitive. Demand for UK exports would take a knock should the partial government November 2013 • CURRENCY TRADER
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FIGURE 4: POUND/KRONA
Some analysts see the potential for the pound to gain ground vs. the Swedish krona. Source: www.advfn.com
shutdown hit U.S. growth.” Bowler adds additional strong gains in the pound are unlikely, given U.S. fiscal worries have been pushed into 2014. “The UK economy could also disappoint in the fourth quarter if the U.S. economy has slowed substantially because of the government shutdown,” she says. The Euro/pound cross (EUR/GBP) has been trending higher since early October, as the Euro strengthened given U.S. dollar weakness in the wake of the Fed’s September decision to delay tapering its monthly asset purchases (Figure 3). “Near-term, the overall picture for the British pound looks a little less positive,” Webster says. “At the time of the high, EUR/GBP was down at levels not seen since the middle of January, where it provided a ‘feeding frenzy’ for UK importers who looked upon an opportunity to buy Euro at a rate of 1.20. It has not been anywhere close since. Nevertheless, given the chances of any Fed tapering are now being pushed out into the first quarter 2014 or even later, the U.S. dollar should remain soft and GBP/USD will probably hold in the 1.60-1.63 area until at least second quarter, when the long-anticipated U.S. dollar rally could eventually get under way.” Webster adds the EUR/GBP is unlikely to return to the near-.8800 highs of earlier this year. “With EUR/USD seemingly set on a run at 1.40, we expect the downside is limited,” he says. “We can expect to see EUR/GBP at least pay a visit to the .8600-.8650 area before the end of the year.” 10
Some analysts say growth differentials could favor the pound over the Euro heading into 2014. BNP Paribas forecasts a 2.6% GDP pace for the UK in 2014 vs. a 1.1% pace for the Eurozone. BNP’s Serebriakov says the Euro/ pound cross has traded between approximately .8400 to .8700 since February. “It’s a wide range, but it’s been going up and down within that range,” he says. “We still see the Euro/pound falling below .8000 next year. Our sense is the Euro is overvalued. The strength in the Euro will impact ECB rhetoric. There is a distinct possibility of a further rate cut by the ECB. Inflation is below target, and the currency is very strong. So, they should be easing policy to offset that.” Looking at sterling on other crosses, St-Arnaud says his firm has been recommending a long pound/Swedish krona (GBP/SEK) trade (Figure 4). “We like sterling and we don’t really like the Swedish krona,” he says. “[The Swedish] economy is probably slowing in coming quarters.” The GBP/SEK cross was trading around 10.20 in late October and St-Arnaud sees the potential for a move toward 10.60-10.80 over the next quarter or two. He notes growth in Sweden is slowing because consumers can’t increase their borrowing. “Because consumption is such a big part of the economy, that will slow growth,” St-Arnaud says. “It’s a relative play. Generally, we should see Swedish economic growth underperform over the next few quarters and on the flip side, the UK economy is getting better.” y
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On the Money ON THE MONEY
Three times and out Navigating the tapering delay and other market minefields.
BY BARBARA ROCKEFELLER
The Federal Reserve’s delay in removing accommodation — reducing the amount of its monthly purchases of Treasuries and mortgage-backed securities, aka tapering — is more important than the U.S. government shutdown and coming within a whisker of sovereign default, at least to the FX market. Students of financial history are appalled. Surely the brush with death of U.S. hegemony is a big deal. The U.S. nearly went into technical default — the inability to pay interest and principal — despite being the richest country on the planet. The full faith and credit of the U.S. governBarbara Rockefeller
ment, standing behind U.S. bonds as the “risk-free” benchmark, became something else: “partial” faith and credit. The French complained during the 1970s about the U.S.’ “exorbitant privilege,” meaning lower interest costs, because all other nations must hold dollars whether they like it or not. As Harvard economic historian Kenneth Rogoff tweeted about potential default, “this is no way of doing business if U.S. wants to remain reserve currency.” It’s not just a matter of reputation; the lower interest rates the US can command because of the dollar’s reserve currency status are worth more than $100 billion annually to Currency Trader Magazine November 2013 the public and private sectors. Figure 1. Dollar Index and Key Events However, as the government shutFIGURE 1: DOLLAR INDEX AND KEY EVENTS down played out from Oct. 1 to Oct. 85.0 17, including the refusal by a political minority to raise the debt ceiling, the 84.5 Minutes of June FOMC Seem Dovish dollar did not fall. In fact, it went up, 84.0 from the Oct. 3 low of 79.75 to the Oct. 16 high of 80.75 (Figure 1). That’s not 83.5 much, but it’s enough to get FX ana83.0 lysts musing that the dollar’s resilience 82.5 must reflect confidence that, of course, a deal would get done and, of course, 82.0 September FOMC the U.S. would not default. Announces 81.5 No Taper To a certain extent, this amounts Bad Payrolls 81.0 to other politically dysfunctional Affirms countries (think Italy) accepting that No Taper 80.5 political theater is just play-acting and shouldn’t concern grown-up financial 80.0 professionals. In fact, the greatest disGovernment Shutdown 79.5 and Potential Default pleasure was voiced by China (and 79.0 it was a Chinese ratings agency that downgraded the U.S.), which allows 24 1 8 15 22 29 5 12 19 26 2 9 16 23 30 7 14 21 28 4 July August September October Novem no political discord at all. This short-sighted point of view is The U.S. dollar actually gained ground during the government shutdown. Source: Chart — Metastock; data — Reuters and eSignal allowed chiefly because the govern-
12
November 2013 • CURRENCY TRADER
Barbara Rockefeller Currency Trader Mag November 2013 Figure 2: Reuters 10-Year Yield Index
FIGURE 2: REUTERS 10-YEAR YIELD INDEX 31.0 30.5 30.0 29.5 29.0 28.5 28.0 27.5 27.0 26.5 26.0 25.5 25.0 24.5 24.0 23.5
50% Retracement
23.0 22.5 22.0 21.5 21.0 20.5 20.0 19.5 19.0 18.5 18.0 17.5 17.0 16.5 16.0
1 19 25 4 11 18 25 1 8 ary March April
15 22 29 6 May
13 20 28 3 10 17 24 1 8 June July
15 22 29 5 12 19 26 3 9 16 23 30 7 14 21 28 4 11 18 August September October November
15.5
Tapering delay has weighed on the U.S. 10-year yield.
ment shutdown and potential default were not dollar negatives. Equity markets continued to rally, and gold didn’t go up as looming default would imply it should have.
Dollar down
Instead, delaying tapering is dollar negative. The dollar rout that started on July 10 was a result of interpretation of the June 18-19 FOMC minutes as dovish. Fed Chief Ben Bernanke stressed that tapering is not tightening, saying, “Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.” And about half the FOMC members wanted to delay tapering until the jobs picture is more secure. Many of us mistakenly thought the central point was that actual tightening was not on the table, not that tapering might be delayed. To be fair, around the same time in July the Euro was benefiting from the perception the peripheral debt problem was a thing of the past. The word “Grexit” disappeared from the press, and in a bit of poetic license, Cyprus declared its version of the Euro was already devalued, and the country had de facto left the Eurozone. As of July 11 the Spanish 10-year yield had fallen to 4.83%, from 7.69% in July the year before (it’s 4.10% now). It looked like the bleeding body of the Eurozone had dragged itself out of the water and was no longer surrounded by hungry sharks. The dollar index took another hit with the Sept. 18-19 FOMC announcement that tapering would be postponed, and another hit on the bad September payrolls report released on Oct. 22 (only 148,000 new jobs vs. 180,000 forecast). The Euro/dollar rate (EUR/USD) rose 119 points in five hours (from 1.3673 at 8 a.m. ET on Oct. 22 to 1.3792 by
CURRENCY TRADER • November 2013
just after 1 p.m.) — not a record but an unmistakable message reinforcing the September incident. It’s three times and out. OK, we get the message — U.S. economic conditions are not good enough to backstop tapering, and they will likely continue to be subpar for several months, especially if the compromise that reopened the government and raised the debt ceiling is replayed in coming months, as seems all too likely. S&P ratings estimated the 16-day government shutdown cost the economy $24 billion, plus a blow to business and consumer confidence, as well as the reputation of the U.S. The response to the payrolls report is a message to the world, and the U.S. government: Screw around with expectations and we will pound you into the ground. From May to the Sept. 18-19 FOMC meeting, the market on the whole believed the Fed would announce tapering at its September meeting. Tapering is far more than removing stimulus (of diminishing and questionable value, anyway) — it is removing market interference. Each time tapering appeared further away, the dollar sold off. It takes some fresh thinking to wrap our heads around default brinkmanship inspiring almost no alarm, but tapering postponement driving the dollar down. Tapering postponement is now expected to last until the Dec. 16-17 FOMC meeting at the earliest, and March is probably a more realistic start date. The Fed needs to see job growth closer to 200,000 and by the December meeting, we will have had three months of fresh payroll numbers. The probability is low payrolls will be good enough to justify tapering, especially because October’s data will be dirty because of the shutdown (public sector employees considered
13
ON THE MONEY Barbara Rockefeller Currency Trader Mag November 2013 Figure 3: S&P Stock Index vs. the Euro (Gteen)
FIGURE 3: S&P STOCK INDEX (BLACK) VS. THE EURO (GREEN) 1780
1.385
1770
1.380
1760
1.375
1750 1740
1.370
1730
1.365
1720
1.360
1710
1.355
1700
1.350
1690 1680
1.345
1670
1.340
1660
1.335
1650
1.330
1640 1630
1.325
1620
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1610
1.315
1600
1.310
1590 1580
1.305
1570
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1560
1.295
1550
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1540
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1530 1520
1.280
1510
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1500
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1490 5 4 11 18 25 1 8 March April
15 22 29 6 13 20 27 3 10 17 24 1 8 May June July
15 22 29 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 November August September October
1480
The two markets that handled the “no-taper caper” most bullishly were equities and the Euro.
employed in the business survey but unemployed in the household survey, for example).
An uncertain future
Meanwhile, Congress is supposed to come up with a compromise budget by Dec. 13 and a new debt ceiling plan by Feb. 7, and the probability of another shutdown and default is not zero. Depending on these outcomes, this Fed could be on hold until June 2014 or later. To traders, June is awfully far away. With each tapering delay, the 10-year yield slips back a little more. Figure 2 shows the Reuters 10-year yield index bottomed on May 1 at 1.61% and peaked at 2.98% on Sept. 5, ahead of the September FOMC meeting. As of Oct. 23 it had fallen to 2.49% on the postponement story. Notice the bond market believed in tapering even though S&P index and Euro/ dollar traders did not. If the yield corrects approximately 50%, it will fall to 2.31%, only a little above the 200-day moving average value of 2.25%. The effect on the dollar is more than the dollar slavishly following yields. You can’t be the issuer of the world’s reserve currency and the “risk-free” asset benchmark if you are messing with pricing. And no matter what else you think about quantitative easing, it’s government interference in a market — in this case, the world’s biggest market. By repressing the true market price of government notes and bonds, QE pushes investors into riskier assets, like corporate bonds, foreign bonds, commodities, and stocks. When QE is combined with the threat of default, the “risk-free” asset against which to compare everything else 14
is contaminated. Nobody knows how to price anything when the risk-free rate is so messy. Are corporate bonds overpriced or fairly priced? For example, on Oct. 24 the Bloomberg U.S. corporate bond index stood at 3.11%, or 61 basis points over U.S. Treasuries. The European investment-grade bond index was yielding more than 100 points less at 2.08%, with the global investment-grade index in the middle at 2.58%. It’s tempting to imagine those departing the no longer risk-free U.S. Treasury market could go to U.S. corporates (and get a little extra return while they are at it), or European investment-grade corporates, while sacrificing only about 50 basis points. With the U.S. T-note at 2.50% and the global investment grade at 2.58%, how much lower does the U.S. note have to go before global corporates look like a nice compromise? It’s not hard to imagine a trickle of reallocations away from the Treasury market swelling into a river if the default story is not killed dead in its tracks. Most investment managers, especially reserve and sovereign fund managers, are stuck with government issues, but that is not written in stone. Instead of diversifying out of the dollar per se, managers could diversify out of it by diverting funds to U.S. corporates. Although that keeps dollar investment flat, the meaning behind such a reallocation is clear — the standing of the U.S. as hegemon in reduced. This is the loss of the metaphorical American empire not with a bang, but with a whimper.
Equities and gold
As for other alternatives to Treasuries, the stock market watched the tapering saga with as much interest as the November 2013 • CURRENCY TRADER
Barbara Rockefeller Currency Trader Mag November 2013 Figure 4: Gold Futures
FIGURE 4: GOLD FUTURES
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uly
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The near-default of the U.S. presumably would have boosted gold, but the metal declined before and during the October government shutdown.
bond and FX markets. And equity traders had an extra factor — they could keep buying even as tapering seemed likely because, after all, the Fed wouldn’t taper unless economic recovery was pretty good, and thus earnings would be pretty good, too. Buying equities during this period was a no-brainer. Now that the economy looks more flimsy than we thought, equity traders can still justify higher prices on the grounds that tapering is going to come someday, come hell or high water. Tapering will drive re-allocators into stocks. Bottom line, the U.S. stock market has grown by more than $4 trillion so far this year, according to Bloomberg, with the S&P up about 23% and probably dueling with 2003 (up 26.4%) as the best year ever (Figure 3). The two parties that managed to navigate the no-taper caper correctly were equity and Euro/dollar traders. Gold is a great mystery. You’d think the near-default of the U.S. would provide a big boost to gold, supposedly the safe port in a sovereign storm. But fear over default never got big enough to overcome a string of factors that included another diatribe by Warren Buffett against gold, George Soros announcing his cutting of positions, and the monstrous losses by John Paulson’s PFR Gold Fund, which dropped more than 60%. The gold gang is awash in whispers of market manipulation by governments that literally do not want gold prices rising because that would be proof that confidence in government is shaky. In Figure 4 the big drop in price (and volume) came on April 15, as the Cypriot central bank was widely expected to sell gold reserves. This rumor started a rout in gold that CURRENCY TRADER • November 2013
took the market down 9.35%, the biggest one-day drop in 30 years. Panic gold selling bled into other securities, including oil and equities, although they recovered while gold did not. In fact, gold fell during the two weeks of the U.S. government shutdown in October, exactly the opposite of what you would expect. To be fair, inflation is not a worry in the U.S. or Europe, which may account for gold being at the same price it was in late 2010. As Warren Buffet likes to say, he would rather own a stock that has a dividend. Longer run, however, unless the U.S. cleans up its act politically and eschews default in a convincing way, gold must be the beneficiary of fear-buying — on top of accumulation by reserve holders who now see the dollar in a dimmer light. Having said that, gold is not for personal savings because it has no intrinsic return, and it is not a good investment. According to the National Bureau of Economic Research, from 1836 to 2011, gold earned only an average 1.1% per year. Treasury bonds yielded 2.9% and equities earned 7.4%. But never mind. Whether gold bottoms here or at a lower level, at some point we can count on gold to behave as conventional analysis says it should — as a safe haven in a world where government debt is above the 90% level in the reserve currency issuer. y Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange, and the author of the new book The Foreign Exchange Matrix (Harriman House). For more information on the author, see p. 4.
15
TRADING STRATEGIES
Profiting from the EUR/CHF floor It’s a high-risk trade, but the SNB’s Euro/Swiss floor presents a unique opportunity.
BY DANIEL FERNANDEZ In 2011, as economic pressure on Swiss exports increased with the rapid valuation of the Swiss franc vs. the Euro, the Swiss National Bank (SNB) decided to create a floor for the Euro/Swiss franc exchange rate (EUR/CHF) at 1.20, pledging to use all tools at its disposal to prevent any moves below this level. The market tested the SNB’s commitment through most of 2012, with the EUR/CHF pair trading in a tight range just above this level (Figure 1). After this test the pair started to trade gradually higher and many speculators realFIGURE 1: WEEKLY EURO/SWISS
ized the SNB had created a very good opportunity to profit from moves in the EUR/CHF above the 1.20 floor. Let’s look at how we can potentially take advantage of this market phenomenon, but also examine some of the risks involved.
Infinite support: Trusting the SNB
Because the SNB is capable of providing extremely large amounts of liquidity — it has the power to issue as many francs as necessary — the 1.20 floor is effectively unbreakable as long as there is the political will to sustain it. This creates an arbitrage opportunity: Because we know the EUR/CHF rate can’t go below 1.20, any long positions we take in the pair will be safe as long as we place a stop order below the 1.20 level. Essentially, we can treat the SNB floor as “infinite support” the market cannot break. As long as this reality remains in place, we can profit if we buy the EUR/CHF pair close to the floor and sell it when it rallies off of it.
The trading scenario
The SNB established 1.20 floor during the period contained by the blue rectangle. The floor was tested in 2012 (red rectangle), and has since presented a trading opportunity (green rectangle).
16
A key component of taking advantage of this situation is, the closer we trade to the 1.20 support level, the more leveraged our positions can be. For example, if the EUR/CHF rate is at 1.2300, we could take a trade risking a margin call on a move to 1.1950 (using a 50-pip safety margin below the floor), in which case we would need November October 2013 2010 • CURRENCY TRADER
FIGURE 2: EUR/SWISS to account for a 450-pip loss. However, with an entry price of 1.2200 the ORDER BOOK stop-loss amount would be only 350 pips, which means we could use a larger position size and could potentially reap larger profits if the EUR/ CHF rallies. As the EUR/CHF moves higher, new longs become less attractive because the potential amount of time you might spend in a drawdown (the space between the entry price and the 1.20 floor) increases and your potential gain decreases (because you need to trade a smaller-sized position). The advantage of this scenario is maximized when we use the highest possible leverage at times when price reaches natural support levels. Many speculators, large and small, have learned about this trading opportunity, which has created an artificially strong support level that has effectively prevented price from dropping to the 1.20 floor. As a result, the SNB has not had to intervene directly in the market since 2012. Figure 2 shows the Oanda order book, which is a fair representation of average speculator positioning. It allows us to see price levels at which large numbers of buy limit orders are supporting the EUR/CHF pair. On Oct. 23, 2013, the order book showed a strong accumulation of buy limits at 1.22, meaning we could set buy limit orders above this level (e.g., between 1.2250 and 1.2300) and expect the additional limit orders Oanda’s EUR/CHF order book to support us — that is, because price is unlikely to breach this strong from Oct. 23, 2013 shows a large support, we can enter positions above it instead of waiting for a potenaccumulation of buy limit orders around 1.22. tial drop to a lower level that, while representing a better opportunity, Source: oanda.com may not readily materialize. Other support points, such as the test of the most recent day’s low, can offer good entry points for long trades. FIGURE 3: EURO/SWISS WEEKLY SUPPORT AND RESISTANCE Interestingly, the order book reveals many traders are following the same strategy, as evidenced by the large number of sell stop orders below 1.20 — a sign of long strategies assuming “infinite support” by the SNB at 1.20. Because we’re only entering one trade at a time, deciding when to exit is important as it directly affects the number of price swings we can take advantage of. Trades can be exited at weekly resistance lines (Figure 3) or, alternately, a position can be taken out by a retracement by setting a trailing stop when price moves 100 to 200 pips in your favor. The first scenario will allow you to cash in and take a new position at a new test of support. The second option will allow you to take advantage of large swings that sometimes occur, Weekly support (red) and resistance (green) levels can be used to such as the ones in January and May 2013. enter and exit trades. Another option is to distribute risk across CURRENCY TRADER • November 2013
17
TRADING STRATEGIES
FIGURE 4: STAGGERED TRADING APPROACH
This trading approach enters four separate long trades and exits 15 pips above the highest entry price.
multiple positions. Figure 4 shows an example of a strategy that separates risk into a maximum of four trades, all of which use a profit target of 15 pips above the highest entry price. To start, a trade is opened that risks 25% (a stop-loss order at 1.1950) and has a profit target of 15 pips; if price moves down a quarter of the distance to 1.2000, a second trade is entered (also risking 25%) with the same profit target as the first. If price declines further, two additional positions are opened in the same manner, resulting in four open positions with risk of a margin call at 1.1950. If price reaches the profit target, a new long position is entered and the process begins again. This strategy would have generated a profit of 110% in 2013 through Oct. 23. However, discretionary strategies based on support and resistance, as mentioned previously, could have produced better results.
Extended drawdowns
A strategy traded in this manner might suffer from extended drawdowns, which can become longer the further away you are from the floor when opening your positions. As a result you may incur significant interest fees if your broker charges you a negative overnight interest rate for holding a EUR/CHF long position. Accordingly, it is advisable to only use this strategy if your broker gives you a positive interest rate on EUR/ CHF longs; otherwise your capital could become significantly eroded if the EUR/CHF becomes trapped in a tight range below your entry for a significant period of time. 18
This means it’s also wise to avoid entering positions when the EUR/CHF is above 1.24, because in this case your potential for extended drawdown periods below your entry price becomes larger.
The big risk: “Infinite” isn’t really forever
This trade has an important caveat: Buying the EUR/CHF pair close to the SNB floor and risking a margin call below 1.1950 is a high-risk setup — it obviously carries the risk of losing all or most of your capital if the SNB doesn’t enforce its policy or changes it. Although the SNB will probably hold the floor while interest rates remain low, it is worth mentioning that inflation in Switzerland (particularly in real estate) as well as a potential unsustainable accumulation of foreign exchange reserves stemming from defending the floor might pressure the SNB to change its strategy. (“Swiss National Bank dilemma – too much of a good thing,” by Michael D. McDonnell offers further analysis on this topic.) Even if the SNB simply lowered the floor from 1.20 to, say, 1.18 it would result in heavy losses for traders using this type of strategy. The approach should be traded in an account where risk of total loss is acceptable. Meanwhile, the strategy is highly rewarding because it is supported by the current market conditions. y Daniel Fernandez is an active trader focusing on forex strategy analysis, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For more information on the author, see p. 4. November 2013 • CURRENCY TRADER
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TRADING STRATEGIES ADVANCED CONCEPTS
Going forward with reversals: The minors Smaller and less-developed currency option markets appear to have cleaner relationships to their carry returns vs. the USD than do major currencies. BY HOWARD L. SIMONS
FIGURE 1: T HE BRAZILIAN REAL AND THREEMONTH RISK-REVERSALS 0% 2%
2.32
4%
2.28
6% 2.24
8%
2.20
10%
2.16
12% 14%
2.12
16% 2.08
20% Sep-13
Oct-12
18%
Apr-13
Oct-11
Apr-11
Nov-10
Nov-09
May-10
May-09
Jun-08
Nov-08
Jun-07
Dec-07
Jun-06
Dec-06
2.00
Jan-06
2.04
Apr-12
Carry 3-Mo 25 3-Mo 35
Three-Month Risk Reversals, Inverse Scale
Log10 USD Carry Return Into BRL, Jan. 4, 2006 = 2.00 Led Two Months
2.36
22%
2.08
-2.5%
2.06
0.0%
2.04
5.0%
2.00
7.5%
1.98 10.0%
1.96
12.5%
1.94
15.0%
1.92
Sep-13
Oct-12
Apr-13
Apr-12
Oct-11
Apr-11
Nov-10
May-10
Nov-09
May-09
Jun-08
Nov-08
17.5%
Dec-07
Dec-06
Jun-06
Jan-06
Jun-07
Carry 3-Mo 25 3-Mo 35
1.90 1.88
20
2.5%
2.02
20.0%
Three-Month Risk Reversals, Inverse Scale
Log10 USD Carry Return Into MXN, Jan. 4, 2006 = 2.00 Led Two Months
FIGURE 2: T HE MEXICAN PESO AND THREEMONTH RISK-REVERSALS
Last month’s examination of risk reversals and their relationship to major currencies (“Going forward with reversals: The Majors,” Currency Trader, October 2013) showed the relative demand for price insurance between currency options’ call and put wings provided early warnings of turning points for those currencies. Now let’s repeat the exercise for a set of minor currencies that includes the Brazilian real (BRL), Indian rupee (INR), South African rand (ZAR), Turkish lira (TRY), Thai baht (THB), Mexican peso (MXN), and Taiwan dollar (TWD). As a refresher, the relative willingness of call and put option buyers to buy their respective contracts can be measured in a “risk reversal,” defined as the difference in implied volatility between call and put options of the same delta. Delta is the expected movement in the option’s price relative to the underlying asset’s price; call option delta ranges from 0 to 1 and put option delta from -1 to 0. When the bounds of 1 and -1 are reached, the options are so deep in the money and have so little time premium remaining they behave like long and short futures or cash-market positions, respectively. Two risk reversals will be used in the following discussion, the 25-delta and 35-delta risk reversals. Because the 25-delta options are further out of the money and are more levered, they tend to convey more information about relative anxiety and therefore are more useful for analysis. November 2013 • CURRENCY TRADER
FIGURE 3: T HE INDIAN RUPEE AND THREE-MONTH RISK-REVERSALS -1% 0% 1%
2.10
2% 3% 4%
2.08
5% 6%
2.06
7% 8%
2.04
9% 10% 11%
2.02
12%
Carry 3-Mo 25 3-Mo 35
2.00
13% 14%
Sep-13
Oct-12
Apr-13
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Apr-11
Nov-10
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May-10
May-09
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Nov-08
Jun-07
Dec-07
Jun-06
Dec-06
Jan-06
15% 1.98
16%
FIGURE 4: T HE SOUTH AFRICAN RAND AND THREE-MONTH RISK-REVERSALS 1%
2.095
2%
2.070 2.045
3%
2.020
4%
1.995
5%
1.970 1.945
6%
1.920
7%
1.895
8%
1.870 1.845
9%
Sep-13
Apr-13
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Apr-12
Oct-11
Apr-11
Nov-10
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May-09
Jun-08
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10%
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1.770
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1.795
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Carry 3-Mo 25 3-Mo 35
1.820
Jan-06
Log10 USD Carry Return Into ZAR, Jan. 4, 2006 = 2.00 Led Two Months
2.120
11%
FIGURE 5: T HE TURKISH LIRA AND THREE-MONTH RISK-REVERSALS 0%
2.20
1%
2.18
2%
2.16 2.14
3%
2.12 2.10
4%
2.08
5%
2.06 2.04
6%
2.02
7%
2.00
8%
1.98 1.96
9%
Apr-13
Oct-12
Oct-11
Apr-12
10% Apr-11
Nov-10
Nov-09
May-09
Jun-08
Nov-08
Jun-07
Dec-07
Dec-06
1.90
Jun-06
1.92
May-10
Carry 3-Mo 25 3-Mo 35
1.94
Jan-06
Log10 USD Carry Return Into TRY, Jan. 4, 2006 = 2.00 Led Two Months
2.22
Three-Month Risk Reversals, Inverse Scale
CURRENCY TRADER • November 2013
-2% 2.12
Three-Month Risk Reversals, Inverse Scale
The data in Figures 1-7 are based on cash markets for the set of minor currencies. The returns on the currencies are presented as the common logarithm of the total carry return from the U.S. dollar into those currencies reindexed to January 2006; this both approximates the return path of a continuous currency futures contract and allows for the more intuitively appealing rising line depicting a stronger currency. The three-month 25- and 35-delta risk reversals are presented as well. All these reversals are depicted on an inverse scale because a call option on a larger number of “units per USD” conveys a weaker, not a stronger, underlying asset. If risk reversals are to have any value in trading and market analysis, they should lead the return series and they do so with a two-month average lead time. Accordingly, the carry return series are shifted by two months in the following charts. The outstanding feature for the Brazilian real (Figure 1) is the steady-state nature of the risk reversals — with two exceptions, the 2008 financial crisis and the 2011 confluence of the U.S. debt ceiling and European sovereign-debt situations, when they correctly expanded prior to the currency’s rebound. Regardless of the long periods of BRL appreciation prior to 2011 or its downturn since then, the risk reversals tend to be weakly bullish. In Figure 2, the Mexican peso’s risk reversals look somewhat similar to the BRL’s: a general steady state punctuated by two bullish expansions, one during the 2008 financial crisis and one during the 2011 U.S. and European debt situations. The Indian rupee’s chart (Figure 3) has a similar asymmetry, with a similar steady-state bias toward weak appreciation for the carry return into the INR as seen for the BRL. Because the INR, like the BRL, had a long period of appreciation between the 2008 financial crisis and mid2011 followed by a downward-pointing trading range, the stickiness of the option market is puzzling. As in the case of the BRL, the two major upturns in the risk reversals correctly called impending bottoms in the currency.
-3%
Three-Month Risk Reversals, Inverse Scale
Risk reversals and the minors
Log10 USD Carry Return Into INR, Jan. 4, 2006 = 2.00 Led Two Months
2.14
11%
21
ON THE MONEY ADVANCED CONCEPTS
FIGURE 6: T HE THAI BAHT AND THREE-MONTH RISK-REVERSALS -1.0% -0.5%
2.15
0.0% 2.13
0.5% 1.0%
2.11
1.5%
2.09
2.0%
2.07
2.5% 3.0%
2.05
Apr-13
4.0% Sep-13
Oct-12
Oct-11
Apr-12
Apr-11
Nov-10
Nov-09
May-10
May-09
Jun-08
Nov-08
Jun-07
Dec-07
Jun-06
Dec-06
Jan-06
2.01
3.5%
Carry 3-Mo 25 3-Mo 35
2.03
Three-Month Risk Reversals, Inverse Scale
Log10 USD Carry Return Into THB, Jan. 4, 2006 = 2.00 Led Two Months
2.17
4.5%
2.03
-2.0%
2.02
-1.5% -1.0%
2.01
-0.5%
2.00
0.0%
1.99
0.5%
1.98
1.0%
1.97
1.5%
1.96
2.0%
1.95
Sep-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Nov-10
May-10
Nov-09
May-09
Jun-08
Nov-08
Jun-07
3.0% Dec-07
Dec-06
Jun-06
Jan-06
1.94 1.93
2.5%
Carry 3-Mo 25 3-Mo 35
Three-Month Risk Reversals, Inverse Scale
Log10 USD Carry Return Into TWD, Jan. 4, 2006 = 2.00 Led Two Months
FIGURE 7: T HE TAIWAN DOLLAR AND THREEMONTH RISK-REVERSALS
3.5%
FIGURE 8: T HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO BRAZILIAN REAL
Lest you think the BRL and INR define a pattern for the minor currencies, consider the South African rand (Figure 4). Here the risk reversals swing about frequently and in both directions. The 25-delta risk reversal was a late to the rebound from the 2008-2009 low, but it anticipated the other shifts in the ZAR reasonably well. The Turkish lira’s risk reversals, especially the 35-delta risk reversal, have anticipated moves in the TRY both higher and lower since mid-2007 (Figure 5). This relatively tight correlation is surprising given the dominance of the interest rate spread as opposed to the spot rate change in the TRY’s carry return (see “Turkish Lira and eternal crossroads,” July 2012). The Thai baht’s risk reversals expanded once, during the 2008 financial crisis, and have hovered at low positive levels otherwise (Figure 6). This has been an accurate assessment of the carry returns into the THB; the currency’s carry return has oscillated within a small trading range since late 2010. The Taiwan dollar’s risk reversals shifted into an increasingly bullish phase throughout 2011 before the carry into the TWD turned lower and then remained bullish through the currency’s subsequent rebound (Figure 7). This picture may seem boring, but what should be so boring about an indicator being correct most of the time?
Prospective returns
Now let’s see whether three-month-ahead returns appear to be a function of these risk reversals and of the forward rate ratio between six and nine months (FRR6,9) for the minor currencies (see “Minor currencies less affected by The Great LIBOR Kerfuffle,” July 2013). The FRR6,9 is the rate at which borrowing can be locked in for three months starting six months from now, divided by the nine-month rate itself. The steeper the yield curve, the more this ratio exceeds 1.00; an inverted yield curve has an FRR6,9 less than 1.00. 22
November 2013 • CURRENCY TRADER
FIGURE 9: T HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO MEXICAN PESO
In Figures 8-14, positive prospective returns are depicted with green bubbles, negative with red bubbles; the diameter of a bubble corresponds to the absolute magnitude of the return. The last datum used, the end of April 2013, is highlighted and the end-July 2013 environment is marked with a crosshair. The most striking feature about the BRL chart is its cluster of negative prospective returns in the upper-right corner of the map where risk reversals are low and the FRR6,9 is increasingly positive (Figure 8). This is equivalent to saying the market expects a more expansive Brazilian monetary policy to result in a weaker BRL, and it adjusts its insurance trade accordingly. The picture for the Mexican peso looks very different (Figure 9). Here the dominant feature is a cluster of positive prospective returns with the 25-delta risk reversal between 2% and 12%; all other observations with the risk reversal either higher or lower are negative. This is an extraordinarily reliable, albeit “data-mined” pattern. The pattern for the Indian rupee has been too mixed to be useful (Figure 10). Here, there are alternating bands of positive and negative prospective returns across the observed range of risk reversals. The South African rand has a much neater and therefore much more useful division (Figure 11). Here nearly all of the observations involving a 25-delta risk reversal greater than 5% and a flat-to-inverted yield curve have positive prospective returns, and vice versa. To echo the comment made for the BRL in reverse, the market associates an inverted yield curve with gains in the ZAR and it prices relative insurance costs accordingly. The Turkish lira has a different pattern (Figure 12). Here the major cluster of negative prospective returns is concentrated in the lower-right corner of the map where the 25-delta risk reversal is less than 5% and where the FRR6,9 is less than 1.08; positive prospective returns are clustered in the upper-left corner. CURRENCY TRADER • November 2013
FIGURE 10: T HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO INDIAN RUPEE
FIGURE 11: T HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO S. AFRICAN RAND
23
ON THE MONEY ADVANCED CONCEPTS
FIGURE 12: T HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO TURKISH LIRA
FIGURE 13: T HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO THAI BAHT
FIGURE 14: T HREE-MONTH-AHEAD RETURNS ON DOLLAR CARRY INTO TAIWAN DOLLAR
The prospective return map for the Thai baht shows a greater dependence on the FRR6,9 than on the risk reversal, but the two measures combine to form a region dominated by positive prospective returns over the superimposed line and negative prospective returns below the line (Figure 13). The Taiwan dollar has an even more extreme division along the FRR6,9-risk reversal combination, but here the superimposed line runs from the upper-left to the lowerright quadrant (Figure 14). Here the negative prospective returns are associated with higher risk reversal levels combined with flatter yield curves. The overall conclusion for the minor currencies is surprising to the extent the smaller and less-developed option markets on them seem to have cleaner relationships to their carry returns against the USD than was the case for the major currencies. A likely explanation here is the majors have been affected more by various programs of quantitative easing and sovereign debt constraints than have the minors and therefore are reacting to anecdotal impulses as opposed to basic market factors. In addition, the conclusion stated for the majors last month applies here: “What we can conclude from the data above is the principle of relative anxiety expressed in the relative volatility measure of a risk reversal does provide some early warning of impending trend changes. This is not infallible, but as is the case with so many market indicators, it must be interpreted rather than applied in a simple trading rule.” y Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. For more information on the author, see p. 4.
24
November 2013 • CURRENCY TRADER
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GLOBAL ECONOMIC CALENDAR November
CPI: Consumer price index ECB: European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. FND (first notice day): Also known as first intent day, this is the first day on which a clearinghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillment of a futures contract. The clearinghouse also informs the seller. FOMC: Federal Open Market Committee GDP: Gross domestic product
1 2 3 4 5 6
7
ISM: I nstitute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: P urchasing managers index PPI: P roducer price index Economic release (U.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators
Release time (ET) 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m.
The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.
8 9 10 11
U.S.: October ISM manufacturing index Australia: Q3 PPI
17
U.S.: October retail sales
20 Germany: October PPI
Brazil: October PPI Australia: October employment report Brazil: October CPI Mexico: Oct. 31 CPI and October PPI UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: October employment report Canada: October employment report LTD: November forex options; November U.S. dollar index options (ICE)
21
22
U.S.: Q3 GDP and October housing
26 starts 27 28
Germany: October CPI Japan: October PPI
13 UK: October employment report
29
14
30 31
U.S.: September trade balance and October PPI France: October CPI Germany: Q3 GDP India: October PPI Japan: Q3 GDP U.S.: October CPI
16
South Africa: October CPI U.S.: October leading indicators Brazil: October employment report Hong Kong: October CPI Japan: Bank of Japan interest-rate announcement Mexico: Q3 GDP Canada: October CPI Mexico: Nov. 15 CPI
23 24 25 Mexico: October employment report
12 UK: October CPI and PPI
15
Hong Kong: August-October
18 employment report 19 U.S.: Q3 ECI
1 2 3
South Africa: Q3 GDP U.S.: October personal income and durable goods Canada: October PPI Germany: October employment report South Africa: October PPI Canada: Q3 GDP France: October PPI India: Q3 GDP and October CPI Japan: October employment report and CPI
December U.S.: October ISM manufacturing index Brazil: Q3 GDP
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26
November 2013 • CURRENCY TRADER
CURRENCY FUTURES SNAPSHOT as of Oct. 30 Sym
Exch
Vol
OI
10-day move / rank
20-day move / rank
60-day move / rank
Volatility ratio / rank
EC
CME
166.2
262.2
1.43% / 67%
1.05% / 31%
3.16% / 58%
.23 / 23%
JPY/USD
JY
CME
113.8
163.1
0.16% / 8%
-1.23% / 48%
-0.95% / 19%
.29 / 18%
GBP/USD
BP
CME
89.5
174.4
0.45% / 36%
-1.24% / 100%
4.30% / 67%
.17 / 0%
AUD/USD
AD
CME
71.6
123.4
-0.83% / 67%
1.04% / 22%
5.32% / 81%
.36 / 92%
CAD/USD
CD
CME
46.4
111.5
-1.41% / 100%
-1.34% / 73%
-1.08% / 40%
.76 / 100%
MXN/USD
MP
CME
34.8
113.8
-0.16% / 14%
1.78% / 58%
-1.91% / 21%
.23 / 23%
CHF/USD
SF
CME
29.9
47.3
1.50% / 62%
0.28% / 2%
2.90% / 43%
.26 / 22%
U.S. dollar index
DX
ICE
20.1
52.9
-1.11% / 69%
-0.72% / 15%
-2.43% / 43%
.31 / 43%
NZD/USD
NE
CME
11.9
23.1
-2.39% / 100%
-0.91% / 42%
3.93% / 15%
.45 / 80%
E-Mini EUR/USD
ZE
CME
3.1
4.6
1.43% / 67%
1.05% / 31%
3.16% / 58%
.23 / 23%
Market EUR/USD
Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.
The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable). LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to today’s close. 20-day move: The percentage price move from the close 20 days ago to today’s close. 60-day move: The percentage price move from the close 60 days ago to today’s close. The “% rank” fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.
CURRENCY TRADER • November 2013
BarclayHedge Rankings: Top 10 currency traders managing more than $10 million (as of 09/30/13, ranked by September 2013 return)
Trading advisor
September return
2013 YTD return
$ Under mgmt. (millions)
1
CenturionFx Ltd (6X)
10.05%
33.00%
40.6
2
Harmonic Capital (Gl. Currency)
7.65%
-9.72%
1126.0
3
Alder Cap'l (Alder Global 20)
3.10%
3.97%
454.0
4
Ortus Capital Mgmt. (Currency Aggr)
2.82%
-24.83%
1003.0
5
INSCH Capital Mgmt (Kintillo X3)
2.58%
2.19%
62.7
6
24FX Management Ltd
2.29%
28.13%
108.2
7
Civic Capital (Curr. Fund LP)
1.78%
13.10%
347.8
8
FX Concepts (GCP)
1.76%
-12.39%
614.0
9
Gedamo (FX Alpha)
1.66%
9.72%
28.6
10
Alder Cap'l (Alder Global 10)
1.60%
1.99%
12.0
Top 10 currency traders managing less than $10M & more than $1M 1
Gloranis GmbH (Forex Private 1)
7.25%
-2.48%
1.0
2
Hartswell Capital Mgmt (Athena)
2.70%
33.00%
1.7
3
MFG (Bulpred USD)
0.81%
2.83%
1.4
4
BEAM (FX Prop)
0.62%
-6.96%
1.5
5
Blue Fin Capital (Managed FX)
0.42%
-1.69%
3.0
6
MDC Trading
0.11%
7.73%
1.5
7
V50 Capital Mgmt (FX)
0.00%
-7.18%
2.5
8
Quaesta Capital GmbH
-0.10%
-0.95%
6.5
9
Four Capital (FX)
-0.13%
0.32%
1.0
10
Fjord Capital Mgmt. (Sherpa FX)
-0.13%
-0.37%
4.0
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.
27
INTERNATIONAL MARKETS
Rank
Currency vs. the U.S. dollar
Oct. 30 price vs. U.S. dollar
1-month gain/loss
3-month gain/loss
6-month gain/loss
52-week high
52-week low
Previous
1
Brazilian real
0.458585
3.02%
3.54%
-8.25%
0.5137
0.4082
1
2
Indian rupee
0.01633
2.64%
-2.97%
-11.63%
0.0188
0.0147
6
3
Australian Dollar
0.95106
2.08%
2.93%
-7.88%
1.0568
0.8893
3
4
Euro
1.37711
1.84%
3.74%
5.34%
1.3802
1.2695
14
5
Singapore dollar
0.80696
1.39%
2.15%
-0.37%
0.8207
0.7792
8
6
Swedish krona
0.15712
1.09%
1.66%
2.86%
0.159
0.1464
11
7
Russian ruble
0.03126
1.07%
2.54%
-2.69%
0.0337
0.0299
5
8
Swiss franc
1.114835
1.00%
3.59%
4.76%
1.1213
1.0274
12
9
Thai baht
0.032195
0.88%
0.33%
-5.77%
0.0348
0.0309
10
10
Taiwan dollar
0.034005
0.55%
1.77%
0.38%
0.0345
0.0326
13
11
Japanese yen
0.01023
0.54%
0.20%
0.10%
0.0126
0.0097
16
12
Chinese yuan
0.163235
0.29%
0.79%
1.45%
0.1633
0.1583
15
13
Hong Kong dollar
0.128975
0.01%
0.05%
0.11%
0.129
0.1288
17
14
South African rand
0.099135
0.00%
-2.91%
-10.31%
0.118
0.0962
4
15
New Zealand dollar
0.826725
-0.11%
2.52%
-3.12%
0.8619
0.7704
2
16
Great Britain pound
1.60867
-0.33%
4.64%
3.73%
1.6286
1.4877
7
17
Canadian dollar
0.95727
-1.35%
-1.69%
-2.88%
1.0166
0.9445
9
GLOBAL STOCK INDICES Country
Index
Oct. 30
1-month gain/loss
3-month gain/loss
6-month gain loss
52-week high
52-week low
Previous
1
Italy
FTSE MIB
19,166.90
9.93%
15.86%
14.31%
19,501.18
14,855.80
3
2
India
BSE 30
21,033.97
8.54%
8.71%
7.84%
21,086.59
17448.70
2
3
Canada
S&P/TSX composite
13,455.30
5.22%
6.94%
8.02%
13,471.06
11,759.00
14
4
UK
FTSE 100
6,777.70
4.88%
3.15%
5.41%
6,875.60
5,605.60
13
5
U.S.
S&P 500
1,763.31
4.86%
4.59%
10.37%
1,775.52
1,343.35
10
6
Germany
Xetra Dax
9,010.27
4.84%
8.94%
13.86%
9,070.17
6,950.53
9
7
Australia
All ordinaries
5,425.40
3.98%
7.94%
4.97%
5,453.10
4,355.90
7
8
South Africa
FTSE/JSE All Share
45,611.91
3.59%
11.27%
17.75%
45,611.91
36,818.76
11
9
Brazil
Bovespa
54,173.00
3.51%
11.55%
-3.11%
63,473.00
44,107.00
5
10
France
CAC 40
4,274.11
3.15%
7.21%
10.82%
4,309.92
3,341.52
8
11
Switzerland
Swiss Market
8,228.40
2.57%
5.35%
4.08%
8,411.30
6,508.50
15
12
Mexico
IPC
41,050.09
2.15%
2.02%
-2.87%
46,075.00
37,034.30
12
13
Singapore
Straits Times
3,230.44
1.98%
-0.46%
-4.09%
3,464.79
2,931.60
6
14
Hong Kong
Hang Seng
23,304.02
1.94%
6.15%
2.49%
23,944.70
19,426.40
4
15
Japan
Nikkei 225
14,502.35
0.32%
4.56%
4.63%
15,942.60
8,619.45
1
28
November 2013 • CURRENCY TRADER
NON-U.S. DOLLAR FOREX CROSS RATES Rank
Currency pair
Symbol
Oct. 30
1-month gain/loss
3-month gain/loss
6-month gain loss
52-week high
52-week low
Previous
1
Aussie $ / Canada $
AUD/CAD
0.99352
3.48%
4.70%
-5.15%
1.0685
0.9224
5
2
Euro / Canada $
EUR/CAD
1.438585
3.23%
5.52%
8.46%
1.4412
1.2705
14
3
Franc / Canada $
CHF/CAD
1.1646
2.38%
5.37%
7.86%
1.169
1.0523
12
4
Aussie $ / New Zeal $
AUD/NZD
1.150375
2.21%
0.40%
-4.92%
1.2793
1.1215
15
5
Euro / Pound
EUR/GBP
0.85605
2.18%
-0.85%
1.55%
0.8747
0.798
16
6
Aussie $ / Yen
AUD/JPY
92.99
1.58%
2.78%
-7.94%
105.05
82.47
2
7
Euro / Yen
EUR/JPY
134.65
1.34%
3.60%
5.27%
134.73
100.81
10
8
Aussie $ / Franc
AUD/CHF
0.8531
1.07%
-0.64%
-12.06%
0.9942
0.8218
4
9
Pound / Canada $
GBP/CAD
1.68048
1.04%
6.43%
6.80%
1.6895
1.5286
8
10
Euro / Franc
EUR/CHF
1.235245
0.83%
0.14%
0.55%
1.256
1.2036
11
11
Franc / Yen
CHF/JPY
109.005
0.50%
3.44%
4.69%
109.20
83.68
9
12
Euro / Aussie $
EUR/AUD
1.44798
-0.24%
0.79%
14.34%
1.4948
1.2183
17
13
New Zeal $ / Yen
NZD/JPY
80.83
-0.60%
2.37%
-3.18%
85.86
64.67
1
14
Pound / Yen
GBP/JPY
157.29
-0.81%
4.49%
3.66%
159.32
126.08
3
15
Aussie $ / Real
AUD/BRL
2.073915
-0.92%
-0.60%
0.40%
2.2253
1.9633
18
16
Euro / Real
EUR/BRL
3.002975
-1.15%
0.19%
14.80%
3.2599
2.5251
20
17
Pound / Franc
GBP/CHF
1.44296
-1.31%
1.00%
-0.98%
1.511
1.4062
6
18
Canada $ / Yen
CAD/JPY
93.595
-1.83%
-1.83%
-2.94%
100.65
79.33
7
19
Pound / Aussie $
GBP/AUD
1.691445
-2.36%
1.66%
12.61%
1.7393
1.4439
13
20
Yen / Real
JPY/BRL
0.022305
-2.45%
-3.27%
9.04%
0.0259
0.0196
21
21
Canada $ / Real
CAD/BRL
2.08745
-4.25%
-5.05%
5.85%
2.3271
1.8879
19
CURRENCY TRADER • November 2013
29
INTERNATIONAL MARKETS GDP AMERICAS
EUROPE AFRICA ASIA and S. PACIFIC
Argentina Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore
Unemployment AMERICAS
EUROPE
ASIA and S. PACIFIC
Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore
CPI AMERICAS
EUROPE AFRICA ASIA and S. PACIFIC
EUROPE AFRICA ASIA and S. PACIFIC
Release date
Change
1-year change
Next release
Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2
9/20 8/30 9/30 9/27 9/6 9/26 9/10 9/4 8/16 8/30 8/12 8/16
2.6% 5.3% 0.9% 0.5% 1.6% 0.7% 0.9% 0.9% -2.4% -4.3% 0.6% 5.1%
8.3% 3.3% 3.4% 2.0% 3.4% 1.3% 6.9% 2.5% 3.3% 10.2% 2.6% 3.8%
12/20 12/3 11/29 12/24 11/14 12/20 11/26 12/4 11/15 11/29 11/14 11/22
Period
Release date
Rate
Change
1-year change
Next release
Q2 Sep. Sep. Q2 Sep. June-Aug. Sep. July-Sept. Sep. Q2
9/13 10/24 10/11 9/5 10/1 10/16 10/10 10/17 10/1 7/31
7.2% 5.4% 6.9% 10.5% 5.1% 7.7% 5.7% 3.3% 4.0% 2.1%
-0.7% 0.1% -0.2% 0.1% 0.1% -0.1% 0.0% 0.0% -0.1% 0.2%
0.0% 0.0% -0.4% 0.7% 0.0% -0.2% 0.4% 0.0% -0.3% -0.1%
11/18 11/21 11/8 12/11 11/28 11/13 11/7 11/18 11/29 10/31
Change
1-year change
Next release
Period
Release date
Argentina
Sep.
10/15
0.8%
10.5%
11/15
Brazil
Sep.
10/9
0.4%
5.9%
11/7
Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore
Sep. Sep. Sep. Sep. Sep. Q3 Sep. Aug. Sep. Sep.
10/18 10/15 10/11 10/15 10/23 10/23 10/21 9/30 10/25 10/23
0.2% -0.2% 0.0% 0.4% 0.2% 1.2% 0.4% 0.9% 0.3% 0.2%
1.1% 0.9% 1.4% 2.7% 1.6% 2.2% 4.6% 10.7% 1.1% 1.6%
11/22 11/14 11/12 11/12 11/25 1/22 11/21 10/31 11/29 11/25
PPI AMERICAS
Period
Argentina Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore
Period
Release date
Change
1-year change
Next release
Sep. Sep. Aug. Sep. Sep. Aug. Q2 Q2 Sep. Sep. Sep.
10/15 10/29 9/30 10/4 10/15 9/26 8/2 9/12 10/14 10/11 10/29
1.1% -0.3% 2.0% 0.3% -0.1% 0.8% 0.1% -4.3% 1.2% 0.3% 0.3%
13.8% 1.0% 1.0% -0.5% 1.2% 6.7% 1.2% -2.4% 6.5% 2.3% -1.5%
11/14 11/28 10/31 11/20 11/12 10/31 11/1 12/12 11/14 11/13 11/29
As of Oct. 30 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
30
November 2013 • CURRENCY TRADER
ACCOUNT BALANCE Rank
Account balance
2012
Ratio
2011
2013+
1
Singapore
51.437
18.602
65.323
53.071
2
Norway
70.817
14.174
62.705
60.773
3
Switzerland
70.756
11.21
59.082
68.101
4
Taiwan Province of China
49.923
10.529
41.23
48.606
5
Netherlands
77.839
10.098
84.86
86.993
6
Germany
238.493
6.954
224.29
214.596
7
Sweden
31.306
5.977
34.188
31.326
8
Ireland
9.325
4.422
2.786
5.117
9
Korea
43.139
3.819
26.068
55.195
10
Hong Kong SAR
7.156
2.718
12.908
6.299
11
Japan
60.446
1.014
119.304
61.064
12
Italy
-14.881
-0.739
-67.152
-0.225
13
Spain
-14.821
-1.12
-55.356
19.445
14
Belgium
-7.754
-1.602
-5.87
-3.552
15
Czech Republic
-4.727
-2.416
-6.112
-3.505
16
United States
-440.417
-2.711
-457.726
-451.458
17
Canada
-62.266
-3.418
-48.98
-57.092
18
Australia
-56.901
-3.691
-34.089
-50.34
19
United Kingdom
-93.866
-3.79
-36.041
-69.096
Source: International Monetary Fund, World Economic Outlook Database, October 2013
GLOBAL CENTRAL BANK LENDING RATES Country
Interest rate
Rate
Last change
April 2013
Oct. 2012
United States
Fed funds rate
0-0.25
0.5 (Dec 08)
0-0.25
0-0.25
Japan
Overnight call rate
0-0.1
0-0.1 (Oct 10)
0-0.1
0-0.1
Eurozone
Refi rate
0.5
0.25 (May 13)
0.75
0.75
England
Repo rate
0.5
0.5 (Mar 09)
0.5
0.5
Canada
Overnight rate
1
0.25 (Sep 10)
1
1
Switzerland
3-month Swiss Libor
0-0.25
0.25 (Aug 11)
0-0.25
0-0.25
Australia
Cash rate
2.5
0.25 (Aug 13)
3
3.25
New Zealand
Cash rate
2.5
0.5 (Mar 11)
2.5
2.5
Brazil
Selic rate
9.5
0.5 (Oct 13)
7.5
7.25
Korea
Korea base rate
2.5
0.25 (May 13)
2.75
2.75
Taiwan
Discount rate
1.875
0.125 (Jun 11)
1.875
1.875
India
Repo rate
7.75
0.25 (Oct 13)
7.5
8
South Africa
Repurchase rate
5
0.5 (Jul 12)
5
5
CURRENCY TRADER • November 2013
31
FOREX TRADE JOURNAL
Waiting for an Aussie rebound to go short. TRADE Date: N/A. Entry: No trade; anticipated short of the Australian dollar/U.S. dollar pair (AUD/USD) around .9570. Reason for trade/setup: The October Spot Check outlined the Aussie/dollar pair’s performance after intermediate declines (e.g., 16 weeks, -10%) followed by smaller rebounds (e.g., seven weeks, +3.3% ), such as the pair had formed as of Sept. 20. Figure 1 shows the AUD/USD’s historical performance after different variations of this pattern, along with it’s trajectory (bright green line) from Sept. 20 through Oct. 29. Although the article noted the Aussie/dollar pair tended to move sideways to slightly higher for a few weeks before sliding to a relative low after eight weeks, the AUD/USD rate staged a nearly 3% rally in the first four weeks after Sept. 20 before reversing during the week ending Oct. 25 and dropping sharply over the next few days. Did the Aussie/dollar’s upside overshoot in October negate the pattern’s longer-term bearish implications? Perhaps. Modeling the pair’s weekly price action as of Oct. 29 offers another perspective about its potential trajectory. Figure 2 shows the pair’s average and median weekly moves in the 12 weeks after the following
FIGURE 1
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conditions: 1. Last week’s high was above the highest high of the preceding eight weeks. 2. This week’s close is below the lows of the previous two weeks. 3. This week’s low is below last week’s low. After these patterns, the pair has underperformed its benchmark one- to 12-week performance (“Overall” lines) and declined to a relative low after five weeks. Note: This analysis, which was conducted on Oct. 29, would not be relevant to the current market unless the AUD/USD rate made a lower weekly close on Nov. 1. The weakness implied both by the previous analysis (which projected a relative low in the week ending Nov. 8) and the new pattern call for a short position. However, given the pair’s rapid descent after its Oct. 22 high, no position had been entered as of Oct. 30; a shortentry limit was planned for around .9570, which represented a rebound to the pair’s most recent intraday congestion and breakdown point. Initial stop: .9689 Initial target: .9295
FIGURE 2
November 2013 • CURRENCY TRADER
FIGURE 3
RESULT Exit: N/A Profit/loss: N/A Outcome: As of Oct. 30, the AUD/USD’s weakness had mostly continued, and no trade had been signaled. Some amount of upside follow-through should be expected if the pair rallies to the entry point, so the stop level has been set a little above the Oct. 24 high; the target represents a decline to the implied support around the early-October low/late-July high. y Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.
TRADE SUMMARY Date
Currency pair
Entry price
Initial stop
Initial target
IRR
Exit
Date
N/A
AUD/USD
.9570
.9689
.9295
2.31
N/A
N/A
P/L point N/A
% N/A
LOP
LOL
Trade length
N/A
N/A
N/A
Legend — IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade). MTM: marked-to-market — the open trade profit or loss at a given point in time.
CURRENCY TRADER • October November 2013 2010
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