Forex Analysis and Trading E-Book

T. J. Marta

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 331

Veröffentlichungsjahr: 2010

Beschreibung

The forex market is huge and offers tremendous trading opportunities. There are many different tools for analyzing the forex market. But what are the best tools and the best ways to use them to trade most effectively? Forex Analysis and Trading organizes the most widely used--although disparate--approaches to forex analysis into one synergistic, robust, and powerful framework. This system draws on fundamental, position, and technical analyses to identify profitable currency positions, enabling traders to make the best decisions regarding major currencies. Marta and Brusuelas are forex trading professionals with years of experience analyzing and trading every major currency.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Acknowledgements

Introduction

Fundamental Analysis

Positioning Analysis

Technical Analysis

PART I - Fundamental Analysis

Chapter 1 - Purchasing Power Parity

Law of One Price

Purchasing Power Parity

Is the Dollar Overvalued?

Chapter 2 - Real Exchange Rates and the External Balance

Productivity Shocks and the Long-Run Equilibrium Exchange Rate

Terms of Trade and Exchange Rates

Fiscal Changes and the Long-Run Real Equilibrium Exchange Rate

International Investment and Exchange Rates

Chapter 3 - Exchange-Rate Determination over the Medium Term Parity ...

Parity Conditions

Chapter 4 - Fair-Value Regressions

Long-Term Fair-Value Regression for EUR/USD

Long-Term Fair-Value Regression for USD/CAD

Long-Term Fair-Value Regression for AUD/USD

Weekly Fair-Value Regressions

Daily Fair-Value Regressions

Conclusion

PART II - Market Sentiment and Positioning

Chapter 5 - Futures Non-Commercial Positioning

Which Measures for Position and Price Action to Use?

EUR/USD and CFTC Non-Commercial Positions

GBP/USD and CFTC Non-Commercial Positions

USD/CHF and CFTC Non-Commercial Positions

USD/JPY and CFTC Non-Commercial Positions

USD/CAD and CFTC Non-Commercial Positions

AUD/USD and CFTC Non-Commercial Positions

NZD/USD and CFTC Non-Commercial Positions

Finding the Data: Setting Up CIXs in Bloomberg

Conclusion

Chapter 6 - Risk Reversals

Analysis of Correlation with Price Action

EUR/USD and Risk Reversals

GBP/USD and Risk Reversals

USD/CHF and Risk Reversals

USD/JPY and Risk Reversals

USD/CAD and Risk Reversals

AUD/USD and Risk Reversals

NZD/USD and Risk Reversals

Conclusion

PART III - Technical Analysis

Chapter 7 - Trend-Following Indicators

Moving Averages

Parabolic SAR (Stop and Reverse)

Moving-Average Convergence/ Divergence (MACD) Indicator

Conclusion

Chapter 8 - Oscillators

Relative Strength Index (RSI)

Findings from RSI Analysis

Bollinger Bands

Slow Stochastics

Conclusion

Chapter 9 - Technical Pattern Recognition

Fibonacci Ratios/Levels

Head-and-Shoulders Patterns

Channels

Multiple Tops/Bottoms and Triangles/Wedges

Japanese Candlestick Patterns

Conclusion

Case Studies

CONCLUSION

INDEX

ABOUT THE AUTHORS

ABOUT BLOOMBERG

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A complete list of our titles is available at www.bloomberg.com/books

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© 2009 by T. J. Marta and Joseph Brusuelas. All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022 or send an e-mail to press @ bloomberg.com.

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Library of Congress Cataloging-in-Publication Data

Marta, T. J.

Includes bibliographical references and index.

Summary: “Two foreign exchange trading professionals share their unique top-down approach to currency analysis. Their approach combines the best of fundamental, sentiment, and technical analysis to reveal the most profitable trading opportunities in one of the world’s largest markets”--Provided by publisher.

ISBN 978-1-57660-339-0 (alk. paper)

1. Foreign exchange market. 2. Foreign exchange futures. 3. Currency convertibility.

4. Investment analysis. I. Brusuelas, Joseph. II. Title.

HG3851.M315 2009

332.4’5--dc22

2009039852

This book is dedicated first to my wife, Melissa, and my children, Alexis and Joseph, who have supported me during this effort; second, to Don Alexander and Robert Sinche, who provided solid and steady mentorship; and third, to all who embark on the quest for the Holy Grail of currency valuation.

—T. J. M.

This book is dedicated to my wife, Amanda Jefferis: a woman of extraordinary intelligence, sweetness, and grace without whom life would be far less meaningful.

—J. B.

ACKNOWLEDGMENTS

I’d like to acknowledge the support of my wife, Melissa, and children, Alexis and Joseph, who put up with numerous lost weekends and cancelled and delayed plans. From a professional perspective, this book would not have been possible without Don Alexander, who gave me my first shot on Wall Street and provided me with the framework by which to analyze long-term currency trends. Bob Sinche, my manager at Citigroup’s institutional foreign-exchange research group, provided a tireless example of leadership and multifaceted analysis of foreign-exchange valuation and trading opportunities. I’d also like to thank the numerous professionals I’ve had the pleasure of meeting and discussing Forex with over the years. Finally, special thanks to Stephen Isaacs of Bloomberg for his editorial skills in guiding me through the process of putting years of thoughts and experience into some semblance of organized layout.

—T. J. M.

I would like to acknowledge the support of my father, Herman, and my mother, Donna, and thank my brothers Jason and James and my sister Rebecca, and her husband, A. J., for their love and encouragement. On a professional level, Robert Since, Ryan Sweet, Aaron Smith, Chris Cornell, Nathan Topper, and Michael Bratus have all provided valuable insight during the writing of this text. Finally, I would like to thank our editor, Stephen Isaacs, whose editorial skills made a complex and time-consuming effort so much easier than it should have been.

—J. B.

INTRODUCTION

How far will the dollar adjust? Within the context of a $3-trillion-a-day foreign-exchange market, the very question of the basic value of the greenback is perhaps the single biggest day-to-day issue in the global economy. Given the recent turbulence experienced by the global economy, the size of the U.S. current account deficit, the rate of consumption in China, and the structural impediments to growth in the European Union, the fundamental question of the adjustment of the dollar has become more—not less—important in the basic functioning of the global economy.

An economist can primarily focus on how larger macroeconomic changes will affect the value of the euro/dollar in the long run. Yet the larger macroeconomic questions that may affect the valuation of a currency pair over the long run may not be so useful in determining the fair value of a pair over the course of weeks or days, and almost never in the course of a single trading session. Portfolio managers and investors with position horizons of days and weeks cannot wait for long-term theory to “kick in,” and traders must instantaneously digest news, economic data releases, and trade flows. A currency strategist interacts with all three types of market participants both as a consumer of those groups’ information and as a provider of information to those groups. The range of both inputs and demands requires the application of a variety of methods by which to determine the value of the dollar.

Unlike many texts on foreign-exchange analytics, this text will not present one overarching methodology as “the way” to determine fair currency values. Rather, our approach, which relies on a multidisciplinary examination, provides an analytical framework for institutional analysts to utilize in making successful investment decisions regarding the currencies of major countries. Rather than presenting the disparate disciplines that are employed to make currency decisions in separate vacuums, this book recognizes that different perspectives take on key relevance in markets under varying conditions, and therefore, that the best investment decisions are based on inputs from the full spectrum of considerations.

Our analytical paradigm consists of three main groupings: fundamental, positioning, and technical. By employing this analytical framework, we believe that this text provides an accurate and realistic look into how foreign-exchange analysts, economists, investors, and traders actually seek to put together profitable investment and trading strategies and mitigate risk in the open global economy.

The foundation and starting point of our framework consists of fundamental analyses to provide macroeconomic and cross-asset perspectives. The second grouping consists of positioning analysis, which attempts to identify extremes in positioning—and so potential turns in market sentiment/direction. Finally, technical analysis provides even more precise price action “triggers” for investment and trading decisions.

Figure I.1 Comprehensive Currency Analysis Framework

Fundamental Analysis

We begin the analysis of any currency using fundamental variables. The very broadest considerations involve purchasing power parity (PPP) and real effective exchange rate (REER) analysis. These frameworks permit an analyst to establish a contextual perspective regarding the “value” of a particular currency. These analytical tools are well suited to long-run exchange-rate determination and are useful to buy-side firms that practice buy-and-hold strategies or global firms that are engaged in long-term planning in a dynamic foreign-exchange environment.

However, the limits of the long-run approach favored by academics and some buy-side institutions are quite observable. Long-run valuations are so broad in scope, they often provide only modest value to traders or risk managers who require more detailed analysis to determine value and potential price action over a more actionable time horizon.

A more precise valuation of a currency’s fundamental fair value for the medium term can be obtained using regression analysis based on monthly economic and financial data. Regressing the currency against financial data using fifty-two weeks of weekly data further refines this estimate. Finally, recognizing that different fundamental considerations can dominate price action over shorter time horizons, one can employ regression analysis of daily price action using sixty-day time horizons to obtain short-term valuations.

Positioning Analysis

Whereas the above methods provide a robust analysis using macroeconomic and cross-asset underpinnings to explain valuations and price action, they do not always lead to profitable decisions. Too often, a purely fundamental approach ignores the psychological aspect of market behavior. According to an old, wise adage, “the markets can stay irrational longer than an investor can stay solvent.” Thus, we incorporate a second level of analysis based on measures of market positioning that allows market actors and risk managers to identify extremes and potential changes in the direction of the market.

Two publicly available measures of market sentiment are the positions reported to the U.S. Commodity Futures Trading Commission (CFTC) by non-commercial traders (sometimes referred to as speculators) and options risk reversals. The CFTC positions are collected by the CFTC once per week on Tuesdays and released on Fridays. Extremes in the positions of non-commercial traders relative to the CFTC positions in recent months allow an analyst to identify when at least one segment of the trading/investing community has not only likely exhausted its ability to contribute further to a price trend, but also could be more likely to begin trading the other way in a market, precipitating a reversal in price action. The drawback of the data is that it is published late on Friday afternoons in the United States when liquidity is low, and that it is three days old when released.

A timelier positioning indicator, although one measuring a different segment of the market, is the risk-reversal skew in the options market (risk reversals). Risk reversals measure the difference in premium for puts versus calls on a particular currency. Extreme readings suggest that options traders are “off balance” in their view regarding future price action, which suggests an increased potential for a reversal in price action. Whereas shifts in both the CFTC and risk reversals tend to correspond to shifts in price action relative to trend, they are frustratingly ambiguous in providing concrete entry or exit levels, and this leads us to the third section of our currency analysis: technical analysis.

Technical Analysis

Detractors liken technical analysis to reading tea leaves. Technical analysts retort that price action “says it all” regarding what is going on in the market and scoff at how often “fundamentalists” obstinately hold a position when price action is screaming that one’s view of how the world works “just isn’t so.” We remain firmly neutral in this bitter debate, noting only from a pragmatic perspective that if enough market participants decide that price action in regards to a channel support, a head-and-shoulder neckline, or a 76.4 percent Fibonacci retracement is important, then it probably is important.

Consequently, we are not looking to establish “black box” technical trading models, but to offer a framework that incorporates changing market sentiment and an appreciation of which specific levels or patterns could be decisive in influencing behavior and price action. In viewing the foreign-exchange markets through a multidimensional prism, a decision maker can make more informed—and profitable—decisions.

PART I

Fundamental Analysis

As we write this in the spring of 2009, the near collapse of the global financial system in 2008 has ushered in the most severe economic downturn since the Great Depression. Dislocation in financial markets caused by the breakdown of monetary discipline, lack of financial regulation, and imprudent lending standards by financials has unleashed a sea of volatility in the global market for foreign exchange.

This market, with a volume of close to three trillion dollars per day, has perhaps experienced its greatest volatility of any time during the era of floating exchange rates. Between January 2007 and February 2009, the exchange rate of the euro/dollar (EUR/ USD) has moved from a position of overvaluation to undervaluation and back. The yen has seen highs not experienced since 1995, and the stabilization of emerging market currencies such as Mexico’s has been lost amid 10 percent declines in valuation in a single day against the dollar.

From December 2008 to February 2009, market sentiment swung from expecting the long-term secular decline of the dollar to the greenback threatening to drive towards parity with the euro. A few short months later, the new quantitative easing policy of the U.S. Federal Reserve, which provides an outsized risk to the long-term inflation prospects of the United States, has swung the market back in the other direction. The euro once again, as of June 2009, appears to be ascendant and the dollar in decline. Unless, of course, the European Central Bank adopts its own version of quantitative easing that will engender another period of volatility in currency markets. Of course, the Chinese call for the adoption of a new global reserve currency, due to the problems in the advanced economies, carries with it the possibility to reorder the global economic landscape.

Under such conditions, the attempt by economists and currency strategists to construct short-term trading strategies or corporate actors to manage foreign-exchange risk is fraught with extreme difficulty. But the advent of a global economy that demands the exchange of currency on a continuous basis does not provide such a luxury.

Yet what on one hand may seem to be a curse, on the other offers tremendous opportunity. For the seasoned foreign-exchange trader this is a difficult but potentially lucrative environment in which to put into practice the ideas, tactics, and strategies at the heart of this text.

So, under such conditions, how does one derive the fair value of the dollar versus the other major currencies? Where should one start, given the significant disturbances in the foreign-exchange markets observed over the past forty years and the probability of further volatility ahead? What value does fundamental analysis have for the currency analyst in such an environment? The first section of this text intends to provide an answer to those potent questions by presenting the theoretical backbone of fundamental analysis, which still plays a significant role in assessing fair exchange-rate values.

1

Purchasing Power Parity

Purchasing power parity (PPP): three words that are sure to warm the heart of any currency economist. But that same concept is certain to cast a glaze over the eyes of most observers of foreign-exchange markets and send a surge of skepticism up the spines of experienced foreign-exchange traders. Yet, the value of such a tried-and-true method of deriving foreign-exchange rates has not diminished.

The Organization for Economic Cooperation and Development (OECD) defines PPP as the rate of currency conversion that equalizes the purchasing power of different currencies by eliminating the differences in price levels between countries. Put a bit more simply, PPP is a method through which one can evaluate how changes in the absolute or relative price level drive changes in the underlying exchange rate between two currencies. This chapter discusses the relative usefulness and shortcomings of employing PPP in foreign-exchange analysis.