Strategies, analysis, and news for FX Traders

November 2007
Volume 4, No. 11

JAPAN: TRADING FX
Politics, carry trades, PATTERN BREAKOUTS:
and the yen p. 8 Opportunities arise from
sideways markets p. 26
JAPANESE INFLATION
and the yen p. 20 TAKING THE PULSE
OF FOREX:
WHAT DOLLAR CRISIS? Triennial BIS forex
p. 12 survey p. 32
 CONTENTS

Contributors . . . . . . . . . . . . . . . . . . . . .6 Trading Basics

Global Markets
Riding the yen roller coaster . . . . . . . .8
The yen-driven carry trade business will
likely ebb and flow with the level of risk
in global markets.
By Currency Trader Staff
On the Money
The road to 1.50 . . . . . . . . . . . . . . . . .12
The dollar appears to be under siege, but
perhaps the situation isn’t as grim as
popularly believed.
By Barbara Rockefeller
Momentum trading in forex . . . . . . .26
From sideways markets emerge trade
opportunities in currencies.
By Raghee Horner
Industry News
BIS report shows
more forex growth . . . . . . . . . . . . . . .32
The triennial forex survey conducted by
the Bank of International Settlements shows
forex trading continues to rise at a rapid pace.
continued on p. 4

Trading Strategies
Japanese inflation and the yen . . . .20
A look behind Japan’s plan for the yen.
By Howard L. Simons

2 November 2007 • CURRENCY TRADER

 CONTENTS

Currency Futures . . . . . . . . . . . . . . .34

Currency fund manager performance.

Global News Briefs . . . . . . . . . . . . .35

New Products and Services . . . . . . . . .39

International Market Summary . .36

Global Economic Calendar . . . . . . . . .40

Events . . . . . . . . . . . . . . . . . . . . . . . . . .38 Key dates for currency traders.
Conferences, seminars, and other events.

Forex Trade Journal . . . . . . . . . . . .42

Key Concepts . . . . . . . . . . . . . . . . . . . .38 A top in the euro?

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4 November 2007 • CURRENCY TRADER

 CONTRIBUTORS
CONTRIBUTORS

A publication of Active Trader ®

 Howard Simons is president of Rosewood

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

Editor-in-chief: Mark Etzkorn

metzkorn@currencytradermag.com  Barbara Rockefeller (http://www.rts-forex.com) is an

Managing editor: Molly Flynn

international economist with a focus on foreign exchange. She
mflynn@currencytradermag.com has worked as a forecaster, trader, and consultant at Citibank

Senior editor: Jeff Ponczak and other financial institutions, and currently publishes two
jponczak@currencytradermag.com daily reports on foreign exchange. Rockefeller is the author of
Contributing writers: Technical Analysis for Dummies (For Dummies, 2004), 24/7
Howard Simons,
Barbara Rockefeller,Marc Chandler
Trading Around the Clock, Around the World (John Wiley & Sons,
2000), The Global Trader (John Wiley & Sons, 2001), and How to
Editorial assistant and
Webmaster: Kesha Green Invest Internationally, published in Japan in 1999. A book tenta-
kgreen@currencytradermag.com
tively titled How to Trade FX is in the works. Rockefeller is on the
Art director: Laura Coyle board of directors of a large European hedge fund.
lcoyle@currencytradermag.com

President: Phil Dorman  Trader Raghee Horner (http://www.raghee.com) has

pdorman@currencytradermag.com
more than 15 years of experience in the markets. In addition to
Publisher, heading a managed account program, she is the
Ad sales East Coast and Midwest:
Bob Dorman author of two books, Forex Trading for Maximum
bdorman@currencytradermag.com
Profit and Thirty Days of Trading, and she writes
Ad sales commentary and analysis for Autochartist,
West Coast and Southwest only:
Allison Ellis
FXStreet, Trading Markets, PitNews.com, and
aellis@currencytradermag.com EZ2Trade Software. Horner has taught currencies, futures, and

Classified ad sales: Mark Seger equities trading for more than a decade to students all over the
mseger@currencytradermag.com
world, emphasizing charting and price action. She has been a
featured speaker at both the Traders Expo and Forex Trading
Volume 4, Issue 10. Currency Trader is published monthly by TechInfo, Inc., Expo. Horner’s video commentary has been featured on
161 N. Clark Street, Suite 4915, Chicago, IL 60601. Copyright © 2007
TechInfo, Inc. All rights reserved. Information in this publication may not be
stored or reproduced in any form without written permission from the publisher.
ForexTV, and her instructional articles are available at The
The information in Currency Trader magazine is intended for educational pur- Money Blogs and eSignal Learning’s “Trading with the
poses only. It is not meant to recommend, promote or in any way imply the
effectiveness of any trading system, strategy or approach. Traders are advised
to do their own research and testing to determine the validity of a trading idea.
Masters.” For more information on Raghee’s charts, visit
Trading and investing carry a high level of risk. Past performance does not
guarantee future results. http://www.autochartist.com.

6 November 2007 • CURRENCY TRADER

 GLOBAL MARKETS

Riding the
yen roller coaster
Equity market volatility and global risk appetites will drive the yen in the near future.

BY CURRENCY TRADER STAFF

T
he start of the fourth quar-
ter has been volatile for
the Japanese yen (JPY).
Japan’s currency swung
up and down in the weeks following a
change of the Japanese political guard
with a new Prime Minister Sept. 26, a
fresh plunge in U.S. equity prices in
mid-October, and ongoing portfolio
adjustments in relation to global carry
trade positions (Figure 1).
Fresh concerns about the U.S. econ-
FIGURE 1 — DOLLAR-YEN
As a key player in carry trades and a barometer for global risk appetites, the
yen has made wide swings in recent months. After staging a modest rally off the
August low, the dollar slumped anew vs. the yen in mid-October.
Source: TradeStation
omy, centered around housing market
woes, helped trigger the October equi-
ty sell-off (the 20th anniversary of the
October 1987 crash might have played
a part, too), which in turn decreased
global investors’ appetite for risk —
again — and helped drive the yen
higher vs. the dollar. It’s like seeing
reruns of your favorite television
episode. When risk appetite in the
global investment community rises,
players move back into the carry trade,
selling yen and buying riskier, high-
yielding assets. A decrease in risk
appetite, however, sparks an unwind-
ing these positions, which ultimately
boosts the yen.
The risk roller coaster
With interest rates at 0.5 percent in
Japan, the lowest among industrial-
ized nations, analysts say the carry
trade is not dead — at least not yet,
anyway.
Sluggish growth conditions in
Japan, with hints that deflation is still
lingering, will likely constrain the
Bank of Japan (BOJ) from “normaliz-
ing” interest rates anytime soon. As a
result, when global investors find a
renewed appetite for risk, they’ll like-
ly step back into the carry trade,
depressing the yen’s value. However,
at the first whiff of volatility, financial
market instability, or weakening eco-
nomic news — especially relative to
the U.S. — a massive unwinding
would prompt the yen to spike up
again.
“Carry trades remain extremely
fluid,” says Brian Dolan, chief strate-
gist at Forex.com, a division of Gain
Capital. Dolan has noticed an
extremely high correlation between
U.S. stocks and the dollar/yen pair
(USD/JPY).
“If stocks are down, the yen crosses
are down,” he says.
Jamie Coleman, managing editor of
Thomson FX Hub, agrees.

8 November 2007 • CURRENCY TRADER

 THE U.S. DOLLAR/JAPANESE YEN AT A GLANCE

“Trading in the yen Daily range (past 40 days): Average: 1.33 Median 1.11
has almost nothing to do Weekly range (past 26 weeks): Average: 2.17 Median: 1.91
with the Japanese econo- 52-week high/low: 124.13 (6/22/07) 111.59 (8/17/07)
my and everything to do Prevailing interest rates (%): U.S. Japan
4.50 .5
with the carry trade and
people’s willingness to Next central bank meetings: Dec. 11 Nov. 12-13
take on risk,” he says. GDP (annualized growth) Q3 2007 * Q2 2007 Q1 2007
“The carry trade has U.S. Japan U.S. Japan U.S. Japan
3.9 0.1 3.8 0.1 0.6 0.8
become the risk barome-
All data as of 10/31/07 *Estimate
ter. When the market
feels risk averse, the yen
strengthens; when the spending and also reforming the taxa- 2008 overall global growth revised
market is in a risk-taking mood, it tion system, including raising con- from 5.2 percent to 4.8 percent.
shorts yen aggressively.” sumption taxes.” The IMF’s forecast for 2008 Japan
Some analysts expressed concern GDP is 1.7 percent — down from a
Political instability the new Prime Minister may actually previous forecast of 2 percent — and
Another factor is Japan’s political be a step backward for the country. they predict 2007 GDP to come in at 2
structure, which is so closely tied to its “I worry he is a member of the old continued on p. 10
economy. A political shake-up at the school,” says Tony Hughes, managing
helm of the Japanese government has director of credit risk at Moody’s
injected uncertainty into the economic Economy.com in Pennsylvania. “He
arena, including much-needed fiscal has been a minister in LDP govern-
reforms. In mid-September Japanese ment and his father was also an LDP
Prime Minister Shinzo Abe of the prime minister. There are all these
Liberal Democratic Party (LDP) was symbolic ties to the old school.”
forced to resign in the wake of his Japan is known for its extensive sys-
party’s devastating loss in upper tem of patronage and backroom deals,
house elections. However, the new which analysts say have included
Prime Minister, Yasuo Fukuda, has many “bridges to nowhere” — pork-
already lost popularity. A late-October barrel spending designed give political
poll by Mainichi Shimbun revealed allies lucrative, but unnecessary, pub-
public support for the new Prime lic works and business ventures.
Minister had dropped to only 46 per- “There is a desperate need for
cent, down 10 percentage points from reform,” says Hughes. “Japan is
the previous month, just after he had increasingly being run by old guys in
assumed office. suits who represent the old politics. I
“Fukuda will face the challenges don’t feel confident the problems they
that bedeviled his immediate prede- encountered in the 80s and 90s will be
cessor — how to move the economy overcome.”
and growth forward, beat deflation,
and curb the recent explosion in public The growth picture
debt, which has reached a point where Japan’s economic fundamentals aren’t
it will represent a significant burden to especially encouraging. Many econo-
future generations,” says Matt mists agree the Japanese economy con-
Robinson, economist at Moody’s tinues to struggle. The International
Economy.com in Sydney, Australia. Monetary Fund (IMF) recently
”Addressing the government’s budget released new projections for global
deficits will require reining in public and individual country growth, with

CURRENCY TRADER • November 2007 9

 GLOBAL MARKETS continued
FIGURE 2 — THE YEN AND THE VIX
Some analysts are watching the relationship between equity markets
and the yen, vis-à-vis the carry trade.
Source: TradeStation
percent. Credit Suisse economists low-
ered their 2008 Japan GDP forecast
from 2.3 percent to 1.8 percent.
Moody’s Economy.com’s 2007 GDP
growth is at 2.1 percent, slowing to 1.8
percent in 2008.
“The Japanese economy has
returned to stagnation, with consumer
spending and consumer sentiment
taking a hit,” Dolan says.
Recent data reveals consumers con-
tinue to hold off on spending. Japanese
department store sales fell 2.5 percent
year-over-year in September, follow-
ing a 1.4 percent year-over-year
increase in August.
Deflation still alive
While economic growth is faltering,
inflation remains nowhere in sight.
The latest data revealed that year-
over-year in August, the core CPI rate
had actually declined by 0.1 percent.
10
“Essentially Japan is still experienc-
ing deflation, and that’s preventing the
BOJ from hiking rates,” says David
Powell, senior analyst at Ideaglobal in
New York. “Japan has not been able to
revive domestic demand very well.
Incomes have not been rising along
with the tightness in the job market,
which constricts consumer spending
and is the weakest link in the Japanese
recovery.”
Looking to 2008, Moody’s
Economy.com’s Robinson does not
think inflation will emerge at any sig-
nificant level.
“High crude oil, as well as higher
food prices across Asia, will put
upward pressure on consumer and
producer prices in the months ahead,
eventually feeding into core inflation
measures,” he says. “The recent appre-
ciation of the currency will counteract
this, dampening any imported infla-
tionary pressures, while the subdued
state of the consumer sector will
ensure that demand pressures remain
too weak to put any real upward pres-
sure on prices. Even if Japan can break
from deflation, any rise will be small.”
Monetary policy
These factors add up to a BOJ firmly
on hold. The overnight rate in Japan
remains at 0.50 percent, the last adjust-
ment a 0.25-percent basis-point hike in
February.
The next meeting is Nov. 12-13 (the
most recent one was Oct. 31, and rates
remained unchanged), but given the
sluggish pace of growth and the lack
of overall inflation, the market expects
the BOJ to leave rates alone into 2008.
However, the BOJ wants to normal-
ize interest rates. If the Japanese econ-
omy were to slow significantly or even
slip into recession, the BOJ would not
have many tools to help jumpstart eco-
nomic growth with interest rates at
such low levels.
“A key decision facing the new
administration will be the replacement
of BOJ Governor Toshihiko Fukui,
whose term expires early next year,”
Robinson says. “The politics surround-
ing future BOJ actions have become a
little more complicated lately.
Governor Fukui still appears adamant
that a rate rise is required without
delay as part of reducing the interest-
rate differential between Japan and the
rest of the world, and thus stemming
the outflow of Japanese yen that has
been fuelling global liquidity.
“However, the newly appointed
Minister of Finance, Fukushiro
Nukaga, has urged considerably more
caution, implying in a statement
recently he would not look favorably
upon a rate increase, and that the cost
of borrowing should not be pushed up
until deflation is a distant memory,”
he adds.
November 2007 • CURRENCY TRADER
G7 Meeting
Prior to the G7 confab on Oct. 19, some
European finance officials had been
complaining about the high level of
the euro (EUR), which led some mar-
ket analysts to speculate the G7 would
adjust its language regarding
exchange rates. However, the recent
G7 meeting saw little in the way of
fresh news or direction for global cur-
rency market traders.
“In their statement, Ministers
remained silent on the recent weak-
ness of the U.S. dollar, restricting com-
mentary to the previously agreed-
upon line that currency values should
be determined by market forces” says
Robinson. “The release of the G7 com-
muniqué from Oct. 19 undermined the
position of any currency trader betting
on a deviation in the long-standing
U.S. policy to refrain from supporting
the currency’s value.”
U.S. housing and the
broader economy
Many questions remain regarding the
state of the U.S. housing market reces-
sion, including how much worse will
it get and what the impact might be on
2008 U.S. economic and global growth.
Ideaglobal economists warned in
their Global Forex Outlook Q4: “In the
event the housing correction is much
more marked and causes a U.S. reces-
sion, USD/JPY could see a serious test
of 105, below which we think it may
get uncomfortable for the Japanese.
Politics will make it difficult for the
BOJ to consider intervention and at the
most they could slow the move rather
than reverse it.”
Yen outlook
Despite the recent dollar/yen volatili-
ty, the pair has remained within a
roughly 118.00/112.00 range since late
August (Figure 1). With the yen
remaining captive to the whims of
global carry trade players, movement
CURRENCY TRADER • November 2007
in the Japanese currency will remain down from the August peak,” Powell
dependent on overall levels of market says.
volatility and global risk appetites. Forex traders are well aware that
For now, currency strategists agree low volatility is ideal for successful
that economic and political fundamen- carry trades. Otherwise, price spikes
tals will have little impact on the over- can wipe out the profits from bullish
all action of the Japanese currency. interest rate differentials.
“It looks like we’ve shifted into a “We expect volatility to remain ele-
113-118 range,” says Thomson FX vated between now and year-end,
Hub’s Coleman. “And 118 has become which should keep the dollar/yen
a formidable barrier. I’d be selling ral- below 120.00,” Powell says.
lies in dollar/yen and euro/yen.” Ideaglobal forecasts the dollar/yen
Forex.com’s Dolan has been moni- at 112.00 at the end of 2007, and at
toring the CBOE Volatility Index’s 110.00 at the end of the first quarter
(VIX) correlation with the yen carry 2008.
trade (Figure 2). “If there is further turbulence in U.S.
“The VIX had been averaging equity markets it would not be a good
around 12-15 in June [as dollar/yen time to be long the dollar/yen,”
was rallying into the 124 region],” he Powell notes.

says. “At the peak of the market tur-
moil in August, the VIX soared to 37.5
as yen carries were dropped.”
In early October, as volatility
retreated, the VIX dropped back to the
15-18 region. However, on Oct. 19, the
VIX had surged above 22 when the
U.S. stock market turned sharply
lower.
Dolan suggests forex traders moni-
tor the VIX as a potential timing tool
for yen carry trades.
“On moves above 18-20 in the VIX,
it might not be a good thing to be look-
ing at the yen carry trade,” he says. “It
is very much a real-time situation. If
you’re trading the yen, you’ve got to
be watching the equity markets.”
Implied volatility in three-month
dollar/yen options is another measure
forex traders could monitor.
Ideaglobal’s Powell has been watching
this indicator in recent weeks, noting a
recent summer implied volatility low
at 6.7 on July 20. However, in mid-
August, as the dollar/yen pair retreat-
ed below 112.00, implied volatility
soared to 14.9. As of Oct. 18, implied
volatility stood at 9.1.
“We are still in a period of elevated
volatility, although it has calmed
11
 ON THE MONEY
The road to 1.50
Will the euro/dollar pair soar to 1.5000?
Does it really matter if it does? Take another look at the dollar “crisis.”
BY BARBARA ROCKEFELLER
T he week of Oct. 15-19 was one of unrelieved
gloom. Everyone pointed to a litany of woes
that doomed the U.S. dollar to ever-lower lev-
els against the benchmark euro. We are usual-
ly tempted to be contrarian when “everyone” is saying the
same thing, but it’s a big list and pretty convincing.
The question is, is this a crisis or not? The dollar may
indeed be headed further downward, but it’s uncertainty
that creates panic and a sense of crisis, and this time there is
little uncertainty. In fact, the dollar’s decline has been quite
orderly; it’s the corrections that have been sharp and shock-
ing. When fear reaches panic levels, the knee-jerk reaction is
to buy the safe-haven dollar, not sell it.
Regardless of newspaper and newscaster scare tactics,
some of what is going on has little or nothing to do with the
dollar itself. Each entry on the list of dollar woes is under-
standable, and none of them is fatal:
• The major stock market indices each fell more than
FIGURE 1 — NYMEX DOLLAR INDEX
In October the dollar hit all-time lows vs. the euro and the Canadian dollar, and the
U.S. dollar index (DXY) established a new all-time low of 77.33.
Source: Data — Reuters DataLink; charts — MetaStock
12
2.5 percent on Friday, Oct. 19, the anniversary of the
biggest one-day price drop ever (22 percent) in 1987.
The same day, oil futures hit an intraday high just
above $90, and although the market closed lower that
day, it was up 45 percent year-to-date. Meanwhile,
gold reached a post-1980 high of $765.20.
• The benchmark 10-year T-note yield closed at 4.401
percent, only a few points off the Sept. 10 lowest low
(4.301 percent). A preponderance of Fed funds futures
(FF) traders think the Fed will cut rates again at the
Oct. 31 policy meeting, and perhaps again at the Dec.
11 meeting, implying the entire yield curve will shift
downward — to the dollar’s disadvantage.
• Former Fed chief Alan Greenspan, on the talk-show
circuit to sell his book, says the probability of recession
in the U.S. is 33 to 50 percent. A 50-percent probability
is very, very high. George Soros feels the probability of
recession as higher than officials see it, without nam-
ing names or a percentage figure.
• The dollar hit an all-time low
(1.4319) against the euro, and the
U.S. dollar index (DXY) hit an all-
time low of 77.33 (Figure 1).
• Earlier the same week, the U.S.
Treasury reported that U.S. net
long-term portfolio investment was
an outflow of $69.3 billion — when
the U.S. needs about $60 billion
inflow per month to “fund” the
current account deficit. Short-term
flows (bank deposits and fixed-rate
securities of 12 months and shorter)
were negative, too, at $93.7 billion.
The total Treasury International
Capital System (TICS) shortfall in
August was a jaw-dropping $163
billion. At the same time, U.S.
investors bought double the
amount of foreign equities in
August as in July ($12.8 billion),
and switched from being sellers of
foreign fixed income in July to big
buyers in August ($21.7 billion).
The TICS headline number in
August was both a record net out-
November 2007 • CURRENCY TRADER
 flow as well as the first negative figure since August
1998, which was the height of the 1997-1998 emerging
market crisis.
• In addition to some limited reserve diversification,
sovereign wealth funds are the new fad among gov-
ernments, and there are no rules for transparency. As
far as anyone can tell, the funds will have a preference
for non-dollar assets, including the euro and emerging
market assets.
• The Group of Seven (G7) met and declined to
express concern about the dollar, which is interpreted
as a green light to keep selling it. The G7 said exactly
what it has said before — that excess volatility is unde-
sirable and that currencies should trade in line with
fundamentals.
This is about as bad as it gets, at least in terms of public-
ity. Even the general public knows about the crashing dol-
lar. Commentators have been talking for more than a month
about how to profit from the ongoing dollar decline. E-mail
boxes are stuffed with come-ons to lure the hobby trader
into currencies. A one-way street is an enticing path if you
are a newcomer.
But amateurs and newcomers are famously the ones who
get their heads handed to them. We need to look a little
deeper into cause and effect. After all, some forex traders
have been saying for some time the dollar would fall to
CURRENCY TRADER • November 2007
1.4500 against the euro, maybe even 1.5000. If conditions
were so awful during the extraordinary week of Oct. 15-19,
why didn’t the euro hit 1.4500? Instead, the euro closed at
1.4310 on Friday, Oct. 19 — only about 100 points above
where it started the month. This doesn’t seem like dollar cri-
sis pricing. And the day after the all-time high (Monday,
Oct. 22), the euro spiked down more than 200 points in
European trading hours, evidently on profit-taking.
Crisis? What crisis? This is business as usual. The list of
factors contributing to the dollar drop can mostly be
explained away, without referencing a “crisis.”
Oil and gold
First, let’s look at the oil market. About 20 percent of the
price is because of the geopolitical situation, as even Middle
Eastern oil ministers have been saying.
It’s no coincidence that Russian President Vladimir Putin
is making friends with Iran — to the extent of selling arma-
ments. Russia depends on exported oil for state revenue
and is quite happy with the Middle Eastern turmoil and
uncertainty that keeps the price high. In addition, the world
is fearful that President Bush will make a pre-emptive strike
against Iran, which will halt shipping in the Persian Gulf.
We all depend on oil. Oil at $100 per barrel or more will
cause dislocation and inflation everywhere. It’s not entirely
true that the Eurozone is indifferent to the oil price (Figure
continued on p. 14
13
 ON THE MONEY continued
FIGURE 2 — EURO-DENOMINATED OIL
Oil may not be as expensive in euro terms as it is in dollar terms, but it’s still rising,
and the Eurozone is not indifferent to the increase
Source: Data — Reuters DataLink; charts — MetaStock
2). Oil may not be as expensive as it is in dollar terms, but
it’s still rising, and while European Central Bank (ECB) offi-
cials and others say a lower price for oil in euro terms
relieves inflationary pressure, that is only vis-à-vis the pres-
sure on the U.S. It’s still inflationary pressure.
Then there is gold, which has been rising regardless of
FIGURE 3 — THREE STOCK INDICES
International stock markets are more connected than ever.
Source: Data — Reuters DataLink; charts — MetaStock
14
inflation fear, which has actually
declined in the past year (as shown by
the spread between regular bond
yields and inflation-adjusted bond
yields, which has fallen from 2.56 per-
cent in early 2005 to 2.35 percent
today). It can be argued that the cause
of the gold price rise is rising incomes
in places that like gold, such as India
and the Middle East, and has nothing
to do with the level of currencies.
Stocks
The relationship of currencies to stock
markets is squirrely. Sometimes, but
not often, a currency will move in line
with its stock market. Japan is the big
exception — the Nikkei rises when the
yen falls, since exporters benefit from a
lower currency level.
On the whole, currencies move
inversely to stock prices, but it’s not a
consistent relationship. Stock traders
seem to live in their own universe and
currency traders live in theirs. For one
thing, stocks tend to rally when inter-
est rates are nudged down but currencies tend to do the
opposite — they fall when rates are nudged down and rise
when the yield differential rises in their favor.
In addition, the percentage of foreign participation in
most stock markets tends to be fairly small (less than 20 per-
cent), again with the exception of Japan, where it’s a little
more than 40 percent. This is, howev-
er, in the process of changing with the
1999 advent of the euro and U.S.
enthusiasm for diversification (a les-
son now learned and not to be forgot-
ten). Besides, as we have seen from
1929 to today, stock market sentiment
seems to leak from one market to
another, and especially in the case of a
sharp decline (Figure 3). Nobody
thinks if the U.S. indices crashed out-
right (a 20-percent-plus move down)
European bourses would be a safe
haven. No, European markets and
most, if not all, others would follow
the U.S. markets down, regardless of
what currencies are doing.
The one country where the curren-
cy-stock market mismatch is the most
glaring is China. The Shanghai index
is up six-fold while the currency is
barely up 10 percent (Figure 4).
Experts such as Mr. Greenspan say we
know we have a bubble only after it
November 2007 • CURRENCY TRADER
 FIGURE 4 — SHANGHAI STOCK INDEX
The Shanghai Composite stock index is up six-fold while China’s currency is barely
up 10 percent.
breaks, but this chart looks uncannily
like the Nasdaq chart (Figure 5). It may
take years for the Shanghai bubble to
burst, or it could come next week. Or
maybe it’s not a bubble and won’t
come at all. Nobody knows.
However, we can be fairly sure if the
Shanghai undergoes a “correction”
like the Nasdaq did in 2000-2002,
China will face domestic difficulties,
including a potential drop in overall
activity that would reduce demand for
commodities, including oil.

Global liquidity
As for a crisis of confidence in the U.S.
(and thus the capital outflow in
August), there is a reassuring reason
for it: In August there was a contrac-
tion of global liquidity as certain cred-
it markets, especially the commercial Source: Data — Reuters DataLink; charts — MetaStock
paper market, froze. The horrendous
Treasury numbers reflect the selling of what was liquid to expect normal levels in the November report (for
keep from having to sell potentially bad investments into a September) or the December report (for October). It was a
market where there were no offers, meaning a 100-percent true crisis and it was U.S. assets that saved the day. Global
write-off would have been necessary. The August capital investors will remember that next time.
flow report was almost certainly an aberration, and we can continued on p. 16

CURRENCY TRADER • November 2007 15

 ON THE MONEY continued
FIGURE 5 — NASDAQ BUBBLE
There are obvious parallels between Figure 4’s Shanghai Composite chart and the
Nasdaq’s run-up to its bubble top in 2000.
Source: Data — Reuters DataLink; charts — MetaStock
But there is a very dark cloud in that silver lining: the
effort by the big three banks — Citigroup, Bank of America,
and JPMorgan Chase — to establish a “Superconduit” fund
that will be the lender of last resort for financial institutions
that own potentially toxic paper. The fund will be on the
order of $80-$100 billion and will buy only the top-rated
paper if the holders find it difficult to get pricing or a buyer.
But wait a minute — who is to say the high-rated paper
deserves the high ratings? The ratings agencies were part of
the problem in the first place, going along with the packag-
ing of bundles of sub-prime paper into what was supposed
to be a triple A-rated package. This packaging idea is based
on modern portfolio theory, which works when the prices
of the various components do not move in sync with one
another. It would have worked except that in the real-life
credit squeeze we had in August, the individual bits and
pieces of the bundle were correlated. In a nutshell, correla-
tion is what you get in a panic.
Banks created “structured investment vehicles” to keep
this paper off their balance sheets, and they funded these
SIVs with commercial paper backed by the very paper they
didn’t want to hold on their balance sheets. The purpose of
the Super conduit is to restore liquidity to the commercial
paper market, which also contains non-financial corporate
issues (including blue-chip names) and financial institu-
tions themselves, including the very banks creating a lender
of last resort for their own off-balance sheet entities.
What’s wrong with this picture? First, the Super conduit
doesn’t solve the issue of toxic sub-prime debt. It still has to
be taken out back and shot — meaning somebody has to
take the loss. It’s exactly like the Latin American debt prob-
16
lem of the early 1980s — the banks don’t
want to admit they were bad at their
core business (credit evaluation).
The Super conduit buys them some
time to get each asset in each bundle
priced correctly. So far it’s a strictly pri-
vate initiative and thus not technically a
bailout of banks “too big to fail,” but
many commentators are suspicious the
initiative will fail — i.e., other banks
will not join the fund, which will mean
taxpayer dollars might have to come
into the picture. That’s doubtful, since
the U.S. is against such interventions as
a matter of principle, but the fact that
people are raising the issue indicates
how deep the lack of trust is in banks
and government. If you can’t find a
sucker to buy bad paper, sell it to the
taxpayer.
Economic slowdown?
The economy looks headed toward a big
slowdown, with the housing sector a
significant drag, but growth is still
expected to be positive, not negative. A
lot depends on whether the yield curve steepens but the
long-end (10 years) remains a tad over the European coun-
terparts, or the whole yield curve shifts down. If buyers of
10-year paper think inflation is not really whipped, they
will demand the extra premium over short-term paper. This
would be a lifeline for the dollar, which is highly correlated
with the bond/Bund spread. That assumes, however, that
ECB rhetoric about the upside risk of inflation is just that —
rhetoric. It’s difficult to imagine the ECB continuing to hike
rates if the U.S. falls into seriously slower growth. True
recession (two quarters of negative growth) is a dim
prospect, since the Fed can be counted on to cut rates until
the idea is shoved out of people’s minds. After all, Fed chief
Ben Bernanke is an expert on the Depression.
We can dismiss oil and stock markets as affecting every-
one equally, and not the dollar to a greater extent than any
other currency. The portfolio outflow can be explained
away as an aberration. The G7 is not indifferent to the dol-
lar; it simply doesn’t attack a member’s currency directly. If
the U.S. gets recessionary, chances are it will spill over into
other countries, too. As for sovereign wealth funds, they are
created by countries with no obligation to report holdings,
although the G7 wants the International Monetary Fund
(IMF) to look into it and get “non-discrimination, trans-
parency, and predictability.” Well, at least the sovereign
funds are on notice.
The sunny side of the street
Where’s the bright side? First, the total amount of expected
sub-prime mortgage default is on the order of $200 billion.
continued on p. 18
November 2007 • CURRENCY TRADER
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 ON THE MONEY continued
This is a tiny number in the context of the U.S. economy —
$13.13 trillion as of end 2006.
It’s probably not true that sub-prime mortgages are the
only problem in the collateralized debt pipeline. There
must be others, as the August credit crunch suggests. But
surely it was an overreaction to tar all commercial paper
with the sub-prime brush. Recovery will not be fast or in a
straight line, but markets are accustomed to borrowing
short-term and lending long-term. Banks have been doing
it for centuries. This is not the problem. The problem is
bundling low-class paper into something that purports to
be high-class, and then overleveraging the package three or
four times to poorly capitalized buyers.
This has nothing to do with the dollar per se. Foreigners
were big buyers of this potentially toxic paper, too. It was a
British bank (Northern Rock) that had a run on it, despite
having a good balance sheet free of the toxic stuff but over-
reliant on commercial paper.
Also, a lower dollar means exports will continue to
boom and alleviate the trade imbalance of more than $700
billion and 7.6 percent of GDP, a supposedly unsustainable
level. Eventually a cheap dollar will inspire foreign direct
investment (FDI), which was a key factor in the dollar’s
recovery in the 1990s. Foreign direct investment covers
everything from Germans building shopping centers in
Cleveland to takeovers of entire companies, as long as
xenophobic protectionism is kept at bay. Maybe we can sell
Rockefeller Center to the Chinese this time.
What goes around…
The falling dollar harms consumers of imports and imper-
ils the U.S. reserve currency status, but unless something
new and horrible comes along, we can see the general out-
line of developments. It’s not the kind of mindless panic
that gets its grip on stock markets from time to time — the
dollar’s decline is actually quite orderly. So what if the dol-
lar goes to 1.50 or 1.55? At some point the euro will be over-
valued, if it’s not already, and the pendulum will swing
back in the dollar’s favor.
Also, at some point, as the euro will become a second
reserve currency, Europe will start having regrets about
being the issuer of a reserve currency — specifically, wild
swings in money supply as users of the currency as a trans-
action medium and as a store of value change course. This
is what happened to the dollar in the early 1980s as
“petrodollars” came swarming in and out, rendering
money supply practically useless as an inflation-manage-
ment tool. European fixed-income markets in particular are
not yet fully mature.
So, we observe the trend and we can easily understand
the reasons for it, but we shouldn’t imagine it will go on
forever. In the end, U.S. institutional robustness, trans-
parency, variety, liquidity, and sheer size will reassert their
attractiveness to global investors. But first we have to suffer
through a period of revulsion lasting perhaps two to three
more years, barring a global crisis.
It won’t be a one-way street. As we are seeing, on the
18
Other Barbara Rockefeller articles:
“Helicopter Ben and the Japanese yen”
Currency Trader, October 2007.
The American and Japanese economies, and the fate of the
confounding yen.
“The dollar’s ‘sub-prime’ future”
Currency Trader, September 2007.
The fallout from the U.S. housing and mortgage meltdown may
be far from over, and how things unfold will have a big impact
on the forex market.
“The rising yen — here we go again”
Currency Trader, August 2007.
The yen has been on the rise vs. the dollar. Find out if it’s a
reversal or just a correction.
“The hammer and the yen”
Currency Trader, July 2007.
Recent statements by Japan’s Ministry of Finance hint at big
things on the horizon for the yen.
“Too big to fail”
Currency Trader, June 2007.
If the dollar is poised to rebound, it might be getting help where
it least expects it.
“Do stocks hold the key to currency levels?”
Currency Trader, May 2007.
The correlation between stock market and currency prices isn’t
what many people think.
“The coming commodity boom”
Currency Trader, April 2007.
Commodities are already having an impact on global
economies.
“The yen: Canary in the currency coal mine”
Currency Trader, March 2007.
Keep an eye on capital flows and the yen — they could be
telling you more about the dollar than first meets the eye.
“Indicator failure and scientific analysis”
Currency Trader, February 2007.
This discussion of market biases and fallacies provides a more
rigorous way to think about trading.
“Reserve diversification, Part II”
Currency Trader, January 2007.
What is the U.S. doing to ensure the Chinese government will
not alter the $700 billion it has in U.S. dollar reserves?
“Charts are not enough”
Currency Trader, December 2006.
Breaking down price action in light of the news.
You can purchase and download past articles at
http://www.activetradermag.com/purchase_articles.htm.
road to 1.45 and 1.50, sizeable corrections will still occur.
Betting against the dollar wholesale is not a wise bet. And if
a global crisis arises, e.g., the Shanghai index melting down,
the dollar and U.S. capital markets will again be a safe-
haven.

For information on the author see p. 6.
November 2007 • CURRENCY TRADER
 TRADING STRATEGIES

Japanese inflation
and the yen
The BOJ’s plans for the yen have far-reaching implications for currency traders.

BY HOWARD L. SIMONS

I nflation is a scourge, so you take notice whenever

someone tells you they would like to see a little more
of it.
have discovered in several venues since July 2007, modern
economies depend on credit. Any such economy has a pre-
ponderance of debtors over creditors, and inflation allows
these debtors to repay their loans in a depreciated currency.
The Bank of Japan (BOJ), which has been seeking every The logical rejoinder is why creditors would not demand
reason imaginable to end its policy of near-zero interest full protection from inflation in the rates they charge, and
rates, produced a study in May 2007 titled “The Costs And the (short) answer is twofold.
Benefits of Inflation: Evaluation For Japan’s Economy.” The First, expected inflation often is lower than future real-
study is 63 pages long, filled with quantitative macroeco- ized inflation, especially on an after-tax basis; this has been
nomics and attempts to find the “optimal inflation rate” for the experience to date with the U.S. Treasury Inflation
Japan, which the BOJ concludes are annual consumer price Protected Securities (TIPS) market. Second, in a world with
increases between 0.5 and 1.0 percent. a small number of extremely liquid creditors — Chinese
Why does the BOJ consider some inflation to be better exporters, OPEC states with current-account surpluses, etc.
than no inflation, or better than the deflation Japan has — and with aging populations in key countries, the mar-
experienced over much of the past decade? Because, as we ginal lender often is willing to accept a lower rate in
exchange for the safety of government
FIGURE 1 — NEAR-ZERO CONSUMER INFLATION IN JAPAN NOT NEW bonds.
A second reason the BOJ regards
The general Japan and Tokyo-region CPI measures are very similar. The year- non-zero inflation as optimal is a con-
over-year changes for the general CPI first turned negative in October 1986,
cept most of us forget about after
while the year-over-year Tokyo-region CPI first went negative in January 1987.
Economics 101 — the demand for cash
(Note: PCYA means percent change vs. year ago.)
balances. If inflation induces preemp-
tive buying, or the conversion of cash
into assets before the cash depreciates
further, deflation does the opposite.
Savers are rewarded both for holding
on to cash and by cheaper prices
tomorrow. Think of your own experi-
ences in consumer electronics: You
know whatever you buy today you
will be able to buy for less tomorrow.
That incentive, spread across an
entire economy, encourages savings
over consumption and makes low
nominal interest rates completely inef-
fective as a tool of economic stimulus.

Inflation in Japan
As currency trading is simply the
assessment of relative inflation rates

20 November 2007 • CURRENCY TRADER

 FIGURE 2 — MONETARY BASE VOLATILITY DID NOT AFFECT CPI

and a given currency’s supply- M2 growth fell in the early 1990s after the Japanese stock and real-estate bub-
demand balance, any signal that a bles burst and has yet to recover. Monetary base changes, higher and lower,
have been violent.
central bank is trying to create more
inflation is of the utmost importance.
All else held equal, we should pre-
sume expected inflation can be
increased in Japan only through
excess creation of yen. As “excess” is a
relative and not an absolute term,
how do we know excess yen have
been created? The answer, quite sim-
ply, is when short-term interest rates
fall, either the yield curve steepens,
the currency falls or some combina-
tion thereof. In the case of the yen, this
has been happening for years and has
created a global liquidity engine
called the yen carry trade (see
“Looking at the yen carry trade,”
Currency Trader, June 2007).

The BOJ aimed at

Japanese consumer
prices and hit global
asset prices instead.
Let’s step back and take a long-term
look at inflation in Japan. Given the
outsized role of the Tokyo region in
the nation’s economy, we should com-
pare both the general CPI and Tokyo’s
CPI. As is often the case with different
inflation measures, we can easily lose
the forest for the trees. Over time, the
general and Tokyo-region CPI meas-
ures are very similar (Figure 1). The
year-over-year changes for the gener-
al CPI first turned negative in October
1986; the year-over-year Tokyo-region
CPI first went negative in January
1987. If consumer inflation had been a
real problem in Japan in the mid-
1970s, the BOJ broke it successfully —
and to the extent that stable, near-zero
or negative inflation in Japanese con-
continued on p. 22

CURRENCY TRADER • November 2007 21

 TRADING STRATEGIES continued

FIGURE 3 — M2 LEADS CPI sumer prices has been a fact of life in

Japan since the second Reagan admin-
The M2 leads the CPI by an average of 20 months. istration.

Money supply
and monetary base
Because inflation is a monetary phe-
nomenon, we should see what is
going on with the money supply in
Japan. There are two measures of
money to consider, monetary base and
M2. Monetary base consists of cash in
circulation plus current-account bal-
ances (excess reserves available to
lend) on the BOJ’s books. M2 is cash,
demand deposits, and certificates of
deposit.
In another throwback to Economics
101, monetary base is the fuel with
which the banking system can create
new money and credit via fractional
reserve lending (i.e., you have to keep
a percent of your funds in reserve).
Central banks rely on this mechanism
to induce large changes in the money
supply via their relatively small trans-
actions in the purchase and sale of
securities. However, what happens in
an economy such as Japan’s, which
endured the simultaneous bursting of
its twin stock and real estate bubbles
in 1990? If commercial banks find
themselves awash in non-performing
loans, they are unable to extend new
credit, and if borrowers are faced with
slack demand for their products and
services, they are not borrowing. In
short, the entire credit expansion
mechanism freezes up and no addi-
tion to the monetary base can lead to
an expansion of the money supply.
Both low interest rates and excess
money are ineffective at stimulating
new borrowing in this situation, and
deflation results.
As an aside, this mechanism, also
called a “liquidity trap,” was
described by John Hicks during the
Great Depression, the study of which
was Fed Chairman Benjamin
Bernanke’s academic specialty. He

22 November 2007 • CURRENCY TRADER

 FIGURE 4 — SHORT-TERM INTEREST RATES
AND LONG-TERM INFLATION EXPECTATIONS

Higher short-term interest rates lower inflation expectations unless offset by an

feared this while a member of the
increase in the monetary base.
Federal Open Market Committee
(FOMC) in 2002-2003, and it was his
advocacy of extraordinary measures
to preserve the flow of credit that led
the Federal Reserve to maintain a
1.00-percent federal funds rate into
2004.
The Federal Reserve studied the
Japanese experience as well. The only
criticism offered here is the American
stock and real estate cycles are out of
phase; stocks fell in 2001-2002, and
real estate began its downturn in 2006.

Yen weakness will

emerge if the BOJ
successfully increases
inflation — unless
inflation and interest
rates rise faster outside
of Japan.

Thus the U.S. was never in danger of a

Japanese-style deflationary epoch.
We can see the ineffectiveness of the
BOJ’s policies by mapping both the
year-over-year changes in the mone-
tary base and M2 against the two CPI
measures described above (Figure 2).
M2 growth fell in the early 1990s after
the bubbles burst and has yet to recov-
er. The changes in the monetary base
have been violent, both higher and
lower. The BOJ concluded in 2001 that
near-zero interest rates were insuffi-
cient to stimulate credit demand, so
they embarked on a policy of “quanti-
tative easing,” or the shoving of funds
into their current account (green
continued on p. 24

CURRENCY TRADER • November 2007 23

 TRADING STRATEGIES continued

arrow). This had no impact on M2 or the price

Related reading indices. When they decided to end this policy
Other Howard Simons articles: in 2006 (orange arrow), M2 growth declined
“Interest-rate shocks and currency moves” slightly, but once again the impact on inflation
Currency Trader, September 2007. was nil.
Short-term interest rates are typically cited as the prime catalyst of currency We can conclude the funds injected by the
moves. This study puts that idea to the test.
BOJ were borrowed elsewhere. Restated, the
“Stock shocks and the dollar” BOJ aimed at Japanese consumer prices and
Currency Trader, September 2007. hit global asset prices instead.
Want to know what really happens to currencies after big stock market Would it have been any different if the BOJ
moves?
had been able to stimulate M2 growth? Quite
“Currencies and Federal Reserve trade weights” possibly yes. If we map the year-over-year
Currency Trader, July 2007. changes in M2 against those for the general
The theory that a weaker dollar makes U.S. goods and services more CPI, we find M2 leads the CPI by 20 months
competitive abroad sounds nice, but the facts argue otherwise.
on average (Figure 3). The r2, or percentage of
“Why currency traders should be humbler” variance explained, is 0.76.
Currency Trader, May 2007. A second factor in the Japanese experience
A close look at the historical returns of professional currency traders is not for has to be accounted for as well. The single-
the feint of heart.
party domination of the Liberal Democratic
“The stronger real: Don’t blame it on Rio” Party (LDP) has led to public works expendi-
Currency Trader, April 2007. tures run amok, with the result that Japan’s
Lessons from past markets shed light on the possible future of Brazil’s high-
national debt now stands in excess of 150 per-
flying currency.
cent of GDP. The LDP chose to pay for their
“Comparing the major euro cross rates” actions by raising the consumption tax in
Currency Trader, March 2007. April 1997 (Figure 3, green arrow). This tax
Europe’s two major non-euro currencies — the British pound and the Swiss
negated any incentive for the Japanese con-
franc — reflect the growing new currency regime.
sumer to increase spending. The wholly pre-
“Mexican peso: Who’s your padre?” dictable result was an immediate and pro-
Currency Trader, February 2007. nounced downturn in the CPI.
The peso is one of several “emerging currencies” that have been gaining
popularity. Find out about the key factor that has propped up the currency —
Interest-rate impact
which could disappear in a flash.
How will higher short-term interest rates in
“The new iron cross” Japan impact expected inflation? Japan has
Currency Trader, January 2007.
had an inflation-linked bond market since
The long history of the D-mark/pound and now the euro/pound offers many
April 2004. While this history is nowhere near
lessons about economic policies and currency fluctuations.
as long as we would like it to be, we can make
“The pros make it look hard” three intriguing observations by mapping 10-
Currency Trader, December 2006.
year expected inflation against overnight call
Are currency traders making life unnecessarily difficult for themselves?
money (Figure 4).
“Currency trends and volatility” First, while the expected inflation rate more
Currency Trader, November 2006. than doubled between August 2005 and May
Interesting insights come from putting currency volatility under a microscope.
2006, it fell sharply in November 2005 (green
“Currencies and conventional U.S. investments” arrow) when BOJ Governor Fukui warned of
Currency Trader, October 2006. an impending credit tightening. Second,
The financial media often reports on moves in the stock and bond markets
expected inflation peaked in May 2006
vis-à-vis currency fluctuations, but these relationships might not be what you
(magenta arrow) just before the BOJ raised
expect.
rates. Third, inflation expectations hit a local
“The dollar index and ‘firm’ exchange rates” bottom in early March 2007 (blue arrow) and
Currency Trader, December 2005.
then rebounded sharply as the BOJ injected
The vast majority of currency traders are familiar only with the current float-
liquidity into the banking system. The BOJ’s
ing-rate system. But are we about to enter a new “firm exchange rate” era
dominated by the dollar and euro? current account balance jumped from ¥5.88
trillion on March 7, 2007 to ¥12.51 on April 3,
“Howard Simons: Advanced Currency Concepts, Vol. 1”
2007. Those inflation expectations then fell
A discounted collection that includes many of the articles listed here.
sharply as the global credit crunch developed
You can purchase and download past articles at in July 2007.
http://www.activetradermag.com/purchase_articles.htm. It would appear from this limited history

24 November 2007 • CURRENCY TRADER

FIGURE 5 — THE YEN AND CONSUMER INFLATION
The declining inflation rate in Japan led to continued firming in the yen, except
when the U.S. consciously pursued a strong dollar.
that higher short-term interest rates
lower inflation expectations unless
offset by an increase in the monetary
base. This provides the BOJ with a tool
for ending its years of low interest
rates and quantitative easing. If Japan
was an economic as well as geograph-
ic island, it could maintain higher lev-
els of expected inflation by keeping
excess money in its account while rais-
ing nominal interest rates to levels that
would maintain the global yen carry
trade without repeating the disrup-
tions of May 2006 and March 2007.
However, Japan’s large external sector
and its exposure to those who have
borrowed massive quantities of yen
over the years subjects its domestic
inflation policies to global cross-cur-
rents.
Inflation and the yen
Now let’s conclude by taking a long-
term look at the yen relative to
Japanese inflation (Figure 5). The
declining inflation rate in Japan led to
continued firming of the yen except
during those periods when the U.S.
consciously pursued a strong dollar.
These retracements are noted with
green trendlines. The last two periods
so marked, the late 1980s and mid-
1990s, saw both an upturn in Japanese
inflation and a weakening of the yen.
We would have to conclude future yen
CURRENCY TRADER • November 2007
weakness will emerge if the BOJ is
successful in increasing inflation,
unless inflation and interest rates rise
faster outside of Japan.
The opposite effect — a weaker yen
leading to an upturn in the rate of
inflation — does not appear in the
data at all. The 2006-2007 time frame,
called a period of yen weakness by
some, is not a period of yen weakness
by historic standards. Moreover, the
unwinding of various yen carry trades
and widespread expectations of more
relaxed monetary policies in the U.S.
and Europe during the July-August
credit crunch actually strengthened
the yen.
Eventually the credit crunch will
end and the world’s central banks will
return to their mission of the first half
of 2007 — fighting inflation via higher
short-term interest rates. The lesson
for currency traders is clear:
Whenever a central bank declares war
on its own currency and wins, go with
the flow and sell that currency. What
has made the last decade tough for
yen traders is deflation in Japan. If this
ends — and the BOJ appears ready
and able to end it prior to July 2007 —
the trade of selling the yen could be a
profitable one for a long time to
come.

For information on the author see p. 6.
25
 TRADING BASICS

Momentum trading
in forex
Momentum trading offers the opportunity to capitalize on moves
that happen every day in the forex market.

BY RAGHEE HORNER

M omentum trading is defined by the cur-

rent market stage. Essentially, a trader
looks to capture the breakout or break-
down from consolidation or congestion

FIGURE 1 — MARKET STAGES

— i.e., sideways price action that reflects the market’s
uncertainty or anticipation, typically before high-impact
economic data releases.
Traders and investors generally shy away from making
large bets before such events — they
are unwilling to step in front of the
size and volatility. This anticipation of
As illustrated by this uptrend, price action progresses through accumulation
(base), mark up (rally), distribution (top), and mark down (selling). a large move keeps traders on the side-
lines as they wait to see which way the
report will move the market.
It’s precisely this psychology that
creates potential momentum trade
opportunities in front of announce-
ments such as an FOMC interest-rate
decision, the employment report, or
the GDP number, to name a few.
Sideways markets can also develop
during market doldrums. Much as the
stock market often consolidates dur-
Source: http://www.Autochartist.com
ing lunch-time hours, the forex
market has periods during which
FIGURE 2 — TRIANGLES
it is more likely to congest —
Triangle are congestion patterns that form between converging support and specifically, after the London
resistance lines.
close until the Asian open.
Momentum trade entries are best
set up leading into and during
the European and UK forex trad-
ing hours, and from the New
York open at 8 a.m. ET until noon
ET because these are the times
when follow-through is generally
best.
Knowing the overall direction
Source: Active Trader magazine
of the market is the key to know-

26 November 2007 • CURRENCY TRADER

 FIGURE 3 — DOUBLE TOPS AND BOTTOMS
These reversal patterns reach a support or resistance
level twice before reversing the trend.

ing when to set up a momentum trade because it is specifi-

cally the initial momentum the entry is looking to capture.
Identifying opportunities in a sideways market can be
Source: Active Trader magazine
accomplished a number of ways; one of
the best is through chart pattern analysis. FIGURE 4 — TRIPLE TOPS AND BOTTOMS
These reversal patterns reach a support or resistance level three times
Market stages before reversing the trend.
and chart patterns
Charts allow you to see the boundaries of
a consolidation or a congestion. While both
occur in non-trending markets, consolida-
tion is typically characterized by narrow,
sideways price action with low variance
and horizontal support and resistance.
Congestion consists of more-volatile
price action occurring within trendlines
that are not necessarily horizontal.
Price direction can be defined by four
Source: Active Trader magazine
stages, which reflect whether it is a buy-
ers or sellers market. Figure 1 shows the
four stages of any market: 1) accumula-
tion, 2) mark up, 3) distribution, and 4)
mark down.
Any trading approach must begin with
an understanding of which stage the mar-
ket is in and how a market transitions
from stage to stage. Only then can an
entry be determined.
Momentum trades can be made only in
the accumulation and distribution stages.

Momentum patterns
There are trending and non-trending
chart patterns; trying to apply the incor-
rect chart pattern to the market will most
likely lead to a poor trade entry. The goal
is to use patterns that provide clearly
defined levels for the current market con-
dition.
Because the objective here is to capital-
ize on sideways markets, let’s examine
continued on p. 28

CURRENCY TRADER • November 2007

 TRADING BASICS continued
FIGURE 5 — RECTANGLE (SIDEWAYS CHANNEL)
Rectangles are congestion patterns that form between
roughly horizontal support and resistance lines.
Source: Active Trader magazine
FIGURE 6 — WAVE INDICATOR
The wave consists of three exponential moving averages (EMAs)
— a 34-bar EMA of the high, a 34-bar EMA of the low, and a 34-
bar EMA of the close. For a momentum setup, the three lines of
the wave should be moving sideways, as they are at the far right
side of the chart.
Source: eSignal and EZ2Trade Software
FIGURE 7 — RECTANGLE
This chart pattern and the one in Figure 8 share the same hori-
zontal support line. A breakout would occur when price pushes
above the rectangle’s resistance line.
Source: http://www.Autochartist.com
28
which chart patterns are ideal for momentum
entries.
A triangle is formed between converging support
and resistance lines (Figure 2). A down-sloping
resistance line indicates a declining level of profit
taking, or more uncertainty about the value of the
stock. An upward-sloping support line squeezes
price into a corner. Once the support or resistance
line is broken, pressure that has built up as a result
of uncertainty is released and momentum is added
to the price change in the direction of the breakout.
Ascending and descending triangles are specific
types of triangle patterns. An ascending triangle has
a horizontal resistance line and a descending trian-
gle has a horizontal support line. An ascending tri-
angle usually forms as a continuation of a bullish
trend, while a descending triangle typically forms
as a continuation of a bearish trend.
Double tops and double bottoms (Figure 3) are
reversal patterns that touch either the support or
resistance lines twice before reversing the trend.
Triple tops and triple bottoms are reversal patterns
that touch either the support or resistance lines
three times before reversing the trend (Figure 4). A
triple top or bottom is a stronger indicator of trend
change than a double top or bottom. For both types
of patterns, look for a strong initial trend and a sig-
nificant breakout to confirm the reversal.
Also referred to as a sideways channel, a rectan-
gle is a pattern formed between horizontal support
and resistance lines (Figure 5).
The wave
Confirming trade setups based on these patterns
requires only a simple indicator called the “wave,”
which consists of three exponential moving aver-
ages (EMAs): the 34-bar EMA of the high, the 34-bar
EMA of the low, and the 34-bar EMA of the close.
This study allows traders to determine which
market stage prices are in and apply the appropri-
ate chart pattern. For a momentum setup, the three
lines of the wave should be moving sideways.
The far-right side of Figure 6 shows a sideways
channel, or rectangle pattern, on a 30-minute chart
of the U.S. dollar/Canadian dollar pair
November 2007 • CURRENCY TRADER
(USD/CAD). Notice that because of variance the rectangle tern. Each entry is equally valid — as long as the market
does not have a perfectly horizontal resistance line. The stage is sideways. Always check the wave to confirm the
more variance in the highs or lows that establish a support stage has not shifted.
or resistance line, the less solid it is. Variance of five pips or continued on p. 30
less is solid; more than that makes the
entry a little less predictable.
The variance of this rectangle pat-
tern’s highs is three pips (0.9831 and
0.9834). This resistance level is solid,
as is the support (both lows are
0.9788). The flat wave confirms an
accumulation or distribution market
is in place. (In rectangle patterns, the
wave tends to be sideways and flat.)
Momentum patterns can also form

It is important the entry

confirmation occurs
as quickly as possible;
waiting for the bar
or candle to close is not
always realistic in
the forex market.
simultaneously when prices begin to
consolidate or congest (Figures 7 and
8). This gives more flexibility to
traders who are more comfortable
making aggressive entries from
breakouts or breakdowns.
Both chart patterns share a hori-
zontal support line. The breakout in
the rectangle occurs when prices
trade through the (approximately)
horizontal resistance line. Contrast
that with the more aggressive entry
opportunity that occurs when price
breaks the down-sloping resistance
line of the descending triangle pat-

CURRENCY TRADER • November 2007 29

 FIGURE 8 — TRIANGLE BREAKOUT
TRADING BASICS continued The breakout above the down-sloping resistance line of this triangle
pattern offers an earlier and more aggressive entry opportunity than
the pattern in Figure 7.

Related reading
“Support and resistance”
Currency Trader, June 2005.
Learn how to use support and resistance
concepts in your trading strategies.

“Support and resistance zones”

Currency Trader, October 2005.
Traders sometimes think of support and
resistance as precise price levels, but this
concept has little use in real trading. Source: http://www.Autochartist.com
Defining broader support and resistance
zones provides a sensible framework for FIGURE 9 — CONFIRMING A BREAKOUT
making trades. Note: This article is also The upside breakout of the ascending triangle (upper chart) has trig-
part of the discounted article collection, gered a long trade. The MACD histogram (bottom of lower chart) was
already above the zero line, confirming the signal.
“Currency Strategies, Vol. 1.”

“Weighted and exponential

moving averages”
Currency Trader, January 2005.
Weighted and exponential moving aver-
ages are designed to be more responsive
to price changes than the simple moving
average. But there are advantages and
disadvantages to this sensitivity.

“MACD system”
Currency Trader, April 2005.
This system uses the two signal types in a
mutual confirmation approach. Note: This
article is also part of the discounted article
collection, “Currency System Analysis, Vol.
1: 2005.”

“Narrowing breakout channels”

Currency Trader, January 2006.
Instead of waiting for price to cross its
highest or lowest points over the last 20
days, this system enters at the second
highest or lowest level.

You can purchase and

download past articles at
http://www.activetradermag.com/
purchase_articles.htm.

30 November 2007 • CURRENCY TRADER

 Another aspect of trading chart patterns is the confirma-
tion of a breakout or breakdown. It is important the entry
confirmation occurs as quickly as possible; waiting for the
bar or candle to close is not always realistic in the forex mar-
ket.
price to trigger a chart pattern breakout or breakdown and,
finally, confirm the break with the MACD histogram.

For information on the author see p. 6.

Confirmation with
the MACD histogram
The upside breakout of the triangle in
the daily chart of the U.S.
dollar/Japanese yen (USD/JPY) pair
in Figure 9 has triggered a long trade.
When would the entry be confirmed?
Many traders wait for the next trad-
ing day, but with the moving average
convergence-divergence (MACD) his-
togram the entry can be taken as price
pierces resistance. In this case the indi-
cator settings used are the default 12-
26-9. The MACD histogram displays
the difference between the MACD line
and the signal line, which is the nine-
bar EMA of the MACD line.
To confirm trades, the MACD his-
togram is used in an “on-off” manner.
For example, to enter long after a
breakout, the histogram bars must be
above the zero line, which means the
signal line is above the MACD line
and price momentum is to the upside.
In Figure 9 price triggered the entry as
it traded up through the resistance of
the triangle pattern (just above the
116.00 level). The MACD histogram
was already above the zero line, so this
trade was “pre-confirmed.”

Step-by-step
momentum trading
Executing any momentum trade can
be broken down into a few simple
steps. First, identify the sideways
wave to confirm the correct market
cycle. Second, wait for a momentum
chart pattern to form. Next, wait for

CURRENCY TRADER • November 2007 31

 CURRENCY NEWS
Survey says…
BIS report shows more forex growth
T
he Bank of International Settlements (BIS) releases
its currency survey every three years. Although
the meat of the BIS report is barely 1,700 words, it
is highly anticipated by many people in the forex arena.
The survey polls 54 central banks and monetary authori-
ties around the world, collecting data on spot forex and
other transactions. Participants in the forex market use the
data to determine new trends.
As expected, the survey showed that spot forex activity
grew at an unprecedented level between 2004 and 2007,
increasing 71 percent to an average daily turnover of $3.2
trillion in April. Survey participants point to increased
interest in the forex market by hedge funds and individual
investors, and institutional investors looking for more
diversity in their portfolios also turned their attention to
forex.
From 2004 to April 27, forex volume
increased 71 percent to an average
daily turnover of $3.2 trillion.
“I think the bottom line can be summed up in one single
word: volatility,” says Andrew Wilkinson of Interactive
Brokers. “Traders, and apparently retail traders, too, love
volatility. We’ve noticed the rise in volume on currency
futures and how that’s feeding through to options activity
and liquidity.”
The number of firms and individuals using technical
trading — particularly algorithmic trading — has also
increased significantly, likely leading to greater forex par-
ticipation.
“Foreign exchange is a bit of a ‘Field of Dreams’ in a
sense,” Wilkinson says. “Retail traders have shown an
appetite for risk and brisk movements in underlying instru-
ments. FX certainly affords that, and product innovators —
from brokerages to exchanges — have built on the mantra,
‘If you build it, they will come.’”
However, while overall volume goes up, the share done
by the interbank continues to fall. Transactions completed
via the interbank accounted for 43 percent of the total mar-
ket; down from a high of 64 percent in 1998. While an
increasing number of brokerages with their own trading
desks are taking business from the interbank, continuing
consolidation in the banking industry is also contributing to
the decreased numbers.
32
What’s getting traded, and where?
The U.S. dollar was involved in 86.3 percent of all forex
transactions in April 2007, with the euro next at 37 percent.
Both totals are down fractionally from 2004. The Japanese
yen (16.5 percent), British pound (15 percent), and Swiss
franc (6.8 percent) round out the top five.
The Australian dollar and the New Zealand dollar both
had large relative increases (from 5.5 percent to 6.7 percent
and from 1 percent to 1.9 percent, respectively), primarily
because of their inclusion in many carry trade strategies.
“The carry trade is another big reason currency trading
has burgeoned,” Wilkinson says. “In this case, the rise in the
demand for basic commodities, fortified by manufacturing
demand and a slide in the value of the dollar, has begged
the question of how to make money off a mining company
in Australia [if you’re an American investor]. Why not take
a more leveraged bet on something more liquid through an
FX account? It makes perfect sense, whereas researching
and locating the right local mining stock might be more dif-
ficult.”
The U.S. dollar/euro pair accounted for 27 percent of vol-
ume, followed by the dollar/yen (13 percent) and the dol-
lar/pound (12 percent).
“The recent outflows and redistribution of funds in the
USD and JPY have also contributed to the volume surges
we are currently witnessing,” says Blake Morrow of
GlobalTec Solutions. “The interesting thing to note is that a
lot of those funds are being diversified into the AUD and
other emerging currencies such as China and India.”
The UK solidified its position as the currency capital of
the world, as 34.1 percent of all transactions occurred there
— up from 31.3 percent in 2004. The U.S.’s share slipped
from 19.2 percent to 16.6 percent. Japan (8.2 percent to 6.0
percent) and Germany (4.9 percent to 2.5 percent) also saw
activity drop, while Switzerland (3.3 percent to 6.1 percent)
and Singapore (5.2 percent to 5.8 percent) had increases.
Among non-spot transactions, volume in forex options
grew 81 percent.
“Volume in foreign exchange options and cross-currency
swaps has more than doubled,” Morrow says. “That allows
me to conclude that the recent explosion of the FX market
has opened the doors to more speculative traders and
money than in times past.
“This information is critical to the individual investor
because it illustrates the enormous volumes this market is
seeing on a daily basis, which results in more specula-
tion.”

November 2007 • CURRENCY TRADER
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 CURRENCY FUTURES
Managed money: Barclay Trading Group’s
Currency traders trying currency trader rankings for September 2007
Top 10 currency traders managing more than $10 million
to hang on to gains as of Sept. 30, ranked by September 2007 return.
2007
A strong October showing has the Rank Trading September YTD $ Under
Barclay’s Currency Trader Index (CTI) at (millions) advisor return return mgmt.
its high point of the year, although its gain 1. Grossman Asset Mgmt (IPS Currency) 14.75 8.8 1,160.0M
is still precipitously small. 2. Cambridge Strategy (Asian Mrkts) 8.25 20.59 25.0M
The CTI gained 0.85 percent in October 3. IKOS CIF (Currency) 6.47 6.83 1,471.7M
and finished the month up 1.59 percent. 4. DynexCorp Ltd. (Currency) 6.06 -0.66 46.5M
Started in 1987, the CTI, which is com- 5. Cambridge Strategy (Extended Mkts) 5.90 8.49 75.0M
prised of 114 managed money programs 6. Sunrise Cap'l Partners (Currency Fund) 5.76 5.21 110.1M
(currency futures and spot forex) is com- 7. Harmonic Capital (Gl. Currency) 5.59 6.37 N/A
ing off back-to-back down years. 8. KMJ Capital (Currency) 5.50 20.03 60.0M
October marked a turnaround for all of 9. Alder Cap'l (Alder Global 20) 4.60 5.09 172.6M
Barclay’s seven indices, as five of the seven 10. Cambridge Strategy (Dev. Markets) 4.59 2.93 37.0M
are now in the black by at least 3.5 percent. Top 10 currency traders managing less than $10 million and more than
$1 million as of Sept. 30, ranked by September 2007 return.
The benchmark CTA Index is up 3.5 per-
1. Galleon Strategic Mgmt (FX Cannon) 71.59 47.21 1.8M
cent, and the Diversified Traders Index
2. DynexCorp Ltd. (Market Sentiment) 9.35 -8.61 4.0M
leads the way with a gain of 5.6 percent.
3. FEM Currency Portfolio Ltd 4.71 3.90 1.8M
The Barclay BTOP FX Index, which
4. New World Cap'l Mgmt (MS Currency) 4.20 161.11 1.3M
tracks the largest investable currency trad- 5. MIGFX Inc (Retail) 3.29 39.22 8.3M
ing programs and accounts for at least half 6. Overlay Asset Mgmt. (OAM Short Term) 3.04 7.92 5.5M
of the investable assets of all programs 7. Forex Cap'l Mkts (Sentiment Fund) 2.98 18.01 2.6M
tracked by Barclay, gained 0.93 percent in 8. Lambay Capital Limited (Short-term ) 2.53 10.58 3.6M
October to increase its yearly gains to 3.06 9. Trimmer Cap'l Mgmt (Devrim) 2.43 26.57 5.0M
percent. 10. Ketch Capital Management (Tack Fund) 2.21 14.99 5.2M
The index closed October at 1,038.73, its
Source: Barclay Hedge (www.barclayhedge.com)
highest point since early August and less Based on estimates of the composite of all accounts or the fully funded subset method.
than 1.5 percent from the all-time high of Does not reflect the performance of any single account.
1,053.60 set in late July.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s
as of Oct. 25 liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.

Contract Pit Elec Exch Vol OI 10-day % 20-day % 60-day % Volatility

sym sym move rank move rank move rank ratio /% rank
Eurocurrency 6E EC CME 160.0 199.8 0.69% 41% 1.24% 32% 4.51% 97% .20 / 10%
Japanese yen 6J JY CME 116.4 176.3 2.59% 100% 0.82% 7% 4.12% 44% .40 / 65%
British pound 6B BP CME 75.4 100.1 0.87% 43% 1.81% 92% 0.72% 17% .35 / 37%
Swiss franc 6S SF CME 47.7 69.5 1.24% 80% 0.09% 3% 3.13% 79% .30 / 27%
Canadian dollar 6C CD CME 47.3 133.6 0.99% 5% 3.99% 44% 10.11% 93% .18 / 23%
Australian dollar 6A AD CME 43.4 82.0 0.43% 6% 3.77% 27% 5.88% 82% .30 / 23%
Mexican peso 6M MP CME 15.9 77.9 0.00% 0% 1.02% 38% 1.43% 20% .11 / 8%
U.S. dollar index DX ICE 3.4 36.8 -0.99% 56% -1.30% 33% -4.19% 97% .23 / 28%
New Zealand dollar 6N NE CME 3.4 25.1 -1.19% 33% 2.85% 25% -0.64% 2% .32 / 32%
E-Mini eurocurrency ZE CME 2.1 2.7 0.69% 44% 1.04% 20% 4.51% 97% .20 / 13%
Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.

LEGEND:
Sym: Ticker symbol.
Vol: 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 today’s close.
20-day move: The percentage price move from the close 20 days ago to today’s close.
60-day move: The percentage price move from the close 60 days ago to today’s 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 10-day move shows
how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-
day move, the % rank field shows how the most recent 20-day move compares to the
past sixty 20-day moves; for the 60-day move, the % rank field 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 lower than the previous readings.
Volatility ratio /% rank: The ratio is the short-term 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.
This information is for educational purposes only. Currency Trader provides this data
in good faith, but assumes no responsibility for the use of this information. Currency
Trader does not recommend buying or selling any market, nor does it solicit orders to
buy or sell any market. There is a high level of risk in trading, especially for traders
who use leverage. The reader assumes all responsibility for his or her actions in the
market.

34 November 2007 • CURRENCY TRADER

 GLOBAL NEWS BRIEFS
EUROPE

The UK’s Q3 GDP rose 0.8 percent from the
previous quarter and increased 3.3 percent on an annual basis.
The country’s unemployment rate for June through August
remained at 5.4 percent compared to the previous three-
month period and fell 0.2 percent compared to the same three
months in 2006.

Germany’s August unemployment fell 0.1 percent from
the previous month to 6.1 percent, a drop of 2.1 percent com-
pared to August 2006.

The INSEE, the French government agency responsible for
economic releases in the country, has temporarily stopped
publishing its unemployment report, saying the usual calcu-
lation methods “were no longer suitable, because of the
sharply divergent changes in the two information sources
from which the series were compiled.” Nonetheless, the
INSEE’s October 2007 economic analysis report stated “the
French economy is projected to create nearly 340,000 new jobs
in 2007.” The group predicted economic growth of 0.7 percent
in Q3 and 0.5 percent in Q4, despite a weaker global econom-
ic environment.

Russia’s third-quarter GDP grew 7.4 percent on an annu-
al basis, an increase from the 6.6-percent growth the country
enjoyed for the same period in 2006. Russian economists have
forecast a yearly GDP growth of 6.5 percent, although the
country is ahead of that projection.
ASIA & AUSTRALIA

China’s foreign exchange reserves were more
than 1.43 trillion dollars at the end of September, the coun-
try’s central bank said. That’s an increase of 45.1 percent from
a year earlier. The country’s trade surplus for the first nine
month was $185.7 billion, already more than in all of 2006.

Hong Kong’s Q3 unemployment rate fell 0.1 percent from
Q2 to 4.1 percent, a drop of 0.6 percent from the same quarter
in 2006 and the lowest level in nine years. A government
spokesman said sustained economic growth offset summer
workers returning to school for the new academic year.

Japan’s August jobless rate increased 0.2 percent from the
previous month to 3.8 percent, a decline of 0.3 percent com-
pared to the same month in 2006.

Australia’s September jobless rate dropped 0.1 percent
from the previous month to 4.2 percent, a decline of 0.5 per-
cent from the same month a year earlier.

China’s Q3 GDP grew 11.5 percent on an annual basis.
While the total exceeded China’s forecast of 8 percent and
kept the country on track for its fifth-straight year of double-
digit growth, it was down slightly from 11.9 percent in the
second quarter, primarily because of export reduction.
CURRENCY TRADER • November 2007
AMERICAS

Canada’s September jobless rate dropped 0.1 per-
cent from the previous month to 5.9 percent, the first time since
November 1974 that Canadian unemployment was less than 6
percent. Employment gains in educational services increased
by an estimated 25,000 and helped to offset declines observed
earlier in the summer. This jump spurred public-sector
employment growth to 4.4 percent on the year through
October, while the private-sector growth was only 0.4 percent.

Brazil’s August unemployment rate was unchanged at 9.5
percent from the previous month and fell 1.1 percent from the
same month in 2006.
AFRICA

South Africa’s second-quarter unemployment
remained unchanged at 25.5 percent from the previous quarter.
The rate dropped 0.1 percent from the second quarter in 2006.
Interest Rates
 The People’s Bank of China increased its one-year
yuan lending rate 0.17 percent to 7.29 percent in
September.
 The Norges Bank of Norway raised its deposit rate
0.25 percent to 5 percent in late September. The bank
has raised rates 25 basis points 12 times since
November 2005.
 The South African Reserve Bank boosted its
repurchase rate 0.5 percent in October to 10.5 per-
cent. The increase is the third 50-basis-point increase
since June and the seventh since June 2006.

The Central Bank of Turkey dropped its overnight
borrowing rate 0.5 percent in October to 16.75 per-
cent. The reduction is the second in as many months,
and it follows a period of inactivity that stretches back
to July 2006.

The National Bank of Hungry dropped its two-
week deposit rate 0.25 percent in September to 7.5
percent, the second decline in four months after a five-
month tightening period in mid- to late-2006.
 The Central Bank of the Philippines dropped its
overnight borrowing rate 0.25 percent in October to
5.75 percent. The drop comes three months after a
huge 1.5-percent reduction, which was the first move
in the rate since October 2005.
35
 INTERNATIONAL MARKET SUMMARY
FOREX (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 South African rand 0.1498 4.46% 2.04% 5.94% 0.1507 0.1282 11

2 Brazilian real 0.5566 3.82% 2.43% 13.15% 0.5611 0.4372 1

3 Australian dollar 0.8992 3.64% 1.66% 8.61% 0.9078 0.7558 4

4 Canadian dollar 1.0329 3.26% 7.77% 15.90% 1.0385 0.842 3

5 Singapore dollar 0.6839 2.70% 2.93% 3.53% 0.6861 0.634 13

6 British pound 2.0489 1.24% -0.65% 2.46% 2.0653 1.8672 17

7 Thai baht 0.0319 1.21% -6.01% 2.54% 0.03384 0.02678 10

8 New Zealand dollar 0.7535 1.17% -6.76% 1.48% 0.8106 0.6531 8

9 Taiwanese dollar 0.03072 1.15% 0.69% 1.99% 0.03098 0.02983 16

10 Euro 1.4244 1.01% 3.05% 4.86% 1.4343 1.2525 6

11 Swedish krona 0.1547 0.72% 3.06% 4.67% 0.1566 0.1359 2

12 Japanese yen 0.008739 0.54% 5.51% 3.62% 0.00896 0.00805 12

13 Russian ruble 0.04019 0.53% 2.03% 3.48% 0.04033 0.03711 7

14 Indian rupee 0.02526 0.44% 1.69% 4.42% 0.02544 0.02198 5

15 Hong Kong dollar 0.129 0.31% 0.86% 0.78% 0.129 0.1264 15

16 Chinese yuan 0.1336 0.15% 0.15% 3.09% 0.1336 0.1263 14

17 Swiss franc 0.8523 -0.14% 2.64% 2.87% 0.8616 0.787 9

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

ACCOUNT BALANCE
Rank Country 2007 Ratio* 2006 2008+ Rank Country 2007 Ratio* 2006 2008+
1 Singapore 41.395 27 36.288 42.208 13 Mexico -6.368 -0.7 -2.425 -10.588
2 Switzerland 65.534 15.8 58.708 64.106 14 France -39.363 -1.6 -27.712 -48.885
3 China 379.162 11.7 249.866 453.146 15 India -23.131 -2.1 -9.503 -32.301
4 Hong Kong 22.796 11.2 20.586 20.456 16 UK -96.687 -3.5 -77.236 -105.144
5 Netherlands 55.891 7.4 8.6 6.7 17 Australia -50.816 -5.7 -41.49 -52.988
18 U.S. -784.341 -5.7 -811.483 -788.293
6 Taiwan 25.402 6.8 24.661 28.365
19 South Africa -18.495 -6.7 -16.608 -19.237
7 Sweden 25.903 6 27.707 25.584 20 Spain -138.916 -9.8 -106.399 -154.849
8 Russia 72.543 5.9 95.322 49.181
9 Germany 175.371 5.4 147.134 174.137 Totals in billions of U.S. dollars
10 Japan 195.904 4.5 170.437 195.145 *Account balance in percent of GDP +Estimate
11 Canada 25.603 1.8 20.792 17.909 Source: International Monetary Fund, World Economic Outlook
12 Brazil 10.253 0.8 13.276 4.299 Database, October 2007

36 November 2007 • CURRENCY TRADER

 NON-U.S. DOLLAR FOREX CROSS RATES
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol Oct. 25 gain/loss gain/loss gain/loss high low Previous
1 Aussie $ / Franc AUD/CHF 1.0552 3.77% -0.96% 5.57% 1.0727 0.9394 9
2 Real / Yen BRL/JPY 63.7023 3.26% -2.93% 9.20% 65.8319 53.0948 4
3 Aussie $ / Yen AUD/JPY 102.903 3.07% -3.66% 4.83% 107.715 85.975 6
4 Real / Euro BRL/EUR 0.3908 2.79% -0.61% 7.90% 0.3995 0.3474 7
5 Canada $ / Yen CAD/JPY 118.207 2.69% 2.14% 11.84% 121.129 98.32 5
6 Aussie $ / Euro AUD/EUR 0.6313 2.58% -1.36% 3.56% 0.646 0.5727 11
7 Real / Pound BRL/GBP 0.2717 2.57% 3.11% 10.45% 0.2784 0.2339 1
8 Aussie $ / Pound AUD/GBP 0.4389 2.36% 2.33% 5.99% 0.4446 0.3932 3
9 Canada $ / Euro CAD/EUR 0.7252 2.21% 4.59% 10.52% 0.7263 0.639 10
10 Canada $ / Pound CAD/GBP 0.5042 1.98% 8.48% 13.10% 0.5058 0.4271 2
11 Pound / Yen GBP/JPY 234.474 0.69% -5.84% -1.12% 251.095 219.288 18
12 Real / Canada $ BRL/CAD 0.5391 0.56% -4.95% -2.35% 0.5695 0.5176 15
13 Euro / Yen EUR/JPY 163.012 0.47% -2.33% 1.21% 168.96 148.856 12
14 Aussie $ / Canada $ AUD/CAD 0.8708 0.36% -5.68% -6.28% 0.9493 0.8439 16
15 Pound / Euro GBP/EUR 1.4385 0.21% -3.59% -2.29% 1.5296 1.4226 20
16 Real / Aussie $ BRL/AUD 0.6192 0.18% 0.75% 4.19% 0.6418 0.5859 13
17 Franc / Yen CHF/JPY 97.5354 -0.68% -2.72% -0.72% 101.852 92.152 14
18 Franc / Euro CHF/EUR 0.5983 -1.16% -0.40% -1.92% 0.6324 0.5942 17
19 Franc / Pound CHF/GBP 0.416 -1.38% 3.30% 0.39% 0.4292 0.4005 8
20 Franc / Canada $ CHF/CAD 0.8254 -3.30% -4.77% -11.25% 0.9751 0.8211 19
GLOBAL STOCK INDICES
1-month 3-month 6-month 52-week 52-week
Rank Country Index Oct. 25 gain/loss gain/loss gain/loss high low Previous
1 Hong Kong Hang Seng 29,854.49 12.96% 27.79% 45.37% 30,025.07 18,106.11 2
2 India BSE 30 18,770.89 11.07% 19.56% 32.02% 19,198.66 12,344.44 1
3 Brazil Bovespa 62,342.23 5.92% 11.33% 25.50% 64,168.92 38,681.44 3
4 Mexico IPC 32,048.18 5.76% 3.04% 9.21% 32,836.12 22,339.28 11
5 UK FTSE 100 6,576.30 2.80% 1.89% 1.77% 6,754.10 5,821.70 9
6 South Africa FTSE/JSE All Share 30,417.46 2.63% 4.61% 7.72% 31,728.18 22,930.63 4
7 Australia All ordinaries 6,644.80 2.37% 4.18% 7.64% 6,809.30 5,289.10 6
8 Singapore Straits Times 3,707.14 2.27% 2.03% 10.24% 3,906.16 2,683.40 5
9 France CAC 40 5,760.30 2.10% -1.32% -3.14% 6,168.15 5,217.70 12
10 Germany Xetra Dax 7,932.44 2.10% 3.12% 8.03% 8,151.57 6,195.81 7
11 Switzerland Swiss Market 8,917.45 1.00% -0.06% -5.43% 9,548.10 8,329.60 14
12 Canada S&P/TSX composite 14,125.00 0.91% 0.14% 3.31% 14,646.82 12,002.60 8
13 Italy MIBTel 31,050.00 0.77% -2.59% -8.62% 34,369.00 29,289.00 15
14 U.S. S&P 500 1,514.40 -0.19% -0.24% 1.27% 1,576.09 1,360.98 10
15 Japan Nikkei 225 16,284.17 -0.72% -8.82% -5.52% 18,300.39 15,262.10 13

GLOBAL SHORT-TERM INTEREST RATES

Country Interest rate Rate Last change May 07 Nov. 06
U.S. Fed Funds Rate 4.75 0.5 (Sept. 07) 5.25 5.25
Japan Overnight call rate 0.5 0.25 (Feb. 07) 0.5 0.25
Eurozone Refi rate 4 0.25 (June 07) 3.75 3.25
UK Repo rate 5.75 0.25 (July 07) 5.5 5
Canada Overnight funding rate 4.5 0.25 (July 07) 4.25 4.25
Switzerland 3-month Swiss Libor 2.75 0.25 (Sept. 07) 2.25 1.75
Australia Cash rate 6.5 0.25 (Aug. 07) 6.25 6.25
New Zealand Cash rate 8.25 0.25 (July 07) 7.75 7.25
Brazil Selic rate 11.25 0.5 (Sept. 07) 12.5 13.75
Korea Overnight call rate 5 0.25 (Aug. 07) 4.5 4.5
Taiwan Discount rate 3.25 0.125 (Sept. 07) 2.875 2.5
India Reverse repo rate 6.5 0.5 (March 07) 6.5 6
South Africa Repurchase rate 10.5 0.5 (Oct. 07) 9 8.5

GLOBAL BOND RATES

Rank Country Rate Sept. 26 1-month 3-month 6-month High Low Previous
1 U.S. 10-year T-note 110.275 1.16% 3.85% 2.05% 111.065 103.21 1
2 Germany BUND 113.95 1.10% 1.53% 0.04% 118.91 109.92 5
3 Japan Government Bond 136 0.94% 2.61% 1.41% 136.39 130.96 4
4 UK Short sterling 93.92 0.11% 0.19% -0.17% 94.73 93.27 2
5 Australia 10-year bonds 93.9 0.09% 0.03% -0.25% 94.515 93.695 3
All data as of Oct. 25

CURRENCY TRADER November 2007 37

 EVENTS
Event: FIMA 2007
Date: Nov. 5-7
Location: Olympia Exhibition Centre, London
For more information: http://www.fima-europe.com
Event: “Is Algorithmic Trading within Your Grasp?”
presented by The Institute for Financial Markets
Date: Nov. 8-9
Location: NYMEX, 1 North End Ave., New York, NY
For more information: Call (202) 223-1528
Event: 20th Annual IFTA Conference
Date: Nov. 8-11
Location: Sharm el Sheikh, Egypt
For more information: Visit
http://www.ifta.org/events/next-conference
Event: Chicago High Probability Options Trading
seminar by DiscoverOptions
Date: Nov. 9, 8:30 to 4
Location: Hyatt Regency O’Hare, Rosemont, Ill.
For more information: Visit
http://www.discoveroptions.com
Event: The Traders Expo Las Vegas
Date: Nov. 15-18
Location: Mandalay Bay Resort and Casino, Las Vegas
For more information: Visit
http://www.tradersexpo.com
Event: ETFs 2007
Date: Nov. 27
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.
R-squared (R2): A statistical measure ranging from zero
to 100 that measures how much of the movement in one
data series correlates to the movement in another — i.e.,
38
Location: Cafe Royal, London
For more information: http://www.wbr.co.uk/ETF
Event: 23rd Annual Futures & Options Expo
Date: Nov. 27-29
Location: Hyatt Regency Chicago
For more information: Go to
http://www.futuresindustry.org and click on “Conferences.”
Event: Third Annual New York
Value Investing Congress
Date: Nov. 28-29
Location: Time Warner Center, New York, NY
For more information:
http://www.valueinvestingcongress.com
Event: McMillan Analysis Corp.’s
Intensive Options Seminar
Date: Dec. 1
Location: The Marriott Marquis Times Square,
New York, NY
For more information: http://www.optionstrategist.com
Event: TradeTech Foreign Exchange Asia 2007
Date: Dec. 3-4
Location: Conrad Hotel, Hong Kong
For more information: http://www.ttfxasia.com
Event: TradeStation Futures Symposium
Date: Dec. 6-8
Location: Hallandale, Fla.
For more information: Visit
http://www.tradestation.com/strategy
how much of the movement is “explained” by the other’s
movement. Zero represents no correlation and 100 repre-
sents perfect correlation.
U.S. Treasury Inflation Protected Securities
(TIPS): Bonds that are adjusted to compensate for rising
inflation, usually by being indexed to the Consumer Price
Index (CPI).
November 2007 • CURRENCY TRADER
 NEW PRODUCTS & SERVICES

CQG has released version 7.5,
which includes Pre-Trade Analytics, a
suite of four new studies — the
DOMTracker, DOMTracker Oscillator,
DOMActivity, and Older Orders Ratio.
These studies track activities in the
order book away from the inside mar-
ket. The new Order Ticker uses a
numeric display fashioned after the
classic stock ticker to display actions at
the inside market and in the order
book. In addition, CQG now offers
Quantity Triggered Stop Orders,
which are elected once the resting
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Other enhancements include scanning
portfolios of spreads for pre-set condi-
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linked to news headlines, instant mes-
saging with other CQG traders, and
live chat with CQG customer support.
Also, CGQ has added the Singapore
Exchange (SGX) to its direct trading
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exchange contracts. SGX has been
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exchanges, which includes Globex,
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NYBOT, ICE, DME,
NYMEX/COMEX, and SFE.
Finally, CQG and Strategy Runner
have announced the integration of
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Runner’s connection with the CQG
API will allow their FCM partners to
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services. In turn, CQG customers will
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es and algorithmic trading solutions
using Strategy Runner’s robust server-
based technology. For more informa-
tion, visit http://www.cqg.com.

FX Solutions has introduced
GTS Pro, a forex trading platform
CURRENCY TRADER • November 2007
designed to meet the needs of today’s CHF), euro/U.S. dollar (EUR/USD),
currency traders. GTS Pro offers forex Swiss franc/Japanese yen (CHF /JPY),
traders a wide range of tools including U.S. dollar/Japanese yen (USD/JPY),
an improved forex calculator for mar- and U.S. dollar/Swiss franc (USD/
gin, pip, and premium calculations, 10 CHF). These foreign exchange con-
trading screen layouts, customizable tracts will begin electronic trading on
workspaces, price alarms for any cur- the ICE platform at 8:00 p.m. ET on
rency pair when a certain price is Thursday, Nov. 8 for trade date Nov. 9.
reached, exportable reporting, and For more information, please visit
custom AccuCharts. For more infor- http://www.theice.com.
mation, visit http://www.fxsol.com.
Note: New Products and Services is a forum for

MarketDelta has introduced a industrybusinesses to announce new products
new indicator called the TPD Index, and upgrades. Listings are adapted from
the first of its kind to take Market press releases and are not endorsements or rec-
Profile concepts and logic and apply ommendations from the Active Trader
them systematically. Named after Dr. Magazine Group. E-mail press releases to
Thomas P. Drinka, a professor who has editorial@currencytradermag.com. Publication
researched Market Profile for close to is not guaranteed.
20 years, the TPD Index has a pane
that shows the 20-day success rate for
the indicator. The TPD Index provides
a maximum of one trading signal each
day. It can be used with intraday time
frames as well, but all the research was
done using daily and 30 minute data.
TPD Index is currently being offered
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http://www.marketdelta.com/newsit
e/tpdi.aspx for more information and
ordering instructions.

ICE Futures, the leading soft
commodity exchange and a subsidiary
of IntercontinentalExchange, is now
offering foreign exchange futures elec-
tronically on the ICE trading platform.
Listing of the foreign exchange futures
contracts will occur in phases. In the
initial phase, the following futures
contracts will be offered electronically
22 hours a day on the ICE platform:
British pound/Japanese yen
(GBP/JPY), British pound/Swiss franc
(GBP/CHF), British pound/U.S. dol-
lar (GBP/USD), euro/British pound
(EUR/GBP), euro/Japanese yen
(EUR/JPY), euro/Swiss franc (EUR/
39
 GLOBAL ECONOMIC CALENDAR NOVEMBER/DECEMBER
MONTH
November 20 Great Britain: Capital issue
Germany: Employment; PPI
1 U.S.: ISM
Canada: CPI
Japan: Account balances
Legend
CPI: Consumer price index
Australia: Index of commodity prices 21 Canada: Retail trade

ECB: European Central Bank 2 U.S.: Employment 22 ECB: Governing council meeting
FOMC: Federal open market Japan: Monetary base Germany: National accounts
committee
Germany: Retail turnover; orders
GDP: Gross domestic product 23 Great Britain: GDP
received and manufacturing turnover
ISM: Institute for supply
management
24 Mexico: Monetary policy announcement
3
PPI: Producer price index 25
4
26 Israel: Interest-rate announcement
Economic Release time 5 Great Britain: Production
release (U.S.) (ET) 27 Japan: Corporate service price index
GDP 8:30 a.m. 6 Australia: Reserve bank meeting
Canada: Employment
CPI 8:30 a.m.
ECI 8:30 a.m.
7 U.S.: Wholesale inventories Poland: Monetary policy council meeting
Great Britain: Monetary policy
PPI 8:30 a.m. 28 U.S.: Durable goods
ISM 8:30 a.m. committee meeting
Poland: Monetary policy council meeting
Unemployment 8:30 a.m. Germany: Production index
Personal income 8:30 a.m.
Australia: Official reserve assets
29 U.S.: GDP
Durable goods 8:30 a.m. Canada: Balance of international
Retail sales 8:30 a.m. 8 ECB: Governing council meeting
payments
Trade balance 8:30 a.m.
Great Britain: Monetary policy
Leading indicators 10 a.m. Czech Republic: Czech national bank
committee meeting
board meeting
Germany: Foreign trade
30 Australia: International reserves and
9 U.S.: Trade balance
foreign currency liquidity
Germany: Bankruptcies
Canada: GDP
10 December
NOVEMBER 2007
11 1
28 29 30 31 1 2 3
4 5 6 7 8 9 10 12 Japan: Balance of payments; corporate
2
11 12 13 14 15 16 17 goods price index; monetary policy
meeting
3 U.S.: ISM
18 19 20 21 22 23 24
Japan: Account balances
25 26 27 28 29 30 1 Australia: Statement on monetary policy
Germany: Retail turnover; orders
13 Japan: Monetary policy meeting
received and manufacturing turnover
Great Britain: CPI
Australia: Index of commodity prices
DECEMBER 2007
26 27 28 29 30 31 1
14 U.S.: Retail sales; PPI
4 Japan: Monetary base
Japan: Monetary survey
2 3 4 5 6 7 8 Australia: Reserve bank meeting
Great Britain: Inflation report;
9 10 11 12 13 14 15 Canada: Interest rate announcement
unemployment
16 17 18 19 20 21 22 Brazil: Monetary policy committee
Canada: Leading indicators
23 24 25 26 27 28 29 meeting
30 31 1 2 3 4 5 15 U.S.: CP Thailand: Monetary policy committee
Germany: CPI meeting
Canada: Manufacturing survey
5 Great Britain: Monetary policy
Philippines: Monetary board meeting
committee meeting
16 Brazil: Monetary policy committee
meeting
17
The information on this page is South Africa: Monetary policy
subject to change. Currency 18 committee meeting
Trader is not responsible for
the accuracy of calendar dates 19 U.S.: Leading indicators
beyond press time. Canada: Wholesale trade
40 November 2007 • CURRENCY TRADER
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 FOREX TRADE JOURNAL

Pattern analysis triggers a short trade in

the euro/U.S. dollar pair. Will it catch a
down move, or is the euro setting a trap
before it makes another record high?

TRADE

Date: Tuesday, Oct. 23, 2007.

Entry: Short the euro/U.S. dollar pair

(EUR/USD) at 1.4218.

Reason(s) for trade/setup: The EUR/USD

pair has rallied from a low of 1.3459 on Aug. 16
to a record high of 1.4349 on Oct. 22 — a 6.6
percent gain — before collapsing intraday.
Pattern analysis shows the potential for at
least a short-term follow-through down move.
Patterns matching the Oct. 22 wide-range outside bar
were analyzed back to 1998. Different criteria were used for
different tests. The first was an outside bar (higher high and
lower low than preceding bar) that was also higher than the
previous 20 highs and closed below the previous close. The
second was the same as the first except the outside bar was
required to close the low of the previous bar. The third was
the same as the first except the outside bar’s high had to be
higher than the previous 60 days.
Pattern 1 occurred 27 times, pattern 2 occurred 13 times,
and pattern 3 occurred 17 times. The precise post-pattern
moves differed slightly between the patterns, but they all
shared the same outline: a small bounce the next day (a
higher close and more up movement than down move-
ment), followed by another downturn that peaked five to
six days after the outside bar. The median largest down
moves as of day 6 ranged from -0.0082 to -0.0139.
The EUR/USD pair closed (New York session) at 1.4180
after falling as low as 1.4125. The analysis indicated a
bounce 0.0064 higher (from the outside bar’s close) should
be expected the next day. A sell order was entered 0.0038
above the close (at 1.4218) to increase the odds of getting
filled.
Initial stop: 1.4317, 0.0032 below the outside bar’s high at
1.4349. If the trade is likely to succeed, price should not
challenge the high of the outside bar.
Initial target: 1.41, just a little above the round-number
Source: TradeStation
price (1.4100) nearest to the outside bar’s low.
RESULT
Exit: 1.4317.
Profit/loss: -0.0099 (0.07 percent).
Trade executed according to plan? Yes.
Outcome: Yes, the big outside-bar down day was indeed a
trap! The analysis said “sell” but, unfortunately, the market
said “buy.”
In hindsight it might seem obvious this was a foolhardy
trade — an attempt to pick a high with unrealistic precision
in a very strong bull trend — but making such judgments in
real-time is much trickier. By Oct. 29 the EUR/USD rate had
shot to a new high above 1.4400.
Also, it is worthwhile to investigate the behavior after
these trade signals fail: Perhaps reversing direction above the
outside bar’s high would offer a viable trade opportunity.

Note: Initial trade targets are typically based on things such as the
historical performance of a price pattern or trading system signal.
However, because individual trades are dictated by immediate cir-
cumstances, price targets are flexible and are often used as points at
which to liquidate a portion of a trade to reduce exposure. As a result,
initial (pre-trade) reward-risk ratios are conjectural by nature.

TRADE SUMMARY
Date Contract Entry Initial Initial IRR Exit Date P/L LOP LOL Trade
stop target length

10/23/07 EUR/USD 1.4218 1.4317 1.41 1.19 1.4317 10/25/07 -0.0099 (.07%) 0.0048 -0.0099 2 days

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

42 November 2007 • CURRENCY TRADER

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