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WEEKLY BOTTOMPATTERN:Time fora bounce? p. 16
CURRENCIESAND SOVEREIGNcredit risks p. 28
CME READIESnew Micro FX futuresp. 38
THE BRITISH POUNDSpounding p. 8
SWEDENS KRONA FACESfamiliar currencychallenge p. 12
RISK AVERSIONand the forex
market p. 20
March 2009
Volume 6, No. 3
Strategies, analysis, and news for FX traders
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Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Global Markets
Has the bleeding stopped
for the pound? . . . . . . . . . . . . . . . . . . . . . . 8The British pound had backed off a bit from
its once-in-a-lifetime sell-off in February, but
few are betting the currency will stage adramatic recovery in the near future.
By Currency Trader Staff
Volatile times for krona . . . . . . . . . . . . . .12Regardless of whether this Nordic currency
can come out of its deep freeze, it is likely
to have a bumpy ride in the coming months.
By Currency Trader Staff
Spot CheckPound/dollar . . . . . . . . . . . . . . . . . . . . . . 16A look at what the British pounds recent price
action hints about its future.
By Currency Trader Staff
On the Money
Rational fear and the forex market . . . . .20Analysis of several intermarket relationships . .
suggests the role of risk aversion in the forex .
market is no cut-and-dried issue.
By Barbara Rockefeller
Advanced StrategiesSovereign credit risk and currencies . . .28Government actions are perversely rewarding
the guilty: As a nations credit rating deterio-
rates, its borrowing costs fall and its currency,
at least temporarily, rises.
By Howard L. Simons
CONTENTS
2 March 2009 CURRENCY TRADER
continued on p. 4
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Numbers from the global forex, stock,
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Forex Journal . . . . . . . . . . . . . . . . . . . . . 43A short trade in the USD/CAD pair.
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Concerns over the global
crisis remain the key
driver in the foreign
exchange market as
investors witness the continued dete-
rioration of economies around the
industrialized world. In February, the
British pound stabilized somewhat vs.
the U.S. dollar after dramatic losses in
recent months.Looking back to what seems now
like a lifetime ago, in November 2007
the pound/dollar pair (GBP/USD)
touched a high of $2.1159 (the highest
price since 1981) and was still trading
above $2.000 in July 2008 before
plunging to a late-January 2009 low of
$1.3500 (the lowest price since
1985), and more recently con-
solidating in the $1.4100-
1.5000 range (Figure 1).The British economy was
especially hard hit during the
fall months thanks to the
UKs strong reliance on bank-
ing and other financial servic-
es. Citing data from the
British Consular Office,
Charmaine Buskas, senior
economic strategist at TD
Securities in Toronto says,
10.7 percent of UK gross
GLOBAL MARKETS
8 March 2009 CURRENCY TRADER
Has the bleeding stoppedfor the pound?The UKs concentration in financial services
has compounded the problems for its economy and currency.
BY CURRENCY TRADER STAFF
BRITISH POUND/U.S. DOLLAR AT A GLANCE
Daily range (past 40 days): Average: .0326 Median: .0329
Weekly range (past 26 weeks): Average: .0828 Median: .0748
52-week high/low: 2.0395 1.3501
Prevailing interest rate, last change: UK U.S.
1%, -0.50% 0%, -0.50%
Next scheduled central bank meeting(s): March 5 March 17-18
GDP (% annualized): Q4 2008 Q3 2008 Q2 2008
UK U.S. UK U.S. UK U.S.
-1.8 -6.2 0.3 -0.5 1.7 2.8
All data as of 2/27/09
A little more than a year after making a 26-year high above 2.1100, the
pound/dollar fell to a nearly 24-year low in January 2009.
FIGURE 1 HOW THE MIGHTY HAVE FALLEN
Source: TradeStation
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domestic product (GDP) comes from financial services. It
accounts for one in 30 jobs. They had the same troubles as
everyone else, but amplified and magnified.
Like the U.S., the UK also suffered a crash in its over-
leveraged housing market at the
same time the global financial crisis
began to hit.
The UK is suffering more than
some because of its financial and
housing sector exposure, says
Stephen Webster, chief European
economist at 4CAST Inc.
GDP freefall
Webster says the UKs economic
situation is dire in every sense.
Economically, the UK officially
slipped into recession as of the
fourth quarter 2008, he says.
Credit conditions remain tightand confidence weak.
Ruth Stroppiana, chief interna-
tional economist at Moodys
Economy.com adds: The ongoing
lending logjam and the associated
adverse impact on the availability
of credit to households and [corpo-
rations] will take a heavy toll on
the economy. Real GDP is expected
to sink by almost 4 percent from
peak to trough, almost double the
2-percent contraction of the early 1990s, but less than the
nearly 6-percent fall in the early 1980s following the winter
of discontent. The UK economy is about halfway through
continued on p. 10
The UK is suffering
more than some
because of its financial
and housing sector
exposure.
Stephen Webster,chief European economist
at 4CAST Inc.
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its deepest recession in three decades.
Moodys Economy.com forecasts UK real GDP to con-
tract by 2.9 percent in 2009, following a mere 0.6 percent rise
in 2008. This compares with 4CAST Inc.s projection of a
3.5-percent 2009 decline and TD
Securities forecast of a 3.1-percent
decline.
BOE action
The Bank of England (BOE) has
aggressively stepped in to combat the
financial crisis. Since early October,
the BOE has slashed its key lending
rate from 5 percent to the current
record low of 1 percent.
Analysts expect the BOE to pull the
trigger on another rate cut at its
upcoming March 5 meeting. Another
0.50-percent easing is widely expect-
ed, which would take the key mone-tary policy rate to yet another record
low of 0.50 percent.
With the monetary policy rate rap-
idly approaching zero, Britains cen-
tral bankers are running out of room
to cut rates much further, Stroppiana
says. Dysfunctional credit markets
have blunted the effectiveness of traditional monetary
policy.
The government has granted the central bank unprece-
dented powers to buy up to 50 billionin corporate assets via the Asset
Purchase Facility. The purchase of
commercial paper and corporate
bonds is currently being financed by
the issue of Treasury bills rather than
by the creation of money. The next
step for Britains central bankers will
likely be to adopt a quantitative easing
policy creating central bank money
to boost money supply in a bid to
increase the availability of credit tohouseholds and corporations.
FX action
Into year-end, forex traders had
focused on the parity level in the
Euro/pound pair (EUR/GBP). On
Dec. 30, EUR/GBP touched the .9800
level intraday but subsequently pulled
back as far as .8600 in early February
before rebounding to around .8860
later in the month (Figure 2).
GLOBAL MARKETS continued
The Euro/pounds run to parity (1.00) came up short late last year, and the pair
subsequently retraced more than 10 percent over the next six weeks.
FIGURE 2 ALMOST, BUT NOT QUITE
Source: TradeStation
The pound/dollar has managed to stay above its January low, but it has not
made a strong move to the upside.
FIGURE 3 TRYING TO STAY AFLOAT
Source: TradeStation
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There was a speculative push to achieve parity in
December, says Michael Woolfolk, senior currency strate-
gist at Bank of New York Mellon. We saw a pullback in
January from the speculative surge to buy the Euro vs. the
pound.
However, analysts are increas-
ingly bearish on the pair.
The UK has been more proac-
tive than the Eurozone in battling
the deteriorating economic condi-
tions, says Meg Brown, senior
currency strategist at Brown
Brothers Harriman. We think the
UK will follow the U.S. out of
recession earlier than Europe. But
we are not there yet.On a relative basis, EUR/GBP
could have more room on the
downside, according Woolfolk. He
and others highlight the
Eurozones exposure to Eastern
European banking woes.
Eastern Europe is imploding
right now, he says. These coun-
tries, such as Poland, the Czech
Republic, and Latvia, are members
of the European Union. They are insevere economic distress with no
positive outlook for the foreseeable
future.
The Eurozones exposure to
these weak links could ultimately
weigh on the Euro in the near
future. Bank of New York Mellon
forecasts a stiff decline in the
Euro/dollar (EUR/USD) toward
$1.15 in the months ahead. Into
year-end, they see an 82.00EUR/GBP target.
In recent weeks, the $1.35 level
has formed a minor bottom of sorts
in the pound/dollar pair (Figure
3). But, the jury is still out on
whether that will act as a strong
floor in the weeks ahead.
Over the coming quarter, the
U.S. dollar will not give up much
ground and the pound will come
under pressure, Brown says. She
advises pound traders to remain short or use pullbacks, to
say, $1.50, to short the pound.
For more analysis of the pound/dollar pair, see Spot check.
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remains stressed, Li says. Followingthe demise of Lehman Brothers, theglobal wholesale funding market seizedup and Swedish banks became reluctantto lend to each other. In response, the
central bank has continued to pumpmassive liquidity into the sector, a totalof SEK 300 billion of loans denominatedin dollars and kronas.
Investors have recently been con-cerned about European banks exposureto emerging European markets, sheadds. Swedish banks have a particular-ly high exposure to the Baltic region.Western European banks are believed toaccount for 90 percent of the value of allbank loans made to Central and EasternEuropean countries.
Lehman Brothers September 2008bankruptcy filing was a watershed eventfor both the Swedish economy and itscurrency.
The collapse of Lehman Brothersconstitutes a turning point for thekrona, says Cecilia Skingsley, head offixed income and foreign exchangeresearch at Swedbank Markets inStockholm. The effect of the collapse
was a sharp increase in financial marketvolatility. This turned out to be hugelydetrimental to small currencies such asthe Swedish krona as investors rushedinto currencies such as the Japanese yen,U.S. dollar, and the Euro, which wereperceived as huge and safe. On top ofthis, a small export-dependent countrylike Sweden has a disadvantage whenthe global business cycle turns down.
The Riksbank
The Swedish central bank theRiksbank has been one of the moreaggressive central banks in the world,according to Swedbanks Skingsley. TheRiksbank began an easing cycle inOctober 2008 and has made four cutssince then, bringing the banks overnightrepo rate from 4.75 percent to 1 per-cent as of February 2009. Most Swedishanalysts agree further rate cuts are possi-ble, with room for another 50 basis point
CURRENCY TRADER March 2009 13
continued on p. 14
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GLOBAL MARKETS continued
cut to a 0.50 percent official rate in thesecond quarter of this year.
Johan Javeus, chief forex strategistat SEB Trading offers a more aggres-
sive outlook.Our view is that the Riksbank will
cut rates to zero at the April 21 meet-ing and keep the repo rate at zero untilthe end of 2010, he says.
The Riksbank has a 2-percent infla-tion target with a tolerance band of+/- 1 percent around that target.While 2008 CPI inflation came in at 3.4percent, inflation is not even on the radar screen this year in fact, it has been plummeting. In December 2008, the CPIrose by 0.9 percent after hitting 4 percent in October 2008.But the Riksbank is forecasting a 0.5-percent decline thisyear in the nations consumer price index (CPI), and SEBforecasts a 0.9-percent CPI decline in 2009, followed by amodest rebound to a 0.4-percent rise in 2010.
The krona
Swedish citizens voted down entry into the EuropeanUnion in 2003 and chose to maintain their own sovereigncurrency the krona. For many years, the USD/SEK pairwas in a steady downtrend as the krona strengthenedagainst the dollar, falling from from 11.06 in July 2001 to
5.81 in April 2008. After winding in a trading range formuch of 2008, the krona made some explosive down movesagainst both the dollar and the Euro beginning in August2008. Again, like most smaller currencies around the world,the krona suffered as the financial panic unfolded.
Risk aversion has meant investors have been sellingrisky assets such as the krona, Li says. The U.S. dollar has been strengthening vs. the krona asrisk-averse investors have been mov-ing into safe havens such as the dol-lar.
From the 6.04 level in August 2008,
USD/SEK surged to 8.90 in lateFebruary 2009 (Figure 2), whileEUR/SEK blasted higher from 9.48 to11.40 in December 2008 before backingoff to 10.41 and then rallying again toa new high in late February (Figure 3).
Although the krona is punished intimes of financial risk aversion,according to Skingsley, the trend isno longer falling, but rather stabilizing[with] continued high volatility.EUR/SEK will be range bound for
another few months, but will recover in the course of thesecond half of 2009. We look for EUR/SEK at 10.00 by yearend.
Volatility will likely remain the name of the game in thenear term.
The Swedish krona will remain volatile against the Eurothis year given continued financial market turbulence, Lisays. The Euro will weaken to 9.40 against the krona bymid-year as investors price in worsening Eurozone eco-nomic fundamentals and further aggressive Eurozone mon-etary policy easing. Moodys Economy.com expects theEuro will finish the year at SEK 9.42 against the krona.
What does this mean in respect to the dollar?The U.S. dollar will continue to benefit in this shaky
global economic environment, partly due to continuedrepatriation flows, partly due to Euro problems stemmingfrom heavy EMU exposure to Eastern Europe, Skingsleynotes. We see USD/SEK at around 8.50 and the Euro willfall vs. both currencies.
SEB Trading expects USD/SEK at 8.75 in mid-2009.The risks are clearly on the upside, Javeus says.
The krona also lost ground against the Euro, which, after a pullback, pushed
above its December high in February.
FIGURE 3 EURO/KRONA
Source: ADVFN (http://www.advfn.com)
The dollar was pushing to new highs vs. the krona in late February.
FIGURE 2 THE BIG TURNAROUND
Source: ADVFN (http://www.advfn.com)
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SPOT CHECK
When, during the weekending Oct. 24, 2008,the British pound/U.S.dollar pair (GBP/USD)
fell more than six percent below the pre-vious weeks low, it was the first timethe pound had dropped that much in
more than 16 years. To be precise, it had-nt fallen that far, that fast since the weekending Sept. 18, 1992 the week, infact, when George Soros was creditedwith breaking the Bank of Englandwith his massive short play against theBritish currency.
That the pound has taken weekly beatings of this magnitude only fourtimes in the past 20 years, and that threeof them have occurred in the past fivemonths (the weeks ending Oct. 24, Nov.12, and Jan. 23), is a testament to theextreme nature of the current market
upheaval. (The market has fallen 3 percent ormore on a weekly basis only 26 times in thepast 30 years, and seven of those drops haveoccurred since August 2008.)
Perhaps not coincidentally, reports surfacedin late January that Soros had been shorting thepound during the most recent sell-off, whichsaw the currency collapse from the 2.1159 highin November 2007 vs. the dollar to a 1.3501 lowin January 2009 (Figure 1). Soros was quoted inThe Daily Telegraph as saying he had foreseen
the drop in sterling, but that after the fall fromaround $2 to $1.40, the risk-reward balance isno longer compelling. Although he hesitatedto say the pounds sell-off was definitively fin-ished, the news was widely interpreted as asign the worst might be over, at least for thenear future.
But does that make it a buying opportunity?Has the bleeding stopped for the pound?reviews the economic and political challengesthe British currency faces as it tries to reboundfrom its most dramatic devaluation in more
16 March 2009 CURRENCY TRADER
Pound/dollar
The pound continued to struggle after the initial September-November
flush-out in financial markets.
FIGURE 2 GBP/USD, DAILY
Source: TradeStation
The pound plummeted to a nearly quarter-century low in January before
stabilizing somewhat in February.
FIGURE 1 GBP/USD, MONTHLY
Source: TradeStation
The British currencys implosion makes it difficult to find historical comparisons,
but one unfolding pattern hints at higher near-term prices, barring a new dollar surge.
BY CURRENCY TRADER STAFF
continued on p. 18
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than half a century. The price action itself isinconclusive.
More so than most markets, the pound/dol-lar pair has struggled to find its footing sinceOctober-November, moving sideways to lower before falling to a new low in late January(Figure 2). Its subsequent run-up formed from the week ending Jan. 16 to the week end-
ing Jan. 23 what likely caught the eye ofmany a chart watcher as a reversal pattern ofsome kind: A sharply lower weekly low thatclosed near the bottom of the weeks range, fol-lowed by a week that bottomed around thesame level but closed near the top of its range(Figure 3). Price initially bounced a little higher,then pulled back slightly over the next couple ofweeks.
However, several ways of modeling the pat-tern with any specificity produced too fewexamples from which to draw conclusions; the
drop from the low of the week ending Jan. 16 tothe following weeks low was, as men-tioned, exceptionally large. Taking intoaccount as many of the characteristicsof the two-week pattern while avoid-ing optimization led to the followingdefinition:
1. Last weeks low is at least 1percent lower than the previousweeks low.
2. Last weeks close was below lastweeks open.
3. The difference between thisweeks low and last weeks lowis less than 0.05 percent.
4. This weeks close is above lastweeks close.
5. This weeks close is in the upper25 percent of the weeks range.
As loose as the parameters are, theyproduced only 16 previous examplesdating back to February 1999. Figure 4compares the median price movement for the 12 weeks
after the pattern (measured from the close of the pattern tothe subsequent 12 weekly closes) to the median price actionfor all one- to 12-week periods during the 10-year analysisperiod.
There is an upside bias to the post-pattern behavior, espe-cially through week 8, but the price action in the first cou-ple of weeks is flat to lower which happens to be the paththe pair took after the most recent instance.
Going back another 20 years to 1979 produced 23 moreexamples, and the overall trajectory was roughly the same:The pair outperformed the market by the end of the reviewperiod, but this time price meandered for seven weeksbefore turning higher.
The evidence is scant, but the pattern analyzed here
points to the potential for some limited upside action in thepound/dollar pair, given the markets most recent movewas in keeping with the patterns historical performance.However, as of Feb. 27, the market had concluded weekfour of its post-pattern move and had already rallied asmuch as .0448 above the Jan. 30 close, much more than thetypical post-pattern move.
Also, its important to remember the other half of thispair is the U.S. dollar, which, although it faces its own prob-lems, has proved it is still something of a safe-haven intimes of turmoil. If the global markets begin to destabilizedramatically again, funds are likely to fly in the direction ofthe dollar, to the detriment of most other currencies.
18 March 2009 CURRENCY TRADER
The two-week pattern that appeared in mid-January was a relatively
rare event because of the size of the down move during the week
ending Jan. 16.
FIGURE 3 GBP/USD, WEEKLY
Source: TradeStation
The pound/dollar pair outperformed the markets overall bias during two
different periods, but results were choppy. Also, relaxing the pattern parameters
significantly produced a total of only 39 examples since 1979.
FIGURE 4 POUND/DOLLAR WEEKLY PATTERN
SPOT CHECK continued
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The explanation for
every market move in
recent months has been
risk aversion. If risk
aversion rises, as symbolized by
declines in the Dow and S&P 500 stock
indices, the dollar goes up as traders
buy into the U.S. currency as a safe
haven. If risk aversion falls because of
some new government initiative to fix
the financial sector or the economy,
the dollar falters (Figure 1).
While its true risk aversion is a
powerful force, its really another way
of saying fear. There was irrationalexuberance on the way up, and now
we have fear on the way down, with
some people claiming this time the
fear is rational and based on authentic
risks of additional wealth destruction.
In short, we havent come up with
any new ideas about the behavior of
markets beyond fear and greed, a
phrase that surely has been around for
centuries.
ON THE MONEY
Prevailing wisdom holds that if risk aversion rises, the dollar goes up astraders buy into the U.S. currency as a safe haven. If risk aversion falls, the
dollar falters.
FIGURE 1 EURO/DOLLAR VS. S&P 500, DAILY
20 March 2009 CURRENCY TRADER
BY BARBARA ROCKEFELLER
Intermarket relationships arent
always what they seem.
It may seem as if the Euro led the S&P down in 1999-2001, but this
relationship has no basis in reality.
FIGURE 2 EURO/DOLLAR VS. S&P 500, WEEKLY
Source: data eSignal and Reuters Online; chart MetaStock
Rational
fear
and theforex market
Source: data eSignal and Reuters Online; chart MetaStock
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The problem with risk aversion as
the explanation for everything is that
it is being tossed around like confetti.
One newspaper reports the Euro/yen
pair has a strong correlation with the
CBOE volatility index (VIX). A hedge-
fund manager says he is very con-cerned about the Euro/yen crossrate
being so strongly correlated with the
S&P 500 stock index. European ana-
lysts are tracking the relationship
between the Euro/dollar and the
Baltic Dry Index (BDI), a measure of
shipping rates and thus a proxy for
global economic activity.
Previously, we had the circular oil-
dollar logic: the dollar is up because
oil is down (on the theory that cheap
oil is good for the U.S. economy), or oil
is up because the dollar is down.
Finally, we have the perennial dollar
and gold relationship gold riseswhen the outlook for the dollar is
bleak. Gold is an alternative to money
as a store of value, even if it cant be
used as a unit of account or a transac-
tion medium (try paying for a quart of
milk or a tank of heating oil with a
chunk of gold).
To all of this we say, balderdash.
Market prices may appear to be corre-
lated, but correlation is not causation.
Market prices are set by two things
fundamentals (such as corporate earn-
ings for stock indices or jewelry
demand for gold) and market senti-
ment. When market sentiment is dom-
inated by fear, rational or irrational, all
prices will fall, but they fall in their
own way and to their own extent
because prices are set by human
traders and each market has a differ-ent trader profile.
Figure 2 shows the Euro and S&P
500 on a weekly basis. It appears the
continued on p. 22
The dollar/yen surging upward to nearly 100 while the S&P 500 is still falling
is a divergence the risk-aversion scenario cannot explain.
FIGURE 3 DOLLAR/YEN VS. S&P 500, DAILY
Source: data eSignal and Reuters Online; chart MetaStock
CURRENCY TRADER March 2009 21
We havent come up with any new ideas about the
behavior of markets beyond fear and greed, aphrase that surely has been around for centuries.
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ON THE MONEY continued
Euro led the S&P down in 1999-2001,
but this has no basis in reality. The
Euro was the least of the reasons the
S&P fell in 2000. The real reason was
the tech wreck and the bursting of the
Internet bubble. The Euro was weak
for its own reasons at the time, or
rather we might say the dollar was
strong for its own reasons, having lit-
tle to do with stocks. We might say
the Euro fell because Euro-holders
were selling them to buy into the U.S.stock market, but the sums involved
do not support the thesis, tens of bil-
lions in portfolio investment vs. hun-
dreds of billions in actual Euro/dollar
positions. The tail does not wag the
dog.
We need to downplay the seeming
correlation for two reasons. First, we
want to avoid knee-jerk trading deci-
sions inspired by developments in
only marginally related markets. This
is called keeping your eye on the ball
and its a basic tenet of good manage-
ment. As management guru Stanley
Drucker advised, Stick to your knit-
ting. If you follow the dollar/yen
and your trading P&L depends on the
dollar/yen, you should not be look-
ing at the gold-oil relationship. A
corollary is that if the rest of the mar-
ket is bedazzled and befuddled byevents in another market, you may be
able to take advantage of it. At some
point they will wake up to the empti-
ness of their presumption, and if you
can predict their exit, you can get
there first.
The second reason is that you want
to have a clear head, uncluttered by
extraneous factors against the day
when your market really does make a
22 March 2009 CURRENCY TRADER
Starting in 2003, it looks like Euro/yen has been highly correlated with the S&P500, but neither currency has anything to do with the U.S. stock index.
FIGURE 4 EURO/YEN VS. S&P 500, WEEKLY
Source: data eSignal and Reuters Online; chart MetaStock
The yen and gold diverged dramatically in the fall of 2008.
FIGURE 5 DOLLAR/YEN (INVERTED) VS. GOLD (WEEKLY)
Source: data eSignal and Reuters Online; chart MetaStock
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move. For example, the yen was said
to be a safe haven for the Japanese.
Risk aversion was causing retailinvestors to pull back from positions
in foreign assets. In the past year,
Japanese investors in overseas invest-
ment trusts saw a pullout of $118 bil-
lion. Despite Japan having the worst
economic performance among G7
countries, with GDP falling 12.7 per-
cent year-over-year in 2008, the yen is
the home currency for the Japanese
and thus their safe haven. Besides, a
new tax law coming into effect in Aprilwaives corporate taxes on repatriated
profits, possibly as much as 10-20 tril-
lion.
This scenario supposedly supports
the inverse correlation of the yen and
the U.S. stock markets. As the Dow
and S&P fall, the yen goes up on repa-
triation. This sounds plausible and
indeed the yen strengthened from
110.67 in August 2008 to 87.13 in
January 2009, or more than 21 percent
(Figure 3).
But now suddenly we have the dol-
lar/yen surging upward to nearly 100
while at the same time the S&P 500 is
still falling a divergence the risk-
aversion scenario simply cannot
explain. Logically, if world equity
assets are falling, risk aversion should be higher and the safe-haven yen
should be rising, not falling. Golly,
maybe the dollar is the safe haven,
after all.
continued on p. 24
CURRENCY TRADER March 2009 23
The rise in gold and decline in oil forms a spike, but the Swiss franc fails to
follow.
FIGURE 6 DOLLAR/SWISS VS. GOLD/OIL (WEEKLY)
Source: data eSignal and Reuters Online; chart MetaStock
When market sentiment is dominated by fear,
rational or irrational, all prices will fall, but they fall
in their own way and to their own extent because
prices are set by human traders, and each market
has a different trader profile.
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rise in gold, coupled with the fall in
oil, delivering a spike while the Swiss
franc fails to follow. The Swiss franc is
regarded as a safe haven in times of
market turmoil and uncertainty and
the spike in gold/oil must spell
uncertainty in capital letters but it
would have been a mistake to buy
Swiss francs on this evidence.
One intermarket relationship that is
consistent and reliable is the one
between the yen and the Nikkei stock
index (Figure 7). This has logic behindit, because when the yen is weak
Japanese companies can sell more
overseas. This is the only time you can
use an intermarket correlation to your
trading advantage but you have to
be nimble. Figure 8 shows the same
relationship on a weekly basis. The
correlation is weaker, because there
are other, separate factors at work in
both markets, like actual earnings over
expected earnings. You cant dawdle
with this one.
Next, consider the Baltic Dry Index
as a proxy for true economic growth.
The BDI, which has been around since
1744, measures the price of shipping
raw materials on various routes
around the world. It takes a long time
to build a ship, so when demand for
shipping rises compared to the supply
of ships, we assume economic growthis good (Figure 9). The Euro seems to
track the index very closely to the May
2008 spike when the index hit a record
high.
By December 2008, the index had
lost all its 2005 gains. So why did the
Euro spike up in December to nearly
1.4600 when the index was still down
in the dumps? Logically, there is no
reason for the Euro to be more highly
correlated with world growth than
any other currency.
The BDI fell for many reasons, but
an important one was the loss of cred-
it that started last July and remains in
continued on p. 26
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TRADING STRATEGIES continued
effect today. Shippers, shipbuilders,
and producers of raw materials
couldnt get credit as the financial
markets seized. Finally, raw materials
prices fell dramatically. The correla-
tion of raw material prices (represent-
ed by the Commodity Price Index in
Figure 10) to the BDI is more impres-
sive than the relationship between the
Euro against the index.
Finally, if we think fear is behind all
markets these days, lets measure fear
itself. That is achieved with the VIX,
which measures the implied volatility
of S&P 500 index options over the
upcoming 30-day period (Figure 11).
A high VIX means fear is really highand the market is likely to go up, on
the theory that an excess of fear will
exhaust itself. VIX spiked to its high-
est level in October 2008, crashed, and
then spiked again. As we know, the
S&P itself failed to deliver a rally
(Figure 1) while at the same time, the
Euro is diverging from VIX. Well, if
fear is what is dominating the curren-
cy market, the Euro should be lower
There is no reason for the Euro to be more highly correlated with world growth
than any other currency. The BDI fell for many reasons notably, the loss ofcredit that started last July.
FIGURE 9 EURO/DOLLAR VS. BALTIC DRY INDEX WEEKLY
Source: data eSignal and Reuters Online; chart MetaStock
The correlation of raw material prices to the BDI is more impressive than the
relationship between the Euro against the BDI in Figure 9.
FIGURE 10 COMMODITY PRICE INDEX VS. BALTIC DRY INDEX, WEEKLY
Source: data eSignal and Reuters Online; chart MetaStock
Its okay to consider that
one market influencesanother, like raw
materials prices
influence the BDI. But
its risky and a bit silly
to trade the Euro/dollar
by looking at the BDI
chart.
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27/45CURRENCY TRADER March 2009 27
much lower. Evidently, risk aver-
sion in stocks is quantitatively and
qualitatively different from risk aver-
sion in currencies.
Context counts. Its okay to consid-
er that one market influences another,
like raw materials prices influence the
BDI. But its risky and a bit silly to
trade the Euro/dollar by looking at
the BDI chart. Dont trade one thing
while looking at something else.
Trade the thing youre looking at.
For information on the author see p. 6.
Competitive devaluations, the EMU, and the yen
Currency Trader, February 2009.
Currency devaluation never works in the long run just ask
Japan but that doesnt mean panicky governments wont
use it to try to stem the flow of blood in the near term.
The Euro: Prosperity or perdition?
Currency Trader, January 2009.
The belief the Euro sell-off has ended may be based on
some false assumptions about how the U.S. and Europe are
handling the economic crisis.
The six Ds of depression
Currency Trader, December 2008.
The buck has gotten a bounce from the recent financial
panic, but the longer-term picture isnt quite as bullish.
Euro and dollar at parity?
Currency Trader, November 2008.
A few short months ago the world was contemplating Euro$2. Now, the talk is all about Euro $1. What are the odds it
will happen?
Crisis of confidence, Currency Trader, October 2008.
As Wall Street and Washington prove themselves equally
inept, the dollar suffers.
The dollar-oil connection
Currency Trader, September 2008.
As oil broke, so did the Euro/dollar pair. What can we learn
from analyzing bursting bubbles?
Horizontal patterns in foreign exchange
Currency Trader, August 2008.
The Euros price action lends itself well to dissection with
the Darvas Box.
Are the summer doldrums here?Currency Trader, July 2008.
If market myth is true, the season will bring a sideways
market. But the myth warrants some analysis.
Manias and crashes: Where will oil lead the dollar?
Currency Trader, June 2008.
Although some analysts argue a falling dollar is helping to
push up oil prices, it might be the other way around. The
question is, when will the bubble-go-round stop?
Is the Euro going to the moon?
Currency Trader, May 2008.
A look at the Euros recent gravity-defying performance.
Whats really driving the dollar?
Currency Trader, April 2008.
Signs of a potential turnaround in the buck can be found in
an unexpected place.
Why is the yen trending higher?
Currency Trader, March 2008.
The yens rise seems to defy logic. Find out whats behind it.
Other Barbara Rockefeller articles:
You can purchase and download past articles athttp://store.activetradermag.com.
The VIX spiked to its highest level in October 2008, crashed, and then spiked
again without a big rally in the S&P. At the same time, the Euro is diverging
from VIX.
FIGURE 11 EURO/DOLLAR (INVERTED) VS. VIX (DAILY)
Source: data eSignal and Reuters Online; chart MetaStock
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ADVANCED STRATEGIES
O
ne witticism circulat-ing about the Internetendlessly and by
fax previously, forthose of you old enough to remem-ber when the fax machine was trschic is the six phases of a project.These are, in chronological order:enthusiasm, disillusionment, panic,search for the guilty, punishment ofthe innocent, and praise and honorsfor non-participants.
This process must be scale-inde-pendent, for it applies to global cen-tral banks and finance ministries,
operating both as separate entitiesand in coordination with each other,as well as to small groups withincompanies.
How else can we explain the phe-nomenon increasingly observ-able in 2008 that once a countryssovereign credit rating deteriorates,its borrowing costs fall and its cur-rency, at least temporarily, rises?
If this is not a perverse rewardingof the guilty, then what is?
Sovereign credit risk
Credit default swaps (CDS) areinsurance contracts wherein thewriter agrees to pay the investor thefull (par) value of the bond in theevent of a default. Think of them asput options on bonds.
They are quoted in basis points,or 0.01-percent units of the dollaramount being insured, usually aminimum of $10 million. The com-
28 March 2009 CURRENCY TRADER
The credit crisis was global and clearly affected German bunds as much if not more
than American bonds.
BY HOWARD L. SIMONS
FIGURE 1 FIVE- AND 10-YEAR CDS COSTS ON U.S. AND GERMAN BONDS
VS. NORMALIZED YIELD SPREAD
Sovereign credit riskand currencies
The policy failures of 2007-2008 are likely to lead to greater government intervention.
8/14/2019 Currency Trader March 2009
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bination of a risky bond plus a CDS,therefore, is a synthetic call option onthe bond. The arbitrage is conceptu-ally simple: A holder of a risky bond
should be willing to pay as much asthe spread over Treasury or othersovereign yields in CDS protection.
What happens when the underly-ing bond itself is a sovereign creditrisk, such as a U.S. Treasury, aGerman bund or a Japanese govern-ment bond (JGB)? The default risk of
any of these instruments involvessomething pretty apocalyptic, on theorder of the issuing governmentceasing to exist and honor its obligations. That happens, asanyone who dabbles in Tsarist or Confederate bonds in any-
thing other than the scripophily market can attest. And ifthat event comes about, it would be pretty pointless toreceive payment for a defaulted U.S. Treasury bond in U.S.dollars. Therefore, the CDS quotes here always are in unitsof another currency; Euros for U.S. bonds and dollars forGerman and Japanese bonds.
Rising CDS costs on various sovereign credit risksbecame an increasing fact of life after the onset of the cred-it crunch in 2007. Governments everywhere (in the U.S. andUK in particular) felt the appropriate response to banksreaping the consequences of their own bad bets and riskmanagement was to bail them out by a combination of neg-
ative real short-term interest rates, acceptance of all hard-to-value securities as collateral, implicit backstops of rescue
plans for entities such as Bear Stearns, the de facto nation-alization of Fannie Mae and Freddie Mac, and the creationof a bewildering array of lending facilities managed bysome combination of the Treasury and the Federal Reserve.
Each one of these steps reduced, in the case of the FederalReserve, the quantity of Treasury securities on its balancesheet. Central banks portfolios held securities of increas-ingly dubious quality, so much so the Federal Reserve hasrefused to disclose the garbage it has accepted as collateraldespite a Freedom of Information Act inquiry.
All this chicanery produced higher inflation and, ironi-continued on p. 30
CURRENCY TRADER March 2009 29
This parallel example observed for American and Japanese bonds confirms an
emerging principle of sovereign credit risk: Governments are being rewarded with
lower borrowing costs as investors flee risk.
FIGURE 2 CREDIT RISK OF JAPANESE FIVE- AND 10-YEAR BONDS
REMAINS ELEVATED
Restated, as credit risks
increased in general,
investors fled riskier
assets for the perceived
safety of sovereign debt
a flight-to-quality only
if you assume quality
and printing press are
interchangeable.
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ADVANCED STRATEGIEScontinued
cally, higher credit costs for bothcorporate borrowers and for resi-dential mortgages without the off-setting benefit of rising asset
prices. As far as complete failureswith catastrophic long-term conse-quences go, you would be hard-pressed to beat this.
Praise and honors for the non-participants might be a Pyrrhicvictory given the damage pro-duced by the participants. Did wemention Timothy Geithner, pres-ent (as the president of the NewYork Federal Reserve) at thedestruction of Lehman Brothersand the draconian rescue of AIG,was rewarded with the TreasurySecretary?
Its important to remember thegovernments AAA credit ratingderives from 1) its taxation author-
Yen implied volatility jumped during the August 2007 panic, well ahead of any increas-
es in CDS costs, and peaked simultaneously with these costs in the January, March,
and September-October 2008 panics. Yen volatility remained elevated along with
these CDS costs.
FIGURE 3 YEN VOLATILITY ROSE WITH SOVEREIGN CREDIT RISK
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ity and 2) its printing presses, notnecessarily in that order. Whilethe federal government can tax100 percent of your money (true
statement: under the due processclauses of the fifth and 14thAmendments, all that is requiredis for Congress to pass a law), it isunlikely to do so, and we saw bythe dollars collapse early in 2008that international creditors mightissue a collective cease-and-desistorder on the printing presses. Ifthe markets sense the govern-ments balance sheet consists ofdefunct mortgage securities, acredit deterioration will occur.
Trans-Atlantic trade
Lets map two different CDScosts, those for German bunds
continued on p. 32
Over the past year, the yen and five-year CDS costs have moved in tandem. Higher
credit risk leads to both lower funding costs and a stronger currency for the govern-
ment at the expense of higher funding costs for everyone else.
FIGURE 4 YEN STRENGTHENED AS SOVEREIGN CREDIT RISK ROSE
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priced in dollars and those forAmerican bonds priced in Euros, attwo different maturities, five and 10years (Figure 1). The jump in CDScosts for the U.S. during various phas-es of the 2008 credit crisis and the gov-
ernments response thereto is quiteapparent, as is the ratchet nature oftheir climb: Once the market priced ina lower credit rating for the U.S., itremained elevated until the nextjump.
What about the CDS costs for theGerman bunds priced in dollars?
While they are at lower basis-pointlevels than their American counter-parts, their path has paralleled U.S.CDS costs. The credit crisis was as aglobal affair and clearly affected theGerman bunds as much if not morethan it did the American bonds.
Lets overlay the normalized yieldspreads between the German andAmerican bonds; this is the yield dif-ferential between the German andAmerican bonds, divided by the
32 March 2009 CURRENCY TRADER
Related reading:Other Howard Simons articles
Minor trends make minor friends
Currency Trader, February 2009.
Do minor currencies offer trading opportunities the majors dont? Find
out what the numbers say.
Let the trend be your friend: The majors
Currency Trader, January 2009.
If currencies trend so much, why do trend followers usually have such blah
performance? This and other questions are answered in this study of currency
trends.
The rupee and emerging markets
Currency Trader, December 2008.
Analysis suggests Indias status as a global economic power is no accident.
Nordic currency confusion
Currency Trader, November 2008.
Get a handle on the dynamics of the Northern European
currencies.
The Swiss francs commodity connection
Currency Trader, October 2008.
How can the Swiss currency be, of all things, a commodity currency?
Franc-ly, my dear, I dont give a carry
Currency Trader, September 2008.
Investigating the Swiss franc carry trade, and what might change its dynamics.
The short, awful life of the dollar carry trade
Currency Trader, August 2008.
The implications of the weak-dollar policy and the dollars roles as a funding currency.
Currencies and commitments
Currency Trader, June 2008.
Find out what COT data conveys about forex price action.
Getting carried away with the kiwi
Currency Trader, July 2008.
Whats driving the New Zealand dollar, and how long is it likely to last?
Currencies and stock index performance
Currency Trader, April 2008.
Find out how stock indices relate to the performance of their
currencies.
Whats down with the Australian dollar?
Currency Trader, March 2008.
Traders have many assumptions about the nature of the Australian dollar, but only one
of these preconceptions appears to have any impact on the currency.
Currencies and U.S. stock-sector returnsCurrency Trader, January 2008.
This exhaustive analysis challenges some common assumptions about the relationship
between currency moves and stocks.
Interest-rate shocks and currency moves
Currency Trader, October 2007.
Short-term interest rates are typically cited as the prime catalyst of currency moves.
This study puts that idea to the test.
Howard Simons: Advanced Currency Concepts, Vol. 1
A discounted collection that includes many of the articles listed here.
You can purchase and download past articles athttp://store.activetradermag.com
ADVANCED STRATEGIEScontinued
Moral hazard: Banks
learned they can force
governments hands
by failing on a grand
scale, and governments
learned their power rises
and their funding costs
fall when they extend
the full faith and credit of
their national treasuries
to wayward financiers.
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American yield itself. This normalizedyield spread began to move stronglylower in mid-July 2008, but then shothigher into December 2008, especiallyat the five-year horizon, as investorsfled into U.S. Treasuries.
This was a rather bizarre phenome-non; as the U.S. abandoned all pre-tense of fiscal and monetary sobrietyand began to borrow $100 billionchunks as if they were $5 bills, U.S.Treasury yields collapsed. ByDecember 2008, four-week Treasury bills were yielding 0.0000 percent atauction and three-month bills wereactually being sold at a premium topar for a negative yield to maturity.
Restated, as credit risks increased ingeneral, investors fled riskier assets forthe perceived safety of sovereign debt.It is a flight-to-quality only if youchoose to use quality and printingpress interchangeably.
Yes, it was time to punish the inno-cent with rising costs for mortgagesand corporate debt, and reward theguilty with declining funding costs forsovereign debt even as the sovereignwas trying desperately to inflate its
way out of every problem, real andimagined.
The expansion of moral hazard wascomplete; banks learned they can forcethe hand of government by failing on agrand scale, and governments learnedtheir power rises and their fundingcosts fall when they extend the fullfaith and credit of their national treas-uries to wayward financiers.
Trans-Pacific trade
One of the downsides of the U.S.-German example is its short life; theCDS series for the Treasuries begins inApril 2008, and that simply is too smallof a data sample to draw any mean-ingful conclusions between credit riskand currencies.
However, if we look across thePacific to Japan, we can find CDS on JGBs trading back to 2003. Lets seewhether these instruments confirm theprinciple suggested here that
money flows into mismanaged gov-ernment coffers.
Five- and 10-year CDS costs on JGBspriced in USD exploded higher between November 2007 and theMarch 2008 Bear Stearns panic low
(Figure 2). They retreated betweenMarch and June 2008 and hit a reactionlow in early June, marked on bothcharts with a green vertical line, andthen rose sharply during theSeptember-October crisis.
The normalized yield spreadbetween Japanese and American five-and 10-year bonds started to rise after June 2008. Japanese yields fell fasterthan American yields even though thecredit risk for Japanese bonds rose at afaster rate and the yen weakenedagainst the dollar.
This was a temporary phenomenon,however. By the time the FOMCannounced its anything goes mone-tary policy on Dec. 16, 2008, the yenwas at a thirteen-year high, and short-term American rates were below their Japanese counterparts in what somemay regard as a violation of the lawsof financial gravity.
This is completely parallel to thephenomenon observed for Americanand European bonds and thus con-firms an emerging principle of sover-eign credit risk: Governments arebeing rewarded with lower borrowingcosts as investors flee risk.
Impact on the yen
Now lets turn this longer historytoward the Japanese currency. If wemap the implied volatility on three-
month non-deliverable forwards onthe yen against five-year CDS costs,we see how this volatility jumped dur-ing the August 2007 panic, well aheadof any increases in CDS costs (Figure3). It peaked simultaneously withthese costs in the January, March, andSeptember-October 2008 panics (yes,there are a lot of panics to enumerate).Volatility on the yen remained elevat-ed along with these CDS costs.
If we strip out the intermediary of
volatility and substitute the yen itself,we see this principle emerge quiteclearly (Figure 4). Over the past year,the yen and five-year CDS costs havemoved in tandem. The circle has beenclosed: Higher credit risk leads to both
lower funding costs and a strongercurrency for the government at theexpense of higher funding costs foreveryone else.
We have to consider another, grim-mer scenario. If the Great Depressionwas prolonged and deepened by poli-cy errors, did the world move awayfrom greater centralized planning? No,the opposite occurred. The era initiat-ed a half-century of ever-greater gov-ernment interference in the economy.
Past performance does not predictfuture results, but what else can weuse? Expect the massive policy failuresof 2007-2008 to lead to greater govern-ment intervention.
For information on the author see p. 6.
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INTERNATIONAL MARKETS
Currentprice 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 British pound 1.45017 4.99% -3.19% -21.76% 2.0397 1.3501 10
2 South African rand 0.09981 1.66% 3.29% -23.87% 0.1391 0.0841 12
3 Hong Kong dollar 0.12898 0.02% -0.03% 0.66% 0.129 0.1279 5
4 Chinese yuan 0.14645 0.02% -0.17% -0.05% 0.1466 0.1395 3
5 Swiss franc 0.85894 -0.97% 4.26% -5.69% 1.0375 0.813 15
6 Australian dollar 0.64528 -1.40% 1.64% -25.56% 0.9849 0.6005 11
7 Canadian dollar 0.80105 -1.42% 1.03% -16.16% 1.0297 0.768 4
8 Indian rupee 0.02001 -1.57% 0.30% -13.34% 0.03974 0.01843 8
9 Singapore dollar 0.65432 -1.69% -0.35% -7.62% 0.7434 0.6489 13
10 Euro 1.27509 -1.86% 0.48% -13.83% 1.6038 1.2329 14
11 Taiwanese dollar 0.02881 -2.93% -3.81% -9.69% 0.03335 0.02865 9
12 Brazilian real 0.41999 -3.35% -0.07% -32.14% 0.6414 0.3751 2
13 New Zealand dollar 0.51066 -3.55% -4.94% -28.01% 0.8214 0.4959 16
14 Thai baht 0.02825 -4.98% -1.60% -4.85% 0.03373 0.0262 6
15 Japanese yen 0.01047 -7.10% 0.19% 15.18% 0.01148 0.00904 1
16 Swedish krona 0.11294 -7.25% -7.92% -28.54% 0.1718 0.1111 7
17 Russian ruble 0.02786 -10.01% -23.42% -32.08% 0.04334 0.0271 17
CURRENCIES (vs. U.S. DOLLAR)
ACCOUNT BALANCE
Rank Country 2007 Ratio* 2006 2008+
1 Singapore 41.395 27 36.288 42.2082 Switzerland 65.534 15.8 58.708 64.1063 China 379.162 11.7 249.866 453.1464 Hong Kong 22.796 11.2 20.586 20.4565 Netherlands 55.891 7.4 8.6 6.76 Taiwan 25.402 6.8 24.661 28.3657 Sweden 25.903 6 27.707 25.5848 Russia 72.543 5.9 95.322 49.1819 Germany 175.371 5.4 147.134 174.13710 Japan 195.904 4.5 170.437 195.14511 Canada 25.603 1.8 20.792 17.909
12 Brazil 10.253 0.8 13.276 4.299
As of Feb. 25 *based on one-month gain/loss
34 March 2009 CURRENCY TRADER
Rank Country 2007 Ratio* 2006 2008+
13 Mexico -6.368 -0.7 -2.425 -10.58814 France -39.363 -1.6 -27.712 - 48.88515 India -23.131 -2.1 -9.503 -32.30116 UK -96.687 -3.5 -77.236 -105.14417 Australia -50.816 -5.7 -41.49 -52.98818 U.S. -784.341 -5.7 -811.483 -788.29319 South Africa -18.495 -6.7 -16.608 -19.23720 Spain -138.916 -9.8 -106.399 -154.849
Totals in billions of U.S. dollars*Account balance in percent of GDP +EstimateSource: International Monetary Fund,
World Economic Outlook Database, October 2008
8/14/2019 Currency Trader March 2009
35/45CURRENCY TRADER March 2009 35
NON-U.S. DOLLAR FOREX CROSS RATES
GLOBAL STOCK INDICES
GLOBAL BOND RATES
Country Interest rate Rate (%) Last change Aug. 08 Feb. 08
U.S. Fed funds rate 0-0.25 0.5 (Dec. 08) 2 3Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.5 0.5Eurozone Refi rate 2 0.5 (Jan. 09) 4.25 4UK Repo rate 1 0.5 (Feb. 09) 5 5.25Canada Overnight funding rate 1 0.5 (Jan. 09) 3 4Switzerland 3-month Swiss Libor 0.5 0.5 (Dec. 08) 2.75 2.75 Australia Cash rate 3.25 1.00 (Feb. 09) 7.25 6.75
New Zealand Cash rate 3.5 1.50 (Jan. 09) 8 8.25Brazil Selic rate 12.75 1.00 (Jan. 09) 13 11.25Korea Overnight call rate 2.5 0.5 (Jan. 09) 5.25 5Taiwan Discount rate 1.25 0.25 (Feb. 09) 3.625 3.375India Repo rate 5.5 1.00 (Jan. 09) 9 7.75South Africa Repurchase rate 10.5 1.00 (Feb. 08) 12 11
GLOBAL SHORT-TERM INTEREST RATES
1-month 3-month 6-month 52-week 52-weekRank Country Index Feb. 25 gain/loss gain/loss gain/loss high low Previous
1 Brazil Bovespa 38,232.00 -0.72% 9.82% -29.82% 73,920.00 29,435.00 12 India BSE 30 8,902.56 -1.13% 2.38% -38.39% 18,137.30 7,697.39 83 Hong Kong Hang Seng 13,005.08 -1.14% 0.98% -38.38% 26,387.40 10,676.30 144 Japan Nikkei 225 7,461.22 -2.88% -10.36% -42.07% 14,601.30 6,994.90 125 Australia All ordinaries 3,281.50 -3.27% -8.22% -35.53% 6,059.50 3,201.50 46 South Africa FTSE/JSE All Share 18,817.56 -6.64% -7.13% -29.53% 33,232.89 17,814.42 77 Mexico IPC 18,200.70 -7.06% -5.68% -31.10% 32,292.90 16,480.00 158 Canada S&P/TSX composite 7,932.30 -8.37% -6.05% -40.31% 15,154.80 7,566.32 29 Singapore Straits Times 1,616.79 -8.45% -2.21% -93.95% 3,269.88 1,473.77 3
10 UK FTSE 100 3,849.00 -8.55% -7.73% -29.64% 6,377.00 3,665.20 611 U.S. S&P 500 764.90 -8.57% -10.79% -39.62% 1,440.24 741.02 5
12 France CAC 40 2,696.92 -8.75% -15.97% -38.09% 5,142.10 2,662.73 1113 Germany Xetra Dax 3,846.21 -11.11% -15.66% -38.92% 7,231.86 3,790.79 1314 Italy MIBTel 12,494.00 -11.92% -18.90% -42.01% 26,458.00 12,349.00 1015 Switzerland Swiss Market 4,702.50 -13.19% -14.16% -33.42% 7,802.60 4,660.90 9
Currency 1-month 3-month 6-month 52-week 52-weekRank pair Symbol Feb. 25 gain/loss gain/loss gain/loss high low Previous
1 Pound / Yen GBP/JPY 138.564 13.07% -3.38% -32.08% 215.863 118.782 152 Pound / Euro GBP/EUR 1.13748 6.94% -3.67% -9.24% 1.3304 1.0195 43 Franc / Yen CHF/JPY 82.08369 6.58% 4.07% -18.13% 105.071 74.698 204 Aussie $ / Yen AUD/JPY 61.65867 6.07% 1.44% -35.39% 104.448 55.1876 175 Canada $ / Yen CAD/JPY 76.5369 6.04% 0.84% -27.25% 108.96 70.6656 136 Euro / Yen EUR/JPY 121.84 5.62% 0.29% -25.19% 169.958 112.045 197 Real / Yen BRL/JPY 40.12818 3.96% -0.26% -41.12% 69.3981 36.0109 108 Franc / Euro CHF/EUR 0.67369 0.90% 3.75% 9.44% 0.6992 0.6106 129 Franc / Canada $ CHF/CAD 1.07277 0.42% 3.16% 12.44% 1.1583 0.9135 18
10 Aussie $ / Euro AUD/EUR 0.5061 0.39% 1.15% -13.67% 0.6268 0.4725 711 Canada $ / Euro CAD/EUR 0.62829 0.39% 0.54% -2.76% 0.6785 0.5799 212 Aussie $ / Canada $ AUD/CAD 0.80592 -0.02% 0.57% -11.26% 0.9833 0.7568 1413 Aussie $ / Franc AUD/CHF 0.75145 -0.50% -2.52% -21.13% 1.0095 0.712 314 Real / Euro BRL/EUR 0.32941 -1.58% -0.55% -21.29% 0.4197 0.2941 115 Real / Canada $ BRL/CAD 0.52455 -1.99% -1.12% -19.10% 0.6719 0.4726 916 Real / Aussie $ BRL/AUD 0.65112 -2.09% -1.71% -8.90% 0.7391 0.5991 517 Franc / Pound CHF/GBP 0.59238 -5.67% 7.67% 20.51% 0.661 0.4658 1618 Aussie $ / Pound AUD/GBP 0.44509 -6.13% 4.97% -4.89% 0.4902 0.3786 1119 Canada $ / Pound CAD/GBP 0.55253 -6.15% 4.34% 7.12% 0.5918 0.4874 820 Real / Pound BRL/GBP 0.28969 -7.99% 3.21% -13.29% 0.339 0.2441 6
Rank Country Rate Feb. 25 1-month 3-month 6-month High Low Previous
1 Germany BUND 125.82 2.05% 4.13% 9.75% 126.53 109.65 12 Australia 10-year bonds 95.765 -0.14% 0.47% 1.62% 96.16 93.18 43 UK Short sterling 98.13 -0.37% 1.47% 4.14% 98.705 93.595 24 Japan Government Bond 139.2 -0.42% 0.04% 0.69% 141.9 132.09 55 U.S. 10-year T-note 121.63 -1.84% 0.38% 4.13% 128.65 111.15 3
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36/4536 March 2009 CURRENCY TRADER
Unemployment
Release 1-year Next Release 1-year NextPeriod date Rate Change change release Period date Rate Change change release
AMERICAS
Argentina Q4 2/25 7.3% -0.5% -0.2% 4/27 ASIA AND SOUTH PACIFICBrazil Jan. 2/20 8.2% 1.4% 0.2% 3/26 Australia Jan. 2/12 4.8% 0.3% 0.7% 3/12
Canada Jan. 2/6 7.2% 0.6% 1.4% 3/13 Hong Kong Nov.-Jan. 2/17 4.6% 0.5% 1.2% 3/17
EUROPE Japan Jan. 2/27 4.1% -0.2% 0.3% 3/31
France Q3 12/4 7.7% 0.1% -0.5% 3/5 Singapore Q4 1/30 2.6% 0.4% 0.9% 4/30
Germany Jan. 2/26 7.3% 0.1% -0.4% 3/31
UK Oct.-Dec. 2/11 6.3% 0.5% 1.1% 3/18
Gross Domestic Product*
Release 1-year Next Release 1-year NextPeriod date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Q3 12/18 -5.1% 19.1% 3/18 S. Africa Q4 2/24 0.8% 11.0% 5/26
Brazil Q3 12/9 1.8% 6.8% 3/10
Canada Q3 12/1 1.2% 6.3% 3/2 ASIA AND SOUTH PACIFIC
EUROPE Australia Q3 12/3 0.1% 1.9% 3/4France Q4 2/13 -0.9% 0.9% 5/15 Hong Kong Q4 2/25 1.5% -2.6% 5/15
Germany Q4 2/13 -1.2% 0.6% 5/15 India Q4 2/27 11.1% 14.0% 5/29
UK Q3 12/23 -0.3% 2.3% 3/27 Japan Q4 2/16 -1.7% -6.6% NLT 5/20
Singapore Q4 2/27 -0.5% -5.6% NLT 5/22
* Final estimates, at current prices, seasonally adjusted
CPI
Release 1-year Next Release 1-year NextPeriod date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Jan. 2/11 0.6% 0.5% 3/11 S. Africa Jan. 2/25 0.4% 8.1% 3/25
Brazil Jan. 2/6 0.5% 5.8% 3/11
Canada Jan. 2/20 -0.3% 1.1% 3/19 ASIA AND SOUTH PACIFIC
EUROPE Australia Q4 1/28 -0.3% 3.7% 4/23
France Jan. 2/20 -0.4% 0.7% 3/12 Hong Kong Jan. 2/23 0.4% 3.1% 3/20
Germany Jan. 2/11 -0.5% 0.9% 3/10 India Jan. 2/27 0.7% 10.4% 3/31
UK Jan. 2/17 -0.7% 3.0% 3/24 Japan Jan. 2/27 -0.6% 0.0% 3/27
Singapore Jan. 2/23 -0.1% 2.9% 3/23
PPI
Release 1-year Next Release 1-year NextPeriod date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Jan. 2/11 -0.1% 7.9% 3/11 S. Africa Jan. 2/26 -0.7% 9.2% 3/26
Brazil Jan. 2/7 -0.3% 8.3% 3/7
Canada Jan. 2/27 -0.1% 1.2% 3/31 ASIA AND SOUTH PACIFIC
EUROPE Australia Q4 1/27 1.3% 6.4% 4/20
France Dec. 1/4 -1.4% 0.0% 3/5 Hong Kong Q3 12/12 -1.2% 5.5% 3/13
Germany Dec. 1/21 -1.0% 4.3% 3/6 India Jan. 2/13 -0.2% 5.3% 3/13
UK Jan. 2/6 0.1% 3.5% 3/6 Japan Jan. 2/12 -1.0% -0.2% 3/11
Singapore Jan. 2/27 1.2% -17.7% 3/27
INTERNATIONAL MARKETS continued
LEGEND:
Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
As of Feb. 27
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37/45CURRENCY TRADER March 2009 37
GLOBAL ECONOMIC CALENDAR
Legend
CPI: Consumer price index
ECB: European Central Bank
FDD (first delivery day): The
first day on which delivery of a
commodity in fulfillment of a
futures contract can take place.
FND (first notice day):Also
known as first intent day, this isthe first day on which a clearing-
house can give notice to a buyer
of a futures contract that it
intends to deliver a commodity in
fulfillment of a futures contract.
The clearinghouse also informs
the seller.
FOMC: Federal Open Market
Committee
GDP: Gross domestic product
ISM: Institute for supply
management
LTD (last trading day): The final
day trading can take place in afutures or options contract.
PMI: Purchasing managers
index
PPI: Producer price index
MARCH/APRIL
March
1
2 U.S.: February ISM; Januarypersonal income
Canada: Q4 GDP
3 Canada: Bank of Canada
interest-rate announcement
4 U.S.: Fed. beige bookAustralia: Q4 GDP
5 France: Q4 employment report;January PPI
UK: Bank of England interest-rate
announcement
ECB: Governing council
interest-rate announcement
6 U.S.: February employment report
Germany: January PPI
LTD: March U.S. dollar index
options (ICE); March currency
options
7 Brazil: February PPI
8
9 Mexico: February PPI; Feb. 28 CPI
10 Brazil: Q4 GDPGermany: February CPI
11 Japan: February PPI
12 U.S.: February retail salesAustralia: February employment
report
France: February CPI
13 U.S.: January trade balanceCanada: February employment
report
Hong Kong: Q4 PPI
India: February PPI
14
15
16 LTD: March U.S. dollar index futures(ICE); March currency futures
17 U.S.: February PPI and housingstarts
Hong Kong: Dec.-Feb. employment
report
FND: March U.S. dollar index
futures (ICE)
18 U.S.: FOMC interest-rateannouncement; February CPI
Japan: Bank of Japan interest-rate
announcement
FDD: March U.S. dollar index
futures (ICE); March currency
futures
19 U.S.: February leading indicatorsCanada: February CPI
20 Germany: February PPIHong Kong: Q4 GDP;
February CPI
21
22
23
24 U.S.: February durable goodsMexico: February employment
report; March 15 CPI
S. Africa: Q4 employment report
25 S. Africa: February CPI
26 Brazil: February employmentreport
S. Africa: February PPI
27 Japan: February CPI
UK: Q4 GDP
28
29
30
31 Canada: February PPIGermany: February employment
report
India: February CPI
Japan: February employment
report
April
1 U.S.: March ISM
2 France: February PPI
3 U.S.: March employment reportLTD:April U.S. dollar index (ICE);
April currency options
Economic Release time
release (U.S.) (ET)
GDP 8:30 a.m.
CPI 8:30 a.m.
ECI 8:30 a.m.
PPI 8:30 a.m.
ISM 10:00 a.m.
Unemployment 8:30 a.m.
Personal income 8:30 a.m.Durable goods 8:30 a.m.
Retail sales 8:30 a.m.
Trade balance 8:30 a.m.
Leading indicators 10 a.m.
The information on this page issubject to change. CurrencyTrader is not responsible for
the accuracy of calendar datesbeyond press time.
APRIL 2009
29 30 31 1 2 3 4
5 6 7 8 9 10 11
12 13 14 15 16 17 18
19 20 21 22 23 24 25
26 27 28 29 30 1 2
MARCH 2009
1 2 3 4 5 6 7
8 9 10 11 12 13 14
15 16 17 18 19 20 21
22 23 24 25 26 27 28
29 30 31 1 2 3 4
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FOREX NEWS
On Feb. 18, the CME Groupannounced it would beginoffering currency futures contracts of
one-tenth the size of its standard con-
tracts. These E-Micro forex contracts
are scheduled to launch on March 22
for six currency pairs.
The Euro/U.S. dollar (EUR/USD),British pound/U.S. dollar
(GBP/USD), and Australian
dollar/U.S. dollar (AUD/USD) E-
Micro contracts will be fully fungible
with their full-sized counterparts, with
margins and exchange fees propor-
tionally scaled down to one-tenth of
the full-contract cost. The three
remaining contracts, U.S.
dollar/Japanese yen (USD/JPY), U.S.
dollar/Swiss franc (USD/CHF), andU.S. dollar/Canadian dollar
(USD/CAD), cannot be directly offset
because of the reversal of the base and
quote currencies from the full-contract
convention.
The CME Group says it hopes to
attract the retail crowd with its new
contracts, not only with its small-trad-
ing size, but also by offering an alter-
native to the interbank, over-the-
counter (OTC) forex market with cen-tralized clearing and guaranteed coun-
terparty credit by trading on CMEs
Globex electronic platform.
This is the opposite direction the
IntercontinentalExchange (ICE) went
with its ICE Millions FX Futures,
launched in November 2008. These
contracts represent a million units of
the base currency 10 times the size
of its standard forex futures contracts.
Because an E-Micro contract repre-
sents only one-tenth of the currency
units of a standard contract, a one-tick
move represents the gain or loss of a
much smaller amount. For example,
for the CMEs standard Australian dol-
lar/U.S. dollar futures contract (AD),
which represents 100,000 Australian
dollars, a single tick is 0.0001, or $10
38 March 2009 CURRENCY TRADER
Average daily volume for forex futures on the CME and ICE has fallen recently.Despite the ICEs new currency contracts ICE Millions the exchanges
year-over-year forex volume dropped by more than 40 percent for three months
in a row.
FIGURE 1 YEAR-OVER-YEAR FX FUTURES VOLUME
Two exchanges, two approaches to new FX futuresAs currency futures volume slumps, the CME and ICE hope to entice investors with new products.
A few of the contracts, which represent 10 times as many units of currency astheir standard counterparts, saw a burst of interest in their first month of trading,
but quickly fell off over the following months.
TABLE 1 ICE MILLIONS MONTHLY VOLUME TOTALS
Currency Futures Feb.
pair symbol (through 25th) Jan. Dec. Nov. Total
EUR/USD IEO 552 852 722 4,082 6,208
GBP/USD IMP 13 8 44 283 348
USD/CAD ISV 0 0 0 0 0USD/JPY ISN 684 590 305 1,478 3,057
USD/CHF IMF 1 0 2 47 50
USD/SEK IKX 0 0 0 0 0
EUR/GBP IGB 0 0 0 0 0
EUR/CAD IEP 27 0 0 0 27
EUR/JPY IEJ 2 0 0 0 2
EUR/SEK IRK 0 0 0 0 0
EUR/CHF IRZ 0 0 0 0 0
AUD/USD IAU 0 0 1 2 3
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LEGEND:
Volume: 30-day average daily volume, in thousands.
OI: 30-day open interest, in thousands.
10-day move: The percentage price move from the
close 10 days ago to todays close.20-day move: The percentage price move from the
close 20 days ago to todays close.
60-day move: The percentage price move from the
close 60 days ago to todays close.
The % rank fields for each time window (10-day
moves, 20-day moves, etc.) show the percentile rank
of the most recent move to a certain number of the
previous moves of the same size and in the same
direction. For example, the % rank for 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.
CURRENCY FUTURES SNAPSHOTas of Feb. 27
The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each marketsliquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.
Market Symbol Exchange Volume OI 10-day move/% rank 20-day move/% rank 60-day move/% rank Volatility ratio/rank
Eurocurrency EC CME 199.6 142.8 -0.58% / 6% -1.98% / 23% 0.22% / 7% .21 / 45%
Japanese yen JY CME 91.5 106.4 -7.60% / 88% -8.28% / 95% -4.67% / 100% .58 / 98%
British pound BP CME 78.1 80.6 0.94% / 0% 0.10% / 0% -3.93% / 4% .10 / 7%
Canadian dollar CD CME 33.9 62.7 -1.23% / 25% -3.72% / 71% -2.46% / 20% .21 / 75%
Swiss franc SF CME 33.6 29.8 -0.15% / 6% -1.44% / 14% 2.87% / 67% .16 / 18%
Australian dollar AD CME 32.3 45.1 -0.14% / 0% -1.35% / 21% -0.31% / 0% .25 / 73%
Mexican peso MP CME 9.1 37.9 -3.17% / 74% -5.93% / 93% -10.27% / 39% .22 / 100%
U.S. dollar index DX ICE 4.7 18.2 2.11% / 73% 1.95% / 31% 1.13% / 9% .26 / 58%
E-Mini eurocurrency ZE CME 2.6 2.4 -0.58% / 6% -1.98% / 23% 0.22% / 7% .21 / 45%
New Zealand dollar NE CME 1.5 12.1 -2.10% / 50% -1.76% / 10% -5.72% / 12% .15 / 35%
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.
This information is for educational purposes only.Currency Traderprovides this data in good faith, but
assumes no responsibility for the use of this infor-
mation. Currency Traderdoes not recommend buy-
ing 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.
CURRENCY TRADER March 2009 39
per contract. However, for the E-Micro
equivalent, a single tick would beworth only $1 per contract. By con-
trast, a single tick for an ICE Millions
contract, which is set at 0.0005, is
equivalent to $500.
Figure 1 shows the year-over-year
changes in monthly average daily cur-
rency volume (ADV) for the CME
Group and ICE. ICE volume began to
decline in mid-2008. Despite the
launch of the new Millions contracts in
November, the exchanges monthlyADV dropped by more than 40 per-
cent in November, December, and
January.
Table 1 shows the total monthly vol-
ume for the ICE Millions contracts
through Feb. 25. Five contracts in the
Millions suite had yet to trade by that
date, and four of the contracts had yet
to see more than 50 contracts change
hands. The Euro/U.S. dollar contract
(IEO), by far the most popular, traded
more than 4,000 contracts in its first
month, but has been unable to rivalthat number in subsequent months.
However, because of its inflated
size, each ICE Millions trade repre-
sents 10 times the volume of a trade in
a standard-sized contract. For exam-
ple, total January volume for the ICEs
standard Euro/U.S. dollar futures
contract (EO) was 10,615, with each
contract representing 100,000 units of
currency. In the same month, 552 IEO
contracts traded, but because eachrepresents a million currency units,
volume was equivalent to 5,520 trades
in the EO contract.
While the demand for currency
products from the CME Group hasnt
suffered as much as ICEs, the
exchange still posted year-over-year
drops in excess of 20 percent in both
November and December following
mostly steady growth throughout
much of 2008.
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Following their most recent sum-mit in Phuket, Thailand, theAssociation of Southeast AsianNations plus the East Asian nations ofChina, Japan, and Korea (ASEAN+3)announced on Feb. 22 their intentionto increase their combined monetarystabilization fund from $80 billion to$120 billion.
While we note that the Asian
economies are in a better position toface challenges due to the structuralreforms undertaken since the Asianfinancial crisis, we recognize that theregional economy is now facing greatchallenges, the groups announced intheir joint statement.
The stabilization fund, called theMultilateralised Chiang Mai Initiative(CMIM), which began in 1997 follow-
ing the Asian financial crisis thatseverely damaged the currencies ofthe ASEAN member nations, providesfunding for a multilateral currencyswap scheme intended to combatshort-term liquidity issues, similar tothe International Monetary Fund(IMF).
The finance ministers of the 13
countries involved in the agreementwill make the final decisions for theincrease when they meet again inMarch 2009. China, Japan, and SouthKorea are expected to foot a large por-tion of the bill.
Currencies in the region fell hard vs.the dollar in early 2009. The Singaporedollar lost 6.9 percent in 2009 throughFeb. 25 (Figure 1). The Thai bhat,which collapsed during the 1997 crisis,fell 3 percent in the same period, whilethe Japanese yen lost 7.4 percent.
40 March 2009 CURRENCY TRADER
INDUSTRY NEWS continued
Managed money: Barclay Trading Groupscurrency trader rankings for January 2009
Top 10 currency traders managing more than $10 million
as of Jan. 31, ranked by January 2009 return.
2009 $ Under Rank Trading January YTD mgmt.
advisor return return (millions)
1. Goldman Sachs (Fund. Currency) 6.47% 6.47% 306.8
2. Alder Cap'l (Alder Global 20) 5.20% 5.20% 170.0
3. Rhicon Currency Mgmt (4XiM) 4.71% 4.71% 20.04. Dominion Capital Mgmt. (FX) 4.08% 4.08% 10.0
5. IKOS G10 Currency Fund 3.79% 3.79% 719.7
6. Alder Cap'l (Alder Global 10) 2.90% 2.90% 36.0
7. Geo Economic Mgmt. System Ltd 2.66% 2.66% 44.7
8. IKOS Currency 2.31% 2.31% 719.7
9. JB Currency Hedge (Discr Seg Port) 2.28% 2.28% 20.4
10. Capricorn Advisory Mgmt (FXG10) 2.15% 2.15% 11.8
Top 10 currency traders managing less than $10 million and more than
$1 million as of Jan. 31, ranked by January 2009 return.
1. Quant Trading (FX Quant 11) 8.00% 8.00% 1.0
2. Informed Funds (Trend Strategies) 6.94% 6.94% 7.23. Mellon Capital Mgmt (Currency Opp) 5.64% 5.64% 9.0
4. Zone Cap'l FX Managed Account 4.11% 4.11% 1.0
5. Wealth Builder FX Group 3.70% 3.70% 1.1
6. M2 Global Mgmt (5X) 3.27% 3.27% 1.0
7. Putnam Currency Alpha Fund 3.24% 3.24% 1.8
8. Blue Fin Capital (Managed Currency) 3.11% 3.11% 1.3
9. Capricorn Advisory Mgmt (fxMT Growth) 1.71% 1.71% 1.0
10. Aspect Capital (Gl. Currency) 1.66% 1.66% 5.0
Source: BarclayHedge (http://www.barclayhedge.com). Based on estimates of the composite of all
accounts or the fully funded subset method. Does not reflect the performa