"Strategies, analysis, and news for FX Traders
May 2008 Volume 5, No. 5
CAN ANYTHING stop the euro? p. 12 SHORT-TERM MOMENTUM: Timing the euro p. 18 CURRENCIES AND stock markets II p. 22 THE LATEST ON the Aussie and kiwi dollars p. 8 BOJ GETS new chief p. 33
CONTENTS
Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Global Markets . . . . . . . . . . . . . . . . . . . . . .8 Aussie and kiwi dollars: Time to decouple? Find out if the Australian and New Zealand dollars can sustain their current price levels. By Currency Trader Staff
Advanced Strategies Currencies and stock index performance, part II . . . . . . . . . . . . . . . .24 An analysis of the connection between international stock indices and their currencies. By Howard L. Simons
On the Money Is the euro going to the moon? . . . . . . .12 A look at the euro’s recent gravity-defying performance. By Barbara Rockefeller
Trading Basics Forex margin . . . . . . . . . . . . . . . . . . . . . .32 Understanding the double-edged sword of margin in the FX market. By Currency Trader Staff
continued on p. 4
Trading Strategies Short-term momentum signals in the euro . . . . . . . . . . . . . . . . .18 Developing a strategy that systematically identifies swing-trade entry points in the euro. By Currency Trader Staff
2
May 2008 • CURRENCY TRADER
CONTENTS
Forex News Insider takes reins at BOJ . . . . . . . . . . .34 Japan’s new central bank chief is unlikely to shake things up. By Currency Trader Staff India opening new doors . . . . . . . . . . .34 The Indian government is considering allowing exchange-traded contracts on the Indian rupee/U.S. dollar rate. FXMarketSpace unveils new platform . . . . . . . . . . . . . . . . . . . . . .35 A new system developed by FXMarketSpace is intended to lower settlement costs for traders.
Currency Futures . . . . . . . . . . . . . . . . . .36 Currency futures news and fund manager performance. International Markets . . . . . . . . . . . . . .38 Numbers from the global forex, stock, and interest-rate markets. Global Economic Calendar . . . . . . . . . . . .42 Important dates for currency traders. New Products & Services . . . . . . . . . . . . .43 Key concepts . . . . . . . . . . . . . . . . . . . . . . .44 Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Conferences, seminars, and other events.
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May 2008 • CURRENCY TRADER
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CONTRIBUTORS CONTRIBUTORS
A publication of Active Trader ®
Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on a wide range of economic and financial market issues.
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Editor-in-chief: Mark Etzkorn metzkorn@currencytradermag.com Managing editor: Molly Flynn Goad mgoad@currencytradermag.com Senior editor: Jeff Ponczak jponczak@currencytradermag.com Associate editor: Chris Peters cpeters@currencytradermag.com Contributing writers: Howard Simons, Barbara Rockefeller, Marc Chandler Editorial assistant and Webmaster: Kesha Green kgreen@currencytradermag.com Art director: Laura Coyle lcoyle@currencytradermag.com President: Phil Dorman pdorman@currencytradermag.com Publisher, Ad sales East Coast and Midwest: Bob Dorman bdorman@currencytradermag.com Ad sales West Coast and Southwest only: Allison Ellis aellis@currencytradermag.com Classified ad sales: Mark Seger seger@currencytradermag.com
Volume 5, Issue 5. Currency Trader is published monthly by TechInfo, Inc., 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. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.
Barbara Rockefeller (http://www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies (For Dummies, 2004), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund.
Thom Hartle (http://www.thomhartle.com) is director of marketing for CQG and a contributing editor to Active Trader magazine. In a career spanning more than 20 years, Hartle has been a commodity account executive for Merrill Lynch, vice president of financial futures for Drexel Burnham Lambert, trader for the Federal Home Loan Bank of Seattle, and editor for nine years of Technical Analysis of Stocks & Commodities magazine. Hartle writes a daily market blog called hartle & flow
(http://www.hartleandflow.com).
6
May 2008 • CURRENCY TRADER
GLOBAL MARKETS
Aussie and kiwi dollars: Time to decouple?
Can the Australian and New Zealand dollars keep climbing or will global economic troubles slow them down?
BY CURRENCY TRADER STAFF
FIGURE 1 — AUSTRALIAN DOLLAR/U.S. DOLLAR PAIR The Australian dollar has doubled in value since April 2001.
D
espite the global financial volatility during the first half of 2008, the Australian and New Zealand dollars have continued their solid bull trends vs. the U.S. dollar. Heading into late April, the Aussie and kiwi dollars were at (or just below) 25- and 23-year highs, respectively. A variety of factors have underpinned the rallies in these currencies recently, including extremely high domestic interest rates for industrialized countries, bullish global demand for both hard and soft commodities, and strong domestic economies. However, the tide may be starting to turn for New Zealand. Analysts expect the Australian dollar/ New Zealand dollar cross rate (AUD/NZD) to strengthen in the months ahead amid signs of economic slowdown in New Zealand.
Looking back Source: eSignal First, let’s get some perspective on how these currencies have performed in recent years. The Australian Carry trade action dollar’s (AUD/USD) monthly chart (Figure 1) reveals a With New Zealand’s official interest rate at 8.25 percent and tremendous uptrend since 2001. The Aussie dollar soared Australia’s central bank rate at 7.25 percent, both currencies from a low around 0.4775 in April 2001 to a peak of 0.9544 have been an active part of the carry trade, especially vs. the in April 2008. Japanese yen. However, during times of heightened market Figure 2’s monthly chart of the New Zealand dollar volatility, traders tend to back off carry trade plays. (NZD/USD) shows a similar picture. The kiwi rallied from “Financial market volatility associated with the subprime a low of 0.3900 in November 2000 to 0.8215 in March 2008. mortgage meltdown and credit market jitters undermined However, given the signs of economic slowdown which the attractiveness of the carry trade in the latter half of 2007, have emerged in New Zealand, some analysts say the New depressing the New Zealand dollar,” says Matt Robinson, Zealand dollar may have topped out. economist at Moody’s Economy.com. “However, the inter8 May 2008 • CURRENCY TRADER
AUSTRALIAN DOLLAR/ NEW ZEALAND DOLLAR AT A GLANCE
est-rate differential between the monetary policy rates in New Zealand and the U.S. ballooned to 525 basis points in All data as of April 29, 2008 *estimate February when the U.S. Federal Reserve slashed its target funds rate by 125 basis points in eight days to 3.0 ty markets have been rallying over the past week (midpercent. This interest rate differential underpinned the kiwi April) or so. The yen carry trade has started to come back dollar’s rally against the greenback as it set a fresh post- into focus. However, despite the fact that these currencies float 23-year high against the U.S. dollar in March,” says are rallying does not mean all is well. The structural deficits and current account deficits in both countries are unsusRobinson. Following the mid-January global equity panic, traders tainably large.” unloaded carry-trade positions, which pushed the New Zealand dollar to a low of 0.7386 in late January. However, Economic focus a strong rally carried the kiwi higher to a 0.8215 rate vs. the In 2007, several positive factors supported overall New Zealand growth. Robinson points to higher global prices for U.S. dollar in mid- March. The bottom line is that both Aussie and kiwi dollars are milk powder, cheese, and butter as supportive to the New “high yielding currencies which tend to rally when risk Zealand agricultural sector. However, the impact of tight aversion subsides,” says Michael Woolfolk, senior currency monetary policy is beginning to filter down into the econostrategist at Bank of New York Mellon. “By and large equicontinued on p. 10
Average daily close-to-close range (past 40 days): 0.0041 Average weekly close-to-close range (past 26 weeks): 0.012 52-week high/low: 1.2102/1.0880 Prevailing interest rate, last change: AUS NZ 7.25% 8.25% Next central bank meeting: May 9 June 5 GDP (% annualized) Q4 2007* Q3 2007 Q2 2007 AUS NZ AUS NZ AUS NZ 0.8 1.0 0.9 0.5 1.1 0.7
GLOBAL MARKETS continued
FIGURE 2 — NEW ZEALAND DOLLAR/U.S. DOLLAR PAIR The New Zealand dollar has climbed 111 percent since November 2000.
Reserve Bank of New Zealand At its latest central bank meeting on April 24, the Reserve Bank of New Zealand (RBNZ) held interest rates at 8.25 percent, as expected. However, currency strategists highlighted a subtle shift in its language. “We did see policy makers tone down the language and adopt a more dovish tone,” says Todd Elmer, currency strategist at Citi FX. In fact, the New Zealand dollar pushed lower in the wake of the meeting as expectations emerge that a rate cut could be on the horizon. According to Dolan, the bank’s previous statement noted, “8.25 percent would need to be maintained for a significant time,” but its latest announcement omitted the word “significant.” Dolan thinks the RBNZ could cut rates at its June 4th meeting.
Source: eSignal
my. Currency watchers highlighted recent weakening in New Zealand’s economic picture as a key factor for traders. Expectations for slower growth ahead will likely weigh on the kiwi. “After growing at more than 3 percent last year, the New Zealand economy is expected to slow to less than 2 percent as tighter monetary policy dampens domestic economy activity,” Robinson says. Bank of New York Mellon forecasts 1.5-percent GDP growth in 2008 followed by 1-percent GDP growth in 2009. “New Zealand data turned horrible in March,” says Brian Dolan, chief currency strategist at Gain Capital. “In March, New Zealand business confidence plummeted from -26 percent to -64 percent. Home sales activity has plunged 50 percent on a year-over-year basis. The real estate market has seized up.” March home sales dropped 53.3 percent from a year ago. New Zealand’s headline CPI has pushed above the central bank’s 3-percent target ceiling, but Robinson expects those pressures to diminish in the months ahead. “With house prices contracting, retail spending slowing, and consumer confidence falling at its fastest pace on record, the [first-quarter inflation reading] of 3.4 percent is likely to represent the peak in the current inflation cycle,” he says.
10
The Australian picture For Australia, Moody’s Economy.com forecasts 3.0-percent GDP growth in 2008 vs. an increase of 3.9 percent in 2007. “Australia’s economy grew at an impressive pace in 2007 and has entered 2008, its 17th year of continuous expansion, on solid footing,” says Ruth Stroppiana, director of Asia Pacific Economics at Moody’s Economy.com. Despite the turmoil in global financial markets, Stroppiana and others are upbeat about Australia’s prospects. A strong domestic picture and continuing global demand for Australia’s minerals and metals exports continues to bode well for the country ahead. “Australia has a more diversified economy [with] oil and natural gas exports [setting] it apart from New Zealand. It also has very significant mineral reserves. Its gold and nonprecious metals exports are significant,” Woolfolk says. While many traders tend to associate Australia with gold, amid a strong historical correlation, their exposure to commodities is actually much broader. “We really should be looking at the broader CRB Index,” Woolfolk says. “Since 1980, the Australian economy has outperformed the U.S. economy in terms of real GDP.” Monetary policy The Reserve Bank of Australia’s (RBA) interest rate is 7.25 percent, with its next meeting scheduled for May 6. While analysts expect the RBA to maintain its current tightening stance, many believe the bank won’t shift rates at its May meeting.
May 2008 • CURRENCY TRADER
FIGURE 3 — AUSTRALIAN DOLLAR/NEW ZEALAND DOLLAR PAIR
“We are quite optimistic on the Aussie dollar,” Elmer says. “Over time, we [believe] the elevated level of hard commodities will hold up better than softs, which New Zealand exports.” Analysts warn, however, that Australia is closely tied to the global commodity cycle and a sharp and protracted retreat in hard commodity prices could take a toll on Australia.
The Aussie/kiwi has traded in a wide range between 1.10 and 1.20 over the past couple of years.
Looking forward Looking at the New Zealand dollar’s March rise above 0.8200, Dolan says “it is very likely that a long-term top has been seen up there.” Analysts expect the kiwi to weaken amid potential interest-rate cuts and slower economic growth. “We could see a move back to 0.7500 by mid to late summer,” Dolan says. With the Australian dollar trading near 0.9500 on April 25 — just five cents below parity (1.00) with the U.S. dollar — one must wonder if AUD will trade at parity any time soon. Currency forecasters don’t expect that to occur in the near term. “It is not our baseline scenario,” Woolfolk says. “We probably have about a 20-percent chance of hitting parity within the next year.” “The aussie strengthening run is expected to run out of steam in the second half of [2008] as global commodity prices begin to moderate,” Stroppiana says. To reach parity, three events need to continue: weakness in the U.S. dollar, strong commodity prices, and strong global growth, he says. But Moody’s sees the Aussie dollar running out of steam, while the U.S. economy and U.S. dollar reach a bottom. And, Stroppiana says the Australian dollar may suffer as commodity prices suffer on weaker global growth. Nonetheless, Woolfolk admits “if nothing changes, we will see parity.”
CURRENCY TRADER • May 2008
Source: eSignal
Aussie/kiwi cross rate Measuring currency appreciation on a percentage basis from Jan. 1 to April 23, the Australian dollar gained 8 percent vs. the U.S. dollar, while the New Zealand dollar gained only 4 percent against the U.S. dollar. Analysts expect that trend to widen. “Over the next several months we should see Aussie perform better than kiwi,” says Woolfolk. The Australian dollar/New Zealand dollar (AUD/NZD) cross rate traded around 1.18 on April 21, after it traded in a range between 1.10 and 1.20 for the past several years (see Figure 3). “We think it will break above 1.20, reflecting a stronger Australian dollar,” says Woolfolk. “There are risks that New Zealand tips into recession. Interest rates are at an economically prohibitive level, and inflation has been a really big problem, while it has been more modest in Australia.” Woolfolk’s potential upside targets for the aussie/kiwi cross rate are 1.22 in the short-term and 1.25 by year’s end.
11
ON THE MONEY
Is the euro going to the moon?
Bang! Zoom! With the dollar taking one on the kisser, could the euro go the way of Alice Kramden?
BY BARBARA ROCKEFELLER
O
ging rise in overall inflation accompanies a rise in commodity prices — notably oil. Inflation expectations are built into longer-term bond yields, so commodities and bond yields move up in sync. Not the strongest correlation, but logical. This time, however, the divergence of commodity prices and bond yields, as shown in Figure 1, is our chief mystery. Another relationship links falling demand with lower Mysterious circumstances commodity prices, which usually occurs during a looming Let’s start with the strange relationship between commodi- slowdown or recession due to outside events, such as the ty prices and the dollar. Under normal circumstances, a lag- housing bubble meltdown and attendant financial market fall-out. Not this time either. Demand from emerging FIGURE 1 — COMMODITY PRICES AND U.S. BOND YIELD markets, especially China, is overwhelming any drop in Commodity prices (green) and Bond yields (black) defy logic and begin to diverge in the summer of 2007. demand from the U.S. and Europe. This is especially true for oil, where demand is already fairly inelastic, at least in the U.S. where people simply can’t reduce demand proportionately to the rise in price. In China, oil demand was 1.07 billion barrels in 2006, up from 166 million ten years earlier, a 600-percent growth. It’s the same for food, where the elasticity of demand is turning out to be pretty low, too. For example, it takes more grain to feed an animal us..."
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