CT200907

Strategies, analysis, and news for FX traders
July 2009
Volume 6, No. 7
BUBBLES AND THE

forex market
p. 12
KOREAN WON:
Risk thermometer
HOT DOWN p. 26
UNDER:
Aussie and Kiwi
dollars p.
p. 88 UNDERSTANDING
THE DOLLAR:
Know the players
IS THERE A BEST p. 18
TIME OF THE MONTH
for breakouts? p.
p. 20
20
CONTENTS
Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Trading Strategies

Breakout timing . . . . . . . . . . . . . . . . . . . .20
Global Markets Analysis indicates certain times of the
Aussie and kiwi in rally mode ... month may be more favorable than others
But for how long? . . . . . . . . . . . . . . . . . . .8 for short-term breakout strategies.
The Australian and New Zealand currencies By Currency Trader Staff
put together blistering rallies this spring. Is it too
much too soon? Advanced Strategies
By Currency Trader Staff Won flew over the carry’s nest . . . . . . . .26
For better or worse, Korea’s currency seems
On the Money to function as a basic risk barometer.
Bubble contamination . . . . . . . . . . . . . .12 By Howard L. Simons
Pondering the nature of the
currency-commodity relationship. continued on p. 4
By Barbara Rockefeller
The players and their impact . . . . . . . . .18

In this excerpt from his forthcoming book,
Making Sense of the Dollar, the author
discusses how different players in the forex
market think about currencies, and the
challenges individual traders face.
By Marc Chandler
2 July 2009 • CURRENCY TRADER

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CONTENTS
Forex News
Forex scams on the rise . . . . . . . . . . . . .32
Financial market regulators are seeing an
uptick in scams, especially in the forex market.
By Chris Peters
International Markets . . . . . . . . . . . . . .34

Numbers from the global forex, stock, New products & services . . . . . . . . . . . . . .38
and interest-rate markets.
Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Global Economic Calendar . . . . . . . . . . . .37 Conferences, seminars, and other events.
Important dates for currency traders.
Have a question about something you’ve seen in

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webmaster@currencytradermag.com.
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CONTRIBUTORS
CONTRIBUTORS
A publication of Active Trader ®
For all subscriber services:

www.currencytradermag.com
Editor-in-chief: Mark Etzkorn
metzkorn@currencytradermag.com
Managing editor: Molly Goad

mgoad@currencytradermag.com
Associate editor: Chris Peters

cpeters@currencytradermag.com Howard Simons is president of
Rosewood Trading Inc. and a strategist for
Contributing editor: Bianco Research. He writes and speaks fre-
Howard Simons
quently on a wide range of economic and
financial market issues.
Contributing writers:
Barbara Rockefeller, Marc Chandler
Marc Chandler (marc@terrak.com) is
Editorial assistant and the head of global foreign exchange strate-
webmaster: Kesha Green gies at Brown Brothers Harriman and an
kgreen@currencytradermag.com
associate professor at New York University’s
Art director: Laura Coyle
School of Continuing and Professional
lcoyle@currencytradermag.com Studies. Chandler has spent more than 20
years analyzing, writing, and speaking about global capital
President: Phil Dorman markets. He has worked for a number of consulting firms
pdorman@currencytradermag.com
and banks and did a stint at a hedge fund in the early 1990s.
Chandler enjoys a high profile in the business media, which
Publisher,
Ad sales East Coast and Midwest: often call upon him for insight into market developments.
Bob Dorman He appears regularly on CNBC and Bloomberg Television.
bdorman@currencytradermag.com His book, Making Sense of the Dollar: Exposing Dangerous
Myths about Trade and Foreign Exchange will be published in
Ad sales
August.
West Coast and Southwest only:
Allison Chee
achee@currencytradermag.com Barbara Rockefeller (http://www.rts-forex.com) is
an international economist with a focus on foreign
Classified ad sales: Mark Seger exchange. She has worked as a forecaster, trader, and con-
seger@currencytradermag.com sultant at Citibank and other financial institutions, and cur-
rently publishes two daily reports on foreign exchange.
Volume 6, Issue 7. Currency Trader is published monthly by TechInfo, Inc.,
161 N. Clark St., Suite 4915, Chicago, IL 60601. Copyright © 2009 TechInfo, Rockefeller is the author of Technical Analysis for Dummies
Inc. All rights reserved. Information in this publication may not be stored or
reproduced in any form without written permission from the publisher. (For Dummies, 2004), 24/7 Trading Around the Clock, Around
The information in Currency Trader magazine is intended for educational pur- the World (John Wiley & Sons, 2000), The Global Trader (John
poses 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
Wiley & Sons, 2001), and How to Invest Internationally, pub-
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
lished in Japan in 1999. A book tentatively titled How to
guarantee future results. Trade FX is in the works. Rockefeller is on the board of direc-
tors of a large European hedge fund.

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GLOBAL MARKETS
Aussie and Kiwi in rally mode …

But for how long?
Beyond the expectation for a near-term pause or correction, opinions differ regarding
the ability of these currencies to extend their recent gains.
BY CURRENCY TRADER STAFF
T
he spring months were kind to the currencies months. Figure 1 shows the Aussie dollar posted a stunning
Down Under, as the Aussie/U.S. dollar rally vs. the U.S. dollar, soaring from its March low at
(AUD/USD) and the New Zealand/U.S. dollar 0.6280 to its 0.8250 June peak. Kiwi bulls launched a similar
(NZD/USD) were finally able to shake off the type of rally, taking the currency from the March low at
massive bear moves that had driven them to multi-year 0.4890 to the June high at 0.6590.
lows in late 2008 and 2009. Let’s take a look at the economic forecasts, monetary pol-
A number of factors contributed to the bullish turn- icy outlooks, and currency market forecasts for these two
arounds in the Aussie and the kiwi, including positive countries. Do the fundamentals support an extension of
growth and interest-rate differentials, a shift away from these currencies’ rallies, or have the Aussie and kiwi
risk aversion, and rising commodity prices in recent overextended themselves?
The big picture

FIGURE 1 — RECENT RALLY A look at a longer-term chart reveals
Both the Australian and New Zealand dollars posted strong rallies vs. the U.S. how brutal 2008 was to the Aussie
buck before pausing in June. and kiwi dollars (Figure 2). Both cur-
rencies had previously enjoyed
multi-year uptrends, fueled in part
by high interest rates that prompted
global money managers to favor the
high-yielding Aussie and kiwi as the
long legs in the then-popular carry
trade.
However, the 2008 global financial
meltdown brought in a major top
and massive collapse in both curren-
cies as money managers unwound
carry trades and poured money into
the U.S. dollar. By October 2008, the
Aussie had plunged to a five-and-a-
half-year low vs. the U.S. dollar,
while the kiwi hit a six-and-a-half-
year low vs. the greenback in March
2009.
The winds began to shift in spring
2009, however. Suspecting the worst
economic news might be in the rear-
view mirror, previously risk-averse
money managers began to spread
Source: TradeStation their wings out of safe-haven U.S.

FIGURE 2 — LONG-TERM PERSPECTIVE
Although their recent gains have been notable, the Aussie and kiwi dollars are
dollar and Treasury positions into still well off the 2008 highs they established after multi-year uptrends.
potentially higher-yielding trades. By
early June, the Aussie dollar had
recouped approximately 60 percent of
its sell-off, while the kiwi had cut its
loss in half.
“It has really been the growing per-
ception among traders that the global
recession is easing, meaning risk-aver-
sion, safe-haven trades have become
less attractive,” says Steve Webster,
director at UK-based TopEcon consult-
ing. “In other words, both real money
and speculative flows have been trans-
ferring to higher yielding recovery-ori-
entated assets in smaller developed
economies like Australia and New
Zealand, with a lot of interest from
Japanese investors in particular.”
Steven Englander, chief currency
strategist, Americas at Barclays
Capital agrees that a factor behind the Source: TradeStation
Aussie and kiwi spring rallies is a
restoration of global confidence. works the different countries have ore shipments supported the country’s
“The worst downside scenarios are adopted. export picture and currency.
given a much lower probability than a “[Australian policymakers] haven’t continued on p. 10
few months ago,” he notes. implemented quantitative easing —
they never went to zero (on interest
Bullish differentials, rates). Yes, their deficits are high, but
and stable policy they never went to double digits.”
Although the spreads are much nar- He says in the current environment,
rower than they were a few years ago, countries that have been able to retain
the Australian and New Zealand dol- orthodox policy frameworks have
lars continue to boast positive interest- become more attractive.
rate differentials to the U.S. dollar. In addition, more bullish economic
Although Australia’s overnight cash growth has supported the Australian
rate is at 3 percent and the Reserve and New Zealand currencies in recent
Bank of New Zealand (RBNZ) has a months, the former more than the lat-
record-low 2.5-percent rate, the U.S. ter. Westpac Economics forecasts a 3.1-
federal funds rate remains near zero. percent decline in U.S. gross domestic
Also, there may be a sense product (GDP) for 2009 vs. only a 0.6-
Australia’s government has tackled percent decline for Australia. New
the global financial crisis in a more tra- Zealand comes in a little closer to the
ditional (read: level-headed) manner. U.S., with a 2.8-percent forecasted
“Their monetary and fiscal policy is decline.
relatively conservative vs. what you “The New Zealand economy has
are observing in the U.S.,” Englander suffered from falling exports and weak
says. And that might be a more impor- investment, and consumer spending
tant factor right now than concerns has been hit by rising unemployment,”
about the global economy as a whole. Webster says. “Recent kiwi strength
“Historically, the Aussie has had a has been a clear negative for exports.”
relatively high beta to the global Meanwhile, Matt Robinson, econo-
cycle,” Englander continues. “If you mist at Economy.com, notes Australia
ask investors now what they are most surprised the market with a 0.4-per-
worried about, it’s not beta relative to cent GDP increase in the first quarter
the global cycle, it is the policy frame- of 2009. He says robust coal and iron
CURRENCY TRADER • July 2009 9

GLOBAL MARKETS
AUSSIE DOLLAR/U.S. DOLLAR AT A GLANCE easing bias by stating that

further cuts are possible if
Daily range (past 40 days): Average: .0160 Median: .0156 economic outcomes disap-
Weekly range (past 26 weeks): Average: .0334 Median: .0313 point their expectations. He
reiterated there will be no
52-week high/low: .9849/.6008
tightening until late 2010. The
Prevailing interest rate, last change: AUS U.S. market ignored the dovish
3% - 0.00% - statement and has been pric-
Next scheduled central bank meeting: July 7 Aug. 11 ing in over 50 basis points of
GDP (% annualized): Q1 2009 Q4 2008 Q3 2008 tightening within 12 months.
AUS U.S. AUS U.S. AUS U.S. It is doubtful this expectation
0.40 -5.5 0.80 -6.3 2.2 -0.5 will be realized.”
All data as of 7/1/09
What’s ahead
Where do the Aussie and
kiwi dollars stand now? Both
NEW ZEALAND DOLLAR/U.S. DOLLAR AT A GLANCE
currencies entered consolida-
tions after their early-June
Daily range (past 40 days): Average: .0140 Median: .0132
highs, and some analysts
Weekly range (past 26 weeks): Average: .0311 Median: .0301 speculate the currencies may
52-week high/low: .7760/.4891 have overshot to the upside
Prevailing interest rate, last change: NZ U.S. and are due for a modest cor-
2.5% - 0.00% - rection in the near-term.
Next scheduled central bank meeting: July 30 Aug. 11 Market watchers also cite
rumors the RBA has been
GDP (% annualized): Q1 2009 Q4 2008 Q3 2008
active in the market in a way
NZ U.S. NZ U.S. NZ U.S.
that could influence the
-0.7 -5.5 -0.6 -6.3 -0.5 -0.5
Aussie dollar’s near-term
All data as of 7/1/09 direction.
“There’s a lot of talk that
the RBA was in the market above the 0.8000 level, selling
Rates on hold Australian dollars vs. the U.S,” says Brian Dolan, chief cur-
Market watchers believe the rate-cutting cycle has bot- rency strategist at Forex.com.
tomed in both New Zealand and Australia. The Reserve “The RBA has been scaling up its sales of Aussie dollar in
Bank of Australia (RBA) is set to meet next on July 7, and order to lift its FX reserves,” says Sean Callow, senior cur-
most observers see little chance the bank will take any rency strategist at Westpac Institutional Bank. “It’s a handy
action. signal for long-term players, since the RBA’s average levels
“July 7 should see the RBA remain on hold at 3 percent,” where it buys AUD/USD are a lot lower than where it sells.
Webster says. “Certainly it has attempted to stay more neu- They were good size sellers in May (AU$15 billion). The
tral than dovish in its communications, so unless there is message for markets, semi-hidden though it is, is that if the
downward shift in the global backdrop in the near term, my RBA regards the low 0.8000s as a cheap level to buy U.S.
view is the RBA will be happy to remain on the sidelines for dollars, perhaps it’s on to something and maybe 0.7000 will
some time to come.” trade before 0.9000.”
Economy.com’s Matt Robinson agrees the RBA has fin- In the short term, “both the Aussie and New Zealand dol-
ished its easing cycle, which has resulted in 4.25 percent of lar remain highly correlated to global risk sentiment and the
rate cuts since September 2008. His outlook for the RBA is China view,” Callow adds. “If you believe either that glob-
for “no further rate cuts, with the prospect of some modest al equities will slide as green shoots turn brown or that
normalization in 2010 — from 3 to 4 percent over the course China is not as strong as its headline numbers claim, then
of the year through staged 25-basis-point increases.” you will look to sell both currencies, especially Aussie,
Similarly, Webster and Robinson both expect the RBNZ which is more tightly tied to China due to its huge mining
to keep rates on hold. Pointing to the results from the bank’s sector. New Zealand’s exports are much more agricultural.”
last meeting on June 11, Webster says the decision to hold Dolan says the markets “have gotten ahead of them-
rates steady rather than cut them was “apparently based on selves” in anticipating an economic recovery. He believes
avoiding the creation of another housing bubble, and a the June 3 high of 0.8250 in the Aussie/dollar could turn out
pick-up in net immigration. RBNZ bank bill projections do to be a multi-month top, and that a 10-percent pullback,
not imply another cut, but Governor Bollard maintained an perhaps towards the low 0.7000s, is possible.

Dolan also warns Australia’s economic outlook could the market as “a little overdone on the upside,” he says “a
worsen. lot of daily indicators have topped and turned lower.” He
“The Australian dollar has not seen any serious negativi- also warns that “data will start to show renewed [econom-
ty based on its real economy,” he says. “But, that is coming ic] weakness.” He sees an opportunity to “sell the kiwi at
as the breadth of the global downturn hits home — look for 0.6500 for a pullback to 0.5900.”
further Aussie weakness.” Webster is also bearish on the kiwi: “I would short the
Robinson echoes that view. “There is a general percep- NZD to year end,” he says. “I also see a downside risk that
tion that financial markets may have gotten ahead of them- global equities will run out of steam. If global risk appetite
selves, making a too-strong V-shaped recovery when the falls further, you could see the kiwi back below 0.6000 by
likely outcome is something more like a prolonged weak the end of the third quarter and targeting 0.5500 by the end
recovery,” he says. “While Aussie/dollar could witness fur- of the fourth quarter.”
ther short-term support, medium-term prospects suggest Despite the recent consolidation below 0.6600 in late
some easing toward a more fundamental value of 0.7500.” June, others are optimistic the bulls can drive kiwi/dollar
through that resistance zone in the weeks and months
The bullish Aussie view ahead.
Englander takes an opposing view of the Aussie currency, “We look for the NZD/USD to reach 0.7200 by year end,”
forecasting (in late June) a one-month target for says David Forrester, forex strategist at Barclays Capital.
Aussie/dollar at 0.7800, and a year-end target at 0.9000. “We expect some further modest pullback in the currency
Conceding the probability of a pause in the near term, over the northern hemisphere summer as commodity prices
Englander says “in the big picture, Asia will be the pull back in line with the slowing of China’s strategic stock-
strongest growth region. Australia will benefit from that. piling of commodities. Over the longer term, we expect the
Also, the U.S. dollar will weaken and the Aussie will bene- New Zealand dollar to resume its upward trend as global
fit from that, too.” growth prospects continue to improve in the second half of
Englander also believes inflation fears will support the the year, particularly in emerging-markets Asia.”
Aussie dollar going forward. “It will be a long time before The bottom line, according to Forrester, is the currency’s
inflation fears are out of the system. Commodity currencies, relative-yield attractiveness. “Despite New Zealand’s
as a group, are good inflation hedges,” he says. “On a pull- record-low policy rate, foreign investors will continue to
back, our tendency would be to buy as opposed to try to buy the New Zealand dollar for its yield. New Zealand con-
ride the pullback.” tinues to have a sizable, albeit smaller, positive interest-rate
gap with the rest of the world. As long as investors’ risk
Kiwi outlook appetite continues to grow, they will continue to buy the
Dolan is bearish short-term on the kiwi dollar. Describing New Zealand dollar for its yield,” he says.
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ON THE MONEY
Bubble contamination
FIGURE 1 — CRB INDEX VS. U.S. DOLLAR INDEX
The CRB-dollar relationship appears to be a near-perfect inverse correlation Analyzing market bubbles
(the dollar index scale is inverted).
bursts some theories about
the relationship between oil
and the dollar.
BY BARBARA ROCKEFELLER
B ubbles have been around

for very long time. We
all know about the Tulip
Bulb Mania and South
Sea Bubble, the Roaring Twenties stock
market bubble and, more recently, the
Tech Bubble that led to the Tech Wreck.
As a general rule, market bubbles
were standalone events. What’s differ-
Source: Chart — Metastock; data — Reuters and eSignal ent about the current bubble is that it is
taking place across a wide range of
FIGURE 2 — CRB INDEX, MONTHLY markets, from houses and commodi-
A long-term chart of the CRB index shows a familiar bubble formation. From ties to stocks and emerging-market
the dip in January 2007 to the July 2008 high, the index rose 61 percent. currencies, if not also the currency
majors.
Figure 1 shows the CRB index (black
candlesticks) and the dollar index
(green bars, inverted scale). It looks
like a near-perfect inverse correlation.
The standard explanation is that
because commodity prices are denom-
inated in dollars, a rise in commodity
prices somehow causes a drop in the
dollar. This logic is confusing. Surely a
rise in commodity prices means more
dollars will be demanded to pay for
them. Assuming the supply of dollars
is constant, higher demand for dollars
should drive the price of the dollar up,
not down.
Critics argue buyers don’t always
use actual dollars as a medium of
exchange; they can pay in any convert-
ible currency, just at the dollar price,
and thus demand for dollars doesn’t
Source: Chart — Metastock; data — Reuters and eSignal
FIGURE 3 — NASDAQ TECH WRECK
After the Nasdaq collapsed, it took years for the index to significantly rebound.
enter into it. Or is the purchase of com-

modities a hedge against a falling dol-
lar? This is a more complicated story
than it appears at first sight, and we
will come back to it.
For the moment, though, we want to
look for bubbles. In Figure 2, which
shows the CRB index from 1980, we
see the familiar bubble formation — a
first leg up starting in 2003 and the sec-
ond leg in 2007. From the dip low in
January 2007 at 293.43, the index rose a
whopping 61 percent to its highest
high (459.04) on July 1, 2008. It’s a safe
bet that booming emerging-market
economies do not account for such an
abrupt, massive price increase.
Speculators are forming Source: Chart — Metastock; data — Reuters and eSignal
another bubble without Thus we have a V-shaped recovery

in commodity prices that is not
waiting a decent period matched by a V-shaped recovery in the
global economy. In short, speculators
— even if they are also true consumers
to mourn the last bubble. of the commodities like China — are
forming another bubble without
allowing enough time to mourn the
Speculating about a bubble last bubble.
We can attribute the rest of the move to This is not what happened in the
speculators anticipating demand from Nasdaq Tech Wreck (Figure 3). In that
booming emerging-market economies. case, it took five years for the Nasdaq
Speculators provide liquidity to mar- to creep back up off its low. No one
kets and other useful functions, such would say stock-market speculators
as the occasional reality check. This are any less prone to mania and panic
chart tells us that starting in July 2008, than other traders. The difference
we began to get the idea that a global between equity and commodity traders lies
recession was coming and demand for chiefly in the amount of leverage available
commodities would fall. The CRB fell to them. Equity traders are capped at 50
back to 2002 levels, hitting bottom in percent margin, or 2:1 leverage, while
March 2009 at 200.34. commodity traders have access to
However, we know that over this much higher leverage, as much as 30:1
past year some traders have continued or more.
to stockpile commodities, whatever It may seem too obvious that the
the price. China has bought every- more leverage allowed in a market, the
thing from copper and lead to grains more prone it will be to bubbles, but
and oil, while financial institution somehow government regulators and
players have stockpiled oil, including the public at large have missed this
holding it on tankers off ports. continued on p. 14

ON THE MONEY
FIGURE 4 — OIL DENOMINATED IN EUROS

(CONTINUOUS FUTURES)
Oil denominated in Euros rather than dollars rose approximately 420 percent
from August 1998 to July 2007.
point. In addition to the usual kind of
speculation, from the early 1990s big
financial institutions such as Goldman
Sachs have claimed to deserve desig-
nation as “hedgers,” which means
they can use more leverage — in order
to hedge their existing speculative
positions. This sounds crazy but regu-
lators have allowed big banks to be
deemed hedgers and thus avoid the
limits and oversight placed on specu-
lators.
Oil, of course, is a major component
of most commodity indices. The price
of oil affects everyone on the planet,
influences foreign policy, and arouses
high emotion among many. Oil is also
subject to hedgers’ rules and leverage,
and banks with this special dispensa-
tion have a self-interest in promoting
speculation by others, which multi-
plies price effects.
FIGURE 5 — OIL DENOMINATED IN U.S. DOLLARS
(CONTINUOUS FUTURES) The justification for high oil prices
— that Americans are greedy over-
The price of oil in dollar terms rose about 474 percent from August 1998 to July consumers, that supply is constrained
2007. while demand continues to grow, that
alternative energy is sadly inadequate,
even that Middle Eastern producers
open and close the spigot to manipu-
late the price — are all just excuses for
seeing the supply/demand dynamic
as always favoring higher prices. But
as hedge-fund manager Michael
Masters told a congressional commit-
tee last year, by the summer of 2008,
speculators were sitting on 1.1 billion
barrels of crude oil futures, more com-
mitments to buy or deliver oil than
existed in the U.S. storage facility in
Oklahoma (the mandated delivery
point for futures contracts) and the
Strategic Petroleum Reserve. If ever
we needed hard proof that speculators
were running the show, this was it.
Well, so what? Commodity futures
exchanges defend speculation as a
necessary component of price discov-

FIGURE 6 — OIL DENOMINATED IN U.S. DOLLARS VS. EUROS
(CONTINUOUS FUTURES)
Although the Euro gained along with oil, it is not logical to say the Euro rally
“caused” the oil rally.
The more leverage

allowed in a market, the
more prone it will be to
bubbles, but somehow
government regulators
and the public at large
have missed this point.
ery. Speculators provide liquidity and

prevent monopolies. Some would
argue speculation is a core component Source: Chart — Metastock; data — Reuters and eSignal
of capitalism, although thousands of
Econ 101 classes have no doubt debated this question to a same time, the price of oil in dollar terms rose about 474
different conclusion. percent (Figure 5). The shape of the two bubbles is about the
same.
The FX effect We could overlay the Euro/dollar rate (EUR/USD) on
Now consider the FX market, where trillions are traded top of the dollar-denominated price of oil and say the rise in
every day, far more than the actual amount of money issued oil “caused” the Euro to go up (Figure 6), but the inconven-
by the governments whose currencies are being traded. ient fact remains that owners of both currencies faced about
Probably as much as 95 percent of forex trading must be the same rise in the cost of oil. It is therefore bad reasoning
attributed to speculation and only about 5 percent to trade to say oil or commodity prices drive currencies.
in physical products and true capital flows. One thing we do know is that the relationship between
This is not about resolving the question of the value of commodities/oil and the dollar is today seen as a given.
speculators, but rather trying to understand currency bub- That means if the price of oil takes off to the upside again,
bles and busts, and how commodity bubbles and busts are regardless of true supply and demand data, the dollar will
influencing currencies. Take the question of the circular fall. This is a synergistic effect of one bubble inflating anoth-
logic that a decline in the dollar “causes” oil to rise, or a rise er one. In this case, it’s oil inflating the Euro.
in oil “causes” the dollar to fall. There is certainly nothing Figure 7 shows the same oil chart with the “normal”
inevitable about this inverse relationship. At times, oil and ongoing linear regression trendline extended from pre-bub-
the dollar have been positively, not inversely, correlated. ble days to the future line. Using this normal growth rate,
And as described last year (“The dollar-oil connection,” by year-end 2009 oil “should” be priced at $89.52. Clearly,
Currency Trader, September 2008), oil priced in Euros has supply and demand for commodities doesn’t proceed in a
hardly been stable and also shows bubble behavior. Figure tidy straight line. In reality, both are influenced by reces-
4 was constructed by dividing the price of oil in dollar sion, and supply in particular is lumpy and lags demand
terms by the dollar price of the Euro, using futures prices because of high capital costs. But as estimates go, the linear
(for both markets) to avoid any question of funding cost regression has the virtue of being based on past price
skewing the outcome. behavior, and it cuts through choppy highs and lows.
In this chart, the blue line is the linear regression trend- Figure 7 also includes standard Fibonacci retracements in
line from August 1998 (when oil cost €10.06) to July 2007 red, and it shows a 50-percent retracement of the oil price
(when it cost €52.50). This is a rise of about 420 percent. The drop would carry oil to about $90 by year end, while a 62-
linear regression is extended past the latter date to show percent retracement would take it to $104.
what the “normal” ongoing rise would have been. At the continued on p. 16

ON THE MONEY
FIGURE 7 — OIL AND A FIBONACCI RETRACEMENT
Pondering the possibilities Projecting the linear regression trendline points to oil around $90 by the end of
These are not forecasts; they are possi- 2009.
bilities. A $20 rise in the price of oil
from $70 to $90 is about 29 percent.
Does that mean the knee-jerk market
will cause a bubble in the Euro of
about the same percentage? If so, we
would be looking for the Euro to rise
from around 1.4052 in late June to
1.6722 by year end, if the Euro moves
one-for-one with oil.
The question is whether this is a
realistic expectation. Unfortunately, it
probably is. I call it “bubble contami-
nation” because the price of oil is influ-
enced as much by its own price itself as
by the real fundamentals; it is in the
grip of speculators.
As for the dollar coming under pres-
sure and the Euro being the automatic
beneficiary, the long-standing anti-dol-
lar bias in the market now has some Source: Chart — Metastock; data — Reuters and eSignal.
heavy ammunition behind it: the
extreme level of debt issued by the U.S. government to fight real reason for the Euro to rise, if that’s what happens, will
recession. This high debt is thought to be automatically be the price of oil.
inflationary and outside the ability of the Fed to manage.
But inflation has yet to appear. It is, so far, theoretical. The For information on the author see p. 6.
Related reading: Other Barbara Rockefeller articles

“Risk aversion,” Currency Trader, June 2009. “The Euro: Prosperity or perdition?”
Extraordinary times call for out-of-the-box Currency Trader, January 2009.
thinking about markets. The belief the Euro sell-off has ended may be based on some
false assumptions about how the U.S. and Europe are handling
“Forecasting follies,” Currency Trader, May 2009.
the economic crisis.
The only technicals that provide tradable forecasts are
patterns — but you have to be on the correct time frame “The six Ds of depression,” Currency Trader, December 2008.
and you can’t forget about the fundamentals. The buck has gotten a bounce from the recent financial panic,
but the longer-term picture isn’t quite as bullish.
“Listening to the chart,” Currency Trader, April 2009.
While everyone debates the ramifications of various policy “Euro and dollar at parity?” Currency Trader, November 2008.
measures, what is the Euro/dollar chart saying? 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
“Rational fear and the forex market”
happen?
Currency Trader, March 2009.
Analysis of several intermarket relationships suggests the role of “Crisis of confidence,” Currency Trader, October 2008.
risk aversion in the forex market is no cut-and-dried issue. As Wall Street and Washington prove themselves equally inept,
the dollar suffers.
“Competitive devaluations, the EMU, and the yen”
Currency Trader, February 2009. “The dollar-oil connection,” Currency Trader, September 2008.
Currency devaluation never works in the long run — just ask As oil broke, so did the Euro/dollar pair. What can we learn from
Japan — but that doesn’t mean panicky governments won’t use it analyzing bursting bubbles?
to try to stem the flow of blood in the near term.
You can purchase and download past articles at http://store.activetradermag.com.

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ON THE MONEY
The players and their impact

To have any chance of trading successfully, you need to understand the playing field. The currency
market has a unique blend of players who don’t look at forex the same way as individual traders —
and who also have access to information you may not.
BY MARC CHANDLER
T he significance of the for-

eign exchange market
outstrips its impressive
size. It is an important
part of the return on foreign invest-
ments. Academic studies suggest the
variability of currencies can account
more forgivable than not hedging
when one should have. For these
investors, currency risk is best man-
aged in a disciplined and deliberate
fashion. But it is not a profit opportu-
nity.
Equity investors tend to see curren-
vations that should not be confused
with profit-seeking behavior.
Trading currencies
The subset of foreign exchange market
participants who view the forex mar-
ket as a potential profit opportunity
for almost a third of the return of a cies as little more than the transaction- appears to be rather small. It is largely
portfolio of international equities over al vehicle necessary to buy foreign limited to speculators, hedge funds,
time and almost two-thirds of the and dealers and proprietary traders
return on a portfolio of global at banks. Although foreign
exchange trading can be very lucra-
bonds. For that matter, investors in
U.S. blue-chip multinational com-
The subset of market tive, banks typically may not make
panies also take on currency expo- as much money outguessing the
sure, albeit indirectly. participants who view forex market as one might imagine.
It is ironic, but prices in the cur- Instead they make money the old-
rency market may not be set the as a potential profit fashioned way, relying on the
way we might assume they are, spread between the bid, or purchase
with profit-maximizing buyers and
sellers duking it out over them.
opportunity appears to be price, and offer, or sell price, and
access to superior and private infor-
That’s because many, if not most, of mation, such as what their clients
the folks trading those trillions of rather small, mostly limited are doing (that is, the order book).
dollars every day are not trying to In the U.S. equity market, client
maximize their profits in the for- to speculators, hedge activity is inside information, and it
eign exchange market. They simply is illegal to trade on it. However, the
don’t see currencies as an asset
class — as an opportunity for prof-
funds, and dealers and foreign exchange market is mostly
unregulated. (Banks have to comply
it — but rather as a risk that needs with applicable capital regulations,
to be hedged, a cost that needs to be proprietary traders at banks. and listed currency derivatives con-
made certain, or a transactional tracts are regulated.) If bank traders
vehicle needed to purchase another shares. Some international equity do not use information generated from
asset, which is more likely what they funds hedge all or some of the curren- the clients’ activities to influence their
are trying to maximize return on. cy risk embedded in their portfolios, own assessment and risk taking for the
Corporate treasurers are hedgers. but for the most part they seem to be in bank, then they are not maximizing
Currency exposure is an uncertainty, the minority. Fixed-income managers the opportunity of their position. Their
and uncertainties are often costly. more typically hedge out the currency performance will likely reflect that.
Companies find it difficult to succeed risk of a foreign bond purchase in the The currency market may hold out
in growing earnings by increasing pro- swap market or another derivative the promise of lucrative profit oppor-
ductivity, client servicing, and the like, market; they simply want to capture tunities for those who are willing to
but executives are loath to risk earn- the interest-rate potential and capital take the time to learn how to trade for-
ings on what appears to some to be lit- gain of the bond, not the value of the eign exchange because many other
tle more than a bet on a currency direc- currency in which it is denominated. participants are not looking to maxi-
tion. Moreover, the incentive structure Central banks also operate in the for- mize profits in that space. However,
appears to be such that the decision to eign exchange market, but they oper- because of the nature of the foreign
hedge when not necessary is much ate under political and economic moti- exchange market, retail investors seem

to be at a distinct disadvantage. The trading — it is buying a lottery ticket. home. The Nikkei has long been an
information asymmetries are pro- Even at 50-to-1 leverage, a 2-percent underperforming stock index, even
found and significant. adverse move wipes out one’s entire when Japan had a weak currency and
Retail investors have access to pub- capital. On top of that, some of the for- record corporate profits. Hence, retail
lic information, and it is relatively eign exchange platforms may trade investors in Japan became involved in
inexpensive. This includes news, currencies for their own accounts. The the yen carry trade, which consists of
macroeconomic developments, gov- buy and sell orders they receive in selling the yen and buying higher-
ernment data, and even market-posi- aggregate become part of their private yielding currencies such as the New
tioning data from the futures information. Their interests may not Zealand and Australian dollars, the
exchanges. Prices are also readily always be the same as their clients’ South African rand, and the U.S. dol-
available. What retail investors do not interests. lar.
have is information on who is buying In some ways, these electronic plat- As seems to be the case in other
and selling and at what levels. Bank forms represent a democratization of instruments as well, there is no substi-
dealers do have access to some of this the capital markets. In the 1970s, forex tute for disciplined risk management
information. Their order book is an trading was the purview of banks, in the foreign exchange market
important source of proprietary infor- financial institutions, and large corpo- because any set of macroeconomic and
mation and contributes rations. By the late 1970s, the Chicago technical conditions are consistent
to discovering profitable trading Mercantile Exchange (CME) traded with a wide range of prices. No matter
opportunities. futures on foreign currencies, along- how sure one is, there is someone on
Not everyone can dissect and digest side pork bellies and live cattle the other side of the trade who may be
the public information they receive. futures. Currency options trade on the just as convinced of the opposite.
Banks hire hundreds of economists, Philadelphia Stock Exchange, now Because of the asymmetries of infor-
analysts, quantitative programmers, part of Nasdaq. That daily turnover in mation, the volatility of currencies,
and financial engineers. These often the currency futures is higher relative and the typically undercapitalized
include former Federal Reserve and to open interest (the number of futures position of the retail forex trader, disci-
Treasury Department officials. Alan contracts that are open at the end of a pline is all the more critical.
Greenspan became a special consult- session) than in the currency options
ant to Deutsche Bank after retiring suggests currency futures are more a For information on the author see p. 6.
from the Fed. How one analyzes even speculator’s market, whereas the
public information is private informa- option market may be more a hedger’s First Serial excerpt from Making Sense of
tion. Without access to this kind of market. the Dollar by Marc Chandler, published by
analysis, retail forex traders may be In recent years, new currency prod- Bloomberg Press, August 2009.
experiencing another type of competi- ucts have been introduced that trade
tive disadvantage. like equities. Among the more success-
There is yet another way that the ful are Rydex’s suite of
retail forex trader is vulnerable. CurrencyShares Trust exchange-trad-
Proprietary traders at hedge funds, ed funds (ETFs) that make it easy for
banks, and other financial institutions retail investors to participate in the
often have knowledge of and access to currency markets. There are
a range of financial instruments and CurrencyShares for major foreign cur-
risk-management tools that small rencies, including the Euro, British
investors simply do not know about or pound, and Japanese yen, as well as
have access to, even if they can com- for some secondary currencies such as
prehend them. the Swiss franc and Swedish krona,
Retail investors also don’t have the and also for some emerging-market
deep pockets needed to sustain posi- currencies like the Mexican peso and
tions and ride through the high volatil- Russian ruble. As equities, the lever-
ity of the foreign exchange market. age on an ETF is the 2-to-1 allowed by
They are capital-shy, like the short the 50-percent margin set by the
stack in a poker game. Federal Reserve. There are options
However, retail investors are often available on CurrencyShares for the
seduced by the amount of leverage more sophisticated or adventuresome.
offered by some electronic trading Recently, new exchange-traded cur-
platforms. There is much variance rency products that grant somewhat
among the business models in this more leverage have been introduced.
space. Some platforms granted 100-to- Retail investors outside the U.S. also
1 leverage — or more — to qualified are known to trade currencies. Their
retail investors before the credit crisis. activities sometimes influence overall
That kind of leverage is suicidal; even currency trends. Japanese retail
savvy hedge funds won’t take it. investors became involved in foreign
That’s not even gambling — where the exchange trading to try to beat low
risk of ruin is to be avoided as it is in yields and low stock market returns at

TRADING STRATEGIES
FIGURE 1 — 10-DAY BREAKOUT TRADES

Trades were closed either by a signal in the opposite direction or at
the close five days after entry. Breakout
timing
The following tests indicate some
momentum signals might have better
odds of success depending on
the time of month they occur.
BY CURRENCY TRADER STAFF
A
Source: TradeStation re particular times of the day,
month, or year better than others
TABLE 1 — TOTAL RESULTS for trading certain strategies or
With the exception of the AUD/USD and GBP/USD pairs, 10-day currencies? Certainly, the fact that
breakouts triggered in the first 10 days of the month fared poorly. currency pairs demonstrate definite liquidity
patterns in different portions of the 24-hour
1 2 3 global forex trading session suggests specific
USD/CAD Avg. trade -$71 $155 -$55 times might be more favorable than others.
Total P/L -$6,648 $18,878 -$6,248 There are also studies indicating certain longer-
No. entries 93 122 113 term “seasonal” influences tied to the equity
USD/CHF Avg. trade -$37 $116 -$20 markets (see “Related reading”).
Total P/L -$3,977 $12,475 -$2,199 But what about the advantages or disadvan-
No. entries 108 108 111 tages of trading currencies or certain strategies
USD/JPY Avg. trade -$125 $304 $163 at different times of the month? Could a simple
Total P/L -$12,971 $31,020 $18,121 momentum strategy — a short-term breakout,
No. entries 104 102 111 for example — perform better or worse in one
GBP/USD Avg. trade $321 $66 $75 part of the month?
Total P/L $36,299 $7,055 $7,472 To find out, let’s look at how a basic channel
No. entries 113 107 99 breakout strategy performed at different times
AUD/USD Avg. trade $118 $47 $57 of the month in seven major currency pairs.
Total P/L $14,029 $5,097 $5,853
No. entries 119 109 103 The strategy
EUR/JPY Avg. trade $12 -$148 $115 The entry signal was a simple 10-day breakout:
Total P/L $1,285 -$16,855 $13,159 Go long on a move above the highest high of
No. entries 106 114 114 the past 10 days and go short on a move below
EUR/USD Avg. trade -$44 $186 $261 the lowest low of the past 10 days. Positions
Total P/L -$4,561 $20,652 $29,002 were exited on the close five days after entry if
No. entries 104 111 111 not reversed by a signal in the opposite direc-
tion.
Total trade signals: 747 773 762 This approach was used because of its sim-
Median no. signals: 106 109 111 plicity and the fact that it traded regularly but
Median (avg.) trade: -$37 $91 $95
not hyperactively — it triggered approximately
two or three times a month per currency pair in
Median (total) P/L: -$3,977 $12,475 $7,472
the analysis period.
Total $: $23,455 $78,320 $65,159
continued on p. 22

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EIA Gas Inventories
Significant FX Chart Formation
Game Changing Stock Event
Negative Same Store Sales
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TRADING STRATEGIES TABLE 2 — WINNING PERCENTAGES
The number of trade signals — itself a potential indication
of price momentum — was lowest in period 1.
1 2 3
USD/JPY 44.23% 61.76% 61.26%
USD/CAD 49.46% 53.28% 53.10%
USD/CHF 53.70% 52.78% 54.95%
The currencies EUR/USD 52.88% 51.35% 58.56%
The system was tested on seven currency pairs: U.S. dol- GBP/USD 48.67% 52.34% 48.48%
lar/Japanese yen (USD/JPY), U.S. dollar/Canadian dollar AUD/USD 54.62% 49.54% 58.25%
(USD/CAD), U.S. dollar/Swiss franc (USD/CHF), EUR/JPY 47.17% 46.49% 55.26%
Euro/U.S. dollar (EUR/USD), British pound/U.S. dollar Median 49.46% 52.34% 55.26%
(GBP/USD), Australian dollar/U.S. dollar (AUD/USD),
and Euro/Japanese yen (EUR/JPY). These rep-
resent the most active dollar-linked currency TABLE 3 — RESULTS FOR NARROWED PORTFOLIO
pairs, as well as a major non-dollar cross rate.
Removing the AUD/USD, GBP/USD, and EUR/JPY pairs
Figure 1 shows a few trades that occurred in the
underscores the period 1 underperformance.
EUR/USD pair.
1 2 3
The test USD/CAD Avg. trade -$71 $155 -$55
The month was divided into three periods: 1) Total P/L -$6,648 $18,878 -$6,248
day 1 through day 10; 2) day 11 through day 20; No. entries 93 122 113
3) day 21 through the last day of the month. USD/CHF Avg. trade -$37 $116 -$20
These divisions were based on calendar day, not Total P/L -$3,977 $12,475 -$2,199
trading day — that is, “3” is the third day of the No. entries 108 108 111
month, not necessarily the third trading day. USD/JPY Avg. trade -$125 $304 $163
The trades were grouped according to the peri- Total P/L -$12,971 $31,020 $18,121
od in which the entry signal occurred, not the No. entries 104 102 111
period in which the exit occurred, or the period EUR/USD Avg. trade -$44 $186 $261
in which the bulk of the trade lasted. For exam- Total P/L -$4,561 $20,652 $29,002
ple, a trade triggered on the final day of period No. entries 104 111 111
1 that lasted five days into period 2 would fall
into period 1. Total trade signals: 409 443 446
The analysis period spanned September 1999 Median no. signals: 104 109.5 111
through June 2009, and included 2,282 trades — Median (avg.) trade -$58 $186 $163
approximately 325 trades per currency pair, or Median (total) P/L: -$5,605 $19,765 $7,961
32 per pair, per year. Commissions or slippage Total $: -$28,157 $83,024 $38,676
were not assessed in the test.
Test results FIGURE 2 — NUMBER OF TRADES FOR SELECT PAIRS

Table 1 summarizes the results of trading stan- The number of trade signals — itself a potential indication of price
dard lots of 100,000 of the base currency, broken momentum — was lowest in period 1.
down into the three periods of the month. The
average trade and total profit or loss (P/L) are
shown for each currency pair (expressed in dol-
lars) for each period, along with the number of
trade signals.
The specific dollar amounts are irrelevant.
The relative performance between the different
periods of the month is what’s important.
If there were no time-of-the-month effect —
which is what we should assume — there
shouldn’t be any meaningful differences
between the different sections in the table. But
that’s clearly not the case — period 1 (trades
triggered during days 1 through 10 of each
month) appears to noticeably underperform the
other two periods. Four of the seven currency
continued on p. 24

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TRADING STRATEGIES
pairs had negative average trades and total P/Ls (one, mation from Table 3. The winning percentages increase
EUR/JPY, was essentially flat) while only two (GBP/USD from periods 1 to 3, with period 1 containing the lowest win
and AUD/USD) had positive average trades and P/Ls. rate for two currencies (dollar/yen and dollar/Canada) and
Also, the first period had the fewest trade sig-
nals — something that could be interpreted as FIGURE 3 — WINNING PERCENTAGE FOR SELECT PAIRS
evidence that it was unfriendly to the type of The winning percentage increase from period 1 to period 3 was even
momentum trade signal represented by the more noticeable in the limited portfolio.
strategy.
Table 2 breaks down the winning percentages
by period. Again, the first period of the month
came up weakest, with a 49.46-percent median
win rate for the seven currency pairs, compared
to 52.34 percent for the middle of the month,
and 55.26 percent for the final third. The highest
and lowest winning percentages for each cur-
rency pair are highlighted green and red,
respectively. The first period never had the
highest winning percentage, but it had the low-
est twice. Although the third period had the
lowest winning percentage in one currency pair
(GBP/USD), it had the highest in four other
currency pairs.
Three currency pairs bear comment at this
point in the analysis. The EUR/JPY pair is the
only currency pair that doesn’t contain the dol-
lar, and because it produced essentially random 1 2 3
results, we’ll exclude it from further analysis. USD/JPY 44.23% 61.76% 61.26%
The pound and Aussie dollar are interesting in USD/CAD 49.46% 53.28% 53.10%
their correlation — two “crown” currencies that USD/CHF 53.70% 52.78% 54.95%
bucked the trend of period 1 underperfor- EUR/USD 52.88% 51.35% 58.56%
mance. Let’s concentrate now on the four other Median 51.17% 53.03% 56.76%
currencies — USD/CAD, USD/CHF,
USD/JPY, and EUR/USD — which are the
major dollar-linked currency pairs, and FIGURE 4 — AVERAGE TRADE FOR SELECT CURRENCY PAIRS
which had more uniform performance. Period 3 was a mixed bag, but period 1’s average trade was clearly the
worst, while period 2’s was the best.
Narrowing the focus
Table 3, which shows the statistics for the
four remaining currency pairs, paints a
much more negative picture of 10-day
breakout signal performance in the first
period of the month, but also highlights
more favorable aspects of the second peri-
od, which appears to be the most consistent
in this limited portfolio. Period 1 had the
fewest trade signals (Figure 2) — again, a
sign of a lack of price momentum — as well
as negative average trade and P/L figures
for all pairs. Period 2 had the highest aver-
age trade and net P/L figures, and the sec-
ond-highest number of trade signals.
Period 3 had the most trade signals and the
second-highest average trade and P/L
numbers.
Figure 3 sheds more light on the infor-

Related reading
“Day-of-the-month effects in the Performance
period 3 responsible for the highest rate in two others (dol-
of Momentum trading Strategies in the Foreign
lar/Swiss and Euro/dollar). Also, the period-3 winning
percentages for dollar/yen and dollar/Canada were only Exchange Market”
marginally below the highest rates in period 2. by Richard D.F. Harris, Evarist Stoja, Yilmaz Fatih.
Figure 4 plots the average trade results for the four cur- Journal of Trading 4, no. 1 (Winter 2009): 48-55.
rency pairs. Period 2’s dominance is obvious, and the slight- This paper analyzes the performance of a momentum
ly negative period-3 figures for dollar/Canada and dol- strategy at different days of the month.
lar/Swiss highlight why that period underperformed peri-
od 2 overall. While the results for periods 2 and 3 leave “Seasonal patterns in the currency market”
some unanswered questions, period 1’s continued poor per- by Kathy Lien (Currency Trader, February 2009).
formance is certainly worth investigating for traders who In a topic from the latest edition of her book, Day Trading
get shorter-term breakout signals in this time window. For and Swing Trading the Currency Market, the author
this 10-year period, simply ignoring signals in period 1 describes persistent annual patterns in the Euro and
would have eliminated losses that amounted to nearly 25 Swiss franc.
percent of the gross profit.
You can purchase and download past Currency Trader articles
at http://store.activetradermag.com
The fine print
The results of this analysis are interesting, but they bear fur-
ther investigation. Most importantly, the divisions of the day of period 2) would be executed on the July 21 open, and
month were used to segregate the trade entries, not the if the trade lasted the full five days, it would not have been
exits. Because many of the trades lasted five days, the bulk exited until July 27.
of the price moves they represent could straddle two peri- Further research would point in the direction of testing
ods. This was also exacerbated by the fact that the system even short-term momentum signals (and shorter trade
entered trades on the open of the day after the signal lengths), and refining the calendar analysis to reflect a
occurred. For example, a trade triggered on July 20 (the last shorter window or even individual days of the month.

ADVANCED STRATEGIES
Won flew over the carry’s nest

FIGURE 1 — WON COLLAPSE DURING ASIAN CRISIS LED TO TRADE SURPLUS
The Korean won reflects
The monthly balance of trade expressed as a percentage of GDP was mostly nega-
tive until the massive capital outflows induced by the 1997 Asian crisis hammered the the bilateral risk-aversion,
KRW and the country switched to a trade surplus that persisted until the end of 2007.
risk-seeking paradigm of
the current financial markets.
BY HOWARD L. SIMONS
K
orea may be the only
country on earth able to
stand toe-to-toe with
Poland in a Bad Choice of
Neighbors contest. Poland’s history
includes multiple partitions, a complete
disappearance, brutal invasions and fight-
ing on its soil, and an artificial division
between hostile powers, while Korea’s his-
tory includes … pretty much the exact
same list.
FIGURE 2 — CARRY TO THE YEN FAILED FIRST
The significant and lasting difference
The yen-won cross is more important than the dollar-won cross. While in between the two countries is Korea had
August 2007 the KRW/USD carry was relatively dormant, the yen began to the good sense to be occupied by the U.S.
move against the KRW at this time (green vertical line). The KRW didn’t start to instead of Russia. It is often pointed out
weaken dramatically against the USD for another six months. that when Ghana was granted independ-
ence from the UK in 1960, it had the same
gross domestic product (GDP) as Korea, a
situation almost incomprehensible today.
If you are going to be occupied, make sure
the occupying power does everything it
can to finance your development and
prove a point about the merits of its eco-
nomic system vis-à-vis a communist alter-
native.
The largesse, however, has not been in
one direction only. The Korean brand of
crony capitalism — consisting of large
conglomerates, or chaebol, intertwined
with government agencies — provided a
model for the evolution of American busi-
ness during the recent bailout binge.
The same reliance on a small group of
large businesses and a small group of large
neighbors has made the Korean economy
continued on p. 28

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ADVANCED STRATEGIES
and currency given to spasms, mostly in a negative direction, over markets proved vulnerable to just a few large enterprises weaken-
the past 20 years. Twice — once during the 1997-1998 Asian cri- ing or to a small number of external factors beyond its control.
sis and once during the 2007-2009 credit crunch — Korean
financial markets and the won (KRW) have taken a severe beating External exposure
as the chaebol system and the country’s large exposure to foreign While the common perception is Korea is a mercantilist economy
funding underscored a certain economic inflexibility. The Korean overweighted toward exports, it might be instructive to note how
the monthly balance of trade expressed as
a percentage of GDP remained negative for
most of the 1990s until the onset of the
Asian crisis (Figure 1). The country ran a
trade deficit and a capital surplus for most
of this period — the combination that has
characterized the U.S. for more than 30
years.
It was not until the massive capital out-
flows induced by the Asian crisis that the
KRW and the ability to import goods col-
lapsed and the country shifted into a trade
surplus that would endure almost continu-
ously until the end of 2007. Then the KRW
fell once again as capital flowed outward;
the trade balance remained negative, how-
ever, because the country did not immedi-
ately enter a recession.
It is important to recognize the source of
the capital flowing out of Korea. If we com-
pare the Royal Bank of Scotland (formerly
ABN-Amro) carry trade indices for borrow-
ing either the Japanese yen (JPY) or the
U.S. dollar (USD) and lending in KRW,
Figure 2 shows the JPY has been the more
important of the two funding currencies
(see “Currency traders should be hum-
bler,” and “Looking at the carry trade,” May
and June 2007, respectively, regarding the
carry indices and the yen carry trade, and
“The short, awful life of the dollar carry
trade,” August 2008, regarding the dollar
carry trade).
A glance at this comparative carry chart
should convince KRW traders the yen-won
cross is the more important rate to keep in
mind. It began to move against the KRW in
August 2007 (green vertical line), a time
when the KRW/USD carry was quiet.
Indeed, in a perfect world a KRW trader
would study the incentives for Japanese
lenders to close their carry trades, sell the
KRW and repurchase their borrowed JPY.
The KRW did not start to weaken precipi-
tously against the USD until February
2008, six months after it started to weaken
against the yen.

The world is not perfect, however, and while the bulk of the changes. The more a FRR6,9 exceeds 1.00, the more we expect
flow into and out of the won in carry trades can be explained in short-term interest rates to rise. The difference between two
yen terms, the dollar flows at the margin illustrate the links FRR6,9 measures, in this case the KRW FRR6,9 minus the USD
between the KRW, Korean capital markets, and global short-term FRR6,9, should tell us whether we should expect Korean short-
interest-rate markets more clearly. term interest rates to rise more — and hence to be supportive of
continued on p. 30
Return on capital
The link between yen carry trades and the
Korean won suggests a currency depend-
ence on returns on Korean capital markets.
As funds chase performance, we should
expect external capital to come into Korean
markets when they are performing strong-
ly and leave when they are performing
poorly — the time-honored strategy of
buying high and selling low.
This appears to be the case, with a
prominent exception marked by the green
rectangle in Figure 3. Mapping the relative
total returns of the Korean and American
stock markets (both expressed in USD) to
the USD/KRW exchange rate shows the
long period of Korean outperformance
from late 2001 through 2007 coincided
with a stronger KRW. The opposite
occurred with a vengeance after February
2008: As the Korean stock market weak-
ened, money fled and the KRW collapsed.
When the U.S. stock market entered its
collapse between October 2008 and March
2009 (the marked area), the Korean mar-
ket outperformed as the KRW was allowed
to seek a level. Once again, we see the les-
son that a country that “defends” its cur-
rency with high short-term interest rates
suffers, while a country willing to let its
currency float can ride out the storm.
The weak
interest-rate link
While expected interest-rate differentials
explain major market exchange rates well
(especially the USD/EUR and USD/CAD
rates), they are less effective in explaining
the movements of minor exchange rates.
The USD/KRW rate is no exception.
If we first calculate the forward rate ratio
between six- and nine-month LIBOR
(FRR6,9) — the rate at which we can lock
in borrowing for three months starting six
months from now, divided by the nine-
month rate itself — for each currency, we
get a measure of expected interest-rate

ADVANCED STRATEGIES
the KRW — than American short-term interest rates. cy by the three-month period of a standard non-deliverable for-
Figure 4 shows the connection here is weak, and the lead time
ward; here the lead time has been closer to five months. Also,
involved is irregular. Normally FRR differentials lead the curren-
while the sharp drop in the differential during the first half of
2008 led the KRW lower, similar
drops in the first halves of 2002 and
FIGURE 3 — KOREAN STOCK – WON LINK BROKE DURING WON COLLAPSE
2004 did nothing of the sort.
The long period of Korean stock-market outperformance vs. the U.S. from late 2001 Moreover, none of the large spikes
through 2007 coincided with a stronger KRW. in the FRR6,9 differential, including
those of late 2000, mid-2003, and
January 2008, led to a stronger
KRW. We have to conclude, there-
fore, the USD/KRW exchange rate is
not driven by expected short-term
interest-rate differentials.
Volatility
Finally, let’s turn to the subject of
volatility. If we map the volatility of
KRW forwards for a USD holder
against the USD/KRW exchange
rate, we see two separate and dis-
tinct regimes since the volatility
data began in March 1999 (Figure
5). Between that date and
November 2004, KRW volatility
was quiet and virtually unrelated to
the USD/KRW rate. After December
2004, the link between volatility
and the KRW became quite direct
and remained that way into
FIGURE 4 — WON-DOLLAR RATE NOT A STRONG FUNCTION OF EXPECTED December 2008. During the 2008
INTEREST-RATE DIFFERENTIALS sell-off in the KRW, volatility
The connection between interest-rate differentials and the KRW is weak and irregular. jumped as fast as the KRW weak-
ened. Such a link suggests the KRW
was part of leveraged hedge-fund
and commodity-trading strategies,
one where a general order to reduce
risk led to the aforementioned
unwinding of carry trades and
shedding of Korean assets, regard-
less of their intrinsic worth.
Restated, Korean markets, like so
many others, were being carried
along on a general tide of increased
risk acceptance or aversion.
The risk market

This conclusion is unsatisfying
somehow; it says, “Tell me what the
world’s leverage and risk appetites
will be, and I will tell you which
range of assets to buy or sell.” That
has been an increasingly true state-
ment for years, and has operated

FIGURE 5 — WON-DOLLAR RATE AND VOLATILITY ALIGNED 2005-2008
After December 2004, volatility and the KRW exhibited a direct connection that per-
sisted into December 2008. During the 2008 KRW sell-off, volatility jumped as fast as
the KRW weakened. The link suggests the KRW was part of leveraged hedge-fund
and commodity-trading strategies, and the push to reduce risk led to the unwinding of
with a real vengeance during the peri- carry trades and shedding of Korean assets.
odic financial crises we have endured.
During a crisis, all correlations move
to 1.00 or -1.00, and that is all the
information you need to know
whether to buy or sell.
The answer for Korea is both direct
and conditional: If the world’s risk
appetite increases, the KRW will
strengthen, and if not, the KRW will
remain under pressure. And there will
be no arguing with reality; that will be
the trade.
It is not quite a bad choice of neigh-
bors, but a statement on the bad con-
dition financial markets find them-
selves in after years of self-inflicted
abuse.
For information on the author see p. 6.
Related reading: Other Howard Simons articles

“Currency volatility and long-term treasury returns” “The rupee and emerging markets”
Currency Trader, June 2009. Currency Trader, December 2008.
The belief that higher currency volatility leads to steeper yield Analysis suggests India’s status as a global economic
curves and negative bond returns has been challenged by the power is no accident.
2008-2009 financial upheaval.
“Nordic currency confusion”
“A cross-rate to bear” Currency Trader, November 2008.
Currency Trader, May 2009. Get a handle on the dynamics of the Northern European
The Euro/yen pair isn’t just a currency cross-rate — it’s a currencies.
gauge of global risk.
“The Swiss franc’s commodity connection”
“And it’s one, two, three — what are we trading for?” Currency Trader, October 2008.
Currency Trader, April 2009. How can the Swiss currency be, of all things, a commodity
They don’t call them frontier markets for nothing. A look at currency?
Vietnam’s currency and stock market over the past few
“Franc-ly, my dear, I don’t give a carry”
years.
Currency Trader, September 2008.
“Sovereign credit risk and currencies” Investigating the Swiss franc carry trade, and what might
Currency Trader, March 2009. change its dynamics.
Government actions are perversely rewarding the guilty: As
“The short, awful life of the dollar carry trade”
a nation’s credit rating deteriorates, its borrowing costs fall
Currency Trader, August 2008.
and its currency, at least temporarily, rises.
The implications of the weak-dollar policy and the dollar’s role as
“Minor trends make minor friends” a funding currency.
Currency Trader, February 2009.
“Getting carried away with the kiwi”
Do minor currencies offer trading opportunities the majors
Currency Trader, July 2008.
don’t? Find out what the numbers say.
What’s driving the New Zealand dollar, and how long is it likely to
“Let the trend be your friend: The majors” last?
Currency Trader, January 2009.
“Currencies and commitments”
If currencies trend so much, why do trend followers usually
Currency Trader, June 2008.
have such blah performance? This and other questions are
Find out what COT data conveys about forex price action.
answered in this study of currency trends.
“Howard Simons: Advanced Currency Concepts, Vol. 1”
You can purchase and download past articles at A discounted collection that includes many of the articles listed
http://store.activetradermag.com here.

FOREX NEWS
Forex scams on the rise

With a new task force on the beat, CFTC actions against forex scammers are on the rise in 2009.
BY CHRIS PETERS
T here has been an uptick in the number of new forex

fraud cases uncovered by the Commodity Futures
Trading Commission (CFTC) so far in 2009. In the first half
In August 2008, the CFTC announced the formation of a
retail foreign currency fraud task force, which is charged
with investigating and litigating fraud in the off-exchange
of the year, the CFTC has issued orders in approximately 10 forex market. The announcement came following the
cases involving foreign currency fraud. approval of the Food, Conservation, and Energy Act of
2008, which strengthened the
CFTC’s oversight of the off-
Managed money: Barclay Trading Group’s exchange currency markets and
currency trader rankings for May 2009 granted the CFTC rulemaking
Top 10 currency traders managing more than $10 million authority. It also authorized the
as of May 31, ranked by May 2009 return. CFTC to bring fraud actions in off-
2009 $ Under exchange futures transactions and
Rank Trading May YTD mgmt. increased the civil and criminal
advisor return return (millions) penalties for manipulation and false
1. Goldman Sachs (Fund. Currency) 12.93% 6.28% 324.0 reporting.
When the task force was
2. 24FX Management Ltd 7.40% 20.36% 22.5
announced, the CFTC said that in
3. IKOS G10 Currency Fund 6.75% 8.48% 473.9
the approximately eight years
4. Auriel Currency 2X Fund 6.13% -10.38% 208.0
between the enactment of the
5. M2 Global Mgmt (2.5X) 5.98% 2.81% 11.0
Commodity Futures Modernization
6. Richmond Group (Gl. Currency) 4.94% -3.33% 45.0
Act in 2000 and the formation of the
7. Laven Funds SPC (Gl. Systematic) 4.80% -8.20% 16.0 task force in 2008, nearly 100
8. IKOS Currency 4.05% 5.20% 473.9 enforcement actions were filed
9. Spot Forex Mgmt. (Geneva) 3.84% 5.55% 14.0 against firms and individuals for
10. John W. Henry & Co. (Int’l. FX) 3.60% -2.07% 14.7 fraudulent activities in the forex
market. Those actions resulted in
Top 10 currency traders managing less than $10 million and more than fines in excess of $560 million and
$1 million as of May 31, ranked by May 2009 return. the restitution of $450 million in
1. Spot Forex Mgmt. (Lausanne) 15.84% 23.56% 5.5 investor losses.
Despite the creation of the task
2. Rove Capital (Dresden) 8.22% 8.85% 2.2
force, there appears to have been a
3. Spot Forex Mgmt. (Zurich) 7.84% 11.41% 7.5
lull in enforcement proceedings in
4. Sagacity (HedgeFX100) 7.43% 22.77% 1.4
2008, with only three actions taken
5. Appleton Cap’l (Gl. Currency) 6.98% -3.33% 9.7
against foreign currency scammers
6. Wealth Builder FX Group 6.22% 48.99% 5.4
that year. In 2007, 12 actions had
7. Absolute Asset Mgmt (Trading 1) 4.53% 5.14% 4.2 been filed, and there were a total of
8. Overlay Asset Mgmt. (Emerging Mkts) 3.70% -0.26% 1.2 seven in 2006. In 2009, however, the
9. Putnam Currency Alpha Fund 3.27% -5.22% 1.8 pace has picked up.
10. Marathon Capital (System FX) 2.15% 0.88% 10.0
Source: BarclayHedge (http://www.barclayhedge.com). Based on estimates of the composite of all accounts Ponzi-liferation
or the fully funded subset method. Does not reflect the performance of any single account. The turmoil in global financial mar-
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. kets has uncovered many fraudu-

CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s
as of June 29 liquidity, 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 216.9 118.6 2.22% / 56% -0.62% / 14% 4.75% / 62% .17 / 2%
British pound BP CME 103.7 78.9 1.73% / 47% 0.77% / 3% 12.64% / 63% .09 / 3%
Japanese yen JY CME 82.2 78.1 1.71% / 40% 0.60% / 9% 3.76% / 43% .20 / 15%
Canadian dollar CD CME 67.4 75.4 -1.96% / 9% -5.77% / 100% 7.32% / 47% .19 / 2%
Australian dollar AD CME 64.4 80.6 2.16% / 27% -0.83% / 100% 12.79% / 56% .11 / 2%
Swiss franc SF CME 44.2 36.2 1.00% / 45% -0.97% / 25% 5.04% / 72% .26 / 27%
Mexican peso MP CME 11.0 40.3 1.97% / 100% -0.40% / 19% 4.49% / 12% .14 / 17%
U.S. dollar index DX ICE 7.8 25.2 -1.82% / 63% 1.15% / 57% -5.30% / 65% .13 / 2%
New Zealand dollar NE CME 4.9 23.1 3.58% / 63% -0.80% / 33% 12.61% / 40% .13 / 5%
E-Mini eurocurrency ZE CME 2.7 1.8 2.22% / 56% -0.62% / 14% 4.75% / 62% .17 / 2%
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.
LEGEND:
Volume: 30-day average daily volume, in thousands. direction. For example, the % rank for 10-day move by the long-term volatility (100-day standard deviation
shows how the most recent 10-day move compares to of prices). The % rank is the percentile rank of the
OI: 30-day open interest, in thousands.
the past twenty 10-day moves; for the 20-day move, volatility ratio over the past 60 days.
10-day move: The percentage price move from the the % rank field shows how the most recent 20-day
close 10 days ago to today’s close. move compares to the past sixty 20-day moves; for This information is for educational purposes only.
20-day move: The percentage price move from the the 60-day move, the % rank field shows how the most Currency Trader provides this data in good faith, but
close 20 days ago to today’s close. recent 60-day move compares to the past one-hun- assumes no responsibility for the use of this infor-
60-day move: The percentage price move from the dred-twenty 60-day moves. A reading of 100% means mation. Currency Trader does not recommend buy-
close 60 days ago to today’s close. the current reading is larger than all the past readings, ing or selling any market, nor does it solicit orders to
The “% rank” fields for each time window (10-day while a reading of 0% means the current reading is buy or sell any market. There is a high level of risk
moves, 20-day moves, etc.) show the percentile rank lower than the previous readings. in trading, especially for traders who use leverage.
of the most recent move to a certain number of the Volatility ratio/% rank: The ratio is the short-term The reader assumes all responsibility for his or her
previous moves of the same size and in the same volatility (10-day standard deviation of prices) divided actions in the market.
lent enterprises — often cases in which the drying up of defendants claimed historical returns of 6 to 10 percent for
incoming funds exposes Ponzi schemes (in which funds each month from January 2000 through June 2006, without
from new clients are used to pay off previous clients to cre- a single loss.
ate the impression of investment profits where none exist). The most recent action, filed against San Francisco-based
Since Bernard Madoff’s high-profile case first shook the SNC Asset Management on June 9, involved approximate-
investment world in December 2008, the Securities and ly 500 customers. The perpetrators of SNC Asset
Exchange Commission (SEC) has reported a massive Management are accused of scamming members of the San
increase in the number of fraud cases. In June alone, anoth- Francisco Bay area Korean community, claiming historical
er six cases were filed involving multi-million dollar Ponzi returns of 50 percent per year, and guaranteed monthly
schemes. The CFTC filed 23 cases against Ponzi-type returns of 2 to 3 percent. Similar to Madoff’s apparent
schemes in the first half of 2009. exploitation of the close-knit Jewish community to acquire
“The CFTC is committed to using every means to end the clients, SNC Asset Management CEO Peter C. Son and CFO
Ponzi-liferation of schemes that have been detected and Jin K. Chung allegedly abused the trust of the Korean com-
exposed thus far so that wrongdoers are severely punished munity in an attempt to pocket millions.
and others are deterred from pursuing a life of criminality,” The CFTC claims the scam began as early as 2003, alleg-
said CFTC director of enforcement Stephen J. Obie in a ing it defrauded investors out of more than $85 million,
recent enforcement-action announcement. with approximately $22 million acquired from October 2007
The latest string of cases filed by the CFTC, on May 21, through October 2008, after which the scheme fell apart.
May 26, and June 9, all involved forex-related firms. In one This makes the case one of the largest in recent years
case involving Houston-based PrivateFX Global One, the brought by the CFTC involving the forex market.

INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)
Current
price 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 New Zealand dollar 0.64218 3.55% 12.78% 12.24% 0.7761 0.4892 4
2 British pound 1.64855 3.46% 12.35% 11.32% 2.0148 1.3501 1
3 Brazilian real 0.50778 2.81% 14.04% 20.76% 0.6414 0.3751 6
4 Australian dollar 0.79802 1.90% 13.44% 16.80% 0.9849 0.6005 3
5 South African rand 0.12333 1.51% 16.25% 19.54% 0.1391 0.0841 8
6 Swiss franc 0.92935 0.82% 4.58% 1.31% 0.9987 0.813 11
7 Euro 1.40507 0.33% 3.35% 0.54% 1.6038 1.2329 9
8 Hong Kong dollar 0.12903 0.01% 0.00% 0.00% 0.1291 0.128 17
9 Chinese yuan 0.14655 -0.14% -0.06% 0.23% 0.1466 0.1439 16
10 Russian ruble 0.03215 -0.25% 6.78% -8.95% 0.04334 0.02695 7
11 Thai baht 0.02937 -0.58% 3.60% 0.38% 0.02993 0.0262 14
12 Japanese yen 0.01048 -0.76% 2.54% -5.42% 0.01148 0.00904 15
13 Taiwanese dollar 0.03046 -0.81% 2.80% 0.53% 0.033 0.02835 12
14 Singapore dollar 0.68767 -0.85% 3.73% -0.49% 0.7434 0.6 13
15 Canadian dollar 0.87135 -2.49% 6.61% 6.17% 1.0024 0.7653 5
16 Indian rupee 0.02052 -4.34% 5.39% 0.64% 0.03974 0.01843 10
17 Swedish krona 0.12713 -5.47% 2.23% 0.47% 0.169 0.1068 2
As of June 25 *based on one-month gain/loss
ACCOUNT BALANCE
Rank Country 2007 Ratio* 2006 2008+ Rank Country 2007 Ratio* 2006 2008+
1 Singapore 39.209 23.486 35.383 26.983 13 Mexico -8.171 -0.797 -4.375 -15.527
2 Hong Kong 25.529 12.332 22.936 30.621 14 India -11.285 -1.024 -9.299 -33.33
3 China 371.833 10.993 253.268 440.011 15 France -26.915 -1.038 -12.835 -45.327
4 Switzerland 43.109 10.094 56.382 44.847 16 UK -80.722 -2.879 -82.975 -45.392
5 Sweden 39.099 8.615 33.804 40.429 17 U.S. -731.214 -5.296 -788.115 -673.266
6 Taiwan 32.975 8.57 26.3 25.024 18 Australia -57.129 -6.28 -40.384 -42.833
7 Germany 250.263 7.536 178.837 235.257 19 South Africa -20.707 -7.307 -16.284 -20.53
8 Netherlands 47.376 6.095 55.874 38.339 20 Spain -145.141 -10.079 -110.14 -154.036
9 Russia 76.241 5.89 94.34 102.331
Totals in billions of U.S. dollars
10 Japan 210.967 4.812 170.437 157.079 *Account balance in percent of GDP +Estimate
11 Canada 12.726 0.886 17.838 9.652 Source: International Monetary Fund, World Economic Outlook
12 Brazil 1.551 0.116 13.643 -28.3 Database, April 2009.

NON-U.S. DOLLAR FOREX CROSS RATES
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol June 25 gain/loss gain/loss gain/loss high low Previous
1 Real / Canada $ BRL/CAD 0.58303 5.40% 6.97% 13.72% 0.6719 0.4726 14
2 Aussie $ / Canada $ AUD/CAD 0.91629 4.47% 6.41% 10.00% 0.9833 0.7568 12
3 Pound / Yen GBP/JPY 157.275 4.10% 9.52% 17.62% 215.863 118.782 1
4 Real / Yen BRL/JPY 48.44263 3.45% 11.17% 27.59% 69.3981 36.0109 4
5 Franc / Canada $ CHF/CAD 1.06708 3.35% -1.90% -4.59% 1.1583 0.939 19
6 Pound / Euro GBP/EUR 1.17335 3.06% 8.71% 10.72% 1.2996 1.0195 7
7 Aussie $ / Yen AUD/JPY 76.13105 2.55% 10.58% 23.42% 104.448 55.1876 2
8 Real / Euro BRL/EUR 0.36143 2.41% 10.35% 20.11% 0.4197 0.2941 11
9 Aussie $ / Euro AUD/EUR 0.568 1.52% 9.74% 16.17% 0.6169 0.4725 9
10 Franc / Yen CHF/JPY 88.6748 1.50% 1.96% 7.06% 105.071 74.698 8
11 Aussie $ / Franc AUD/CHF 0.85892 1.01% 8.47% 15.28% 0.9997 0.712 6
12 Euro / Yen EUR/JPY 134.044 0.99% 0.74% 6.23% 169.958 112.045 5
13 Real / Aussie $ BRL/AUD 0.63647 0.79% 0.52% 3.35% 0.7391 0.5991 18
14 Franc / Euro CHF/EUR 0.66149 0.48% 1.19% 0.77% 0.6992 0.6109 16
15 Real / Pound BRL/GBP 0.30808 -0.67% 1.50% 8.45% 0.339 0.2441 17
16 Aussie $ / Pound AUD/GBP 0.48417 -1.55% 0.96% 4.91% 0.5052 0.3786 13
17 Canada $ / Yen CAD/JPY 83.12767 -1.89% 3.92% 12.19% 106.673 70.6656 3
18 Franc / Pound CHF/GBP 0.56385 -2.54% -6.92% -9.01% 0.661 0.4798 20
19 Canada $ / Euro CAD/EUR 0.62021 -2.87% 3.15% 5.60% 0.6745 0.5799 10
20 Canada $ / Pound CAD/GBP 0.52866 -5.79% -5.12% -4.64% 0.5918 0.4874 15
GLOBAL STOCK INDICES
1-month 3-month 6-month 52-week 52-week
Rank Country Index June 25 gain/loss gain/loss gain/loss high low Previous
1 Hong Kong Hang Seng 18,275.03 6.74% 34.16% 28.84% 23,369.10 10,676.30 3
2 Japan Nikkei 225 9,796.08 4.80% 15.52% 15.02% 13,950.60 6,994.90 9
3 Australia All ordinaries 3,851.50 3.11% 8.61% 9.57% 5,451.40 3,090.80 15
4 India BSE 30 14,345.62 3.11% 48.38% 49.92% 15,600.30 7,697.39 2
5 Canada S&P/TSX composite 10,355.85 2.84% 17.71% 24.61% 14,584.80 7,479.96 7
6 Singapore Straits Times 2,302.46 1.54% 36.10% -57.36% 3,013.93 1,455.47 1
7 Brazil Bovespa 51,515.00 1.38% 23.24% 41.25% 65,804.00 29,435.00 4
8 U.S. S&P 500 920.26 1.09% 13.07% 6.00% 1,316.29 666.79 14
9 Mexico IPC 24,245.71 0.19% 19.60% 8.53% 29,541.80 16,480.00 5
10 South Africa FTSE/JSE All Share 22,156.10 -1.12% 4.23% 5.51% 30,413.42 17,814.40 6
11 Switzerland Swiss Market 5,361.30 -1.56% 7.86% -0.71% 7,358.50 4,235.00 13
12 France CAC 40 3,163.10 -2.26% 9.32% 1.50% 4,558.56 2,465.46 12
13 Germany Xetra Dax 4,800.56 -2.40% 13.67% 3.70% 6,626.70 3,588.89 10
14 UK FTSE 100 4,252.60 -3.61% 9.03% 0.85% 5,666.10 3,460.70 11
15 Italy FTSEMIB 18,940.63 -5.14% 16.46% -1.05% 29,598 12,332 8
GLOBAL SHORT-TERM INTEREST RATES
Country Interest rate Rate (%) Last change Dec. 08 June 08
U.S. Fed funds rate 0-0.25 0.5 (Dec. 08) 0-0.25 2
Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.1 0.5
Eurozone Refi rate 1 0.25 (May 09) 2.5 4
UK Repo rate 0.5 0.5 (March 09) 2 5
Canada Overnight funding rate 0.25 0.25 (April 09) 1.5 3
Switzerland 3-month Swiss Libor 0.25 0.25 (March 09) 0.5 2.75
Australia Cash rate 3 0.25 (April 09) 4.25 7.25
New Zealand Cash rate 2.5 0.50 (April 09) 5 8.25
Brazil Selic rate 9.25 1.00 (June 09) 13.75 12.25
Korea Overnight call rate 2 0.5 (Feb. 09) 3 5
Taiwan Discount rate 1.25 0.25 (Feb. 09) 2 3.625
India Repo rate 4.75 0.25 (April 09) 6.5 7.75
South Africa Repurchase rate 7.5 1.00 (May 09) 11.5 12
GLOBAL BOND RATES
Rank Country Rate June 25 1-month 3-month 6-month High Low Previous
1 Germany BUND 120.63 0.84% -1.94% -3.43% 126.53 109.7 1
2 Japan Government Bond 137.67 0.75% -0.93% -1.50% 140.6 132.09 5
3 UK Short sterling 98.89 0.05% 0.43% 0.67% 98.95 93.715 2
4 Australia 10-year bonds 94.325 -0.44% -1.28% -1.64% 96.16 93.50 4
5 U.S. 10-year T-note 116.20 -2.49% -5.66% -8.30% 128.65 111.44 3

INTERNATIONAL MARKETS
Gross Domestic Product*

Release 1-year Next Release 1-year Next
Period date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Q1 6/18 -7.9% 9.6% 9/18 S. Africa Q1 5/26 -0.3% 6.6% 8/25
Brazil Q1 6/9 -8.4% 2.8% 9/11
Canada Q1 6/1 -3.0% -3.5% 8/31 ASIA AND SOUTH PACIFIC
EUROPE Australia Q1 6/3 -0.6% 5.5% 9/2
France Q1 5/15 -1.2% -1.9% 8/13 Hong Kong Q1 5/15 -12.7% -7.3% 8/14
Germany Q1 5/15 -3.8% -5.1% 8/13 India Q1 5/29 -1.6% 8.0% 8/31
UK Q1 6/30 -3.0% -4.0% 9/29 Japan Q1 5/20 -4.0% -15.2% NLT 8/17
Singapore Q1 5/22 -8.4% -9.6% NLT 8/21
* Final estimates, at current prices, seasonally adjusted
Unemployment
Period date Rate Change change release Period date Rate Change change release
AMERICAS
Argentina Q1 6/12 8.4% 1.1% 0.0% 9/14 ASIA AND SOUTH PACIFIC
Brazil May 6/25 8.8% -0.1% 0.9% 7/23 Australia May 6/11 5.7% 0.1% 1.6% 7/9
Canada May 6/18 8.4% 0.4% 2.3% 7/10 Hong Kong March-May 6/16 5.3% 0.0% 2.0% 7/20
EUROPE Japan May 6/30 5.2% 0.2% 1.2% 7/31
France Q1 6/4 9.1% 1.1% 1.5% 9/3 Singapore Q1 4/30 3.2% 0.7% 1.3% 7/31
Germany May 6/30 7.7% 0.0% 0.3% 7/30
UK Feb.-April 6/17 7.2% 0.7% 1.9% 7/15
CPI
AMERICAS AFRICA
Argentina May 6/10 0.4% 5.4% 7/14 S. Africa May 6/24 0.4% 8.0% 7/29
Brazil May 6/10 0.5% 5.2% 7/8
Canada May 6/18 0.7% 0.1% 7/17 ASIA AND SOUTH PACIFIC
EUROPE Australia Q1 4/23 0.1% 2.5% 7/22
France May 6/12 0.2% -0.3% 7/16 Hong Kong May 6/22 -0.3% 0.0% 7/21
Germany May 6/10 -0.1% 0.0% 7/9 India May 6/30 0.7% 8.6% 7/31
UK May 6/16 0.6% 2.2% 7/21 Japan May 6/26 -0.2% -1.1% 7/31
Singapore May 6/23 0.6% -0.3% 7/23
PPI
AMERICAS AFRICA
Argentina May 6/10 0.4% 5.6% 7/14 S. Africa May 6/25 -1.1% -3.0% 7/30
Brazil May 6/9 -0.1% 1.2% 7/9
Canada May 6/30 -1.1% -4.3% 7/30 ASIA AND SOUTH PACIFIC
EUROPE Australia Q1 4/20 -0.4% 4.0% 7/20
France May 6/30 -0.3% -7.8% 7/29 Hong Kong Q1 6/12 -0.3% -1.4% 9/14
Germany May 6/19 0.0% -3.6% 7/20 India May 6/12 0.5% 0.4% 7/9
UK May 6/5 0.4% -0.3% 7/10 Japan May 6/10 -0.4% -5.4% 7/10
Singapore May 6/29 1.2% -20.9% 7/29
LEGEND:
Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
As of June 30.

GLOBAL ECONOMIC CALENDAR MONTH
JULY/AUGUST
Legend
CPI: Consumer price index July
ECB: European Central Bank 1 U.S.: June ISM manufacturing 21 Canada: Bank of Canada
FDD (first delivery day): The
first day on which delivery of a
report interest-rate announcement
commodity in fulfillment of a Hong Kong: June CPI
futures contract can take place.
2 U.S.: June employment report
UK: June CPI
FND (first notice day): Also ECB: Governing council
known as first intent day, this is interest-rate announcement 22 Australia: Q2 CPI
the first day on which a clearing-
Mexico: June employment report
house can give notice to a buyer 3
of a futures contract that it
intends to deliver a commodity in 4 23 Brazil: June employment report
fulfillment of a futures contract. Mexico: July 15 CPI
The clearinghouse also informs 5
the seller. 24
FOMC: Federal Open Market 6
Committee 25
GDP: Gross domestic product 7
26
ISM: Institute for supply
management
8 Brazil: June CPI
27
LTD (last trading day): The final 9 Australia: June employment report
day trading can take place in a
Brazil: June PPI
28 U.S.: June durable goods
futures or options contract.
PMI: Purchasing managers Germany: June CPI 29 U.S.: Fed beige book
index Mexico: June 30 CPI; June PPI France: June PPI
PPI: Producer price index U.K.: Bank of England interest-rate South Africa: June CPI
Economic Release time announcement
release (U.S.) (ET) 30 Canada: June PPI
GDP 8:30 a.m. 10 U.S.: May trade balance Germany: June employment report
CPI 8:30 a.m. Canada: June employment report South Africa: June PPI
ECI 8:30 a.m.
Japan: June PPI
PPI 8:30 a.m. 31 U.S.: Q2 GDP (advance); June ECI
ISM 10:00 a.m. UK: June PPI
Japan: June employment report
Unemployment 8:30 a.m.
Personal income 8:30 a.m.
11 and CPI
Durable goods 8:30 a.m.
12 August
Retail sales 8:30 a.m.
Trade balance 8:30 a.m. 13 1
Leading indicators 10 a.m.
14 U.S.: June PPI and retail sales
2
JULY 2009
28 29 30 1 2 3 4 15 U.S.: June CPI
3 U.S.: July ISM manufacturing report
5 6 7 8 9 10 11 Japan: Bank of Japan interest-rate
12 13 14 15 16 17 18 announcement 4 U.S.: June personal income
19 20 21 22 23 24 25 UK: May employment report 5
26 27 28 29 30 31 1 16 France: June CPI 6 Australia: July employment report
17 Canada: June CPI Brazil: July PPI
AUGUST 2009
U.S.: June housing starts U.K.: Bank of England interest-rate
26 27 28 29 30 31 1
announcement
2 3 4 5 6 7 8 18 ECB: Governing council
9 10 11 12 13 14 15
16 17 18 19 20 21 22
19 interest-rate announcement
23 24 25 26 27 28 29 20 U.S.: June leading indicators 7 U.S.: July employment report

30 31 1 2 3 4 5 Australia: Q2 PPI Brazil: July CPI
Germany: June PPI Canada: July employment
The information on this page is
subject to change. Currency Trader Hong Kong: April-June Mexico: July 31 CPI; July PPI
is not responsible for the accuracy of employment report UK: July PPI
calendar dates beyond press time.

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Strategies, analysis, and news for FX traders

BUBBLES AND THE

Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Trading Strategies

The players and their impact . . . . . . . . .18

2 July 2009 • CURRENCY TRADER

Sell 1000 0.5 Buy 1000

Low 1.25338 High 1.27552

20.5 ALL 861 883 ALL 29.5

International Markets . . . . . . . . . . . . . .34

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4 July 2009 • CURRENCY TRADER

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Managing editor: Molly Goad

Associate editor: Chris Peters

6 July 2009 • CURRENCY TRADER

The benefits of trading FX through managed accounts

I nvesting in foreign exchange (FX) used to be the exclusive preserve

*Source: Deutsche Bank Currency Returns (DBCR) The above

THIS PRODUCT MAY NOT BE APPROPRIATE FOR ALL

Aussie and Kiwi in rally mode …

BY CURRENCY TRADER STAFF

The big picture

8 July 2009 • CURRENCY TRADER

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FIGURE 4 — OIL DENOMINATED IN EUROS

14 July 2009 • CURRENCY TRADER

The more leverage

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16 July 2009 • CURRENCY TRADER

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