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DailyFX Weekly Range-Breakout Barometer

January 17, 2006

Implied volatility is one of the most tried and true methods for objectively measuring expected volatility in the spot market. Derived from currency options with different maturities, implied volatilities are used to help predict potential movements in the spot market and is one of the most popular strategies of systems traders and other professional hedge funds. At its most fundamental, the basic and intuitive interpretation of this implied data is often the most telling for traders. Taken alone, a steady rise in the longer-term implied volatility (the red line) is indicative of a strengthening trend; while inversely, a decline often

reveals that a period of range or consolidation in spot is ahead or already in place. Additionally, the histogram or spread between the shorter and longer-term implied volatilities (the blue colored bars) tells a different perspective. As the histogram rises, volatility is

expected to pick up faster in the near future relative to the longer-term range. Ultimately, this increases the probability of a breakout scenario in the underlying currency. Volatility Situation

Currency Spot Price Barometer Reading

EURUSD 1.2933 RANGE

GBPUSD 1.9690 RANGE

USDJPY 120.63 RANGE

USDCAD 1.1730 BREAKOUT

USDCHF 1.2475 RANGE

AUDUSD 0.7865 RANGE

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results. FXCM, L.L.C.® NEW YORK 1.212.897.7660 TOKYO 81.3.3556.5541

LONDON 44.(0)20.7464.8408 HONG KONG 852.2119.0116

Daily FX Research Team John Kicklighter

Currency Analyst 1.212.897.7660

1.888.50.FOREX (36739)

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EURUSD

Short-term implied volatility has picked up across the board for the majors, even though the vols gauges are offering a murky outlook for activity in the days ahead. For the euro, the gauge of implied volatility continues to move lower in tandem with the slide in spot action. However, since EURUSD bounced off of the 1.29 level, the expectations of a move over the longer-term have also risen. This may suggest the solid support seen around the even level in underlying spot, will act as a spring board as event risk from fundamental releases encourage breaks in either direction. On the other hand, the contracting spread denotes a different feeling. As the spread between long and short-term vols stabilize, the premium for a breakout looks rather sparse.

GBPUSD

Like the euro, the outlook for volatility in the British pound has settled over the past few weeks. Since marking its high in cycle high in early December, long-term implieds have progressed lower. In the past week though, the same gauge has risen nearly 0.5 percentage points. This rebound in forecasted price momentum has followed a 400-point rally in GBPUSD. Conspicuously, this is the same set up seen two weeks ago when the drop from 1.9750 encouraged the long-term gauge to round higher. Whether or not this recent pick up follows the same pattern or not will likely depend upon price action around 1.9750 resistance. A break above leaves few technical nets and premium for price protection would likely jump. Alternatively, the spread offers only a modest hint of a possible break. The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

FXCM, L.L.C.® NEW YORK 1.212.897.7660 TOKYO 81.3.3556.5541 LONDON 44.(0)20.7464.8408 HONG KONG 852.2119.0116

Short term – long term differential Long term implied

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USDJPY

Technicals proved a better breakout gauge for the Japanese yen last week, as a build up in bidding pressure under USDJPY spot led to a break of major resistance seen at 120. However, despite the convincing move, long-term implieds have not jumped in head first. Since bottoming out near 5 percent in the second half of December, the indicator has not even picked up a full percentage point. What’s more, even as USDJPY spot moved through the 120 level, longer-term vols barely budged. This trepidation suggests a continuation higher could be hard fought. On the other hand, the implieds spread has supplied relatively accurate signals for short-term breakouts recently. With a questionable BoJ rate hike on deck, the most recent positive spread could foreshadow yet another near break.

USDCAD

After being locked in a steady trend for over five months, USDCAD seems to have finally found a convincing ceiling. Yielding to the psychological 1.18 level, spot has spent nearly two weeks testing the waters. The pause has taken its toll on long-term implieds as the gauge slipped more than 0.75 percentage points. The more important take away from the volatility reads, however, is the growing spread. From a negative 0.6 percentage spread, the differential has climbed to a positive 0.4 percentage point spread, suggesting market participants are positioning for a potential breakout. Should the ultimate move be through 1.18, the steady rise in the long-term gauge will likely pick up where it left off, while a turn lower will conversely leads to another steady decline in predictive volatility. The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results. FXCM, L.L.C.® NEW YORK 1.212.897.7660 TOKYO 81.3.3556.5541

LONDON 44.(0)20.7464.8408 HONG KONG 852.2119.0116

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USDCHF

Though USDCHF has taken out round number after round number, long-term implied volatility refuses to surrender to the possibility that this six-week long move will evolve into a broader trend. Since rallying on the collapse in underlying spot price back in the final weeks of November, the longer-termed implied volatility read has cooled significantly. Now at 7 percent, the gauge seems to have found a bottom as spot finally finds resistance. USDCHF has recently entered congestive range trading below 1.25. This range has produced a week of the smallest daily ranges seen in months. At the same time, the flat implied spread gives little indication that speculation of a sharp move in the coming days is not finding much traction.

AUDUSD

Implied volatility derived from the Australian dollar-based major is giving little indication of either a looming breakout or the beginnings of a new trend. The differential between short and long-term implied volatility has fallen to a 0.4 percentage point deficit as AUDUSD sees few reliable levels of support or resistance. Long-term implieds have similarly floundered as recent price action has curtailed the possibility of a new downtrend forming after the sharp, 200-point drop in the opening week of the year. Both levels of implied volatility will likely stagnate until spot approaches 0.7775 for a possible breakdown or a new leg in the fledgling uptrend calls out momentum. The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results. FXCM, L.L.C.® NEW YORK 1.212.897.7660 TOKYO 81.3.3556.5541

LONDON 44.(0)20.7464.8408 HONG KONG 852.2119.0116