CT112010

THE YEN AND JAPANESE BONDS p.
22
Strategies, analysis, and news for FX traders
November 2010
Volume 7, No. 11
QUANTITATIVE EASING:
Dollar in the balance? p. 6
Much ado about nothing? p. 12
MULTI-MOVING SPOT CHECK:

average trend system AUD/USD p. 16
for currencies p. 18
DOES THE AUSSIE DOLLAR

have some gas left in the tank? p. 33
CONTENTS
Contributors....................................................... 4 Currency Futures Snapshot.................. 26
Global Markets International Markets............................. 28

QE2: Who wins, who loses?.......................6 Numbers from the global forex, stock, and
Find out which currencies are in the best and interest-rate markets.
worst positions as the Fed renews stimulus
efforts via quantitative easing. Events ........................................................31
By Currency Trader Staff Conferences, seminars, and other events.
On the Money Global Economic Calendar......................... 32

Don’t fight the Fed.................................... 12 Important dates for currency traders.
Quantitative easing, and its likely impact, is
widely misunderstood — except when it comes Forex Journal............................................33
to the dollar. Buying high and looking higher.
By Barbara Rockefeller
Spot Check
Australian dollar/U.S. dollar..................... 16
The Aussie dollar recently pushed above a
couple of notable resistance levels and is now in
relatively uncharted territory.
By Currency Trader Staff
Trading Strategies Looking for an

Multiple average trend-following............. 18
advertiser?
Translating a multi-moving average technique
into a mechanical forex-trading system Click on the company name for a
highlights the benefits of simplicity and direct link to the ad in this month’s
diversification. issue.
By Daniel Fernandez
dbFX
Advanced Strategies eSignal
The yen and
FXCM
Japanese bond markets ............................. 22
Moscow Forex Expo 2010
The idiosyncratic yen appears slightly less
exceptional when analysis adjusts for “perma- The Traders Expo Las Vegas
expectations” of higher interest rates in Japan.

By Howard L. Simons
Questions or comments?
Submit editorial queries or comments to
webmaster@currencytradermag.com
2 November 2010 • CURRENCY TRADER

CONTRIBUTORS
q Howard Simons is president of Rose-

wood Trading Inc. and a strategist for Bianco
Research. He writes and speaks frequently on
a wide range of economic and financial market
A publication of Active Trader ®
issues.
For all subscriber services:
www.currencytradermag.com q Daniel Fernandez is an active trader with
a strong interest in calculus, statistics, and eco-
Editor-in-chief: Mark Etzkorn nomics who has been focusing on the analysis
metzkorn@currencytradermag.com
of forex trading strategies, particularly algorith-
mic trading and the mathematical evaluation of
Managing editor: Molly Goad long-term system profitability. For the past two
mgoad@currencytradermag.com years he has published his research and opinions on his blog
“Reviewing Everything Forex,” which also includes reviews
Contributing editor: of commercial and free trading systems and general interest
Howard Simons articles on forex trading (http://fxreviews.blogspot.com).

Fernandez is a graduate of the National University of Colom-
bia, where he majored in chemistry, concentrating in computa-
Contributing writers:
tional chemistry. He can be reached at
Barbara Rockefeller,
dfernandezp@unal.edu.co.
Marc Chandler, Chris Peters
q Barbara Rockefeller (www.rts-forex.com) is an inter-

Editorial assistant and
national economist with a focus on foreign exchange. She has
webmaster: Kesha Green
worked as a forecaster, trader, and consultant at Citibank and
kgreen@currencytradermag.com
other financial institutions, and currently publishes two daily
reports on foreign exchange. Rockefeller is the author of Tech-
President: Phil Dorman
nical Analysis for Dummies (For Dummies, 2004), 24/7 Trading
pdorman@currencytradermag.com
Around the Clock, Around the World (John Wiley & Sons, 2000),
The Global Trader (John Wiley & Sons, 2001), and How to Invest
Publisher, ad sales:
Internationally, published in Japan in 1999. A book tentatively
Bob Dorman
titled How to Trade FX is in the works. Rockefeller is on the
bdorman@currencytradermag.com board of directors of a large European hedge fund.
Classified ad sales: Mark Seger
seger@currencytradermag.com
Volume 7, Issue 11. Currency Trader is published monthly by TechInfo, Inc.,

PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2010 TechInfo, Inc. All
rights reserved. Information in this publication may not be stored or reproduced
in any form without written permission from the publisher.
The information in Currency Trader magazine is intended for educational

purposes only. It is not meant to recommend, promote or in any way imply the
effectiveness of any trading system, strategy or approach. Traders are advised
to do their own research and testing to determine the validity of a trading idea.
Trading and investing carry a high level of risk. Past performance does not
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GLOBAL MARKETS
QE2: Who wins, who loses?

Find out which currencies are in the best and worst positions as the
Fed renews stimulus efforts via quantitative easing.
BY CURRENCY TRADER STAFF
Heading into the final months of 2010, the global economy including personal balance-sheet issues of individual con-
is continuing to rebound from the financial crisis, but sumers. However, as they continue to save more and pay
there’s a clear dichotomy between mature and emerg- down debt, consumer spending weakens, Bryson notes —
ing economies, with the latter leading the growth charge. a conundrum for any economy powered in large part by
This has left several major powers, including the U.S. and consumer spending.
Japan, grappling with the challenge of finding new ways “Debt issues take a long time to work through,” he
to inject even more stimulus into their growing but still- notes. “There isn’t a magic bullet to turn this around over-
sluggish economies. night.”
The situation raises several questions for traders and U.S. numbers have expanded from the financial crisis,
investors, especially in the forex arena. Some market but they are not robust. According to Credit Suisse, first-
observers wonder why additional stimulus in the form of quarter GDP was 3.7 percent, second quarter was 1.7
central bank purchases of Treasuries — so-called quanti- percent, third quarter is estimated at 2.6 percent, and the
tative easing (QE) — is being implemented. Did the first fourth quarter forecast is 1.6 percent — an overall annual
round work, or not? What impact will the new round of average growth rate of 2.8 percent for the year.
quantitative easing (“QE2”) likely have on the U.S. and Also, unemployment remains stubbornly high and
global economies? What are the risks of QE2 for the dollar? inflation remains dangerously low, with some economists
Finally, what are the other likely currency winners and los- worried the balance could tip toward deflation. In August
ers in the next few months if QE2 occurs in the U.S.? U.S. Federal Reserve chief Ben Bernanke first hinted the
Fed would renew Treasury purchases, and reinforced
Unbalanced GDP growth the message in October. At its Nov. 2-3 meeting, the Fed
Analysis of global gross domestic product (GDP) rates announced it would purchase $600 billion of additional
reveals the unevenness of the economic recovery. longer-term Treasuries by the end of the second quarter of
Nomura’s late-October forecasts have 2010 global GDP 2011 (approximately $75 billion per month).
coming in around 4.7 percent, with emerging-market econ-
omies leading the way at a 7.2-percent pace and developed From QE1 to QE2
economies trailing significantly at 2.5 percent. The BRICs How did the global economy get to this juncture? James
(Brazil, Russia, India, and China) are expected to have the Pressler, associate international economist at the Northern
strongest growth at 8.7 percent. Trust Company notes the global economy was flooded
Nomura forecasts the global economy to slow to a 4-per- with money in late 2008 to kick-start growth.
cent pace in 2011, with developed nations downshifting “For a brief period, it stimulated demand and sent
to a 1.9-percent rate. Credit Suisse forecasts global GDP growth rates back up,” he says.
growth at 4.7 percent this year and 4.3 percent in 2011. However, Pressler points out this was a temporary fix.
“The global economy continues to grow, but at a rela- “Let’s face it, stimulus is spiking the punch bowl,” he says.
tively subdued pace, especially in the advanced econo- “You really want to get the party going? Dump rum in the
mies,” says Jay Bryson, global economist at Wells Fargo punch bowl. And at the end of 2008 and into 2009, a lot of
Securities. He says advanced economies remain weighed rum was being thrown in the global punch bowl.”
down by “leverage problems that need to be corrected,” But as is often the case after too much of a good thing,

Pressler notes, we’re now suffering the after-effects. tended consequences of renewed quantitative easing.
“Now, many people are saying, ‘I don’t feel so great,’” The goal of QE is to lower long-term interest rates even
he says. further to stimulate economic action. However, there’s
Fast forward to mid-2010: The economic recovery rate in always risk that low rates could inflate asset price bubbles
the U.S. was at a much slower pace than the Fed expected, again, according to Bryson. He believes emerging-market
according to David Jones, president and CEO of DMJ equity and property markets, which have been perform-
Advisors and former 35-year Wall Street economist. ing strongly, are potential “bubble” areas. (For more on the
“The pace is so slow it’s unlikely to bring down the cycle of central bank-driven bubbles and busts, see “The
elevated unemployment rate,” he says. “The Fed is ready importance of being carried” in the January 2011 issue of
to respond with a carefully calibrated second round of Active Trader magazine, on newsstands in December.)
quantitative easing.” For every economist harping about current deflation,
It’s not necessarily that the first round of QE didn’t you can likely find another who will warn the danger we
“work.” Instead, Jones says, “after a financial crisis as big may face is future inflation.
as we’ve been through, financial institutions are still dele- “If you keep rates too low, too long, further out you
veraging. Also, consumers are still trying to reduce their could end up with high inflation in terms of goods and
balance sheets, which is a significant factor limiting the services,” Bryson says.
recovery.” Pressler adds, “Some people argue if that money gets
After the Nov. 2-3 meeting, the Fed announced addi- put to work, it could cause significant imbalances and
tional QE with the goal of “easing financial conditions and aggravate inflation.”
to put downward pressure on long-term interest rates,” Jones says the “biggest danger is that the Fed is per-
according to Jones. ceived as monetizing Treasury debt in relation to a run-
However, there’s some discord within the Fed regarding away deficit, which could eventually destabilize inflation.
the appropriateness of a second round of bond purchases, The lesson that the Fed learned from the 1970s is they have
and much debate in the financial community regarding its to keep inflation expectations stable at all costs.”
potential impact.
Bryson says simply: “I don’t know how much it will What about Japan?
actually do.” Any discussion of U.S. quantitative easing winds its way
How much of QE2 is already priced into long-term inter- to Japan’s efforts in the same vein, and its ongoing fail-
est rates? ure to combat the country’s chronic economic stagnation.
“[10-year Treasury yields] have fallen from 2.8 percent in Many critics of Japan’s nearly 20-year battle with deflation
August to around 2.5 percent now,” Jones says. “The stock say the Bank of Japan (BOJ) and Ministry of Finance sim-
market has rallied strongly and the dollar has plummeted. ply haven’t been aggressive enough in attacking deflation.
One could argue the markets have largely discounted a Japan has struggled with deflation for more than a
milder version of quantitative easing.” decade, and growth remains sluggish. According to Credit
Jones estimates the markets had currently priced in Suisse, Japan’s first quarter GDP came in at 5 percent, but
roughly $500 billion in purchases of longer-term Treasuries it slowed to 1.5 percent in the second quarter. The third
over a six-month period. (The first round of quantitative quarter is forecast at 2 percent and the fourth quarter at
easing in 2008-2009 represented around $1.725 trillion.) -0.9 percent.
The actual number came in around $100 billion higher. Pressler’s research team believes before 2010 is over
“Now that we have a much improved financial sector, Japan could fall back into a technical recession, with two
we have to ask how much more bang for the buck you get back-to-back quarters of negative GDP growth.
from pushing long-term rates lower,” he says. Jones also Recently, Japan announced a fresh round of quantitative
wonders how the political environment feeds into the cur- easing and began taking steps to rein in the runaway bull
rent caution in the business community regarding hiring trend in the yen, which recently posted a 15-year high vs.
and investment. the dollar (Figure 1). In September, Japanese authorities
“There’s uncertainty in the business sector, with the reportedly intervened in the FX markets for the first time
threat of higher taxes and uncertainty over regulation,” since 2004, selling about 2.1 trillion yen.
he says. “Given there are other factors that have caused Also, in early October the BOJ cut its official overnight
businesses to be very cautious regarding hiring, in these call rate from 0.10 percent to a range of zero to 0.10 per-
circumstances a second round of quantitative easing may cent, and announced it would set up a 5-trillion yen fund
not have the impact the first round had.” ($60 billion) to buy government bonds and other assets.
Overall, Jones believes additional stimulus will likely Figure 1, however, suggests the latest QE from Japan has
have some impact, but concedes the Fed is “basically run- had little impact as the yen continues to strengthen against
ning out of ammunition in terms of easing financial condi- the dollar.
tions.” “You may not see an immediate response,” says Tu
Packard, senior economist at Moody’s Analytics. “This is a
The inflation argument big struggle. Put yourself in the BOJ’s shoes — there’s only
In addition to its known risks, there’s the issue of unin- so much they can do.”
CURRENCY TRADER • November 2010 7

GLOBAL MARKETS
However, Pressler looks at the ris-

FIGURE 1: ANOTHER YEN MILESTONE ing yen and Japan’s recent QE from a
different perspective.
“If anything, the FX markets treat
it as a validation that the BOJ is very
worried about deflation,” he explains.
“They aren’t thinking this is necessar-
ily the cure for deflation.”
Pressler says for the BOJ to make a
difference, it must “keep its foot on
the pedal and take a firm stance. Tell
the market ‘we’re going to throw yen
at you until we see a reversal of this
deflation situation.’”
Despite his earlier comments
regarding stimulus, Pressler, who has
studied the Japanese situation closely,
says QE2 in the U.S. “has to be done.
Whether it causes a dramatic turn-
around is hard to say. But it puts a
floor under the economy’s woes, and
that’s a good start.”
Although Japan recently began taking steps to rein in a runaway bull trend Market maneuvers
in the yen, including a renewed quantitative easing campaign and FX market With renewed quantitative easing
intervention, the dollar/yen pair has fallen below its 1995 low. coming from the U.S. Fed, the next
Source for all figures: TradeStation question is how to trade it. What are
the expected currency winners and
losers in November and December
FIGURE 2: EURO REBOUND as the market begins to deal with the
impact of the new stimulus?
First, market watchers agree QE is
bearish for the dollar. The goal, after
all, is “downward pressure on long-
term rates, which makes it less attrac-
tive to invest in U.S. assets,” Jones
says.
Since mid-June the U.S. dollar has
been in a bear trend vs. the Euro, with
the EUR/USD pair jumping from
$1.18 to $1.41 in mid-October (Figure
2). Few expect the dollar to signifi-
cantly reverse its relative weakness in
the near future.
“We think the dollar will be broadly
weaker against all the major curren-
cies,” says Dan Katzive, currency
strategist at Credit Suisse.
Nick Bennenbroek, head of cur-
rency strategy at Wells Fargo, holds a
similar outlook, pointing out that QE
increases the supply of dollars.
After falling to its lowest level since 2006 in early June, the Euro/U.S. dollar pair “According to the law of supply
jumped 19 percent 1.4158 in mid-October before consolidating. Most analysts and demand, that will be bearish for
see further gains in the pair by year-end. the dollar,” he says. “We suspect the

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GLOBAL MARKETS
dollar will continue to weaken after we get quantitative catalyst for this near-term profit-taking, which could take
easing. To an extent, you can argue it’s priced into the mar- “Euro/dollar below $1.3500 by year-end.”
ket, but it will continue to be a negative force on the dollar. Although Galy expects any dollar rally to be a counter-
There’s always the possibility of more QE.” trend move in the longer downtrend, he believes it could
Bennenbroek targets additional Euro/dollar strength, be a fairly “brutal” correction. For example, he pegs poten-
taking the pair toward $1.4300-1.4500 by year-end. tial for Aussie/dollar to retreat to the .8700-.8500 zone on
such a move.
More gains ahead “Everyone has the same position on,” he notes. “It will
Other expected beneficiaries of the current scenario are wash out in a week or two.”
mostly currencies that have already chalked up healthy After this episode Galy ultimately sees a “stabilization,
gains this year. then recovery and back to the same risk trade.” Following
“The main winners will be commodity-based currencies the correction, he expects risky assets to outperform with a
like the Australia and New Zealand dollars — and Canada bias toward long-Asia/short-dollar trades.
could probably do okay,” Bennenbroek says. As always, traders need be cautious heading into year-
Australia and New Zealand especially are in a position end because of potentially less-liquid conditions in the
to benefit from favorable interest-rate differentials. forex world and other financial markets.
While the U.S. is holding official interest rates at near “Market makers’ willingness to take risks will be
zero, Australia and New Zealand are “quite likely to see reduced because they are defending their compensation
interest rates move higher,” Bennenbroek explains. He going into year-end,” Galy notes.
forecasts medium-term gains in those currencies, with a Time-honored advice includes limiting risk and protect-
12-month target of 1.0600 in the Aussie/U.S. dollar pair ing profits.
(AUD/USD) and .8000 in the New Zealand/U.S. dollar “For the retail trader, the potential for slippage is signifi-
pair (NZD/USD). Figure 3 shows a weekly chart of both cant,” Galy warns. “Don’t take too much risk going into
pairs. year-end.” y
Sebastien Galy, currency strategy at BNP Paribas, sees
Asian currencies relative to the dollar
as QE2 winners. FIGURE 3: BENEFITS DOWN UNDER
“Relative to mature markets, QE2
is already priced in,” he says, add-
ing, “$500 billion [in QE] was already
priced into the Euro/dollar at $1.3850.”
This, he contends, means “Asian cur-
rencies such as the Indonesia rupiah
(IDR), Korean won (KRW), and Indian
rupee (INR) are a safer bet on a multi-
month basis.”
However, he stresses that gains in
these currencies vs. the dollar are more
likely to be gradual rather than large,
sudden moves.
Upside dollar correction?

Galy thinks the U.S. dollar may be ripe
for a corrective move in the short-term.
“The market is poised for a correction
— profit-taking type of behavior,” he
says. “We’ve been trending in the short-
dollar/long-risk assets since the end The already strong Australian and New Zealand dollars are poised to benefit
of August. My guess is we will see a — over time — from continued U.S. dollar weakness. However, some analysts
comeback in the dollar.” think the U.S. currency could experience a strong countertrend rebound before
He anticipates either “shock” or another major bear move emerges.
“disappointment in QE2” as a potential

CURRENCY TRADER • October 2010 11
ON THE
On the MONEY
Money
Don’t fight the Fed

Quantitative easing, and its likely impact, is widely
misunderstood — except when it comes to the dollar.
BY BARBARA ROCKEFELLER
As the dollar started to rally in late October, a newswire basis of -0.55 percent. Investors will get a positive return
ran the headline “Inflation fear drives dollar higher.” Wait if inflation goes up. That investors were willing to over-
a minute. Inflation fear causes currencies to fall, doesn’t it? pay to get their hands on inflation-protected notes means
Yes. (Be careful what you read.) they believe inflation will rise. From Fed Chairman Ben
So, what is really happening, and what’s likely to hap- Bernanke’s point of view, this is a good thing, or at least a
pen next? First, inflation. The “inflation fear” in the head- less-bad thing. A little fear of inflation is better than panic
line is deduced from the auction of five-year TIPS (infla- over deflation.
tion-adjusted Treasury notes), which sold at $105.50 for a Economists and market mavens can’t agree on how to
$100 face value, or an initial negative return on a nominal measure inflation expectations. Just comparing the yield
Barbara Rockefeller
on T-notes against the same-tenor TIPS
Currency Trader Mag Nov 2010 fails to account for the lesser liquid-
FIGURE 1: REACTION TO PROPOSED QE2
Figure 1 Dollar Index
ity in TIPS. Even so, the breakeven
between the protected and unpro-
MACD (-0.66432) 0.2
0.1
0.0
-0.1
-0.2 tected had risen from 1.13 percent last
summer to about 1.78 percent in late
-0.3
-0.4
-0.5
-0.6
-0.7
-0.8
October.
-0.9
-1.0 Another measure is the spread
between the 30-year and the 10-year,
-1.1
-1.2
U.S. dollar index
78.2730, (DXY), daily
Dollar Index (77.6240, 77.5590, 78.1490, +0.44100)
85 which stands at around 1.30 percent
85
Dollar drops on
prospect of QE2
84 in late October, or a difference of 0.48
Dark red 100-day
84
83
percent from the same-tenor five-year
moving average con- 83 comparison. Both measures purport to
82
verges to green 200-
82 put a number on inflation expectations,
day moving average 81
81
but this is a pretty big margin of error.
80 Of course, you can always ask con-
80
79 sumers what inflation they expect,
79
78
and fat lot of good that does you. The
78 late-October Conference Board sur-
77
Dollar rises on talk 77 vey showed U.S. consumers expect
of small QE2
76
76
inflation to rise to 5 percent in one
75 year, from about 2 percent currently.
6 2
August
9 16 23 30 6
September
13 20 27 4
October
11 18 25 1 8
November
15 22 29
Because home prices are included in
that reckoning, a high forecast may be
The dollar initially fell at the prospect of a new round of quantitative easing, but
then rallied in late October when it emerged the amount might be as low as
wishful thinking. In any case, 5 percent
$200 billion. is outrageously and unrealistically
Source: Chart — Metastock; data — Reuters and eSignal high, and suggests even greater eco-
nomic illiteracy than we imagined.

New talk of inflation, however unrealistic, may mark We can’t blame just the banks, although paying interest
the end of the deflation scare that is one of the top justifi- on reserves is kind of silly if what the Fed really wants to
cations for quantitative easing (QE). And that leads us to do is to goose lending. The reason the multiplier is so low
the second big factor pushing interest rates and currencies is that everyone, from consumers to banks, is rebuilding
today. Bernanke made it clear at the Jackson Hole central their balance sheets after the crisis. Consumers are reduc-
bankers’ meeting in late August that a second round of ing debt, at an annual rate of 4.4 percent in 2009 and 2.3
QE, dubbed QE2, was on the table. Estimates of the size percent in the first half of 2010. With the housing market
of this second round ranged initially from $500 billion, a now tied up in knots because of the foreclosure problem,
number mentioned by New York Fed President William C. much mortgage lending is stalled. Bank lending to corpo-
Dudley, to Goldman Sach’s $2-4 trillion. The very thought rations has contracted as companies are sitting on a $1 tril-
of another round of QE riled knee-jerk monetarists, who lion-plus pile of cash from seven quarters of good earnings
believe a giant increase in money supply invariably leads and borrowing little — and those who do want to borrow
to inflation, all else being equal. The dollar fell on the are able to tap the bond market for seemingly unlimited
prospect of QE2 — and then rose when it emerged in late sums at record low rates. IBM, for example, issued a $1.5
October that the amount might be as low as $200 billion billion three-year note in August for a measly 1 percent.
(Figure 1). Junk-bond issuance is accelerating in 2010. Deleveraging
But of course, all other things are not equal these days. was always in the cards after the financial crisis, and so it
It’s a mistake to apply the monetarists’ rule that inflation should surprise no one that lending is taking a hit from
is always and everywhere a function of an increase in both the supply and demand side.
money supply — without also considering the velocity of This is one reason (and a good sone) some economists
money. Extra money that just sits in bank reserves (earning project that another round of QE is not going to do much
interest, by the way) does not promote economic activity, to boost economic activity or inflation. In fact, some econo-
and thus does not create inflation. The Fisher equation, on mists — notably Kansas City Fed Chief Thomas Hoenig —
which the monetarist rule is based, states that money sup- believe it would be better to let the market know “extraor-
ply times velocity equals production times inflation. dinary measures” are no longer needed and that would
itself boost activity. According to Hoenig, “There is simply
The velocity of money no evidence the additional liquidity would be particularly
What is velocity? The turnover rate of money in the real effective in spurring new investment, accelerating con-
economy. Under fractional reserve banking, when I pay sumption, or cushioning or accelerating the deleveraging
the plumber $100, he deposits the check in the bank and that is hopefully winding down.”
the bank sets aside a fraction, say 15 percent, as reserves, Hoenig is a minority of one at the Fed, however, which
and lends out the remaining $85. The baker borrows the implies the Fed will be buying additional T-notes for the
$85 to pay for butter and the dairyman deposits his check next six months and perhaps longer — unless and until the
in his bank. The banks again reserves 15 percent and lends economy picks up to the Fed’s satisfaction and/or infla-
the remaining $72.30 to the carpenter, who pays his lum- tion does actually appear. As of late October, no one knows
ber bill, and so on. The resulting multiple use of the same how much it will buy. A Wall Street Journal survey in early
money is named the “multiplier effect.”
Some folks dislike debt so much on gen- FIGURE 2: M1 MONEY MULTIPLIER
eral principle they fail to appreciate that
the debt component of money supply
is the key driver of economic growth. If
we didn’t have fractional reserve bank-
ing, we wouldn’t necessarily still be
driving horse-drawn buggies, but we
wouldn’t have the technology-laden life
we have today, either.
Figure 2 shows the money multiplier
from the St. Louis Fed. The multiplier
always drops during a recession, but
the drop in the 2008-09 recession was
extraordinarily steep. The multiplier is
creeping up in 2010, but is less than 1,
meaning money is being “re-used” or
lent out by banks at a snail’s pace. Look
The multiplier always drops during a recession, but the drop in the 2008-2009
at the left-hand side of the multiplier recession was extraordinarily steep. (Shaded areas indicate U.S. recessions.)
chart, when it was more than three Source: Federal Reserve Bank of St. Louis http://research.stlouisfed.org/fred2/series/MULT
times higher in 1985.

ON THE MONEY
October showed a consensus among economists that the practically nothing, you might as well take a pass on non-
Fed would buy $250 billion per quarter for a total of $750 yielding assets and hope for a speculative price gain. The
billion. The New York Fed’s Dudley said his estimate of more this approach pays off, the more people get sucked
$500 billion is equivalent to a 0.50 percent to 0.75 percent into commodity trades. Some are professionals whose
cut in the Fed funds rate. Reuters points out the Fed has managers insist on meeting combined-asset benchmarks,
to buy $30 billion per month just to reinvest early repay- and some are amateurs who think they are following the
ments from its portfolio of mortgage-backed bonds. For “smart money.” These two constituencies are fickle, and
perspective on Goldman Sachs’ forecast of $2-4 trillion, the their fickleness forms the basis for expecting burst bubbles.
original announcement of QE was for $1.75 trillion. Hot money is exactly what it sounds like — money that
One of the Fed’s goals in engaging in another round of can reverse direction and exit in less than 24 hours.
QE2 is to keep the long end of the yield curve low. Because Such hot money — money that reverses direction and
financing costs for everything from mortgages to junk exits in less than 24 hours — is under the careful watch of
bonds are built off the 10-year Treasury note, and because emerging-market ministries of finance and central banks,
the Fed seeks to boost activity, low rates all along the yield too. Brazil and China are just two of the emerging markets
curve are the desired outcome. In contrast, a steepening where authorities are imposing new regulations, taxes,
yield curve is a sign the bond market is building in higher or both to tone down hot money inflows. They have two
inflation expectations. Therefore, to say the Fed is actively fears: pressure on the currency to rise excessively from
seeking to create inflation is to misunderstand the Fed’s investor demand, and the possibility of a fast exodus if a
goals. The Fed wants just enough inflation to be able to bubble bursts. The lessons of the 1997-98 Asian crisis were
say deflation has been beaten back, but not so much infla- well-learned by emerging-market governments, if not by
tion that the yield curve steepens. investors, who always think they will be able to escape
before the mud hits the fan. In Figure 3, which shows
Other implications select emerging-market stock indices, Bombay, Brazil,
Keeping interest rates low has ramifications in other areas, and Mexico are moving in lockstep; only the Shanghai
including commodity prices. The knee-jerk reaction among Composite lags.
oil, gold, and other commodity traders is that QE will Emerging-market currencies are “misaligned,” as the
cause inflation, which should cause the dollar to fall, thus International Monetary Fund puts it. According to The
making hard assets a refuge. But if financial assets yield Economist’s Big Mac purchasing power parity calculations,
Barbara Rockefeller the Brazilian real is overvalued by 42
Currency Trader Mag Nov 2010
FIGURE 3: EMERGING-MARKET STOCK INDICES
Figure 2 Selected Emerging Market Stock Indices percent. In fact, the Euro is overvalued
by 29 percent and the Swiss franc by
Bombay Sensex Orange
220
215
more than 80 percent. Meanwhile, cur-
Brazil Bovespa Black 210 rencies from China, Russia, Mexico,
Mexican Bolsa Blue
and South Korea are undervalued by
205
Shanghai Composite Green 200
195
190
20 to 40 percent. This means Mexico,
185 for example, has a competitive advan-
tage over Brazil.
180
175
170
165
Brazilian Finance Minister Guido
160 Mantega spoke of “currency wars”
in late September, and this was a big
155
150
145
140
topic at the G20 finance ministers’
135 meeting in October. At that meeting,
preliminary to the head-of-state sum-
130
125
120
115
mit on Nov. 11-12, member countries
110 agreed they will “move towards more
market-determined exchange rate sys-
105
100
95
90
tems” and “refrain from competitive
85 devaluation of currencies.” In addition,
“Advanced economies, including those
80
75
x100
70
with reserve currencies, will be vigilant
2007 M A M J J A S O N D 2008 M A M J J A S O N D 2009 M A M J J A S O N D 2010 M A M J J A S O N
against excess volatility and disorderly
Brazil and China are just two of the emerging markets imposing new regulations, movements in exchange rates. These
taxes, or both to tone down hot money inflows. They have two fears: pressure actions will help mitigate the risk of
on their currencies to rise excessively from investor demand, and the possibility excessive volatility in capital flows fac-
of a fast exodus if a bubble forms and bursts. ing some emerging countries.”
Source: Chart — Metastock; data — Reuters and eSignal U.S. Treasury Secretary Geithner may

have been seeking coordinated pressure on China in par- monetarists are sure that creating all that money will cre-
ticular, which promised a faster pace of yuan appreciation ate inflation and the U.S. intends to devalue its public debt
in June but delivered only about 2 percent by late October. that way. To raise money supply is also in direct contradic-
But the outcome is symmetrical — developed countries, tion to the emerging G20 consensus that every member
including the U.S., have a responsibility not to devalue, has a responsibility to the others to take whatever steps are
too. In fact, just as the U.S. may be charging China with necessary to maintain FX market stability and not to use
unfair trade subsidies in the form of an undervalued cur- currency policy to promote its self-interest. The U.S. wants
rency, China could charge the U.S. with an unfair trade China to revalue the yuan faster, but China wants the U.S.
subsidy by engaging in quantitative easing that pushes to stop taking actions that devalue the dollar.
the dollar down. The Chinese commerce minister told the This is not to say the Fed can be expected to alter its
Financial Times the amount of dollars being issued by the decision because of objections by other G20 members, but
U.S. is “out of control” and is leading to an “attack” of it can’t be entirely unmindful of the international response.
imported inflation. In fact, the U.S. may have to make some kind of gesture
Good grief, everyone believes QE will lead to inflation at the G20 summit in Seoul on Nov. 11 to offset whatever
and devaluation even though that would be true only if QE action the Fed takes the week before. The days are long
the velocity of money were to pick up to normal levels. gone when the U.S. treasury secretary can just speak the
It might also be true if imports were a high percentage of “strong dollar, best interests” mantra and get the desired
GDP, but in the U.S. as of August, imports were $200 bil- outcome.
lion, or only about 0.001 percent of GDP — hardly enough
to have an inflationary effect. Damned if you do...
One reason for the widespread adherence to the false It’s a harsh judgment, but the U.S. is failing to convince
belief is the level of U.S. government debt. No one doubts the markets it doesn’t seek inflation, in part because in the
the U.S. budget is on an unsustainable path. In the 2010 fis- quest to stomp out deflation once and for all, the Federal
cal year (just ended on September 30) the deficit was $1.29 Reserve is seeking a higher level of inflation. Another
trillion, or 8.9 percent of GDP. Debt held by the public is round of quantitative easing, even at a modest level, sends
$9.2 trillion (63 percent of GDP) and will reach $18.5 tril- the message the U.S. economy is still in need of stimulus.
lion (78 percent of GDP) in 10 years. By contrast, consider Short of giving the world a lesson on the Fisher equation
the EMU Stability Pact calls for debt not to exceed 60 per- (during which it would have to justify paying interest on
cent of GDP, and in the 40 years from 1960 to 2000 in the reserves), the Fed is stuck with the perception it is delib-
U.S., debt averaged 37 percent of GDP. The UK, with debt erately trying to devalue the dollar. Even Japan, which
at “only” 53.1 percent of GDP, engaged in a massive £81 understands deflation all too well, rescheduled its own
billion cost-cutting campaign in October to avoid a ratings quantitative easing to the same date as the Fed policy
agency downgrade. The U.S. is nearing the point where meeting in early November in order to offset the expected
rating agencies grumble and threaten downgrades. Despite dollar decline on the announcement.
having reserve currency status, the U.S. is vulnerable to a The old rule says “Don’t fight the Fed.” That means
downgrade and would have to pay higher rates of return the Fed will engage in QE as long as it deems necessary,
to attract the same level of foreign investment in its notes and will likely succeed in keeping interest rates low all
and bonds. along the yield curve. We can think of only one action
What does this have to do with inflation? Nothing, that would offset the seeking-devaluation consensus: FX
except the perception that when a country becomes over- market intervention. The U.S. has not intervened in many
indebted, a nifty way out is to devalue. As written many years, having done so only twice between August 1995 and
times before (see “Bucks, bonds and the new bully in December 2006. At a guess, intervention is not on the table,
town,” Currency Trader, November 2009), there is no evi- despite the G20 finance ministers’ statement that advanced
dence this is the intent of anyone in government, past or countries will be “vigilant against excess volatility and
present. Also, if the Federal Reserve seeks to hold down disorderly movements in exchange rates” in order “to help
interest rates across the yield curve, it would logically have mitigate the risk of excessive volatility in capital flows fac-
a strong interest in better fiscal management, although it ing some emerging countries.” Why should the U.S. spend
fears losing its prized independent status by interfering in cold, hard cash to help Brazil? Let Brazil impose capital
what is essentially a political matter. controls. This makes the U.S. a bad citizen in the context
Another round of quantitative easing, along with a too- of G20, wanting others to take initiative for the sake of the
high public deficit, gives foreigners a big headache. For global economy that it won’t take itself out of perceived
one thing, it does nothing to assuage fear among holders self-interest. For this fundamental reason, it’s difficult to
of the dollar as a reserve currency that the U.S. is not seek- see the dollar rallying anytime soon. Look at the chart of
ing to “debase” its currency. (Technically, debasing means the dollar index again — it points resolutely
to clip the edges of a gold or silver coin, which is hardly downward. y
relevant today, but the term endures.) Again, half-seeing For information on the author, see p. 4.

SPOT CHECK
Australian dollar/U.S. dollar

The Aussie dollar recently pushed above a couple of notable resistance
levels and is now in relatively uncharted territory.
BY CURRENCY TRADER STAFF
In October, the Australian dollar/U.S.

FIGURE 1: MONTHLY AUSSIE/DOLLAR
dollar pair (AUD/USD) reached 1.000
for the first time since July 1982, cap-
ping an amazing rebound from its
October 2008 low and surpassing its
pre-financial crisis high from July 2008
(Figure 1).
The pair rallied 22 percent from the
June 4 close of .8231 (the lowest weekly
close of the late-spring pullback) to the
Nov. 2 intraday high of 1.0023. Since
2000, the Aussie/dollar pair has ral-
lied 20-percent or more in a 22-week
span 16 other times — but 15 of them
occurred in 2009 during consecutive
weeks in the middle of the market’s
furious rebound from the October 2008
financial-crisis low, making it difficult
to draw any meaningful conclusions
from these moves. (The 16 instances,
The AUD/USD pair has pushed to its highest levels in 27 years, and in which concluded the week of Feb. 6,
November has posted its fifth consecutive higher monthly high. 2004, marked the top of an approxi-
Source: TradeStation
mately 2.5-year uptrend, and were
followed by a
TABLE 1: CONSECUTIVE MONTHLY HIGHS four-month down-
No. higher highs 1 2 3 4 5 6 7 8 9 10
swing.) Figure 2
shows a weekly
Occurrences 100 64 31 18 10 5 4 2 2 1
chart of AUD/
% 64% 48.4% 58.1% 55.6% 50% 80% 50% 100% 50% USD, highlighting
The current run of five consecutive higher monthly highs has been equaled 10 other times since 1971, the recent run, and
and exceeded 15 other times. the pair’s penetra-

tion of the 2009-2010 and 2008 highs.
After a brief consolidation, the pair FIGURE 2: WEEKLY AUSSIE/DOLLAR
pushed to a new monthly high in
early November — its fifth consecu-
tive higher monthly high. Table 1,
which lists runs of higher monthly
highs up to 10 months long dating
back to 1971, shows such moves are
relatively rare. There have been 10
other runs of five higher monthly
highs (followed by a lower monthly
high); only 15 runs have been longer
(one 11-month run isn’t included in
the table). There have been five runs
of six consecutive higher monthly
highs — a 50-percent drop-off.
(However, the odds of continuing
to a seventh consecutive monthly
high were much better — four of the
five six-week runs extended another The AUD/USD pair has exceeded the highs of the past two years after rallying
week.) y more than 20 percent since early June.
Source: TradeStation
For more analysis of the Aussie dollar, see
“QE2: Who wins, who loses?”
TRADING STRATEGIES
Multiple average
trend-following
Translating a multi-moving average technique into a mechanical forex-
trading system highlights the benefits of simplicity and diversification.
BY DANIEL FERNANDEZ
In his 1997 book Trading Tactics: An Introduction to trading systems do.

Finding, Exploiting and Managing Profitable Share Trading The following analysis explores the idea of using two
Opportunities, Daryl J. Guppy discussed the application of groups of moving averages to create a simple system to
an indicator he called the Guppy Multiple Moving Average follow longer-term trends.
(GMMA), which was based on using groups of moving
averages to better determine trend direction and strength. Reviewing the indicator
The idea is to use several slow moving averages to To create a mechanical strategy to trade on the daily time
determine long-term trend direction, coupled with a group frame, we will first establish the two groups of moving
of faster moving averages to gauge short- and medium- averages, as Guppy originally did: The “slow group” will
term developments. The goal is to help traders spot trade consist of the 60-, 50-, 45-, 40-, 35-, and 30-day simple mov-
opportunities by analyzing the level of interaction and sep- ing averages (SMAs) and the “fast group” will consist of
aration between the different moving averages, rather than the 15-, 12-, 10-, 8-, 5-, and 3-day SMAs.
using moving average crossovers, as most moving-average Figure 1 shows a chart of these averages revealing sev-
eral pieces of information, including
the longer-term trend direction and the
FIGURE 1: MOVING AVERAGE ALIGNMENT presence of consolidation periods and
small countertrend moves highlighted
by the shorter averages. However,
translating such visual impressions into
a mechanical trading strategy can be
difficult because of the varying rela-
tionships between the 12 different mov-
ing averages. A simple approach is to
evaluate the order of the moving aver-
ages and enter trades when they are
arranged in such a way that indicates
trends on the long-term, intermediate,
and short-term time frames are moving
in the same direction.
The trading strategy

The system is a simple set of rules
Trades are signaled when a large group of moving averages (in this case, 12) designed to keep you in the market
align in such a way that, in the case of long trades, the short-term averages are only when there is a high degree of
above the longer-term averages. certainty regarding trend direction.
Source for all figures: MetaTrader 4
Long trades are entered when on the
18 October 2010 • CURRENCY TRADER

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TRADING STRATEGIES
FIGURE 2: SAMPLE TRADES
high (i.e., all moving average

are aligned) and get out quick-
ly when the market reverses.
To limit losses, all trades are
also protected with a stop-loss
of two times the 20-day aver-
age true range (ATR). Trade
size is calculated dynamically
based on changes in volatility
and account balance (based on
a standard forex “lot” size of
100,000):
Position size = (0.004 *

The long trades were entered when the averages were in successive order with longest account balance in USD) /
average on bottom and shortest on top, and exited when the averages deviated from this ATR (in pips)
alignment.
For example, if the cur-
rent EUR/USD price is
last closed candle all 12 moving averages align in increas- 1.3550, the 20-day ATR is 0.0150, and the account size
ing order — that is, successively shorter moving averages is $10,000, the position size would be 0.26, or $26,000
are above the longer averages — e.g., 3-day SMA > 5-day ((0.004*10,000)/150), and the stop-loss value would be
SMA > 8-day SMA > 10-day SMA > 12-day SMA > 15-day 1.3250 (1.3550-2 * 0.0150). The equation results in risk of
SMA > 30-day SMA > 35-day SMA > 40-day SMA > 45-day roughly 8 percent per trade if the stop-loss is hit. However,
SMA > 50-day SMA > 60-day SMA. Similarly, short trades it should not cause the system to reach a severe drawdown
are entered when the averages align in descending order level because the majority of trades will likely be liquidat-
(3-day MA < 5-day SMA < 8-day SMA < 10-day SMA, ed first by the relatively sensitive exit rule.
etc.). Any open trades are closed when the SMAs lose their The system will be tested on daily data in the Euro/U.S.
proper alignments on the last closed candle. dollar (EUR/USD), British pound/U.S. dollar (GBP/USD),
Figure 2 shows three sample long signals, each one and Swiss Franc/U.S. dollar (USD/CHF) pairs from June
shorter-term than the preceding trade. All of them are 1, 2000 through May 1, 2010, using an initial account size
exited before significant price reversals occur. The rules are of $100,000. Trading costs of 2, 3.5, and 3.5 pips will be
designed to get into the market when “directionality” is assessed for the EUR/USD, GBP/USD, and USD/CHF
pairs, respectively. The tests will
TABLE 1: TEST RESULTS be conducted using MetaTrader
EUR/USD USD/CHF GBP/USD Portfolio 4 using data provided by
MetaQuotes.
Total profit 215% 91% 79% 822%
Profit factor 1.82 1.82 1.38 1.56 Test results
Avg. compounded yearly profit 12.2% 6.7% 6% 26.3% The system was profitable on
the EUR/USD, GBP/USD, and
Maximum drawdown 27.2% 20.6% 34.2% 45.6%
USD/CHF pairs without any
Number of trades 99 89 76 264 optimization or changes in logic
Win % 50.5 43.8 44.7 47 (Table 1); the results also show
the EUR/USD pair was the best-
Average profit:loss ratio 1.78 2.33 1.7 1.78
performing pair, keeping with
Performance for the three-pair portfolio was better than the sum of its parts. its performance in most other
trend-following strategies. This

Related reading
“Validating candlestick patterns with tick volume”
By Daniel Fernandez, Currency Trader, October 2010
A “double-doji” breakout strategy gets a boost from a tick-
superior performance can be attributed to the pair’s higher
volume filter.
liquidity and more stable trend tendencies, which result in
fewer whipsaws than in other pairs.
“Taking advantage of the Asian trading session”
The strategy produces what we would expect from a
By Daniel Fernandez, Currency Trader, June 2010
good long-term trend-following system: a relatively low
Breaking down the range characteristics of the Asian
trade frequency, a favorable average profit-to-loss ratio,
forex session produces some surprisingly reliable trading
and a winning percentage close or slightly below 50 per-
statistics.
cent. Also, Figure 3 shows the strategy manifested the
extended (one to three years) drawdowns characteristic of
“Using dynamic look-back periods in FX systems”
this type of trading strategy.
By Daniel Fernandez, Currency Trader, May 2010
Another aspect of Figure 3 is that the overall portfo-
A robust approach to making a trading system dynamic
lio’s equity curve has better characteristics than any of
improves profitability and shrinks drawdowns.
the individual currency pair curves. Because trends and
drawdowns do not always develop at the same time in the
“Trend transitions in forex”
three pairs, the composite performance is smoothed. This,
By Dave Landry, Currency Trader, October 2010
in turn, increases both the total and average compounded
Analysis of several transitional patterns, including a
yearly profits, while other system metrics, such as the prof-
similar multiple moving average approach called the “Bow
it-to-loss ratio and winning percentage, are a compromise
Tie.”
of the three individual currency pairs’ results.
Most importantly, the portfolio’s maximum
drawdown — although larger than that of any of the indi-
vidual pairs — is not what we would expect from totaling applied to different currency pairs which, although they
the three component drawdowns. Because the currency might not perform brilliantly individually, can provide
pairs’ profit and drawdown periods are not synchronized, much better results as a portfolio. y
the strategy is able to reduce overall risk through diversi- For information on the author, see p. 4.
fication.
Simple, effective FIGURE 3: EQUITY CURVES

The system’s performance
suggests Daryl Guppy’s idea
to follow trends based on the
alignment of a large group of
moving averages can be effec-
tively translated into a simple
trading strategy, and dem-
onstrates that complexity is
not necessary to achieve posi-
tive results when developing
trend-following techniques.
The simple base strategy
offers much room for experi-
mentation: trading a larger
basket of currencies, optimiz-
ing the moving averages, or
refining the entry and exit
rules to provide a better over-
all mathematical expectancy.
The strategy also allows trad- The portfolio’s profitability was much higher than the sum of the individual currency pairs’
ers to diversify, since it can be due to the lack of correlation between their drawdowns.

TRADING STRATEGIES
ADVANCED CONCEPTS
The yen and

Japanese bond markets
The idiosyncratic yen appears slightly less exceptional when analysis
adjusts for “perma-expectations” for higher interest rates in Japan.
BY HOWARD L. SIMONS
As anyone who has traded currencies for more than five ation (see “No man is anisland, but the UK is” August
minutes can attest, the yen is very different from other cur- 2010). Other currencies have imperfect links to prospective
rencies in its market rhythms (see “The yen stands alone,” returns on assets (see “Currencies and stock index per-
March 2006). Other currencies represent countries in performance,” April 2008). Other currencies trade as if short-
manent trade surplus, but many of these are pegged or term interest rate arbitrage does not matter, and still other
quasi-pegged to the dollar. Other currencies most certainly currencies, most notably the U.S. dollar and Swiss franc
are pushed around by domestic political considerations are funding currencies for carry trades (see “The short,
and are caught in the bizarre grip of competitive devalu- awful life of the dollar carry trade” and “Franc-ly my dear,
I don’t give a carry,”
August and September
FIGURE 1: SWAP SPREADS RENORMALIZING AFTER CRISIS 2008). It seems as if
only the yen combines
all of these qualities to
the extent a reasonable
trader can conclude,
“The yen’s not really a
market.”
Or is it? While cur-
rencies are linked more
to short-term interest
rates and movements
than to capital markets,
we should remember
all capital markets are
linked in a giant web
and what influences a
country’s bond market
must have a certain
The 10-year Japanese government bond yield and the 10-year swap spread had moved in parallel influence on its cur-
fashion between the May 2003 low in yields and the onset of the financial crisis in 2007 (green
rency market, too (see
rectangle). The swap spread has remained static since April 2010 even as bond yields have declined.
“Currency carry and

FIGURE 2: JAPANESE SWAP SPREADS SINCE DEC. 16, 2008
yield-curve trading,” January 2010). Let’s

take a look at the Japanese bond market and
include fixed-income volatility and swap
spreads in the analysis.
Swap spreads
A swap spread, as a refresher, is what a
borrower who is paying a floating rate of
interest on a bond will pay to fix those rates.
Rising swap spreads thus indicate fear of ris-
ing interest rates, and vice-versa. The courses
of 10-year Japanese government bond yields
and 10-year swap spreads had moved in a
parallel manner between the May 2003 low
in yields and the onset of the financial cri-
sis in 2007, marked with a green rectangle
(Figure 1). Swap spreads have remained stat-
ic since April 2010 even as bond yields have
declined; this stable demand to fix yields can
be interpreted as unease with the strength of
the Japanese bond rally.
While the short end of the yield curve saw fairly constant swap spreads,
Swap spreads plunged far further and at the long end swap spreads plunged to negative levels and then rose
faster during the height of the crisis in 2008 back toward zero.
and early 2009 than
10-year JGB yields. FIGURE 3: THE TERM STRUCTURE OF INTEREST-RATE VOLATILITY
Once the crisis passed
after March 2009, swap
spreads returned to a
normal convergence
path with JGBs.
That observation
holds for one tenor, or
time to maturity, for
swap spreads. If we go
back to the December
16, 2008 date when the
Federal Reserve first
moved to near-0 per-
cent short-term interest
rates and hinted that
quantitative easing
would be the next step,
and the Bank of Japan Although the one-year zero-coupon implied volatility in Japan (green axis) is much higher than
restarted quantita- those for longer maturities, Japan also has five-year volatility exceeding 10-year, 30-year, and
tive easing without two-year volatility, in that order — a jumbled structure that testifies to the confusion surrounding
the anticipated course of Japanese interest rates
announcing it, how

ON THE MONEY
ADVANCED CONCEPTS
FIGURE 4: JAPANESE YIELD CURVE NOW IN BULLISH FLATTENING

has the term structure of swap spreads
advanced? The short end of the yield
curve saw fairly constant swap spreads
(Figure 2). It was at the long end
where swap spreads plunged to nega-
tive levels and then rose back toward
zero. A negative swap spread can be
verbalized as, “I am so confident inter-
est rates are not going to rise you will
have to pay me to fix them.” Some
traders just have a mean streak.
Fixed-income volatility
Now let’s take a look at fixed-income
volatility in the Japanese market.
Implied volatility readings for zero-
coupon Japanese government secu-
rities are very different from their
American counterparts. In the U.S.,
volatilities tend to decline with matu-
rity. While the one-year zero-coupon
In Japan, just as in the U.S., the mad scramble to get yield, any yield, has implied volatility in Japan (marked
pushed investors further out along the maturity spectrum and has forced many in Figure 3 with a green axis) is much
to assume bond duration risks they may not understand. higher than those for longer maturi-
ties, Japan is witness to
FIGURE 5: THE YIELD CURVE HAS STOPPED LEADING VOLATILITY the odd spectacle of five-
year volatility exceeding
10-year, thirty-year and
two-year volatility, in
that order. This jumbled
structure stands as tes-
timony to the confusion
surrounding the expected
course of Japanese inter-
est rates.
The yield curve

The one aspect of
Japanese bond markets
not subject to confusion
in 2010 has been the bull-
ish flattening of the yield
curve (Figure 4). Note
While the FRR2,10 has tended to lead two-year zero-coupon volatility by 13 weeks in both how the short end of the
the U.S. and in the Eurozone, the relationship in Japan has ceased to exist. The very steep
yield curve is lying flat
FRR2,10 should be leading to greater hedge demand and thus higher volatility for two-year
notes, but the Japanese bond options market no longer seems to care. against the “floor” of 0
percent like a too-long

drapery hitting floor, while the long end of the yield should be leading to greater hedge demand and thus
curve has been moving lower in a classic waterfall fash- higher volatility for two-year notes, but the Japanese
ion since April 2010. In Japan, just as in the U.S., the bond options market, like the fictional Rhett Butler, no
mad scramble to get yield, any yield, has pushed inves- longer seems to give a damn.
tors further out along the maturity spectrum and has What we can see, however, is a far more direct rela-
forced many to assume bond duration risks they may tionship between the yen and the FRR2,10 in Japan. As
not understand. the Japanese yield curve steepens along this key seg-
We can extract one segment out of this yield curve ment of the capital market line, the yen strengthens
surface, the forward rate ratio between two and ten (Figure 6). This is a combination of expectations for
years. This is the rate at which borrowers can lock in higher long-term interest rates in Japan and for higher
money for eight years starting two years from now fixed-income volatility. Both of these elements are pres-
divided by the 10-year rate itself. The more this FRR2,10 ent in many other currencies’ evaluations, which sug-
exceeds 1.00, the steeper the yield curve. While the gests the yen is not as exceptional as it may seem if we
FRR2,10 has tended to lead two-year zero-coupon volatil- just shift the analysis forward in maturity to reflect the
ity by 13 weeks, a calendar quarter, very directly in both “perma-expectations” for higher interest rates in
the U.S. and in the Eurozone, the relationship in Japan Japan. y
has ceased to exist (Figure 5). The very steep FRR2,10 For information on the author, see p. 4.
FIGURE 6: THE YIELD CURVE AND THE YEN
As the Japanese yield curve steepens along this key segment of the capital market line, the yen strengthens — a
combination of expectations for higher long-term interest rates in Japan and for higher fixed-income volatility.

CURRENCY FUTURES SNAPSHOT as of 10/29/10
The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the
legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).
10-day 20-day 60-day Volatility

Market Sym Exch Vol OI
move / rank move / rank move / rank ratio / rank
EUR/USD EC CME 349.4 192.0 -0.47% / 0% 0.84% / 0% 5.41% / 45% .15 / 15%
JPY/USD JY CME 101.6 133.0 1.18% / 20% 3.51% / 79% 6.69% / 54% .13 / 18%
GBP/USD BP CME 108.0 83.8 0.23% / 0% 1.18% / 26% 0.86% / 9% .31 / 85%
AUD/USD AD CME 90.8 133.1 -0.74% / 67% 1.10% / 8% 6.97% / 29% .17 / 15%
CAD/USD CD CME 85.5 106.2 -0.64% / 13% -0.05% / 0% -0.36% / 10% .41 / 40%
CHF/USD SF CME 39.4 52.9 -2.64% / 57% -1.07% / 83% 6.33% / 28% .26 / 93%
MXN/USD MP CME 25.6 125.9 0.75% / 22% 1.80% / 23% 1.73% / 33% .25 / 13%
U.S. dollar index DX ICE 24.1 34.2 0.24% / 20% -1.09% / 16% -3.78% / 16% .15 / 17%
NZD/USD NE CME 6.3 26.4 1.11% / 14% 2.50% / 33% 4.42% / 69% .30 / 62%
E-Mini EUR/USD ZE CME 5.3 5.0 -0.47% / 0% 0.84% / 0% 5.41% / 45% .15 / 15%
Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is
based on pit-traded contracts.
LEGEND:
Volume: 30-day average daily volume, in
BarclayHedge Rankings
thousands. (as of 9/30/10, ranked by September 2010 return)
OI: 30-day open interest, in thousands. Top 10 currency traders managing more than $10 million
10-day move: The percentage price move
from the close 10 days ago to today’s close. $ Under
September 2010 YTD
20-day move: The percentage price move Trading Advisor Mgmt.
from the close 20 days ago to today’s close. Return Return
(Millions)
60-day move: The percentage price move
from the close 60 days ago to today’s close. 1. Friedberg Comm. Mgmt. (Curr.) 15.60% 56.79% 79.2
The “% rank” fields for each time window 2. QFS Asset Mgmt (QFS Currency) 10.62% 18.02% 757.0
(10-day moves, 20-day moves, etc.) show
the percentile rank of the most recent move 3. Silva Capital Mgmt (Cap. Partners) 10.50% 13.20% 18.3
to a certain number of the previous moves of 4. IKOS FX Fund 9.20% 29.74% 1111.0
the same size and in the same direction. For
5. Richmond Group (Gl. Currency) 7.16% 1.32% 37.0
example, the % rank for the 10-day move
shows how the most recent 10-day move 6. Harmonic Capital (Gl. Currency) 7.12% 6.66% N/A
compares to the past twenty 10-day moves;
7. Greenwave Capital Mgmt (GDS Alpha) 6.92% 7.56% 11.0
for the 20-day move, it shows how the most
recent 20-day move compares to the past 8. Greenwave Capital Mgmt (GDS Beta) 5.36% 4.02% 11.0
sixty 20-day moves; for the 60-day move,
9. Ortus Capital Mgmt. (Currency) 5.13% 21.16% 1579.0
it shows how the most recent 60-day move
compares to the past one-hundred-twenty 10. Millennium Global Currency (GBP) 5.11% 4.18% 277.8
60-day moves. A reading of 100% means
the current reading is larger than all the past Top 10 currency traders managing less than $10M & more than $1M
readings, while a reading of 0% means the
current reading is smaller than the previous 1. Vaskas Capital Mgmt (Global FX) 6.62% 0.18% 3.8
readings.
Volatility ratio/% rank: The ratio is the short- 2. Millennium Global Currency (USD) 4.82% 3.99% 2.5
term volatility (10-day standard deviation 3. Rove Capital (Dresden) 4.02% 9.55% 2.2
of prices) divided by the long-term volatility
4. King's Crossing Cap'l (FX Model) 2.06% -5.48% 7.5
(100-day standard deviation of prices). The
% rank is the percentile rank of the volatility 5. Armytage AAM (Asian Currency) 1.78% -11.59% 3.7
ratio over the past 60 days.
6. BEAM (FX Prop) 1.31% 8.23% 1.7
7. Basu and Braun (Everest Mgd.Accts) 1.13% 10.31% 1.2
8. CenturionFx Ltd 0.89% 6.90% 6.1
9. Drury Capital (Currency) 0.70% -0.19% 3.4
10. KMJ Capital (Currency) 0.47% -0.76% 7.5
Based on estimates of the composite of all accounts or the fully funded subset method.
Does not reflect the performance of any single account.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.
26 October 2010 • CURRENCY TRADER

November
INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)

Oct. 26
1-month 3-month 6-month 52-week 52-week
Rank Currency price vs. Previous
gain/loss gain/loss gain/loss high low
U.S. dollar
1 Japanese yen 0.01239 4.34% 8.40% 16.45% 0.01243 0.01053 15
2 Euro 1.401485 3.87% 8.57% 4.73% 1.5144 1.1891 3
3 Australian Dollar 0.993995 3.65% 10.99% 7.17% 1.033 0.8069 2
4 Swedish krona 0.152315 3.62% 11.29% 9.38% 0.1534 0.1227 1
5 Indian rupee 0.022545 2.99% 6.60% 0.20% 0.02274 0.02085 10
6 Thai baht 0.033535 2.90% 8.07% 7.85% 0.03358 0.02938 14
7 New Zealand dollar 0.75365 2.67% 3.64% 5.12% 0.7641 0.6561 5
8 Taiwan dollar 0.03267 2.51% 4.85% 3.08% 0.03267 0.03056 11
9 Singapore dollar 0.77388 2.31% 6.05% 6.06% 0.7747 0.702 9
10 Russian ruble 0.033035 1.93% 0.18% -3.69% 0.03497 0.03077 17
11 South African rand 0.144855 1.68% 7.69% 7.36% 0.1478 0.1204 6
12 Swiss franc 1.030465 1.25% 8.69% 10.55% 1.0566 0.853 4
13 Brazilian real 0.58661 0.71% 4.06% 3.04% 0.6075 0.5076 8
14 Chinese yuan 0.150205 0.71% 1.86% 2.57% 0.150400 0.146 13
15 Canadian dollar 0.981225 0.49% 1.65% -1.97% 1.0068 0.9195 7
16 Hong Kong dollar 0.128865 -0.05% 0.09% 0.03% 0.129 0.1281 16
17 Great Britain pound 1.57416 -0.53% 2.07% 2.36% 1.6877 1.4235 12
GLOBAL STOCK INDICES

Country Index Oct. 26 Previous
gain/loss gain/loss gain loss high low
1 Mexico IPC 35,373.39 6.80% 7.33% 4.74% 35,429.20 28,263.00 12
2 Hong Kong Hang Seng 23,601.24 5.64% 13.25% 9.33% 23,866.90 18,971.50 2
3 Germany Xetra Dax 6,613.80 5.33% 6.77% 4.45% 6,668.54 5,312.64 10
4 South Africa FTSE/JSE All Share 30,133.78 4.06% 5.74% 2.81% 30,439.46 25,793.06 3
5 Canada S&P/TSX composite 12,684.68 4.05% 7.99% 3.29% 12,710.20 10,745.20 14
6 U.S. S&P 500 1,185.64 3.81% 6.33% -2.18% 1,219.80 1,010.91 5
7 Italy FTSE MIB 21,363.52 3.74% 2.61% -6.23% 24,059 18,045 13
8 Brazil Bovespa 70,740.39 2.80% 6.47% 2.71% 72,140.00 57,634.00 11
9 UK FTSE 100 5,707.30 2.40% 6.66% -0.81% 5,833.70 4,790.00 7
10 France CAC 40 3,852.66 2.30% 5.95% -3.62% 4,088.18 3,287.57 4
11 Switzerland Swiss Market 6,476.60 2.17% 4.47% -4.81% 6,990.70 5,935.00 15
12 Singapore Straits Times 3,162.51 1.58% 6.59% 5.33% 3,220.71 2,605.10 9
13 Australia All ordinaries 4,761.50 0.83% 5.71% -3.09% 5,048.60 4,194.40 6
14 India BSE 30 20,221.39 0.52% 12.22% 13.95% 20,854.60 15,330.60 1
15 Japan Nikkei 225 9,377.38 -2.35% -1.33% -16.02% 11,408.20 8,796.45 8

NON-U.S. DOLLAR FOREX CROSS RATES

Rank Currency pair Symbol Oct. 26 Previous
gain/loss gain/loss gain loss high low
1 Euro / Pound EUR/GBP 0.89031 4.43% 6.37% 2.34% 0.9239 0.8065 5

2 Yen / Real JPY/BRL 0.021125 3.63% 4.17% 13.03% 0.02127 0.01838 19
3 Euro / Canada $ EUR/CAD 1.428305 3.37% 6.81% 6.84% 1.5983 1.2502 11
4 Aussie $ / Canada $ AUD/CAD 1.013015 3.14% 9.18% 9.32% 1.0134 0.8643 4
5 Euro / Real EUR/BRL 2.3842 2.93% 4.12% 1.44% 2.6379 2.1772 10
6 Aussie $ / Real AUD/BRL 1.694485 2.91% 6.65% 4.01% 1.6982 1.4954 3
7 Euro / Franc EUR/CHF 1.36004 2.59% -0.10% -5.26% 1.5173 1.2763 13
8 Aussie $ / Franc AUD/CHF 0.96461 2.31% 2.12% -3.05% 1.0079 0.8949 9
9 Aussie $ / New Zeal $ AUD/NZD 1.31891 0.95% 7.10% 1.96% 1.3233 1.2088 8
10 Franc / Canada $ CHF/CAD 1.05018 0.76% 6.92% 12.77% 1.0657 0.8989 15
11 Euro / Aussie $ EUR/AUD 1.40995 0.22% -2.12% -2.28% 1.6627 1.3633 18
12 Canada $ / Real CAD/BRL 1.672715 -0.22% -2.32% -4.86% 1.8244 1.6003 16
13 Euro / Yen EUR/JPY 113.095 -0.46% 0.15% -10.06% 138.473 105.404 2
14 Aussie $ / Yen AUD/JPY 80.225 -0.67% 2.42% -7.98% 88.048 72.0981 1
15 Pound / Canada $ GBP/CAD 1.604285 -1.01% 0.41% 4.42% 1.7882 1.4894 17
16 New Zeal $ / Yen NZD/JPY 60.815 -1.62% -4.41% -9.76% 69.5279 58.9096 7
17 Pound / Franc GBP/CHF 1.527595 -1.76% -6.11% -7.42% 1.7112 1.5097 20
18 Franc / Yen CHF/JPY 83.15 -2.98% 0.31% -5.07% 91.549 76.36 6
19 Canada $ / Yen CAD/JPY 79.18 -3.71% -6.23% -15.84% 94.1955 79.0966 12
20 Pound / Aussie $ GBP/AUD 1.58367 -4.03% -8.03% -4.49% 1.8296 1.58367 21
21 Pound / Yen GBP/JPY 127.07 -4.65% -5.78% -12.07% 151.731 126.422 14
GLOBAL CENTRAL BANK LENDING RATES

Country Interest Rate Rate Last change April-10 Oct-09
United States Fed funds rate 0-0.25 0.5 (Dec. 08) 0-0.25 0-0.25
Japan Overnight call rate 0 0.1 (Oct. 10) 0.1 0.1
Eurozone Refi rate 1 0.25 (May 09) 1 1
England Repo rate 0.5 0.5 (March 09) 0.5 0.5
Canada Overnight funding rate 1 0.25 (Sept 10) 0.25 0.25
Switzerland 3-month Swiss Libor 0.25 0.25 (March 09) 0.25 0.25
Australia Cash rate 4.5 0.25 (May 10) 4.25 3.25
New Zealand Cash rate 3 0.25 (July 10) 2.5 2.5
Brazil Selic rate 10.75 0.5 (July 10) 8.75 8.75
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 6 0.25 (Sept 10) 5,25 4.75
South Africa Repurchase rate 6.5 0.5 (Mar. 10) 7 7

INTERNATIONAL MARKETS
Unemployment Period Release date Rate Change 1-year change Next release
Argentina Q2 8/23 7.9% -0.4% -0.9% 11/22
AMERICAS Brazil Sept. 10/21 6.2% -0.5% -1.5% 11/25
Canada Sept. 10/8 8.0% -0.1% -0.3% 11/5
France Q2 9/2 9.3% -0.2% 0.2% 12/2
EUROPE Germany Sept. 10/28 6.7% -0.1% -0.9% 11/30
UK May-July 9/15 7.8% -0.1% -0.1% 11/17
Australia Sept. 10/7 5.1% -0.1% -0.6% 11/11
Hong
ASIA and July-Sept. 10/19 4.2% 0.0% -1.2% 11/16
Kong
S. PACIFIC Japan Aug. 10/1 5.1% -0.1% -0.1% 11/1
Singapore Q2 7/30 2.3% 0.1% -0.9% 10/29
GDP Period Release date Change 1-year change Next release
Argentina Q2 9/17 23.9% 12.8% 12/17
AMERICAS Brazil Q2 9/3 1.2% 9.0% 12/9
Canada Q2 8/31 0.7% 6.7% 11/30
France Q2 8/13 0.7% 6.7% 11/30
EUROPE Germany Q2 8/13 2.3% 4.9% 11/12
UK Q2 9/28 1.4% 5.8% 12/22
AFRICA S. Africa Q2 8/24 -4.4% -4.7% 11/30
Australia Q2 9/1 0.9% 3.2% 12/1
Hong Kong Q2 8/13 0.4% 6.5% 11/12
ASIA and S. India Q2 8/31 19.1% 8.8% 11/30
PACIFIC
Japan Q2 8/16 0.1% 0.4% 11/15
Singapore Q2 8/27 7.8% 18.8% NLT 11/26
CPI Period Release date Change 1-year change Next release

Argentina Sept. 10/15 0.7% 11.1% 11/12
AMERICAS Brazil Sept. 10/7 0.5% 4.7% 11/9
Canada Sept. 10/22 0.2% 1.9% 11/23
France Sept. 10/13 0.1% 1.6% 11/10
EUROPE Germany Sept. 10/12 -0.1% 1.3% 11/9
UK Sept. 10/12 0.0% 1.1% 11/16
AFRICA S. Africa Sept. 10/27 0.1% 3.2% 11/24
Australia Q3 10/27 0.7% 2.8% 1/25
Hong Kong Sept. 10/21 0.3% 2.6% 11/22
ASIA and
S. PACIFIC
India Sept. 10/29 0.0% 9.9% 11/30
Japan Aug. 10/1 0.3% -0.9% 11/1
Singapore Sept. 10/25 0.0% 3.7% 11/23
PPI Period Release date Change 1-year change Next release

Argentina Sept. 10/15 0.9% 15.1% 11/12
AMERICAS
Canada Aug. 9/29 0.4% 0.6% 10/29
France Sept. 10/28 0.1% 1.6% 11/30
EUROPE Germany Sept. 10/20 0.3% 3.9% 11/19
UK Sept. 10/8 0.3% 4.4% 11/5
AFRICA S. Africa Sept. 10/28 -4.1% 6.8% 11/25
Australia Q3 10/25 1.3% 2.2% 1/24
Hong Kong Q3 9/13 2.1% 5.9% 12/13
ASIA and India Sept. 10/14 0.2% 5.4% 11/14
S. PACIFIC
Japan Sept. 10/14 0.0% -0.1% 11/11
Singapore Aug. 9/29 -0.1% -1.5% 10/29
As of Oct. 28, 2010 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

ACCOUNT BALANCE
Rank Country 2009 Ratio* 2008 2010+
1 Singapore 32.387 17.773 35.815 44.481
2 Norway 49.58 13.096 79.885 68.572
3 Taiwan Province of China 42.916 11.338 27.505 42.639
4 Hong Kong SAR 18.278 8.68 29.296 18.899
5 Switzerland 41.697 8.476 10.234 50.004
6 Sweden 29.43 7.247 37.279 26.439
7 Netherlands 42.702 5.36 41.978 44.024
8 Korea 42.668 5.125 -5.776 26.041
9 Germany 163.256 4.89 245.722 200.188
10 Japan 141.751 2.796 157.079 166.463
11 Belgium 1.333 0.282 -14.891 2.321
12 United Kingdom -24.259 -1.113 -44.063 -50.31
13 Czech Republic -2.146 -1.128 -1.255 -2.358
14 United States -378.434 -2.68 -668.856 -466.513
15 Canada -38.075 -2.85 6.483 -44.245
16 Ireland -6.705 -3.015 -13.886 -5.582
17 Italy -67.151 -3.17 -78.874 -58.272
18 Australia -43.693 -4.395 -47.477 -29.828
19 Spain -81.198 -5.532 -155.962 -71.92
Totals in billions of U.S. dollars *Account balance in percent of GDP +Estimate
Source: International Monetary Fund, World Economic Outlook Database, October 2010
EVENTS
Event: Third Annual Inside Commodities Conference Event: 2011 CBOE Risk Management Conference
Date: Nov. 4 Date: Feb. 27–March 1
Location: New York Stock Exchange Location: St. Regis Monarch Beach resort,
For more information: Go to Dana Point, Calif.
www.insidecommoditiesconference.com/br For more information: Go to www.cboeRMC.com
Event: Las Vegas Traders Expo Event: London Traders Expo

Date: Nov. 17-20 Date: April 8-9
Location: Caesars Palace, Las Vegas Location: Queen Elizabeth II Conference Centre
For more information: Go to www.moneyshow.com For more information: Go to www.tradersexpo.com
Event: The World MoneyShow Orlando 2011 Event: Dallas Traders Expo
Date: Feb. 9-12 Date: June 15-18
Location: Gaylord Palms Resort, Orlando Location: Hyatt Regency Dallas at Reunion
Show focus: Asia & Emerging Markets For more information: Go to www.tradersexpo.com
For more information: Go to
www.moneyshow.com/twms/?scode=013104 Event: The World MoneyShow Vancouver 2011
Date: July 7-9
Event: New York Traders Expo Location: Vancouver Convention Centre
Date: Feb. 20-23 For more information: Go to
Location: Marriott Marquis Hotel, New York City www.moneyshow.com/vcms/?scode=013104
For more information: Go to www.tradersexpo.com

GLOBAL ECONOMIC CALENDAR: NOVEMBER
1 17 U.S.: October CPI and housing

CPI: Consumer price index
ECB: European Central Bank 2 starts
FDD (first delivery day): The first 3 U.S.: October ISM manufacturing UK: September employment report
day on which delivery of a com-
modity in fulfillment of a futures report and FOMC interest-rate 18 U.S.: October leading indicators
contract can take place.
FND (first notice day): Also
announcement 19 Germany: October PPI
known as first intent day, this is 4
UK: Bank of England interest-rate LTD: November forex options
the first day on which a clear-
inghouse can give notice to a announcement 21
buyer of a futures contract that it
intends to deliver a commodity in
5
U.S.: October employment report 22 Hong Kong: October CPI
fulfillment of a futures contract. Canada: October employment report Mexico: Q3 GDP
The clearinghouse also informs
the seller. UK: October PPI 23 Canada: October CPI
FOMC: Federal Open Market
ECB: Governing council interest-rate South Africa: Q3 GDP
Committee
GDP: Gross domestic product announcement 24 U.S.: October personal income and
ISM: I nstitute for supply
LTD: November U.S. dollar index durable goods
management
LTD (last trading day): The final options (ICE) Mexico: Nov. 15 CPI
day trading can take place in a
futures or options contract.
6 South Africa: October CPI
PMI: P
urchasing managers index 7 25 Brazil: October employment report
PPI: P
roducer price index
8 Mexico: October employment report
Economic Release 9 Brazil: October CPI South Africa: October PPI
release (U.S.) time (ET)
GDP 8:30 a.m. Germany: October CPI 26 Japan: October CPI
CPI 8:30 a.m.
ECI 8:30 a.m.
Mexico: Oct. 31 CPI and October
27
PPI 8:30 a.m. PPI 28
ISM 10:00 a.m.
Unemployment 8:30 a.m.
10 U.S.: September trade balance 29 Canada: October PPI
Personal income 8:30 a.m. Brazil: October PPI 30 Canada: Q3 GDP
Durable goods 8:30 a.m.
Retail sales 8:30 a.m. France: October CPI France: October PPI
Trade balance 8:30 a.m. 11 Australia: October employment Germany: October employment
Leading indicators 10:00 a.m.
report report
Japan: October PPI India: Q3 GDP and October CPI
November 2010 12 France: Q3 GDP Japan: October employment report
31 1 2 3 4 5 6 Germany: Q3 GDP
7 8 9 10 11 12 13
13 December
14 15 16 17 18 19 20
14 India: October PPI 1 U.S.: Fed beige book and November
21 22 23 24 25 26 27
28 29 30 1 2 3 4 15 U.S.: October retail sales ISM manufacturing report
Japan: Q3 GDP Australia: Q3 GDP
The information on this page is 16 U.S.: October PPI 2 France: Q3 employment report
subject to change. Currency Trader
is not responsible for the accuracy Hong Kong: August-October em- 3 U.S.: October employment report
of calendar dates beyond press
ployment report LTD: December U.S. dollar index
time.
Japan: Bank of Japan interest-rate options (ICE)
announcement
UK: October CPI

FOREX TRADE JOURNAL
XXXXXX
Buying high and looking higher.
TRADE
Date: Friday, Oct. 29, 2010.
Entry: Long the Australian dollar/U.S.

dollar (AUD/USD) at .9795.
Reason for trade/setup: With the Source: TradeStation

pair having recently surpassed its late-
2008 high and hitting 1.0000 for the first time since 1982, Profit/loss: .0135.
it might not appear to be the best time to attempt a long
trade. However, after a roughly three-week consolidation/ Outcome: The market made a favorable move when
pullback, the pair has twice bounced off established sup- trading resumed on Nov. 1, rallying to .9914 (.0017 shy of
port around .9650, and further near-term U.S. dollar weak- the initial profit target) and triggering an upward adjust-
ness looms in reaction to renewed quantitative easing by ment of the stop to .9802. The pair pulled back to around
the Federal Reserve. The question: Has the market already .9830 intraday, forming an obvious chart support level a
pulled back enough, or is it likely to retrace a larger por- fair distance above the stop.
tion of the September-October rally before making another The next day, the pair made a serious jump, blasting
upside run? (This was a paper trade.) through the initial target and reclaiming the 1.000 level.
The stop was then raised to .9895, thus locking in .0100
Initial stop: .9654. Raise stop to breakeven on a move profit (less commissions) on the remainder of the trade. y
above .9870.
Note: Initial trade targets are typically based on things such as the historical per-
Initial target: .9930. Take partial profits and raise stop. formance of a price pattern or a trading system signal. However, because individ-
ual trades are dictated by immediate circumstances, price targets are flexible and
RESULT are often used as points at which to liquidate a portion of a trade to reduce expo-
sure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.
Exit: .9930.
TRADE SUMMARY
Currency Entry Initial Initial P/L Trade
Date IRR Exit Date LOP LOL
pair price stop target point % length
10/29/10 AUD/USD .9795 .9654 .9930 0.96 .9930 11/2/10 .0135 1.38% .0211 -.0008 2 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).

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THE YEN AND JAPANESE BONDS p.

Strategies, analysis, and news for FX traders

MULTI-MOVING SPOT CHECK:

DOES THE AUSSIE DOLLAR

Contributors....................................................... 4 Currency Futures Snapshot.................. 26

Global Markets International Markets............................. 28

On the Money Global Economic Calendar......................... 32

Trading Strategies Looking for an

expectations” of higher interest rates in Japan.

2 November 2010 • CURRENCY TRADER

q Howard Simons is president of Rose-

Howard Simons articles on forex trading (http://fxreviews.blogspot.com).

q Barbara Rockefeller (www.rts-forex.com) is an inter-

Classified ad sales: Mark Seger

Volume 7, Issue 11. Currency Trader is published monthly by TechInfo, Inc.,

The information in Currency Trader magazine is intended for educational

4 November 2010 • CURRENCY TRADER

Download the latest software at: www.eSignal.com/mobile/download,

*Exchange fees apply on all data.

QE2: Who wins, who loses?

BY CURRENCY TRADER STAFF

6 November 2010 • CURRENCY TRADER

CURRENCY TRADER • November 2010 7

However, Pressler looks at the ris-

8 November 2010 • CURRENCY TRADER

See the complete schedule and get a free pass at:

Upside dollar correction?

10 November 2010 • CURRENCY TRADER

Don’t fight the Fed

12 November 2010 • CURRENCY TRADER

CURRENCY TRADER • November 2010 13

14 November 2010 • CURRENCY TRADER

CURRENCY TRADER • November 2010 15

Australian dollar/U.S. dollar

BY CURRENCY TRADER STAFF

In October, the Australian dollar/U.S.

16 November 2010 • CURRENCY TRADER

In his 1997 book Trading Tactics: An Introduction to trading systems do.

The trading strategy

18 October 2010 • CURRENCY TRADER

Trade FX with dbFX

FIGURE 2: SAMPLE TRADES

high (i.e., all moving average

Position size = (0.004 *

20 November 2010 • CURRENCY TRADER

Simple, effective FIGURE 3: EQUITY CURVES

CURRENCY TRADER • November 2010 21

The yen and

22 November 2010 • CURRENCY TRADER

yield-curve trading,” January 2010). Let’s

CURRENCY TRADER • November 2010 23

FIGURE 4: JAPANESE YIELD CURVE NOW IN BULLISH FLATTENING

The yield curve

24 November 2010 • CURRENCY TRADER

FIGURE 6: THE YIELD CURVE AND THE YEN

CURRENCY TRADER • November 2010 25

10-day 20-day 60-day Volatility

26 October 2010 • CURRENCY TRADER

CURRENCIES (vs. U.S. DOLLAR)

GLOBAL STOCK INDICES

28 November 2010 • CURRENCY TRADER

1-month 3-month 6-month 52-week 52-week

1 Euro / Pound EUR/GBP 0.89031 4.43% 6.37% 2.34% 0.9239 0.8065 5

1 17 U.S.: October CPI and housing