Strategies, analysis, and news for FX traders

June 2010
Volume 7, No. 6

EURO/DOLLAR PARITY, COMMODITY

CURRENCY SETUPS, AND MORE:
What’s in store for the rest of the year? p. 6

SIGNALS FROM THE ASIAN

forex session p. 18

THE EURO’S RECORD MOVE p. 16

RISK, FEEDBACK LOOPS,

and self-fulfilling
prophecies in FX p. 12

CHANGING GEARS
in the Aussie dollar p. 32

SOUTH OF THE BORDER:

Colombian peso analysis p. 22
 contents

Contributors....................................................... 4 Currency Futures Snapshot................. 25

Global Markets International Markets............................. 26

Dollar bulls in the driver’s seat ....................6
A look at the major currency stories at the mid-
point of the year, and what the remainder of
2010 may bring.
By Currency Trader Staff
Numbers from the global forex, stock, and
interest-rate markets.
Global Economic Calendar......................... 29
Important dates for currency traders.

On the Money Events . ......................................................30

The world is not flat ..................................12 Conferences, seminars, and other events.
How low can the Euro go?
By Barbara Rockefeller New Products & Services........................... 30

Spot Check Key Concepts.............................................31

Euro/U.S. dollar .........................................16
Where the Euro’s been, where it’s going: Forex Journal............................................32
The numbers. Reversing direction in the Aussie dollar.
By Currency Trader Staff

Trading Strategies
Taking advantage of the
Asian trading session ...............................18 Looking for an
Analyzing the often-overlooked Asian trading advertiser? 
session points to a novel way of exploiting forex Click on the company name for a direct
market inefficiencies. link to the ad in this month’s issue.
By Daniel Fernandez
eSignal

Advanced Strategies FXCM

Colombian peso, the richest kind . ........... 22
Traders Expo
Colombia’s peso gets a helping hand from U.S.
interest-rate policy. Your FX Trading Room
By Howard L. Simons

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

 June 2010 • CURRENCY TRADER

 contributors

q Howard Simons is president of Rosewood

Trading Inc. and a strategist for Bianco Research.
He writes and speaks frequently on a wide
A publication of Active Trader ®
range of economic and financial market issues.
For all subscriber services:
www.currencytradermag.com

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

national economist with a focus on foreign exchange. She
has worked as a forecaster, trader, and consultant at Citibank
Editor-in-chief: Mark Etzkorn and other financial institutions, and currently publishes two
metzkorn@currencytradermag.com
daily reports on foreign exchange. Rockefeller is the author of

Managing editor: Molly Goad Technical Analysis for Dummies (For Dummies, 2004), 24/7 Trading
mgoad@currencytradermag.com Around the Clock, Around the World (John Wiley & Sons, 2000),
The Global Trader (John Wiley & Sons, 2001), and How to Invest
Contributing editor:
Howard Simons Internationally, published in Japan in 1999. A book tentatively

titled How to Trade FX is in the works. Rockefeller is on the
Contributing writers:
Barbara Rockefeller, Marc Chandler, board of directors of a large European hedge fund.
Chris Peters

Editorial assistant and q Daniel Fernandez is an active trader with

webmaster: Kesha Green a strong interest in calculus, statistics, and eco-
kgreen@currencytradermag.com

nomics who has been focusing on the analysis
President: Phil Dorman of forex trading strategies, particularly algorith-
pdorman@currencytradermag.com
mic trading and the mathematical evaluation of

Publisher, ad sales: long-term system profitability. For the past two

Bob Dorman
years he has published his research and opinions on his blog
bdorman@currencytradermag.com
“Reviewing Everything Forex,” which also includes reviews
Classified ad sales: Mark Seger of commercial and free trading systems and general inter-
seger@currencytradermag.com
est articles on forex trading (http://fxreviews.blogspot.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.

Volume 7, Issue 6. Currency Trader is published monthly by TechInfo, Inc.,

161 N. Clark St., Suite 4915, Chicago, IL 60601. Copyright © 2010 TechInfo,
Inc. All rights reserved. Information in this publication may not be stored or
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.

 June 2010 • CURRENCY TRADER

Which Tools Are Used by More
Successful Traders Worldwide?

eSignal is used by tens of thousands of

traders and is voted #1 by organizations
worldwide. Why?
eSignal gives you access to the same reliable data
and predictive tools professionals use —
so you’ll know exactly when to get in...and out
of your trades.
eSignal gives you what you need for
consistent market success:
 Real-time stock, futures, options and
Forex quotes plus news that can change
the direction of the market
 Advanced charting with EFS, so you can
create your own strategies or modify 100s
of existing free strategies
Tens of thousands of individual traders prefer to use the  Market scanners to quickly and easily find
professional, feature-rich tools found only in eSignal. the best trading opportunities of the day
 Free online education to help you gain
skill in the art and science of trading
eSignal
Voted Best for More Than 15 Years!
Stocks & Commodities Readers' Choice Award
 Free software and free integrated trading
Best Real-Time/Delayed Data with your choice of broker
Find out for yourself how easy it is to get started.
eSignal eSignal Call now and we’ll have you up and running
Trade2Win Members' Choice Voted Best
right away. Get your 30-day, risk-free trial of
5 Years in a Row! Real-Time Data Feed
Best Real-Time Data Feed World Finance eSignal today and start trading for yourself.

Start your 30-day trial* today and ask 800.215.7202

about our “2nd-month-free” special www.eSignal.com/offer/ct

eSignal is a division of Interactive Data Corporation (NYSE: IDC). *All fees will be refunded to you, minus any taxes and applicable add-on service/exchange fees, if you cancel within the first 30 days of service. Call for details. x14269
 Global Markets

Dollar bulls
in the driver’s seat
As mid-year approaches, the dollar is soaring, the Euro is testing multi-
year lows and commodity currencies may be poised for a rebound.
By Currency Trader Staff

What a difference a year can make.
Last year the bears pummeled the U.S. dollar as the eas-
ing financial crisis let the air out of the “flight-to-quality”
trade and reinflated concerns about U.S. structural and fis-
cal problems, not to mention sluggish growth prospects.
However, the first five months of 2010 have been a
completely different story. Amid dramatic losses in equity
markets and the unfolding European sovereign-debt crisis,
Figure 1: EURO WOES
Battered first by the European debt crisis and then by a rush into the U.S. dollar,
the Euro dropped to its lowest levels vs. the dollar since 2006.
Source: TradeStation
global money managers have flocked back to the U.S. dol-
lar. Among the major industrialized currencies, the buck
has been the place to be.
The biggest currency story of late, of course, has been
the Euro’s dramatic decline. The Euro/U.S. dollar pair
(EUR/USD), which had recouped the majority of its 2008
losses by the end of 2009, tumbled from above 1.5100 in
December to 1.2142 in late May — a nearly 20-percent
decline that took the Euro to its low-
est level vs. the dollar in more than
four years (Figure 1). The sell-off’s
April-May leg was especially precipi-
tous, with the pair dropping more
than 11-percent from the April 12 high
to the May 19 low. The Euro dropped
to 1.2110 on June 1.
The Euro’s loss was, of course, the
dollar’s gain. “The reason the dol-
lar went up is because people didn’t
want to own the Euro,” says Philip
Roth, chief technical market analyst at
Miller Tabak & Co.
The U.S. dollar index (DXY) has
recaptured the vast majority of its
2009 sell-off by the end of May
(Figure 2). Although the Euro is the
single largest component of the dol-
lar index, the dollar has posted large
gains vs. a wide range of currencies
over the past several months. From
Dec. 31, 2009 through the May high
closes, the dollar surged nearly 15
percent against the Euro, 17 percent

 June 2010 • CURRENCY TRADER

 FIGURE 2: DOLLAR BENEFICIARY
By late May the U.S. dollar index had regained almost all its 2009 losses.

against the Danish krone, 13 percent

vs. the Norwegian krone, 12 percent
vs. the Swedish krona, and 11 percent
vs. the British pound (Table 1).
The list goes on. During same time
period, the greenback rallied 12 per-
cent against the Swiss franc, 9 percent
against the Australian dollar, 8 per-
cent vs. the New Zealand dollar, 6.30
percent vs. the Brazilian real, and 4.14
percent vs. the South Korean won.
The Japanese yen was the one
major currency that managed to hold
its ground vs. the dollar in the first
five months of 2010. Through the
highest close as of May 25, the yen
had gained 3.59 percent against the
dollar (Figure 3). However, most of Source: TradeStation
that was seen not as safe-haven buy-
ing but rather a repatriation of the
carry trade. (The Mexican peso also TABLE 1: ON THE YEAR VS. THE DOLLAR
gained incrementally vs. the dollar.) Pair Symbol Dec. 31 May 27 % +/-
“We’ve seen risk aversion based
Euro/$ EUR/USD 1.4323 1.2202 14.81%
in part on the global equity sell-off,
which prompted carry trade players $/Danish krone USD/DKK 5.1943 6.0966 17.37%
to square up,” says Michael Woolfolk, $/Norweg. krone USD/NOK 5.7839 6.508 12.52%
managing director at BNY Mellon.
Pound/$ GBP/USD 1.6164 1.4333 11.33%
For example, traders who had been
long the Aussie/yen cross rate would $/Swedish krone USD/SEK 7.147 7.9757 11.60%
have sold the Australian dollar and Aussie/$ AUD/USD 0.8973 0.817 8.95%
bought the Japanese yen to square up
Kiwi/$ NZD/USD 0.7231 0.6648 8.06%
that position. The Aussie/yen cross
has collapsed over the past month, $/franc USD/CHF 1.0355 1.1624 12.25%
plunging from 88.00 to 72.00 in the $/yen USD/JPY 93.01 89.67 -3.59%
span of four weeks (Figure 4).
$/Canada USD/CAD 1.0529 1.07 1.62%
Ultimately, the May equity break-
down accelerated trends that had $/Brazil real USD/BRL 1.74 1.8368 5.56%
already been in place. $/Mexican peso USD/MXN 13.0825 12.883 -1.52%

The equity connection The U.S. dollar has soared vs. most currencies in the first five months of 2010.
Volatility surged in spring as fresh

CURRENCY TRADER • June 2010 

 Global Markets

FIGURE 3: JAPANESE YEN

The Japanese yen was the one major currency that managed to hold its ground
vs. the dollar in 2010, although it is still trading near historically low levels.

(bad) news about the European

sovereign-debt crisis kept rolling in,
putting pressure on the Euro and
pumping up the dollar. Then equity
markets began to turn down. From
late April through late May, the S&P
500 had lost roughly 15 percent of its
value.
“We are going through a significant
shock,” says Sebastien Galy, currency
strategist at BNP Paribas.
The calamity prompted a new
round of U.S. dollar flight-to-quality
and safe-haven buying — just as had
occurred in 2008 and early 2009.
“The dollar is still the safe-haven
and reserve currency of the world
Source: TradeStation — that has been clearly reinforced,”
says Julia Coronado, senior economist
FIGURE 4: SQUARING UP THE CARRY TRADES at BNP Paribas.
The Aussie/yen pair crumbled in May as risk aversion notched higher and carry “The dollar is a combination safe-
trade players bailed out of short-yen positions. haven and also a bet on the future in
the form of stability and credibility,”
Galy says.
The global equity market downturn
has encouraged asset liquidation. In
the Eurozone, the Euro Stoxx index
was down 13.6 percent year-to-date
as of May 25. The FTSE 100 had
fallen 8.7 percent, and even China’s
Shanghai Composite index was down
20 percent.
“Part of the move [lower] in the
Euro/dollar is a function of the stock
market,” BNP’s Galy says. “People
feel uncomfortable with assets in the
Eurozone and now have to get out.
The pressure and [bullish] demand
for the dollar is so one-sided.”
While the February lows in the
Dow Jones Industrial Average and
the S&P 500 were holding up as of
late May, those levels — around 9835
Source: TradeStation in the Dow and around 1044 in the

 June 2010 • CURRENCY TRADER


In the short-term, currency
players are eyeing the Euro’s
January 1999 “launch rate” of
1.1800.
S&P 500 — are the key chart levels to monitor, according to
Miller Tabak’s Roth.
Of the 83-percent gain in the S&P 500 from the March
2009 low to the April 2010 high, Roth notes, “the 2009-2010
advance is going to be corrected for many months.” The
15-percent pullback from the April 2010 high may have
just been the start, according to Roth.
Roth warns if the S&P 500 takes out 1040, he sees addi-
tional losses toward the 950-900 zone. Such a sell-off could
take place perhaps in the fall of 2010 or maybe in 2011, he
CURRENCY TRADER • June 2010 
says.
More importantly, however, further declines in stocks
would likely be dollar-supportive, analysts say.
A continuing dichotomy
Questions looming for the remainder of the year are
whether the bull trend in the U.S. dollar can continue, and
what other currencies can be expected to outperform in the
second half.
“We still like the dollar,” notes Vassili Serebriakov, cur-
rency strategist at Wells Fargo. “We’ve been bullish on it
for quite a while. Perhaps there is some scope for the losses
in the Euro to slow down, but generally, the dollar should
do well against the pound, yen, and Swiss franc.”
Analysts seem to agree that in the second half of the
year the U.S. dollar should outperform other major curren-
cies, but will likely underperform key emerging currencies,
including those in India, Korea, and Brazil.
“The dollar should do well against the majors, but
weaker against emerging currencies — especially Asian
currencies, such as the Indian rupee and Korean won,”
 Global markets

FIGURE 5: LAUNCH RATE, THEN PARITY?

Two looming downside targets for the Euro are its 1999 launch rate around 1.18
and parity (1.00) with the U.S. dollar.
Serebriakov says.
“The U.S. [economic] recovery is
looking better than most industrial-
ized countries right now — it is good
relative to Europe,” BNP Paribas’
Coronado says. “But that’s not the
case when you make the comparison
to emerging markets. Asia, Brazil, and
India are showing solid recoveries
that look quite good.” However, she
adds this somewhat is to be expected.
“We are an older economy, which
don’t generally grow as fast as emerg-
ing markets.”

Euro woes
With the EUR/USD trading around
$1.220 at the beginning of June, cur-
rency analysts say the downtrend is
likely to continue. “The Euro should
Source: TradeStation continue to flounder and falter,” says
Brian Dolan, chief currency strategist
at Forex.com. “Into the end of the
FIGURE 6: CANADIAN DOLLAR
year, the Euro is likely to see further
As is the case with other “commodity currencies,” many analysts see gains for
the Canadian dollar in the coming months, and a potential drop in the USD/CAD readjustment.” He targets $1.15 as a
rate below 1.00. year-end objective, and adds “that
risks are to the downside.”
In the short-term, BNY Mellon’s
Woolfolk notes currency players
are eyeing the Euro’s January 1999
“launch rate” of 1.1800. “There will be
pullbacks and profit-taking, but that
is a reasonable objective, near term,”
Woolfolk says.
Galy says his firm’s fourth quarter
2010 target for the year is $1.08. “The
Fed will tighten in mid-2011, but the
Eurozone will not tighten in 2011,” he
explains. “[Interest-rate] differentials
will widen.”
There’s another, perhaps longer-
term, milestone looming below the
1.1800 level, though. “We are headed
to parity (1.00) over the next two to
three years,” Woolfolk says.
Wells Fargo’s Serebriakov agrees.
“We certainly see the Euro, perhaps
Source: TradeStation
one to two years from now, closer to

10 June 2010 • CURRENCY TRADER

parity with the U.S. dollar. But that is not the forecast for
this year.”
Commodity currencies
Another theme currency analysts see playing out in the
second half of the year is the potential for commodity cur-
rencies, such as the Canadian dollar (CAD), Australian
dollar (AUD), and New Zealand dollar (NZD), to perform
well. Both the New Zealand and Australian currencies
pulled back dramatically in May.
“We are in the midst of a
position flush-out as investors
reduce [risk] exposure,” says “The dollar should do well against
Todd Elmer, Citi currency strat-
egist. “But this will be a buying the majors, but will be weaker
opportunity for currencies like
the Canadian dollar and the against emerging currencies,
Australian dollar.”
Elmer expects the Canadian
and Aussie dollars to outper-
especially Asian currencies, such as
form in the months ahead
“once risk appetite stabilizes,”
the Indian rupee and Korean won.”
citing “more vigorous recov-
eries, greater sensitivity to a
pickup in global growth, and better fiscal positions” than
other industrialized countries.
Brian Kim, currency strategist at UBS, sounded a similar
note. “In the second half, we think the commodity cur-
rencies will do well,” he says. “Several of those countries,
such as Canada and New Zealand, will be among the
next wave of policy rate hikes, which should give some
strength to those currencies.”
“I think the global recovery is still intact, which is likely
to benefit commodity currencies,” adds Forex.com’s Dolan.
In addition to commodity exports, bullish interest-rate
differentials will buttress the commodity currencies in
the second half. As of late May, Australia was leading the
major central banks with a 4.50-percent lending rate.
“The RBA (Royal Bank of Australia) has been at the fore-
front of central banks willing to dial back monetary stimu-
lus, as it has raised its key lending rate 150 basis points
(1.5 percent) since this past October,” wrote Wells Fargo
economists at in their May Global Chartbook. “With infla-
tion currently in the upper half of the bank’s target range,
we think the RBA will likely take a breather at its June
meeting before considering another rate hike.”
The Bank of Canada (BOC) initiated a rate-hike cycle on
June 1 by raising its overnight rate .25 percent to .50 per-
cent. Subsequent BOC meetings are scheduled for July 20,
September 8, October 19, and December 7.
New Zealand’s central bank lending rate stands at 2.5
percent. The Reserve Bank of New Zealand is scheduled
to meet on June 9. Analysts expect the RBNZ to embark
on a tightening cycle in the second half of this year, which
should support the currency.
Some analysts also say the May wash-out may have cre-
ated good buying spots.
“The market mayhem
brought us down to big
levels in the commodity
currencies,” Dolan says.
“The 77.00-82.00 area is
attractive in the Aussie/
dollar.” He is targeting
gains toward 92.00-95.00
in the Aussie/dollar pair
by year-end (Figure 5).
For the Canadian dol-
lar, Dolan sees 1.0700-
1.100 as a potential sell
zone, with a target of .9900-.9700 by year end (Figure 6).
Not a golden opportunity?
For a completely different, longer-term perspective, Miller
Tabak’s Roth note the U.S. dollar and the Euro have both
declined a great deal vis-à-vis gold.
“I don’t think either currency is very attractive long-
term,” he says. “The fact that gold has made new highs in
terms of the pound, the Euro, the Swiss franc and the dol-
lar shows that a lot of investors don’t want to own any of
these currencies.”
Caution advised
Financial market conditions are jittery and volatile as we
enter the summer months.
“Right now a lot of people are going with the short-Euro
trend,” UBS Kim says. “It’s tough to fight the trend. But
you have to be cautious near term.”
BNP Paribas Galy also warns currency traders to be
“extremely prudent. Be very tactile, because trends don’t
last very long. Don’t be highly leveraged.” ›

CURRENCY TRADER • June 2010 11

 On The Money
On the Money

The world is not flat

Feedback effects and self-fulfilling prophecies set up
interesting scenarios for the Euro and other markets.

By Barbara Rockefeller

Oil is up because the dollar is down, or so say the flat-
earthers. Gold is up and equities are down because of
sovereign risk in Europe. The world is flat and everything
is connected or correlated to everything else, at least in the
world of international finance. It’s convenient shorthand
— just look at the price of oil and you know, or think you
know, where the Euro/dollar pair is priced, or soon will
be.
Poppycock. Yes, it’s true the near-instantaneous avail-
ability of news and price information has changed the
trading landscape, but it hasn’t changed the laws of sup-
ply and demand or the rules governing human behavior;
Figure 1: FEAR AND THE AUSSIE DOLLAR
Sell-offs in the AUD/USD pair have been driven more than once by fear rather
than fundamentals.
Source: Chart — Metastock; data — Reuters and eSignal
traders are still human beings, however technically well-
equipped. The world is flat and everything is related to
everything else only if you are very short-sighted.
The risk angle
We used to live in a two asset-class world. When stocks
fell or became overly volatile, investors demanded bonds,
driving the price up and the yield down. Traders could
easily anticipate this risk-appetite/risk-aversion behavior.
Sometimes what moved the markets could be surprising,
but at least the logic was clear. Now other commodities are
being treated the same way — as a proxy for risk appetite
or risk aversion — and it upsets the
analytical apple cart.
Take the Australian dollar. When
Chinese and other Asian demand for
commodities rose during the 2000s,
Australia was the obvious beneficia-
ry. In addition, Australia did not suf-
fer much from the sub-prime fallout,
so it did not need emergency pump-
priming or draconian interest-rate
cuts. Australia has a sophisticated
and well-managed central bank that
not only maintained higher interest
rates than the rest of the developed
world throughout the 2008-2009 cri-
sis, but was the first G7 country to
raise rates in 2009. The Reserve Bank
of Australia (RBA) adopted inflation
targeting in 1993 and has achieved
credibility on that measure. A data
box on the RBA Web site shows the
cash rate (4.5 percent) and inflation
rate (2.9 percent) as the top entries.
The higher rates in Australia, of
course, were the underlying reason

12 June 2010 • CURRENCY TRADER

 Figure 2: GOLD AND RISK
The price of gold is a function of sovereign risk fear, even when the name of the
sovereign changes.
for the carry trade against many other
lower-yielding currencies, especially
the Japanese yen. The rise in risk
aversion from the sub-prime crisis in
2008 and now the European sovereign
risk crisis would naturally cause a
pullback in the AUD against all the
carry trade currencies. The actual
pullbacks, however, appear exces-
sive given the excellent fundamentals
behind the AUD, especially the enor-
mous interest-rate advantage.
In Figure 1 the AUD/USD pair rose
from a low of .4778 in April 2001 to
a high of .9849 in July 2008, or a rise
of more than 100 percent. But when
the Lehman crisis started affecting
all classes of financial instruments in
September 2008, the AUD/USD rate
fell to a low of .6009 by October, a 40-
Source: Chart — Metastock; data — Reuters and eSignal
percent drop in three months. Note
that the drop exceeded the 62-percent
Figure 3: THE EURO AND GOLD
Fibonacci retracement level, by the During the week the Euro and gold both started correcting upward, no new
way, but failed to reach the 100-per- development in the European sovereign-debt saga justified a rise in either market.
cent retracement level.
In May 2010 something similar
unfolded — a 10 percent drop from
the November 2009 high at .9406 to
.8088 as of May 21, 2010. So far this
has been a 38-percent retracement.
Should we expect another drop of
more than 62 percent as we saw in
2008? That would take the AUD to
73.14.
The point here is the AUD is being
governed by risk aversion alone, with
no weight given to the commodity
outlook or the interest-rate differen-
tial, both of which confer tremendous
real advantage. If the market is being
driven by fear alone, we must say
it is irrational. Fear is more “real”
than true economic demand for
commodities and higher yield. In a
yield-starved world, this is irrational,
indeed.
Source: Chart — Metastock; data — Reuters and eSignal
If we need to be able to measure

CURRENCY TRADER • June 2010 13

 On the money
fear to forecast currencies, let’s take a look at gold. Gold
is the quintessential proxy for risk aversion. From 2005 to
the end of 2009, gold rose alongside the Euro — a positive
correlation (Figure 2). This was universally interpreted as
a sign gold was a substitute for the falling dollar and ris-
ing U.S. sovereign risk — the risk that Fed money creation
would inevitably lead to inflation.
But suddenly the Greek debt crisis catapulted Europe
to the top of the sovereign-risk pile, and today there’s an
inverse relationship between gold and the Euro instead of
the inverse relationship between gold and the dollar.
So far, so good; we can accept a switch in focus. But
note again gold fundamentals, such as the cost of min-
ing, supply, central bank sales, or demand for jewelry in
India — are at best gnats. The price of gold is a function
of sovereign risk fear, even if the name of the sovereign
changes. The traditional supposed driver of gold, inflation,
is nowhere to be seen.
The Euro and gold should, therefore, be moving in lock-
step — both symbolize sovereign risk. The Financial Times
reported in May that Europeans are buying gold coins at
an unprecedented pace — foundries are working around
the clock and exports from the U.S. to Europe are high.
Figure 3 affirms the price of gold denominated in Euros
tracked the EUR/USD rate very closely since the begin-
ning of the year, but it is an interactive relationship. If you
examine the chart closely, you will see times when gold
Figure 4: FIBBING THE EURO
The EUR/USD has already broken two big support lines and is at the 50-percent
retracement level. Parity (1.00) is highlighted red. If the previous intermediate
low at 1.1672 breaks, parity may be an irresistible target.
Source: Chart — Metastock; data — Reuters and eSignal
14 June 2010 • CURRENCY TRADER
was falling and it took a day or two for the Euro to catch
up, or the Euro dragged gold the other way, as was the
case on May 10. In other words, the relationship between
gold and the Euro has taken on a life of its own, like
Frankenstein. During the week the Euro and gold both
started correcting upward, no new development in the
European sovereign-debt saga justified a rise in either one.
In fact, profit-taking in gold that started early in the week
seems to have been one of the key triggers for the Euro to
make a bottom, however temporary it turns out to be.
Gold traders decided to take profits and it aided the
Euro? Yes. This new development suggests the new “robo-
trading” poses a big risk to anyone trying to trade the FX
market in a rational way. We are shocked, shocked, to find
there is gambling going on here.
The Euro scenario
Feedback effects between gold and the Euro, or between
equity indices and currencies, raise the risk for everyone.
An excessively volatile move in one security can feed
an overreaction in another, which then jumps to a third.
Another example might be the Shanghai Composite Stock
Index bear market arising from fear of Chinese tighten-
ing, which leads to commodity price drops, which leads to
declines in resource stocks in Japan, which leads to a drop
in the Nikkei, which leads to a stronger yen that is itself
under siege from position-paring in carry trades triggered
by the same drop in commodities.
Because all these markets are huge,
the result could be tsunami-level
waves of selling followed by a more
modest creeping back as traders see
oversold conditions.
It’s no wonder Germany insti-
tuted a ban on naked short sales of
European bonds and the equities
of important financial institutions,
the U.S. is changing circuit break-
ers in equities, and there is talk of
intervention in FX. We do not think
speculation is a dirty word, but mar-
ket linkage and automatic correla-
tion trading are making speculation
more dangerous than ever — and all
divorced from the economic reality
of supply and demand. If you were
not a technical trader to begin with,
you had better become one now.
That would be for short-term trad-
ing, by which we mean a holding
period of a day or less. For longer-
term trading, the macro big picture
factors should still hold sway. For
EMU countries to guarantee the debt of a member is an dislike Fibonacci retracement lines because there is no rea-
extraordinary move that violates both the spirit and the son to suppose human behavior is dictated by a number
letter of the Maastricht Treaty — and demonstrates the sequence (why this one instead of any of the many other
depth of the commitment to the concept of the Eurozone. interesting number sequences?), except when the humans
Most analysts think it will not work. Taking on new debt in question expect those numbers to materialize, forming
promotes growth only if the money is applied to a pro- a self-fulfilling prophecy. The downfall of the Euro may
ductive use, such as improving communications or trans- be the ideal chart for the Fibonacci sequence to play out.
portation — not if it’s used to pay for social services. The Figure 4 shows the EUR/USD has already broken two big
restructuring and thus, by definition, partial default by support lines and is at the 50-percent retracement level. If
Greece and perhaps some other countries is almost inevi- it continues downward, as we expect, it may reach 1.1236,
table. Sentiment toward the Eurozone and the Euro has not the 62-percent retracement level, or the previous interme-
been this negative since the early days in 1999 when the diate low of 1.1672 from November 2005 (green), or the
currency was first launched. Remember the Euro fell from starting point, 0.8229 from October 2009.
1.1719 on Day One to the all-time low 0.8229 in October In between is the always interesting number of 1.00,
2000. or parity (red). If the previous intermediate low at 1.1672
Only two outcomes are possible: The EMU devises cred- breaks, parity is the irresistible, magnetic number. ›
ible new institutions to enforce the original fiscal probity
concepts, or Greece is expelled from the EMU. At the end For information on the author, see p. .
of May 2010, we are only at Chapter 2 or 3 of a saga that
will run to 20 or more chapters.
The Euro may revive before we
know the ending, and probably
will rally several times before
it’s over, but overall, we have
no reason to suppose the trend
now in place will end anytime
soon, and that’s despite any
other development in stocks,
bonds or commodities.
We venture this forecast
because the people who
determine the compositions
of the really big portfolios are
treasury committee members
selecting the composition of
national reserves, and sover-
eign wealth funds that allocate
money to different currencies
for long-run return and stabil-
ity of returns. An FX trader
may feel compelled to jump if
gold or oil changes levels, but
we assume serious asset man-
agers at the national level are
not so flighty. We concede this
is a very big assumption, but
we would bet that no reserve
or sovereign wealth fund man-
ager has been among those
dumping Australian dollars.
How far can the Euro go? We

CURRENCY TRADER • June 2010 15

 Spot check

Euro/U.S. dollar
Minor signals may point to a bounce in the relatively near future, but
the pair has a couple of big monkeys clinging to its back.

After dropping below its May low vs. the U.S. dollar on Review of Figure 1’s monthly chart shows the EUR/
June 1 — to 1.2110, its lowest level since April 13, 2006 — USD pair punching through its 2008 and 2009 lows
the Euro has many forex watchers wondering how much with the next obvious downside chart-based target the
lower it can go. November-December 2005 lows around 1.1640-1.1660
Projections of a drop to the Euro’s January 1999 official (which, if reached, would fulfill the prediction of a retrace-
“launch” price of 1.1800 and the 1.0000 parity level with ment to the 1.1800 launch level).
the dollar have been thrown into the ring mostly because The 1.2000 zone the pair descended in May to was argu-
they are there — they are psychologically compelling ably a significant target, as this general level encompasses
“headline” numbers. (Few people have yet had the nerve the pair’s initial high in late 1998, the mid-2003 high, and
to seriously argue the year-2000 low of .8227 is in danger the 2004 and 2005-2006 consolidations. (Fibonacci fans will
of being tested any time soon.) no doubt point out 1.2100 is approximately a 50-percent
retracement of the rally from the
Figure 1: THE EURO’S BIG PICTURE October 200 all-time low to the July
The EUR/USD pair punched through its 2008 and 2009 lows in May 2010. 2008 all-time high.)
The next downside chart target is the November-December 2005 lows around Most analysts are, not surprisingly,
1.1640-1.1660. foreseeing greater losses for the Euro
over the next couple of years. Let’s
look at where the Euro has been and
see if it sheds any light on the prob-
ability of these various targets getting
hit.

Extreme action
One thing Figure 1 makes perfectly
clear is the Euro’s roller coaster ride
over the past two years has no prec-
edent in the currency’s brief lifetime.
From late 2000 to early 2008 the Euro
was on a one-way bullish track, with
the 2004-2005 aborted top/consolida-
tion the only significant roadblock.
The Euro nearly doubled in value
against the dollar, gaining 95 percent
low to high.
Table 1 shows the EUR/USD pair
Source: TradeStation
tumbled a little more than 23 percent

16 June 2010 • CURRENCY TRADER

Month 2010
 Table 1: THE BIG MOVES
July 2008 high Nov. 2009 high
Price 1.6039 1.5143
from its November 2009 high to the May 2010 Oct. 2008 low 1.2729 -26.00%
close — a move that would have been unprec- May 2010 close 1.2305 -30.35% -23.06%
edented if not for the pair’s 30-percent decline
The EUR/USD’s early 2010 sell-off would have been exceptional had
from its July 2008 all-time high to the October
it not been for the even larger, faster collapse in July-October 2008.
2008 low.
The slightly lower monthly low established on
June 1 was the seventh consecutive lower monthly low, Until 2008, the Euro’s biggest decline vs. the Euro was
something that has occurred less than a handful of times the 30.28-percent drop from the January 1999 open to the
over the past decade: in July 2001, when the EUR/USD October 2000 low. Table 1 shows the 2008 high-to-low col-
pair rallied to a higher monthly high and close, then con- lapse was on par with 1999-October sell-off — except that
solidated for several months before embarking on a strong the latter move took nearly two years to unfold while the
uptrend in 2002; in July 1999, when the pair again formed former took only three months. The November 2009-May
an outside month, consolidated for three months, then 2010 drop was smaller on a percentage basis, and has
turned lower again. In May 2000 the pair marked its eight lasted a little longer than the 2008 move, but it is still the
consecutive lower monthly low. It gained ground in June second-biggest drop on record for the EUR/USD pair since
before turning lower to form the October 2000 all-time low. 2001.
May was the sixth consecutive month of lower highs, Table 2 shows how much the EUR/USD pair would
lows, and closes for EUR/USD, a feat the pair accom- have to drop (measured from several notable highs and
plished only one other time, in June 1999. Finally, the Euro lows) to reach various milestones that have been men-
dropped more than 7 percent from the April low to the tioned in the press. The January 1999 open (launch price)
May low, which it has done only one other time — from of 1.1800 isn’t too far below the May 2010 closing price
September to October 2008. (-4.10 percent), but the 1.00 parity level would constitute
Although it might be tempting to note the bullish price another decline of nearly 20 percent. A move to the all-time
action that has, at least temporarily, followed many of low would require a 33-percent decline below the May
these events, there are simply too few of them to use as close, and would constitute a nearly 50-percent decline
models for future price behavior—the unavoidable prob- from the all-time high.
lem when analyzing extreme market events. We are left Such moves are obviously not out of the question,
to invoke abstracts, such as the observation that extreme although they are unlikely to occur overnight and without
moves tend to be at least partially reversed; but such intervening upside action.
observations, while true, make poor trading guidelines. continued on p. 21

Table 2: HOW FAR THE EURO WOULD HAVE TO FALL

July 2008 high Oct. 2008 low Nov. 2009 high May 2010 close
Price 1.6039 1.2729 1.5143 1.2305
Launch 1.1800 -26.43% -7.30% -22.08% -4.10%
Parity 1.0000 -37.65% -21.44% -33.96% -18.73%
All-time low 0.8227 -48.71% -35.37% -45.67% -33.14%

The January 1999 (launch) rate isn’t too far below the May 2010 closing price (-4.10 percent), but the 1.00 parity level
would constitute a decline of nearly 20 percent.

CURRENCY TRADER • June 2010 17

 TRADING strategies
Taking advantage
of the Asian
trading session
Breaking down the range characteristics of the Asian forex session
produces some surprisingly reliable trading statistics.
By Daniel Fernandez
Two of the most important questions in trading are wheth-
er exploitable inefficiencies develop in the markets, and if
such inefficiencies persist as a market evolves. A particu-
larly interesting case involves the possibilities associated
with low-volatility periods during which currency prices
trade in limited ranges. This article explores this issue in
the context of the Asian trading session (11 p.m. to 7 a.m.
GMT) from 2006 to 2010 in the Euro/U.S. dollar (EUR/
USD), Euro/British pound (EUR/GBP), and Euro/Swiss
franc (EUR/CHF).
These currency pairs were chosen because of their rela-
tive inactivity during the Asian session, none of them
containing a currency native to this trading period. By
evaluating certain characteristics of these currency pairs
during the Asian session over a four-year period we can
determine whether their character has changed over time,
or if they behave in a predictable manner that could be
exploited in trading.
Figure 1: OVERALL ASIAN SESSION RANGE
The average high-low ranges for each six-month period.
18 June 2010 • CURRENCY TRADER
Analyzing the Asian session
The study was conducted using hourly data from
Metaquotes from January 2006 to December 2009. (To
ensure data quality, this data was compared to comparable
data from Dukascopy and Oanda; no significant differ-
ences were detected.)
Two key characteristics of a specific forex trading session
are 1) its overall range (high – low for the session) and 2)
the “absolute movement” within the trading session (the
absolute value of the open – close for the session). Let’s
divide the 2006 to 2010 price data into six-month sub-peri-
ods and calculate the overall range and absolute move-
ment averages for the three currency pairs.
Figure 1 shows the average range values (in pips, .0001)
and Figure 2 shows the average absolute movement val-
ues. The results are not surprising. The highest values in
both categories belong to the most liquid pair, EUR/USD,
and the open-close differences are quite low for all the
pairs, reflecting the low volatility of the Asian session.
However, the results show the Asian
session’s characteristics have changed
substantially since 2006 in absolute pip
terms: In Figure 2, for example, the low-
est average absolute movement value
for the EUR/USD was 14 pips, which
increased to a maximum of 53 pips
during the July-Dec. 2008 period, in
line with an average overall range that
increased from a minimum of 31 to 106
pips in Figure 1.
The standard deviation and average
figures in Table 1 show all three cur-
rency pairs have undergone significant
changes during the Asian session over
the years; exploiting any movement
using absolute pip values would most
likely not be possible over the long-
term.
 Table 1: ASIAN SESSION IN PIPS
Absolute Absolute
Range Range
movement movement
avg. StD
avg. StD
EUR/USD 60 28 30 15
However, the absolute movements
and overall ranges increased and EUR/CHF 38 17 17 9
decreased in line with market volatility, EUR/GBP 28 14 12 8
with the second half of 2008 producing The average range and absolute-movement figures for the three currency pairs
the highest average values for all the expressed in pips.
currency pairs. Let’s see what analyzing
the range and absolute movement in
the context of changing volatility does Figure 2: ABSOLUTE (OPEN-CLOSE) MOVEMENT
to the results. The average absolute movement (the absolute value of the open minus the
close) for each six-month period. The EUR/USD pair had the biggest overall
Adjusting for volatility ranges (Figure 1) and open to close moves.
Using the 14-period daily average true
range (ATR) to measure volatility, each
currency’s range and absolute move-
ment figures were divided by their
respective 14-day ATRs to express these
figures as a percentage of the ATR.
Then, the results were averaged in six-
month periods as detailed above:

1. The average 14-period daily ATR is

calculated at the beginning of each
Asian trading session (i.e., each
day).
2. The range and absolute movement
values for each Asian session are
calculated in pips.
3. The values from step 2 are divided Figure 3: SESSION RANGE AS PERCENTAGE OF ATR
by the 14-day ATR calculated at the The average high-low ranges for each six-month period are shown here as
beginning of each corresponding percentages of the 14-day average true range.
session.
4. All the ATR-adjusted values from
step 3 are averaged for a given six-
month period.

The results of these calculations are

shown in Figure 3 and 4 (range and
absolute movement, respectively). What
we see now is completely different from
the absolute pip-value results in Figures
1 and 2. The highest average range
as a percentage of ATR belongs to the
EUR/CHF pair for most of the analy-
sis period (Figure 3), while the highest
average absolute movement did not
belong exclusively to the EUR/USD, but

CURRENCY TRADER • June 2010 19

 On the money
trading strategies

momentarily passed to the EUR/CHF

Figure 4: OPEN-CLOSE MOVEMENT AS PERCENTAGE OF ATR pair in the second half of 2006.
The average absolute movement for each six-month period as a percentage of However the most important find-
each currency pair’s 14-day average true range. ing is shown in Table 2: The standard
deviations of these ATR-adjusted
values are much lower than those
in Table 1, giving us a much more
reliable tool for predicting average
Asian-session currency movement
during a given period. Whereas the
standard deviations in Table 1 were
approximately 45 to 50 percent of the
average ranges, in Table 2 they were
only 6 to 7 percent.
It’s also important that the averages
and standard deviations for the range
and absolute movement in Table 2 are
almost identical for all three currency
pairs, indicating that by taking vola-
tility into account, we are better able
to identify a fundamental aspect of
Table 2: ASIAN SESSION AS PERCENTAGE OF ATR market behavior.
Absolute Absolute
Range Range Context is everything
movement movement
avg. StD This information can be used to
avg. StD
design systems around the Asian
EUR/USD 45 3 22 3 session that could trade market inef-
EUR/CHF 48 3 21 3 ficiencies inherent to this time period.
Even though the absolute pip values
EUR/GBP 45 3 19 2
indicated significant variation in the
The average range and absolute-movement figures for the three currency pairs
Asian session’s characteristics over
are expressed here as a percentage of the 14-day average true range.
time, adjusting the currency pairs’
behavior taking volatility
into account eliminated most
Related reading of this variability and left
us with values that have a
Daniel Fernandez articles: Other articles:
significant predictive com-
ponent, which means they
“Adaptive FX money management” “Breakout timing”
are promising candidates for
Currency Trader, November 2009. Currency Trader, July 2009
developing trading ideas that
This article shows how a money-man- Are particular times of the day, month, or
agement system that adjusts trade size year better than others for trading certain exploit predictable ranges.
based on market volatility can transform strategies or currencies? These tests indi- For example, if the EUR/
an unprofitable forex trading strategy into a cate some momentum signals might have USD reaches its highest ATR-
profitable approach. better odds of success depending on the adjusted range reading, you
time of month they occur. may be able to enter a trade
“Using dynamic look-back that targets a close value
periods in FX systems” “Time-zone trading in the Euro” based on the average abso-
Currency Trader, May 2010 Currency Trader, June 2007 lute movement value. This
A robust approach to making a trading Intraday trends in forex often begin when type of trading idea will be
system dynamic improves profitability and the markets shift from one regional trading explored in a future article. ›
shrinks drawdowns. center to another. Historical testing uncov-
ers several promising price moves in the For information on the author, see
Euro currency futures. p. 4.

20 June 2010 • CURRENCY TRADER

Spot Check continued from p. 17

Figure 2: BEARISH MOMENTUM ON DECLINE?

As of June 1, the EUR/USD pair had mostly moved sideways for two weeks,
with one push to the upside, and a push to a slightly lower low on June 1.

Overarching issue
The fact that, as of June 1, the EUR/
USD pair had essentially consolidated
for two weeks without falling to a
dramatically lower low might be con-
sidered evidence of waning bearish
momentum (Figure 2). The pattern
itself had mixed performance over a
relatively small (fewer than 20) sam-
ples over the past 10 years.
As a final note, what looked to be
a energetic intraday turnaround for
the Euro and the stock market — both Source: TradeStation
rallied sharply from negative terri-
tory in early trading to go positive Figure 3: EURO AND THE STOCK MARKET
on the day — fizzled by the end of The EUR/USD pair (top) mirrored the stock market’s (represented here by the
the day (Figure 3), which points to an E-Mini S&P 500 futures, bottom) ups and downs very closely on June 1.
unavoidable truth about the Euro and
the dollar these days: For better or
worse, the EUR/USD pair is still very
much in the grips of the reactionary
stock-driven relationship established
in the 2008-2009 financial crisis — that
is, turmoil in the global equity mar-
kets drives money into the U.S. dollar
as a safe-haven, which drives down
the EUR/USD rate.
Any doubt this relationship was
fading disappeared in May — and
was reinforced on June 1, for good
measure. Barring a surprise develop-
ment that will convince investors
European debt issues have worked
themselves out, a rally in equities
stands to be the Euro’s best friend in
the near future. ›

Source: TradeStation

CURRENCY TRADER • June 2010 21

 TRADING strategies
Advanced strategies

Colombian peso,
the richest kind
Getting a handle on a currency in a country with a largely “off-the-books” economy is difficult,
but in this case the driving force is Washington D.C.
BY Howard L. Simons

Certain European nations, particularly France and Italy,
have a long tradition of businesspeople keeping three sets
of books: one for themselves, one for their partner, and
one for the tax authorities. This culture of off-the-books
accounting for tax purposes led to the now-forgotten
“mattress trade” in the Euro between 2000 and 2002. The
common currency came into existence at just over 1.17 dol-
lars per Euro and slid down toward 0.82 by October 2000;
it did not embark on a multi-year bull market until May
2002.
The reason for the Euro’s early weakness was attributed
by many to the selling of “legacy” currencies held as cash
for dollars prior to those legacy coins and bills being taken
FIGURE 1: PESO LARGELY INDEPENDENT OF INFLATION
The official Colombian CPI has increased at an average annual rate of 9.58
percent since January 1994, while the U.S. figure over the same period is 2.455.
Although this implies the COP should have weakened against the USD over this
period, it didn’t — thanks to the Fed’s low-interest-rate policy since 2003.
out of circulation at the start of 2002. French francs, Italian
lira, Spanish pesetas, Portuguese escudos and the rest had
to be pulled out from literal and figurative mattresses,
converted into some other form of cash, and the dollar was
the refuge of choice. Such is the power of an underground
economy.
Of course, that trade cuts both ways. Legend has it coun-
terfeit C-notes, $100 bills with the new enlarged portrait of
Benjamin Franklin and other anti-counterfeiting devices,
were being offered for sale on the streets of Bangkok before
they were issued for circulation in the U.S. A second obser-
vation in this regard was counterfeit $100 bills were the
currency of choice in Russia during the tumultuous 1990s.
By Gresham’s Law (bad money driv-
ing out good), the real $100 notes were
hoarded and the counterfeits were
passed into circulation. It is indeed all
about the Benjamins.
The velvet underground
If you play a word association game
with “Colombia,” you might get more
than a few giggles. Ever since the hey-
day of Pablo Escobar and his Medellin
cartel, the country has been associated
with the large, um, “pharmaceutical
precursors” sector. The efforts by the
Bogota government and the U.S. Drug
Enforcement Administration to control
this trade have led to an ongoing low-
level war with the FARC guerillas who
seem to take special joy in blowing up
crude oil pipelines in Colombia’s Caño
Limòn oilfields. The drug traffic raises
the relative size of the illegitimate
sectors of the Colombian economy to
the legitimate ones by increasing the
former and decreasing the latter. The

22 June 2010 • CURRENCY TRADER

 Figure 2: INSURANCE ON THE PESO RISES AND FALLS with it
Colombian peso excess volatility for a USD holder has tended to rise and fall in
the general direction of the currency and without the typical lead time evident in
other currencies.

extent to which this is true can be illus-

trated by the heading for Colombian
GDP data on Bloomberg: “GDP
Excluding Drug Crops.”
Truth be told, any economic data
from countries such as Afghanistan,
now alleged to provide more than 90
percent of the world’s opium poppy,
should be taken with a modicum of
skepticism. A World Bank official
regarded as an expert on Third World
debt was asked in 1976 by a graduate
student in international economics how
he arrived at certain figures. He point-
ed up to his office ceiling. Puzzled, the
student pressed onwards. The reply
came, “I was pointing at that light.
When no actual data are available, I
stare up at that light, think about what Figure 3: PESO NOW MOVING WITH ABSOLUTE INTEREST RATE
information I have and arrive at what After June 2000, the COP generally moved parallel to the interest-rate gap for
the debt level should be.” Some early another six years. That connection weakened and broke during the financial
life experiences are more indelible than crisis, but resumed after the bear-market low and the introduction of quantitative
easing in March 2009.
others.

Scratch the
commodity connection
We recently explored some curren-
cies such as the South African rand or
Chilean peso (see “Cry, the beloved
currency” March 2010, and “Chilean
peso makes exceptions to currency
rules,” May 2010). Those were easy to
do as the gold and copper markets,
respectively, are transparent. While
Colombia is a large exporter of coffee,
cut flowers, emeralds and other gem-
stones, and (increasingly) crude oil, no
one pretends it is the dominant export.
We will not be able to establish a com-
modity link for the Colombian peso
(COP) here.
We can, however, infer certain fac-
tors of economic and financial success
for the country. The official consumer price index (CPI) for have weakened against the USD over this period. We
Colombia has increased at an average annual rate of 9.58 would have been wrong. The Federal Reserve’s policy of
percent since January 1994 (Figure 1); this compares to an low interest rates since 2003 put the COP in an uptrend
average annual rate of consumer inflation in the U.S. of between April 2003 and May 2008. That trend broke when
2.455 percent over the same period (please refer to previ- the financial crisis of 2008 led to massive dollar buying
ous anecdote on the credibility of numbers). and shedding of risky assets around the world, but it
Given the role of relative inflation expectations in the resumed after the Fed embarked upon quantitative easing
interest-rate parity model, we should expect the COP to in March 2009. Some might consider this picture a damn-

CURRENCY TRADER • June 2010 23

 On the money
advanced strategies
Figure 4: peso BECAME A CARRY TRADE AFTER MID-2006
The rate of return on the COP carry trade has moved parallel to the relative
performance of Colombian equities to U.S. equities.
ing indictment of the Federal Reserve’s money-solves-
everything approach, and who are we to disagree?
Pricing the risk
We have seen across a wide range of currencies how
“excess volatility,” or the ratio of implied volatility on
three-month non-deliverable forwards to realized high-
low-close volatility, minus 1.00, tends to lead movements
in the currency by three months on average. This makes
perfect sense as the measure indicates which party in the
trade has the higher level of anxiety, and in which direc-
tion.
The relationship is rather different for the COP, how-
ever. In this case the COP excess volatility for a USD
holder has tended to rise and fall in the general direction
of the currency and without the normal lead time (Figure
2). When the COP strengthens, put option buying rises
and vice-versa. Even though the COP has put in some pro-
longed rallies since 2003, the market never embraces COP
strength, only COP weakness.
Interest rates not important
Just as we saw for the Chilean peso two months ago,
the relatively illiquid interest-rate arbitrage market for
Colombian deposits make a normal interest rate analysis
for the COP difficult. We cannot compare relative yield
curves for the COP and the USD by constructing forward
rate ratios (FRRs) for each; the key FRR for currencies
between six and nine months, the rate at which we can
lock in borrowing for three months beginning six months
from now divided by the nine-month rate itself, is inap-
24 June 2010 • CURRENCY TRADER
plicable.
A simple spread between six-
month deposit rates in both countries
is revealing for one factor, and that
is the huge interest-rate gap between
the start of 1999 and the middle of
2000. Colombian short-term rates
were in excess of 30 percent at that
point. As the interest-rate gap nar-
rowed, the COP weakened as those
seeking yield went elsewhere. After
June 2000, the general course of the
COP moved parallel to the interest-
rate gap for another six years. The
connection weakened and broke dur-
ing the financial crisis, but resumed
in force after the bear market low
and arrival of quantitative easing in
March 2009.
Relative asset returns
Those high interest rates should provide a tip-off to which
way the USD carry to the COP has been moving over the
years. Even if the COP spot rate weakens, the interest-
rate spread should be more than enough to compensate.
This has been especially true since U.S. short-term rates
were driven near zero. The rate of return on this carry
trade has moved in parallel to the relative performance
of Colombian equities to U.S. equities expressed in USD
terms (Figure 4).
Here the numbers are a little inspiring. In USD terms,
Colombian equities have outperformed American stocks
at an annualized rate of 26.1 percent since December 2008.
The annualized return on the carry trade has been 15.9
percent, with the spot rate accounting for 11.1 percent of
that. As it turns out, a brave investor who borrowed the
USD and who either lent in the COP or bought Colombian
equities at the time of the October 2008 low was rewarded
handsomely. The action was undertaken without comment
at the time and was assigned the label of “brave” or “fool-
ish” only in retrospect.
Can the dual success of the COP and returns on COP-
denominated assets continue? The answer will come not
from Colombia but rather from Washington, D.C. If the
Federal Reserve persists in its manic monetary policies, the
success could endure for a long time.
Perhaps someone in Bogota or even in Medellin is star-
ing at a picture of Ben Bernanke and wondering, “What’s
he smoking?” ›
For information on the author, see p. 4.
 CURRENCY FUTURES SNAPSHOT as of 5/28/10

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

Contract Symbol Exchange Volume OI 10-day move/% rank 20-day move/% rank 60-day move/% rank Volatility ratio/rank
EUR/USD EC CME 443.1 256.5 -0.51% / 5% -7.39% / 87% -9.54% / 95% .22 / 55%
JPY/USD JY CME 156.8 139.0 1.56% / 27% 3.44% / 67% -0.46% / 12% .56 / 55%
GBP/USD BP CME 145.8 132.0 -0.48% / 10% -5.14% / 75% -4.41% / 35% .14 / 10%
AUD/USD AD CME 140.9 126.1 -4.31% / 44% -8.26% / 65% -6.90% / 91% .66 / 75%
CAD/USD CD CME 110.9 126.3 -1.83% / 42% -3.26% / 50% -2.06% / 75% .51 / 62%
CHF/USD SF CME 62.2 46.4 -2.24% / 20% -6.91% / 94% -7.11% / 97% .21 / 10%
MXN/USD MP CME 36.8 108.1 -1.99% / 31% -4.38% / 50% -2.06% / 85% .47 / 63%
U.S. dollar index DX ICE 30.6 40.6 0.34% / 0% 5.18% / 81% 7.34% / 91% .22 / 35%
NZD/USD NE CME 11.4 21.0 -3.94% / 47% -6.67% / 93% -2.73% / 50% .65 / 87%
E-Mini EUR/USD ZE CME 7.4 5.6 -0.86% / 10% -7.05% / 83% -9.91% / 98% .23 / 55%

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

LEGEND: Managed money: Barclay Trading Group’s

Volume: 30-day average daily volume, in thou- currency trader rankings for April 2010
sands.
Top 10 currency traders managing more than $10 million
OI: 30-day open interest, in thousands. as of April 30, ranked by April 2010 return.
10-day move: The percentage price move from 2010 $ Under
the close 10 days ago to today’s close. April YTD mgmt.
Rank Trading advisor return return (millions)
20-day move: The percentage price move from
the close 20 days ago to today’s close. 1. Goldman Sachs (Fund. Currency) 13.12% 34.17% 557.4
2. 24FX Management Ltd 12.80% 4.33% 30.5
60-day move: The percentage price move from
the close 60 days ago to today’s close.
3. MIGFX Inc (Retail) 5.66% 17.12% 13.0
4. FX Concepts (Multi-Strategy) 3.64% 10.79% 2769.0
The “% rank” fields for each time window (10-
5. Gables Capital Mgmt (Global FX) 3.24% 0.07% 10.1
day moves, 20-day moves, etc.) show the per-
centile rank of the most recent move to a certain 6. Friedberg Comm. Mgmt. (Curr.) 2.98% 19.23% 70.4
number of the previous moves of the same size 7. Quantica Capl (Diversified FX) 2.80% 5.97% 26.0
and in the same direction. For example, the % 8. Excalibur Absolute Return Fund 2.58% 2.93% 45.5
rank for the 10-day move shows how the most 9. Auriel Currency 2X Fund 2.29% 0.50% 143.0
recent 10-day move compares to the past twenty
10. FX Concepts (GCP) 2.25% 6.38% 3323.0
10-day moves; for the 20-day move, it shows how
the most recent 20-day move compares to the
Top 10 currency traders managing less than $10 million and more than
past sixty 20-day moves; for the 60-day move, it
$1 million as of April 30, ranked by April 2010 return.
shows how the most recent 60-day move com-
pares to the past one-hundred-twenty 60-day 1. Excel Capital Mgmt. (FX) 9.64% 93.31% 2.4
moves. A reading of 100% means the current 2. D2W Capital Mgmt (Radical Wealth) 9.60% 29.51% 1.6
reading is larger than all the past readings, while 3. Rove Capital (Dresden) 2.62% 6.31% 2.2
a reading of 0% means the current reading is 4. Overlay Asset Mgmt. (Emerging Mkts) 1.95% 5.35% 8.0
smaller than the previous readings. 5. Armytage AAM (Asian Currency) 1.76% 0.53% 4.0
Volatility ratio/% rank: The ratio is the short-term 6. Greenwave Capital Mgmt (GDS Alpha) 1.42% 2.42% 8.0
volatility (10-day standard deviation of prices) 7. Wooster Asset Mgmt (Portage Fund) 1.25% 0.28% 6.9
divided by the long-term volatility (100-day stan- 8. BEAM (FX Prop) 1.13% 3.23% 1.7
dard deviation of prices). The % rank is the per- 9. Greenwave Capital Mgmt (GDS Beta) 0.85% 1.08% 8.0
centile rank of the volatility ratio over the past 60 10. Marathon Capital (System FX) 0.43% 2.08% 10.0
days. Source: BarclayHedge (www.barclayhedge.com). Based on estimates of the composite of all accounts or the
fully funded subset method. Does not reflect the performance of any single account.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

CURRENCY TRADER • June 2010 25

 TRADING STRATEGIES
INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)
Current
price vs. 1-month 3-month 6-month 52-week 52-week Previous
Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank

1 Japanese yen 0.01114 4.70% -0.58% -1.94% 0.01179 0.01011 17

2 Chinese yuan 0.146395 -0.03% -0.06% -0.03% 0.14760 0.1458 14

3 Hong Kong dollar 0.128175 -0.50% -0.48% -0.66% 0.129 0.1281 15

4 Thai baht 0.03071 -1.24% 1.54% 1.87% 0.03157 0.02866 11

5 Taiwan dollar 0.03098 -2.26% -0.55% -0.27% 0.03201 0.03007 9

6 Singapore dollar 0.705305 -3.34% -0.50% -2.51% 0.7326 0.6817 2

7 Brazilian real 0.53263 -6.44% -2.43% -7.77% 0.5882 0.478 3

8 Indian rupee 0.021035 -6.51% -2.50% -2.57% 0.02263 0.01988 4

9 South African rand 0.12583 -6.74% -1.63% -6.85% 0.1389 0.1187 13

10 British pound 1.433635 -6.78% -6.19% -13.92% 1.7042 1.4235 1

11 Canadian dollar 0.928665 -7.22% -1.54% -2.23% 1.0068 0.8527 5

12 Russian ruble 0.03175 -7.43% -4.57% -8.61% 0.03497 0.03007 8

13 New Zealand dollar 0.66339 -7.47% -3.72% -8.98% 0.7635 0.609 7

14 Swiss franc 0.86021 -7.72% -6.75% -13.59% 1.0087 0.8549 16

15 Euro 1.226035 -8.38% -9.19% -18.42% 1.5144 1.216 12

16 Swedish krona 0.124845 -10.35% -9.73% -14.17% 0.148 0.1228 10

17 Australian dollar 0.81505 -12.12% -8.08% -12.00% 0.9405 0.7702 6

As of May 26 *based on one-month gain/loss

ACCOUNT BALANCE
Rank Country 2008 Ratio* 2007 2009+ Rank Country 2008 Ratio* 2007 2009+
1 Singapore 36.188 19.222 47.311 33.838 12 United Kingdom -40.725 -1.517 -75.483 -28.838
2 Norway 83.825 18.59 54.678 52.901 13 Belgium -12.855 -2.539 9.956 -1.254
3 Hong Kong SAR 29.296 13.618 25.529 23.373 14 Czech Republic -6.669 -3.086 -5.483 -1.942
4 Sweden 37.279 7.783 39.054 25.781 15 Italy -78.874 -3.418 -51.691 -71.27
5 Germany 245.722 6.69 253.756 160.627 16 Australia -46.683 -4.406 -57.552 -40.941
6 Taiwan Province 17 United States -706.068 -4.889 -726.572 -417.999
of China 25.122 6.239 32.975 42.572 18 Ireland -13.886 -5.189 -13.876 -6.705
7 Netherlands 41.978 4.787 67.589 41.652 19 Spain -153.665 -9.592 -144.435 -74.136
8 Japan 157.079 3.214 210.967 141.656
Totals in billions of U.S. dollars
9 Switzerland 11.947 2.388 43.531 43.102 *Account balance as percent of GDP +Estimate
10 Canada 7.606 0.507 14.53 -36.132 Source: International Monetary Fund, World Economic Outlook
11 Korea -5.776 -0.62 5.876 42.668 Database, April 2010.

26 June 2010 • CURRENCY TRADER

 NON-U.S. DOLLAR FOREX CROSS RATES
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol May 26 gain/loss gain/loss gain/loss high low Previous
1 Yen / Real JPY/BRL 0.020915 11.90% 1.88% 6.30% 0.02227 0.01838 21
2 Pound / Aussie $ GBP/AUD 1.75895 6.08% 2.05% -2.18% 2.0859 1.6328 9
3 Euro / Aussie $ EUR/AUD 1.50423 4.26% -1.20% -7.29% 1.8005 1.377 16
4 Pound / Franc GBP/CHF 1.66664 1.00% 0.59% -0.37% 1.8112 1.5778 4
5 Pound / Canada $ GBP/CAD 1.54376 0.48% -4.72% -11.95% 1.9173 1.4894 10
6 Franc / Canada $ CHF/CAD 0.92629 -0.54% -5.29% -11.62% 1.0724 0.909 19
7 Euro / Franc EUR/CHF 1.425295 -0.71% -2.61% -5.58% 1.5383 1.3989 11
8 Canada $ / Real CAD/BRL 1.74355 -0.83% 0.91% 6.01% 1.8338 1.6003 13
9 Euro / Canada $ EUR/CAD 1.320215 -1.25% -7.76% -16.55% 1.63 1.2748 17
10 Euro / Pound EUR/GBP 0.85516 -1.70% -3.19% -5.23% 0.9411 0.8399 20
11 Euro / Real EUR/BRL 2.301855 -2.07% -6.92% -11.54% 2.8724 2.2286 18
12 Aussie $ / Franc AUD/CHF 0.947505 -4.77% -1.42% 1.86% 1.0079 0.8457 7
13 Aussie $ / New Zeal $ AUD/NZD 1.228555 -5.03% -4.53% -3.33% 1.3233 1.1931 12
14 Aussie $ / Canada $ AUD/CAD 0.87766 -5.29% -6.64% -9.99% 0.9895 0.8725 14
15 Aussie $ / Real AUD/BRL 1.530245 -6.07% -5.79% -4.58% 1.6978 1.5256 15
16 Pound / Franc GBP/JPY 128.7 -10.94% -5.67% -12.19% 163.057 127.065 1
17 Canada $ / Yen CAD/JPY 83.37 -11.39% -0.95% -0.26% 94.1955 79.6163 2
18 New Zeal $ / Yen NZD/JPY 59.56 -11.63% -3.14% -7.13% 69.5573 58.1679 5
19 Franc / Yen CHF/JPY 77.225 -11.83% -6.19% -11.85% 91.549 76.36 8
20 Euro / Yen EUR/JPY 110.07 -12.46% -8.64% -16.77% 139.2 108.8 6
21 Aussie $ / Yen AUD/JPY 73.18 -16.06% -7.54% -10.22% 88.048 46.508 3
GLOBAL STOCK INDICES
1-month 3-month 6-month 52-week 52-week
Rank Country Index May 26 gain/loss gain/loss gain/loss high low Previous
1 Canada S&P/TSX composite 11,543.90 -6.00% -0.74% 0.94% 12,321.80 9,535.50 4
2 Mexico IPC 31,328.49 -7.23% -0.97% 2.89% 34,223.90 22,956.00 7
3 India BSE 30 16,387.84 -7.65% -0.25% -2.77% 18,047.90 13,220.00 10
4 South Africa FTSE/JSE All Share 27,047.51 -7.72% 1.06% 0.08% 29,565.10 21,665.90 5
5 Germany Xetra Dax 5,758.02 -9.07% 2.85% 2.56% 6,341.52 4,524.01 2
6 Switzerland Swiss Market 6,167.50 -9.35% -8.10% -1.84% 6,990.70 5,204.80 14
7 Singapore Straits Times 2,696.02 -10.21% -1.99% -2.40% 3,037.97 2,211.81 3
8 Hong Kong Hang Seng 19,196.45 -11.07% -6.85% -13.57% 23,099.60 16,977.70 6
9 Australia All ordinaries 4,330.40 -11.86% -6.90% -8.40% 5,048.60 3,710.10 13
10 U.S. S&P 500 1,067.95 -11.89% -3.31% -2.16% 1,219.80 869.32 1
11 UK FTSE 100 5,038.10 -12.44% -5.91% -3.00% 5,833.70 4,096.10 9
12 Brazil Bovespa 60,190.00 -12.61% -9.49% -9.34% 71,989.00 48,262.00 11
13 Japan Nikkei 225 9,522.66 -14.72% -5.96% 1.49% 11,408.20 9,050.33 8
14 France CAC 40 3,408.59 -14.73% -8.09% -7.36% 4,088.18 2,957.83 12
15 Italy FTSE MIB 18,778.41 -17.58% -10.87% -14.34% 24,559 17,626 15
GLOBAL CENTRAL BANK LENDING RATES
Country Interest rate Rate (%) Last change Sept. 2009 April 2009
United States Fed funds rate 0-0.25 0.5 (Dec. 08) 0-0.25 0-0.25
Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.1 0.1
Eurozone Refi rate 1 0.25 (May 09) 1 1
England Repo rate 0.5 0.5 (March 09) 0.5 0.5
Canada Overnight funding rate 0.50 0.25 (June 10) 0.25 0.25
Switzerland 3-month Swiss Libor 0.25 0.25 (March 09) 0.25 0.25
Australia Cash rate 4.5 0.25 (May 10) 3.5 3
New Zealand Cash rate 2.5 0.50 (April 09) 2.5 2.5
Brazil Selic rate 9.5 0.75 (April 10) 8.75 10.25
Korea Overnight call rate 2 0.5 (Feb. 09) 2 2
Taiwan Discount rate 1.25 0.25 (Feb. 09) 1.25 1.25
India Repo rate 5.25 0.25 (April 10) 4.75 4.75
South Africa Repurchase rate 7 0.5 (Aug. 09) 7 7.5
GLOBAL BOND RATES
Rank Country Rate May 26 1-month 3-month 6-month High Low Previous
1 U.S. 10-year T-note 121.16 3.93% 3.11% 0.57% 122.08 112.90 3
2 Germany BUND 128.72 3.76% 3.43% 4.19% 129.55 117.47 1
3 Japan Government Bond 140.6 0.97% 0.50% 0.75% 140.98 135.45 5
4 Australia 10-year bonds 94.68 0.55% 0.17% -0.03% 94.87 94.09 4
5 UK Short sterling 99.24 -0.03% -0.10% -0.14% 99.52 98.62 2

CURRENCY TRADER • June 2010 27

 INTERNATIONAL
continued MARKETS

GDP*
Unemployment
Release 1-year Next
Period date Change change release Release 1-year Next
AMERICAS Period date Rate Change change release

Argentina Q4 3/17 4.8% 10.7% 6/18 AMERICAS

Brazil Q4 3/11 2.0% 4.3% 6/8 Argentina Q1 5/21 8.3% -0.1% -0.1% 8/23

Canada Q1 5/31 2.5% 5.6% 8/31 Brazil April 5/27 7.3% -0.3% -1.6% 6/24

EUROPE Canada April 5/7 8.1% -0.1% 0.0% 6/4

France Q1 5/12 0.4% 0.7% 8/13 EUROPE

Germany Q1 5/12 0.6% 3.2% 8/13 France Q4 3/4 9.6% 0.5% 1.8% 6/3

UK Q4 3/30 1.2% -1.7% 6/30 Germany April 6/1 7.1% -0.2% -0.5% 6/30

AFRICA UK Jan.-March 5/12 8.0% 0.2% 0.9% 6/16

S. Africa Q1 5/25 1.6% 1.4% 6/24 ASIA and S. PACIFIC

ASIA and S. PACIFIC Australia April 5/13 5.3% 0.0% -0.3% 6/16

Australia Q4 3/3 1.9% 1.3% 6/2 Hong Kong Feb.-April 5/18 4.4% 0.0% -0.9% 6/17

Hong Kong Q1 5/14 -6.5% 9.2% 8/13 India April 5/28 5.1% 0.1% 0.1% 6/29

India Q1 5/31 19.1% 12.2% 8/31 Japan Q1 4/30 2.2% -0.1% -1.0% 7/30

Japan Q1 5/20 1.2% 4.9% 8/16 Singapore March 4/8 5.3% 0.0% -0.2% 5/13

Singapore Q1 5/21 4.1% 15.5% NLT 8/27

* Final estimates, at current prices, seasonally adjusted

CPI PPI
Release 1-year Next Release 1-year Next
Period date Change change release Period date Change change release
AMERICAS AMERICAS
Argentina April 5/12 0.8% 10.2% 6/11 Argentina April 1/5 0.1% 14.5% 6/11
Brazil April 1/5 0.6% 2.7% 6/9 Brazil April 5/6 0.7% 3.0% 6/9
Canada April 5/21 0.3% 1.8% 6/22 Canada April 5/31 0.3% -0.4% 6/29
EUROPE EUROPE
France April 5/12 0.3% 1.7% 6/11 France March 4/30 0.6% 2.0% 6/2
Germany April 5/11 -0.1% 1.0% 6/10 Germany April 5/20 1.5% 5.5% 6/24
UK April 5/18 0.6% 3.7% 6/15 UK April 5/7 1.4% 5.7% 6/4
AFRICA AFRICA
S. Africa April 5/26 0.2% 4.8% 6/23 S. Africa April 5/27 1.5% 5.5% 6/24
ASIA and S. PACIFIC ASIA and S. PACIFIC
Australia Q1 4/28 0.9% 2.9% 7/28 Australia Q1 4/27 1.0% -0.1% 7/26
Hong Kong April 5/20 0.4% 2.4% 6/22 Hong Kong Q1 3/12 1.8% -0.3% 6/14
India April 5/31 0.0% 13.3% 6/30 India April 5/15 1.2% 9.6% 6/10
Japan April 5/28 0.0% -1.2% 6/25 Japan April 5/17 0.4% -0.2% 6/10
Singapore April 5/24 0.9% 3.2% 6/23 Singapore April 5/27 1.5% 11.6% 6/29

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

28 June 2010 • CURRENCY TRADER

 Global economic calendar: June
June 18 Germany: May PPI
CPI: Consumer price index
ECB: European Central Bank
1 U.S.: May ISM manufacturing report 19
FDD (first delivery day): The first Canada: Bank of Canada interest- 20
day on which delivery of a com-
modity in fulfillment of a futures rate announcement 21 Hong Kong: Q1 GDP
contract can take place. France: April CPI 22 Canada: May CPI
FND (first notice day): Also
known as first intent day, this is Germany: April employment report Hong Kong: May CPI
the first day on which a clear-
inghouse can give notice to a
2 Australia: Q1 GDP South Africa: Q1 employment report
buyer of a futures contract that it 3 23 U.S.: FOMC interest-rate announce-
intends to deliver a commodity in
fulfillment of a futures contract. 4 U.S.: May employment report ment
The clearinghouse also informs
the seller. Canada: May employment report South Africa: May CPI
FOMC: Federal Open Market 5 24 U.S.: May durable goods
Committee
GDP: Gross domestic product
6 Brazil: May employment report
ISM: Institute for supply 7 Mexico: May Employment report;
management
LTD (last trading day): The final
8 Brazil: Q1 GDP June 15 CPI
day trading can take place in a 9 U.S.: Fed beige book South Africa: May PPI
futures or options contract.
PMI: Purchasing managers index Brazil: May CPI and PPI 25 U.S.: Q1 GDP (third)
PPI: Producer price index Mexico: May 31 CPI; May PPI Japan: May CPI
Economic Release 10 U.S.: April trade balance 26
release (U.S.) time (ET)
GDP 8:30 a.m. Australia: May employment report 27
CPI 8:30 a.m. Germany: May CPI 28 U.S.: May personal income
ECI 8:30 a.m.
PPI 8:30 a.m. Japan: May PPI 29 Canada: May PPI
ISM 10:00 a.m. ECB: Governing council interest-rate Japan: May employment report
Unemployment 8:30 a.m.
Personal income 8:30 a.m. announcement 30 India: May CPI
Durable goods 8:30 a.m.
UK: Bank of England interest-rate UK: Q1 GDP
Retail sales 8:30 a.m.
Trade balance 8:30 a.m. announcement July
Leading indicators 10:00 a.m.
11 U.S.: May retail sales 1 U.S.: June ISM manufacturing report
France: May PPI France: May PPI

JUNE 2010 UK: May PPI 2 U.S.: June employment report

30 31 1 2 3 4 5 12 3
6 7 8 9 10 11 12 13 4
13 14 15 16 17 18 19
14 Hong Kong: Q1 PPI 5
20 21 22 23 24 25 26
27 28 29 30 31­ 1 2
15 Japan: Bank of Japan interest-rate 6
announcement 7 Brazil: June CPI and PPI
UK: May CPI 8 Australia: June employment report
16 U.S.: May PPI and housing starts Mexico: June 30 CPI; June PPI
The information on this page is
subject to change. Currency UK: April employment report 9 Canada: June employment report
Trader is not responsible for
FDD: June currency futures (CME) Germany: June CPI
the accuracy of calendar dates
beyond press time. 17 U.S.: May CPI and leading indicators
Hong Kong: March-May employment
report

CURRENCY TRADER • June 2010 29

 New Products
DailyFX (www.dailyfx.com), FXCM’s free news and
research Web site, launched a new, video-based DailyFX
Trading Course, free to all live FXCM clients. The DailyFX
Trading Course is designed to introduce popular trading
tools and techniques. The bulk of the course consists of 60
video lessons, spanning 15 trading subjects, and over 10
hours of live instructor-led Webinars each week. In addi-
tion to the videos and Webinars, students can complete
homework assignments and further their learning through
course forum discussions. Moreover, the curriculum’s “go
at your own pace” and “learn what you want” format pro-
vides students the flexibility and freedom to focus on the
subjects they want for as long as they want. Unlike previ-
ous DailyFX course offerings, the new DailyFX Trading
Course is not for sale. Instead it is free to all live FXCM
clients. The course includes two Core Video Lessons,
Instructor Take lessons (in which a DailyFX instructor
explains how they specifically trade with the subject under
discussion), Daily Instructor Webinars (live Webinars to
complement the core video lessons), Homework (allowing
students to reflect on the lessons covered and gauge how
well they have absorbed course materials), and Forums,
where students pose questions directly to course instruc-
tors as well as continue to engage in subjects covered in
the week’s lessons.
TD AMERITRADE (www.tdameritrade.com) has
launched thinkOnDemand, a “paper-trading” tool using
simulated cash and positions for retail traders and inves-
Events
Event: FIA/FOA International Derivatives Expo
Date: June 8-9
Location: The Brewery, Chiswell Street, London
For more information: Go to www.idw.org.uk
Event: Los Angeles Traders Expo
Date: June 9-12
Location: Pasadena Convention Center, Los Angeles
For more information: Go to Date: Sept. 23-25
www.moneyshow.com/caot/?scode=013721
Event: Global Hedge Fund Forum 2010
Date: June 22
Location: Online
For more information: www.globalhedgeforum.com
30 June 2010 • CURRENCY TRADER
tors. The thinkOnDemand service provides users with
tick-by-tick intraday prices that can be replayed at any
time – hours, days and weeks after they have occurred
– without leaving the live trading platform. In its simplest
terms, thinkOnDemand is like a personal digital video
recorder (DVR) for traders. Users of the thinkorswim from
TD AMERITRADE trading platform can use thinkOnDe-
mand to paper trade stocks, futures, forex and options.
Because thinkOnDemand is completely integrated into
the live trading platform, traders can also move back and
forth between thinkOnDemand paper trading and live
trading with a single click. Traders can select any date
from the previous four months and replay, fast forward,
and pause the archived market data, enter simulated
trades, and see the hypothetical results. thinkOnDemand
complements six software releases that have recently
added new functionalities and resources to the thinkor-
swim from TD AMERITRADE trading platform, includ-
ing: Gadget 360, which displays complex options data in
an easy-to-interpret graphical form; extraordinary order
control for the active trader; live-from-the-floor Market
Cast squawk box, and custom position grouping; and
access to even more charts, futures, options, and forex, as
well as more analytics, alerts, and news. ›
Note: New Products is a forum for industry businesses to announce new
products and upgrades. Listings are adapted from press releases and are not
endorsements or recommendations from the Active Trader Magazine Group.
E-mail press releases to editorial@currencytradermag.com. Publication is
not guaranteed.
Event: The MoneyShow San Francisco 2010
Show focus: Green investing
Date: Aug. 19-21
Location: San Francisco Marriott
For more information: Go to www.moneyshow.com and
click on Events > The World MoneyShows
Event: The Forex, Futures & ETFs Expo Las Vegas 2010
Location: Caesars Palace, Las Vegas
For more information: Go to www.moneyshow.com
Event: Las Vegas Traders Expo
Date: Nov. 17-20
Location: Caesars Palace, Las Vegas
For more information: Go to www.moneyshow.com
 Key Concepts
Carry trades involve buying (or lending) a currency
with a high interest rate and selling (or borrowing) a cur-
rency with a low interest rate. Traders looking to “earn
carry” will buy a high-yielding currency while simultane-
ously selling a low-yielding currency.
Fibonacci series: A number progression in which
each successive number is the sum of the two immedi-
ately preceding it: 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on. As
the series progresses, the ratio of a number in the series
divided by the immediately preceding number approaches
1.618, a number that is attributed significance by many
traders because of its appearance in natural phenomena
(the progression of a shell’s spiral, for example), as well
as in art and architecture (including the dimensions of
the Parthenon and the Great Pyramid). The inverse, 0.618
(0.62), has a similar significance.
Some traders use fairly complex variations of Fibonacci
numbers to generate price forecasts, but a basic approach
is to use ratios derived from the series to calculate likely
price targets. For example, if a stock broke out of a trad-
ing range and rallied from 25 to 55, potential retracement
levels could be calculated by multiplying the distance of
the move (30 points) by Fibonacci ratios –– say, 0.382, 0.50,
and 0.618 –– and then subtracting the results from the high
of the price move. In this case, retracement levels of 43.60
[55 - (30 * 0.38)], 40 [55 - (30 * 0.50)], and 36.40 [55 - (30 *
0.62)] would result.
Similarly, after a trading range breakout and an up
move of 10 points, a Fibonacci follower might project the
size of the next leg up in terms of a Fibonacci ratio –– e.g.,
1.382 times the first move, or 13.82 points in this case.
The most commonly used ratios are 0.382, 0.50, 0.618,
0.786, 1.00, 1.382, and 1.618. Depending on circumstances,
other ratios, such as 0.236 and 2.618, are used.
While Fibonacci retracements are used to calculate the
possible partial correction levels of a previous price move
(i.e., a reversal of up to 100 percent of a previous price
swing), Fibonacci extension levels are used to extrapolate
moves in the same direction as a previous price swing
— for example, projecting a target for a new upswing that
represents a 161.8-percent gain from a certain price level
based on the size of the previous upswing.
True range True range (TR): A measure of price move-
ment or volatility that accounts for the gaps that occur
CURRENCY TRADER • June 2010 31
between price bars. This calculation provides a more accu-
rate reflection of the size of a price move over a given peri-
od than the standard range calculation, which is simply
the high of a price bar minus the low of a price bar. The
true range calculation was developed by Welles Wilder
and discussed in his book New Concepts in Technical Trading
Systems (Trend Research, 1978).
True range can be calculated on any time frame or price
bar — five-minute, hourly, daily, weekly, etc. The following
discussion uses daily price bars for simplicity. True range
is the greatest (absolute) distance of the following:
1. Today’s high and today’s low.
2. Today’s high and yesterday’s close.
3. Today’s low and yesterday’s close.
Average true range (ATR) is simply a moving average of
the true range over a certain time period. For example, the
five-day ATR would be the average of the true range calcu-
lations over the last five days.
Variance and standard deviation: Variance mea-
sures how spread out a group of values are — in other
words, how much they vary. Mathematically, variance is
the average squared “deviation” (or difference) of each
number in the group from the group’s mean value, divid-
ed by the number of elements in the group. For example,
for the numbers 8, 9, and 10, the mean is 9 and the vari-
ance is:
{(8-9)2 + (9-9)2 + (10-9)2}/3 = (1 + 0 + 1)/3 = 0.667
Now look at the variance of a more widely distributed
set of numbers: 2, 9, and 16:
{(2-9)2 + (9-9)2 + (16-9)2}/3 = (49 + 0 + 49)/3 = 32.67
The more varied the prices, the higher their variance
— the more widely distributed they will be. The more var-
ied a market’s price changes from day to day (or week to
week, etc.), the more volatile that market is.
A common application of variance in trading is stan-
dard deviation, which is the square root of variance. The
standard deviation of 8, 9, and 10 is: sq. rt. 0.667 = .82; the
standard deviation of 2, 9, and 16 is: sq. rt. 32.67 = 5.72. ›
 FOREX trade journal

Short trade runs course,

long-side probabilities kick in.

Trade
Date: Monday, May 24, 2010.

Entry: Long the Australian dollar/U.S.

dollar (AUD/USD) at .8310.

Reason for trade/setup: Reversing

last month’s short trade based on the
pattern from the article “Top pattern
feeds bottom formation” (Currency
Trader, March 2010), this paper trade
was based on two factors: the conclu-
sion of the weekly short pattern, which
has historically reached its maximum
profit three weeks after the signal
(which occurred the week of April 16 in
this case), and the dramatic May sell-off
that drove the pair to new lows for the
year.
“Top pattern feeds bottom formation” showed the short
pattern to be a setup for a much more significant long
pattern whose profitability extended at least 11 weeks, on
average. The pair was concluding its fifth week after the
short signal on May 21.
The AUD/USD pair sold off hard in May as equity
markets collapsed and money flooded into the U.S. dollar.
After slamming below the February low, the Aussie dol-
lar dropped to its lowest level since July 2009 on May 21,
but recovered to close toward the upper end of its range.
With the market poised for a rebound, we went long the
next day (May 24) as the pair was appearing to sustain its
recovery.
Initial stop: .8011
Initial target: .8560
Result
Exit: .8349
Profit/loss: .0039
Outcome: The market’s high volatility required putting
Source: TradeStation
the stop farther away than we would have liked (below the
May 21 low), and another sell-off on May 25 put the trade
to the test: The Aussie dollar made a slightly lower low at
.8066 before reversing to closing the day at the top of its
range.
The trade got some breathing room on May 27 when a
major stock-market rally took some starch out of the U.S.
dollar, the AUD/USD pair jumped more than 3 percent (to
a little above .8500). We moved the stop to .8349 to remove
the risk from the trade and waited for the market to reach
the initial profit target.
The pair pushed to .8550 on May 28, but closed lower at
.8471 before pausing and, finally, breaking sharply on June
1 to .8280, hitting the stop. By mid-morning in the U.S. ses-
sion the pair had rebounded back above .8400
We were too rigid with this trade. Adhering inflexibly
to the target price instead of taking profits in its vicinity
when the market started to weaken resulted in leaving
what would have easily been a 2-percent gain (the trade
was up nearly 3 percent at its highest level) on the table.›
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.

Trade Summary
Currency Entry Initial P/L Trade
Date Initial stop IRR Exit Date LOP LOL
pair price target point % length
5/24/10 AUD/USD .8310 .8011 .8560 0.84 .8349 6/1/10 .0039 0.47% .0240 -.0030 6 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).

32 June 2010 • CURRENCY TRADER

 Join Thousands of Fellow Traders to
Exchange Ideas and Learn New Strategies

John
Carter

Toni Turner

Confirmed speakers include:

Robert Miner
Author
Martin Pring
President
Tom DeMark
Founder Register to Attend the Largest Trader
Dynamic Trading Pring.com Market Studies, LLC
Event on the West Coast and Learn:
➤ New ways to use charts and indicators to analyze the markets

Carolyn Boroden Lawrence McMillan Jackie Ann

➤ How new software and services can help you make
CTA and Technical Founder and President Patterson better trades
Analyst, Synchronicity McMillan Analysis Corp. Editor
BackTesting Report
➤ How new regulations may affect your trading methods

See the complete schedule and get a free pass at:

Harry Boxer Raghee Horner Larry Pesavento
www.LATradersExpo.com. Or, call 800/970-4355.
Author Author Chief Investment
The Technical Trader Forex Trading for Strategist, Trading Tutor
Mention priority code 017887.
Maximum Profit
and
many more! Platinum Sponsor Gold Sponsor Silver Sponsor Media Partner

a Production of
MoneyShow | Githler Center
1258 North Palm Ave.
Sarasota, FL 34236 USA