THE EURO AND THE NEW DEBT CRISIS p.

10

Strategies, analysis, and news for FX traders

December 2010
Volume 7, No. 12

How low can

the Euro go? p. 14
Brazil’s hot-money conundrum:
A real problem? p. 6 Intraday pivot-point
strategy p. 18
Asymmetric currency risks:
Not all currencies are A go-round in
created equal p. 22 the pound p. 33
 CONTENTS

Contributors....................................................... 4 Advanced Concepts

Global Markets
The Brazilian real:
Between a bull and a hard place................6
Attractive fundamentals square off against the
reality of a government determined to keep its
economy and currency from boiling over.
By Currency Trader Staff
On the Money
The Euro takes on another debt crisis... 10
Europe deals with another debt crisis as the
year winds down. What are the implications for
the Euro — and the U.S. debt situation?
By Barbara Rockefeller
Spot Check
Euro/U.S. dollar......................................... 14
Weak Euro could get weaker before rebounding.
By Currency Trader Staff
Asymmetric currency risks ....................... 22
Take note, currency traders: One size does
not fit all when it comes to market analysis and
trading system design.
By Howard L. Simons
Currency Futures Snapshot.................. 26
International Markets............................. 28
Numbers from the global forex, stock, and
interest-rate markets.
Events ........................................................31
Conferences, seminars, and other events.
Global Economic Calendar......................... 32
Important dates for currency traders.

Looking for an
Trading Strategies
Daily pivot breakouts............................... 18 advertiser? 
When attempting to trade mechanically defined
Click on the company name for a
intraday support and resistance levels, don’t
direct link to the ad in this month’s
forget the time element. issue.
By Daniel Fernandez

dbFX
eSignal
FXCM
Managed Futures Today
PFGBEST

Questions or comments?
Submit editorial queries or comments to
webmaster@currencytradermag.com

2 December 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 12. 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
guarantee future results.

4 December 2010 • CURRENCY TRADER

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 GLOBAL MARKETS

The Brazilian real:

Between a bull and a hard place
Attractive fundamentals square off against the reality of a government
determined to keep its economy and currency from boiling over.

BY CURRENCY TRADER STAFF

After surging more than 20 percent in 2009 vs. the U.S.
dollar, the Brazilian real (BRL) is heading into year-end
at a level little-changed vs. the buck, having wandered in
a long-term trading range since its November-December
2009 highs (Figure 1). This relatively stagnant price action,
however, belies the heated political-market tug-of-war
behind the scenes of the Brazilian currency, which still
offers one of the most bullish interest rates in the world —
perhaps too bullish for its own good.
The story has its roots in the flood of global liquidity
unleashed in response to the 2008-2009 financial crisis,
which was recently renewed by the Federal Reserve’s sec-
ond round of quantitative easing (see “QE2: Who wins,
FIGURE 1: A TAME 2010
The dollar/Brazilian real rate is back where it was approximately one year ago.
Source for all charts: ADVFN.com
who loses?” Currency Trader, November 2010). With excess
liquidity sloshing around the financial system, money
managers continue to view the high-yielding BRL as a
profitable vehicle. Another facet of the story is the signifi-
cant weakening of major currencies around the world,
which has prompted some Asian central banks to inter-
vene to keep the relative value of their currencies low.
A bullish currency and favorable interest-rate differential
might seem like great problems to have, but one of Brazil’s
major concerns is that it’s in danger of getting too much of
a good thing. In short, too much global capital is flowing
into Brazil in search of increasingly rare returns that are
unavailable elsewhere. In September, Brazilian government
officials characterized the dramatic
weakening of major currencies as an
“international currency war” because
it gives countries with weaker curren-
cies an unfair advantage at the export
table. The BRL rallied toward its July
2008 pre-Lehman Brothers collapse
level in mid-October, and the Brazilian
Ministry of Finance went on the attack
for the second time in 2010 against the
rush of foreign capital inflows into its
country.
The USD/BRL move from the
January 2010 high at $1.8950 to the
October low at $1.6450 represented a
13-percent depreciation of the dollar vs.
the Brazilian currency. Global money
managers have been attracted to the
high Brazilian central bank lending
rate (the selic rate), currently at 10.75
percent.
However, concerns the BRL has

6 December 2010 • CURRENCY TRADER

appreciated too fast and too far, putting the Brazilian Brazilian econ overview:
export sector at risk, resulted in decisive action from the More than an exporter
government. Latin America as a whole has bounced back smartly
from the global recession. Alfredo Coutino, director of
Government applies brakes Latin America at Moody’s Analytics, estimates 2010 Latin
To help cool the hot-money inflows, the Brazilian govern- American GDP growth to come in at 5.8 percent, with the
ment initially instituted a 2-percent financial-transaction LatAm recovery being led by Brazil, Argentina, Chile,
tax called the IOF (Imposto sobre Operações Financeiras) on Peru, and Colombia. He says these countries “are doing
foreign capital inflows in October 2009, which it upped to extremely well because of a lower dependence on exports
4 percent in September 2010 on fixed-income investments. and because their export sectors are more diversified.” By
Just two weeks later, it hiked the tax again, this time to 6 contrast, Mexico and Central America are more directly
percent. tied to the United States as a trading partner.
“The tax is levied on the way in,” explains Marcelo Moody’s forecasts a 7-percent 2010 GDP reading for
Salomon, chief Brazil economist at Barclays. “[Investors] Brazil, throttling down to a still-robust 5 percent in 2011.
pay 6 percent up front to buy a bond.” “The recovery process post-global financial crisis was
In their Nov. 1 LatAm FX Focus report, HSBC Global very strong in Brazil,” Salomon says.
Research analysts wrote: “Very generally speaking, the In addition to exports, domestic demand has bolstered
Brazilian authorities draw a clear distinction between ‘pro- growth numbers in Brazil. Wells Fargo economists forecast
ductive’ and ‘speculative’ inflows. For instance, the gov- a 7.8 percent 2010 GDP reading, moderating to 5.3 percent
ernment tends to see equity inflows as being ‘productive’ in 2011.
in the sense that they buy ownership and provide local “The economy has slowed down from its break-neck
companies with capital to grow. This view helps to explain pace reported during the first half of the year, [but] it is
why equity investors have been exempt in the recent IOF still growing at a reasonably strong pace,” wrote Wells
tax increases. For similar reasons, we would not expect the Fargo economists in the Nov. 16 Global Chartbook. “Exports
authorities to target FDI (foreign direct investment) or for grew by 30.5 percent during October year-over-year…
that matter, foreign borrowing by local companies.” [a]nd retail sales increased by 11.8 percent in August com-
The attempt to stem the tide of foreign inflows appears pared to the same month a year earlier.”
to have initially worked, as the USD/BRL rate strength- Coutino notes that China has become Brazil’s largest
ened from $1.6450 in mid-October to
$1.7390 in mid-November (Figure 2).
FIGURE: 2 COOLING A HOT CURRENCY
Also, Salomon notes the IFO tax “did
make a difference as [bond] yields
increased on the long end.”
Enrique Alvarez, head of Latin
American Research at Ideaglobal,
agrees the IOF has achieved its pur-
pose.
“We had a steeply appreciating cur-
rency to 1.6500, now we have a cur-
rency that’s much more challenged to
break 1.7000,” he says.
From a macroeconomic perspective,
Brazil continues to boast strong growth
out of the global recession, healthy
export trade to China, surging domes-
tic demand and a new president set to
take office in January 2011. How will
this economic bullishness and govern- The attempt to stem the tide of foreign inflows appears to have initially worked,
ment vigilance play out in the BRL into as the USD/BRL rate strengthened from $1.6450 in mid-October to $1.7390 in
year-end and in 2011? mid-November.

CURRENCY TRADER • December 2010 7

 GLOBAL MARKETS
trading partner, with 15 percent of total Brazilian exports
headed to China, vs. only 10 percent to the U.S.
“No matter what happens in the U.S., Brazil can still
perform well as long as China is performing well,” he
says. After posting a severe 10.3-percent drop-off in 2009,
Brazilian exports are expected to rise 8 percent overall in
2010 and 6.1 percent in 2011.
Salomon says the growth in Brazil is much more than a
commodity story — i.e., simply a function of Brazil being a
major raw products exporter, which it is. The country has
undergone a major internal transformation over the past
decade. According to Salomon, in 2003 the middle class
comprised 23 percent of the Brazilian population, but that
segment ballooned to 51 percent by 2008.
“There was an increase in the empowerment in the
middle class,” he says. “Job market creation grew very fast.
Domestic demand is more important today than external
demand.”
Brazil’s prosperity is reflected in its ever-increasing inter-
national profile. The country is preparing for both the 2014
World Cup and the 2016 summer Olympics. The new infra-
structure — including roads, bridges, and airports — being
built for those events is also bolstering economic growth.
Dampening the economic flames
In response to this boom, the Brazilian central bank initiat-
ed a monetary tightening phase, first hiking rates in April
from 8.75 to 9.5 percent. The current rate is 10.75 percent.
The next interest rate policy meeting is set for Dec. 8, but
economists largely expect the central bank to keep rates
steady, as additional hikes would increase the interest rate
differential, attracting even more foreign capital inflows to
the country and currency. (Click here to see the outcome of
the meeting and the BRL’s initial reaction.)
The political arena
Dilma Rousseff, Brazil’s newly elected, first female presi-
dent, takes office in January. In a country that has wit-
nessed political turmoil in the past, her decisive 56-percent
electoral victory was a welcome episode of sustained polit-
ical stability. The prevailing view among politicos is that
her government will more or less perpetuate the policies of
popular outgoing President Luiz Inacio Lula da Silva.
Coutino wrote in a Nov. 9 Moody’s research report:
“By electing Dilma Rousseff as president, Brazilians have
affirmed the country’s current economic policies, which
have led to sustained growth, stable prices, and social
progress. Rousseff, of the Worker’s Party, will continue
the current model of free-market policies combined with
social programs. Indeed, some Brazilians perceive the elec-
tion as an extension of the legacy of social and economic
8 December 2010 • CURRENCY TRADER
development of outgoing President Luis Inacio Lula da
Silva. However, Rousseff, an economist, may want to put
her own stamp on her administration. Though the elec-
tion marks a continuation of economic policies, it is also a
departure for the country, because this time Brazil will not
face the disruption that has accompanied political transi-
tions over the past several decades.”
As the new government assumes power, analysts will be
watching the level of government spending.
“We saw fiscal expansion going into the elections,” says
Dirk Willer, head of Latin America local markets strategy
at Citigroup in New York. “Generally, after [an] election,
you see fiscal contraction.” He notes that budget expendi-
ture growth rates topped 20 percent heading into the presi-
dential election.
A fiscal contraction, he explains, could involve slowing
growth of expenditures, few big government spending
projects, and a lower increase in the minimum wage — all
of which could potentially put minor pressure on the BRL.
“It could mean less GDP growth, and be a slight nega-
tive for the currency,” Alvarez says.
FX action
Although the BRL had gained a mere 0.17 percent vs. the
dollar year-to-date through Nov. 16, few analysts see a
great deal of downside risk in the currency despite the
government’s efforts to keep the economic pot from boiling
over.
Michael Woolfolk, managing director at BNY Mellon in
New York, summed up his outlook for the BRL with three
words: “It’s still hot.” Foreign direct investment is posi-
tive, he says, and he sees very little to detract from further
upside in the currency.
It’s widely viewed the U.S. Fed’s renewed quantitative
easing campaign will keep global financial market liquidity
strong, which likely means capital flows will still be aimed
squarely at Brazil.
“As long as QE2 is out there, the overflow of funds
should prefer Brazil because of the interest-rate differen-
tials,” Alvarez says. “The natural path in 2011 will be for
the real to appreciate.”
However, he says the current 6-percent IOF tax repre-
sents “a permanent feature that longs in the currency are
going to have to fight.”
Salomon adds, “The government has signaled a strong
intention. It will throw a lot of sand in the currency appre-
ciation trend.”
Although the increase to 6 percent in the IOF tax was
seen as market unfriendly — and it certainly impacted the
BRL — it doesn’t negate the bullish case for the currency
longer-term, according to Willer.
 “The carry [interest-rate advantage] is still high enough
that the real still has to appreciate,” he says. “I would
expect further appreciation next year. The authorities will
fight it, so it will probably be slower than it would be oth-
erwise.”
Risks on the horizon
Of course, Brazil’s economy and currency face several
risks, inflation ranking high among them.
“Right now, the biggest risk for Brazil is that infla-
tion expectations are becoming unanchored,” Alvarez
says. “They can’t use monetary policy to curtail inflation,
because higher interest rates would increase inflows, and
that’s exactly what they don’t want. The central bank’s
hands are tied by the Fed right now.”
As of October, Brazilian CPI stood at 5.2 percent. The
country’s official inflation target of 4.5 percent, plus or
minus 2 percent.
“How do you bring inflation down if there’s huge global
liquidity searching for yield? It’s a big dilemma,” he says.
Willer also views the U.S. economy as a potential risk.
If people are reading the U.S. economy completely wrong
and the Fed has to abandon quantitative easing earlier
than expected, he argues, it could detract from flows into
the BRL.
“[Also], if China were to have a harder landing [than
expected], that would be quite negative,” he says.
lower price level as something of a line in the sand. “It
shouldn’t cross 1.6500 because of the intervention risk,” he
says.
The longer-term picture is a different story. Looking far-
ther out, a major long-term objective for BRL bulls lies at
the pre-Lehman Brothers collapse level at $1.5500/1.5600
from August 2008 (Figure 3).
“Our view is that we will get to that level eventually,”
says Wells Fargo currency strategist Vassili Serebriakov.
However, he adds the path may be uneven because “the
real remains very sensitive to global risk appetite.” Also,
he believes the government’s attempt at capital controls
will slow, but not reverse, the BRL’s longer-term trend.
“For those who have a medium to longer-term perspec-
tive, our bias is to be a buyer on weakness in the Brazilian
real,” he says.
Coutino voices the most bullish view on Brazil’s cur-
rency, with a USD/BRL target of 1.500 for the first half of
2011.
“It’s one of the most attractive markets for portfolio
investors,” he says. “Real interest rates in Brazil are one of
the highest in the world at 10.75 percent.”
And like several other analysts, Coutino believes the
government’s capital controls won’t derail the currency’s
long-term trajectory, despite its short-term impact.
“The speed of the revaluation process slowed, but they
didn’t reverse the trend of the exchange rate,” he says. y

Currency real-ity
FIGURE 3: 2008 IN SIGHT?
Given the contrary forces at work in the
BRL market — attractive interest rates
on the one hand and pointed efforts to
cool the currency on the other — it’s
not surprising that many of the shorter-
term calls on the Brazilian currency
describe flat to mildly bullish price
action. Alvarez sees the BRL mostly
trading in a range between 1.6800 and
1.7300 into year-end. “There’s a tug-
of-war between the market and the
Brazilian authorities around that level,”
he says.
Salomon pegs a slightly higher range
into year-end between 1.7500 and
1.6500, explaining that moves toward
1.7500 would be driven by “global jit-
ters” and risk aversion, while moves
Longer-term, some analysts believe there are few impediments to the BRL’s
toward 1.6500 would occur when those
bullish fundamentals, and that the USD/BRL pair could reach its 2008 low.
jitters subside. However, he sees the

CURRENCY TRADER • December 2010 9

 ON THE
On the MONEY
Money

The Euro takes on

another debt crisis
Europe deals with another debt crisis as the year winds down. What are
the implications for the Euro — and the U.S. debt situation?

BY BARBARA ROCKEFELLER

Will the Euro survive the sovereign debt crisis? In a nut- European Financial Stability Facility (EFSF) was instituted.
shell, yes. But as the debt-solution process evolves, the Transferring this same move, in size and slope, from the
market can be expected to overreact in both expected and Irish crisis going forward in time, projects a Euro low of
unexpected ways. The Euro is likely to come out on the 1.1091 around mid-May 2011.
other end considerably battered and bruised. Of course, this is not how things work. History repeats,
First, look at Figure 1. The Greek debt crisis carried the but not exactly. It took six months for the Greek saga to
Euro from a peak of 1.5142 in late November 2009 to a low play out, but only about two weeks for worries about
of 1.1956 in June 2010. The drop was put on hold when the Ireland to transform into a crisis. The current chatter about
Barbara Rockefeller
Currenyc Trader Mag Dec 2010 Portugal and Spain will surely take
Figure 1: EMU Memember Debt Crises
FIGURE 1: THE EURO AND THE GREEK DEBT CRISIS much less time to develop into a crisis,
Euro (1.36720, 1.37860, 1.35770, 1.36230, -0.00650) if that’s what’s coming. Once crisis
mode gets the upper hand in the mind
Greek Debt of the market, the process moves along
Crisis Begins
1.45 at a faster pace. In fact, it’s a good
Irish Debt
Crisis Begins bet that by mid-May next year, the
1.40
entire peripheral country debt issue,
including Portugal and Spain, will be
1.35
wrapped up. The European institu-
1.30 tional response, frustratingly slow and
incomplete at the beginning, is becom-
1.25 ing increasingly energetic.
1.20
Grappling with the issue
1.15 Energetic, yes, but questions about
adequacy remain. Consider that “con-
1.10 tagion” is more than a psychological
phenomenon and far from irrational.
The Bank for International Settlements
1.05

1.00
(BIS) reports the three largest credi-
ug Sep Oct Nov Dec 2010 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Feb Mar Apr May Jun Jul Aug tors to the Irish economy were, as of
The Greek debt crisis carried the Euro from a peak of 1.5142 in late November end-June, Germany, with €109 billion
2009 to a low of 1.1956 in June 2010. in exposure, or 4.5 percent of German
Source for all figures: Chart — Metastock; data — Reuters and eSignal
GDP. The UK comes next, with €100

10 December 2010 • CURRENCY TRADER

billion, or 7 percent of GDP, and France, with €40 billion
or 2 percent of GDP.
In fact, as of year-end 2009, the BIS says Eurozone banks
accounted for 62 percent of all bank exposure to the coun-
tries under pressure (Greece, Ireland, Portugal, and Spain),
with a collective $727 billion of exposure to Spain, $402
billion to Ireland, $244 billion to Portugal, and $206 billion
to Greece. Core countries France and Germany have the
most exposure, a combined $958 billion or 61 percent of
Eurozone exposure, mostly to Spain. Interestingly, French
exposure is to the non-bank private sector in Spain, while
German exposure is to Spanish banks. In Ireland, German
exposure is the other way around, $126 billion to the non-
bank private sector and only one-third to the banks.
UK banks have the biggest exposure to Ireland ($230 bil-
lion), while Spanish banks were the ones with the highest
level of exposure to residents of Portugal ($110 billion),
almost two-thirds to the non-bank private sector.
This may seem like a jumble of numbers (quoted in
some places in dollars and other places in Euros, increas-
ing confusion), but it illustrates the point that contagion
is inevitable. If Irish banks had not been nationalized and
guaranteed by the government, losses would be cascad-
ing through the UK, German, and French banking sectors.
Similarly, Portugal may protest that it’s “not Ireland,” i.e.,
its banking sector is OK, but if the new Portuguese auster-
ity strikes hard at the non-bank private sector, plain old
default will harm Spanish banks and, in a domino effect,
German banks.
Total Eurozone bank exposure to the four peripherals
adds up to €1.579 trillion, or double the amount (€750
billion) agreed upon in the creation of the EFSF. Not every
asset is going to fail or get marked down, but when banks
take losses, they tend to pull in their risk-taking horns.
They also need to rebuild capital, especially now that the
Basel III rules call for 8-percent first-tier capital coverage.
Assuming European banks will be newly risk-averse and
credit-shy, doesn’t that mean the European Central Bank
(ECB) should lower rates to goose growth?
Germany’s hard line
Not if you are sitting at the German central bank.
Bundesbank President Axel Weber believes high public
deficits risk damaging inflation expectations and would
force central banks to employ more restrictive monetary
policy. This is the famous trade-off between fiscal laxity
and monetary policy enunciated by former ECB presi-
dent Willem Duisenberg at the beginning of the European
Monetary Union (EMU) in 1999. Weber also said the
Stability and Growth Pact must be “toughened” since it
CURRENCY TRADER • December 2010 11
was inadequately enforced, and the Eurozone needs a bet-
ter crisis mechanism. Weber favors making funds available
to members only under the condition that “private credi-
tors” are not relieved of their responsibility. What Weber
means is, private holders of sovereign debt must take a
haircut — i.e., exchange their current bonds for new ones
at a discount, a la Argentina. To show he is not a total SOB,
Weber concedes instituting the exchange mechanism is
sensible only after the crisis has passed.
If you feel befuddled by how that would work, you are
not alone. Why buy a sovereign bond today if you know
that in the next six or 12 or 18 months you will be forced to
exchange it for one with a lower face value?
German Chancellor Angela Merkel and Finance Minister
Wolfgang Schaeuble have repeatedly said investors must
take a haircut, with special emphasis on “speculative”
investors. This insistence reveals two things about the
German attitude: First, they do not accept speculation as
a necessary condition to market liquidity. To the German
mind, speculation is always evil and destructive. Second,
it may be only Germans who accept that after a global
crisis like the one that started in 2007, deleveraging is not
optional.
Germany is the largest EMU country, accounting for 24
percent of total Eurozone GDP, and has fashioned itself as
its moral leader. Germany intends to hold the rest of the
EMU hostage to the idea of haircuts for private investors at
some point in the future, introducing uncertainty to every-
thing to come in the next year. This is somewhat a case of
he who pays the piper calls the tune, since it is the German
taxpayer contributing the most to the EFSF. Germany gets
to set some of the rules, if not all of them. Some critics
say Germany is setting itself up to be the one to aban-
don the Euro and the Eurozone, either when the German
Constitutional Court rules the Stability Pact’s no-bailout
clause must be enforced, or after some of the EMU’s 26
members declines to approve the ESFS.
This disregards the fact that Germany enjoys being the
leader of Europe in its own eyes, if not French ones, and
has gained the most from the common currency free-trade
zone. A great deal of its massive trade and current account
surplus is with other Eurozone members. The sense is just
starting to emerge that France may be taking the revolving
presidency of G8 and G20, but it is Germany that intends
to shape post-crisis conditions. Schaeuble admits the Irish
crisis is putting the Euro at risk and has said: “We have
to assume responsibility. If we can’t defend our currency
effectively as a stable currency, the economic and social
consequences for our country and the people in our coun-
try would be incalculable. It is extremely important to
 ON THE MONEY

show in Germany that what is being discussed so much And what about the U.S.?
internationally is indeed possible: to fight in a measured Hypothetically, if Germany wins the restructuring battle,
way the main causes of the crisis — excessive deficits in the contrast with conditions in the U.S. can only appear
public budgets and liquidity bubbles in financial markets.” worse. The U.S. deficit is not only huge, but faces a politi-
You can’t say it more clearly than “We have to assume cal crisis when the debt ceiling comes up for renewal in
responsibility.” So far the foreign exchange market is April 2011. Republican leaders have already said they
enjoying the seesawing of risk appetite and risk aversion, intend to say no to raising the debt ceiling, not on principle
talk about upcoming crises, and the ongoing connected- but to deprive the Obama administration of the ability to
ness of financial assets with hard assets (oil, gold, and conduct government business. In other words, they intend
other commodities). It appears that without the federal to shut down the government again, as occurred during
transfer capability that makes the U.S. system work, the the Clinton administration, and potentially engineer a
Eurozone is stuck with a permanent vulnerability to default on U.S. government debt.
exactly this kind of crisis — and its day as a top reserve If the rise in Greek government bond yields over the
currency further away. past year by 6.94 percent to 11.90 percent is a reflection
But German resolve in assuming responsibility is very of dysfunctional government, what can be in store for
impressive, and no one can argue Germany is wrong to the U.S.? At present, the 10-year yield is about 2.8 per-
seek avoiding big public deficits and bubbles alike, even if cent, down 55 basis points from a year ago. A small rise
its diatribes against speculation are a bit overdone. If this to 3 percent or 3.5 percent, as seems to be occurring, is
interpretation is correct, relief as a permanent rescue mech- dollar-friendly. But were the yield to rise by 500 or 600
anism and recommitment to the Stability Pact principles basis points to 8 or 9 percent because of fear of default,
could have the effect of lifting the Euro not only past the it’s impossible to see that as anything other than deeply
December 2009 level, but above the record high of 1.6038 dollar-hostile.
(from July 2008). Figure 2 shows the dollar index (red) against the Reuters
Barbara Rockefeller
Currenyc Trader Mag Dec 2010
10-year T-note yield index (black). The
Figure 2: 10-Year Yield (Black) vs. Dollar Index (Red) correlation is rough and contaminated
FIGURE 2: DOLLAR INDEX & REUTERS 10-YEAR T-NOTE YIELD INDEX
by the financial crisis favoring the
125 10 Y TSY YLD NDX (28.4000, 28.4800, 27.9800, 28.1300, -0.62000), Dollar Index (78.3140, 78.8840, 77.9750, 78.6820, +0.17800)
70 dollar as a safe haven, but the correla-
120 tion does exist and it is based on the
65
principle that capital flows to the high-
est real rate of return, all other things
115
60
110 being equal.
55 In the event of a potential U.S.
105
default, all other things are not equal.
100
50
The dollar index and 10-year note yield
45
would diverge. In the face of possible
95
massive losses, it’s no wonder some
90
40 investors think Japanese bonds (at a
measly 1-1.5 percent return) look pref-
erable.
35
85

30 So, as we contemplate the Euro

80
into year-end, the question may be
75 25 not whether the Euro will survive
the sovereign debt crisis, but rather
20
whether the U.S. will survive it. Who in
70

1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201
Washington will say “We must assume
The correlation between the dollar index (red) and the 10-year T-note yield index
responsibility”? y
(black) is rough and contaminated by the financial crisis favoring the dollar as a
safe haven, but the correlation does exist. For information on the author, see p. 4.

12 December 2010 • CURRENCY TRADER

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CURRENCY TRADER • December 2010 13
 SPOT CHECK

Euro/U.S. dollar
An already weak Euro may slide further before rebounding.

BY CURRENCY TRADER STAFF

Pummeled by another default (see “The Euro takes on Greek crisis, fears now are that similar defaults and bail-
another debt crisis”), the Euro reversed nearly 10 percent outs for Portugal and Spain are more a matter of if than
off its early November high of 1.4281 to 1.2979 by Nov. 30 when.
(Figure 1). The sovereign-debt story undoubtedly has been What does the price action portend, apart from this fun-
driving the Euro lower (and the dollar higher), just as it damental picture? To start, it should be noted the Euro,
did earlier this year. Although the Euro rebounded which had been dropping since December 2009, continued
smartly — 20 percent off the June low of 1.1876 — after the to decline for several weeks even after the Greek bailout
terms were finalized in early May.
Chart watchers now have the June
FIGURE 1: ANOTHER DEBT-CRISIS SELL-OFF 2010 low and the November 2005 low
around 1.1650 in their sights as an obvi-
ous resistance zone (Figure 2). More
to the point, despite the severity of
the November sell-off — which would
typically imply at least a marginal
reactionary rebound — most historical
examples of similar moves suggest the
Euro has more room on the downside
(based on its level of approximately
1.3000 on Nov. 30).
Figure 3 shows the EUR/USD’s
median gains after four-week, high-to-
low declines of 5 percent (or larger),
7.5 percent (or larger), and 9 percent
(or larger) since Dec. 1, 2000. The
moves are measured from the close of
the four-week decline to the weekly
closes one to 12 weeks later. Four-
week declines equal to or larger than
The EUR/USD pair declined more than 9 percent in November, high to low. the current decline have occurred
Source: TradeStation
just 13 previous times, while 7.5-per-

14 December 2010 • CURRENCY TRADER

 FIGURE 2: LONG-TERM PICTURE

cent or larger four-week sell-offs

have occurred 22 times; 5-percent or
larger declines have formed 70 times.
Regardless of the size of the decline,
price movement is flat to lower over
the next four to five weeks, after
which price takes a turn to the upside.
The rebound after the largest declines
is (as expected) the most robust,
while the move after 5-percent or
larger declines was the weakest. The
price action after the 7.5-percent or
larger declines was something of an
anomaly: It was the most negative of
the three categories until week 5, and
its subsequent rebound was in the
middle of the pack.
Figure 4 shows the price action
after runs of four consecutive weeks
The recent slide has brought the 2010 low in sight, with the 2005 low not much
of lower lows, the length of the EUR/ farther away.
USD’s run as of the week ending Source: TradeStation
Dec. 3. Two versions are shown: “1st
instances” represents the price action
FIGURE 3: EUR/USD AFTER FOUR-WEEK SELL-OFFS
after only the 16 qualifying weeks that
concluded an initial a four-week run
of lower lows. (Such weeks are often
followed by another weekly lower
low, creating a string of four-week
runs. This measurement ignores sub-
sequent qualifying weeks.) The other
measure reflects the performance of
all qualifying weeks (37 total), regard-
less if they were preceded by a four-
week lower low run. The fact that
there were 16 initial qualifying runs
but 37 total runs shows that after a
four-week run of lower lows, the odds
were in favor of at least one more
lower weekly low.
The subsequent price action in
Figure 4 resembles that of Figure 3:
After relatively large four-week declines, the EUR/USD pair tended to move
initial weakness followed by a rally. sideways to lower for a few weeks, then turn upward.
However, the almost uniformily nega-

CURRENCY TRADER • December 2010 15

 SPOT CHECK

FIGURE 4: EUR/USD AFTER FOUR WEEKS OF LOWER LOWS

tive results after the first instances

underscores the tendency for the
EUR/USD pair to makes subsequent
lower weekly lows after a four-week
run of lower lows.
Table 1 provides the numbers.
There were 37 instances of four-week
or longer runs of lower lows, and
21 five-week or longer runs, which
means the odds of a four-week run
extending were approximately 57
percent; this probability of exten-
sion increased to 61.90 percent and
remained near that level through
week 8. The final row shows the
number of runs ending at the differ-
After four weeks of consecutive weekly lower lows, price had a tendency to
make subsequent lower weekly lows. ent week intervals (i.e., exactly four
weeks long, exactly five weeks long,
etc.). In short, based on the past 10
FIGURE 5: FOUR WEEKS OF LOWER LOWS AND LARGE DECLINES
years, the odds of a lower low after
the week ending Dec. 3 are somewhat
better than 50 percent, and with each
subsequent week (through week 8),
around 62 percent.
A final perspective is provided by
Figure 5, which shows the EUR/USD
pair’s performance after four weeks
of lower lows combined with a drop
of 5-percent or more (29 instances)
or 7.5 percent or more (10 instances);
there were too few instances of
9-percent or larger declines to ana-
lyze. The interesting — and surpris-
ing — thing here is the divergence
between the two patterns. After the
5-percent decline version, price even-
After four weeks of lower lows and a 7.5-percent or larger decline, price tually turned upward after some
continued to drop — but this tendency reflects only 10 examples over the past initial weakness. After the 7.5-percent
10 years. version, price continued to drop.
However, little
TABLE 1: CONSECUTIVE WEEKLY LOWS, DECEMBER 2000-NOVEMBER 2010 confidence can
Consec. lower lows 4 5 6 7 8 9 10 11 be put in these
results because
No. occurrences 37 21 13 8 5 3 2 1
of the extremely
% 56.76% 61.90% 61.54% 62.50% 60% 66.67% 50% low number of
Exact length 16 8 5 3 2 1 1 1 examples. y
The odds of a lower low after an initial four-week run of lower lows were around 57 percent.

16 December 2010 • CURRENCY TRADER

CURRENCY TRADER • Decemer 2010 17
 TRADING STRATEGIES

Daily pivot breakouts

When attempting to trade mechanically defined intraday support
and resistance levels, don’t forget the time element.

BY DANIEL FERNANDEZ

Few technical analysis tools are as widely used as support
and resistance. However, the difficulty of systematically
defining support and resistance levels has resulted in a
scarcity of fully mechanical systems based on them. This
article outlines a trading strategy based on pivot points
— mechanically defined intraday support and resistance
levels — and shows its long-term statistical performance in
simulation. These results indicate developing a successful
system from pivot-point-based inefficiencies in the forex
market is possible.
Pivot-point calculations
Pivot points are formulas (often attributed to a tradition
passed down among floor traders) used to determine sup-
port and resistance levels derived from the high, low, and
closing prices (H, L, C) of the previous price bar. As the
FIGURE 1: SAMPLE TRADE
years progressed, these levels became ingrained in the
trading community’s collective consciousness and evolved
as standard support and resistance levels used by a wide
range of traders.
Pivot points are defined in a mathematically precise way
using the information from the previous trading day (new
levels are generated every day). The pivot-point value is
added to and subtracted from the previous bars’ reference
points to determine several support and resistance levels.
The pivot-point (PP) formula is: 
PP = (H + L + C)/3
The support and resistance levels derived from the pivot
point are:
1. First resistance level (R1) = (PP*2) - L
2. Second resistance level (R2) = PP +
(H - L)
3. Third resistance level (R3) = (PP*2) -
(2 * L) + H
4. First support level (S1) = (PP*2) - H
5. Second support level (S2) = PP - (H
+ L)
6. Third support level (S3) = (PP*2) - (2
* H) + L

A typical countertrend pivot-point

application is to cover any short posi-
tions and go long at either of the two
support levels, or sell any long posi-
tions and go short at the projected
resistance levels. Alternately, breakout
trades could be placed if price pushes
A long trade was triggered when a 60-minute bar opened above the R2 above the resistances levels or below
resistance level. the support levels.
Source for all figures: MetaTrader 4 When building a pivot-point-

18 October 2010 • CURRENCY TRADER

December
 Deutsche Bank
dbfx.com/CT

based trading system it is important to define which

approach will be used — that is, whether the levels
will be traded in countertrend fashion in expectation
of range-bound price action (between the various sup-
port and resistance levels), or if the levels will form
the basis of a breakout strategy, in which moves above
resistance imply further price gains and moves below
support imply further declines. This analysis explores
a system based on breakouts of the S2/R2 levels in the
Euro/U.S. dollar pair (EUR/USD).

A pivot breakout strategy

The system uses a very simple entry logic: The sys-
tem goes short when an hourly (60-minute) bar opens
below the S2 support level, and goes long when an
hourly bar opens above the R2 resistance level:

1. Go long if open > R2

2. Go short if open < S2 Trade FX with dbFX
Trades are exited by either a stop-loss, a profit target,
and access
or a time-based exit. The stop-loss is placed at the S1
level for shorts and R1 level for longs, while the profit
Deutsche Bank’s
target is placed at a distance equal to the difference consistent, competitive
between the PP and the S3 level (for shorts), or the dis-
tance between the PP and the R3 level (for longs). The
pricing, 24 hours a day.
time-based rule simply closes any open trade 30 hours
after entry. This criterion reflects the idea that the inef- dbFX’s margin trading platform
ficiency the system is attempting to exploit is based on
intraday support and resistance levels, which should
also offers up to 100:1 leverage
lose their relevance as time passes. and the peace of mind knowing
Trade size is determined by the following equation, your funds are held with
which is designed to result in per-trade risk of approxi-
mately 1.5 percent:
Deutsche Bank.
Trade size = 0.02*account balance in USD/(contract
size in USD*|[trigger level – pivot level|)
Open your free demo
account today:
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Trigger level = R2 for long trades or S2 for short
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Figure 1 shows a sample trade from Sept. 21, 2010.

The pivot levels for that day (based on prices from
Sept. 20) were:

Pivot = 1.3070
S1 = 1.3021
S2 = 1.2979
S3 = 1.2930
R1 = 1.3112
R2 = 1.3161 The above information has been approved and/or communicated by Deutsche Bank AG London
in accordance with appropriate local legislation and regulation. Deutsche Bank AG London is
R3 = 1.3203 regulated for the conduct of investment business in the UK by the Financial Services Authority.
Trading in margin foreign exchange can be risky. The use of leverage in foreign exchange trading
can lead to large losses as well as large gains. Markets referred to in this publication can be highly
volatile. For general information regarding the nature and risks of the proposed transaction and
types of financial instruments please go to www.globalmarkets.db.com/riskdisclosures. This
product may not be appropriate for all investors. Before entering into this product you should
CURRENCY TRADER • December 2010 19 take steps to ensure that you understand and have made an independent assessment of the
appropriateness of the product.
 TRADING STRATEGIES

When the third hourly bar of the day opened at 1.3247 ish bar immediately before the entry bar pierced both the
(above R2), a long trade was triggered. A stop-loss was R2 and R3 levels. As a result the system assumed more risk
placed 135 pips (1.3247 – 1.3112) below the entry price, (since the stop-loss would be farther away from the entry
and a profit target was set 133 pips (1.3203 – 1.3070) above price), although the higher momentum increased the prob-
the entry price. Assuming a $100,000 account balance and ability the market would reach the profit target.
a $100,000 standard forex contract size, the trade size was
$110,000 (0.02*100,000/(100,000*|1.3161-1.3070|)). In this System results
case the trade was closed at the profit target. The system was tested (in Metatrader 4) on hourly EUR/
Note that the amount of money risked per trade changes USD data from Jan. 1, 2000, through Oct. 1 2010. Trading
depending on how much the last hourly bar advances rela- costs were set at .0002 (two pips).
tive to the stop level (R1 or S1). In this case the large bull- Figure 2 shows the system was profitable over the
course of the nearly 11-year test run, both with and with-
out the time-based exit rule, although the former results
TABLE 1: IMPACT OF THE TIME-BASED EXIT
were much better than the latter. Table 1 emphasizes the
Time exit w/o time exit underperformance of the version without the time-based
Total profit 122% 54% exit. Trades that are likely to hit the profit target usually do
Win percentage 43.74% 32.83% so in the first day; much further out than that the relevance
of the intraday support or resistance breakout disappears,
Maximum drawdown 17.28% 28.69% and positions run an increased risk of losses. By closing
Avg. annual profit 8.09% 5.15% trades after 30 hours, the full expected effect of the intra-
Number of trades 727 664 day breakout is realized and the efficiency of the system is
greatly increased. Results are barely profitable without the
Profit-to-loss ratio 1.53 2.18
time-based exit, making its inclusion vital for the strategy’s
Profit factor 1.19 1.07 success.
The time-based exit rule was a major component of the The time-based exit version of the system had only
system’s profitability. three losing years during the 11-year test period, an aver-
age compounded yearly profit of 8.09
percent, and a maximum drawdown of
FIGURE 2: EQUITY CURVES
-17.28 percent. The strategy also had a
good average risk-to-reward ratio, with
an average profitable trade at least 1.5
times the size of the average loss.
The annual returns provide important
insight about the system’s long-term
trading characteristics, revealing it gen-
erated most of its profits during about
one-third of the test period’s years; the
others were either down years or essen-
tially break-even (Figure 3). Curiously,
although the system trades on an intra-
day basis, some of its key performance
characteristics — profits, drawdown
length, and yearly return distributions
— are similar to those of a long-term
trend-following strategy. However,
Without the time-based exit, the system ended the test profitably, but overall because it seems to work best in condi-
performance was flat. With the time-based exit, equity more than doubled.
tions that appear mostly range-bound

20 December 2010 • CURRENCY TRADER

 Related reading
By Daniel Fernandez:

Multiple average trend-following

on the daily time frame (e.g., 2004- Currency Trader, November 2010
2005), the system could potentially Translating a multi-moving average technique into a mechanical forex-trading
function as a useful complement to system highlights the benefits of simplicity and diversification.
a daily time frame trend-following
system, such as the moving-average Validating candlestick patterns with tick volume
Currency Trader, October 2010
system described in “Multiple aver-
A “double-doji” breakout strategy gets a boost from a tick-volume filter.
age trend-following” (Currency Trader,
November 2010).
Taking advantage of the Asian trading session
Currency Trader, June 2010
Time is key Breaking down the range characteristics of the Asian forex session produces
The analysis highlights two important some surprisingly reliable trading statistics.
aspects regarding mechanical pivot-
based strategies. First, it is possible Other articles:
to develop systems that success-
fully trade intraday mathematically Putting pivot points to the test
defined support and resistance levels. Active Trader, November 2006
Second, the time-exit criterion is criti- Many view pivot points as potential intraday support and resistance areas, but
cal for the success of this strategy. If does the market really respond to these levels the way traders expect? This
you want to develop strategies using in-depth analysis studies pivot points in stock-index ETFs.
pivot levels, it is important to con-
sider the appropriate holding period, Fibonacci pivot points
and implement a rigid time cutoff to Futures & Options Trader, February 2008
exit positions if they fail to reach the This article compares two types of intraday pivot-point strategies. The first
intended profit or loss targets. This strategy uses standard pivot points, while the second strategy uses pivot
points based on Fibonacci levels with the goal of defining more accurate
reduces the number of positions left
support and resistance levels and boosting the technique’s reward-to-risk ratio.
to chance and increases the likelihood
that profits accumulated from these
short-lived inefficiencies are effec-
tively captured. FIGURE 3: ANNUAL RETURNS
This strategy offers only a glimpse
of the possibilities of this type of
support and resistance analysis. For
example, the system did not make
use of a longer-term time-frame fil-
ter or any additional mechanism to
improve entry accuracy. Other inputs,
such as the inclusion of additional
volatility criteria (e.g., allowing or
disallowing trades when volatility
reaches a certain level) might further
refine the entry and exit mechanisms
and achieve better results. Finally,
the strategy could be optimized and
tested on other currency pairs and be
applied to a basket of
instruments. y
The system posted eight profitable years out of 11 in the test period, and the average
winning year was much larger than the average losing year.
For information on the author, see p. 4.

CURRENCY TRADER • December 2010 21

 TRADING STRATEGIES
ADVANCED CONCEPTS

Asymmetric currency risks

Take note, currency traders: One size does not fit all when it comes
to market analysis and trading system design.xx

BY HOWARD L. SIMONS

One of the great quandaries of market analysis is rec-
onciling the central precept of technical analysis — that
the immutability of human behavior leads to repeatable
patterns over time and, by implication, to self-similarity
across both timeframes and separate markets — with
observed differences in return distributions across markets.
As an equal opportunity afflicter, we should acknowledge
the central precept of fundamental analysis, market effi-
ciency, cannot provide much guidance here, either.
In reality, none of this should be a surprise. We can
FIGURE 1: EURO WEEKLY CANDLESTICK CHART
As is common in secular bull markets, the retracement sell-offs are sharper than the
movements with the trend — a result of the eagerness of trend-followers to protect
profits and the asymmetry of speculative positions.
decompose all trades into spreads. At the most basic level,
the direct purchase of any asset for cash involves swap-
ping the short-term interest rate of return on cash for the
at-risk return on the asset. In the case of currencies, we are
swapping one set of cash flows received for another, plus
the change in the spot rate over time. As different countries
have different interest rate policies and monetary manage-
ment institutions, we should expect the resulting currency
trades between any two national monetary regimes to
reflect these differences on a repeatable basis over time as
long as the national regimes generating
those differences remain constant.
The net result of asymmetric risk
profiles is familiar across a wide range
of markets. All traders accept stocks
decline more rapidly than they rise, and
many of the soft commodities’ charts
can be described as “three months up
and three minutes down.”
Let’s take a look at the long-term his-
tories of three currencies — the Euro,
the Japanese yen, and the Canadian dol-
lar — in terms of asymmetry, but with a
twist. Instead of the daily price returns
beloved by students of such matters,
let’s take a step up on the time scale to
weekly. Not only does this sidestep the
increasingly vexing question of when
a trading “day” begins and ends in the
24-hour currency market, it highlights
the much larger changes that take place
over a week after stops are run, barrier
options are hit, etc.

22 December 2010 • CURRENCY TRADER

 FIGURE 2: EURO’S DISTRIBUTION OF WEEKLY RANGE RETURNS

Finally, let’s modify the weekly return

into something we will dub the “range
return.” These are the percentage
changes from the current week’s high The Euro’s returns display a two-humped “bimodal” distribution rather than a normal
or low against the previous week’s last distribution.
trade.
FIGURE 3: JAPANESE YEN WEEKLY CANDLESTICK CHART
Candles in the wind
Now let’s display the weekly data for
the three currencies on semi-logarithmic
candlestick charts. These will highlight
the percentage changes for each cur-
rency. Positive and negative weeks are
depicted in green and red candlestick
bodies, respectively, and the shadows
are suppressed to reduce the visual clut-
ter.
First, let’s take a look at the currency
with the deepest market and the short-
est history, the Euro (Figure 1). A visual
inspection suggests negative weekly
range returns for the Euro are larger
than positive returns, and there is a
good fundamental reason behind this,
Yen traders are familiar with its tendency to rally more violently than it sells off.
too. After mid-2002, when the so-called
“mattress trade” of selling legacy Euro
cash for dollars ended, the Euro has FIGURE 4: YEN’S DISTRIBUTION OF WEEKLY RANGE RETURNS
been in a secular uptrend against the
dollar. As is common in secular bull
(bear) markets, the retracement sell-offs
(rallies) are sharper than the movements
with the trend. This is due to the eager-
ness of trend-followers to protect profits
and the asymmetry of speculative posi-
tions (see “Currencies and commit-
ments,” Currency Trader, June 2008).
But while the distribution of weekly
range returns on the Euro may look
skewed, a histogram indicates some-
thing quite different indeed (Figure 2).
The returns are not distributed normally
as one might expect (and as shadowed
by a blue normal probability density
curve), but are bimodal in nature. Like The histogram of weekly yen returns is unimodal and has a number of very large
a dromedary camel, the Euro has two weekly range returns.

CURRENCY TRADER • December 2010 23

 ON THE MONEY
ADVANCED CONCEPTS

humps.
Now let’s take a look at the Japanese yen, which along
with the Canadian dollar has an active history going back
FIGURE 5: WEEKLY CANDLESTICK CHART FOR CANADIAN DOLLAR
The Canadian dollar is one of the trendiest markets, but can also move abruptly in
both directions.
FIGURE 6: CANADIAN DOLLAR’S DISTRIBUTION OF WEEKLY RANGE
to 1972 (Figure 3). Anyone who has traded the yen (pre-
sumably everyone reading this ) senses it rallies more vio-
lently than it sells off, and this is certainly observable in the
weekly candlestick chart. Once again,
the fundamentals support this observa-
tion; not only must Japanese exporters
be paid at predictable intervals, but the
yen has been a funding currency for
carry trades since the mid-1990s. As
those who have borrowed the yen sense
a policy change to raise borrowing costs
in Japan see the same information at the
same time, they must react quickly to
repurchase the JPY.
Unlike the case for the Euro, the his-
togram for the yen confirms our beliefs
(Figure 4). It is both unimodal in nature
and has a number of very large weekly
range returns.
Now we come to the Canadian dol-
lar (Figure 5). This is one of the trendi-
est markets (see “Let the trend be your
friend: The majors,” Currency Trader,
January 2009), but experience indicates
it can both trend and move abruptly in
both directions, not just higher or lower.
That said, the period between 2002 and
2006 saw some extremely impressive
gains for the CAD.
The distribution of weekly range
returns confirms the sense the Canadian
dollar has more symmetry than either
the Euro or the yen (Figure 6). Indeed,
if it were not for two rather prominent
sell-offs out of more than 2,000 weeks,
we might have to classify weekly range
returns here as normally distributed.

Skewness and kurtosis

If we plot rolling one-year skewness
of weekly range returns for the three
The Canadian dollar has more symmetry than either the Euro or the yen. If not for currencies, we see they are anything
two prominent sell-offs, the weekly range returns could be described as normally but constant (Figure 7). The early his-
distributed. tory of the yen, for example, was wildly
skewed toward positive returns as it

24 December 2010 • CURRENCY TRADER

 FIGURE 7: ROLLING 1-YEAR SKEWNESS OF WKLY RANGE RETURNS

began a multiple-year bull market in

the 1970s. The CAD, on the other hand,
shows strong skewness in both direc-
tions, while the Euro’s skewness is sur-
prisingly tame over its short history. No
trading strategy based upon a naturally
embedded option would work in any of
these currencies.
An examination of the kurtosis of
the weekly range returns highlights
The early history of the yen was wildly skewed toward positive returns, while the
the comments made above for both the CAD shows strong skewness in both directions. The Euro’s skewness is surprisingly
Euro and the Canadian dollar (Figure tame over its short history.
8). A positive coefficient of skewness
indicates a peaked distribution; a nega-
tive coefficient indicates a flat distribu- FIGURE 8: ROLLING 1-YEAR KURTOSIS OF WKLY RANGE RETURNS
tion. The “normal” Canadian dollar has
consistently positive kurtosis, while the
surprisingly languid Euro spent nearly
all of its pre-2007 to 2009 financial cri-
sis history with a flat distribution of
returns.
The most important conclusion we
can reach here is one we have reached
in other times and in other places, and
that is one size does not fit all when
it comes to market analysis and the
design of trading systems. Anyone who
ignores the Canadian dollar’s greater
propensity to trend or the yen’s positive
skewness is putting themselves at an
unnatural and needless disadvantage.
This business is tough enough without
using all of the information at your dis-
The “normal” Canadian dollar has consistently positive kurtosis, while the Euro
posal. y spent nearly all of its pre-2007 to 2009 financial crisis history with a flat distribution
of returns.
For information on the author, see p. 4.

CURRENCY TRADER • December 2010 25

 CURRENCY FUTURES SNAPSHOT as of Nov. 30

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 377.7 198.1 -4.33% / 100% -6.28% / 100% 1.02% / 1% .45 / 83%
JPY/USD JY CME 111.2 135.0 -0.73% / 25% -3.69% / 94% 0.99% / 2% .16 / 27%
GBP/USD BP CME 110.7 92.9 -3.06% / 78% -2.86% / 85% 0.80% / 9% .63 / 100%
AUD/USD AD CME 102.3 123.7 -2.61% / 70% -2.18% / 100% 4.71% / 12% .23 / 53%
CAD/USD CD CME 87.9 107.3 -1.75% / 90% -0.73% / 57% 1.31% / 30% .25 / 13%
CHF/USD SF CME 42.8 46.9 -1.86% / 25% -1.14% / 32% 1.50% / 9% .12 / 8%
U.S. dollar index DX ICE 25.9 36.2 2.44% / 38% 5.70% / 100% -2.25% / 5% .39 / 93%
MXN/USD MP CME 25.3 141.7 -1.47% / 78% -0.77% / 21% 3.95% / 72% .33 / 65%
NZD/USD NE CME 7.2 29.8 -3.79% / 100% -2.65% / 100% 3.21% / 37% .49 / 83%
E-Mini EUR/USD ZE CME 6.1 5.5 -4.33% / 100% -6.28% / 100% 1.02% / 1% .45 / 83%
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.

BarclayHedge Rankings
LEGEND:
Volume: 30-day average daily volume, in (as of Oct. 31 ranked by October 2010 return)
thousands. Top 10 currency traders managing more than $10 million
OI: 30-day open interest, in thousands.
10-day move: The percentage price move $ Under
September 2010 YTD
from the close 10 days ago to today’s close. Trading Advisor Mgmt.
20-day move: The percentage price move Return Return
(Millions)
from the close 20 days ago to today’s close.
60-day move: The percentage price move 1. 24FX Management Ltd 7.90% 48.89% 48.7
from the close 60 days ago to today’s close. 2. Richmond Group (Gl. Currency) 6.81% 8.23% 38.0
The “% rank” fields for each time window
(10-day moves, 20-day moves, etc.) show
3. State Street Assoc. (Gl. FX Alpha) 5.95% -7.55% 345.0
the percentile rank of the most recent move 4. IPM Global Currency Fund (C) 2.65% 11.18% 183.0
to a certain number of the previous moves of
5. IPM Global Currency Fund (A) 2.64% 10.45% 183.0
the same size and in the same direction. For
example, the % rank for the 10-day move 6. QFS Asset Mgmt (QFS Currency) 2.26% 20.71% 752.0
shows how the most recent 10-day move 7. FX Concepts (GCP) 2.26% 17.01% 3100.0
compares to the past twenty 10-day moves;
for the 20-day move, it shows how the most 8. John W. Henry & Co. (Int'l. FX) 1.87% -5.94% 12.8
recent 20-day move compares to the past 9. Greenwave Capital Mgmt (GDS Alpha) 1.79% 9.49% 11.0
sixty 20-day moves; for the 60-day move,
it shows how the most recent 60-day move 10. Sunrise Cap'l Partners (Currency Fund) 1.75% -1.53% 18.9
compares to the past one-hundred-twenty Top 10 currency traders managing less than $10M & more than $1M
60-day moves. A reading of 100% means
the current reading is larger than all the past 1. D2W Capital Mgmt (Radical Wealth) 20.80% 95.49% 2.5
readings, while a reading of 0% means the 2. CenturionFx Ltd (6X) 10.32% 54.82% 2.3
current reading is smaller than the previous
readings. 3. Rove Capital (Dresden) 3.02% 12.86% 2.2
Volatility ratio/% rank: The ratio is the short- 4. King's Crossing Cap'l (FX Model) 2.02% -3.55% 7.5
term volatility (10-day standard deviation
of prices) divided by the long-term volatility 5. Wealth Builder FX Group 2.00% -3.64% 2.9
(100-day standard deviation of prices). The 6. CenturionFx Ltd 1.72% 8.74% 6.2
% rank is the percentile rank of the volatility
ratio over the past 60 days.
7. Quant Trading (FX Quant 11) 1.53% -1.70% 2.1
8. M2 Global Mgmt (2.5X) 1.37% 1.85% 2.4
9. Aurapoint Asset Mgmt (QV) 1.11% 17.41% 1.9
10. BEAM (FX Prop) -0.03% 8.20% 2.0
Based on estimates of the composite of all accounts or the fully funded subset method.
Does not reflect the performance of any single account.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

26 October 2010 • CURRENCY TRADER

December
CURRENCY TRADER • December 2010 27
 INTERNATIONAL MARKETS

CURRENCIES (vs. U.S. DOLLAR)

Nov. 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 Canadian dollar 0.99021 0.92% 5.14% 6.63% 1.0068 0.9217 15
2 New Zealand dollar 0.760025 0.85% 8.61% 14.57% 0.7975 0.6561 7
3 Great Britain pound 1.57645 0.15% 2.14% 9.96% 1.6746 1.4235 17
4 Chinese yuan 0.150385 0.12% 2.25% 2.73% 0.150800 0.146 14
5 Hong Kong dollar 0.12888 0.01% 0.01% 0.55% 0.129 0.1281 16
6 Japanese yen 0.01239 0.00% 4.69% 11.22% 0.01246 0.01053 1
7 Taiwan dollar 0.03247 -0.61% 4.07% 4.82% 0.03327 0.03074 8
8 Thai baht 0.033275 -0.78% 4.82% 8.35% 0.03386 0.02938 6
9 Brazilian real 0.581415 -0.89% 2.90% 9.16% 0.6075 0.5076 13
10 Singapore dollar 0.764325 -1.23% 3.90% 8.37% 0.78 0.702 9
11 Australian Dollar 0.980485 -1.36% 11.11% 20.30% 1.033 0.8069 3
12 South African rand 0.141645 -2.22% 4.21% 12.57% 0.1478 0.1233 11
13 Swiss franc 1.001695 -2.79% 3.10% 16.45% 1.0566 0.853 12
14 Indian rupee 0.02186 -3.04% 2.51% 3.92% 0.02274 0.02089 5
15 Russian ruble 0.03202 -3.07% -1.02% 0.85% 0.03487 0.03077 10
16 Swedish krona 0.14386 -5.55% 7.47% 15.23% 0.1542 0.1227 4
17 Euro 1.226035 -12.52% -3.11% 0.00% 1.5144 1.1891 2

GLOBAL STOCK INDICES

1-month 3-month 6-month 52-week 52-week
Country Index Nov. 26 Previous
gain/loss gain/loss gain loss high low
1 Japan Nikkei 225 10,039.56 7.06% 12.72% 5.43% 11,408.20 8,796.45 15
2 Mexico IPC 36,904.53 4.33% 18.22% 17.80% 37,153.90 29,926.10 1
3 Germany Xetra Dax 6,848.98 3.56% 15.84% 18.95% 6,901.93 5,433.02 3
4 South Africa FTSE/JSE All Share 31,181.38 3.48% 16.03% 15.28% 31,816.61 26,041.96 4
5 Canada S&P/TSX composite 12,892.71 1.64% 10.64% 11.68% 13,114.00 10,990.40 5
6 U.S. S&P 500 1,189.40 0.32% 13.58% 11.37% 1,227.08 1,010.91 6
7 Switzerland Swiss Market 6,483.60 0.11% 5.74% 5.13% 6,990.70 5,935.00 11
8 Singapore Straits Times 3,158.08 -0.14% 7.94% 17.14% 3,313.61 2,648.15 12
9 UK FTSE 100 5,668.70 -0.68% 9.95% 12.52% 5,902.10 4,790.00 9
10 Australia All ordinaries 4,690.20 -1.50% 6.85% 8.31% 5,048.60 4,194.40 13
11 Hong Kong Hang Seng 22,877.25 -3.07% 10.99% 19.17% 24,988.60 18,971.50 2
12 France CAC 40 3,728.65 -3.22% 7.30% 9.39% 4,088.18 3,287.57 10
13 Brazil Bovespa 68,226.00 -3.55% 6.83% 13.35% 73,103.00 57,634.00 8
14 India BSE 30 19,136.61 -5.36% 4.99% 16.77% 21,108.60 15,652.00 14
15 Italy FTSE MIB 19,844.31 -7.11% 0.55% 5.68% 24,058.80 18,044.50 7

28 December 2010 • CURRENCY TRADER

 NON-U.S. DOLLAR FOREX CROSS RATES
1-month 3-month 6-month 52-week 52-week
Rank Currency pair Symbol Nov. 26 Previous
gain/loss gain/loss gain loss high low

1 Canada $ / Yen CAD/JPY 82.73 4.48% 3.95% -0.77% 94.1955 78.9222 19

2 New Zeal $ / Yen NZD/JPY 63.495 4.41% 7.37% 6.61% 68.8751 58.9096 16
3 Pound / Yen GBP/JPY 131.705 3.65% 1.02% 2.33% 150.704 126.422 21
4 Pound / Franc GBP/CHF 1.5738 3.02% -0.92% -5.57% 1.7112 1.5097 17
5 Aussie $ / Yen AUD/JPY 81.92 2.11% 9.86% 11.94% 88.048 72.0981 14
6 Canada $ / Real CAD/BRL 1.703125 1.82% 2.18% -2.14% 1.8244 1.6287 12
7 Pound / Aussie $ GBP/AUD 1.607825 1.53% -8.07% -8.59% 1.8231 1.58367 20
8 Aussie $ / Franc AUD/CHF 0.978825 1.47% 7.77% 3.31% 1.0079 0.8949 8
9 Franc / Yen CHF/JPY 83.685 0.64% 1.92% 8.37% 91.028 76.36 18
10 Aussie $ / Real AUD/BRL 1.686395 -0.48% 7.98% 10.20% 1.7226 1.4954 6
11 Pound / Canada $ GBP/CAD 1.592035 -0.76% -2.85% 3.13% 1.754 1.4894 15
12 Euro / Yen EUR/JPY 111.43 -1.47% 4.21% 1.24% 134.556 105.404 13
13 Euro / Franc EUR/CHF 1.33144 -2.10% 2.23% -6.58% 1.5139 1.2763 7
14 Aussie $ / New Zeal $ AUD/NZD 1.290025 -2.19% 2.30% 5.00% 1.3233 1.2088 9
15 Aussie $ / Canada $ AUD/CAD 0.99018 -2.25% 5.68% 12.82% 1.0172 0.8643 4
16 Yen / Real JPY/BRL 0.020585 -2.56% -1.70% -1.58% 0.02127 0.01838 2
17 Euro / Aussie $ EUR/AUD 1.36024 -3.53% -5.14% -9.57% 1.6627 1.3545 11
18 Franc / Canada $ CHF/CAD 1.0116 -3.67% -1.94% 9.21% 1.0657 0.8989 10
19 Euro / Real EUR/BRL 2.293945 -3.79% 2.44% 2.86% 2.6379 2.1772 5
20 Euro / Pound EUR/GBP 0.84603 -4.97% 3.19% -1.07% 0.9154 0.8065 1
21 Euro / Canada $ EUR/CAD 1.346905 -5.70% 0.25% 2.02% 1.593 1.2502 3

GLOBAL CENTRAL BANK LENDING RATES

Country Interest Rate Rate Last change May-10 Nov-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 4.75 0.25 (Nov 10) 4.5 3.5
New Zealand Cash rate 3 0.25 (July 10) 2.5 2.5
Brazil Selic rate 10.75 0.5 (July 10) 9.5 8.75
Korea Korea base rate 2.5 0.25 (Nov. 10) 2 2
Taiwan Discount rate 1.25 0.25 (Feb. 09) 1.25 1.25
India Repo rate 6.25 0.25 (Nov 10) 5.25 4.75
South Africa Repurchase rate 6 0.5 (Sept.10) 7 7

CURRENCY TRADER • December 2010 29

 INTERNATIONAL MARKETS

Unemployment Period Release date Rate Change 1-year change Next release
Argentina Q3 11/22 7.5% -0.4% 1.6% 2/22
AMERICAS Brazil Oct. 11/25 6.1% -0.1% -1.4% 12/17
Canada Oct. 11/5 7.9% -0.1% -0.5% 12/3
France Q2 9/2 9.3% -0.2% 0.2% 12/2
EUROPE Germany Oct. 11/30 6.7% 0.0% -0.8% 1/4
UK June-Aug. 11/17 7.7% -0.1% -0.1% 12/15
Australia Oct. 11/11 5.2% 0.0% -0.4% 12/9
Hong
ASIA and Aug.-Oct. 11/16 4.2% 0.0% -1.0% 12/16
Kong
S. PACIFIC Japan Oct. 11/30 5.1% 0.1% -0.1% 12/28
Singapore Q3 10/29 2.1% -0.1% -1.2% 1/31
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 Q3 11/30 -0.1% 6.2% 12/23
France Q3 11/30 0.4% 1.5% 2/15
EUROPE Germany Q3 11/12 0.7% 4.2% 2/15
UK Q2 9/28 1.4% 5.8% 12/22
AFRICA S. Africa Q3 11/30 0.6% 9.7% 2/22
Australia Q2 9/1 0.9% 3.2% 12/1
Hong Kong Q3 11/12 7.8% 6.8% 2/23
ASIA and S. India Q3 11/30 18.7% 21.7% 2/28
PACIFIC
Japan Q3 11/15 0.9% 3.9% 2/14
Singapore Q3 11/26 1.6% 12.5% NLT 2/25

CPI Period Release date Change 1-year change Next release

Argentina Oct. 11/12 0.8% 11.1% 12/15
AMERICAS Brazil Oct. 11/9 0.8% 5.2% 12/8
Canada Oct. 11/23 0.4% 2.4% 12/21
France Oct. 11/10 0.1% 1.6% 12/14
EUROPE Germany Oct. 11/9 0.1% 1.3% 12/9
UK Oct. 11/16 0.3% 3.2% 12/14
AFRICA S. Africa Oct. 11/24 0.2% 3.4% 12/14
Australia Q3 10/27 0.7% 2.8% 1/25
Hong Kong Oct. 11/22 2.2% 2.6% 12/21
ASIA and
S. PACIFIC
India Oct. 11/30 1.1% 9.7% 12/31
Japan Oct. 11/26 0.4% 0.2% 12/28
Singapore Oct. 11/23 0.5% 3.5% 12/23

PPI Period Release date Change 1-year change Next release

Argentina Oct. 11/12 0.9% 15.1% 12/15
AMERICAS
Canada Oct. 11/29 0.5% 2.3% 1/5
France Oct. 11/30 0.8% 3.8% 12/23
EUROPE Germany Oct. 11/19 0.4% 4.3% 12/20
UK Oct. 11/5 0.6% 4.0% 12/10
AFRICA S. Africa Oct. 11/25 0.4% 6.4% 12/15
Australia Q3 10/25 1.3% 2.2% 1/24
Hong Kong Q3 9/13 2.1% 5.9% 12/13
ASIA and India Oct. 11/14 0.3% 5.6% 12/14
S. PACIFIC
Japan Oct. 11/11 0.2% 0.9% 12/10
Singapore Oct. 11/29 1.2% 0.4% 12/29
As of Nov. 30, 2010 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

30 December 2010 • CURRENCY TRADER

 EVENTS
Event: The World MoneyShow Orlando 2011
Date: Feb. 9-12
Location: Gaylord Palms Resort, Orlando
Show focus: Asia & Emerging Markets
For more information: Go to
www.moneyshow.com/twms/?scode=013104
Event: New York Traders Expo
Date: Feb. 20-23
Location: Marriott Marquis Hotel, New York City
For more information: Go to www.tradersexpo.com
Event: 2011 CBOE Risk Management Conference
Date: Feb. 27–March 1
Location: St. Regis Monarch Beach resort,
Dana Point, Calif.
For more information: Go to www.cboeRMC.com
CURRENCY TRADER • December 2010 31
Event: London Traders Expo
Date: April 8-9
Location: Queen Elizabeth II Conference Centre
For more information: Go to www.tradersexpo.com
Event: Dallas Traders Expo
Date: June 15-18
Location: Hyatt Regency Dallas at Reunion
For more information: Go to www.tradersexpo.com
Event: The World MoneyShow Vancouver 2011
Date: July 7-9
Location: Vancouver Convention Centre
For more information: Go to
www.moneyshow.com/vcms/?scode=013104
 GLOBAL ECONOMIC CALENDAR
December U.S.: November housing starts
16 Hong Kong: Sep. - Nov.
U.S.: November ISM employment report
CPI: Consumer price index
1 manufacturing index U.S.: November leading
Australia: Q3 GDP indicators
ECB: European Central Bank
17 Brazil: November employment
FDD (first delivery day): The first
day on which delivery of a com- France: Q3 employment report report
modity in fulfillment of a futures 2 ECB: Governing council interest-
18
contract can take place. rate announcement
FND (first notice day): Also 19
U.S.: November employment
known as first intent day, this is Germany: November PPI
the first day on which a clear- report 20 Hong Kong: Q3 GDP
inghouse can give notice to a Canada: November employment
buyer of a futures contract that it
3 report
Canada: November CPI
intends to deliver a commodity in Hong Kong: November CPI
LTD: December U.S. dollar index 21
fulfillment of a futures contract. Japan: Bank of Japan interest-
options (ICE)
The clearinghouse also informs rate announcement
the seller. 4 U.S.: Q3 GDP (third)
FOMC: Federal Open Market
5 Mexico: November employment
Committee 22 report
GDP: Gross domestic product 6
Canada: Bank of Canada UK: Q3 GDP
ISM: I nstitute for supply
management
7 interest-rate announcement U.S.: November personal income
LTD (last trading day): The final and durable goods
8 Brazil: November CPI 23
day trading can take place in a France: November PPI
futures or options contract. Australia: November Mexico: Dec. 15 CPI
PMI: P
urchasing managers index employment report
Brazil: Q3 GDP and November 24
PPI: P
roducer price index
PPI 25
Economic Release 9 Germany: November CPI 26
release (U.S.) time (ET) Mexico: November PPI and Nov.
GDP 8:30 a.m.
27
30 CPI
CPI 8:30 a.m. Japan: November employment
ECI 8:30 a.m.
UK: Bank of England interest- 28 report and CPI
rate announcement
PPI 8:30 a.m.
U.S.: October trade balance
29
ISM 10:00 a.m.
Unemployment 8:30 a.m. 10 Japan: November PPI 30
Personal income 8:30 a.m. UK: November PPI 31 India: November CPI
Durable goods 8:30 a.m. 11 January 2011
Retail sales 8:30 a.m.
Trade balance 8:30 a.m. 12 1
Leading indicators 10:00 a.m. Hong Kong: Q3 PPI 2
LTD: December forex futures U.S.: December ISM
13 (CME); December U.S. dollar 3 manufacturing index
index (ICE) Germany: November
December 2010 4
U.S.: FOMC interest-rate employment report
28 29 30 1 2 3 4 announcement; November PPI
5 6 7 8 9 10 11
5 Canada: November PPI
and retail sales
12 13 14 15 16 17 18 France: November CPI 6
19 20 21 22 23 24 25 India: November PPI U.S.: December employment
14 South Africa: Q3 employment report
26 27 28 29 30 31 1 7 Mexico: December PPI and Dec.
report and November CPI
UK: November CPI 31 CPI
The information on this page is FND: December U.S. dollar index
subject to change. Currency Trader futures (ICE)
is not responsible for the accuracy
U.S.: November CPI
of calendar dates beyond press
time. South Africa: November PPI
UK: October employment report
15 FDD: December forex futures
(CME); December U.S. dollar
index futures (ICE)

32 December 2010 • CURRENCY TRADER