Barron’s TRADING and and the theories underpinning it have ... · arena, Currency Trading and Intermarket Analysis will put you in a better position to assess shifts in economic

LAÏDI$70.00 USA / $77.00 CAN

Currencies are becoming an integral part of

many investors’ portfolios and have grown to

be a distinct asset class in banks’ investment

products. While the mechanics of the forex market

and the theories underpinning it have been widely

explored, there has been little discussion regarding the

practical intermarket relationships shaping currencies

via interest rates, equities, and commodities.

Nobody is more familiar with this situation than author

Ashraf Laïdi. As head FX strategist at CMC Markets—

one of the world’s leading forex/commodity brokers—

he 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 fi eld with you.

Following an innovative approach based on what still

works and what doesn’t in currency market analysis;

applying charts and case studies to intermarket

analysis in unprecedented ways; and weighing both

old theories and newly emerging phenomena in this

arena, Currency Trading and Intermarket Analysis

will put you in a better position to assess shifts in

economic and market dynamics and make more

profi table trading decisions in the process.

Some of the essential issues addressed include:

• The latest commodity boom with a breakdown by individual commodity group and its implication for currencies

• The relationship between short- and long-term interest rates and how it can be applied to anticipate vital shifts in central bank decisions and turning points in economic growth

• The drivers of risk appetite in the market and their effect on foreign exchange

• Central bank currency reserves in regions such

as the oil-producing nations, and the evolution of power between the Dollar and the Euro

• A gold-based approach to valuing the major currencies and determining their secular strengths and weaknesses over the past decades

• And much more

Currency trading has increased in size and speed, and

so has its impact on the global fi nancial scene. Having

a solid grasp of these markets is no longer limited

to fi guring out interest rate and growth differentials.

Currency Trading and Intermarket Analysis outlines

the tools needed to understand the macroeconomic

and fi nancial nuances of this dynamic fi eld and

provides you with insights that are essential to making

the most of your time within it.

( c o n t i n u e d f r o m f r o n t f l a p )

( c o n t i n u e d o n b a c k f l a p )

ASHRAF LAÏDIFOREWARD BY RON INSANA

HOW TO PROFITFROM THESHIFTING

CURRENTS IN GLOBAL MARKETS

CURRENCYCURRENCYTRADINGTRADING andandINTERMARKETINTERMARKETANALYSISANALYSIS

Praise for CURRENCY TRADING AND INTERMARKET ANALYSIS

“ Ashraf Laïdi is virtually without peer in his grasp of currency movements and their signifi cance for fi nancial and commodity markets and the global economy. As his new book illustrates, he’s blessed with an uncommon knack for describing the meaning of trends in those often erratic markets in clear and concise fashion.”—Alan Abelson, Columnist, Barron’s

“ Ashraf Laïdi’s book is sure to become an instant classic from Wall Street to Main Street. For the fi rst time, a real expert has masterfully connected the rhymes and reasons behind currency, gold, oil, and other commodity price and interest rate movements in a way that is both clear and indispensable for the practitioner. In these turbulent times, the investor who wants to stay ahead of the curve and reap above average returns, the business fi nance student who wants to get the feel of the marketplace and enrich his or her educational experience, the international business fi nance professor who wants to make the class relevant, and the policymaker who wants to engineer stable and sustained growth must read this book and a number of times, from cover to cover.”— Hossein Askari, Iran Professor of International Business and Professor of International

Affairs, The George Washington University

“ A comprehensive guide to the factors that drive the FX market, with a particular emphasis on the major currency pairs.”—Brad Setser, Fellow, Geoeconomics, Council on Foreign Relations

“ Ashraf Laïdi’s insights on the dollar have enlightened the millions who have seen him on TV or read his analysis. His book explains in simple language the complex inter-relationships between the dollar, oil, gold, and interest rates. Valuable information for all investors—even the pros.”—Susie Gharib, Anchor, PBS’s Nightly Business Report

“ Ashraf Laïdi is well known to city journalists as the rising star of the currency markets. His book offers a majestic sweep of the global fi nancial system, showing how credit, oil, gold, and equity markets all interact to shift currencies one way or another. It is a primer on thirty years of exchange rate drama. If you want to know when to play the carry trade and when to steer well clear, this well-crafted opus is probably the best guide you are going to fi nd.”—Ambrose Evans-Pritchard, International Business Editor

“ Ashraf Laïdi has been an invaluable source of insight as global currencies have endured their fi ercest bout of turbulence for years. This book offers an accessible, yet comprehensive, guide to the world’s largest and perhaps least understood fi nancial market.”—Peter Garnham, Currencies Correspondent, Financial Times

Jacket Des ign : Bar soom Des ign

ASHRAF LAÏDI is the head

FX Strategist at CMC Markets,

where he oversees the analysis

and forecasting functions of

G-10 currency pairs as well as

decisions and trends of the

major global central banks. His

online FX analysis has received wide following for

more than a decade, centering on G-10 currencies

and economies. Prior to joining CMC, Laïdi monitored

the performance of a multi-FX portfolio at the United

Nations, assessed sovereign and project investment

risk for Hagler Bailly and the World Bank, and analyzed

emerging market bonds at Reuters. Laïdi also created

the fi rst 24-hour currency Web site for traders and

researchers during the inception of the Euro. He is the

founder of AshrafLaidi.com.

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TO PROFIT FROMTHE SHIFTING CURRENTSIN GLOBAL M

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Wiley Trading

“For anyone eager to get a fi x on what makes the currency markets tick, this book is a

perfect introduction. And for the seasoned investor, it’s a stimulating refresher course.”

—Alan Abelson, Barron’s

ASHRAF LAÏDIFOREWORD BY RON INSANA

P1: JYSFM JWBT010-Laidi October 16, 2008 9:55 Printer: Yet to come


Additional Praise forCurrency Trading andIntermarket Analysis

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

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

“Barron’s readers often ask if there is a book to explain to them how mar-kets really work. After plowing through textbooks and graduate studies, ittook three-plus decades of covering markets to learn that academics live ina different world than the day-to-day markets. Ashraf Laıdi has produced awork that is accessible to the layperson but at the same time provides a so-phisticated view of all markets—commodities, precious metals, credit, andequities—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 specificdetails related to some well-known periods of the USD changes. It shouldclearly please beginners seeking a better understanding of FX movementsover the last decades. For sophisticated investors, they will appreciate dis-covering the new angles introduced in dissecting the major developmentsin currencies.”

—Hamid Bousba, Director, Senior Portfolio Counsellor,Citi Private Bank, Citibank (Switzerland)



CurrencyTrading andIntermarket

Analysis

i


Founded in 1807, John Wiley & Sons is the oldest independent publish-ing company in the United States. With offices in North America, Europe,Australia and Asia, Wiley is globally committed to developing and market-ing print and electronic products and services for our customers’ profes-sional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survivedthe market’s ever changing temperament and have prospered—some byreinventing systems, others by getting back to basics. Whether a novicetrader, professional or somewhere in-between, these books will providethe advice and strategies needed to prosper today and well into the future.

For a list of available titles, please visit our Web site at www.WileyFinance.com.

ii


CurrencyTrading andIntermarket

AnalysisHow to Profit from the Shifting

Currents in Global Markets

ASHR AF LA IDI

John Wiley & Sons, Inc.

iii


Copyright C© 2009 by Ashraf Laıdi. All rights reserved.

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

No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning, orotherwise, except as permitted under Section 107 or 108 of the 1976 United States CopyrightAct, without either the prior written permission of the Publisher, or authorization throughpayment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web atwww.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201)748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their bestefforts in preparing this book, they make no representations or warranties with respect to theaccuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose. No warranty may be createdor extended by sales representatives or written sales materials. The advice and strategiescontained herein may not be suitable for your situation. You should consult with aprofessional where appropriate. Neither the publisher nor author shall be liable for any loss ofprofit or any other commercial damages, including but not limited to special, incidental,consequential, or other damages.

For general information on our other products and services or for technical support, pleasecontact our Customer Care Department within the United States at (800) 762-2974, outside theUnited States at (317) 572-3993 or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appears inprint may not be available in electronic books. For more information about Wiley products,visit our web site at www.wiley.com.

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.ISBN 978-0-470-22623-0 (cloth)

1. Foreign exchange market. 2. Foreign exchange futures. 3. Investment analysis.I. Title.

HG3851.L315 2009332.4′5–dc22

2008032245

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1

iv

www.wiley.com


To my parents Ahmed & Aisha Laıdi

v


vi


Contents

Foreword xi

Preface xiii

Acknowledgments xvii

CHAPTER 1 Gold and the Dollar 1

End of Bretton Woods System Marks Gold’s Takeoff 2

Fed Tightening and FX Interventions Rein in Gold Rally 3

Central Banks’ Gold Sale Agreements 5

Gold-USD Inverse Relation 6

Recent Exceptions to the Inverse Rule 6

Using Gold to Identify Currency Leaders and Laggards 8

Gold’s Secular Performance 11

Valuing Currencies via Gold 13

Golden Correlations 14

Don’t Forget Falling Gold Production 16

Gold and Equities: Hard versus Monetary Assets 16

Equity-to-Gold Ratios 19

The Role of the Speculators 21

Gold Is Part of a Larger Story 22

CHAPTER 2 Oil Fundamentals in theCurrency Market 25

From a Gold Standard to an Oil Standard (1970s–1980s) 26

Oil Glut and Price Collapse (1981–1986) 32

The Super Dollar of 1980–1984: The World’s Third Oil Shock 34

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viii CONTENTS

World Intervenes against Strong Dollar (1985–1987) 39

Iraq’s Invasion of Kuwait and the Gulf War (1990–1991) 41

The Asian Crisis and OPEC’s Miscalculation (1997–1998) 44

Oil Thrives on World Growth, Dot-Com Boom (1999–2000) 46

Iraq War Fuels Oil Rally, Dollar Flounders, China Takes Over

(2002 to Present) 46

Summary 49

CHAPTER 3 When the Dollar Was King (1999–2001) 51

The Major Theories 52

Annual Performance Analysis of Individual Currencies 53

Summary 70

CHAPTER 4 The Dollar Bear Awakens (2002–2007) 71

2002: The Beginning of the Dollar Bear Market 71

2003: Dollar Extends Damage, Commodity Currencies Soar 78

2004: Global Recovery Boosts Currencies against U.S. Dollar 84

2005: Commodities Soar alongside Dollar, Carry

Trades Emerge 90

2006: Dollar Vulnerable as Fed Ends Two-Year Tightening 94

2007: Record Oil Boosts Loonie, Helpless Fed Hits Greenback 102

Lessons Learned 108

CHAPTER 5 Risk Appetite in the Markets 111

Carry Trades in Foreign Exchange 112

Using Risk Appetite to Gauge FX Flows 121

Tying It All Together: 1999–2007 134

CHAPTER 6 Reading the Fed via Yield Curves,Equities, and Commodities 137

Yield Curves and the Economy 138

Types of Yield Curves 139

Rationale of Inverted Yield Curve Implications 142

Effectiveness of Yield Curve Signals’ Implications 142


Contents ix

Greenspan’s “Conundrum” Proved Bernanke’s Problem 143

Implications for Growth, Stocks, and Currencies 145

Tying Interest Rates to the Gold-Oil Ratio 153

Conclusion 158

CHAPTER 7 U.S. Imbalances, FX ReserveDiversification, and the U.S. Dollar 161

The U.S. Twin Deficits 162

U.S. Current Account Deficit: Old Problem, New Challenges 165

Adding the Budget Balance to the Mix 169

Financing the Deficits: The Path to Unsustainability? 170

Dissecting U.S.-Bound Foreign Capital Flows 172

U.S. Stocks and Bonds Vie for Foreign Money 173

Capital Flows Shift Identities 177

Foreign Direct Investment and M&As 179

How Long Will Foreign Capital Be Available on the Cheap? 181

Don’t Ignore U.S. Investors’ Flows Abroad 182

Currency Reserve Diversification: OPEC and the Middle East 185

Further Currency Diversification Is Inevitable 187

The View Ahead 189

CHAPTER 8 Commodities Supercyclesand Currencies 191

The Current Commodity Cycle versus Previous Cycles 193

Dissecting Commodity Classes 196

Commodities and their Currencies 207

Developing World to Maintain Ripe Outlook for Food

and Grains 208

Energy Efficiency Not Enough to Halt High Oil 214

Copper and Gold to Shine on Long-Term Fundamentals 219

Commanding Heights or Common Bubbles? 223

CHAPTER 9 Selected Topics in Foreign Exchange 225

Revisiting Yield Curves 225

Is Dollar Stability a Necessity? 230


x CONTENTS

How Far Will Commodities Outstrip Equities? 236

U.S. Politics and the U.S. Dollar 240

Conclusion 247

Bibliography 249

About the Author 251

Index 253


Foreword

O n the day of my birth, “Good Friday” March 31st, 1961, the DowJones Industrial Average was sitting at 678.5. The dollar was stillanchored to gold, exchangeable at $35 an ounce. Interest rates were

regulated and low, the economy was strong and steady in the fifteen yearsafter the end of World War II.

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

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

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

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

My father never made that much money to begin with, so the incipientinflation that would rage another 10 years, hurt us in ways I never under-stood.

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

Shortly thereafter came the first of two oil shocks, wage and price con-trols, “Whip Inflation Now” buttons, and an economy so ragged and unevenwe 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 andmean, social unrest set in, my first car loan, $2,000 for a tan 4-door, 1979Chevy Nova (a babe magnet if ever there was one) cost me 201/2 percent ininterest.

xi

Documents

Barron’s TRADING and and the theories underpinning it have ... · arena, Currency Trading and Intermarket Analysis will put you in a better position to assess shifts in economic