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Saxo #FXdebates Trading insights from our Top Analysts

INDEX

FOREWORD PAGE 3 Blomberg By Robert Bierman

WELCOME PAGE 4 By Torben Kaaber and Charlotte Kan

CHAPTER I PAGE 5

CHAPTER II PAGE 8

CHAPTER III PAGE 11

CHAPTER IV PAGE 14

CHAPTER V PAGE 17

CHAPTER VI PAGE 20

Gold: just another currency?

Ole Hansen

The Euro in crisis

Steen Jakobsen

The Dollar & the FED

John Hardy

Yuan Diplomacy
Nick Beecroft

Currency Wars
Rakesh Shah

10 Rules for pratical trading strategies

Rakesh Shah To optimise your trading experience on our awardwinning trading platform, Head of Saxo FX Academy, Rakesh Shah presents its key functionality in the platform as well as his 10 golden rules for practical applications in trading.

Investors are still looking for an alternative to money, as the risk of debasement has never been greater, notes Ole Hansen, Head of Commodity Strategy at Saxo Bank. Does this make gold the hottest currency today? Is gold really money? It is the question central bankers wish they never had to answer

To correct the imbalances the monetary union has created, a profound restructuring of the system is the only option. Europeans need to either embrace a mandate for change, or face the slow death of japanisation, argues Steen Jakobsen, Saxo Banks chief economist.

The Federal Reserves aggressive quantitative easing programme since the onset of the financial crisis in 2008 has been the chief driver in weakening the US Dollar. However, despite the late 2012 launch of an open-ended QE3 and the Feds best efforts to kill it, there are encouraging signs for the greenback, argues John Hardy, Head of FX Strategy at Saxo Capital Markets.

How long will it take before the Renminbi replaces the Dollar as the worlds first reserve currency? Years, decades - or centuries? Nick Beecroft, Chairman of Saxo Capital Markets stresses that the Chinese are a patient nation and also warns that the supertanker of Chinese RMB appreciation could change direction in heavy seas.

00:

00

Is there a financial timebomb hiding in the financial markets? Currency wars, far from helping the nations involved in competitive devaluation, may actually damage rather than boost global trade says Rakesh Shah, Head of Saxo FX Academy. Find out how to benefit from this situation in this chapter.

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FOREWORD

In a world with few economic certainties, currencies have become a key indicator as to who is winning in the global economy. The Euro, the Yuan and the Dollar have become headlines beyond the financial news, dinner conversation where never before discussed and topics for debate when financial leaders gather. With the status of the worlds biggest currencies up for discussion, invariably gold attracts interest as an option. Saxo and Bloomberg LINK have convened the worlds leading financial minds for DISCUSSION and DEBATE. Lately, regardless of the primary purpose of the gathering, foreign exchange is a topic at the top of the agenda. News on the Bloomberg Terminal covers an astounding range of topics. Take the past month, for instance, in October 2012, stories in the top ten most read range from Lance Armstrongs troubles to senior executive changes at Citigroup, the state of unemployment in the U.S. and the price of Oil. Whats interesting is to look longer term. In the 12 months preceding October 2012, the most-read story on the Bloomberg Terminal was headlined Central Banks Cut Cost of Borrowing Dollars to Ease Crisis.

That headline ran November 30, 2011 as the world sought to find ways to ease the impact of the Euro crisis. Fast forward nearly a year later and the mostread story of September 2012 was Fed Undertakes QE3 with $40 Billion MBS Purchases per Month. Bloomberg LINK and Saxo Capital Markets have teamed up in an effort to give focus to key issues that recur in debates amongst serious participants in the foreign exchange markets. This e-book is one of the products of that collaboration. The best minds at Saxo Capital Markets have brought forward their best thoughts on the FX markets and shared them with you in this publication. We know you will find the contents to be thoughtprovoking and useful as you consider how you will play in the FX markets. There will be more to come as our collaborators at Saxo Bank continue to build this library of valuable insight. The debate will continue in live form as the #FXdebates produced by Bloomberg LINK and Saxo Capital Markets convene in-person in 2013. The FX debate will continue for long into the future, and we thank you for joining it alongside us. Robert Bierman

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WELCOME!

Torben Kaaber
CEO OF SAXO CAPITAL MARKETS

Charlotte Kan
EDITOR AT SAXO CAPITAL MARKETS

The global economic slowdown and the Eurozone debt crisis have tested not just the world leaders and their people, but also investors ability to anticipate, innovate and allocate. The possible collapse of the single market and its consequences on the global economy have forced forex players to be creative and examine various investment scenarios. At Saxo, we believe that the development of the Euro crisis and tough economic times will present huge challenges, but also a myriad of opportunities for forex traders. Our Saxo eBook aims at challenging your views and help you become more creative in your trading. We invite you to join the debate and share your views with us.

Is the Eurozone crisis a major concern or a great opportunity for FX traders? As the second most traded currency globally, the future of the Euro and the single currency project will heavily impact FX markets. Our chief economist Steen Jakobsen thinks we are stuck in a vicious circle of protest and denial, and the best way out of the crisis is a radical restructuring of the Eurozone. Macro has failed miserably, and needs to be replaced by micro, he argues. Do you agree? You may not, and you may be right. At Saxo Capital Markets, we like to look at the bigger picture and think outside the box. All over the planet, to revive moribund economies policy makers and central bankers are resorting to the biggest form of denial of all: quantitative easing - or in the words of Saxos Head of FX Strategy John Hardy extend and pretend. Will QE Infinity fail to revive the US economy, or does it have an alternative motive - to kill the Dollars value? What about the Renminbi? Is China determined to take over the Dollars role as the worlds reserve currency - and if it does when? Find out what our experts think, share your views and join the #FXdebates.

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CHAPTER I

Gold, just another currency?

Investors are still looking for an alternative to money
Ole Hansen
HEAD OF COMMODITY STRATEGY Ole Sloth Hansen is a specialist in all traded Futures, with over 20 years experience both on the buy and sell side. Ole joined Saxo Bank in 2008 and is today part of the Trading Advisory Team analysing a diversified range of products from fixed income to commodities. He previously worked for 15 years in London, most recently for a multi-asset futures and forex Hedge fund, where he was in charge of the trade execution team. FOLLOW THIS TRADER

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Since the 16th Century, golds purchasing power has maintained a broadly constant level. *

THE VALUE OF GOLD... 1560-2012 An ounce of gold has repeatedly bought a mid-range outfit of clothing throughout the ages

16th C.

18th C.

21th C.

...AND THAT OF THE DOLLAR 1850-2012 On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. 1850
* Data from: Roy W. Jastram and Jill Leyland (2009), The Golden Constant: The English and American Experience 1560-2000, Cheltenham, UK and Northampton, MA: Edward Elgar Publishing Ltd, Reproduced with permission.

1900

1950

1980

TODAY

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The Gold Standard

Revered throughout the ages as a symbol of prosperity, thanks to its natural beauty, scarcity, and durability, gold has been the reserve asset that has backed fiat currencies in financial economic systems worldwide, from 700 BC when gold coins were first manufactured on a large scale in Lydia (a region of Turkey), until the Bretton Woods agreement of fixed exchange rates was signed in 1944, marking the end of the gold standard. Over the past years, with the world economy hitting the doldrums, gold has regained its appeal as a safe-haven asset, but will it last? Here we ask Ole Hansen, Head of Commodity Strategy at Saxo Bank, whether gold can really be considered a currency asset. A passionate advocate of the necessity to revert back to the gold standard is US Congressman Ron Paul. On July 13 2011, during a Congressional hearing before the House Financial Services Committee, the Republican confronted Fed Chairman Ben Bernanke with the question: The price of gold today is $1,580. The Dollar during these last three years has devalued almost 50%. When you wake up in the morning, do you care about the price of gold? Clearly puzzled, Bernanke answered that he did indeed pay attention to the price of gold, but that it reflects several things - like global uncertainty. The reason people hold gold is as a protection against what we call tail risks, really, really bad outcomes, Bernanke said, before being interrupted again by Ron Paul with the question: Do you think gold is money? Looking increasingly uneasy, Bernanke answered: no, its a precious metal. He went on to awkwardly explain that gold is an asset. Central banks hold gold because it is a form of reserves, and a longterm tradition, according to Bernanke. After a long pause, Ron Paul sharply concluded: Some people still think its money. Fearing that the Feds monetary policy will lead inexorably to the death of the Dollar, Ron Paul thinks the US and global monetary systems should be totally reformed because fiat currencies do not lead to honest trade as they are not backed by physical assets. Will gold save the world, as Ron Paul seems to believe?

So what is gold?
Central bankers may differ, but the question certainly makes them break into a sweat. The role of gold in the financial markets, its nature and value, are not only difficult to define, they are also controversial. Is gold a currency, a commodity, both - or neither?

Gold, not a commodity like the others

COMMODITY A basic economic good used in commerce, which has little or no difference in composition or quality regardless of the place of production While certain attributes of gold match the description of a commodity, its physical and functional characteristics set it apart from the rest of commodities. gold is a scarce, enduring, dense and malleable metal, and the diversity of its uses makes it unique. gold is mostly used in jewelry 42% of the global demand in the second quarter of 2012. It is also used in the industry, with electronic, medical and dental applications. Finally, gold is an increasingly important financial asset, used both as a store of wealth and a risk diversifier. Unlike other commodities, golds production is more geographically diverse - according to the World gold Council the top three producers in 2011 were China (13%), Australia (9%) and the US (8%). This diversity leads to less geopolitical and climate risks, and therefore lower volatility relative to other commodities another unique attribute.

USE OF GOLD IN 2012

TOP 3 GOLD PRODUCERS IN 2011

42

Other China 13% Medical Australia 9% Dental Electronics

Jewellery

2
SOURCE: WORLD GOLD COUNCIL

USA 8%

SOURCE: WORLD GOLD COUNCIL

Gold is money and nothing else

JP Morgan, 1913

In 1913, JP Morgan declared to the US Congress: gold is money, and nothing else. What the American financier meant is that gold works as a medium of exchange, a unit of account and an alternative store of value, the three classical functions of money. Fastforward 100 years and gold looks very much the same: it still shines, especially in the darkest of times. The allure of gold, which has maintained its popularity throughout centuries as a store of wealth, is no less valid today despite some recent hesitancy following a decade of strong gains. Investors are still looking for an alternative to money as the risk of debasement has never been greater, with central banks continuing to diversify their currency reserves away from the Dollar, says Ole Hansen, Head of Commodity Strategy at Saxo Bank. WHY GOLD IS MONEY? BECAUSE IT CAN WORK AS:

Looking forward, Ole Hansen believes gold will retain its role as a safe haven in financial markets. gold investments through Exchange Traded Funds already reached a new record with almost 300 tons added over the last year. The combined amount of gold now used to back Exchange Traded Products has risen to a level only exceeded by the national reserves of two countries (USA and germany). Even though gold is not money it is nevertheless increasingly being accepted as an alternative to cash by major clearing houses as collateral for trading futures, stocks and interest rate products. This is a trend that is expected to continue, thereby further boosting golds status as an alternative to money, he says.

1
MEDIUM OF EXCHANGE

2
UNIT OF ACCOUNT

3
ALTERNATIVE STORE OF VALUE

No asset is safe now

Zhang Jianhua Peoples Bank of China

For the Chinese, gold is the currency de rigueur. No asset is safe now, said the Peoples Bank of Chinas official Zhang Jianhua late last year. The only choice to hedge risks is to hold hard currency - gold. With general distrust of government and central banks policies, hoarding gold seems to have become the Middle Kingdoms priority as the favourite means to store wealth. Already the worlds top producer, China is on track to overtake India this year as the worlds top consumer of gold, the World gold Council said. Central banks and governments all over the world still hold large gold reserves. gold is actually the worlds third largest reserve asset, after US Dollar and Eurodenominated assets, as it helps preserve national wealth and protects against economic instability.

Paper money eventually returns to its intrinsic value - zero, noted French philosopher Voltaire back in 1729. On the other hand, gold holds its value, its supply is limited, and it can act as a hedge both against inflation and deflation. In his seminal book on the purchasing power of gold throughout the centuries, The golden Constant*, Roy Jastram demonstrated that despite important short-term fluctuations, the average price of an ounce of gold over long periods of time tends to buy you the same thing, such as a mid-range outfit, unlike currencies like the Dollar, which value changes over time (see our infographic). The thing about gold is that it does not matter so much what it is, but what it does - and who holds most of it. Ancient Egyptians believed gold was a piece of flesh from the Sun god. Less poetically, but perhaps more accurately, gold isnt just another currency, it is an alternative currency in a world where nothing is perceived to be safe anymore.

WORLDS LARGEST RESERVE ASSETS Gold Euro

US Dollar

Trading Perspective
Will gold continue its multi-year rally higher in 2013 following the pause in 2012?

gold against the US Dollar, a daily chart including Simple Moving Average.

Bull Case
Negative real interest rates, quantitative easing, inflation worries, financial investors looking for alternatives, central bank buying will continue to add support and could see it potentially reach upwards of 2,080 USD/oz.

Bear Case
The investment space becomes too crowded, a sharp Dollar appreciation, a bout of extreme risk aversion and moving from risk on/off to growth on, could all have a negative impact on gold. A break below the current floor at 1,525 could signal the end of the current bull run and trigger a much deeper correction.

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GOLD INDEX

gold CFD on Future candlestick chart (Daily) with Dual Simple Moving Average and Fibonacci also applied.

THE TRADING STATISTICS FOR GOLD 2012 High: 1797 2012 Low: 1526 Key Support: 1738 Key Resistance: 1797 Placement in 2012 high to low Fibonacci range: Inside the 76.4 to 100 zone Dead Cross or Golden Cross: golden cross on 18 Sep. 2012

Trading spot Gold

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CHAPTER II

The Euro in crisis

The cycle between denial and protest is destined to last for a while
Steen Jakobsen
CHIEF ECONOMIST Steen Jakobsen was appointed as Chief Economist in March 2011. Steen has over 20 years of experience within the fields of proprietary trading and alternative investment. He started his career at Citibank N.A. Copenhagen, from where he moved to Hafnia Merchant Bank as Director, Head of Sales and Options. In 1992, he joined Chase Manhattan in London as VP, Head of Scandinavian Sales, and then the Chase Manhattan Proprietary Trading group. In 1995-1997 he worked as a Proprietary Trader and Head of Flow Desk at Swiss Bank Corp., London. In 1997 he became global Head of Trading, FX and Options at Christiania (now Nordea) in New York before joining UBS in New York in 1999 as Executive Director of the global Proprietary Trading group. FOLLOW THIS TRADER

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PUBLIC DEBT VS GDP

Public Debt / GDP (%) < 80

( 2011 DATA )

80 - 100 100 - 200 > 200

debt ( bn) GDP ( bn) debt GDP

13,174 12,797

10,904 4,745

2,088 2,570

1,507 1,826

103%

229%

81%

82.5%

355 215

165%

SOURCE: EUROSTAT

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Restructure the Eurozone?

From the time it erupted in 2009, the Eurozone debt crisis has paralysed equity and debt markets and little progress has been made towards a resolution - leaving investors, the regions leaders and their citizens in a state of limbo. Yet what is at stake is not just the future of the single market, but the entire world economy. The region is the planets second biggest economic powerhouse. The Euro is also the second reserve currency globally. It may seem unpalatable, but to correct the imbalances the monetary union has created, an upheaval of the system may be the only option, Steen Jakobsen argues. A greek exit may sound like a frightening scenario, but profoundly restructuring the Eurozone may be less painful than the slow death of Japanisation with deflation, massive fiscal deficits, and negative real-rates. Here Saxos chief economist considers the different outcomes for the Euro debt crisis and what to consider when trading the single currency.

Delay is the deadliest form of denial

C. Northcote Parkinson Like economic crises in the past, the EU banking and sovereign debt crisis follows a three-phase model:

1
DENIAL

2
PROTEST EXTEND AND PRETEND

3
MANDATE FOR CHANGE

Fiscal stimulus

Social tension Governments replaced by the opposition Use of unconventional monetary tools Taxes increase Workers income carries on shrinking

Cut with the past Reforms are initiated V-shaped recovery

In the first stage of the crisis, the denial phase, policy makers and central bankers use fiscal stimulus and easing as if the issue was merely cyclical. There is complete denial of the scope of the problem, Steen Jakobsen argues.

Then, as better days fail to materialise, voters punish the incumbent governments by replacing them with the opposition who in their turn extend and pretend. Social tension arises, and policy makers in their desperation throw even more cash at the problem by using the unconventional monetary toolbox - whilst breaking treaty laws. We have done this for so long that the impact will be more negative and the upside when doing more QE and long-term refinancing operation will be shorter and less potent, probably even counterproductive. No one in their right mind believes lower interest rates will solve anything. The market clearly knows that to deal with solvency someone needs to take a loss not get more debt. This outcome is a vicious circle: every time central banks turn on the printing press, peoples purchasing power dwindles. The real problems remain unaddressed, workers income carries on shrinking and tension builds up. Employees today take home less than 43.5% of gDP - down from more than 50% before the crisis started so essentially we have a world record low in terms of what the employees take home. You can argue that it is fair enough because there is low growth, however the problem is that corporates have record-high profits. So the corporates and their owners have record-high earnings and incomes, and the wage earners have record-low earnings. The disposable income of the middle classes and the lower income classes is massively down firstly because there is increased taxation, and indirect taxes through the social benefits contribution across all of Europe, Steen Jakobsen notes.

For Saxo Banks chief economist, the only way we get a mandate for change is if we reach the depth of the crisis. Just in the way alcoholics or drug-users have to reach rock-bottom before they can find the will to recover and overcome their addiction, the Eurozone may bounce back only once its leaders and inhabitants end up in such a desperate situation that they realise the only way out is through radical and real change. Steen Jakobsen believes that so far, the EU has remained embedded in the first and second phases of the crisis, having yet to arrive at a mandate for change. The cycle between denial and protest is destined for a while longer, he argues.

WORKERS INCOME AS A PROPORTION OF GDP

50

43

5% ,

Before Crisis started

Today

Meeting of the Cardinals

A theme already introduced in Saxo Banks Outrageous Predictions for 2012 is that the Eurozone debt crisis will only end when there is a Meeting of the Cardinals (MoC): a gathering of key EU players once the crisis reaches a critical phase, resulting in a dramatic restructuring of Europe. The Meeting of the Cardinals will be the only orderly solution dictated by rational and practical solutions. Some countries need to leave the Euro, whether permanently or temporarily. Here, the guinea pig will most likely be greece. This will force Club Med to the table and make them accept further loss of sovereignty on fiscal and monetary policy, most likely in a german model where the European Court of Justice becomes the highestranking authority, says Steen Jakobsen. The MoC scenario will likely lead to a shortterm negative market reaction and a deep one-to-three year recession. However, this could also trigger the final phase of the three-phase crisis model. Inside the mandate for change there is a V-shaped recovery when reforms are initiated from the low point. For investors, the MoC is the best solution as it will lead to several years of prosperity amid better debt-toequity, more realistic future expectations, and a public sector under control, he says.

There is a V-shaped recovery when reforms are initiated from the low point
This is the concept that there are no good solutions to this crisis. We are trained and educated to think there is always a solution to a problem, but we have been doing this for so long and we are out of time. If there is a complete impasse, the only immediate path left will be a Destruction of Capital in the good old Joseph Schumpeter sense. The forest fire of deleveraging that cleans the slate. Under this scenario, markets would re-test their 2009 lows and there will be a deep rooted discontentment with politics and the banking system, which could even lead to social unrest and worse.

Doom and gloom

Conclusion: the system must fail

O M ACR O M IC R

The magnitude of this debt crisis is far larger than the market realises, and in fact is so big that there is no real solution as imagined by either side of the north-south divide. The idea that its merely a question of germany paying is not only nave, but also impossible. They cannot and they should not. And we can all forget the silly notion that the ECB is the only solution to this debt crisis, Steen Jakobsen says. For him the monetary experiment has simply not worked and there is only one

solution: the system must fail, the Euro and the Eurozone need to be redefined. We cant solve this by taking short-cuts to a banking union when there is no political or fiscal union. The reason Europe is going up in flames economically is the lack of accountability on behalf of policy makers and politicians. giving them more rope to hang themselves via extendand-pretend measures is not the path forward, Steen Jakobsen concludes.

Trading Perspective

Monthly EURUSD price chart (since 1972) showing Dual Simple Moving Average.

Bull case
The main macro input on Europe is now the german election (September 2013) and the total apathy left behind by the discussion on fiscal multipliers from the IMF has left the central planners rudderless on the open sea of debt crisis. Re-election of the same party ensures a smooth transition of current plans. We need to make politicians accountable. The only way to do this is to institute maximum structural deficits of say 1 pct of gDP - that will remove the cheque book from the central planners and create a tangible goal-line the voters can react to. If politicians do make significant progress in this area, change can make the difference.

Bear case
In germany, a new party will add a degree of uncertainty for the Euro. Furthermore, giving greece more time will only make things worse - greece is clearly in open violation of all measures and Spain is following the same path as its structural deficit increases month by month Do not forget or underestimate the degree to which the crisis has finally arrived at the door steps of the rich north. This will quickly change the dynamics, as protecting domestic growth and jobs in germany, Netherlands and Denmark before anything else will become the top priority and increase the risk of irreconcilable differences and decrease the will to move in the direction of a full transfer union, leaving Europe ever more at odds with itself.

List of instruments available to trade the Euro

EURO INDEX

EURUSD 4hour bar chart.

THE TRADING STATISTICS FOR EURO CURRENCY VS USD 2012 High: 1.3484 2012 Low: 1.2040 Key Support: 1.2806 Key Resistance: 1.3074 Placement in 2012 high to low Fibonacci range: Inside the 61.8 to 76.4 zone Dead Cross or Golden Cross: Dead cross 3 Oct 2011

Trading the Euro

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CHAPTER III

The Dollar & the Fed

QE wont break the buck
John Hardy
HEAD OF FX STRATEGY John J. Hardy is Head of FX Strategy for Saxo Bank. A graduate of the University of Texas at Austin, John started at Saxo Bank in 2002. As author of the popular FX Update and FX Monthly columns on Tradingfloor. com, John has developed an extensive following among Saxo Banks clients, the press and sales traders. FOLLOW THIS TRADER

The DOLLAR & The feD

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OR DEBT MONETISATION?
Federal Reserves Balance sheet [annual average in $ trillions] The Fed's balance sheet has almost tripled since 2008. At the same time, government borrowing costs have hit new lows.
2.92 2.25 2.24 2.43
$ tn US SOCIAL SECURITY

Official holders of US Debt The Federal Reserve is the second single largest holder of US debt after the US Social Security Fund and thus holds more US debt than China, the third largest holder of US debt.
2.82

$15.58 trillion

DOMESTIC FOREIGN

0.95

Yield on US 10-year Treasuries

4.07

17.2%
OIL EXPORTERS BRAZIL

FEDERAL RESERVE HOLDINGS

10.7%
13.1%

OTHER INTRAGOVERNMENTAL HOLDINGS

3.84 3.36 1.92

OTHER NON INTRAGOVERNMENTAL HOLDINGS

1.62

2.05

26%
1.5%
SWITZERLAND

08

09

10

11

12

13

CHINA

QE1

QE2

QE3

7.3%
JAPAN

1.7%
CARIBBEAN TAIWAN

OTHERS

20

20

20

20

20

20

1.5%
RUSSIA

1.2%
LUXEMBOURG UK

1%
0.8%
GERMANY

$600 bn
$100 billion in government-sponsored enterprises + up to $500 billion in mortgage-backed securities.

$600 bn
$600 billion in longer-term Treasury securities purchased by June 2011.

$40 bn / month +
$40 billion a month in mortgage-backed securities + reinvestment of principal = increase of longer-term assets by about $85 billion a month.

1% 0.9% 0.9%

0.9%
IRELAND NORWAY

6.9%

BELGIUM

0.6%
SINGAPORE

0.4%
THAILAND

0.4%
FRANCE

HONG KONG

0.5%

0.4%

0.3%

12.1%
12

SOURCES:

Federal Reserve Board of Governors Flow of Funds

http://www.ssa.gov/cgi-bin/investheld.cgi

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

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QE wont break the buck The Federal Reserves aggressive quantitative easing programme (QE) since the onset of the financial crisis in 2008 has been the chief driver in weakening the US Dollar.
NOVEMBER 2008 MARCH 2009 NOVEMBER 2010 JUNE 2011 TODAY

?
QE1
$1.725 TRILLION
SOURCE: FEDERAL RESERVE

However, despite the late 2012 launch of an open-ended QE3, the greenback will not get much weaker, argues John Hardy, Head of FX Strategy at Saxo Capital Markets. Here we look at how the balance of positives outweigh negatives for the Dollar, and why the US currency may rise despite the Feds best efforts to kill it with QE.

QE2
$600 BILLION

QE3

QE perpetuates the debt

John Hardy

The perils of Quantitative Easing

Printing money is currently the Federal Reserves weapon of Another peril of the Feds QE is that, in a global choice to defend its dual mandate: maximum employment economy, it has been forced upon the whole world. and stable prices. However QE not only does little to When the Fed does QE it is printing US Dollars, which address the structural problems of the economy, it actually are transmitted to the global financial markets when delays the economys necessary adjustments. It perpetuates the US Dollar is the worlds most important reserve the constant blowing of asset bubbles, forcing liquidity currency. So QE has aggravated bubbles everywhere into commodity prices and to foreign shores where it from Brazil to Canada to Sweden bubbles that have is not always welcome. Higher commodity prices can become far larger for their respective economies than often further suppress demand in the economy, actually the US credit and housing bubble was by 2007-08, for damaging it rather than supporting it, John Hardy notes. example. So eventually, these countries will also have to deal with their respective credit bubbles, and thats the With QE, the Fed has endless ammunition, but its power beginning of the story for why the US Dollar, relatively becomes less and less effective to fight low growth speaking, has a better chance at strengthening than one and high unemployment because it must always get might think. The US has already achieved a significant bigger and bigger in order to have the same effect. QE degree of deleveraging in its economy at least in the is extend and pretend it not only perpetuates the banking sector if not in public finances and is far better presence of too much debt in the system but creates positioned for growth going forward than either Europe, more debt as it suppresses interest rates, making it which has yet to deleverage, or many smaller economies, cheaper and cheaper to service the debt, and thereby which are in varying phases of feeling out the tops of letting it grow endlessly, never to be repaid. It also their respective credit cycles, John Hardy points out. allows a profligate government to continue to run huge structural deficits and avoid needed structural reforms. Worst of all, it bails out debtors who made bad decisions in the past, and via negative real interest rates (little or no yield on investments while inflation continues to eat away at purchasing power) punishes responsible savers, Saxo Capital Marketss Head of FX Strategy argues.

US economy positives
Relative to other major economies, the US looks in a better place. This is because the Bernanke Fed is not the only central bank using and abusing QE: all over the world, monetary policy makers have become addicted to the money-printing machine. The ECB, the Bank of Japan, the Bank of England are all engaged in QE programmes of their own. Meanwhile in China, the old business model needs re-inventing with a shift to domestic consumption, creating a healthcare system, encouraging competition and deepening financial markets. The country is facing its slowest pace of growth in almost three decades and all other economic indicators suggest sluggishness near term. China is clearly entering a long transition period that must take it away from its long-standing reliance on infrastructure building and production capacity expansion, John Hardy argues. The country is also suffering from a postpeak credit cycle that was aggravated by extensive private lending networks, in addition to the mal-investments made by the big Chinese banks. The demographic picture is also rather concerning due to the long-standing one child policy. On the other hand, there are encouraging trends intrinsic to the US economy, John Hardy points out, such as:

RESHORING INITIATIVE Bringing manufacturing jobs back to the domestic market as production in the US for certain types of goods is becoming far more competitive than in the past.

SHALE GAS REVOLUTION New methods of extracting formerly unreachable natural gas have led to a huge increase in production capacity on US soil. This in turn means US natural gas prices are now a fraction of the cost of what they are elsewhere, as natural gas is very expensive to liquefy and transport if sources cannot be reached by pipelines. As natural gas can also be used for electricity generation, this reduces the overall cost of energy consumption for the country.

DEMOGRAPHICS US demographics meanwhile are in far better shape than Japans or most of Europes, especially germany, where the number of workers supporting each pensioner is plummeting as the population ages. Still, John Hardy warns that it is important for the US to bring down the costs of its healthcare system.

HIA (HOMELAND INVESTMENT ACT) Another potential support for the Dollar would be a second round of HIA, which in 2005 allowed US corporations to repatriate foreign profits without paying tax. Under this programme, easily half a trillion Dollars of foreign profits could be repatriated, as the US government will need to look for new ways to stimulate the economy without adding to the fiscal burden. They could link repatriation tax breaks with all kinds of other incentives as well, he says.

Maybe there are more US economy positives than US Dollar positives

Maybe there are more US economy positives than US Dollar positives, but they should keep the Dollar from weakening against most of the other major currencies. There are many adjustments that need to take place in the world, and the market has overplayed commodity economies and their currencies to the upside. The Euro also faces serious issues, and if doesnt weaken much more against the US Dollar, well have the EU breakup scenario moving rapidly forward. As for China, the country is likely to eventually try to seek a repeat of its past currency devaluation. The hot money in China is now rapidly flowing out of, rather than into the country. The Dollar still looks better than most other currencies regardless of the fact that QE is an abomination and is not the right prescription for the economy, John Hardy sums up.

Trading Perspective
We are looking at the AUD /USD cross in this example as this is one of the currency pairs with a high interest rate differential against the USD. In addition it has seen big moves in the last 2 years. What do the fundamentals tell us about the continuation of this trend and how does the US interest rate policy affect commodity currencies around the globe?

Australian Dollar/US Dollar (Spot) Weekly Candlestick chart with Dual Simple Moving Average applied.

Bull case
Risks to the AUDUSD bearish case exist. If the market sours on the US due to the impending fiscal cliff and due to the Feds promise of open-ended quantitative easing, the US Dollar could remain weak as the world decides that the US is not the place to invest. Also, if key Australian commodity prices remain well supported by a world of profligate money-printing central banks and if China unleashes new stimulus measures to mark its impending leadership transition, the AUDUSD could remain resilient and even rally anew before weakening longer term.

Bear case
The US is four years beyond the bursting of its bubble and has a very weak currency while the Australian bubble has just begun to burst and the Aussie is a very strong currency. With global growth fundamentals limping along and potentially remaining poor and corporate earnings outlooks pointing south, risk appetite could retrench and the US Dollars safe haven status will see it appreciate against most currencies, especially the Australian Dollar, which is at risk due to its own over-valuation, a shrinking interest rate advantage, and Chinas difficult transition period.

List of instruments available to trade the USD

DOLLAR INDEX

DXc1 NYBOT US Dollar Index - continuous

Dollar Index 4 hour bar chart from July-October 2012.

THE TRADING STATISTICS FOR THE DOLLAR INDEX 2012 High: 84.25 2012 Low: 78.22 Key Support: 80.31 Key Resistance: 78.60 Placement in 2012 high to low Fibonacci range: Inside the 23.6 to 38.2 zone Dead Cross or Golden Cross: Dead cross on 11 Oct. 2012

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CHAPTER IV

Yuan Diplomacy
The supertanker of Renminbi appreciation can change direction
Nick Beecroft
Senior Market Analyst Nick Beecroft has over 30 years of international trading experience within the financial industry. Nick publishes comments and analysis on global macro-economic and political developments and their implications for the financial markets, with a special focus on Forex, g7 interest rates and bond markets, including in-depth examination of Central Bank thinking and tactics. FOLLOW THIS TRADER

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SHARE THIS INFOgRAPHIC

BEGGAR THY NEIGHBOUR

CURRENT ACCOUNT BALANCE CHINA VS USA ($ Million)

BILATERAL TRADE IMBALANCE

YUAN / DOLLAR EXCHANGE RATE

3,240

400 300 200 200

0.1600 0.1550 0.1500 0.1450 0.1400 0.1350 0.1300 0.1250 0.1200

51

100 0 - 100 - 200 - 300 - 400

$bn

FOREIGN CURRENCY RESERVES

$10 bn

- 500 - 600 - 700 - 800 - 900

2005

2006

2007

2008

2009

2010

2011

SOURCES:

US Census Bureau (2012)

/ IMF (2011) /

Bloomberg (2012)

CHINA IMPORTS

$273,121

US EXPORTS

Bn

$69,999

Bn

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Gradually allowing the Renminbi to become an internationally-traded currency is the long, tricky journey the Peoples Bank of China (PBOC) has embarked on.
But where, and what, will it lead to? Nick Beecroft, Chairman of Saxo Capital Markets Ltd, explains that the reputation of the Chinese as a cautious and wise nation may be deserved. Traders who expect the redback to become the worlds new reserve currency soon should take notice of the old Chinese proverb: Man who waits for roast duck to fly into mouth must wait very, very long time.

Internationalisation of the Renminbi: a step-by-step strategy

Both the government and the PBOC have stated that the internationalisation of the Renminbi and foreign exchange reforms are necessary to move to a market economy and better reflect Chinas weight in the worlds global economy. However, liberalising the use of the Renminbi in international trade and cross-border investment is a slow, step-by-step strategy, notes Nick Beecroft. First, to test the water, the government is introducing the so-called RMB Cross Border Trade Settlement Pilot Scheme to satellite nations in the region to develop an offshore market for the Renminbi. Hong Kong in 2009 was followed by Taiwan recently. Singapore is on the cards. Ultimately, London also hopes to have its role to clear transactions in the redback. The pilot scheme has been rather successful: from nothing in 2009, offshore Renminbi deposits in Hong Kong are now said to account for 9.5% of total banking deposits, Nick Beecroft points out.

A balancing act
However, the Renminbi internationalisation journey is likely to take longer than most people expect. It is not only a long, but also a complex process involving the relaxation of Chinas monetary policy and the creation of a more flexible exchange rate. Urged by its trading partners to appreciate its currency, China took steps in that direction by ending the Renminbi peg to the greenback. Since the fixed peg to the Dollar officially ended in July 2005, leading to carefully-controlled and gradual Yuan appreciation - the PBOC allows only a certain amount of movement per day many observers expected a oneway Yuan appreciation movement for many years. The belief has grown this year that this is not a one-way bet anymore. Since the crisis struck in 2008, Chinese authorities became concerned about the deterioration of world trade and the consequences of a stronger Renminbi. They put a halt to its appreciation in the middle of 2008 and became confident enough only during 2010 to allow it to strengthen again, Nick Beecroft says. China is currently facing its slowest pace of growth in almost three decades. Its current account surplus has diminished rapidly - from 10% of gDP in 2007, to 2% this year. However, any temptation by the Chinese authorities to permanently stop the Yuans appreciation could potentially have disastrous consequences, Nick Beecroft warns. The Chinese government and the POBC are therefore treading carefully, with the double-objective of not harming their exports further and keeping their top trading partner if not happy, at least amenable. The alleged unfair weakness of the Yuan against other major currencies like the Dollar has led to simmering tensions between the United States and China over the last 10 years, and often rises up the policy agenda during U.S. Presidential election campaigns, as we have seen again in 2012, says Nick Beecroft. In its semi-annual report on the foreign exchange market, the U.S. Treasury so far has abstained from labeling China a currency manipulator obviously fearing this could cause a huge diplomatic incident. This would have certainly been repeating the errors of the 1930s in another form. The Smoot-Hawley Act in the Thirties introduced trade tariffs which are thought to have lengthened and exacerbated the Depression, inducing trade wars as other countries retaliated and global trade suffered massively, notes Nick Beecroft.

10

2
2007

Today

CURRENT ACCOUNT SURPLUS AS A PERCENTAGE OF GDP

SOURCE:IMF

Too soon to say

The supertanker of Chinese Renminbi appreciation has slowed to a crawl and even reversed a little during 2012. This becomes self-fulfilling as the two things that move the currency are trade-related flows and they have become not so favourable for the Yuan now because of the reduction in the surplus and speculative flows. It was massively popular to speculate that the currency would strengthen. All the way down, that move in the Dollar-Yuan rate was self-fulfilling: it drew more and more people into that speculation. However, now you could say after a virtually-unchanged year thats not front-andcentre for a lot of hedge funds. That supertanker could change direction completely if China fell off a cliff, there are rumours of a property collapse, or banks going bust. Then you could start seeing capital flight if they had an open current account and thats why they dont they take these very gradual steps, Nick Beecroft believes. Now the new politburo is in place, the next crossroads China will encounter in its Yuan liberalisation odyssey will be the outcome of the Eurozone crisis and of course, the performance of the Chinese economy, he says. And in the long-term? Its too early to say, says Nick Beecroft, quoting Zhou Enlai, one of Chinas former Premiers in response to a question he was asked in the 1970s about the consequences of the 1789 French Revolution. A clich intended to show that China, unlike the West, is a patient, far-sighted nation. Although, it now seems that Enlai confused the French Revolution with the 1968 riots in Paris a few years earlier. As so often happens in the dialogue between China and the West, this was lost in translation. Does this sum up Chinas monetary policy?

YUAN/DOLLAR RATE

SOURCE: BLOOMBERG

Trading Perspective
Two main factors will influence the China growth story, and therefore the driving engine for global growth: the ability of the European leaders to fix the Eurozone crisis, and the outcome of the fiscal deficit cliff in the US. Chart: Relative correlation of the Chinese market and the European equity market growth in 2012.

EuroStoxx50 CFD daily chart with IShares FTSE/Xinhua China 25 also applied. Short term changes in the CFD: Stoxx50E.I EU Stocks 50 index and China ETF: FXC: xlon iShares FTSE/Xinhua China 25 tracker.

Bull case
A short-term solution will assist in the stabilisation of growth in the Eurozone, helping Chinese and global growth to keep on track. A grexit may be seen as containable and politically desirable in germany, if it subsequently enables Angela to say to her electorate Look, we dont throw good money after bad. You now see we can be tough, if theres no prospect of success. So, trust me when I ask for more money for Portugal, Spain and Italy.

Bear case
Spain and Italy are next, putting Euro project into question. No resolution to the US fiscal cliff issue. If no major new deal is struck, spending cuts and tax increases will be automatically triggered to the tune of $600 billion, or approximately 3.7 percent of gDP (this, by the way, is more austerity than any European Club Med country is willing to enact). It will have real implications for the economy, but also the stock market.

List of instruments available to trade the Renminbi

YUAN INDEX

US Dollar/Chinese Renminbi daily (staircase)chart.

THE TRADING STATISTICS FOR THE CHINESE YUAN 2012 High: 6.39 2012 Low: 6.27 Key Support: 6.27 Key Resistance: 6.36 Placement in 2012 high to low Fibonacci range: Inside the 0 to 23.6 zone Dead Cross or Golden Cross: golden Cross on the 14th of July (very close to a possible dead cross)

WisdomTree Dreyfus Chinese Yuan Fund (NYSE) Daily Chart (CFD) starting June 2011

THE TRADING STATISTICS FOR THE CYB 2012 High: 25.49 2012 Low: 25.03 Key Support: 25.29 Key Resistance: 25.49 Placement in 2012 high to low Fibonacci range: Inside the 76.4 and 100 zone Dead Cross or Golden Cross: Dead cross on the 20 Dec. 2011(very close to a possible golden cross)

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CHAPTER V

Currency Wars
Is there a financial time bomb hiding in the FX market?
Rakesh Shah
HEAD OF FX ACADEMY AT SAXO CAPITAL MARKETS UK Rakesh has over 17 years experience in leveraged trading in London and New York, having worked for several global investment banks. In January 2012, Rakesh joined Saxo Capital Markets as Head of FX Academy where he brings his unique expertise in pragmatic trading strategies to Saxos customers. He frequently presents seminars aimed at high frequency professional traders. FOLLOW THIS TRADER

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IS MONETARY EASING A HOSTILE ACT?

YUAN / DOLLAR MEXICAN PESO / DOLLAR
99.7 0.6045 0.1289 94.7 93.4 91.1 88.6 0.0959 0.4393 82.4 0.0697 86.3 0.0853

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EURO INDEX

(BoE Calculated Effective Exchange Rates)

DOLLAR INDEX

(BoE Calculated Effective Exchange Rates)

BRAZILIAN REAL / DOLLAR

0.5578

0.1574

87.3 0.4931
80. 9

748 0.4
0.0097

0.0759

BANXICO 4.5% PBOC

6%

BACE N

SOURCE: BLOOMBERG 10/12

% 7.25
CENTRAL BANK

ECB FED

0.75%

0.25%

INTEREST RATE (%)

2007

2008
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2009

2010
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2012

18

A classic currency war is brewing

Wars play their part in history, shaping and changing the landscape for generations to come. Financial markets are no exception. The 21st century has created a global economy where hyper liquidity allows the transfer of financial assets from one zone to another on an unprecedented scale. Superpowers flex muscles for the control of these assets through the setting of interest rates, loan and debt agreements to manage current account surpluses. In this context a classic currency war is brewing, spurred by devaluation and inflation, the dangerous by-products of a near-zero interest rate environment. Is there a financial time bomb hiding in the foreign exchange market? Rakesh Shah, FX trader and head of Saxo FX academy raises this hypothesis.

:00 00

The Battle Scene

The primary tools for fighting currency wars are interest rates, with most countries eagerly anticipating moves from the United States and the Eurozone. Lowering interest rates can have an unwanted side effect of letting inflation rise. Even the worlds juggernaut, China, has run into challenges with sustaining growth without letting inflation run wild. Some countries have advantages. Brazil is an example. The countrys banking system was not hit as hard during the subprime lending scandals. This combined with the rise in commodity prices, led to higher growth rates, allowing Brazil to be somewhat more flexible with economic policies. Based on this, if commodity demand slows down, we will have to redraw the entire global currency domination map, as so many players are commodity driven, Rakesh Shah argues.

The power players

When participating in the currency battle, the first step is identifying who the power players are. For each currency we must assess the ability of the domestic economy to withstand inflationary pressures that lower interest rates bring, he says. Next, traders should analyse each currency in order to evaluate which one has the firepower to win the war. Find out which political establishments have the ability to manage their fiscal and monetary policies well enough to keep growth on track and at the same time keep goods and services relatively cheap for exporting, Rakesh Shah says. When strong confidence in a countrys economy is maintained, foreign investment continues which helps keep domestic inflation in check as the country produces more of its own goods and services and relies less on costly imports.

Weapons of mass devaluation

Historically, the weapons of mass devaluation used to drive currencies lower in the pursuit of competitive advantage, in the global growth race, have been both fiscal and monetary stimuli. However, when interest rates hit rock bottom and taxes can no longer rise, a new financial weapon is created: quantitative easing - the unleashing of a tidal wave of money into an economy with the promise that it will all be gathered back one day to pay back the debt, Rakesh Shah notes. Except just like a tsunami, no one knows where the water will hit first and what will be the long-term impact. The hole dug by quantitative easing may be so deep, that it may never be possible to rise back up to the surface again, he adds. The US announced unlimited QE3 and this set a new paradigm in the war. What comes after unlimited, super unlimited? They are basically saying expect rates to be at rock bottom for a long time, so please dont buy any US currency as your yield will be extremely low. Therefore, expect little change in US short-term rates over the next few years. Other global FX power players include the Euro, tied together with the British Pound - the fate of great Britain being closely intertwined with that of the Eurozone - followed by the Yen, Australian Dollar, Swiss Franc, Brazilian Real, Renminbi, as well as the Canadian Dollar and a host of minor and exotic currencies.

Trading perspective

Current Market Scenarios

In the medium term, there will likely be more volatility and large-scale shifts in currency values, especially within so-called commodity economies, Rakesh Shah believes. It is therefore important to track every movement seen on a relative basis when major economic announcements are made.

Brazil
The currency wars term was coined by Brazils Finance Minister, guido Mantega in 2010, to alert the world to the dangers of competitive devaluation. Lets see why. Brazil has had a roller coaster ride with its currency over the last decade. The country has relied on using currency controls and fiscal policy on imports and exports in the last few years to stem speculation in the Brazilian Real. Letting go of some of these strings in the past has caused some predictable volatility in the currency. For traders, the short term trend is your friend has been an important adage here. Since the second quarter of 2012, Brazil has achieved some success in influencing its currency, which has devalued by an average of over 10% between Q2 and Q3, 2012.

USA vs China
In the US, the devaluation of the Dollar to help the countrys trade deficit has a real impact on the growth and job situation. It does play an important part in the domestic policy even if it is not explicitly discussed. If we cut directly to the central battlefield in the currency wars, China has been the elephant in the battle. Recent data suggests that the Chinese central bank will once again change its stance on the pace of devaluation in the Dollar-Renminbi rate, even if it is already at a limited pace, Rakesh Shah notes.

US Dollar/Chinese Renminbi (Spot) Daily chart, including Dual Simple Moving Average and Fibonacci Retracements.

Well-positioned Nations
Measuring the degree of strength in currency power in the battle involves calculating the growth of foreign currency reserves and the growth of the current account surplus for each country. At the top of this group we can place Singapore, Japan Thailand and Malaysia from the Far East. Commodity-rich exporters are natural beneficiaries with their high levels of exports and many gulf States in the Middle East meet these criteria. Here we can see how the Thai Baht appreciated in the last four months during the same period in which the Dollar devalued against the Euro. The Thai Baht also exhibited some nice technical patterns.

US Dollar/Thai Baht (Spot) Weekly chart including Dual Simple Moving Average and Fibonacci Retracement.

Further afield we just have to think of oil rich countries to complete the list. Looking at Norway, an oil exporter, we can see the currency has consistently trended strongly against the Euro in the last few years. How long this will continue will depend on the demand and pricing of oil and the ability of the government accrue current account surpluses against domestic costs and expenditure. Knowledge of this information is the first step in forming an FX strategy, Rakesh Shah explains.

Euro/Norwegian Krone (Spot) monthly candlestick chart with line applied to indicate trend direction.

Switzerland: a special case

A major issue on the minds of FX traders worldwide is the Swiss intervention in the Euro/ Swiss Franc market after the Swiss National Bank (SNB) stepped in to prevent the currency falling below the 1.20 level. With the ability to print an infinite number of Francs, the SNB is in a strong position to defend against the appreciation of its currency, Rakesh points out. In some ways this creates an unnatural barrier where the currency does not move beyond a certain point, even though economic factors and relative pricing in other currency pairs would suggest a lower exchange rate. For many traders this creates a unique situation each week where the currency range is clearly held at the lower level by the SNB. But as with everything in financial markets, there is no free lunch. There is the story of the old man that runs across the road to pick up pennies he dropped, in front of an on-coming bus. What can seem like a logical situation in terms of risk and reward can get very messy when strategies go wrong. One must learn the moral of the story: dont run in front of buses without knowing the risks.

Euro/Swiss Franc (Spot) Weekly candlestick chart displaying Central Bank intervention in EURCHF during 2012.

Historically, the danger lies in exceptional events, where one day, you may risk a total wipe-out if youre on the wrong side. We have seen this in the past when george Soros battled against the Bank of England that was trying to keep the sterling in the ERM on Black Wednesday (16th September 1992) and in this case he won. Betting a central bank has deep enough pockets to always win, in any short term situation, does not always work out for a trader.

Conclusion
In real terms even if the currency is not devalued, in respect to the health of the economy, the true test lies in the effects of inflation and whether the currency retains its purchasing power. So in the long-term, if we use an example of Brazil, although the exchange rate may be the same as it was four months ago, in real terms with inflation, those Brazilian Reals are depreciating away in value as it takes more reals to buy the same loaf of bread or bag of rice. Sadly the net losers in currency war for Brazil are its own people, who have less buying power with their currency for the foreign imports they love so much. Just like in any other war, for any major economy in the competing currency battle, both sides will suffer grave losses if the economic policies in the fight tip the whole world into a massive slowdown and with another major recession for everyone, he warns.

List of instruments available to trade the exotics

EXOTICS INDEX

USD/Mexican Peso (Spot) Daily candlestick chart with Dual Simple Moving Average and Fibonacci retracements applied.

THE TRADING STATISTICS FOR USD MXN 2012 High: 14.59 2012 Low: 12.54 Key Support: 12.66 Key Resistance: 13.43 Placement in 2012 high to low Fibonacci range: Inside the 0 to 23.6 range Dead Cross or Golden Cross: Dead cross on 29 Aug 2012

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10 Rules for practical trading strategies

Trading the markets, following the trends and managing the risk
Rakesh Shah
10 rules for pratical trading strategies
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Trading the markets, following the trends and managing the risks
FX Trader and Head of Saxo Academy Rakesh Shah looks at strategies and the practicality of trading the currency markets. Rakeshs 10 Rules for practical trading application:

1.

AUTOMATING FILTERS FOR HIGHER QUALITY STRATEGY COMPOSITION Nothing beats market experience. Why? The markets are dynamic, each day presents a new set of opportunities and every situation needs to be evaluated in the perspective of the bigger picture within which it sits. E.g. EUR/USD can be trading at 1.30 on Monday and on Wednesday at the same key support or resistance level. Dont be fooled into thinking that the trade dynamics on both days will be the same. If you are a discretionary trader, you will need to adjust your trading analysis to take into account all the new data, economic factors and related instrument prices (e.g. other cross currencies in the case of the Euro). Map out all the outcomes from given situations to allow you to execute faster. Keep an eye on the trading calendar; this is one of the most useful tools for the experienced trader. If you are a systematic trader, then you will still need to check (i.e. have filters) that ensure the risk, exit targets and volatility still match your strategy. get busy analysing and using demo account for trading new ideas as soon as is possible to build up your trading experience.

2.

AUTOMATED STRATEGY EVALUATION AND INPUT Become an expert with your platform and the analysis available. The platform is your vehicle for getting in and out of the markets. It does not matter if you are a Fernando Alonso or a Jeremy Clarkson, if you never get out of first gear, you will be missing out on all the power of driving a car. Winning the race is that much harder. Learn all the functionality and tricks that the platform gives you to get an edge. Regular tutorials are available at the educational section. Sometimes finding inspiration for trading ideas is challenging. The TradeMaker facility allows you to investigate a strategy to see if it suits your trading style and risk. It is important to remember that all decisions must be your own.

Trade Maker: Idea generator: EURJPY trade based on technical and market momentum.

3.

ESTABLISH YOUR WHAT IF CRITERIA TO MATCH THE TRADING OPPORTUNITIES Master your techniques and your reaction to the market. How have you traded key strategic numbers, such as the non-farm payrolls? What happens when the numbers are just marginally different to consensus estimates? Having a second view from which to confirm your ideas is invaluable. You can deploy your strategy immediately. But far too often, I see traders that have not mastered their tools and strategy, creating confusion when decision need to be made quickly. To do this, spend some to figure out all the what ifs before you put the trade on. What if the market opens up strongly up or down? What if the market trades sideways for longer than expected? What if there is a surprise news announcement? Trading needs to be relaxed and the secret to this is getting prepared for all the possible outcomes upfront. Keeping up to date with so much news is a challenge and Trading Floor can support you to do that with concise and incisive analysis in the key topics that are affecting the market both short and long term. Keeping up to date is easier with an analysis dashboard (picture 1), and specialist streams for specific currency pairs (picture 2).

Picture 1: Trader Dashboard

Picture 2: Expert dashboard for instant analysis.

4.

ENSURE VOLATILITY MATCHES EXPECTED RETURNS ON YOUR STRATEGY Here is a specific technique and strategy for managing risk in a strongly trending market. Currency markets tend to spend time either in consolidation zones before breaking out or in trending zones (where they are making either new lows or highs to define a new range). Dont get caught out by trading inbetween the two concepts. Having clarity on what you are doing will help when managing outcomes. Switching between 2 strategies just causes confusion in most cases. To help you see more clearly zones a useful technique is to use Keltner Channels. These are similar to Bollinger Bands, but instead of using standard deviation to set bands, Keltner Channels use Average True Range above and below an exponential moving average.

5.

RECYCLE CAPITAL AS QUICKLY AS IS POSSIBLE TO ENSURE A HIGHER ROI IN POSITIVE EXPECTANCY ENVIRONMENTS If you are trading a range and the market moves outside of the range, dont wait for the price to move back into the range, you should consider to cut your losses immediately. Take a fresh look at the market and decide if this is the place you want to put on a fresh trade again. Recalculate your strategy entry, stop and exit points. Treat it as a fresh trade. By taking a fresh look, it may become clear that this is not the best entry point for your strategy. See the chart to see how ranges are formed at horizontal levels or in channels.

Euro/US Dollar (Spot) hourly chart including applied trend lines.

6.

AUTOMATE DOUBLE OUTCOME STRATEGIES WITH ADVANCED ORDERS What happens if you are in the middle of a consolidation range and are forecasting on the market moving higher, but you are not sure if this will happen now or the market will move to the bottom of the range first, before turning and then beginning a new leg higher (i.e. you are a market bull and your view is that, after a period of tight consolidation, you want to be on the next move higher?). You have two choices, wait for the breakout to happen or wait to buy at the support level. How do you practically manage that? Will you wait and manually enter the trade by setting up a price alert by email or on the system. Or will you use the platform to do the hard work for you by automating part of the process? The choice is yours and one potential method is to use the platform to set up 2 mutually exclusive trades. To do this use an OCO order: One cancels other

7.

DEPLOY MARKET RISK TO WORK IN YOUR FAVOUR IN TERMS OF VOLATILITY WITH FIXED STOP LOSSES IN TRADING Trading volatility in the forex markets is possible using an online platform. One method of capturing volatility in the forex market is to use forex options. There are a number of strategies that can be deployed here. One of the first steps I like to look at, when formulating an FX options strategy, is to understand the practicalities of traded market and the dynamics of the instrument that will affect the strategy. To do this you need to understand volatility and the time value and how these will impact the price of the option. (This will be covered in more detail in some upcoming events, books and tutorials). Analysis of the subtle differences on how different currency pairs behave with volatility and the liquidity available at different times of the day will pay a factor in your decision-making. Next you must consider how far you expect a currency pair to run on breaking a key support or resistance level. Factor into this, any viewpoint that you have and when they expect to happen, e.g. What are the implications of central bank intervention in your market, non farm payrolls etc. If you trade a vanilla call (see picture 1) or put, you can place a delta hedge immediately after the trade. The delta hedge is automatically calculated and presented in a dealing ticket for execution (see picture 2)

Picture 2

Picture 1

8.

MAXIMISE RISK TO REWARD WITH OPTIONS The important point to note here is that long options or fully paid up front options allow you to fix your risk at the outset of the trade. The maximum you can lose is the premium paid. For this very reason, they can be very useful for traders that have trouble managing risk on a trade-by-trade level. Having the ability to execute them directly over a platform help to make trading them practical. And also getting live mark to market prices will help you to keep on top of the profit and loss position in your overall portfolio. getting experience in trading takes time and knowledge, the more action you take, the quicker you move up the learning curve.

1,000,000 Euro/US Dollar, Vanilla Options trade (Strike 1.2850), shown on Options Board (including further information such as the greeks).

Euro/US Dollar 1,000,000 Buy Stop Order at 1.30000 (OCO Buy Limit Order from 1.28000)

9.

REFERENCE TECHNICAL LEVELS WITH MORE THAN ONE SOURCE TO IMPROVE YOUR ANALYSIS The way to do this is condiser using a demo account and run a check on whether you practice what you plan. Discipline is built upon practice and in the world of trading, practice makes perfect. Practice analysing markets and check your analysis agrees with other traders. Assisted analysis is available. If you want to see the technical levels for any currency or equity market, the technical analysis tool will give you a number of levels and support and resistance lines, using a predefined program to plot them on charts. They are electronically created, so are available 24 hours a day.

Saxo Tecnical Analysis tool.

10.

FOR THOSE MOVING FROM EQUITIES TO FOREX, ESTABLISH THE DIFFERENCES IN THE TRADING CYCLE Take the time to learn what works and what does not when trying something new. There are a thousand different errors a trader can make, ranging from bad timing (getting in a long time after your entry signal occurred), to bad risk management (trading in amounts that are either too big or too small for your account). Practice on a demo account to get any new strategy under your belt and then run a test portfolio to make sure you, as a person with a unique and individual trading style, have the personality to manage the complete trading cycle without any hesitation or conflict.

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This material has been provided for information and educational purposes only and should not considered as an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy. Any opinion or statement expressed are the views of the author(s) and may not necessarily represent those of Saxo Capital Markets UK Limited (SCML). SCML makes no representation or warranty, and assumes no liability, for the accuracy or completeness of the information provided herein. In providing this material SCML, or any affiliated company has not taken into account any particular recipients investment objectives, special investment goals, financial situation, specific needs or demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Capital Markets UK Limited assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation. Trading in margined products such as Foreign Exchange or other derivative products carry a high level of risk and it is possible to incur losses that exceed your initial investment. If you are unsure of the risks involved you should seek independent investment advice. The contents of these materials refer to past performance and past performance is not a reliable indicator of future performance and will not necessarily be repeated in the future. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.

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