Strategies, analysis, and news for FX traders

March 2010
Volume 7, No. 3

ASIAN CURRENCIES:
Beyond the yen and yuan p. 8

WEEKLY SWING SOUTH

strategy p. 20 AFRICAN RAND:
A gold story or
an interest-rate
THREE POTENTIAL story? p. 24
forex catalysts
p. 14
FOREX TRADERS
COMMENT
on proposed
leverage limit
p. 28
 CONTENTS

Advanced Strategies
Cry, the beloved currency . . . . . . . . . . . .24
Analysis reveals a surprising source of
momentum in the South African rand.
By Howard L. Simons

Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Forex News

Forex traders voice their opinions . . . . .28
Global Markets Retail traders share their displeasure
Other Asian tigers . . . . . . . . . . . . . . . . . . . .8 regarding the CFTC’s proposed
China and Japan grab the headlines, but other cap on leverage.
Asian economies are percolating, and their
currencies are reflecting that strength. continued on p. 4

By Currency Trader Staff

On the Money
Unhappy surprises and forex
market perversity . . . . . . . . . . . . . . . . . . .14
What could rock the forex market in coming
months?
By Barbara Rockefeller

Trading Strategies
Top pattern feeds bottom formation . . . .20
Extending a short-side trade setup leads to
interesting developments on the long side of the
market.
By Currency Trader Staff

2 March 2010 • CURRENCY TRADER

 CONTENTS

Currency Futures Snapshot . . . . . . . .30

International Markets . . . . . . . . . . . . . .32

Numbers from the global forex, stock,
and interest-rate markets.

Global Economic Calendar . . . . . . . . . .35

Important dates for currency traders.

New products & services . . . . . . . . . . .36

Events . . . . . . . . . . . . . . . . . . . . . . . . . .36
Conferences, seminars, and other events.
Forex Journal . . . . . . . . . . . . . . . . . . . . .38
Key concepts . . . . . . . . . . . . . . . . . . . . .37 Tradus Interruptus.

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4 March 2010 • CURRENCY TRADER

 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

Contributing writer: Chris Peters

cpeters@currencytradermag.com

Contributing editor:
Howard Simons

Contributing writers:  Howard Simons is president of

Barbara Rockefeller, Marc Chandler
Rosewood Trading Inc. and a strategist for
Editorial assistant and Bianco Research. He writes and speaks fre-
webmaster: Kesha Green
quently on a wide range of economic and
kgreen@currencytradermag.com
financial market issues.
Art director: Laura Coyle
lcoyle@currencytradermag.com

President: Phil Dorman

pdorman@currencytradermag.com  Barbara Rockefeller (www.rts-forex.com) is an
international economist with a focus on foreign exchange.
Publisher,
Ad sales East Coast and Midwest: She has worked as a forecaster, trader, and consultant at
Bob Dorman Citibank and other financial institutions, and currently
bdorman@currencytradermag.com
publishes two daily reports on foreign exchange.
Ad sales Rockefeller is the author of Technical Analysis for Dummies
West Coast and Southwest only:
Allison Chee (For Dummies, 2004), 24/7 Trading Around the Clock,
achee@currencytradermag.com Around the World (John Wiley & Sons, 2000), The Global

Classified ad sales: Mark Seger Trader (John Wiley & Sons, 2001), and How to Invest
seger@currencytradermag.com Internationally, published in Japan in 1999. A book tenta-

Volume 7, Issue 3. Currency Trader is published monthly by TechInfo, Inc.,

tively titled How to Trade FX is in the works. Rockefeller is
161 N. Clark St., Suite 4915, Chicago, IL 60601. Copyright © 2010 TechInfo,
Inc. All rights reserved. Information in this publication may not be stored or on the board of directors of a large European hedge fund.
reproduced in any form without written permission from the publisher.

The information in Currency Trader magazine is intended for educational pur-

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
to do their own research and testing to determine the validity of a trading idea.
Trading and investing carry a high level of risk. Past performance does not
guarantee future results.

CURRENCY TRADER • March 2010 5

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 GLOBAL MARKETS
Other Asian tigers
Out of the yen-yuan spotlight,
there have been more than a few notable currency developments in Asia.
BY CURRENCY TRADER STAFF
D
espite recent U.S. and (to a lesser extent) Eurozone
stabilization, the U.S. is still struggling to establish
sustainable growth and the Eurozone is plagued
by fiscal problems that could take years to overcome, mak-
ing Asia the obvious engine of global economic recovery
and growth.
Regardless of its own issues, Asia has clearly distanced
itself from the pack in terms of rebounding from world-
wide recession. In fact, non-Japan Asia escaped deep reces-
sion, with some individual countries, such as South Korea,
avoiding the technical definition of a recession altogether.
FIGURE 1 — KOREA: DOLLAR-WON
The USD/KRW pair’s extended downtrend since March 2009 reflects
the renewed strength of the Korean won, which suffered during the
2008 financial crisis. The pair has yet to return to its pre-crisis levels
around 1000, however.
Source: ADVFN.com
8 March 2010 • CURRENCY TRADER
“Asia was a bystander,” says Paul Sheard, global chief
economist at Nomura Sheard. “2008 was somebody else’s
crisis. Asia, ex-Japan, is the star performer in the globe.”
Although Asian analysis typically centers around China
and Japan, big moves in the currency arena have occurred
away from the tethered yuan, which remains in a managed
float against a basket of currencies dominated by the U.S.
dollar, and the moribund yen. Several Asian currencies
have posted blistering gains in recent months, and some
market watchers say the appreciation is likely to continue.
It is impossible to talk about Asia without mentioning
China, but in addition to China’s stellar growth
outlook, other countries are putting up solid
economic numbers as well. Credit Suisse fore-
casts 9.6 percent gross domestic product (GDP)
growth in China for 2010, but also sees a 7.9-
percent growth rate for India, 6 percent for
Singapore, 5.7 percent for Indonesia, 5.2 per-
cent for Korea, 4.8 percent for Taiwan, and 4.6
percent for Hong Kong. Credit Suisse econo-
mists forecast overall real GDP growth of 8 per-
cent for the non-Japan Asian region.
That compares to the firm’s 2010 forecasts of
3.6 percent GDP growth in the U.S., 1.7 percent
in Japan, 1.5 percent for the Eurozone, and 1.5
percent for the UK.
Recovery divergence
and currency moves
One of the more interesting facets of the global
economy’s ongoing recovery is the divergence
between developed nations and emerging-
market countries, the former burdened with
having to extricate themselves from some of
the financial excesses that precipitated the meltdown. In Taiwanese dollar (TWD) rallied 10.2 percent, and the Thai
short, the bigger they come, the harder they fall. baht (THB) gained 10.01 percent.
“If you look at 2010, it’s a shallow recovery in the devel-
oped world because of the aftermath of deleveraging,” Korea fights back
Sheard says. He forecasts a paltry 2.2-percent GDP rate for At the height of the financial crisis in 2008, global money
developed nations vs. a 6.7-percent continued on p. 10
pace for emerging-market nations.
From March 2009 (the major turning
point for recovery across financial
markets) through the end of January
2010 when global equity gains paused,
several Asian currencies surged
sharply higher.

“We’ve seen
remarkable, unexpected
strength in emerging
Asian currencies. They
have, on a fundamental
basis, been viewed
favorably.”
—Michael Woolfolk,
managing director at BNY Mellon

“We’ve seen remarkable, unexpect-

ed strength in emerging Asian curren-
cies,” says Michael Woolfolk, manag-
ing director at BNY Mellon. “They
have, on a fundamental basis, been
viewed favorably.”
The South Korean won (KRW)
chalked up sizzling gains of 38.1 per-
cent vs. the U.S. dollar, while the
Indonesian rupiah (IDR) jumped 29.07
percent, and the Indian rupee (INR)
rallied 12.8 percent. Not far behind,
the Singapore dollar (SGD) gained
10.65 percent, the Malaysian Ringgit
(MYR) climbed 10.38 percent, the

CURRENCY TRADER • March 2010 9

 GLOBAL MARKETS
FIGURE 2 — INDONESIA: DOLLAR-RUPIAH
The Indonesian rupiah gained nearly 30 percent vs. the dollar over
the past year, and the USD/IDR pair was trading near its 2010 low in
early March.
Source: ADVFN.com
The 1997 Asian Crisis
One reason Asia might have held up so well during the 2008-2009
financial meltdown is the region had its own debacle a decade earlier
— the Asian Crisis of 1997-1998.
“When the crisis hit in 1997, this area was battered horribly,” says
James Pressler, international economist at Northern Trust Company.
But, he adds, in the wake of the crisis “a number of the main players —
Malaysia, Indonesia, and Korea — went on massive reform drives that
[helped stabilize] their economies.”
Nomura’s Sheard agrees.
“As a result [of the crisis], they had done a lot of things to get their
house in order,” he says, noting that a number of countries were able
to shift from having a current account deficit to a current account sur-
plus.
One of the key developments of the 1997-98 Asian crisis was a mas-
sive build-up of foreign exchange reserves by the region’s central
banks. These reserves “are the central bank’s extra money in the sys-
tem. If there is a crisis situation, they can use this money to defend their
currencies,” Pressler explains.
Look at Taiwan, for example.
“During the 1997 crisis, Taiwan had $85 billion in reserves,” Pressler
says. “It ended 2009 with $348.2 billion of foreign reserves. South
Korea had $20.4 billion in reserves in 1997 and it ended 2009 with
$269.9 billion — 10 times as much. It’s a significant cushion, which
allows you to control your currency’s destiny.”
Sheard estimates total Asian central bank foreign reserves at about
$4 to 4.5 trillion, with approximately $2 trillion of that in China’s coffers.
10
managers pulled money out of “risk trades”
and many emerging markets. As a result, some
Asian currencies were hit hard early in the cri-
sis. Korea offers a good illustration of how
things played out.
“When the crisis first hit, a lot of people bet
Korea would fail, that it would end up having a
liquidity crisis,” says James Pressler, interna-
tional economist at Northern Trust Company.
“At the end of 2008, a lot of speculators went
against the Korean won. It went down to almost
1500 per U.S. dollar (Figure 1). That fight went
on into the first quarter of 2009. It depreciated
well below its fundamentals.
“But by February and March, they realized
they had called it wrong and the won appreci-
ated throughout the rest of 2009.”
Alaistair Chan, associate economist at
Moody’s Economy.com agrees.
“From the beginning of 2008 to its trough in
March 2009, the won fell 67 percent against the
dollar, so the gains in the won since then are
simply a rebound from those prior losses,” he
says. “The won is not closely tied to [the
Chinese or Japanese currencies], although poli-
cymakers closely watch the won’s value with
respect to both,” he says. “But they are most
concerned about the won with respect to the
dollar, given that many Korean multinationals
continue to seek funding in dollars and receive
export revenues in that currency.”
In weighing the won’s prospects, Chan notes,
“Recovery in the Korean economy and
increased risk appetite will put upward pres-
sure on the won, but the pace of the gains is
likely to slow. To increase export competitive-
ness, policymakers are willing to allow the cur-
rency to remain relatively cheap. The govern-
ment is putting pressure on the Bank of Korea
to keep interest rates low, which will reduce
gains.”
As is the case in many Asian nations, exports
play a significant role in Korea’s economy and
in the region’s dramatic growth rates. A key
influence, according to Sheard, is rising per
capita incomes.
“People are moving from poverty into better
lifestyles,” he says. “There are 1.3 billion people
in China and 1.2 billion people in India. These
March 2010 • CURRENCY TRADER
people are becoming wealthier.” Serebriakov notes the won had strengthened as high as
Although Chan notes the value of exports accounted for 1000 per U.S. dollar in June 2008. He also expects a tighter
around 45 percent of Korean GDP in 2009, he explains this central bank monetary policy in the first half of 2010 to sup-
figure “overstates the export dependence of the economy, port the won.
as some of the exports were re-exports of imported compo- continued on p. 12
nents and commodities. Nevertheless,
Korea’s economy is highly dependent
on exports.”
In general, South Korea has a more
sophisticated manufacturing base
than, say, China. South Korea manu-
factures high-end information com-
munications products, semi-conduc-
tors, and computer parts.
“South Korea is a standout after
Japan in terms of manufacturing
prowess,” says Brian Dolan, chief cur-
rency strategist at Forex.com.
Pressler says South Korea grew at a
roughly 0.5 percent GDP pace in 2009,
but he forecasts 4.9 percent growth for
2010. Moody’s Economy.com has an
even a more bullish outlook.
“Our GDP forecast is for a robust
6.6-percent growth rate this year —
significantly higher than the 0.2-per-
cent growth recorded in 2009,” Chan
says. “A large part of the gain is due to
an inventory bounce from a year ago;
year-on-year growth in the first quar-
ter is likely to be higher than 7 per-
cent.”
The South Korean won was trading
around 1150 in early March. Barclay’s
analysts target a strengthening move
vs. the U.S. dollar to 1140 in three
months and 1125 in six months.
Wells Fargo has a 12-month target
of 1050.
“While this appreciation has been
impressive, it’s still short of the highs
seen in 2008,” says Wells Fargo cur-
rency strategist Vassili Serebriakov of
the won’s recent gains. “There’s still
some upside scope, even if you look at
where it was a few years ago.”
Before the onslaught of the global
financial crisis began to reverberate
throughout emerging markets,

CURRENCY TRADER • March 2010 11

 GLOBAL MARKETS

“Will the Chinese revalue, for example, 5 percent higher

Indonesia and then let it float again?” he says. “A one-off revaluation
Shifting to Indonesia, Pressler forecasts 5.5-percent GDP creates an expectation it might do that again in the future.
growth in 2010. The country avoided a technical recession We think China probably will let it start to appreciate more.
(two consecutive quarters of negative GDP growth) in 2008, “This will be a major event for the forex markets, proba-
and in 2009 it actually grew at a 4.6-percent pace. bly in the second quarter. We see the renminbi at 6.45 by
Pressler explains Indonesia is a large commodity pro- year-end.”
ducer, with the majority of its exports heading to China. It’s He says Asia is looking ahead — China put huge domes-
a major supplier of agricultural “softs” (coffee, sugar, tic infrastructure programs in place as part of its fiscal stim-
cocoa), as well as palm oil and rubber. Indonesia also has ulus during the global financial crisis.
crude oil reserves, but Pressler notes most of it is used “It is building domestic infrastructure for a modernizing
domestically.
Barclay’s analysts forecast a three-month
FIGURE 3 — THE CHINA FACTOR
IDR target of 9200, and a six-month target of
9000. The currency was trading around 9320 in The Chinese yuan has flatlined since its last bout of appreciation vs.
the U.S. dollar in mid-2008. Chinese authorities clamped down on the
early March (Figure 2). currency’s float as the financial crisis deepened.
“The IDR has outperformed most of its
peers in the course of 2009 after the severe sell-
off in 2008,” says Stephen Webster, director of
UK-based TopEcon consulting. “On an
indexed basis, the sharp correction was bol-
stered by the relatively stronger fiscal position
— compared to say, the Philippines — and
positive ratings action.”

The China factor

Over the same period, the Chinese yuan (ren-
minbi) gained 0.27 percent vs. the dollar
(Figure 3). Although Chinese authorities never
formally announced an end to the gradual
appreciation of the yuan vs. the dollar, in the
heat of the 2008 financial crisis, China clamped Source: ADVFN.com
down again to stimulate growth at home. As a
result, one of the key questions for currency traders this economy to serve the tens of millions of people that are
year is, when will the Chinese government resume its poli- coming off the farms,” Sheard says. “The future of Asia is
cy of gradual currency appreciation? to keep this process going and to rely on domestic
In early March, the Chinese yuan was trading around demand.”
6.83. Many eyes in the forex world will remain focused on Although it’s true the economy is linked and internation-
China in 2010, with expectations authorities will resume al, few seem to be willing to bet against Asia relative to the
their policy of currency appreciation this year. rest of the globe.
“We see mid-2010,” Serebriakov says. “We think a “If you’re an investor sitting in a developing country
stronger [Chinese] currency will be aimed at preventing the wondering where should I put my money, you are going to
economy from overheating.” want to put money into Asia,” Sheard says. “For investors
Serebriakov also notes recent gains in the U.S. dollar may willing to take a little risk, Asia is the high growth region.
make yuan appreciation more palatable from a political These are strongly growing economies with rising income
standpoint. levels. It’s not surprising these currencies have appreciated.
Sheard says there’s debate about the size and type of We would not expect that trend to be interrupted over the
revaluation that might occur. medium to longer-term.”

12 March 2010 • CURRENCY TRADER

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 ON THE MONEY

Unhappy surprises
and forex market perversity
Three scenarios threaten to upset the FX applecart.

BY BARBARA ROCKEFELLER

U
nder normal trading conditions, FX market on schedule, with purchases of mortgage-backed securities
players must track a complex web of data, last in line to be ended on March 31, 2010. Step 3 was
news, and analysis. Floating over it all is the emphasis on the Fed using payment of interest on reserves
one big thing that can override all the careful as the key tool rather than changing the Fed funds rate, as
analysis, and even the technicals — an “institutional sur- communicated in the Feb. 10 statement.
prise.” Today the market is chewing its fingernails over Step 4 was the increase in the discount rate one week
three likely institutional surprises. after the Feb. 10 announcement. This is a liquidity manage-
You’d think figuring out how the forex market will ment measure rather than an exercise of monetary policy,
respond to any one of them would be fairly easy, but you’d but never mind. The discount rate hike implicitly means the
be wrong. Sometimes the market can be perverse, as when Fed must believe the economy and banking sector are
a currency rises on bad news because worse news was fore- robust. That the hike came right after the big banks report-
cast. ed profits (and bonuses) at or near 2007 levels is probably
not coincidental, but secondary.
No. 1: U.S. exit plan The exit plan looked to be on track for a real hike — of the
In a Feb. 10 statement, Fed chairman Ben Bernanke Fed funds rate — by year-end. But in the semi-annual
announced the U.S. exit plan, which consists chiefly of halt- Congressional testimony in the last week of February,
ing the purchase of securities to beef up market liquidity. Bernanke said jobs gains are going to come slowly. The eco-
(And some Fed policy board members would be happy to continued on p. 16
go one step further and sell the assets to
get them off the fat Fed balance sheet.) It FIGURE 1 — STERLING
also entails paying interest on bank
Talk that the Bank of England might have to return to quantitative easing
reserves held at the Fed to regulate the
measures sent the British pound tumbling. Rumors of similar measures in the
supply of credit, an adjunct to the
U.S. would likely have the same effect on the dollar.
reverse repo market and a more flexible
tool than the Fed funds rate.
To set the stage, remember that the
cyclical transition from loose policy and
special liquidity measures to a recovery
and tightening mode started with the
November 2009 employment report
released on Dec. 4. Job losses were small,
and have remained modest ever since.
Some market participants jumped to the
conclusion a rate hike could come as
early as June 2010. Everyone knows it
will be a long haul to recover the eight
million jobs lost in the Great Recession,
but everyone also thinks that when job
losses switch to job gains, the Fed will be
comfortable with considering tighten-
ing.
Step 2 was the Treasury announce-
ment that the alphabet soup of special
Source: Chart — Metastock; data — Reuters and eSignal
liquidity measures would be terminated

14 March 2010 • CURRENCY TRADER

 ADVERTISEMENT
Growth is the trend:
Five key reasons why we think the retail forex market will continue to grow in 2010
By Betsy Waters, Global Director, dbFX – Deutsche Bank’s online forex trading platform.
Growth. It’s not a word necessarily associated to the financial mar-
kets in recent times. However, when it comes to foreign exchange –
it’s a continuing key trend for 2010 and is a direct by-product of
improving access to the world’s largest 24 hours a day market.
dbFX spoke to a number of market participants at the recent
Traders Expo in New York, and found a general consensus of views
that the flow of new entrants to the market is primarily being driv-
en by a wave of equity traders looking to enhance their returns and
shifting their focus to forex.
Like many of my peers, I believe this growth in the retail market
will continue in 2010. The question is why, and the answer is five-
fold.
Firstly, for sophisticated investors who are looking to put a propor-
tion of their investments into a diversified asset class, forex offers
significant advantages, in particular because of its 24-hour liquidity,
tight spreads and easy and ready access.
Secondly, the fundamental principles of trading forex are similar to
those required for other asset classes. For example, active traders
who are following technical and fundamental analysis of the global
markets are well equipped to take a view on the direction of the
forex markets. These traders are able to diversify their investment
portfolios from traditional bond and equity assets to forex, thus
spreading their risk more effectively.
Thirdly, advances in technology are improving and enhancing the
client and trading experience – whether that be the use of stop-loss-
es or trailing stops. Clients can execute their trading plans using
combinations of orders to effectively manage their currency risk.
Sophisticated investors are increasingly wanting to make their own
financial and investment decisions and are demanding fair and
transparent pricing and access to the latest market research like that
which is provided on the dbFX.com platform
Fourthly, the continuing demand for algorithmic trading systems
will drive future growth. After accounting for less than one per
cent of trades in January 2009, algorithmic trades accounted for
25% of all dbFX’s trading volume by January 2010 and will contin-
ue to attract new entrants to forex markets (although they should
only be used to supplement trader’s existing trading / investment
strategy).
Lastly, the growth in popularity of Managed Account programmes
like those offered by dbFX are adding to the overall popularity of
forex markets. Managed Accounts are targeted at investors who
want to gain exposure to forex without actually having to trade
themselves – but still ensuring they have full access and control
over their capital.
All in all, retail FX has a bright future, and the case for long-term
and sustainable growth in retail FX is clear and compelling. The
key to taking advantage of this potential is to educate the financial
community on the benefits of this emerging asset class, and clearly
demonstrate how it can add diversification value to an investment
portfolio. 
 ON THE MONEY
FIGURE 2 — EURO RELATIVE STRENGTH

The Euro’s down move has not been particularly forceful; sentiment
nomic recovery is still fragile: capital spend- appeared to be diverging in late February.
ing and bank lending aren’t picking up.
Even though the Fed staff projects inflation
won’t rise to more than about 2.5 percent
this year and next, which means the Fed
probably won’t see a need to raise rates, to
have the Fed funds rate at zero to 0.25 per-
cent isn’t normal. Levels like that smack of
crisis; the Fed seeks normalization.
It’s unclear to what extent a growth
deficit that fails to reduce unemployment
will interfere with the Fed’s normalization
timetable. Actually, the Fed denies there is a
timetable, but the bank’s staff projections
are for recovery this year and next, if not at
a sizzling pace.
Here is the potential institutional sur-
prise: the Fed engages in a pause in nor-
malization, whether formally announced or
not. The market wouldn’t be happy. Once a
change is in the works, it needs to maintain
a certain momentum. The Fed’s pace so far
has actually been quite speedy as these Source: Chart — Metastock; data — Reuters and eSignal
things go, including one policy board mem-
ber dissenting at the late-January meeting to the language
“rates will remain low for a considerable period.” No. 2: Greek sovereign default
In the UK, the Bank of England (BOE) first filled up its The consensus is building that a Eurozone bailout of Greece
quota of £200 billion of quantitative easing and then would be bad for the Euro, and evicting Greece from the
stopped, but only a few weeks later BOE Governor Mervyn EMU, if necessary, would be good. The Maastricht Treaty
King said quantitative easing may have to be fired up again. principle is that you don’t need “sovereign” status to issue
And this in the context of inflation so high (over the 3-per- a currency if you have high fiscal standards and a good cen-
cent target maximum) that the governor had to write a let- tral bank. Bailing out Greece would water down the com-
ter to Alistair Darling, the Chancellor of the Exchequer (the mitment to the Maastricht principle and reduce its credibil-
British equivalent of Treasury Secretary), explaining what ity in world markets. Letting Greece sink or swim on its
the Bank is going to do about it. own merits is the only choice that leaves the Eurozone with
See what happened to the British pound as these events a chance at reserve currency status.
unfolded (Figure 1). The breakout under the confirmation There’s only one way the Eurozone can bail out Greece
line of the head-and-shoulders pattern occurred as King without losing reserve-currency aspirations: invent a new
mused out loud about possibly needing more quantitative kind of Euro-bond with an explicit pan-EMU guarantee.
easing. This would prove the Eurozone has the institutional inven-
If the Fed’s normalization process loses momentum, or if tiveness to compete with the U.S. As a practical matter, the
the Fed has to mimic the BOE and renew quantitative eas- EMU can’t hope to become the reserve currency until it has
ing measures, we should expect the dollar to face the same a bond market rivaling the U.S. bond market, anyway. The
consequences. The yield on the 10-year bond, which rose currently fragmented market for national bonds in Europe
from 3.20 percent in December to nearly 4 percent as of lacks depth, breadth, and variety.
early March, would retreat, removing dollar support. It’s unlikely the EMU members can devise a rescue
Unfortunately, the appearance of bad economic data casts scheme that keeps Greece from default and doesn’t arouse
doubt on the Fed’s ability to proceed. Americans are a political backlash among their own citizens. Time is too
famously impatient. While we may think an extended peri- short. Every day brings a new scandal or awful news. On
od of low rates should be favorable for equities, for exam- one day, the Athens stock market couldn’t open because
ple, the loss of confidence could have exactly the opposite protesters had blocked the door. Greece is suffering the
effect. We have been longing for an end to the inverse cor- indignity of having European Commission and IMF offi-
relation between oil prices and the dollar, but this is one set cials poring over its accounts and thinking up ways to cut
of circumstances when both could be going down at the spending and raise revenue — without regard for historical
same time. Be careful what you wish for. continued on p. 18

16 March 2010 • CURRENCY TRADER

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 ON THE MONEY

FIGURE 3 — S&P 500 VS. SHANGHAI COMPOSITE AND BRAZIL BOVESPA

and cultural norms (such as the When the U.S. stock market dipped in July 2009, China followed about six
biggest defense budget per capita in weeks later. The Chinese correction took the Shanghai Composite below its
the EMU). August high, a level it failed to recapture, while the S&P continued to make
The failure of an EMU member and higher highs off the March 2009 low.
possible change in membership status
should have sent the Euro to even
lower lows. But while the Euro’s occa-
sional corrective bounces are unim-
pressive, the strength of the down
move itself is actually weak. The top
window in Figure 2 contains the rela-
tive strength index (RSI) with a 21-day
weighted moving average, and indi-
cates the Euro is rising off the oversold
level. The RSI is an indicator with a
modicum of predictive value. Like all
indicators, it uses past prices, but by
showing the shifting relationship of
the high or low to the close, it also
reflects sentiment. In this case, the
Euro is still falling but sentiment is
diverging — a danger sign.
What does it mean if a steady diet of
bad news is failing to exert downward Source: Chart — Metastock; data — Reuters and eSignal
pressure? One idea is the news may be
bad for Greece but not for the EMU — precisely because the But beware of something in Western talk about emerging
market is now expecting Greece to be expelled from the markets in general and China in particular — the so-called
EMU. “leadership” role of their stock markets. While both
An alternative idea is that Greece is able to issue its Chinese and Brazilian stock markets bottomed about four
expected bonds and the market is willing to buy them, even months before the S&P, and the Bovespa has outpaced both
if at a horribly high rate. In the last week of February, Greek other indices since then, the Chinese index is highly corre-
bonds needed to yield almost double the rate of German lated with the U.S. index. You can’t really say China has
Bunds, or nearly 7 percent. Well, okay, the rate is the rate. stock market “leadership.” In fact, the U.S. dipped last July
Both outcomes are Euro-friendly. In fact, the outcome that is and China followed about six weeks later (Figure 3). The
Euro-unfriendly is trying to muddle through and prolong- Chinese market correction took the Shanghai Composite
ing the process so speculators get a chance to spread the under its August high, a level it hasn’t recaptured, whereas
contagion to Spain and other struggling EMU countries. the S&P made a continuous series of higher highs off the
March 2009 low. By that measure, the S&P is ahead of the
No. 3: Emerging market “leadership” Shanghai. In what way is it useful to consider that either
While the developed world was undergoing the financial Brazil or China “leads” the U.S.?
and economic crisis, some emerging markets came out of it The talk of leadership is fanciful, perhaps arising from
pretty well, whether insulated by relative isolation or fast some joy over the West getting a deserved comeuppance or
action to create stimulus. maybe assertion of the big-picture theme that China will
China is the prime example. After an early stumble, the take over from the U.S. as world leader, just as the U.S. took
economy came roaring back, with gigantic capital inflows that role from the UK. But this prematurely dismisses the
into real estate, but also high industrial production and U.S. When the U.S. sneezes, the world still catches cold, and
exports. The Peoples’ Bank tightened reserve requirements that includes China.
and took other actions to cool things down. China went on We mustn’t confuse economic might, which Asia certain-
holiday the last week of February to celebrate the Chinese ly does have, with financial power. Asia’s economic power
New Year, and the first week of March is the annual party has grown wildly, but Asian stock markets account for
congress, which sometimes delivers fresh news. What the about 34 percent of world market capitalization, only a hair
world wants is a bigger currency revaluation than the 22 over the U.S. (33 percent) and Europe (27 percent, according
percent that has occurred since the one-time action in July to The Economist). Asian central banks may hold about two-
2005; we may get a better sense of whether that’s realistic or thirds of world reserves, but reserves are only about 5 per-
wishful thinking during March. cent of total world assets — and the majority of world

18 March 2010 • CURRENCY TRADER


assets are held by private owners in
the West. Financial power may follow
economic power, but has not done so
yet in the case of emerging markets
and specifically in the case of China.
To the extent Brazil depends on
China, Brazil can catch the American
flu, too. Who, exactly, benefits more
from the big trade deficit the U.S. car-
ries with China? The U.S. gets materi-
al goods and the Chinese get paper
that promises an income stream. If
the U.S. economy stays sluggish, it
can still print paper but China will be
hard-pressed to peddle goods for
which demand is evaporating.
Last year, there were many
episodes of the Chinese complaining
about the too-weak dollar and
demanding the world create some
other place to stash their savings. If
this was not a mere ploy, it was child-
ish. Maybe it was both. Regardless,
the U.S. can’t expect the Chinese to
remain silent about current account
imbalances, the level of the dollar,
and the overall relationship of China
to the rest of the world.
China is the perpetual potential
surprise. In the past, this has always
been detrimental to the dollar. Notice
that the Chinese are quiet when the
dollar is rising — they kick it only
when it’s down. Something is going
to happen. Because little happens
when the dollar is on the upswing,
we must deduce from recent experi-
ence it’s most likely to happen when
the dollar is already down for some
other reason.
The strong-dollar scenario seems
justified on the basis of the relative
strength of the U.S. economy, rising
bond yields and yield curves, and
institutional excellence (relative to
other countries) in the form of the
central bank.
Nonetheless, the strong-dollar sce-
nario is vulnerable to shocks — such
as a prolonged jobless recovery,
Euroland pulling a rabbit out of its
hat, or China getting aggressive. Do
not bet the ranch.
For information on the author see p. 5.
CURRENCY TRADER • March 2010
Related reading:
Other Barbara Rockefeller articles
“Risk-on, risk-off model in flux”
Currency Trader, February 2010.
How much stock can you put in the risk appetite/aversion story
in the forex market?
“Bees in the bonnet”
Currency Trader, January 2010.
Does the dollar’s new uptrend have legs?
“The easy fix”
Currency Trader, December 2009.
The dollar has for some time been supported primarily by lip service from
government officials. What could really make a difference in the buck’s
prospects?
“Bucks, bonds and the new bully in town”
Currency Trader, November 2009.
The massive U.S. debt has many fearing the worst for the U.S. dollar. Perhaps
the sentiment is overdone.
“It’s the price of oil, stupid”
Currency Trader, October 2009.
A major drop in crude prices could help boost the dollar.
Will it happen?
“Are fundamentals coming back?”
Currency Trader, September 2009.
Assessing the signs of change in the FX market.
“The dollar still has a chance”
Currency Trader, August 2009.
The stabilizing economic picture doesn’t seem to have
benefited the buck very much.
“Bubble contamination”
Currency Trader, July 2009.
Pondering the nature of the currency-commodity
relationship.
“Risk aversion”
Currency Trader, June 2009.
Extraordinary times call for out-of-the-box thinking about markets.
“Forecasting follies”
Currency Trader, May 2009.
The only technicals that provide tradable forecasts are
patterns — but you have to be on the correct time frame
and you can’t forget about the fundamentals.
“Listening to the chart”
Currency Trader, April 2009.
While everyone debates the ramifications of various policy measures, what is
the Euro/dollar chart saying?
“Rational fear and the forex market”
Currency Trader, March 2009.
Analysis of several intermarket relationships suggests the role of risk aversion
in the forex market is no cut-and-dried issue.
19
 TRADING STRATEGIES

Top pattern
feeds bottom formation
Finding patterns in unexpected places: Research into a short-entry price
pattern leads to what might be an even more compelling long-side setup.

BY CURRENCY TRADER STAFF FIGURE 1 — SHORT-SIDE SETUP

The short-side pattern consists of a weekly bar that opens low, closes high, and
is followed by a week with a higher high and lower close. The pattern typically

T
forms two or three times per year.
he Aussie dollar’s 2009
resurgence — and its long-
term strength vs. the U.S.
dollar prior to the 2008 financial col-
lapse — might not prompt traders to
think in terms of favoring short-side
setups for the AUD/USD pair, but one
shouldn’t disregard potentially useful
opportunities just because they fly in
the face of a multi-year trend, should
they?
The Forex Trade Journal in the
February 2010 issue of Currency Trader
featured a mid-January trade in the
AUD/USD pair that occurred in the
context of perceived short-term
exhaustion in the Aussie currency, but
was anchored by a pattern that was Source: TradeStation
found through coincidental research
into the market’s price behavior. The resulting short trade week that opened relatively low, closed relatively high, and
turned out to be profitable, although it didn’t capture even was followed by a week that made a slightly higher high
a third of the total down move that occurred after entry. but closed lower. Other settings are certainly worth
Figure 1 highlights several examples of the pattern, researching.
which forms on the weekly time frame and consists of the As formulas, the rules are:
relationship between two consecutive price bars:
1. (open[1]-low[1])/(high[1]-low[1]) <= .25
1. Last week opened in the bottom 25 percent of the 2. (close[1]-low[1])/(high[1]-low[1]) >= .75
week’s range and closed in the upper 25 percent of 3. high > high[1]+ .0010
the range. 4. close < close[1]
2. This week’s high is at least 0.0010 above last week’s
high. Where 0 and 1 refer to the current week and last week.
3. This week’s close is below last week’s close.
Because the pattern incorporates the most recent week’s
The pattern parameters weren’t optimized or researched close, Figure 1 might give a somewhat exaggerated impres-
— they are simply representative values meant to reflect a continued on p. 22

20 March 2010 • CURRENCY TRADER

secr
etar
y@cf
tc.
gov
 TRADING STRATEGIES

FIGURE 2 — SHORT-PATTERN PERFORMANCE

The setup’s negative bias is apparent, and contrasts the bullish bias that pre-
vailed during the analysis window. The pattern’s advantage appeared to wane
after week 3.
such as the early 2008 and early 2009
signals in Figure 1.
Figure 2 shows the median per-
formance for the first eight weeks after
the completion of the pattern for all 59
instances. The chart also shows the
average returns for all one- to eight-
week periods in the analysis window,
along with the pattern’s winning per-
centage (i.e., the percentage of times
the AUD/USD pair closed lower than
the pattern’s closing price). The nega-
tive bias is obvious, and stands in
stark contrast to the overall bullish
bias for all one- to eight-week periods
in the analysis window.
sion of the pattern’s potential. The qualifying price bars are The pattern’s maximum advantage occurred at week 3,
marked at the top, but in reality trades would have to be when the median closing down move for the pattern was -
entered near the close of these bars, so possible gains are 0.58 percent and the winning percentage was 61 percent.
not as large as they might initially appear. After that, the pattern’s edge appeared to wane — the
Between Feb. 15, 1985 and Feb. 15, 2010, this pattern down moves shrank until disappearing completely by
appeared 59 times, most recently the week ending Jan. 15, week 8, at which point the odds favored a net upside move.
2010; it occurred 23 times since 1999. The pattern fires two (Coincidentally, the maximum gain for the trade from the
or three times a year on average (twice in 2007, twice in week of Jan. 15 came in the third week after entry — what
2008, and three times in 2009, in fact), although a notable would have been a nearly 6-percent profit on a closing
minority of signals occurred within six bars of one another, basis.)
Figure 3, which shows the results of
FIGURE 3 — 1999-2010 SHORT-PATTERN PERFORMANCE the 23 patterns since January 1999, has
The pattern was much less successful during this almost exclusively bullish a couple of similarities to Figure 2, but
period, but it still demonstrated a bearish bias peaking at week 3. a greater number of striking differ-
ences. Although it is difficult to see
because of the difference in scale, the
average eight-week close-to-close
move for the AUD/USD pair in this
period was 0.0038 — more than three
times the size of the move for the 1985-
2010 period. During this much more
bullish period, dominated by the mas-
sive 2001-2008 bull move, the pattern
was much less successful, but it still
managed to show a notable bearish
bias in the first three weeks. In fact, the
median close-to-close down move
during this period at week 3 was
slightly larger than for the entire
analysis period (-0.0068 to -0.0058).

22 March 2010 • CURRENCY TRADER

 FIGURE 4 — GOING LONG
Using the close of week 3 from the previous analysis as a buy point, this long-
side strategy significantly outperformed the AUD/USD’s built-in bullish bias.

The winning percentage was never

above 57 percent, however, and both
the size and frequency of the post-pat-
tern down moves evaporated quickly.
By week 5 the median post-pattern
move was a gain, and from week 6
onward the gains were actually larger
than the market’s average upside bias
— a signal many traders will recognize
as the advantage of buying corrections
in a strong bull market.
Given the apparent pivotal nature of
week 3 in the analysis, why not test the
results of going long on the close of
this week?
price patterns — no optimization occurred and no addi-
Turning the tables tional rules or parameters were added — these are interest-
Figure 4 shows the AUD/USD’s performance from the ing candidates for further research and development. Risk
close of week 3 in the previous analysis to the closes of the control and money-management rules, among other fac-
subsequent 12 weeks for the 1985 to January 2010 time win- tors, might make more out of their basic tendencies.
dow — the extra four weeks included to highlight the pat- As a final note, the long-side analysis was performed
tern’s persistent gains. The original tests already suggested after the entry of the trade in this month’s Forex Trade
the third week after the top pattern might be a favorable Journal, and may help explain the trade’s relatively quick
long entry point, and given the currency pair’s established collapse.
upside bias, positive results should not
be surprising. However, this analysis FIGURE 5 — BUY POINT
shows the post-pattern median gains Blue arrows mark the long entry points that would have complemented the short
went significantly beyond the signals originally displayed in Figure 1.
AUD/USD’s built-in bullish bias.
The odds of a higher close at the end
of any given week were never less
than 55 percent and were mostly
above 60 percent. Results for the 23
long signals from 1999 to January 2010
(not shown) produced similar median
gains that were typically twice as large
as those in Figure 4.
Figure 5 adds blue arrows to indi-
cate the default buy points three weeks
after the original short pattern’s sell
signals. Some were simply beneficiar-
ies of strong bull conditions, a couple
were outright poor entry points, and
three (including the most recent)
marked quite propitious buy levels.
Source: TradeStation
Given the robust nature of both

CURRENCY TRADER • March 2010 23

 ADVANCED STRATEGIES

Cry, the beloved currency

South African interest rates may drive the rand, but in a different direction than expected.

BY HOWARD L. SIMONS

T
here was a time, not too long ago, when it If we were to play any sort of word association game
would have been impossible to write anything these days with South Africa, “gold” might come to mind.
about South Africa for fear of treading upon South Africa, along with Australia, central Canada, and
apartheid-era sensitivities. Those days are western Siberia, has one of the world’s greatest concentra-
mercifully in the past, and while South Africa still has its tions of mineral wealth. If we may take a foray into geolo-
problems, including an extraordinarily high crime rate and gy, all these regions are on continental “cratons,” or original
one of the world’s highest incidences of AIDS, it is no continental rock. The mineralization of these rocks may
longer an international pariah. extend all the way back to asteroid impacts cracking the
earth’s early crustal shell and allowing hot, mineral-laden
water to seep into the fractures and produce veins of ore.
Surprise — the long-term correlation
Put gold on hold
between gold and the South African The link between gold and South Africa is so strong that
most people assume without examining the data that the
rand (ZAR) has to rise and fall with it. It should surprise
rand is slightly negative. all and sundry to learn the long-term correlation between
gold and the ZAR is slightly negative. The only time the
two markets moved in synch
FIGURE 1 — THE ZAR IS SLIGHTLY NEGATIVELY CORRELATED WITH GOLD was 2003-2004, highlighted in
Figure 1.
The only time the gold and the rand moved in synch was 2003-2004.
The inflation connection
As many well-accepted economic
theories don’t hold up well to
examination, we tend to be sur-
prised when they do, in fact,
work. One of these is linked to the
theory of purchasing power pari-
ty we can demonstrate to be a
poor indicator of currency move-
ments (see “A parody of purchas-
ing power,” December 2009).
If we map the purchasing
power of both the USD and the
ZAR going back to 1971, we find
the dollar has lost 81.6 percent of
its value while the ZAR has lost

24 March 2010 • CURRENCY TRADER

97.7 percent, a loss rate eight times as great (Figure 2). The relationship; it says for three years, foreign investors in
ZAR is worth only 9.6 percent of its 1971 exchange rate rel- South Africa were rewarded equivalently for swapping
ative to the USD, a 10.39:1 loss. The ZAR’s loss of interna- USD deposits for ZAR deposits and for swapping American
tional purchasing power is greater than its loss of domestic continued on p. 26
purchasing power, assuming you
can believe either country’s infla- FIGURE 2 — RAND HAS WEAKENED ALONG WITH RELATIVE
tion data. PURCHASING POWER
While the dollar has lost 81.6 percent of its value since 1971, the rand has lost
Stocks and carry returns 97.7 percent, a rate eight times as great.
Over the years the ZAR has tend-
ed to yield more than the USD.
These interest-returns can exceed
spot-rate losses (see “The short,
awful life of the dollar carry
trade,” August 2008) and make
holding the ZAR a profitable ven-
ture even when the spot rate
slides.
Comparing the ZAR spot rate
and its carry return on an index
basis going back to the January
1999 advent of the Euro reveals a
very substantial difference in the
two series (Figure 3). The ZAR
spot rate is 20.7 percent weaker
now than it was in January 1999;
the carry return against the USD FIGURE 3 — TRADE THE STOCK OR LEND THE CURRENCY?
has been 63.06 percent.
The rand spot rate is 20.7 percent weaker now than it was in January 1999, while
We can add an additional con-
its carry return against the USD has been 63.06 percent.
cept here: the relative stock market
total returns in USD terms (green
line, Figure 3). Between December
2001 and May 2005, the relative
performance of the South African
stock market had moved closely in
parallel to the spot movement in
the ZAR. Then between May 2005
and May 2006, highlighted in
Figure 3, relative performance had
no close link to either the ZAR’s
spot rate or to the carry index.
After May 2006, the relative per-
formance of the two stock markets
started to move in increasingly
close alignment with the carry
index.
This is a rather extraordinary

CURRENCY TRADER • March 2010 25

 ADVANCED STRATEGIES

FIGURE 4 — SOUTH AFRICAN SWAP CURVE

stocks for South African stocks. Sixty years of modern For the most part, yields have peaked on a ridge between six
months and one year, with both the longest-term and shortest-
portfolio theory have told us that stock investors
term rates lower.
assume greater risks and should expect to receive
greater rewards than investors in short-term fixed-
income instruments, but in the South African case, this
is not at all evident.

An unstable swap curve

The strong returns for three-month ZAR deposits are
even more remarkable when the term structure of
South African interest rates is taken into account.
Mapping the swap curve across tenors from three
months to 30 years over the past decade shows some
very wide oscillations in both the level of interest rates
and in the way the yield curve changes (Figure 4). For
the most part, yields have peaked on a ridge between
six months and one year, with both the longest-term
and shortest-term rates lower. The overall level of
yields plunged between 2003 and 2006, a period when
the ZAR entered a prolonged rally from nearly 12 per
USD to fewer than 6 per USD.
South African rates rose once again during the 2008
financial crisis as higher yields were required to keep
funds in the country. This is con-
sistent with patterns seen else-
FIGURE 5 — INSURANCE ON A STRONGER RAND HAS BEEN CHEAP SINCE 2003
where: While many central banks
use higher short-term interest When the U.S. entered its prolonged period of low interest rates, insurance on the
rates as a tool to “defend” their rand entered a prolonged cheap period.
currencies and many external
investors have come to expect
this reaction, the opposite often is
true. The higher short-term inter-
est rates are seen as unstable and
short-lived instruments of eco-
nomic damage, while the deci-
sion to abandon them as a tool is
a signal the economy is about to
grow again.

No worries
An attribute that works frequent-
ly in currency markets is a fear
gauge, in this case, the ratio of
implied volatility to high-low-
close volatility minus 1.00. It’s
quite normal to expect a sharp

26 March 2010 • CURRENCY TRADER

sell-off in a currency to be accompanied by rising demand
for insurance against further declines. This hasn’t been the
case in the rand since 2001. Once the U.S. entered its pro-
longed period of low interest rates, insurance on the ZAR
entered a prolonged period of being cheap (Figure 5). Even
during the financial crisis of late 2008, excess volatility
remained quite tame.
We are left with the question of what is the primary driv-
er of the ZAR? We know it sinks during financial crises, as
Related reading: Other Howard Simons articles
“Islamic currencies: What’s for dinar?”
Currency Trader, February 2010.
Does having a tradable currency make an economy develop
more quickly, or is development a precondition for a tradable
currency?
“Currency carry and yield-curve trading”
Currency Trader, January 2010.
Examining the currency-bond connection.
“A parody of purchasing power”
Currency Trader, December 2009.
Is there such as thing as a currency “fair value”?
“The hidden cost of illiquidity”
Currency Trader, November 2009.
Evidence mounts that we actually failed to learn the lessons
of the Great Depression.
“How Eastern Europe got carried away”
Currency Trader, October 2009.
The Swiss National Bank’s move to quantitative easing in
March reopened the Swiss franc-Eastern Europe carry trade.
“Hungary’s Blue Danube Waltz”
Currency Trader, September 2009.
A look at a unique currency slated to be absorbed by
the Euro in the next few years.
“Post-bubble ruble trouble and reversal”
Currency Trader, August 2009.
Which rate matters most, the Russian ruble vs. the dollar,
or the ruble vs. the Euro?
CURRENCY TRADER • March 2010
do most emerging market currencies, and we know better
than to treat it as a simple reflection of gold prices.
The best indicator, paradoxically, seems to be South
African interest rates — but in a different direction than
expected. When South African rates start falling, expect
money to start flowing into South African equities and for
the ZAR to tag along.
For information on the author see p. 5.
“Won flew over the carry’s nest”
Currency Trader, July 2009.
For better or worse, Korea’s currency seems to function as a
basic risk barometer.
“Currency volatility and long-term treasury returns”
Currency Trader, June 2009.
The belief that higher currency volatility leads to steeper yield
curves and negative bond returns has been challenged by the
2008-2009 financial upheaval.
“A cross rate to bear,” Currency Trader, May 2009.
The Euro/yen pair isn’t just a currency cross rate — it’s a
gauge of global risk.
“And it’s one, two, three — what are we trading for?”
Currency Trader, April 2009.
They don’t call them frontier markets for nothing. A look at
Vietnam’s currency and stock market over the past few years.
“Sovereign credit risk and currencies”
Currency Trader, March 2009.
Government actions are perversely rewarding the guilty: As a
nation’s credit rating deteriorates, its borrowing costs fall and
its currency, at least temporarily, rises.
“Minor trends make minor friends”
Currency Trader, February 2009.
Do minor currencies offer trading opportunities the majors
don’t? Find out what the numbers say.
“Howard Simons: Advanced Currency Concepts, Vol. 1”
A discounted collection that includes many of the articles
listed here.
27
 FOREX NEWS

Forex traders voice their opinions

Don’t punish us for the sins of others, forex traders argue.

BY CURRENCY TRADER STAFF

A s of March 1, the Commodity Futures Trading

Commission’s (CFTC) “request for comment” regard-
ing its proposed 10:1 cap on forex leverage triggered
more than 5,700 responses, virtually all from private traders and
forex industry professionals irate about what they see as an
who are fools with their money. The gamblers will continue to
gamble; they’ll just do it elsewhere. And fools will still lose
money, but somewhere else, like the pink sheets.”
Hugh Kimura sounded a similar note. “I realize the CFTC’s
intent is to try to protect retail traders from using excessive lever-
unnecessary and intrusive regulation. age, but the truth is that even with no leverage (like in the stock
Although many responders voiced a concern the CFTC’s market), traders who do not use proper money management will
move would drive business out of the U.S. and eliminate still lose money,” he wrote. “It is like any other dangerous activ-
American jobs at a time when unemployment is around 10 per- ity. I believe that proper disclosures should be in place, but we
cent, the primary theme running through the responses should be free to make our own personal decisions to engage in
appeared to be: “Our risk is our business, not yours — butt out.” that activity or not.”
“Please leave well enough alone,” Nancy Cunningham wrote. Thomas Torti also argued that any potential investor protec-
“The proposed limitation will shut down legitimate, knowledge- tion would come at the expense of responsible traders.
able traders with small accounts. Ultimately, limiting leverage in “While the intent is admirable, if this is implemented, the
the forex [market] will not protect the gamblers and the people result would hurt the consumer,” he wrote. “The problem with
most small investors is they lack the knowledge to invest
correctly. Most small investors are not willing to do their
Currency managers, futures volume up in Feb. due diligence and put in the thousands and thousands of
hours of work to learn how to invest. The result is they
February was a good month for currency-oriented commodity trading eventually lose their investment no matter what the lever-
advisors (CTAs) and currency futures in general. The BarclayHedge age. A good example of this is the number of people who
Currency Traders Index indicated a positive return for currency man- have lost thousands and thousands of dollars in their
agers in February (up 0.20 percent with approximately 20 percent of 401(k) plans, traditionally one of the so-called safer
funds reporting), and a year-to-date gain of 0.24 percent — modest, but investments.”
still better than the firm’s overall CTA index, which was down 1.35 per- Others suggested the CFTC consider a less drastic
cent on the year, weighed down by losses in the diversified, systematic, leverage reduction (e.g., 50:1), while one Barton Varney
and financial/metals indices. advocated an incremental approach.
Barclay’s BTOP FX Index, which tracks the largest currency man- “If your goal is to reduce risk, why not take a less puni-
agers, pointed to potentially more robust final results for February, up tive route?” he asked. “Change your computation ratio:
0.96 for the month and 1.06 percent on the year. for every 10,000 units of currency, reduce [leverage] by 10
Currency futures volume has been strong so far in 2010. CME Group — i.e., 100:1, then 90:1, then 80:1, etc. By the time one
forex futures and options average daily volume (ADV) was 931,000 con- reaches 100,000 units, the ratio is 10:1. This way capital is
tracts in February, up 82 percent from February 2009’s 512,000 ADV. increased proportionally as risk goes up. This gives retail
The three-month average daily volume as of the end of February was traders a reasonably level playing field with the wealthy.”
824,000 vs. 777,000 as of the end of January and 754,000 as of the end The CFTC’s proposed cap would give retail forex
of December 2009. traders less leverage than is typically available in the cur-
Euro futures and options posted average daily volume of 362,000 rency futures market (approximately 25:1 to 40:1 depend-
contracts. Australian dollar futures and options ADV climbed to nearly ing on the currency). Many forex industry professionals
119,000, while Canadian dollar futures and options surpassed 88,000. have argued the leverage reduction would put the U.S.
Other contracts of note include the New Zealand dollar, in which year- industry at a competitive disadvantage to non-U.S. forex
over-year total volume increased more than 600 percent for February, brokers offering 100:1 or higher leverage, and that theme
from 26,000 to 185,000, and the new E-Micro Euro/USD contract, which was also evident in the responses.
posted total volume of 45,000 for the month. “It seems apparent to me that the motives of this regu-
Meanwhile, currency futures and options volume at the lation are to disable the off-exchange retail foreign
IntercontinentalExchange (ICE) more than tripled last month, with ADV exchange markets, prevent participation by United States
of 30,649 contracts in February 2010 vs. 8,367 in the same month last citizens, and attempt to move them to exchanges such as
year — a 266.3-percent jump. In February, the U.S. Dollar Index contract the CME,” wrote Mark Matzeldelaflor, who concluded
(DX) established its second consecutive monthly records for total and his comments with “I am a United States citizen and I
average daily volume (521,754 and 27,461 contracts, respectively). approved this message!”
The comment period closes March 20.

28 March 2010 • CURRENCY TRADER

CurrencyTrader_Ad-VCMS10_Layout 1 1/19/10 3:26 PM Page 1
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 CURRENCY FUTURES SNAPSHOT as of March 1

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

Market Symbol Exchange Volume OI 10-day move/% rank 20-day move/% rank 60-day move/% rank Volatility ratio/rank
Eurocurrency EC CME 326.4 186.9 -0.31% / 5% -2.09% / 32% -10.06% / 98% .13 / 5%
British pound BP CME 131.8 103.0 -4.18% / 100% -6.12% / 100% -9.80% / 100% .57 / 88%
Japanese yen JY CME 127.0 119.3 1.00% / 86% 1.37% / 39% -2.69% / 66% .71 / 100%
Australian dollar AD CME 112.8 102.3 1.54% / 40% 2.04% / 55% -2.74% / 55% .28 / 30%
Canadian dollar CD CME 82.0 90.8 0.91% / 10% 2.71% / 80% 0.24% / 7% .58 / 78%
Swiss franc SF CME 52.2 39.3 -0.14% / 5% -1.61% / 21% -7.34% / 98% .17 / 0%
Mexican peso MP CME 22.9 95.3 1.69% / 55% 2.96% / 87% 0.97% / 18% .18 / 2%
U.S. dollar index DX ICE 22.8 54.0 0.04% / 0% 0.99% / 22% 7.68% / 92% .17 / 12%
New Zealand dollar NE CME 9.7 21.4 0.53% / 25% -0.23% / 3% -3.78% / 61% .31 / 35%
E-Mini eurocurrency ZE CME 3.7 3.2 -0.18% / 0% -2.48% / 40% -9.71% / 96% .13 / 5%

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).

LEGEND: Managed money: Barclay Trading Group’s

currency trader rankings for January 2010
Volume: 30-day average daily volume, in thou-
sands. Top 10 currency traders managing more than $10 million
as of Jan. 31, ranked by January 2010 return.
OI: 30-day open interest, in thousands.
2010 $ Under
10-day move: The percentage price move from
Jan. YTD mgmt.
the close 10 days ago to today’s close. Rank Trading advisor return return (millions)
20-day move: The percentage price move from 1. Friedberg Comm. Mgmt. (Curr.) 11.91% 11.91% 66.5
the close 20 days ago to today’s close. 2. Aurapoint Asset Mgmt (Calypso1) 4.76% 4.76% 175.0
60-day move: The percentage price move from 3. First Quadrant (Managed Currency) 3.59% 3.59% 469.0
the close 60 days ago to today’s close. 4. INSCH Capital Mgmt (Kintillo X3) 3.48% 3.48% 54.2
The “% rank” fields for each time window (10- 5. IPM Global Currency Fund (C) 3.45% 3.45% 165.0
day moves, 20-day moves, etc.) show the per- 6. IKOS G10 Currency Fund 3.36% 3.36% 467.5
centile rank of the most recent move to a certain 7. Overlay Asset Mgmt. (SHCFP) 2.71% 2.71% 120.8
number of the previous moves of the same size 8. Cambridge Strategy (Emerging Mkts) 2.26% 2.26% 60.0
and in the same direction. For example, the % 9. Alder Cap'l (Alder Global 20) 1.90% 1.90% 336.0
rank for the 10-day move shows how the most 10. Goldman Sachs (Fund. Currency) 1.58% 1.58% 456.3
recent 10-day move compares to the past twenty
10-day moves; for the 20-day move, it shows how Top 10 currency traders managing less than $10 million and more than
the most recent 20-day move compares to the $1 million as of Jan. 31, ranked by January 2010 return.
past sixty 20-day moves; for the 60-day move, it
1. Smart Box Capital (Leveraged FX) 24.41% 24.41% 1.5
shows how the most recent 60-day move com-
2. Excel Capital Mgmt. (FX) 21.72% 21.72% 1.8
pares to the past one-hundred-twenty 60-day
3. D2W Capital Mgmt (Radical Wealth) 10.40% 10.40% 2.8
moves. A reading of 100% means the current
4. QuantFX AM (Managed Account) 4.73% 4.73% 1.9
reading is larger than all the past readings, while
5. Smart Box Capital (FX) 4.56% 4.56% 5.0
a reading of 0% means the current reading is
6. Sagacity (HedgeFX100) 3.34% 3.34% 1.5
smaller than the previous readings.
7. Wealth Builder FX Group 2.30% 2.30% 5.3
Volatility ratio/% rank: The ratio is the short-term
8. BEAM (FX Prop) 2.05% 2.05% 1.5
volatility (10-day standard deviation of prices)
9. Overlay Asset Mgmt. (SHMS) 1.03% 1.03% 1.6
divided by the long-term volatility (100-day stan-
10. IKOS IKAST Futures Fund 0.65% 0.64% 4.7
dard deviation of prices). The % rank is the per-
centile rank of the volatility ratio over the past 60 Source: BarclayHedge (www.barclayhedge.com). Based on estimates of the composite of all accounts
or the fully funded subset method. Does not reflect the performance of any single account.
days.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

30 March 2010 • CURRENCY TRADER

 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 Canadian dollar 0.947805 0.24% 0.40% 2.19% 0.9795 0.7653 14

2 Hong Kong dollar 0.128785 0.10% -0.19% -0.19% 0.1291 0.1286 10

3 Swedish krona 0.138325 0.07% -4.33% -2.56% 0.148 0.1068 11

4 Chinese yuan 0.146475 0.01% 0.03% 0.06% 0.14660 0.1455 9

5 Thai baht 0.03024 -0.02% 0.48% 2.91% 0.03045 0.02712 4

6 Indian rupee 0.021605 -0.12% 0.44% 4.93% 0.02205 0.01858 5

7 Japanese yen 0.011095 -0.22% -1.55% 5.07% 0.01179 0.00986 1

8 Brazilian real 0.548425 -0.38% -5.20% 0.39% 0.5882 0.3999 17

9 Taiwanese dollar 0.03116 -0.38% 0.61% 2.35% 0.03165 0.02835 6

10 Singapore dollar 0.709405 -0.39% -1.67% 2.18% 0.7256 0.6 7

11 Russian ruble 0.033305 -0.80% -3.99% 4.83% 0.03497 0.02695 16

12 Australian dollar 0.891455 -1.07% -3.07% 6.22% 0.9405 0.6284 2

13 South African rand 0.128685 -1.78% -3.60% 0.35% 0.1383 0.09322 12

14 New Zealand dollar 0.69181 -2.53% -4.89% 0.92% 0.7635 0.4892 8

15 Swiss franc 0.92545 -3.64% -6.46% -1.90% 1.0087 0.8353 13

16 Euro 1.35475 -4.21% -9.38% -5.40% 1.5144 1.2455 15

17 British pound 1.54301 -4.22% -6.87% -6.36% 1.7042 1.3653 3

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

ACCOUNT BALANCE
Rank Country 2008 Ratio* 2007 2009+ Rank Country 2008 Ratio* 2007 2009+
1 Norway 88.008 19.478 61.811 51.41 13 Belgium -12.891 -2.547 7.772 -4.455
2 Singapore 26.983 14.831 39.209 20.501 14 Czech Republic -6.669 -3.083 -5.483 -4.075
3 Hong Kong 30.621 14.219 25.529 22.288 15 Italy -78.812 -3.406 -51.208 -52.42
4 Sweden 37.279 7.783 39.054 25.403 16 Australia -46.605 -4.599 -57.305 -29.89
5 Netherlands 65.746 7.497 59.598 55.648 17 U.S. -706.068 -4.889 -726.572 -369.787
6 Germany 235.257 6.405 250.263 94.248 18 Ireland -13.886 -5.189 -13.876 -3.925
7 Taiwan 24.894 6.361 32.975 28.216 19 Spain -153.665 -9.592 -144.435 -86.701
8 Japan 157.079 3.199 210.967 96.891
Totals in billions of U.S. dollars
9 Switzerland 12.065 2.412 43.032 29.731 *Account balance in percent of GDP +Estimate
10 Canada 7.606 0.507 14.53 -34.309 Source: International Monetary Fund, World Economic Outlook
11 Korea -6.406 -0.69 5.876 26.979 Database, October 2009.
12 UK -46.457 -1.733 -75.483 -44.735

32 March 2010 • CURRENCY TRADER

 NON-U.S. DOLLAR FOREX CROSS RATES
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol Feb. 25 gain/loss gain/loss gain/loss high low Previous
1 Aussie $ / Franc AUD/CHF 0.96326 2.67% 3.62% 8.28% 0.9694 0.7396 5
2 Aussie $ / New Zeal $ AUD/NZD 1.28858 1.54% 1.90% 5.25% 1.2939 1.1931 9
3 Canada $ / Real CAD/BRL 1.728235 0.63% 5.91% 1.80% 1.9211 1.6003 3
4 Canada $ / Yen CAD/JPY 85.43 0.48% 2.02% -2.71% 90.3149 75.3811 18
5 Yen / Real JPY/BRL 0.02023 0.12% 3.80% 4.63% 0.025 0.01865 1
6 Euro / Pound EUR/GBP 0.877995 0.01% -2.69% 1.02% 0.9495 0.8399 19
7 Euro / Franc EUR/CHF 1.463885 -0.57% -3.12% -3.57% 1.5483 1.4558 15
8 Pound / Franc GBP/CHF 1.66735 -0.60% -0.44% -4.54% 1.8112 1.5843 7
9 Aussie $ / Real AUD/BRL 1.625485 -0.69% 2.24% 5.80% 1.6978 1.4975 2
10 Aussie $ / Yen AUD/JPY 80.355 -0.80% -1.51% 1.13% 86.194 46.508 12
11 Aussie $ / Canada $ AUD/CAD 0.940545 -1.31% -3.46% 3.94% 0.9895 0.8059 3
12 New Zeal $ / Yen NZD/JPY 62.36 -2.29% -3.36% -3.92% 69.5573 48.2198 16
13 Euro / Aussie $ EUR/AUD 1.51967 -3.18% -6.51% -10.95% 2.0054 1.4975 20
14 Pound / Aussie $ GBP/AUD 1.730895 -3.18% -3.92% -11.85% 2.2482 1.7203 11
15 Franc / Yen CHF/JPY 83.415 -3.42% -4.96% -6.61% 91.549 80.444 17
16 Euro / Real EUR/BRL 2.470265 -3.84% -4.41% -5.77% 3.106 2.4508 8
17 Franc / Canada $ CHF/CAD 0.97641 -3.88% -6.84% -4.01% 1.1171 0.9666 10
18 Pound / Yen GBP/JPY 139.08 -3.97% -5.38% -10.86% 163.057 131.446 13
19 Euro / Yen EUR/JPY 122.11 -3.97% -7.93% -9.95% 139.2 119.372 21
20 Euro / Canada $ EUR/CAD 1.429355 -4.44% -9.74% -7.44% 1.6888 1.4158 14
21 Pound / Canada $ GBP/CAD 1.627985 -4.45% -7.25% -8.37% 1.9173 1.6091 6
GLOBAL STOCK INDICES
1-month 3-month 6-month 52-week 52-week
Rank Country Index Feb. 25 gain/loss gain/loss gain/loss high low Previous
1 Mexico IPC 31,649.10 3.89% 0.91% 13.01% 33,080.10 16,756.70 11
2 Switzerland Swiss Market 6,644.00 2.99% 3.45% 7.15% 6,735.40 4,235.00 2
3 Canada S&P/TSX composite 11,631.44 2.44% -0.05% 6.51% 12,070.20 7,479.96 6
4 Brazil Bovespa 66,121.00 0.91% -2.64% 15.15% 71,068.00 35,722.00 5
5 U.S. S&P 500 1,102.94 0.56% -0.69% 7.29% 1,150.45 666.79 7
6 UK FTSE 100 5,278.20 0.34% -1.61% 7.35% 5,600.50 3,460.70 10
7 Hong Kong Hang Seng 20,399.57 -0.97% -9.78% -0.28% 23,099.60 11,344.60 9
8 South Africa FTSE/JSE All Share 26,731.80 -1.29% -2.76% 6.14% 28,346.70 18,120.60 3
9 Germany Xetra Dax 5,532.33 -1.76% -4.66% -0.45% 6,094.26 3,588.89 15
10 Singapore Straits Times 2,749.15 -2.22% -1.56% 4.98% 2,947.08 1,455.47 8
11 Australia All ordinaries 4,614.90 -2.70% -2.66% 4.47% 4,984.00 3,090.80 4
12 India BSE 30 16,254.20 -3.14% -5.49% 3.61% 17,790.30 8,047.17 12
13 France CAC 40 3,640.77 -3.73% -4.42% -1.08% 4,088.18 2,465.46 13
14 Japan Nikkei 225 10,101.96 -3.91% 6.99% -3.77% 10,982.10 7,021.28 1
15 Italy FTSE MIB 20,843.23 -6.84% -8.35% -7.26% 5,601 3,461 14
GLOBAL CENTRAL BANK LENDING RATES
Country Interest rate Rate (%) Last change Aug. 09 Feb. 09
U.S. Fed funds rate 0-0.25 0.5 (Dec. 08) 0-0.25 0-0.25
Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.1 0.1
Eurozone Refi rate 1 0.25 (May 09) 1 2
UK Repo rate 0.5 0.5 (March 09) 0.5 1
Canada Overnight funding rate 0.25 0.25 (April 09) 0.25 1
Switzerland 3-month Swiss Libor 0.25 0.25 (March 09) 0.25 0.5
Australia Cash rate 3.75 0.25 (Dec. 09) 3 3.25
New Zealand Cash rate 2.5 0.50 (April 09) 2.5 3.5
Brazil Selic rate 8.75 0.5 (July 09) 8.75 12.75
Korea Overnight call rate 2 0.5 (Feb. 09) 2 2
Taiwan Discount rate 1.25 0.25 (Feb. 09) 1.25 1.25
India Repo rate 4.75 0.25 (April 09) 4.75 5.5
South Africa Repurchase rate 7 0.5 (Aug. 09) 7 10.5
GLOBAL BOND RATES
Rank Country Rate Feb. 25 1-month 3-month 6-month High Low Previous
1 Germany BUND 124.3 0.93% 1.65% 1.52% 125.63 117.47 1
2 U.S. 10-year T-note 118.56 0.71% -1.59% 0.58% 125.44 112.90 3
3 Japan Government Bond 139.97 0.63% 0.45% 0.78% 140.32 135.45 5
4 Australia 10-year bonds 94.465 0.01% -0.14% -0.16% 95.95 94.11 4
5 UK Short sterling 99.34 -0.02% 0.09% 0.10% 99.52 98.01 2

CURRENCY TRADER • March 2010 33

 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 Q3 12/18 -0.4% -0.4% 3/17 S. Africa Q4 2/23 2.5% 6.7% 5/25
Brazil Q3 12/10 1.3% -1.2% 3/11
Canada Q4 3/1 2.4% -0.7% 5/31 ASIA AND SOUTH PACIFIC
EUROPE Australia Q3 12/16 0.2% -2.5% 3/3
France Q4 2/12 0.7% -0.2% 5/12 Hong Kong Q4 2/24 5.7% 2.6% 5/14
Germany Q4 2/12 -0.1% -0.6% 5/12 India Q4 2/26 8.8% 11.9% 5/31
UK Q3 12/22 1.1% -3.1% 3/30 Japan Q4 2/28 1.1% 4.6% 5/20
Singapore Q4 2/19 -1.2% 4.0% NLT 5/21
* Final estimates, at current prices, seasonally adjusted

Unemployment
Release 1-year Next Release 1-year Next
Period date Rate Change change release Period date Rate Change change release
AMERICAS
Argentina Q3 12/14 9.1% 0.3% 1.3% 3/15 ASIA AND SOUTH PACIFIC
Brazil Jan. 2/25 7.2% 0.4% -1.0% 3/25 Australia Jan. 2/11 5.4% -0.1% 0.4% 3/11
Canada Jan. 2/5 8.3% -0.1% 1.0% 3/12 Hong Kong Nov.-Jan. 2/18 4.9% 0.0% 0.3% 3/18
EUROPE Japan Dec. 1/29 5.1% -0.2% 0.8% 3/2
France Q3 12/10 9.1% 0.0% 1.7% 3/4 Singapore Q4 1/29 2.1% -1.3% -0.4% 4/30
Germany Jan. 2/25 7.5% 0.0% 0.3% 3/31
UK Oct.-Dec. 2/17 7.8% 0.0% 1.4% 3/17

CPI
Release 1-year Next Release 1-year Next
Period date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Jan. 2/12 1.1% 8.2% 3/12 S. Africa Jan. 2/24 0.3% 6.2% 3/24
Brazil Dec. 1/13 0.8% 4.6% 3/5
Canada Jan. 2/18 0.3% 1.9% 3/19 ASIA AND SOUTH PACIFIC
EUROPE Australia Q4 1/27 0.5% 2.1% 4/28
France Jan. 2/23 -0.3% -0.2% 3/16 Hong Kong Jan. 2/23 0.1% 1.0% 3/22
Germany Jan. 2/9 -0.6% 0.8% 3/10 India Jan. 2/26 1.8% 16.2% 3/31
UK Jan. 2/16 0.2% 3.5% 3/23 Japan Jan. 2/26 -0.2% -1.3% 3/26
Singapore Jan. 2/23 0.8% 0.2% 3/23

PPI
Release 1-year Next Release 1-year Next
Period date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Jan. 2/12 1.0% 11.5% 3/12 S. Africa Jan. 2/25 1.3% 2.7% 3/25
Brazil Jan. 2/5 0.9% -0.3% 3/8
Canada Jan. 3/1 0.3% -0.3% 3/30 ASIA AND SOUTH PACIFIC
EUROPE Australia Q4 1/25 -0.4% -1.5% 4/27
France Jan. 2/25 0.7% 0.4% 3/31 Hong Kong Q4 12/14 0.1% -2.0% 3/12
Germany Jan. 2/19 0.8% -3.4% 3/19 India Jan. 2/15 0.8% 8.6% 3/15
UK Jan. 2/5 0.4% 3.8% 3/5 Japan Jan. 2/10 0.3% -2.1% 3/10
Singapore Jan. 2/26 1.5% 13.0% 3/29

LEGEND:
Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
As of March 1.

34 March 2010 • CURRENCY TRADER

 GLOBAL ECONOMIC CALENDAR MONTH
MARCH/APRIL
Legend March
18 U.S.: February CPI and leading
CPI: Consumer price index 1 U.S.: February ISM index and indicators
ECB: European Central Bank personal income Hong Kong: Dec.-Feb.
FDD (first delivery day): The Canada: Q4 GDP and January PPI employment report
first day on which delivery of a
commodity in fulfillment of a
2 Canada: Bank of Canada 19 Canada: February CPI
futures contract can take place. interest-rate announcement Germany: February PPI
FND (first notice day): Also
Japan: January employment Hong Kong: Q4 GDP
known as first intent day, this is report
20
the first day on which a clearing- 3 U.S.: Fed beige book
house can give notice to a buyer
Australia: Q4 GDP
21
of a futures contract that it
intends to deliver a commodity in ECB: Governing council 22 Hong Kong: February CPI
fulfillment of a futures contract. interest-rate announcement
The clearinghouse also informs
23 South Africa: Q4 employment report
the seller.
4 France: Q4 employment report UK: February CPI
UK: Bank of England interest-rate
FOMC: Federal Open Market
announcement 24 U.S.: February durable goods
Committee Mexico: March 15 CPI
GDP: Gross domestic product 5 U.S.: February employment report South Africa: February CPI
ISM: Institute for supply Brazil: February CPI
management UK: February PPI 25 Brazil: February employment report
LTD: March currency options; Mexico: February employment report
LTD (last trading day): The final
day trading can take place in a March U.S. dollar index options (ICE) South Africa: February PPI
futures or options contract. 26 Japan: February CPI
PMI: Purchasing managers
6
index 7 27
PPI: Producer price index 28
8 Brazil: February PPI
Economic Release time 29
release (U.S.) (ET) 9 Mexico: Feb. 28 CPI and
GDP 8:30 a.m. February PPI 30 Canada: February PPI
CPI 8:30 a.m.
10 Germany: February CPI Japan: February PPI
ECI 8:30 a.m.
Japan: February PPI UK: Q4 GDP
PPI 8:30 a.m.
ISM 10:00 a.m. 11 U.S.: January trade balance 31 France: February PPI
Unemployment 8:30 a.m. Australia: February employment Germany: February employment
Personal income 8:30 a.m. report report
Durable goods 8:30 a.m. Brazil: Q4 GDP India: February CPI
Retail sales 8:30 a.m.
12 U.S.: February retail sales April
Trade balance 8:30 a.m.
Leading indicators 10:00 a.m. Canada: February employment report 1 U.S.: March ISM index
Hong Kong: Q4 PPI
MARCH 2010 2 U.S.: March employment report
13
28 1 2 3 4 5 6 3
7 8 9 10 11 12 13
14
4
14 15 16 17 18 19 20 15 India: February PPI
LTD: March currency futures; 5
21 22 23 24 25 26 27
March U.S. dollar index futures (ICE) 6
28 29 30 31 1 2 3
16 U.S.: February housing starts and 7 Japan: Bank of Japan
FOMC interest-rate announcement interest-rate announcement
APRIL 2010 France: February CPI
27 28 29 30 1 2 3 FND: March U.S. dollar index 8 Australia: March employment report
4 5 6 7 8 9 10 futures (ICE) Brazil: March CPI and PPI
ECB: Governing council
11 12 13 14 15 16 17 17 U.S.: February PPI interest-rate announcement
18 19 20 21 22 23 24 Japan: Bank of Japan Mexico: March 31 CPI and March PPI
25 26 27 28 29 30 1 interest-rate announcement UK: Bank of England interest-rate
UK: January employment report announcement
The information on this page is FDD: March currency futures;
subject to change. Currency March U.S. dollar index (ICE) 9 Canada: March employment report
Trader is not responsible for the UK: March PPI
accuracy of calendar dates LTD: April U.S. dollar index options
beyond press time. (ICE)

CURRENCY TRADER • March 2010 35

 NEW PRODUCTS & SERVICES
 GAIN Capital Holdings has revamped its Web site
(www.forex.com), featuring comprehensive Web and
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The first 100 visitors who sign up for a practice account will
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Capital’s chief currency strategist Brian Dolan and compa-
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research. The site also features Trade Dashboard, a snap-
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news headlines and latest research; Currency Pair
Summary, a quick, consolidated view of the latest quotes,
news and research for a particular currency pair; and
Quickdock, an expandable window that allows traders to
quickly enter a trade, view open positions or check account
balances from any page on the site. The new mobile version
of FOREX.com allows customers to easily access real-time
market information and trade and manage their accounts
via their mobile devices. The site has been optimized for
EVENTS
Event: 35th Annual International
Futures Industry Conference
Date: March 10-13
Location: Boca Raton Resort & Club, Fla.
For more information: Go to www.futuresindustry.org
Event: The 17th Forbes Cruise for Investors
Date: March 18-30
Location: Crystal Symphony, Sydney to Auckland
For more information: Go to
www.moneyshow.com/events/Investment_Cruises.asp
Event: FXCM Forex Trading Expo
Date: May 3-4
Location: Las Vegas
For more information: Go to www.fxcm.com
36
smartphones and other popular Web-enabled mobile
devices such as the iPhone, iPod Touch, Android, and Palm
Pre. The new site is now available in the U.S. at
www.forex.com and will roll out in the UK, Australia, and
Singapore, as well as other international markets in the
coming months.
In addition, GAIN’s UK and U.S. services are now offer-
ing two new currency pairs — Mexican peso (USD/MXN)
and South African rand (USD/ZAR).
 Interbank FX (www.interbankfx.com), an online off-
exchange retail foreign currency trading provider, has
unveiled its latest addition — the Pattern Recognition
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Interbank FX Web site, traders have comprehensive tutori-
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education of how to supplement trading using chart pat-
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plete with tutorials to maximize MT4 as well as an innova-
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performance metrics. This page allows traders to display
and/or download IBFX spreads by date and periodicity. 
Note: New Products and Services is a forum for industry businesses to
announce new products and upgrades. Listings are adapted from press releas-
es and are not endorsements or recommendations from the Active Trader
Magazine Group. E-mail press releases to editorial@currencytradermag.com.
Publication is not guaranteed.
Event: FIA/FOA International Derivatives Expo
Date: June 8-9
Location: The Brewery, Chiswell Street, London
For more information: Go to www.idw.org.uk
Event: Los Angeles Traders Expo
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Event: The Forex, Futures & ETFs Expo Las Vegas 2010
Date: Sept. 23-25
Location: Caesars Palace, Las Vegas
For more information: Go to www.moneyshow.com
March 2010 • CURRENCY TRADER
 KEY CONCEPTS
Discount rate: The interest rate the Federal Reserve
charges banks for borrowing funds. Banks rarely use the
Fed’s so-called “discount window,” which is generally
intended to provide funds when banks find themselves
unexpectedly short of cash. Because of its limited use,
changes in the discount rate are often interpreted as sym-
bolic, especially compared to the Fed funds interest rate,
which is the lending rate banks charge each other for
overnight loans.
Purchasing power parity: The idea that an exchange
rate should reflect the level that results in the same price (in
the two currencies) for a product purchased in two coun-
tries. For example, if a certain automobile costs 50,000
British pounds in Great Britain, it should cost 25,000 U.S.
dollars in the U.S. if the current British pound/U.S. dollar
rate (GBP/USD) is 2.0000.
Quantitative easing is a tool a central bank uses to
attempt to stimulate the economy when cutting interest
rates is not feasible — such as when rates are already at or
near zero. Through quantitative easing, the central bank
purchases assets (e.g., treasuries, mortgages, securities)
from financial institutions to pump money into the finan-
cial system. Quantitative easing is often referred to as
“printing money.” Critics contend the practice runs a high
risk of creating high inflation, among other drawbacks.
Relative strength index (RSI): Developed by Welles
Wilder, the relative strength index is an indicator in the
“oscillator” family designed to reflect shorter-term momen-
tum. It ranges from zero to 100, with higher readings sup-
posedly corresponding to overbought levels and low read-
ings reflecting the opposite. The formula is:
RSI = 100 – (100/[1+RS])
where:
RS = relative strength = the average of the up closes
over the calculation period (e.g., 10 bars, 14 bars) divid-
ed by the average of the down closes over the calcula-
tion period.
For example, when calculating a 10-day RSI, if six of the
days closed higher than the previous day’s close, subtract
the previous close from the current close for these days, add
up the differences, and divide the result by 10 to get the up-
close average. (Note that the sum is divided by the total
number of days in the look-back period and not the num-
ber of up-closing days.)
For the four days that closed lower than the previous
day’s close, subtract the current close from the previous
low, add these differences, and divide by 10 to get the
down-close average. If the up-close average is 0.8 and the
down close average is 0.4, the relative strength over this
period would be 2. The resulting RSI would be 100 -
(100/[1+2]) = 100 - 33.3 = 66.67.
 FOREX TRADE JOURNAL

New analysis negates

Aussie dollar short trade.

TRADE
Date: Tuesday, Feb. 16, 2010.

Entry: Short the Australian dollar/U.S.

dollar (AUD/USD) at .8998.

Reason for trade/setup: About a

month after the Aussie dollar trade
described in last month’s Journal, this
short-side opportunity presented itself
when the AUD/USD pair — which had
fallen from its January high above .9300 to
below .8600 by early February — rebound-
ed to a little above .9000 by Feb. 16. We
decided another short-side play was in
order as the market had recaptured about
half its sell-off and touched a round-number price thresh-
old; a test of the recent low was in order.
The relatively wide-range, high-closing bar on Feb. 16
presented a short opportunity, as price was likely to at
least pause.
Initial stop: .9068
Initial target: .8661, a little above the lowest close of the
Feb. 4-8 bottom.
RESULT
Exit: .8962
Source: TradeStation
boost to the U.S. dollar. Price dropped as low as .8921 before
rebounding a little into the New York close. As the Asian
session got underway, the pair eventually fell to .8877. It
appeared the trade was beginning to pan out.
However, that turned out to be the last chance to take a
decent short profit out of the market. Follow-through didn’t
materialize in the subsequent U.S. session (in the dollar or
in U.S. stocks, which had also received a shock from the dis-
count-rate announcement). Subsequent analysis of the
Aussie dollar (see “Top pattern feeds bottom formation”)
showed the market was potentially in the third week of
what statistics suggested could be a longer-term upswing.
As the AUD/USD pair pushed toward new daily highs
above .8980, we entered an order to cover at .8962, which
was filled in the next 30 minutes.

Profit/loss: +.0036
Outcome: After trading as high as .9035 on Feb. 17, the
pair turned down on Feb. 18 — mostly late in the U.S. ses-
sion after the Federal Reserve announced it was raising the
discount rate from .50 percent to .75 percent, providing a
Note: Initial trade targets are typically based on things such as the historical per-
formance of a price pattern or a trading system signal. However, because indi-
vidual trades are dictated by immediate circumstances, price targets are flexible
and are often used as points at which to liquidate a portion of a trade to reduce
exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by
nature.

TRADE SUMMARY
Date Currency Entry price Initial stop Initial target IRR Exit Date P/L LOP LOL Trade length
pair Point %

2/16/10 AUD/USD 0.8998 0.9068 0.8661 4.81 .8962 2/19/10 .0036 .40% .0121 -.0037 3 days

Legend: IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during
lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade).

38 March 2010 • CURRENCY TRADER

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