Currency Trading and Intermarket Analysis E-Book

Ashraf Laïdi

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Veröffentlichungsjahr: 2008

Beschreibung

As head FX strategist at CMC Markets–one of the world's leading forex/commodity brokers–Ashraf Laidi understands the forces shaping today's currency market and their interplay with interest rates, equities, and commodities. And now, with Currency Trading and Intermarket Analysis, he shares his extensive experiences in this field with you. Throughout the book, Laidi outlines the tools needed to understand the macroeconomic and financial nuances of this dynamic field and provides you with insights that are essential to making the most of your time within it.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

Foreword

Preface

Acknowledgements

CHAPTER 1 - Gold and the Dollar

END OF BRETTON WOODS SYSTEM MARKS GOLD’S TAKEOFF

FED TIGHTENING AND FX INTERVENTIONS REIN IN GOLD RALLY

CENTRAL BANKS’ GOLD SALE AGREEMENTS

GOLD-USD INVERSE RELATION

RECENT EXCEPTIONS TO THE INVERSE RULE

USING GOLD TO IDENTIFY CURRENCY LEADERS AND LAGGARDS

GOLD’S SECULAR PERFORMANCE

VALUING CURRENCIES VIA GOLD

GOLDEN CORRELATIONS

DON’T FORGET FALLING GOLD PRODUCTION

GOLD AND EQUITIES: HARD VERSUS MONETARY ASSETS

EQUITY-TO-GOLD RATIOS

THE ROLE OF THE SPECULATORS

GOLD IS PART OF A LARGER STORY

CHAPTER 2 - Oil Fundamentals in the Currency Market

FROM A GOLD STANDARD TO AN OIL STANDARD (1970s-1980s)

OIL GLUT AND PRICE COLLAPSE (1981-1986)

THE SUPER DOLLAR OF 1980-1984: THE WORLD’S THIRD OIL SHOCK

WORLD INTERVENES AGAINST STRONG DOLLAR (1985-1987)

IRAQ’S INVASION OF KUWAIT AND THE GULF WAR (1990-1991)

THE ASIAN CRISIS AND OPEC’s MISCALCULATION (1997-1998)

OIL THRIVES ON WORLD GROWTH, DOT-COM BOOM (1999-2000)

IRAQ WAR FUELS OIL RALLY, DOLLAR FLOUNDERS, CHINA TAKES OVER (2002 TO PRESENT)

SUMMARY

CHAPTER 3 - When the Dollar Was King (1999-2001)

THE MAJOR THEORIES

ANNUAL PERFORMANCE ANALYSIS OF INDIVIDUAL CURRENCIES

SUMMARY

CHAPTER 4 - The Dollar Bear Awakens (2002-2007)

2002: THE BEGINNING OF THE DOLLAR BEAR MARKET

2003: DOLLAR EXTENDS DAMAGE, COMMODITY CURRENCIES SOAR

2004: GLOBAL RECOVERY BOOSTS CURRENCIES AGAINST U.S. DOLLAR

2005: COMMODITIES SOAR ALONGSIDE DOLLAR, CARRY TRADES EMERGE

2006: DOLLAR VULNERABLE AS FED ENDS TWO-YEAR TIGHTENING

2007: RECORD OIL BOOSTS LOONIE, HELPLESS FED HITS GREENBACK

LESSONS LEARNED

CHAPTER 5 - Risk Appetite in the Markets

CARRY TRADES IN FOREIGN EXCHANGE

USING RISK APPETITE TO GAUGE FX FLOWS

TYING IT ALL TOGETHER: 1999-2007

CHAPTER 6 - Reading the Fed via Yield Curves, Equities, and Commodities

YIELD CURVES AND THE ECONOMY

TYPES OF YIELD CURVES

RATIONALE OF INVERTED YIELD CURVE IMPLICATIONS

EFFECTIVENESS OF YIELD CURVE SIGNALS’ IMPLICATIONS

GREENSPAN’S “CONUNDRUM” PROVED BERNANKE’S PROBLEM

IMPLICATIONS FOR GROWTH, STOCKS, AND CURRENCIES

TYING INTEREST RATES TO THE GOLD-OIL RATIO

CONCLUSION

CHAPTER 7 - U.S. Imbalances, FX Reserve Diversification, and the U.S. Dollar

THE U.S. TWIN DEFICITS

U.S. CURRENT ACCOUNT DEFICIT: OLD PROBLEM, NEW CHALLENGES

ADDING THE BUDGET BALANCE TO THE MIX

FINANCING THE DEFICITS: THE PATH TO UNSUSTAINABILITY?

DISSECTING U.S.-BOUND FOREIGN CAPITAL FLOWS

U.S. STOCKS AND BONDS VIE FOR FOREIGN MONEY

CAPITAL FLOWS SHIFT IDENTITIES

FOREIGN DIRECT INVESTMENT AND M&As

HOW LONG WILL FOREIGN CAPITAL BE AVAILABLE ON THE CHEAP?

DON’T IGNORE U.S. INVESTORS’ FLOWS ABROAD

CURRENCY RESERVE DIVERSIFICATION: OPEC AND THE MIDDLE EAST

FURTHER CURRENCY DIVERSIFICATION IS INEVITABLE

THE VIEW AHEAD

CHAPTER 8 - Commodities Supercycles and Currencies

THE CURRENT COMMODITY CYCLE VERSUS PREVIOUS CYCLES

DISSECTING COMMODITY CLASSES

COMMODITIES AND THEIR CURRENCIES

DEVELOPING WORLD TO MAINTAIN RIPE OUTLOOK FOR FOOD AND GRAINS

ENERGY EFFICIENCY NOT ENOUGH TO HALT HIGH OIL

COPPER AND GOLD TO SHINE ON LONG-TERM FUNDAMENTALS

COMMANDING HEIGHTS OR COMMON BUBBLES?

CHAPTER 9 - Selected Topics in Foreign Exchange

REVISITING YIELD CURVES

IS DOLLAR STABILITY A NECESSITY?

HOW FAR WILL COMMODITIES OUTSTRIP EQUITIES?

U.S. POLITICS AND THE U.S. DOLLAR

CONCLUSION

Bibliography

About the Author

Index

Additional Praise for Currency Trading and Intermarket Analysis

“Ashraf Laïdi shows his deep and broad knowledge of the currency markets in this book. As one of the most prolific analysts on the Forex markets, Laïdi outlines the historical linkage of monetary policy, world finance, and currency markets into a readable primer for any student of the global markets.”

—Ginger Szala, Publisher/Editorial Director, Futures Magazine Group

“Barron’s readers often ask if there is a book to explain to them how markets really work. After plowing through textbooks and graduate studies, it took three-plus decades of covering markets to learn that academics live in a different world than the day-to-day markets. Ashraf Laïdi has produced a work that is accessible to the layperson but at the same time provides a sophisticated view of all markets—commodities, precious metals, credit, and equities—and how they interact with the biggest market of all, currencies. If only I had this book when I started out!”

—Randall W. Forsyth, Editor, Barron’s Online

“A very detailed book with an important flow of information and specific details related to some well-known periods of the USD changes. It should clearly please beginners seeking a better understanding of FX movements over the last decades. For sophisticated investors, they will appreciate discovering the new angles introduced in dissecting the major developments in currencies.”

—Hamid Bousba, Director, Senior Portfolio Counsellor,

Citi Private Bank, Citibank (Switzerland)

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Copyright © 2009 by Ashraf Laïdi. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Laidi, Ashraf. Currency trading and intermarket analysis : how to profit from the shifting currents in global markets / Ashraf Laidi. p. cm. - (Wiley trading series) Includes bibliographical references and index.

eISBN : 978-0-470-47216-3

1. Foreign exchange market. 2. Foreign exchange futures. 3. Investment analysis. I. Title. HG3851.L315 2009 332.4’5-dc22 2008032245

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To my parents Ahmed & Aisha Laïdi

Foreword

On the day of my birth, “Good Friday” March 31st, 1961, the Dow Jones Industrial Average was sitting at 678.5. The dollar was still anchored to gold, exchangeable at $35 an ounce. Interest rates were regulated and low, the economy was strong and steady in the fifteen years after the end of World War II.

The “Bretton Woods” global currency system of fixed exchange rates was in place and there was relative stability in the pre-Vietnam, pre-hippie years.

Ten years later, the next, and only, time my birthday would fall on “Good Friday,” such stability was no longer assured. A few short months later, the stability fostered by the 1944 “Bretton Woods Accord” would be shattered when President Richard Nixon abandoned the gold standard on August 15, 1971.

I was ten years old and don’t remember the event. I only remember the ramifications.

Within a matter of months, I recall that inflation became a national issue. As a young boy growing up in blue collar Buffalo, New York, I was perplexed as to why, so suddenly, food and energy costs were rising in a way that hurt my family’s finances.

My father never made that much money to begin with, so the incipient inflation that would rage another 10 years, hurt us in ways I never understood.

We began crossing the “PeaceBridge,” a span that connected Buffalo to the edge of Canada and bought groceries in another country where they were cheaper.

Shortly thereafter came the first of two oil shocks, wage and price controls, “Whip Inflation Now” buttons, and an economy so ragged and uneven we left a dying town for the presumed land of milk and honey, California.

But even there, another oil shock hit in 1979, gas lines were long and mean, social unrest set in, my first car loan, $2,000 for a tan 4-door, 1979 Chevy Nova (a babe magnet if ever there was one) cost me 20½ percent in interest.

The economic calm of my birth year had turned to chaos and nearly ruinous chaos, at that.

Much of it came amid a radical departure from the “sound money” principles that drove our economy in the post-War years.

After twenty years of relative calm, from 1981 to 2001, again we find ourselves in a similar predicament, though with different root causes. The dollar, until recently, was falling precipitously as this latest credit crisis dramatically weakened the U.S. economy. A combustible mix of financial engineering and excess leverage has cost us dearly.

Among the fixes that may one day be necessary may be a more formal, global foreign exchange regime. While I am not necessarily a fan of returning to the “gold standard,” I do understand and personally appreciate the need for a more stable global monetary system that contains and restrains some of the more animal spirits of markets gone wild.

It is my fervent hope that in the ensuing months and years we will find new and better ways to limit the damage that financial market panics have wrought, particularly the one of most recent vintage, which I believe has the capacity to entirely destabilize the world economy.

We need a much more enlightened, coordinated, and concerted global policy response to the financial market meltdown we are now enduring. Part of it may include a reform of our currency trading system. The currency markets are the biggest and most liquid markets in the world. And even though in a free-floating exchange rate system, a country’s currency, rather than its interest rates or its real economy, acts as the “shock absorber” during times of stress. That shock absorber is being tested today.

Hopefully it will survive the test. Nearly half a century into my life, I am hoping that my ten-year-old daughter and my other two children do not have to face the wrenching dislocations I did some thirty-seven years ago, and will instead enjoy the serene calm that existed on the day of my birth, not the chaos that erupted just after my tenth birthday.

Ron Insana

Preface

As the weakness in the U.S. dollar becomes a prolonged trend in the foreign exchange market and the euro assumes an increasingly credible position in global exchanges, currencies are no longer a topic restricted to economists or bank traders. With the multiyear bull markets in stocks, bonds, and real estate having largely concluded their upward run, global investors remain on a continuous quest for yield. In the United States, individual investors have more than quadrupled their holdings of non-U.S. stocks between 1996 and 2007, elevating their awareness of foreign economies and currencies to new heights. Meanwhile, the multitude of banks and brokerage houses offering currency trading services for investors has increasingly integrated foreign exchange into investor portfolios worldwide.

Academics and market professionals have done their bit in producing literature about the mechanics of foreign exchange markets and the theories underpinning them. But relatively little is written on how to explore the practical intermarket relationships that shape currencies via interest rates, equities, and commodities. Most investors have come across the notion of interest rates’ impact on foreign exchange rates, but have yet to grasp the situations when interest rates and central bank policy are displaced by shifting risk appetite and economic growth. While central banks aim to manage expectations in bond and currency markets, they tend to misread such risks as asset price inflation and financial market contagion, leaving professional and institutional investors wrong-footed. Integrating commodities into the mix, record-breaking prices have significantly driven the foreign exchange market, raising the need for investors to determine the currencies most responsive to price developments in energy, metals, food, and agricultural raw materials. And given the plethora of media types generating constant financial market information and advice, investors need to separate noise from sound market and economic signals.

This book aims at placing readers ahead of the pack in assessing shifts in economic and market dynamics so as to better predict central bank policy changes and make profitable decisions in currency markets accordingly. It also strives to build an understanding of market risk appetite and to highlight the currency implications of the changes in risk-driven flows. While the book’s central theme is the foreign exchange market, it exposes the intermarket intricacies shaping currencies via equity, bond, and commodity markets. Noneconomic/market considerations, such as geopolitical events, are also addressed in detail to explain the changing trends in low- and high-yielding currencies.

The intended readership comprises those requiring a comprehensive breakdown of the intermarket forces driving foreign exchange rates. Anyone wishing to learn how to anticipate changes in central bank policies and their market consequences will find value in the chapters about yield curves and the Federal Reserve. In addition to those trading currencies for themselves, a bank, or a corporate treasury, traders of interest rate and equity indexes may also benefit from the unified approach in the book. Economists, students, and market reporters seeking a comprehensive analysis of the real-life interrelationships between currencies, equities, interest rates, and commodities will find here a unique analysis of tried and tested market patterns.

Chapter 1 starts with a historical investigation of the relationship between gold and the U.S. dollar, before introducing a gold-based approach to valuing the major currencies and determining their secular strengths and weaknesses throughout the past decades. The chapter also touches upon the role of gold relative to other commodities as a preview for Chapter 8, which is devoted to commodities supercycles.

Chapter 2 offers detailed analysis of the economic and geopolitical events shaping oil and the U.S. dollar since the 1971 collapse of the Bretton Woods currency system. The major shifts in oil diplomacy and U.S. monetary policy are carefully addressed, providing incisive examination into the evolving powers of oil-producing nations and their impact on the world economy.

Chapters 3 and 4 contain an original approach in ranking the major foreign exchange rates between 1999 and 2007 in relative and absolute terms, while citing the fundamental forces underpinning currency performances. A wide range of variables are tackled, such as national and world GDP growth, interest rates, capital flows, external balances, risk appetite, and commodity and equity markets.

Chapter 5 devotes substantive analysis to the role of carry trades in shaping risk appetite via low- and high-yielding currencies. An area of the financial market that is seldom understood by academics but regularly tackled in trading circles, risk appetite is addressed with demonstrable examples of major shifts in volatility, corporate spreads, and currency futures.

Chapter 6 picks up where several books on currencies left off in considering interest rates. The chapter exposes the relationship between short- and longer-term interest rates and how it is best applied to anticipate vital shifts in central bank decisions and turning points in economic growth. The relationship between oil and gold is also used as a complement to improve the forecasting of these important cyclical shifts.

Chapter 7 highlights the widening budget and current account deficits of the United States and the changing patterns of capital flows financing these imbalances. Central bank currency reserves are analyzed in regions such as the oil-producing nations, while assessing the evolution of power between the dollar and the euro.

Chapter 8 examines the latest commodity boom with a breakdown by individual commodity group and the implication for currencies. In addition to assessing the performance of commodity currencies, this chapter evaluates the cyclical pattern between commodities and equities and the implications for monetary and hard assets.

Chapter 9 introduces diverse currency themes ranging from the historical relationship between U.S. politics and the dollar, to the cyclical evolution of commodities relative to equities. The chapter revisits the U.S. yield curve and interest rate cycles, while including the USD/JPY exchange rate as an additional element in confirming tightening interest rate cycles.

Currency markets have increased in size and speed and so has their impact on the global financial scene. Attaining a solid grasp of these markets is no longer limited to figuring out interest rate and growth differentials. Currency Trading and Intermarket Analysis offers comprehensive tools to maneuver through macroeconomic and financial market nuances with the objective of making profitable decisions in foreign exchange markets.

Acknowledgments

I would first like to express my gratitude to Kevin Commins of John Wiley & Sons, who turned my aspiration of authoring a book into a reality. His command of the markets as well as his flexibility to work through the multi-themed dynamics of this book have proven invaluable for this project. I owe exceptional debt to my editor Emilie Herman, whose patience and understanding of my unfathomable time constraints were vital in maintaining mobility to the book and its frequent revisions. And thanks also to Meg Freeborn and Laura Walsh of Wiley.

My sincere thanks to Patrick Kempf, whose research prowess and resourcefulness exceeded expectations of quality and expediency regardless of what part of the world he happened to have been in. I also thank Eric Chang and Colin Cieszynski for always providing me the help I needed at short notice.

Many thanks to Vassili Serebriakov, Vicki Schmelzer, and Mohannad Aama, whose suggestions, feedback, and thought-provoking conversations helped raise vital questions on the divergence between the economy and the markets. A heartfelt thanks to Sarah Mitwalli for her support.

My gratitude to Ron Insana, Peter Garnham, and Alan Abelson for their incisive coverage of the markets and constant challenging of the conventional ways of analysis and assessment. I extend my gratitude to John Murphy, whose 1991 work on intermarket analysis revolutionized the all-encompassing approach toward financial markets and the global economy. A special thanks to Drs. Scheherazade Rehman and Hossein Askari for conveying their wealth of academic and practical expertise in international finance and economics in such an enthusiastic, professional, and inviting manner.

My love and heartfelt gratitude to my parents and sister, Ahmed, Aisha, and Adila, for their love and unconditional support.

CHAPTER 1

Gold and the Dollar

The relationship between gold and the dollar has long mirrored the decades-old battle between real tangible assets and financial assets. Traditionally the dollar has been the representative currency in any analysis of gold, due to its sustained role as the world’s reserve currency and the preferred means of exchange and invoicing transactions. The creation of the euro in 1999 and its subsequent ascent as a credible and strengthening currency has certainly started to challenge the dollar’s leading position among world currencies, but the euro has yet to dethrone the greenback from its dominating perch. Nonetheless, the probability of such occurrence has been gradually on the rise and may fully materialize as early as 2015.

Considering the 400-year historical connection between gold and paper currencies, the 100 years of dollar dominance, and the role of gold in initiating the present world currency order, it is appropriate to begin this book with the evolution of the relationship between gold, the dollar, and other currencies. Aside from examining the eventual trend between gold and the greenback, this chapter sheds light on how currency market participants can absorb the price developments in gold vis-à-vis currencies and equities in order to gain a better grasp of the cyclical shifts underpinning markets and economics.