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Strategies, analysis, and news for FX traders

November 2011 Volume 8, No. 11

U.S. Dollar: Does the buck (trend) stop here? p. 6

The Japanese yen and U.S. Treasuries: Back to the future p. 24

Reserve diversification: Dollar, Euro, and renminbi p. 14

Universal FX trading: Testing a long-term trend-following system p. 20


Contributors .................................................4 Global Markets The dollars roller-coaster ride ..................6

Did the October downturn kill the chance of a longer-term rally? By Currency Trader Staff

Currency Futures Snapshot ................. 29 International Markets ............................ 30

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

Forex Trade Journal ...............................33

European deal sinks dollar/Canada trade.

On the Money Time to reverse the reserve currency chatter .......................................................14

The dollar can decline, but not because the Euro or the renminbi are poised to replace it as the worlds reserve currency. By Barbara Rockefeller

Trading Strategies Universal trend-following strategy ......... 20

An extremely long-term trend-following approach can work if its applied to a broad portfolio and given enough time to exploit multiple market cycles By Daniel Fernandez

Looking for an advertiser?

Click on the company name for a direct link to the ad in this months issue. Ablesys eSignal FXCM Nadex Ninja Trader

Advanced Concepts The yen and Treasuries: Back to the future ................................... 24
The relationship between the Japanese currency and U.S. Treasuries would likely shock market watchers from the 1980s. By Howard L. Simons

Global Economic Calendar ......................... 28

Important dates for currency traders.

Events ...........................................................28
Conferences, seminars, and other events.

Questions or comments?
Submit editorial queries or comments to webmaster@currencytradermag.com
2 November 2011 CURRENCY TRADER

q Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on a wide range of economic and financial market issues.
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Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag.com Managing editor: Molly Goad mgoad@currencytradermag.com Contributing editor: Howard Simons

q Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund. q Daniel Fernandez is an active trader with a strong interest in calculus, statistics, and economics who has been focusing on the analysis of forex trading strategies, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For the past two years he has published his research and opinions on his blog Reviewing Everything Forex, which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://mechanicalforex.com). Fernandez is a graduate of the National University of Colombia, where he majored in chemistry, concentrating in computational chemistry. He can be reached at dfernandezp@unal.edu.co.

Contributing writers: Barbara Rockefeller, Daniel Fernandez, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag.com

President: Phil Dorman pdorman@currencytradermag.com Publisher, ad sales: Bob Dorman bdorman@currencytradermag.com Classified ad sales: Mark Seger seger@currencytradermag.com

Volume 8, Issue 11. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2011 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.


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The dollars roller-coaster ride

Did the October downturn kill the chance of a longer-term buck rally?
The U.S. dollars action this fall has been one of big trending moves one up and one down driven by the capricious nature of global market sentiment and risk appetite. After breaking out of an extended trading range near its multi-year lows, the U.S. Dollar Index (DXY) in September rallied nearly 8 percent to its early October peak, only to promptly reverse course to plunge about 6 percent to the Oct. 27 low the day European leaders announced a major deal to resolve the Greek debt crisis (Figure 1). The buck almost immediately reversed, however, as doubts about the plan gripped the markets. While weak U.S. economic fundamentals and concerns over the potential for a double-dip recession were in part behind the dollars September rally (the buck being a safe6

haven, despite its home countrys woes), its gains were also fueled by risk aversion over the mounting Eurozone debt crisis. Despite the U.S. credit downgrade earlier this year, analysts say U.S. Treasuries and the dollar remain the go-to investments during times of global financial turmoil and uncertainty. However, as U.S. economic data began to surprise on the upside after weeks of disappointing numbers, analysts and traders did an about-face and increasingly discounted the possibility of a double-dip recession, exiting their safehaven dollar positions. Lets take a look at what recent data implies about the condition of the U.S. economy; the question of QE3 and what it could mean for the dollar; and likely dollar-trading

scenarios going into year-end.


U.S. economy data: Ups and downs

August and September U.S. economic data had shown surprising signs of renewed weakness a negative for risk appetite, notes Brian Dolan, chief currency strategist at Forex. com. The result? A sell-off of pretty much everything but the buck and bonds. We saw a move out of stocks and commodities and into the safety of Treasuries and the U.S. dollar, he says. Also, the Euro debt crisis further unraveled, which conspired further to push investors into the dollar. The dollar rally eventually peaked in early October, as the next round of economic numbers proved to be less dour than increasingly pessimistic traders and investors expected. Ever since the September employment data came out, the fears of recession have receded somewhat, says Mark Vittner, managing director and senior economist at Wells Fargo. That day, Friday, Oct. 4, indeed marked a turning point in the forex market. The U.S. dollar embarked on a nearly one-month down move, punctuated by the big sell-off on Oct. 27; equities moved in the opposite direction (Figure 2). The September U.S. non-farm payrolls data surprised on the upside, beating market expectations (which no doubt had been downsized because of the poor numbers from the previous months) with a 103,000 increase in new jobs that month. (Despite the better-thanexpected non-farm payrolls number, the unemployment rate remained at 9.1 percent.) Brightening matters more, the August payrolls number was revised higher. Nonetheless, the summer swoon rattled the already frazzled nerves of harried investors and consumers. Most folks are resigned that we will see sluggish economic growth over the next few quarters, Vittner

The dollars October sell-off accentuated by the big down move on October 27 nearly erased its September rally. The dollar jumped higher, though, on Oct. 31 and Nov. 1.
Source for all charts: TradeStation


The October downturn in the dollar (top) was accompanied by one of the strongest October stock rallies on record (bottom).


Total durable orders fell by 0.8 percent in September, but the drop was not as steep as economists had expected and the decline was led by a fall in orders for aircraft rather than a huge decrease in spending on consumer items.

says, noting the October consumer confidence number plunged to 39.8, down from 46.4 in September. I think consumers are frustrated because its tough to find a job and even for folks who have a job, inflation is rising faster than incomes. However, Standard & Poors deputy chief economist Beth Ann Bovino notes there has been something of disconnect between hard data and soft data, referring to actual economic gauges such as GDP and employment vs. sentiment measures such as consumer confidence. She notes that although the sentiment figures show people are scared, [t]he U.S. hard data is mixed. She also thinks the data for the second half of the year will be a big improvement over the first six months. Describing a first-half 2011 gross domestic product (GDP) growth rate of around .7 percent as pretty lousy, Bovino nonetheless forecasts a 2-percent GDP rate for the second half of the year. On Oct. 27, the Q3 GDP number came in at 2.5 percent. Bovino also says durable orders are coming in better than sentiment data suggests. Total durable orders fell by 0.8 percent in September, but the drop was not as steep as economists had expected and the decline was led by a fall in orders for aircraft rather than a huge decrease in spending on consumer items. Nomura Securities chief economic advisor David Resler echoes the hard-soft disconnect. Consumer confidence looks like crap, but what people say and what people do with their spending are two different things, he notes. Like Bovino, Resler expects the second half of 2011 to produce better economic numbers than the first half, although he concedes at this stage of an economic expansion relative to

the business cycle trough we should be 10 percent higher. The level of activity is pathetically low, he adds. Growth over the last two years has been about 2.5 percent. In a more typical recovery, one would have expected to see growth twice that. The growth rate is depressed when compared to what is normal and healthy. Resler forecasts a 1.8-percent U.S. GDP rate for 2011 overall, while he expects a 2.3-percent increase from the fourth quarter of this year to Q4 2012. However, he also says if the current payroll tax cut is not extended in 2012, first-quarter 2012 economic growth could take a little hit. In an interesting side note, Resler says another overlooked factor has played a minor role in the slowerthan-normal recovery: the weather. Not just regular old bad weather, but the worst snowstorms in years in the Midwest and on the East Coast last winter, severe flooding in the Midwest this spring, and frequent tornadoes in the spring and summer. On top of that, there was the earthquake and tsunami in Japan, and more recently, the flooding in Thailand. Through this year, the world economy has struggled with some of the worst weather conditions weve seen in the last century, he says. It ultimately slows activity, but it is very hard to quantify you cant measure what didnt happen. Resler says the extreme weather also negatively impacts consumer spending. Overall, even if the news isnt as bad as it sometimes feels, the economy nonetheless doesnt have a great deal of wiggle room. The bright spots are few and far between, Wells Fargos Vittner says. The economy is showing a good bit of resiliency, but it doesnt have a whole lot of margin for error.

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The potential exists for heightened market volatility as headlines drive nervousness and investor anxiety ahead of the Super Committee deadline.

The potentially volatile Washington factor

Several analysts note the importance of Washington, D.C., on how the economic recovery will unfold in early 2012, and specifically how the so-called deficit Super Committee could impact the U.S. dollar. Standard & Poors Bovino, for example, says a lapse in the payroll tax cut in 2012 would be a hit to the economy. She also highlights the potential loss of long-term jobless benefits as a possible negative. Those checks are certainly getting spent, she notes. Bovino estimates 2012 GDP at around 1.5 percent, but says a lot of that is tied to what happens from the government. With the Super Committees deadline looming on Nov. 23, she says the fiscal situation in the U.S. remains a risk to the economy and the dollar. Nomuras Resler says his firm believes the Super Committee wont agree on $1.2 trillion in deficit reduction, but it will come relatively close. We think they will come up with about $800 billion to $1 trillion, he says. Congress will pass that and the president will sign it. The mandated budget cuts, known as sequestration, dont go into effect until January 2013, but Resler says there will be a lot of changes before 2013. There would be an absolutely significant slowdown built into 2013 [if sequestration occurs]. But we dont think policymakers will let that happen. However, the potential exists for heightened market volatility as headlines drive nervousness and investor anxiety ahead of the Super Committee deadline. Will we get a situation similar to the one we had during the debt ceiling? says Charles St-Arnaud, FX strategist at Nomura. If nothing comes out of those discussions and we see the same deadlock, we could see another cut in the U.S. credit rating again.

Forex.coms Dolan considers such a scenario bad for the dollar. The ongoing deficit squabbling is a long-term dollar negative, he says. However, St-Arnaud argues that although another downgrade could create more volatility, it wouldnt be a game-changer for the U.S. dollar. Everyone still considers U.S. assets to be the safest, he says. Most of all, inaction on the part of policymakers represents the looming threat to markets. The dollar will do a lot better if Congress can pass a credible plan to deal with the deficit issues and it doesnt cause an immediate drag on the economy, Wells Fargos Vittner says.


The recent better-than-expected economic data has had one other potential effect: Most economists believe support is waning for the Federal Reserve to embark on a third round of quantitative easing, or QE3, to energize the economy. The absence of an impending QE3 program is actually a dollar positive, as quantitative easing is generally interpreted as bearish for a currency. We would need to see a [negative] turn in the economic data for the Fed to do QE3, St-Arnaud says. Inflation remains in the 2.5- to 3-percent range. Its completely different from QE1 and QE2, when we had a question about deflation. Now, deflation is not really in the picture. Dolan agrees. The [improved] data suggests QE3 is not forthcoming, he says.

Dollar action

The Oct. 27 market reaction to the Europe debt crisis deal was swift and severe for the U.S. dollar. The deal, which included an agreement that Greek debt holders would write off 50 percent of the face value of their bonds, sent

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Having struggled under the burden of the ongoing European debt crisis, the Euro jumped sharply vs. the dollar in late October with the announcement of a plan to resolve the Greek debt problem.


The USD/CAD dollar pair dropped back below 1.0000 in late October after rallying from around .9400 in late July to above 1.0500 in early October.

players scrambling out of the dollar and into the Euro as risk appetite reawakened with a vengeance. Of the sharp plunge in the dollar that day, Wells Fargo currency strategist Vassili Serebriakov says, The market [was] certainly reacting enthusiastically, in a classic risk-on pattern. However, he also sounded a cautionary note. We are not entirely convinced this is the grand solution it was intended to be, he says. The details are lacking and there is implementation risk. The crisis is still far from solved. In general, despite the explosive price action on Oct. 27, most market watchers reacted in measured, if positive, tones to the plan welcoming the decision but viewing it as a first step. Europe met the minimum requirements, Forex.coms Dolan says. They removed the EU debt crisis as a reason to buy the dollar. For now, he adds, theyve bought themselves some time. Nonetheless, problems still remain for Italy, Portugal, Spain, and Ireland. With risk appetite back in fashion, Serebriakov says, The dollar should be weaker, but look for that weakness to be expressed against currencies other than the Euro, he says. As long as resistance around 76.00 holds in the U.S. Dollar Index, Dolan says traders could see a retest of the summer lows around 73.50. The Euro/U.S. dollar pair (EUR/ USD) jumped sharply on Oct. 27, pushing back above 1.4000 roughly halfway between its July 2008 all-time high and its June 2010 low (Figure 3). The U.S. dollar/Canadian dollar (USD/CAD) pair dropped back below 1.0000 in late October after rallying from around .9400 in late July to above 1.0500 in early October (Figure 4). y



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On THE MONEY ON the Money

Time to reverse the reserve currency chatter

The dollar can decline, but not because the Euro or the renminbi are poised to replace it as the worlds reserve currency.
Did you notice the idea of a declining dollar because of reserve diversification has been quietly taken off the table? Perhaps the FX market is becoming increasingly skeptical of muddy thinking. European leaders want us to think they can magically make the 326 billion left in the European System of Financial Supervisors (ESFS) rescue fund do the work of 2 trillion. Protesters in the streets of cities around the world want us to believe that complaining about income inequality will affect policy. Advocates of emerging markets want us to believe the Chinese renminbi will take over the dollars reserve currency role in this decade. Poppycock to all of them. The protesters in urban parks may garner the approval of a majority in polls, but they lack a direct institutional link to policymakers. To be effective in the real world, the protesters would have to raise enough money to hire a legislative advisor and a lobbyist exactly as financial institutions do. Without an implementation vehicle, the protests will continue to have no driving political or economic effect. The absence of a vehicle applies equally to the idea of the renminbi taking over the reserve currency job of the dollar. The analysis takes a back seat to the inconvenient fact that the renminbi is not a tradable currency except by proxy (equities) or the non-deliverable forward market. Even if everyone in the FX world were to agree the renminbi should be the reserve currency, how would they

implement the transition when they cant even open a checking account? The European issue is different. There are plenty of vehicles to express market sentiment: equities, bonds, CDs, and FX. And yet, as the crisis drags on and on, none of these markets is expressing its depth and breadth. In fact, the Euro is rising off the early October low (1.3146) after a long range-bound summer. The Euro could even surpass the 200-day moving average around 1.4090; if it does, it could retest the May 4 high at 1.4940. To understand a rising Euro as Europe falls deeper into crisis, you have to accept the basic perversity of markets. Markets in general and the FX market in particular are perfectly willing to accept the right way to trade may have nothing to do with correct analysis it is wiser to trade with the crowd and make gains than to have brilliant analysis and lose money. This is an application of game theory. Cooperating, or agreeing to agree, results in a win-win for both parties over several hands, even if trading is a zero-sum game in any single hand. This is the sense in which it may be irrational to buy Euros as a crisis worsens, but it is rational to keep buying as long as the other players are continuing to buy. In order for the Europeans to sell the current bailout plan, they have to convince the key players that working on a problem is the same as solving it. Endless committee reports and summits serve that purpose. We should

not be surprised they have been FIGURE 1: THE EURO 1.64 getting away with this work-in1.63 1.62 progress rationalization, even if we 1.61 1.60 1.59 also expect that at some point a key 1.58 1.57 1.56 player will blurt out The emperor 1.55 1.54 Gold = Highest inter1.53 has no clothes! and the game will be 1.52 mediate high 1.5142 1.51 up. The new game will recognize the 1.50 1.49 1.48 underlying crisis and set off the same 1.47 1.46 1.45 rewards for cooperation on the way 1.44 1.43 1.42 down as it did on the way up, result1.41 1.40 ing in the same overshooting that is 1.39 1.38 1.37 a defining characteristic of the FX 1.36 1.35 1.34 market. 1.33 1.32 Green = 200-day 1.31 The trigger for the game change Dark Red = 100-day 1.30 1.29 1.28 could well be the chart. Events drive 1.27 1.26 sentiment and sentiment drives the 1.25 1.24 1.23 chart, but its a mistake to imagine 1.22 1.21 1.20 the chart doesnt have a feedback 1.19 1.18 1.17 effect on sentiment. In Figure 1, first 1.16 note theres a series of lower highs vDec 2008 MarAprMay JunJul Aug SepOct Nov Dec2009 MarAprMay JunJul Aug SepOctNov Dec2010 MarAprMay JunJul Aug SepOctNovDec2011 MarAprMay JunJul AugSepOctNovDe and lower lows, the most basic definiThe Euro has had a downside bias since 2008. If it falls to support, it would tion of a downtrend. Granted, they reach 1.1464 by year-end. are on a vast scale covering several Source: Charts Metastock; data Reuters and eSignal years but the definition has been met. Next, note the 100-day moving average (dark red) is converging with the 200-day moving average (green), headed downward. Greek debt exceeds 220 billion that cannot be repaid There have been four crossovers since the crisis began in under any scenario, and the probability is high for a 2008, and its not inconceivable the Euro will fail to avoid a partial (orderly) default. downward crossover this time, too. Even if the Euro man Contagion may spread to countries not yet bailed out ages to rise above the 100-day and 200-day averages on (Spain and Italy) and worsen conditions in countries a relief rally that something decisive is being done the already bailed out (Ireland and Portugal). Spain and probability seems low it can surpass resistance around Italy together need to borrow 900 billion by mid1.4697 or the historic last highest high of 1.5142 from 2013. Nov. 26, 2009 (gold horizontal line). If the Euro falls to sup European banks are heavily exposed to the bonds of port, it would reach 1.1464 by year-end. these countries and need at least 109 billion in new capital according to the European Banking Authority), Why the Euro should fall: Loaves and fishes 200 billion according to the International Monetary Europe has many emergency issues as we go into yearFund (IMF), or perhaps as much as 275 billion end. The first is that the enhanced ESFS will have 440 according to private bank estimates. billion and needs about 2 trillion in order to backstop A Lehman-style liquidity crisis in the banking sector everything that likely needs backstopping. About 114 has would need intervention by the European Central already been committed to Ireland, Spain, and Greece, so Bank (ECB), but the European Monetary Union (EMU) that leaves 326 billion. The Maastricht Treaty forbids bailhas no ministry of finance or treasury to offer a TARP/ outs, and thus the ESFS cannot be used to guarantee the TALF-style program. bonds of at-risk countries, which will instead have to borrow from the EFSF to provide their own cushion. Consider The EMU founders didnt forget to institute a ministry the following: of finance or treasury; they deliberately declined to form
CURRENCY TRADER November 2011 15

Barbara Rockefeller Currency Trader Mag Nov 2011 Figure 1. Euro


one because the primary job of a treasury is to balance the income and outflow of the sovereign. The income is, on the whole, taxes and the outflow is public works, including welfare transfers. The balancing mechanism is sovereign debt. The EMU doesnt have pan-EMU taxation nor panEMU debt, and thus no need for a treasury. The lack of a treasury is the main reason European leaders are at such a loss as to how, exactly, to structure the bailout. George Soros, among others, proposes the creation of a treasury via a new treaty, but he doesnt mention panEMU taxation or a Eurobond, which are the only logical reasons to have a treasury in the first place. Germany has determined its maximum potential liability should be 112 billion and would oppose any leveraging of the EFSF that would increase that amount. So we are back to figuring out how to multiply 326 billion to reach 2 trillion. As October drew to a close, various proposals were making the rounds, including the EFSF

forming Special Purpose Vehicles (SPV), a term last heard in connection with Enron. The EFSF has a triple-A rating, but its hard not to wonder about the rating of SPVs. Now compare European SPVs with the U.S. solution: $200 billion injected (some say force-fed) into banks, and all of it now repaid at a profit. This is not to defend the U.S. emergency response, but simply to say the U.S. response was not only decisive, but fast. The comparison does not show Europe in a good light. Bottom line: Is this the portrait of a sovereign that could or should be trusted to become the issuer of the primary reserve currency, replacing the U.S. and the dollar? As of end-October 2011, no one could respond yes.

A new book proposes China will eclipse the U.S. within the decade and essentially take over the role of military and economic superpower. In Eclipse: Living in the Barbara Rockefeller Shadow of Chinas Economic Dominance, Currency Trader Mag Nov 2011 Figure 2. Chinese Renminbi/USD (inverted scale) Arvind Subramaniam of the Peterson FIGURE 2: CHINESE RENMINBI Institute for International Economics 6.20 6.25 argues that China is already bigger 6.30 6.35 6.40 than the U.S. in size and purchasing 6.45 6.50 power, runs a trade surplus, and is a 6.55 6.60 6.65 creditor country. He predicts the ren6.70 6.75 6.80 minbi will match or replace the dol6.85 6.90 lar as a reserve currency by the early 6.95 7.00 7.05 2020s, because the choice of a unit 7.10 7.15 of account, or numeraire, follows 7.20 7.25 7.30 trade. Figure 2 shows the renminbi 7.35 7.40 over the past few years. 7.45 7.50 7.55 This brings up the subject of how, 7.60 7.65 exactly, a reserve currency obtains its 7.70 7.75 7.80 status. Historically, the chosen com7.85 7.90 7.95 mercial unit of account is also the 8.00 8.05 reserve currency for the simple reason 8.10 8.15 8.20 that governments require merchants to 8.25 8.30 convert foreign currency proceeds to 8.35 8.40 the local currency; thats how govern2004 2005 2006 2007 2008 2009 2010 2011 2012 ments acquire foreign currencies. Even The slowly appreciating Chinese currency is ill-positioned to become the global today many countries do not allow reserve currency. merchants to hang on to their foreign

Speaking of reserve currencies


currency proceeds. It would be possible for merchants to prefer one currency as the efficient unit of account and governments to select a different one for reserve currency purposes, but that would add another transaction to the mix and be, literally, inefficient. Besides, merchants choose their numeraire because it is safe. Transfers in and out may be measured and even taxed, but not restricted. Deposits can earn a real rate of return, and there is a variety of asset classes to invest in. Most of all, the issuer will not expropriate it. Think about expropriation vs. devaluation for a minute. In a socialist state like China, ownership of money is not a property right guaranteed by the sovereign. The state can expropriate the citizens property, including money. We speak of devaluation as expropriation by other means, but its a metaphor and not literally true. The U.S. is thought by some to have a policy of devaluation, and if so, you would think merchants would chose a different currency. Indeed, the resolutely anti-inflation stance of the ECB is the Euros main claim to gold standard status for merchants. But the Maastricht Treaty and Stability Pact limits on public indebtedness is a key factor in that anti-inflation stance, and the EMU has failed on this front. Assuming Europe returns to the Treaty standards, the Euro has a chance to become the global commercial numeraire. China does not. Even if we believe its data on inflation, we lack reliable information about state and public institution indebtedness. In reviewing Subramaniams book in the Financial Times, Martin Wolf noted size isnt everything when measuring economic power quality and variety count, too. Chinas dependence on imported raw materials is a serious vulnerability. Also, China cannot match the U.S. in technology. In addition to world leadership in companies, Wolf notes, the

The right way to trade may have nothing to do with correct analysis: It is wiser to trade with the crowd and make gains than to have brilliant analysis and lose money.

U.S. has the worlds foremost institutions of higher learning, a powerful network of alliances, the global language and huge cultural influence, not least its values of liberty and democracy . . . China cannot match them. China is a developing country, with huge domestic challenges, ruled by an authoritarian regime what I call a premature superpower. Its puzzling why a prominent economist like Subramanian would neglect these core concepts and champion the downfall of the U.S. and the dollar in favor of an unqualified contender. Searching for other works by this author, we find a paper on the primacy of institutions that has been recycled several times with various co-authors, including a Harvard professor. You can find one version of the paper at amazon.com, another at the National Bureau of Economic Research, and a third at the IMF. A fourth version can be downloaded from the Institute of International Economics (www.iie.com/ publications/papers/subramanian0204.pdf). What does this paper say? The quality of institutions trumps geography and trade in determining income levels. Controlling for institutions, geography has at best weak direct effects on incomes, although it has a strong indirect effect through institutions. Similarly, controlling for institutions, trade has a negative, albeit, insignificant direct effect on income, although trade too has a positive effect on institutional quality. In other words, it wouldnt matter to African incomes that the continent has a distinct shortage of deep-water ports compared to other continents if African countries had good institutions. Really? We are certainly willing to accept that geography is not destiny, but without ports, ocean-going trade falters and thus legal and commercial practices fail to develop. In fact, Subramanian notes, Our findings indicate that when




investors believe their property rights are protected, the economy ends up richer. But nothing is implied about the actual form that property rights should take. We cannot even necessarily deduce that enacting a private propertyrights regime would produce superior results compared to alternative forms of property rights. If this seems stretching things too far, consider the experiences of China and Russia. China still retains a socialist legal system, while Russia has a regime of private property rights in place. Despite the absence of formal private property rights, Chinese entrepreneurs have felt sufficiently secure to make large investments, making that country the worlds fastest growing economy over the last two decades. In Russia, by contrast, investors have felt insecure, and private investment has remained low. Our institutional quality indicators bear this out, with Russia scoring considerably lower than China despite a formal legal regime that is much more in line with European norms than Chinas. Credibly signaling that property rights will be protected is apparently more important than enacting them into law as a formal private property rights regime. In other words, there is no etched-in-stone right way of doing things. Context counts. Success is seen when emerging markets combine some unorthodox measures with the orthodox ones. Maybe this is why important institutional differences persist among advanced countries in corporate governance, labor markets, social insurance, and so on. From the paper: It is important to underscore that this does not mean economic principles work differently in different places. We need to make a distinction between economic principles and their institutional embodiment. Most first-order economic principles come institution-free. Economic ideas such as incentives, competition, hardbudget constraints, sound money, fiscal sustainability, and property rights do not map directly into institutional forms. Property rights can be implemented through common law, civil law, or, for that matter, Chinese-type socialism. Competition can be maintained through a combination of

There is no etched-in-stone right way of doing things. Context counts. Success is seen when emerging markets combine some unorthodox measures with the orthodox ones.

free entry and laissez faire, or through a well-functioning regulatory authority. Macroeconomic stability can be achieved under a variety of fiscal institutions. Institutional solutions that perform well in one setting may be inappropriate in other settings without the supporting norms and complementary institutions. Where does this leave us? A financial market economist must disagree with the academic economist that property rights can be protected through Chinese-type socialism. Microsoft and Sony would not agree that their property rights are being properly protected in China, even if local businessmen feel they are sufficiently protected to justify starting a business. Recent press reports about fraudulent accounting at Chinese companies listed on U.S. exchanges, as well as whole factories and their owners disappearing overnight because of blackmarket loan-sharking are frightening. We would say the institutions are not good enough for merchants to adopt the renminbi as their numeraire, except perhaps for some regional sphere-of-influence purpose. Without the merchants, reserve currency status does not follow. Heres a dandy quote from Adam Smiths The Wealth of Nations: Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government. The Euros woes and the insufficiency of Chinese institutions doesnt mean the dollar will go up, but it should mean the dollar will not fall further on the reserve diversification story. It may fall for other reasons, but reserve diversification should now be laid to rest for a few more years. y
For information on the author, see p. 4.





Universal trend-following strategy

An extremely long-term trend-following approach can work if its applied to a broad portfolio and given enough time to exploit multiple market cycles.

One of the biggest problems of designing and testing a trading system is the inherent lack of certainty about its future performance. When a trader refines a strategy to trade only certain instruments or optimizes parameters to produce better historical results, it reduces the odds the system will produce comparable returns in real trading because of the unlikelihood that the specific market behavior that produced those results will be replicated in the future. As a result, some traders and system designers favor painting with a broader brush, seeking to create robust strategies that capture basic behavioral tendencies common to the widest possible portfolio of markets. Longterm trend-following systems are perhaps the best known approach of this type: Trends are rarer than random or sideways price action, and most trend-following trade signals result in losses, but by trading a wide portfolio of markets the system can capture enough large moves to turn a profit in the long run. Here we will apply this concept to the forex market by developing a strategy for a wide portfolio of currency pairs while avoiding any optimization. This way, the resulting trading system should theoretically have the best odds of reproducing its past results in real trading, since future market conditions would have to change fundamentally to render the system ineffective.

A universal trend-following system

Because trend-following is likely the most universal trading approach, we will test a simple moving average (SMA) crossover system on the daily time frame that should allow us to capture very long-term trends (several months to several years) in any currency pair. A key element to this system is diversification. Although the system would likely be inappropriate to trade on a single currency pair it might be effective or it might fail applying it to a broad portfolio increases its odds of capitalizing on enough large moves to make it successful. This stop-and-reverse (SAR) system is always in the market when a long position is exited, a short position is simultaneously opened, and vice versa. The rules are: 1. Go long and cover short when the 50-period SMA crosses above the 350-period SMA. 2. Go short and exit long when the 50-period SMA crosses below the 350-period SMA. Figure 1 shows examples of trade signals in the Euro/ Swiss franc pair (EUR/CHF). The system is designed to capture trends that are long even compared to those captured by most long-term trend-following systems. The long trade in Figure 1, which was triggered in spring 2005 and exited in early 2008 (at which point the system went short), lasted more than three years and booked an overall
November 2011 CURRENCY TRADER October 2010 CURRENCY


profit of more than 600 pips. Notice that, like most long-term trend systems, it gave back a large portion of the open-trade profit by the time it changed direction.

Money management

To give the system an adaptive element it also incorporates a volatilityadjusted, position-sizing mechanism based on the 14-day average true range (ATR). The higher the volatility, the smaller the trade size: Trade size = 0.002*Account Balance/(Lot Size * 14-day ATR) Because risk is not controlled by a hard stop-loss, the 0.002 term ensures the risk per trade will be small even when wide price swings are occurring. For example, assuming a $100,000 standard forex tradelot size, a current account balance of $125,000, and a 14-day ATR of 225 pips (0.0225), the position size taken would be: Trade size = 0.002*125,000/ (100,000*0.0225) = 0.11, or $100,000*0.11 = $11,111 The equation would risk just 2 percent of the accounts size if the current price movement was 10 times the 14-day ATR, so trading with this system and position-sizing equation can be considered very conservative since the actual risk per trade is limited by both the low risk and the internal closing mechanism (i.e., exiting positions on signals in the opposite direction).

The system is designed to capture very long-term trends based on a moving average crossover. Positions are reversed when a signal triggers in the opposite direction.


Pair Aussie dollar/Swiss franc Aussie dollar/Japanese yen Aussie dollar/New Zealand dollar Aussie dollar/U.S. dollar Canadian dollar/Swiss franc Canadian dollar/Japanese yen Swiss franc/Japanese yen Euro/Aussie dollar Euro/Canadian dollar Euro/Swiss franc Euro/British pound Euro/Japanese yen Euro/New Zealand dollar Euro/U.S. dollar British pound/Swiss franc British pound/Japanese yen British pound/U.S. dollar New Zealand dollar/Japanese yen New Zealand dollar/U.S. dollar U.S. dollar/Canadian dollar U.S. dollar/Swiss franc U.S. dollar/Japanese yen Symbol AUD/CHF AUD/JPY AUD/NZD AUD/USD CAD/CHF CAD/JPY CHF/JPY EUR/AUD EUR/CAD EUR/CHF EUR/GBP EUR/JPY EUR/NZD EUR/USD GBP/CHF GBP/JPY GBP/USD NZD/JPY NZD/USD USD/CAD USD/CHF USD/JPY Trade cost (pip spread) 8 7 14 3.5 7 7 6 8 8 3.5 3 6 17 2 7 6 3.5 7 8 5 3.5 2.5



Test results

The strategy was tested on daily data in 22 currency pairs from June 6, 2000, to June 6, 2011 (11 years). Table 1 shows the portfolio, along with trading costs (in pips) for each currency pair. The portfolio includes almost all crosses involving the U.S. dollar (USD), Euro (EUR), Swiss franc (CHF), British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD). The first thing worth mentioning about the strategy is that its trade frequency is extremely low for most symbols because the strategy needs to tackle very long economic cycles to be able to gather successful results. Because lessliquid pairs have a higher level of randomness (most of the pairs in the portfolio are minors), long moving average lengths are required to exploit generic trend-following

inefficiencies. The total number of trades for the portfolio was 259, which is the equivalent of 11 trades per pair (one trade per year per pair, on average). As a result, analyzing individual symbol results is pointless; only the portfolio as a whole has enough trades to yield a statistically meaningful analysis. Accordingly, its useful to think of the system as a composite, market-wide strategy rather than as a collection of individual strategy/symbol results. The portfolio managed to generate net profitable results over the 11-year period, as shown by the balance and equity curves in Figure 2. The balance curve (heavier line) represents the change in account equity based on closed trades; the equity curve (thinner line) reflects the account equity based on open-position profit or loss at a given time. The results are relatively good despite the universal and un-optimized nature of the strategy, with an average annual return of 9.91 percent and a maxiTABLE 2: PORTFOLIO TEST RESULTS mum drawdown of 34.07 percent (Table 2). The reward-to-risk ratio of 3.6 suggests the strategy Metric Portfolio results fulfills its primary objective of capturing very Avg. annual return 9.91% long-term market trends (one to five years). The strategy also displays some classic weakMaximum drawdown 34.1% nesses of a long-term trend-following system, Reward/risk ratio 3.6 including a very long maximum drawdown length of 1,993 calendar days more than five Winning percentage 37% years (in this case, at the beginning of the 11-year Profit factor 2.15 test window). However, it is worth noting the equity curve is above the balance curve throughNumber of trades 259 out almost all the test period, which means the Maximum drawdown length 1,993 days strategy persistently accumulated large profitable positions as long-term trends evolved over the years. The equity growth FIGURE 2: EQUITY CURVES shows a relatively steady uptrend (with a parabolic bump higher during the 2008 financial crisis), meaning that equity accumulation was consistent, even though it sometimes took several years to close a position and book a profit. The systems annual performance in Figure 3 is not very impressive (revealing four losing years at the beginning of the test period) precisely because of the previously mentioned phenomena, which causes trades to last for many years before closing. The heavier line represents closed-trade profits; the thinner line represents This year (through June 6) has been open-trade profits. by far the systems most profitable because many extremely long-lasting


trades (including some that were generated in 2008 as the financial crisis began) were closed only just this year for very large profits. These trades occurred mostly in the major pairs and JPY cross rates (mainly the EUR and GBP crosses), but other pairs also contributed. The equity curve in Figure 2 highlights the fact that the 2011 profit was not generated quickly, but was rather the result of a multi-year accumulation. Analyzing the systems per-trade risk profile also reveals some favorable characteristics: an average risk per trade of 0.75 percent and a maximum risk of 1.46 percent, which indicates the combination of the positionsizing equation and the internal tradesignal logic limit risk to reasonable levels. Figure 4 shows the risk profile for each symbol in the portfolio.


A strategy built to last

It cannot be stressed enough that this system does not attempt to work in just one or even a few years (or on a single currency pair). Rather, it is a tool for capturing long-term trends in a broad-based portfolio over the course of multiple economic cycles. Although the benefits of using a system such as this may not be evident after even half a decade, its extreme robustness (because of the high number of symbols and the lack of optimization) increases the odds it will survive changes in future market conditions other than a complete disappearance of all long-term trends, which is highly unlikely. Although the system has been analyzed only with the purpose of illustrating a universal trading approach, modifications such as trade pyramiding and alternative money management rules have the potential to improve it. y
For information on the author, see p. 4.

The system suffered through four losing years at the beginning of the test period, while 2011 (through early June) was shaping up to be a big winning year.


The average per-trade loss was less than 1 percent for most pairs.




The yen and Treasuries: Back to the future

The relationship between the Japanese currency and U.S. Treasuries would likely shock market watchers from the 1980s.
If you climbed into your time machine and set the dial to 1985 to seek the markets shared wisdom regarding the Japanese yen and U.S. Treasuries, what would you find? The answer can be summarized neatly and succinctly: Treasury yields being driven down by Japanese inflows, but these inflows stop and reverse if the yen strengthens against the dollar. Back then, the fear of the Japanese selling U.S. bonds if the dollar weakened had something of a spiders-andsnakes primal nature to it. However, that is where the parallel does (or should) end. A cobra or a black widow can ruin your day, but the Japanese selling their bond holdings into a hole would ruin their day. The logic is and always will be simple: A country running a current account surplus has to run a capital account deficit. If it reduces its capital account deficit, its exports must be reduced proportionately, and that is a self-destrucFIGURE 1: JAPANESE PORTFOLIO INVESTMENT AND YEN/DOLLAR RATE tive act. Moreover, economic decisions are made at the margin, and the weaker dollar made U.S. Treasury securities cheaper for Japanese investors. Japanese investors have understood this even if perpetually fretful American bond traders have not. If we map net Japanese portfolio investment over all categories tracked by the U.S. Treasurys International Capital Statistics report, including Treasuries and agencies, corporate bonds, and equities, we find no discernible relationship between the course of the yen and monthly portfolio purchases three months later (Figure 1). The green vertical line in all charts marks the September 1985 Plaza Accord to weaken the dollar; we can climb back into the time Theres no discernible relationship between the yens movement and monthly machine. portfolio purchases three months later. The green vertical line marks the September Once the yen rose in 1985, it 1985 Plaza Accord to weaken the dollar. never looked back, no matter




how much abuse Japan hurled at its own economy or how low it pushed its own interest rates. The dollar had two rather substantial rallies in 1988-1989 and again in 1995-1998, both of which seemed like major secular moves at the time but which now look like notches on the chart. This might not have surprised our Back to the Future marketwatchers in 1985 as much as the subsequent course of American interest rates, both long-term and short-term. While a link between the yen and one-year U.S. Treasuries existed prior to September 1985, it disappeared afterwards, never to return (Figure 2). No link ever existed between the yen and 10-year U.S. Treasuries (Figure 3).

The pre-September 1985 link between the yen and one-year U.S. Treasuries has never returned.


Yield curve and yen carry

We can rearrange the data in the preceding charts to ask whether the U.S. Treasury yield curve as measured by the forward rate ratio between one and 10 years (FRR1,10) has affected the yen (Figure 4). The FRR1,10 is the rate at which we can lock in borrowing for nine years starting one year from now, divided by the 10-year rate itself. The

There has never been an evident link between the yen and 10-year U.S. Treasuries.





Its a mistaken assumption that a steeper U.S. yield curve leads to yen strength against the dollar.


The 14-year period from 1985 to 2009 was the only period when the yens rise did not parallel the carry trade.

more this measure exceeds 1.00, the steeper the yield curve is. Many bond traders (and indeed, many currency traders) have managed to convince themselves a steeper U.S. yield curve leads to yen strength against the dollar on the notion a looser monetary policy in the U.S. makes the dollar increasingly worthless. This viewpoint is, however, nothing more than the sound of one hand clapping; currencies are priced off relative interest rate expectations. A comparison of an exchange rate dominated by differential shortterm interest rate expectations to a yield curve in one of the countries should not be valid. Lets add a carry trade into the mix and see if this can explain the linkage between the yen and long-term U.S. Treasuries. Instead of a standard currency carry trade at the same maturity (such as swapping three-month yen for three-month dollars), or instead of a single-currency yield curve trade (such as borrowing two-year Treasuries and lending 10-year Treasuries), lets do the equivalent of a calendar diagonal trade and borrow three-month yen and lend 10-year Treasuries. This can be depicted as the forward rate ratio between the two markets,


The post-March 2009 period is one where the yen can strengthen and long-term Treasuries can rally simultaneously a combination thought impossible in the 1980s.

a required normalization given the huge swings in both parallel to the course of the spot yen since the JPY bottom interest rates. during the October 1998 Long-Term Capital Management Two dates stand out since the introduction of JPY LIBOR fiasco (Figure 6). The net carry return is the total return on in 1989; these are bounded by the turquoise rectangle in the Treasury index less the total cost of borrowing at the Figure 5. The first occurred just before the yens April 1995 three-month horizon. This relationship essentially has been peak and Japans decision to start driving short-term interhidden in plain sight for almost 13 years, the best place to est rates lower more aggressively than it had been doing. hide something, past, present, or future. y The second occurred in March 2009 when the U.S. moved For information on the author, see p. 4. to quantitative easing. Two countries, two currencies, one answer: Just start printing money FIGURE 6: U.S 7- TO 10-YEAR TREASURIES GAINED AS YEN STRENGTHENED and hope for the best. The spot rate of the yen paralleled the yen carry into 10-year Treasuries both before the Japanese era of ease and after the U.S. began to fight Japan for the title of Worlds Cheapest Currency To Borrow. Restated, the 14-year period when the yen was the unquestioned holder of this dubious title was the only period when the yens rise did not parallel the carry trade. The post-March 2009 period, therefore, is one where the yen can strengthen and long-term Treasuries can rally simultaneously a combination seen as impossible in those Back to The Future days of the mid-80s. It may come as a further surprise to many that the net carry return in USD terms of borrowing The net carry return of borrowing either three-month JPY or three-month USD and either three-month JPY or threelending in U.S. 7- to 10-year Treasuries has paralleled the spot yen since the JPY month USD and lending in U.S. bottom during the October 1998 Long-Term Capital Management fiasco. 7- to 10-year Treasuries has been




CPI: Consumer price index ECB: European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. FND (first notice day): Also known as first intent day, this is the first day on which a clearinghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillment of a futures contract. The clearinghouse also informs the seller. FOMC: Federal Open Market Committee GDP: Gross domestic product ISM: Institute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: Purchasing managers index PPI: Producer price index Economic release (U.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m.

1 2 3 4 5 6 7 8 9

U.S.: October ISM manufacturing report U.S.: November FOMC interest-rate announcement Germany: September employment report ECB: Governing council interest-rate announcement U.S.: October employment report Canada: October employment report LTD: November forex options; November U.S. dollar index options (ICE)


17 Hong Kong: Aug.-Oct. employment 18 19 20 21

report U.S.: October leading indicators Canada: October CPI Germany: October PPI

U.S.: October housing starts

22 Hong Kong: October CPI 23 durable goods 24

U.S.: Q3 GDP

U.S.: October personal income and South Africa: October CPI Japan: October CPI employment report


11 12 13

Brazil: October PPI Mexico: Oct. 31 CPI and October PPI U.S.: September trade balance Australia: October employment report France: October CPI Germany: October CPI UK: Bank of England interest-rate announcement Brazil: October CPI Hong Kong: Q3 GDP Japan: October PPI UK: October PPI

25 Mexico: Q3 GDP and October 26 27 28

29 South Africa: Q3 GDP 30

Japan: October employment report U.S.: Fed beige book Canada: Q3 GDP and October PPI France: October PPI Germany: October employment report India: Q3 GDP and October CPI U.S.: November ISM manufacturing index France: Q3 employment report U.S.: November employment report Canada: November employment report


India: October PPI U.S.: October PPI and retail sales Germany: Q3 GDP UK: October CPI U.S.: October CPI Japan: Bank of Japan interest-rate announcement UK: October employment report

14 Japan: Q3 GDP 15 16

2 3 4 5

The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.

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Market EUR/USD AUD/USD GBP/USD CAD/USD JPY/USD MXN/USD U.S. dollar index CHF/USD NZD/USD E-Mini EUR/USD Sym EC AD BP CD JY MP DX SF NE ZE Exch CME CME CME CME CME CME ICE CME CME CME Vol 339.9 156.7 112.7 105.3 89.9 36.6 31.6 25.2 7.1 5.6 OI 220.4 104.7 165.2 100.6 141.9 87.5 67.6 23.8 24.2 4.6 10-day move / rank 2.00% / 43% 3.81% / 31% 1.92% / 60% 1.84% / 31% 1.92% / 100% 1.83% / 30% -2.20% / 56% 3.58% / 85% 2.28% / 17% 2.00% / 43% 20-day move / rank 5.46% / 100% 10.80% / 100% 3.20% / 92% 5.15% / 100% 1.72% / 65% 6.63% / 100% -4.88% / 100% 4.96% / 73% 7.97% / 100% 5.46% / 100% 60-day move / rank 0.19% / 6% 2.02% / 35% -1.04% / 28% -1.48% / 55% 4.38% / 63% -8.07% / 61% 0.55% / 25% -10.92% / 87% -2.42% / 0% 0.19% / 6% Volatility ratio / rank .47 / 50% .54 / 30% .47 / 50% .36 / 30% .26 / 77% .22 / 18% .51 / 57% .27 / 52% .38 / 33% .47 / 50%

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.

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each markets 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-byside electronic contracts (where applicable). LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to todays close. 20-day move: The percentage price move from the close 20 days ago to todays close. 60-day move: The percentage price move from the close 60 days ago to todays close. The % rank fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.

BarclayHedge Rankings: Top 10 currency traders managing more than $10 million
(as of September 30 ranked by September 2011 return) September return 41.14% 13.17% 12.51% 11.70% 7.31% 6.41% 6.31% 5.77% 5.38% 5.21% 12.25% 8.93% 8.28% 4.64% 2.27% 1.03% 1.01% 0.87% 0.83% 0.71% 2011 YTD return 2.11% 0.98% 9.21% 25.58% -12.75% 1.67% 1.43% 15.33% -0.39% -7.18% 39.40% 36.68% 27.19% 26.33% 0.17% 8.29% 8.18% 3.18% 6.39% -9.65% $ Under mgmt. (millions) 153.5 245 152 17.4 25 135 25 14.3 592.7 893 4.0 3.1 9.9 1.5 1.7 4.5 8.6 1.8 1.4 3.0

Trading advisor 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Friedberg Comm. Mgmt. (Curr.) Currency Insight (Diversified Sys.) Cambridge Strategy (Asian Mrkts) CenturionFx Ltd (6X) Richmond Group (Gl. Currency) Premium Currency (Curr. Plus) Floyd Cap'l Mgmt (Currency) Zooz Capital Management Premium Currency (Currencies) Harmonic Capital (Gl. Currency) Wealth Builder FX Group (Low Risk) Iron Fortress FX Mgmt First Capital Trading (Forexmax) Adantia (FX Aggressive) Four Capital (FX) Capricorn Currency Mgmt (FXG10 USD) Overlay Asset Mgmt. (Emerging Mkts) Basu and Braun (Everest) Capricorn Currency Mgmt (FXG10 EUR) Vaskas Capital Mgmt (Global FX)

Top 10 currency traders managing less than $10M & more than $1M

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.



Rank Currency 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Australian Dollar Brazilian real Russian ruble Swedish krona Great Britain pound New Zealand dollar Euro South African rand Swiss franc Singapore dollar Canadian dollar Chinese yuan Japanese yen Taiwan dollar Hong Kong dollar Thai baht Indian rupee Oct. 26 price vs. U.S. dollar 1.046069 0.570255 0.032765 0.15267 1.59946 0.80191 1.39156 0.126675 1.136195 0.791685 0.993635 0.157015 0.013145 0.03320 0.128605 0.032445 0.019975 1-month gain/loss 6.88% 6.09% 5.18% 5.08% 3.48% 3.31% 3.03% 2.81% 2.80% 2.71% 2.14% 0.80% 0.65% 0.53% 0.35% 0.28% -0.55% 3-month gain/loss -3.47% -11.62% -9.14% -3.28% -1.85% -7.29% -3.19% -14.00% -8.13% -4.38% -5.74% 1.13% 2.94% -4.32% 0.20% -3.41% -10.81% 6-month gain/loss -2.54% -10.59% -8.46% -7.05% -3.12% 0.12% -4.53% -14.94% 0.34% -2.27% -5.31% 1.96% 7.83% -4.13% -0.05% -2.86% -10.41% 52-week high 1.1028 0.65 0.0366 0.1662 1.6702 0.8797 1.4842 0.1518 1.3779 0.832 1.059 0.1572 0.013145 0.03510 0.129 0.0338 0.0226 52-week low 0.9478 0.5294 0.0306 0.1422 1.5407 0.7207 1.2901 0.12 0.996 0.7572 0.9467 0.1492 0.0117 0.0322 0.1281 0.0316 0.0196 Previous 11 17 15 12 6 9 8 14 16 10 5 2 1 7 3 4 13


Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Italy Germany France Hong Kong Australia UK India Mexico U.S. South Africa Brazil Switzerland Japan Singapore Canada Index FTSE MIB Xetra Dax CAC 40 Hang Seng All ordinaries FTSE 100 BSE 30 IPC S&P 500 FTSE/JSE All Share Bovespa Swiss Market Nikkei 225 Straits Times S&P/TSX composite Oct. 26 16,071.92 6,016.07 3,169.62 19,066.54 4,300.80 5,553.20 17,288.83 35,818.58 1,242.00 31,736.62 57,144.00 5,700.50 8,748.47 2,769.94 12,186.06 1-month gain/loss 13.83% 12.54% 10.85% 9.53% 9.50% 9.11% 7.71% 7.29% 6.80% 6.79% 6.32% 5.55% 4.47% 4.36% 4.09% 3-month gain/loss -15.54% -18.14% -16.32% -15.53% -7.44% -6.35% -6.64% 1.35% -6.75% -0.41% -3.70% -4.84% -13.36% -13.07% -8.38% 6-month gain loss -26.72% -18.22% -21.65% -20.58% -13.19% -8.50% -11.55% -2.91% -7.81% -2.85% -14.89% -11.98% -8.48% -12.67% -12.39% 52-week high 23,273.80 7,600.41 4,169.87 24,988.60 5,069.50 6,105.80 21,108.60 38,876.80 1,370.58 33,094.06 73,103.00 6,739.10 10,891.60 3,313.61 14,329.50 52-week low 13,115.00 4,965.80 2,693.21 16,170.30 3,829.40 4,791.00 15,745.40 31,659.30 1,074.77 28,391.18 47,793.00 4,695.30 8,227.63 2,521.95 10,848.20 Previous 4 3 11 15 13 5 2 10 12 8 7 1 6 9 14




Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair Aussie $ / Yen Aussie $ / Canada $ Aussie $ / Franc Aussie $ / New Zeal $ Pound / Yen New Zeal $ / Yen Euro / Yen Franc / Yen Canada $ / Yen Pound / Canada $ Euro / Canada $ Aussie $ / Real Pound / Franc Franc / Canada $ Euro / Franc Euro / Pound Euro / Real Pound / Aussie $ Euro / Aussie $ Canada $ / Real Yen / Real Symbol AUD/JPY AUD/CAD AUD/CHF AUD/NZD GBP/JPY NZD/JPY EUR/JPY CHF/JPY CAD/JPY GBP/CAD EUR/CAD AUD/BRL GBP/CHF CHF/CAD EUR/CHF EUR/GBP EUR/BRL GBP/AUD EUR/AUD CAD/BRL JPY/BRL Oct. 26 79.58 1.052765 0.92067 1.30444 121.675 61.05 105.86 86.435 75.585 1.609705 1.400475 1.834385 1.407725 1.14347 1.22477 0.87003 2.440245 1.529025 1.330285 1.74244 0.023055 1-month gain/loss 6.17% 4.64% 3.96% 3.42% 2.81% 2.73% 2.39% 2.15% 1.48% 1.31% 0.87% 0.74% 0.66% 0.65% 0.20% -0.38% -2.89% -3.18% -3.56% -3.73% -5.12% 3-month gain/loss -6.22% 2.41% 5.08% 4.12% -4.65% -9.88% -5.96% -10.75% -8.44% 4.13% 2.71% 9.23% 6.85% -2.53% 5.38% -1.36% 9.54% 1.68% 0.29% 6.65% 16.50% 6-month gain loss -9.61% 2.93% -2.87% -2.66% -10.16% -7.08% -11.46% -6.94% -12.19% 2.31% 0.82% 9.01% -3.45% 5.97% -4.86% -1.45% 6.78% -0.60% -2.04% 5.90% 20.61% 52-week high 89.46 1.052765 0.9818 1.3746 139.19 67.97 122.63 105.79 88.95 1.6354 1.4316 1.8452 1.5936 1.3569 1.3766 0.9038 2.5367 1.6373 1.4228 1.8282 0.0246 52-week low 72.72 0.9708 0.7477 1.2354 117.7 56.86 101.41 81.55 72.63 1.5302 1.2811 1.6066 1.1778 1.0113 1.0376 0.8297 2.1692 1.4806 1.2947 1.5997 0.0186 Previous 19 14 7 10 16 20 18 21 15 11 13 5 3 17 6 12 4 8 9 2 1

Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa

Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate

Rate 0-0.25 0-0.1 1.5 0.5 1 0 4.75 2.5 11.5 3.25 1.875 8.5 5.5

Last change -0.5 (Dec. 08) -0-0.1 (Oct. 10) 0.25 (July 11) -0.5 (March 09) -0.25 (Sept 10) -0.25 (Aug 11) -0.25 (Nov 10) -0.5 (March 11) -0.5 (Oct. 11) 0.25 (June 11) 0.125 (June 11) -0.25 (Oct 11) -0.5 (Nov. 10)

April 2011 0-0.25 0-0.1 1.25 0.5 1 0.25 4.75 2.5 12 3 1.75 7.25 5.5

Oct. 2010 0-0.25 0-0.1 1 0.5 1 0.25 4.5 3 10.75 2.25 1.5 6 6



Argentina Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore

Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2

Release date
9/16 9/6 8/31 9/28 8/16 10/5 8/30 9/7 8/12 8/31 8/15 8/19

26.1% 8.7% 0.4% 0.4% 0.6% 0.5% -6.4% 2.7% -1.1% 16.7% -0.3% -3.3%

1-year change
20.1% 9.0% 5.6% 3.2% 3.7% 4.5% -3.6% 6.3% 9.9% 7.7% -1.3% 4.2%

Next release
12/16 12/6 11/30 12/23 11/15 12/22 11/29 12/7 11/11 11/30 11/14 11/25


Unemployment AMERICAS

Q2 Sept. Sept. Q2 Aug. June-Aug. Sept. July-Sept. Sept. Q3

Release date
8/22 10/27 10/7 9/1 9/29 10/12 10/13 10/18 10/28 10/31

7.3% 6.0% 7.1% 9.1% 6.0% 8.1% 5.2% 3.2% 4.1% 2.0%

-0.1% 0.0% -0.2% -0.1% 0.0% 0.2% 0.0% 0.0% -0.2% -0.1%

1-year change
-0.6% -0.2% -0.9% -0.2% -0.9% 0.3% 0.1% -1.0% -0.9% -0.1%

Next release
11/21 11/24 11/4 12/1 11/2 11/16 11/10 11/17 11/29 1/31



Argentina Sept. Sept. Sept. Sept. Sept. Sept. Sept. Q3 Sept. Sept. Sept. Sept. Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date
10/14 10/7 10/21 10/12 10/13 10/18 10/19 10/26 10/21 10/31 10/28 10/24

0.8% 0.5% 0.2% 0.1% 0.1% 0.7% 0.4% 0.6% 0.4% 1.5% 0.0% -0.2%

1-year change
9.9% 5.0% 3.2% 2.2% 2.6% 5.2% 5.7% 3.5% 5.8% 10.1% 0.0% 5.5%

Next release
11/11 11/11 11/18 11/10 11/10 11/15 11/23 1/25 11/22 11/30 11/25 11/23




Argentina Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Sept. Sept. Sept. Sept. Sept. Sept. Q3 Q2 Sept. Sept. Sept.

Release date
10/14 10/31 10/31 10/20 10/7 10/27 10/24 9/15 10/14 10/14 10/28

0.9% 0.4% 0.2% 0.3% 0.3% -3.3% 0.6% 2.8% 0.6% -0.1% 1.9%

1-year change
12.6% 5.3% 6.1% 5.5% 6.3% 10.5% 2.7% 8.9% 9.7% 2.5% 11.0%

Next release
11/11 11/30 11/30 11/18 11/11 11/24 1/23 12/13 11/14 11/11 11/29

As of Oct. 31 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.




European deal sinks dollar/Canada trade.

Date: Thursday, Oct. 20, 2011 Entry: Long the U.S. dollar/ Canadian dollar pair (USD/CAD) at 1.0165 Reason for trade/setup: This trade was prompted by the bullish implications of the longer-term pattern analyzed in the Spot Check feature in the October issue of Currency Trader, which found a tendency for upside follow-through after large price jumps like the one that occurred the week ending Sept. 23. Although the postpattern price behavior suggested immediate upside movement, the article also noted the relatively frequent occurrence of large pullbacks that occurred before price moved higher. In this case the pair edged higher a couple of weeks (to above 1.0657) before pulling back sharply. The Oct. 14-19 consolidation suggest ripening conditions for a return to the upside; the trade parameters were established to give the position the room to challenge the round-number target just below the Oct. 24 low. Initial stop: 0.9984, a little below the whole-number threshold of 1.0000 Initial target: 1.0487 RESULT Exit: 0.9984 Profit/loss: -.0181.00 Outcome: The trade didnt start out particularly well, but whatever potential it had was erased when the European debt deal announced on Oct. 27 pulled the rug out from under the dollar. The trade missed being stopped out by a handful of pips on Oct. 25, but the pair reversed sharply intraday to close almost exactly at the entry price. It was only a brief respite, though: The next days down-closing inside day was followed by the flush-out below .9900. Perhaps an entry should have been delayed until after a definitive test of par. y
Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature. Source: TradeStation

TRADE SUMMARY Date 10/20/11 Currency pair USD/CAD Entry price 1.0165 Initial stop 0.9984 Initial target 1.0487 IRR 1.78 point 0.9984 10/27/11 -.0181 MTM Date P/L % -1.8% LOP .0047 LOL -.0181 Trade length 5 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). MTM: marked-to-market the open trade profit or loss at a given point in time.