The major significance of cross-currency triangulations–in which foreign money exchanges do not involve the U.S. dollar–results from the fact that many currencies are not typically traded against each other in the interbank market. Major companies, importers and exporters, governments, investors, and tourists, all needed a method to simultaneously transact business in euros while allowing for money and profits to repatriate back to their home currencies. With a realignment of the currency markets due to the adoption of the euro, cross-currency pairs such as the EUR/JPY, GBP/CHF, GBP/JPY, and EUR/GBP, as well as many other cross-currency pairs, developed over time, for many reasons.
Notice that none of the base currencies in the pairs listed above is a nation that has adopted the Maastricht Treaty, and therefore rejected the adoption of the euro. With the European Union’s implementation of Rule 1103/97 on Sept. 11, 1997, formal legality existed for calculating conversions to euros. This rule also established convertibility to six decimal places (rather than just three) and the adoption of triangulation as the legal norm for transacting business in the eurozone. This legality gave investors, traders, and bankers a new means to trade currencies, with a whole host of new profit opportunities. This article will focus on triangulation as a means to trade and profit.
- Cross-currency triangulation takes advantage of the discrepancies in the bid-ask spread between non-U.S. dollar exchange rates in order to turn a profit.
- The most popular triangular opportunities are usually found with the CHF, EUR, GBP, JPY, and U.S. dollars in order to convert from euros to home currencies.
- The basic cross exchange rate formula is A/B x B/C = C/B.
How Triangulation Changes the Process
Before triangulation existed, a company in the U.K. selling products in Switzerland and receiving Swiss francs had to sell Swiss francs for U.S. dollars and then sell U.S. dollars for British pounds. Before cross currencies existed, repatriations occurred by triangulating pairs with U.S. dollars. Therefore, triangulation with crosses gave us the means to take advantage of the bid-ask spreads in the interbank market.
On a daily basis, well-capitalized investors and traders can always find discrepancies between bid-ask spreads through the many cross pairs that exist today, thanks to the inclusion of euros. Although these arbitrage opportunities may last for as little as 10 seconds, many capitalize on these differences to turn a profit. Fortunately, computers linked directly to the interbank market can easily meet this challenge and profit through bid-ask spreads around the world from banks that make markets in currencies.
Cross Exchange Rate Formula
The basic formula always works like this: A/B x B/C = C/B. The cross rate should equal the ratio of the two corresponding pairs, therefore, EUR/GBP = EUR/USD divided by GBP/US, just like GBP/CHF = GBP/USD x USD/CHF.
Cross Exchange Rate Formula Example
For example, suppose we know the bid and offer of AUD/USD and NZD/USD, and we want to profit from AUD/NZD.
AUD/NZD bid = AUD/USD bid divided by NZD/USD offer = a certain rate
AUD/NZD offer = AUD/USD offer divided by NZD/USD bid = a rate
The product of the rate through the bid-ask spread will determine whether a profit opportunity exists.
Three-Pair Triangulation Example
Suppose that we have a three-pair triangulation opportunity such as GBP/CHF, EUR/GBP, and EUR/CHF, in which GBP/CHF is quoted from EUR/GBP and EUR/CHF. Notice the base currencies within EUR/GBP and EUR/CHF; they equal the GBP/CHF, but we must make our euro conversions in order to achieve our objective.
GBP/CHF bid = EUR/CHF bid divided by EUR/GBP offer = a certain rate
GBP/CHF offer = EUR/CHF offer divided by EUR/GBP bid = a certain rate calculated in euros
Whether you earned a profit in this example would depend on exchange rates. Notice the conversion of euros from GBPs and CHFs; triangulating currencies usually involves either euro or U.S. dollar conversions.
Triangulation Example With U.S. Dollar
Suppose we triangulate a U.S. dollar conversion from CHF/JPY; CHF/JPY is simply USD/CHF and USD/JPY. The bid equals the division of the bid of the cross rate terms currency (top), by the offer of the base (bottom). To find the offer, divide the offer of the terms currency by the bid of the base.
If the USD/CHF rate is 1.5000-10 and USD/JPY is 100.00-10 for a CHF/JPY cross rate, the bid would be 100.00 divided by 1.5010 or 66.6223 JPY/CHF; the offer would be 100.10 divided by 1.5000 or 66.7337 JPY/CHF.
In most instances, triangulation involves profiting from exchange rate disparities. This can be accomplished in many ways. For example, suppose you institute two buys on a certain pair and one sell, or you sell two pairs and buy one pair. Any number of triangulation opportunities exist every day from banks in Tokyo, London, New York, Singapore, Australia, and all the places in between. These same opportunities may exist around the world, trading the exact same pair. The most popular triangular opportunities are usually found with the CHF, EUR, GBP, JPY, and U.S. dollars, in order to convert from euros to home currencies.
What is noticeable, more and more, is that many brokers, including retail currency brokers, are including cross currency pairs in their dealing rates section of their trade stations. One can now trade the GBP/USD as easily as the USD/GBP, and the EUR/USD as easily as the USD/EUR. The difference between the interbank market and the retail side of trading is the spot market. Many may want to transact their business through the spot market where they know their trade will be executed because prices in the interbank market are so ephemeral.
Traders can easily transact any triangular arbitrage opportunities with two or three currency pairs crossed by many nations, as well as take advantage of any other bid-ask spread opportunities. For the small retail trader with limited funds, this would probably work. However, for the well-capitalized trader, it may not because the spot market doesn’t always reflect exact exchange rates. Larger traders may have to wait on certain spot prices before transacting their business–a wait they may not be willing to risk when it comes to profits.
The Bottom Line
Many opportunities exist for the arbitrage and triangular traders, that don’t always include exchange rate arbitrages. Traders may want to capitalize on merger and acquisition opportunities through the currency markets, swap trades, forward trades, yield curve trades, and options trades. The same opportunities exist for each one of these markets.
When we think about correlation coefficients between two currency pairs, normally we think about correlations among the major pairs against the US dollar such as the EUR/USD, GBP/USD or their direct opposites USD/CHF and USD/JPY. One topic not mentioned in the research is the correlation among currency crosses that directly corresponds to to their USD counterparts. How these pairs move in relation to their USD counterparts will be the subject of this article as well as the Pearson Product Moment Coefficient to determine how to factor various correlation coefficients.
When we measure correlation, we are measuring strength and direction of a linear relationship between two random variables, in this instance two currency pairs. Pearson’s Product Moment Coefficient is the most popular factor because it measures an absolute value from -1 to + 1 of a pair by dividing the covariance of two variables by the product of its standard deviation. In one instance, we are measuring X and Y slopes in terms of the absolute values. Knowing absolute values of a currency pair will almost answer the question how far will a pair move in relation to its counterpart based on an X,Y slope. Specifically, to determine an exact location of the X and Y plot where prices are located at any time, use the Correlation of Determination. An absolute value of + 1 says a pair has a direct correlation and an absolute value of – 1 infers a negative correlation. But currency correlations rarely reflect a perfect relationship. Instead high 80’s or low 90’s is near perfection when the relationship is positive and 20’s to 30’s when the relationship is negatively correlated.
For example, based on September correlations we know that EUR/USD and AUD/USD has a monthly absolute value of .74, a three month absolute value of .76 and a six month absolute value of .72. This positive relationship means in terms of USD that the EURO and AUD will move together 74 percent, 76 percent and 72 percent of the time for the next six months. What these absolute values mean in terms of currency crosses is quite different. Which way will the EUR/AUD move in terms of its EUR/USD and AUD/USD counterpart? The relationship is negative and in direct contrast to its USD counterpart. So if the EURO and AUD will move together 70 percent of the time against the USD, it has to have a negative correlation against each other and will sell off 70 percent of the time as the EURO/USD and AUD/USD moves up. So as the EURO/USD and AUD/USD move down, the EUR/AUD will move up.
The EURO/USD and GBP/USD are well known for their positive correlations. For September, the absolute values are .75 for one month, .73 for 3 months and .66 for 6 months. But these correlations are against the USD. How would EUR/GBP correlate against this USD relationship. If both pairs rise with the USD, they must be negatively correlated against each other so the EUR/GBP will sell off 70 percent of the time as the EUR/USD and GBP/USD rise with the USD.
What if we have two pairs not so closely correlated such as the GBP/USD and AUD/USD. The absolute values are .58 for one month, .73 for three months, .70 percent for six months and .61 for a year. What does this correlation say about the GBP/AUD and how would you look at this trade knowing traditionally these two pairs normally correlate. The GBP/AUD for the month of September is going nowhere and will probably trade in a small range because the correlation is not positive or negative in terms of absolute values. In terms of correlations, this is an uncertain pair especially when its immediate counterparts signal uncertainty. So looking at the GBP/USD and AUD/USD for GBP/AUD direction is not the place to begin. Another way may be to look at Yen crosses.
Suppose we know the GBP/USD is negatively correlated to the USD/JPY based on these September absolute values. -.05 for 1 month, -0.12 for three months, -0.07 for six months and +.16 for one year. Which way will the GBP/JPY move and how should you look at this trade in terms of correlations and absolute values. The best way is factor the cross rates to determine where the pair is presently trading. For example, GBP/JPY is derived from GBP/USD and USD/JPY. So a GBP/JPY cross rate is calculated by taking the cross rate bid by multiplying the bid of the terms currency (top) by the bid of the base currency(bottom). For the cross rate offer, multiply the offer of the terms currency (top)by the offer of the base currency (bottom). If GBP/USD rate is 1.6000-10 and USD/JPY Yen rate is 100.00-10 then GBP/JPY cross rate is as follows. The bid would be 1.6000 X 100.00 or 160 Yen per GBP and the offer would be 1.60010 X 100.10 or 160.26 Yen per GBP. Always look at cross rate formulas as A/B X B/C = CB.
So if we correlate the GBP/JPY to the GBP/AUD based on the absolute values of the GBP/USD and AUD/USD for GBP/AUD and
GBP/USD and USD/JPY for GBP/JPY, we find those correlations to be negative. As the GBP/JPY sells off based on the one month absolute value of -.05, the GBP/AUD will rise based on the .58 absolute value of the GBP/USD and AUD/USD.
Visually, look at these two pairs, GBP/JPY and GBP/AUD. Subtracting the GBP aspect of this relationship leaves two base pairs that have negative correlations based on their absolute values. How do you know.
AUD/USD to USD/JPY correlations are as follows. 1 month correlations .08, 3 month .04, 6 months .18 and 1 year .48. This relationship doesn’t change if we inverse correlate USD/JPY to AUD/USD, statistical figures remain the same.
What does the GBP/JPY and GBP/AUD relationship say to the above EUR/AUD example. The GBP/AUD and the EUR/AUD should both move in tandem because they are positively correlated based on their positive absolute values. Although EUR/AUD should move faster than GBP/AUD because the EUR/AUD is more closely correlated to the EUR/USD and the AUD/USD.
So if the EUR/USD and the GBP/USD both experience a sell off and the EUR/AUD, GBP/AUD and EUR/GBP all rise, we can look at EUR/AUD, GBP/AUD and EUR/GBP as US dollar pairs. To sell the EUR/USD and GBP/USD simply means you are selling the EUR and GBP against the US dollar. This means dollar pairs such as the USD/CHF, USDJPY and USD/CAD all move up as the EUR/USD, GBP/USD sell off. Likewise, the correlations of USD/CHF, USD/JPY, USD/CAD, GBP/AUD, EUR/GBP and EUR/AUD all have absolute values closely aligned with the US Dollar and move in tandem with each other. So a long EUR/AUD or EUR/GBP is a long US Dollar position the same as USD/CHF, USD/JPY and USD/CAD.
How would we look at opposite correlation crosses like the GBP/CHF when absolute values don’t align. GBP/CHF is comprised of GBP/USD and USD/CHF so maybe we want to triangulate these pairs using the above cross rate formulas. Absolute values align like this. For GBP/USD to USD/CHF absolute values are one month -.64, -.67 for three month, -.57 for 6 months and -.45 for one year. Looking at absolute values for negatively aligned crosses never correlate so direction must be determined using indicators, candles and charts especially if our answer can’t be found by triangulating these pairs using the cross rate formulas. Another method to determine direction for GBP/CHF may be to look at other related pairs that have negative alignments such as the EUR/CHF, AUD/CHF, AUD/CAD or even the Yen pairs since all move in tandem with GBP/CHF. Or look at pairs that have negative correlations for further confirmation such as EUR/AUD and GBP/AUD.
The false premise regarding currencies is the US dollar plays no part in various cross rates when in fact the US dollar is the beginning of all traded pairs and dictates all directions for all traded pairs in the world. As long as the US Dollar is the currency of exchange for traded goods and commodities in the world and the dominant reserve currency, it will always set direction for all currency pairs and their various crosses. So always look to dollar direction by checking the USD Index before choosing which pairs to trade.
So the question can you execute trade decisions based on correlations and absolute values. The simple answer is it depends because some correlations have tendencies to change over time. What would cause changes in absolute values could be outside influences such as economic situations within certain nation’s economies, which way interest rates are heading within nations, the question of how much risk traders are willing to add and changing central bank policies. In uncertain economic environments, traders may be willing to stay away from cross pairs and institute safe trades such as straight USD pairs. A bombshell announcement like a collapsed housing market or a decision by a central bank to add massive liquidity to their economies would cause traders to bail out of cross and carry trade pairs quickly leaving the unsuspected holding massive losses. So the question of risk must be a factored decision before contemplating any cross pair trade.
Take the GBP/AUD example as our question of risk. Normally these pairs have strong correlations and an interest rate difference between the two pairs at 2.5 percent. Yet because of uncertain economic times in England coupled with a series of poor economic announcements over time, the correlations are uncertain in terms of absolute values. Even with carry trade potential to earn interest, traders are not willing to risk capital to these trades.
When economic growth or the potential for growth exists, absolute values will change and correlations will change with those values. Notice the one year absolute value between AUD/USD and USD/JPY. Today that value sits at .48 yet the short term gauges barely a relationship. Is this a forecast for growth between these nations later or a forecast for growth for the region. Possibility of a statistical relationship so far.
Know also while statistical relationships may exist between currency pairs, many pairs are statistically correlated to
other factors such as stock market moves, treasury yields, risk indices such as the VIX index and option risk reversals. Interest rates are and always will be the driving force behind any currency trade whether its a cross or straight USD trade. So in uncertain economic times, traders are best advised to trade USD pairs and trade cross pairs when growth returns.
Brian Twomey is a currency trader and adjunct Political Science Professor at Gardner-Webb University.
While the pages of this magazine is and always has been traditionally devoted to all aspects of trading many various markets, I thought it appropriate to inform traders of new rule changes issued by the National Futures Association that apply to currency traders in the United States. These rule changes have far reaching implications for not just currency traders but training schools, trading systems and firms that have principle offices in the United States. The traditional methods of doing business will be drastically changed as of August 1, 2009. Note that these rule changes apply only to the United States as the National Futures Association and the Commodities Futures Trading Commission are the governing bodies for the United States and lacks any jurisdiction outside the United States. What I would like to highlight in this article is first the history of the retail trader and the firms and schools that rose along with the general public’s popularity with trading. Next, I will outline the new rules recently issued by the National Futures Trading Commission and outline their implications for traders. A comparison and contrast of these new rules to the old way of trading will be highlighted so traders and all concerned can understand what these new rules mean.
The retail trader is a phenomenon inherent in the modern day since the early 1990’s. Traditionally, traders were a small group of people that worked in the industry, were well trained by a university education or were taught by an insider in the industry. The use of indicators as a means to make trading decisions was quite primitive but rose along with the retail trading public. Along came the computer, the PC that revolutionized trading for anybody interested. So trading any instrument became wholly democratized for young and old, educated or not, industry experience or not. All that was required was a computer, investment money and the ability to learn. Along with this phenomenon and a growing interest to learn came training schools, trading systems and firms to handle this growing interest. Traders were taught how to place orders to hedge, stop loss orders, limit orders, closing and opening positions and the use of many modern day indicators that arose with the computer. Many learned how to profit from these methods..We have all grown accustomed to this normal way of doing business since the early 1990’s. The National Futures Association has now turned this modern method of trading on its head with new rules that now govern trading, particularly currency trading.
Rule 2-43 and its various lettered subsections dealt a serious blow for traders that wish to hedge a currency position in the same currency pair. No longer can currency traders hedge positions. This rule went into effect May, 2009.
Next came Rule 2-43b, the elimination of stop loss, trailing stops and limit orders, effective August 1. No longer can positions be closed by hitting the close button, effective August 1, 2009. Instead positions must be closed by an OCO order, an offsetting position. Lastly Rule 2-43b instituted FIFO, first in- first out. This means no matter how many lots a trader may have or how many points of profit, the first lot must be addressed first before dealing with the remaining lots.
Hedging and its implications. Why hedge and why is hedging so important to traders. Suppose a major economic announcement will be released imminently and you the trader don’t know which way the announcement will go based on expectations. So you implement a long and short in the same currency pair. Upon release of the announcement, your pair takes off long. So you bail out of your short position and ride your long position for a profit. If the economic release was really out of sync with expectations, you maybe able to hold both positions at the same time and profit both ways. I’ve done this countless times. Suppose you are a swing trader and hold positions for long periods. Well you notice that on one particular day your long position will suffer an outside day so you take on a short position to hold and profit for the day. Suppose you entered a long trade and realized you entered at the wrong point but you know the trade is a good long. Your trade position goes down so you go short so as not to miss the points and wait for your long to come back and profit. Suppose the GBP/USD approaches resistance or support but it doesn’t appear it will break at that moment so you hedge your position and profit. Suppose the USD/JPY is trading at the middle of its range and you want to take a position but are unsure of direction so you hedge your position. Every point of movement can be a gain with hedging especially for scalpers. No longer is hedging allowed in the same currency pair under Rule 2-43b. The argument by the NFA is hedging increases fees for the firm and has no economic benefit for the trader. The solution is to go long and short using two different accounts. Another argument by the NFA is hedging creates rollover interest for firms. and has no economic benefit for the trader. The solution is to go long and short using two different accounts. Another argument by the NFA is hedging creates rollover interest for firms.
Rollover interest or carry interest is paid on accounts when traders hold their positions overnight. A trade that is profitable earns interest while negative positions lose interest. Not much because interest rates are so low around the world. Well hedgers may have multiple positions that may or may not earn interest and results in fees for the firm if traders hold hedge positions overnight rarely would a hedger want to hold an unsure position overnight. As an aside, much speculation exists that oil traders will undergo the same fate to eliminate hedging. Commodity Futures Trading Commission Rule 74 FR 23964 took the hedging function away from non commercial swap traders and replaced it with “limited risk management”. Sophisticated traders would know hedging as a limit and a stop loss with prices placed at different intervals.
Stop loss orders are geared for traders that don’t scalp or sit in front of the computer all day. Normally these traders have market savvy and understanding because they know where the market is going but realize events of any trading day may disrupt their profit potential. So they set a stop loss, a point of loss they are willing to lose on a trade in case a position goes against them. Many use trailing stops especially when you have profits built into your trade. As the market goes against you, your trailing stop hits and you are able to realize your profits. Stop loss orders are not allowed anymore according to Rule 2-43b.
Limit orders. How far are you willing to ride your trade and how much profit do you want to earn. This is the purpose to set your limit on your computer. Again a function for sophisticated traders who know their market and currency pairs because they don’t have to sit and wait to exit their trade manually but increasingly used by traders of all sorts as this market has grown in popularity. Also not allowed under Rule 2-43b as of Aug 1, 2009.
Close out trades. For those not using trading systems who wish to manually close out a trade, you simply click the close button to exit your trade and take your profits or sustain your loses. No longer allowed under Rule 2-43b beginning Aug 1, 2009. Instead OCO orders will be instituted to enter and exit the market. OCO stands for One Cancels the Other. Reason for OCO orders are due to the last NFA rule called FIFO, First in, first out. Suppose you have a buy order for one lot on the GBP/USD at 4800. Now suppose your trade drops to 4700 and you place another buy order. An hour later your 4700 position is now 4750 on your second lot. You can’t exit your trade with a 50 pip profit because you must first address the first lot. You can’t take your profits because you still have a loss on the first lot. When the first position is resolved, you may then take your profits. First opened must be the first closed.
Exiting the market. Using OCO orders allows traders to exit the market using OCO entry orders as long as the entry is in the opposing direction. Suppose you are long the GBP/USD at 4800 and you wish to exit at 4900. You enter a sell at say 4600 and take your profits. OCO is linked so when you enter to take your profits, the sell order is automatically cancelled. OCO allows a trader to link any pair, any price and any amount. OCO orders will be the governing orders for entry and exit for currency traders in lieu of stops, limits and closing position windows. The new FIFO rules just don’t allow for these positions any longer.
I guess the next question is why the revolution and why currency markets are affected. This answer must be twofold. The number of complaints and enforcement actions investigated and ruled upon by the National Futures Association and the Commodity Futures Trading Commission against currency trading firms is enormous. Many firms don’t register with FINRA or the NFA, others don’t segregate their accounts, others violate anti money laundering laws and bank secrecy acts, some charge enormous spreads, principles just disappear with their firms money and others rig the main trading computer. The list and complaints are endless. Currency trading is traded in the over the counter market so a certain buyer beware scenario must be evident because of the unregulated nature of this market.
Secondly, its very explicit in the writings and communications of the NFA and CFTC that the general public is just not smart or sophisticated enough to understand such complicated financial instruments nor can they have the capacity to trade and profit from such instruments. So they instituted these protect thy customer rules. But only in the United States do these rules apply. While legitimate firms have abided by many new and various policies such as increased capital requirements from $15 to $20 million, prompt account statements and frequent audits, actions by NFA still follow under the protect thy customer rule. Yet the NFA knows from their prior explicit communication and policy statements that regulating this market is quite impossible so why not regulate traders. So can the regulating authorities treat the currency market as a regulated futures market by instituting orders the same as futures orders and eliminate the profit motive and drive traders away from the business of trading currencies. Remains to be seen.
What these rules mean for firms is a complete retool of their computer systems that will take time. Increasing the capital requirement for firms may help drive out the many corrupters of the industry and give the respectable firms the name they deserve.
Trading system designers must retool their systems as well to comply with new rules. Training schools will have to teach new methods of trading.
One aspect of the currency markets is prices never remain the same for any length of time. At times these markets will look chaotic to the novice because of the fast movement of prices. But it is this fast movement of prices that gives the currency markets their organization and traders ability to profit from price discovery. A true method does in fact exist for traders novice or pro to profit. Now more than ever exists education upon education for traders to learn these markets, to learn indicators, to learn various currency pairs and how they move and the mechanical aspects of this market. Its in every firms interest to help traders become successful. This they do through education. Novices are encouraged to stay away until ready.
Because of the recent proposal of the Farm Bill in Congress, the CFTC will have the ability to regulate Forex traders if passed.
Traders should be aware of other proposals that may affect their markets such as carry interest that could be treated as ordinary income. Hedge funds that may see more registration, more reporting requirements and compliance costs. Forex traders that manage accounts may have to pass a test and face higher costs. Speculation exist that margin requirements may be decreased for Forex traders eliminating further the profit objective. Our markets are currently in flux and facing a revolution so traders must be aware of enforcement actions by regulating authorities and legislation proposed by our government.
Brian Twomey is a currency trader and Adjunct Political Science Professor at Gardner-Webb University.
Many names can be subscribed to the Economist”s introduction of the Big Mac Index since its invention in 1986, lighthearted, tongue in cheek and half hearted. How serious they were with this index is questionable but since 1986 whole cottage industries have developed by economist, traders and teachers devoted to the concept of finding the perfect arbitrage trade.
The idea behind the Big Mac Index was to measure the percentage of overvaluation and undervaluation between two currencies in each nation by comparing prices of a Big Mac Hamburger using the United States Dollar through the Federal Reserve’s trade weighted average as its base since Big Mac Hamburgers are sold in almost 120 nations of the world. Since the Big Mac became the standard consumer good common to all nations, devising a method for determining overvaluation and undervaluation of currency pairs would be based on the formula of purchasing power parity.
To determine purchasing power parity, factor the price of a Big Mac in nation A in the local currency. Next determine the price of a Big Mac in U.S. Dollars.. Purchasing power parity is the price of a Big Mac in nation A divided by the price of a Big Mac in U.S. Dollars. Take this figure and divide by the Federal Reserve’s trade weighted average, the exchange rate.
The exchange rate is the percentage of under or overvaluation of a currency . A lower price means the first currency is undervalued compared to the second currency while a higher price means the second currency is overvalued in percentage terms against the dollar. The concept behind this formula is prices will eventually equalize over time. While this simple formula may serve as a theoretical guide to determine under and overvaluations of currencies, practicality says many limitations exist in the short and long term for measuring evaluations and achieving successful trades.
Prior research suggests short term duration will never achieve parity because the short length of time will never equalize prices while longer terms may see deviations in prices last for many years without a guaranteed means of achieving real parity. One reason for this is some nations undervalue their currency purposefully especially if they are export dependent to aid their exporters and earn more in foreign reserves. This is a constant revenue stream and a means for emerging market nations to become world competitive. Another conundrum for the long term is the measure of the trade weighted average which can remain a constant for many years compared to the prices of a Big Mac which is market driven.Prices of Big Mac’s are not even constant within nations.So the comparison of the Big Mac Index is apples to oranges where prices may never equalize and parity may never be achieved. Factor the hidden costs involved between nations and the index can remain skewed for many, many years.
For example, many nations institute a Value Added Tax, a tax on goods at the border. This tax must be valued with any transportation costs. Inflation is never the same between nations. This can have an effect of eroding prices where high inflation may exist in one nation and lower in another. The cost of goods and commodity prices may be quite different in many nations which may skew not only the Big Mac Index but the original cost of the Big Mac in any particular nation. Wage costs and further trade restrictions between nations can also skew the longer term implications for the Big Mac Index as well as the cost of the Big Mac. Factor a possible war among or between nations and a possible financial crisis, the Big Mac Index may never achieve parity. Not to mention the fact that the index can’t predict impending crisis yet prices of a Big Mac may be skewed due to a supply and demand problem.
Various people in many nations accept and reject eating a Big Mac based on cultural and religious reasons. More differences may exist between populations of the countryside and the more populous cities
Implementing a trade based on trade weighted exchange rates may turn out to be unprofitable compared to a normal trade based on current market driven spot prices and current market driven Big Mac prices. Spot prices move based on the dollar index, a trade able instrument on the New York Board of Trade.Whole cottage industries, web sites, college lectures have devoted themselves to this concept of purchasing power parity based on the cost of the Big Mac hamburger, a parity that may never exist.
Brian Twomey is a currency trader and an adjunct professor of Political Science at Gardner-Webb University
Some believe that currency markets are trending all the time and picking that one indicator that signals the buy or sell will instantly make one profitable because of the fast nature and reputation of these markets. When in actuality, currency markets are more ranging than they are trending. What happens to that one trend that falls prey to a range trade. Did that currency pair fail to breakout at the top or bottom of its range. Were you prepared for the failure.What I would like to focus on is a little known and not widely studied chart set up called congestion, in this instance currency congestion counts.
Currency congestion in non academic terms can be easily defined as the location on a chart where the currency pair just gets bogged down and stuck, stuck in a place where defined ranges become smaller and smaller. Its a place where opening and closing prices are almost the same, up candles are preceded by down candles and down candles are preceded by up candles. Congestion can last for days and even weeks at a time causing traders frustration, time and absolute uncertainty in direction. Moreover, as time means money gained or lost, you the trader are left wondering where the next move will come, will you be profitable and how long will it take. To determine if a currency pair is in the congestion zone or better known as the fulcrum, count your daily candles and determine where highs and lows are the same or almost the same price. The number of candles within the small range is your currency congestion count or chart count.This is the congestion zone.
Congestion occurs from two areas. One is after a trend, usually a long advance or decline. This is normally a period of consolidation anyway but uncertainty further hinders the next direction. Yet consolidation and congestion are quite different. Consolidation is nothing more than a short rest for a pair as it gains steam for the next leg up or down. While congestion doesn’t have a leg, its just stuck. The other occurs due to economic uncertainty, uncertainty in interest rates or general economic activity either in one particular nation or a general economic dilemma facing the entire world. One pair that may be in congestion doesn’t mean all pairs are in congestion. Non USD pairs such as the EUR/USD and GBP/USD can easily become congested as much as USD pairs such as the USD/CHF and USD/JPY. Crosses such as the GBP/CHF, EUR/CHF and GBP/AUD can easily find themselves in congestion. All markets fast or slow fall prey to periods of congestion. We have to go back to historic beginnings of the markets however to find modern day answers to this dilemma.
Alexander Wheelan wrote the Point and Figure Technique in 1954 where prices were charted on box graph paper using X’s and O’s to represent opening and closing prices. Trends were found drawing trend lines at 45 degree angles. When prices found themselves in congestion, they were termed fulcrums, inverted fulcrums, compound fulcrums and the like. A fulcrum is the center that represents the balance of prices.
Some may argue that fulcrums are reversal patterns. We would know reversals using today’s candles by measuring support and resistance patterns within the congestion zones. A horizontal line was then drawn in the middle of the congestion zone. Wherever prices closed in relation to the line would signal the next direction. Typically two closing prices above or below the line was the perfect signal. Using today’s candlestick patterns, you would perform the same functions to determine the next direction. Lines should be drawn directly in the middle of the fulcrum and wait for two consecutive closes above or below the line. This horizontal line may be drawn directly through a candle as well to keep the fulcrum in equilibrium. Chances are this breakout may be sufficient to find the new direction and earn a profit. As Point and Figure charting must have been an extremely tedious practice to not only find winning trades but working out problems of congestion must have been even more difficult. So the Bar Chart was invented.
Bar charts are simple sticks where opening and closing prices are denoted by hash marks. Congestion on bar charts ocurrs when prices close on four bars within the confines of a range of a single price bar. The single price bar may be a measuring bar. So you need at least four bars to be considered congestion. Any range extensions is still considered congestion because prices fall within the zone. This just adds to the overall congestion count. Bar charts made the analysis of charting much easier than Point and Figure charts because it gave rise to trend lines and the ability to find more winning trades and work out dilemmas of congestion.
The book Success in Commodities, the Congestion Phase System by Eugene Nofri and his daughter Jeanette Nofri Steinberg fully opened the door to the study of congestion and congestion counts. Congestion for the Nofri’s was based on closing prices. Congestion was defined as “if a high or low is not broken and followed by two closes in the opposite direction, market congestion exists. Price may break congestion but find itself back within two or three days”. This is a new congestion zone using new highs and lows as the foundation. Next plot seven days closing prices to ensure stabilization in congestion zones.
The Nofri’s used 32 chart examples to highlight trend patterns in congestion zones. Based on this two day closing price
principle, the Nofri’s traded commodities (Grains) on the assumption that when prices close lower or higher for the second day in a row, you buy it or sell it on the close expecting prices to close higher or lower on the third day. The trade closes on the third day. The authors claim of 75 percent accuracy in trades was independently verified. Success in Commodities was a historic breakthrough in many respects. It gave us a clearer understanding of congestion and congestion counts, introduced modern day traders to a better understanding of support and resistance, introduced the radical idea the trend may not necessarily be your friend at all times. What this book really gave us was a new concept called the range trade.These concepts opened the door to further academic studies and new models based on these 1970’s practices.
The first academic studies were solely based on this radical concept of measuring close to close ratios. Later such studies as the Parkinson Estimator, Garman and Klass and older Garch models began investigating price volatility based on a market’s highs and lows and open and closes. The common theme of these studies is the range trade can be and was extremely profitable.
Even with the advent of candlestick patterns equipped with an understanding of congestion based on historical standards and the understanding of charts and chart patterns, not a trader exists that hasn’t fallen prey to this phenomenon of the markets. So the questions left unanswered is how did we get to congestion and what can be done about it will be highlighted next.
Because ranges get smaller and smaller as prices move towards congestion, the early warning sign of this phenomenon is what is known as the stalled candlestick pattern. Usually after a long advance or decline, an upward pattern that looks like a bullish three white soldiers pattern develops. The problem materializes when the third candle upward in a three white soldiers pattern fails. The opposite occurs in a three black crows pattern downward where the third candle fails, where a new high or low is not made in either pattern and represents indecision. These patterns are fakeout patterns as one would believe that a downward or upward spiral will continue. Instead congestion occurs and ranges get smaller and smaller so a trader that bought or sold into these positions is stuck for a temporary period.
What usually occurs next is the symmetrical triangle after a stalled pattern. This is confirmation of congestion because ranges are really small as the symmetrical triangle gets smaller. The only answer is wait for the two opposing lines of the triangle to meet in a point and follow the breakout up or down.
For those periods of congestion where trading ranges occur, draw horizontal lines through the fulcrum as well as marking out highs and lows of the range with an upper line of support and lower line of resistance. Now trade the range while waiting for a breakout. This is also known loosely as the box pattern. To complete this scenario fully, measure the ranges by adding the range from high to low and subtract those values. The answer will be where prices will go up or down upon a breakout. Many will know this pattern as the rectangle where the horizontal lines are support and resistance and the vertical lines are the measure of the range.
No better way to find a breakout by using ADX and DMI. Low ADX numbers will alert traders to an imminent breakout especially if congestion lasted for a long period. Low ADX readings will alert traders further to the strength of the imminent breakout. DMI simply confirms the direction of the breakout. A positive cross above signals a breakout to the upside while a downward cross is the signal to the downside.
Another aspect to congestion is pivot point analysis, an effective and popular tool for any market. A pivot point is simply a strong point of support or resistance used to test one moment of time in the market. Simply add the high,low and close and divide by three to determine where that point is located. These lines are solid points of support and resistance and can best measure congestion zones as well as trading ranges.
The chances are probably good that congestion will form within a 50% Fibonacci zone simply because 50 % zones are marked by previous long advances or declines. If you measure the advance or decline by an A- B move, the C aspect of that corrective move usually marks congestion, the 50% or the indecision aspect of the market. Yet figuring out where the C move will go will help to know where the D or the breakout phase will come while congestion occurs. Swing traders may want to go a step further by predicting turning points for the D move based on Fibonacci days such as 13, 21, 34, 55 or 89 days in the future.
Be careful of bid and ask prices. This is an early warning sign to congestion because bounces of bid or ask prices can inflate the range by the average spread. This will ensure further congestion.
Some may argue that breakouts will follow the previous direction before congestion occurred. This answer is not an absolute and can’t be relied upon for a profitable trade especially if congestion lasted for long periods. Fundamentals of the market may have changed during these long congestion periods.
The last aspect of congestion is to factor standard deviation to find where prices may travel out of the congestion zone. 1. Compute the mean of prices. 2. Compute deviation by subtracting the mean from each value. 3. Square each deviation. 4. Add the squared deviations. 5. Divide by 1 less than the sample size. 6. Take the square root. The square root is the variance where is measured the spread of prices. This again is one moment in time but it may hint at a breakout up or down based on the variance. The variance simply says are prices distributed more to the upside or downside.
One aspect of congestion is the fact if congestion lasts for long periods, the breakout will be a strong breakout with a violent thrust up or down and can mean a very profitable situation.
In the currency markets, many pairs exist that are natural to the range trade. Not necessarily congestion but the range trade. AUD/ CAD, EUR/GBP and the EUR/CHF are prime examples. During the month of April, the EUR/CHF ranged approximately 290 pips all month. AUD/CAD has barely 50 pip ranges on any given day. Know that the charts are trying to forwarn these profitable situations long in advance if traders take advantage of the message.
Brian Twomey is a currency trader and Adjunct Professor of Political Science at Gardner-Webb University.
Suggested readings: Success in Commodities, The Congestion Phase System, Eugene Nofri and Jeanette Nofri Steinberg. Success Publishing 1975
Technical Analysis of the Financial Markets, A Complete Guide by John J. Murphy, 1999 New York Institute of Finance.
Getting Started in Forex Trading Strategies, Featuring the Goodman Swing Count Index, Michael Duane Archer, Wiley 2008,
Two Steps Forward and One Step Back: The Congestion Phase Charting System. Fred Gehm, MTA Journal Fall 1991
Chart Congestion Analysis, Holliston Hill Hurd, Stocks and Commodities 1992
Vertical Horizontal Filter, Jayanthi Gopalakrishnan, Stocks and Commodities 1992
Goodman Swing Index, Michael Duane Archer
Addition to IMF and Special Drawing Rights Article
Many analysts, pundits and commentators the world over can presume not a thing happened, not an agreement reached at the G-20 Summit but intellects of the markets and the financial system would say otherwise. One has to only go back one week and reevaluate the China proposal stating the world should redesign the currency system and peg currencies to international bonds issued by the IMF creating baskets of currencies as a new peg and redesign the special drawing rights and procedures for trade. While this proposal may be quite interesting on its face, it has at its core the ability to completely level the capitalist playing field the world over and reevaluate and threaten the United States as the major reserve currency of the world. What this means for traders of all markets the world over is astounding. What does it mean to be a reserve currency? What exactly was the communique signed and agreed by all leaders of the G-20 summit. What are the China proposals in detail. What are special drawing rights used in world trade and how does it relate to the communique. Lastly what does these proposals mean for traders. All will be explained in detail.
Because the United States with its special status as world leader due to its successful rebuilding efforts the world over from both World War 1 and World War 2, currently enjoys the status of being the world’s reserve currency. This came from United States efforts from rebuilding Europe after the war through the Marshall Plan and building such world institutions as the United Nations, World Bank and the International Monetary Fund. This was accomplished so nations of the world can have peaceful diplomacy and share in various trade ventures so all nations can rebuild. Because the United States has a stable political system as well as stable and regulated markets, the status of being the world’s reserve currency has again been placed and reinforced upon the United States in the modern day.
To have the status of a reserve currency simply means the United States dollar is an accepted currency, an accepted safe currency due to its stable political system and regulated and safe markets. Because of this safe status, world governments and world institutions hold large quantities of dollars as part of their foreign exchange reserves. This high status allows the United states dollar to be the pricing currency for world products traded in the global marketplace such as gold and oil. Reserve status also allows the United States to purchase commodities at a reduced rate than other nations who must exchange their currency along with a transaction cost. Since the first world war, the United States has enjoyed this reserve currency status and will enjoy into the distant future this reserve status because of its leading economic position unless its position as leader is threatened. As part of the G-20 communique, the IMF would be greatly strengthened and possibly threaten this status.
After Bretton Woods in 1944 where the world decided to peg their currencies to the price of gold, the International Monetary Fund was created. The optimal word here is fund. The IMF is a cooperate bank where all monies go to a special kitty and only about 1 billion of income is earned from fund lending. Money given to the fund is lent to economically struggling nations where balance of payment and monetary systems must be realigned due to wars, tyrannical governments and recessions.
The IMF works based on nation commitments. For example, $50 billion was committed in the last six months by various nations. Japan committed $100 million, Norway committed $4.5 million and Canada committed $10 billion U.S. dollars. Prior to the G-20 summit, the IMF worked based on the quota system. A portion of reserves for each nation would be pleged to the IMF based on a nations economic position in the world. The more money committed to the IMF the more votes a nation may have in determining economic direction of the world. Currently the United States has the most votes than any other nation due to its financial commitment.
The IMF was originally charged in 1944 with overseeing the monetary system to ensure exchange rate stability and payment systems. Currently 185 members belong to the IMF, a majority of the 185 members joined as of 1981. As time progressed, the Special Drawing Rights system emerged in 1969.
A special drawing right is an international reserve asset created in 1969 to supplement existing official reserves of members nations. Traditionally, allocation of SDR’s worked based on IMF quotas. Minor and emerging market nations failed to grow before 1973 when the world worked on a fixed rate gold system because minor nations didn’t have enough gold or reserve currencies to participate in the SDR system. So trade and economic development failed to materialize for minor nations.
After 1973 when the world agreed to a floating currency system, the SDR system expanded as the unit of account of the IMF. The SDR is an accounting unit not a currency but it is a claim on freely usable currencies of members. SDR’s work in two ways. Currency exchanges based on voluntary exchanges between members and strong economic nations who wish to purchase currencies from weaker nations.
The values of SDR’s was once based on gold equivalents to U.S dollars. Today after Bretton Woods, the SDR value is now a basket of currencies consisting of the EURO, Japanese Yen, British Pound and the United States dollar. Currently, the U.S. Dollar makes up 44% of the basket, EURO 34% and Yen and British Pound 11% a piece.The value of SDR’s is then the sum of these four currencies valued in U.S. Dollars measured to six decimal places. As of Friday April 3, 2009 1 USD =666621 SDR with an SDR interest rate = .42 %. So the SDR rate changes on a daily basis based on the London close of prices for the day. For the United States this is 11:00 Eastern time. Knowing these values on a daily basis will determine interest rates charged to members for loans, how much interest rates paid or charged based on SDR holdings. Interest rates are based on yields or rates on three month EURO bond rates, three month Japanese Treasury Discount Bills, three month U.K. Treasury Bills and three month U.S Treasury bills. The current communique from the G20 summit calls for an increase of $250 billion with a new special allocation of SDR’s.
So the IMF deals not with currencies from members but SDR’s which is their unit of exchange. This takes the bias from the system because all currencies have differing values and allows the IMF to function freely. For example, Japan agreed to lend the IMF US $100 billion. This equates to $68 billion in SDR’S. The quota system works the same way. The United States quota in SDR is $37.1 billion which translates to $58.2 billion US. Paulau, the smallest member state has a quota of SDR $3.1 million which equates to $4.9 million.
Since the resources of the IMF are stretched due to many nations facing severe hardships due to this present financial crisis, nations are allowed and encouraged to lend to the IMF. In exchange nations may earn interest on their SDR holdings. The IMF doesn’t necessarily deal directly with member governments rather they deal with either the central banks of the member governments because they are considered independent of member nations governments. Many issues have arisen concerning SDR’s since the G-20 summit.
For example, since SDR;s are used for global transactions by governments, can SDR’s replace the U.S. Dollar as the system of exchange. If so, are we then moving towards a one currency world in the future where the IMF would be the leading institution of the world. Can another nation threaten the SDR system or allow their currency to be the new reserve currency. Currently, businesses don’t use the SDR system. But smaller nations who just increased their exposure within the IMF in the last few years could easily peg their currencies to SDR. Latvia is a current example. Other smaller nations use the EURO or the U.S. Dollar as their peg.
China backs a plan where the IMF would issue SDR denominated bonds for China purchases. As a nation with large currency reserves and able to purchase large quantities of bonds.
, China would be able to position themselves as an economic giant for the forseeable future not to mention China’s ability to increase its exposure within the IMF. This is USD negative and EURO/USD positive. Its USD negative because it threatens the United States as a reserve currency simply because those SDR allocations leading nations have grown accustomed to would now be reduced to a bond. These bonds would be tied strictly to a basket of currencies supplanting the major currencies of the world and allowing the Chinese Yuan to become more of a dominate currency in the world. China’s currency is not remotely market based rather its manipulated through adjustments through its banking reserve requirements. Instead of allowing its currency to free float, its value is based on Chinese banking reserve requirements. This allows for a small appreciation and stops the world from accusing China of market manipulation.This is how the Chinese were able to accumulate massive reserves through trading activities. Currently China contributes $40 billion to the IMF.Nothing in the present communique suggests that this plan will gain traction.
So what came out of the communique is increased funding for the IMF, $500 billion with SDR allocation funded at $250 billion and $250 billion trade finance program to promote trade. Further, bank secrecy laws are under attack, calls for an oversight board to monitor banks, calls for better accounting practices across national boundaries, more monitoring of derivatives, IMF allowed gold sales, an overall $5 trillion program for jobs with a 4 % output and of course focus on strengthening emerging markets since they are hit the hardest during this recession with debt nearly reaching their respective GDP levels. When one reads these communiques year after year, they read like the Basel Accords.
The Basel 2 Committee on Banking Supervision has as its goal to improve consistency of capital regulations internationally, make regulatory capital more risk sensitive and promote enhanced risk management practices among large internationally active banking organizations. What does this mean? Allow for capital adequacy of banks, more risk disclosure, a ratings based system for corporate debt and strengthening reporting requirements. This was all part of this and previous comminiques. So what does the latest G20 summit mean for traders.
Beginning with the IMF’s 103.4 million ounces of gold valued at $86 billion U.S. Looking at the relationship of USD/XAU–gold– traditionally this relationship has been an opposite. As the U.S. dollar moves up, gold moves down. Why? Becasuse gold has always been an inflation hedge. But this relationship has changed recently. Now gold moves up with the dollar. The U.S. dollar must appreciate in order for the U.S. to maintain its dominance and lead the world out of this recesion. The IMF may sell some gold but not all 103 million ounces so the effect may just be negligible on the gold market. Traders can still go long gold as well as the U.S. dollar and bank profits. Gold is no longer the standard reserve tool it once was. The dollar took its place. How long this relationship will hold is a product of the market.
Emerging markets and emerging nations will see increases by the developing world away from the purchases of treasuries. This possibility exists simply because of the huge debt the U.S. must issue to cover stimulus and other programs.
Commodities across the board will see higher prices as trade increases again.
One way to look at the overall financial situation and determine where investments should be made and whether these relationships will hold steady is to look at the BKX banking indicator and the MSCI world stock market indicators. A trend in both indices is a trend for stock markets, U.S. Dollars and gold.
Brian Twomey is a currency trader and adjunct professor of Political Science at Gardner-Webb University.
Suggested readings: G20.org, IMF.org and newyork fed.org
1. The overwhelming trend of the 1920’s was characterized as what type of new culture. Two Points.
2. Four aspects of historical developments occurred and gave us the modern method of society. What are the four methods. 8 points.
3. Give a brief explanation of the Scopes trial. What was on trial. What did we learn about this trial. 5 points.
The Concentric Zone Theory outlined five key zones in a city. Name the five zones. Two points each.
6 & 7.Booker T Washington and William DuBois shared two distinct philosophies to answer the ills of the black population. What were those philosophies. Two points each.
Booker T Washington:
8. This famous Supreme Court case of 1896 gave states the right to segregate blacks. Two points.
9. The United States answer to help Native American Indians was defined as what measure. Two Points.
10. This act was responsible for the westward migration of white settlers. Two points.
11. What was so special about the Interstate Commerce Commission.What did this act accomplish? Four points.
12. Who were the muckrackers and what was their purpose? Name two Four Points.
13. The Jungle gave us what act passed under the Presidency of Theodore Roosevelt. Two points.
14. The progressive movement can be defined as one word. What was that one word. Two points.
15. Three famous laws passed by the political progressives and implemented today. What were they. 6 points.
16. Define the 19th Amendment. Two points.
17. Name two people responsible for passage. Four points.
18. John Dewey was at the forefront of advocacy for educational reforms, What were the two schools of thought regarding compulsory education. Four points.
19. President Woodrow Wilson passed the federal reserve act. Define this act. Four points.
20. Define the League of Nations, its purpose and intentions. 5 points.
21. Compare the League to today’s United Nations. 5 Points.
22. Two aspects that prevented the League from passage. What are they. 5 points.
23. Wilson’s foreign policy can be described as one word. Two points.
24. Define the Sherman and Clayton Anti Trust acts. 5 points.
25 Define the Monroe and further Roosevelt Corollary. 5 points.
26 Define Social Darwinism and its application as it applied to politics during the Progressive era. 5 points.
27. Woodrow Wilson shaped and helped to define the modern day presidency. Name at least two historic changes implemented by Wilson still in existence today 4 points.
28 Roosevelt built what waterway. Our partnership with this waterway is defined by what nation. 4 points.
. 29. In a paragraph define a common theme among the presidencies of Roosevelt, Taft and Wilson. 6 Points.
30. Two acts that defined tariff rates during the presidencies of Taft and Wilson. Name one of the two. Two Points.
When the S&P’s, Gold and DXY was last visited January 2020. GOLD, S&P’s and DXY all traded above 5 year averages. An imbalance existed as the correct relationship is either DXY and GOLD remain above 5 year averages or the S&P’s must drop below 5 year averages.
Inversely, DXY amd GOLD must trade below 5 year averages and the S&P’s above. DXY and Gold as non risk assets and considered the safety trade must be misaligned to the risk asset of the S&P’s.
DXY now at 93.00’s, broke below its 5 year average at about 96.45 while GOLD at 1.1311.12 and the S&P’s at 3041.91 trades above 5 year averages. To align properly, either Gold trades below its 5 year average to meet its proper counterpart DXY or both must break above and the S&P’s must break below. Gold is currently the outlier and imbalanced inside the USD mix.
The affect to DXY below its 5 year average is 8 of 28 currency pairs now trade above 5 year averages as follows; EUR/USD, EUR/CAD, USD/CAD, AUD/CAD, EUR/NZD, EUR/AUD, EUR/GBP and CHF/JPY. Most vital to this list is recent converts to break 5 year averages, EUR/USD and AUD/CAD. As DXY broke below its 5 year average, its only correct and natural for EUR/USD to break above at current 1.1286.
AUD/CAD at 0.9594 is trading directly at its 5 year average. This would explain AUD/USD partial ability to trade higher and higher into deep overbought. AUD/USD’s big test is here at its 5 year average at 0.7283. AUD/USD assistance is AUD/EUR at current 0.6084 remains firmly below its 5 year average and informs a much lower AUD over time will trade.
When DXY as the main driver to all currency prices, broke its 5 year average allowed the Non USD pairs to travel higher.
DXY 96.45 coincides to EUR/USD at 1.1286.
The S&P’s extreme prices and short points are located 3294.54, 3315.98 and 3326.20 to target points at 3198.28, 3195.70, 3188.78, 3149.97 and 3167.93. Current S&P’s opens at 3258.44 and about 50 points to extremes. At 3294 coincides to short EUR/USD as both achieve deeply overbought status at extremes.
For today’s EUR/USD daily short trade is located at 1.1812 to target right at 1.1717. longer term, short points are located at 1.1822, 1.1807 and 1.1777 to target 1.1477 on a break of 1.1597.
|What is the value of an SDR?|
|Initially, the value of the SDR was defined in terms of one US-$, which in turn was defined in terms of an ounce of gold: $35/oz until 18-Dec-1971; $38/oz between 18-Dec-1971 and 11-Feb-1973; $42.22/oz between 12-Feb-1973 and 30-Jun-1974. Since July 1974 the SDR has been defined in terms of a basekt of currencies. This basket consisted initially of 16 currencies and was reduced to five in 1981. When the German Mark and French Franc were replaced by the Euro in 1999, the number of currencies shrank to four. Every five years the IMF determines which five currencies will enter the basket, and which weight will be applied to each currency. The exchange rates used by the IMF to calculate the official SDR are the noon rates in the London foreign exchange market. When the London market is closed, noon rates in the New York market are used, and Frankfurt fixing rates are employed when the New York market is also closed. The tables on the right show the composition of the SDR.|
|Note that the currency values are exact as defined by Rule 0-1 of the IMF. However, the weights are approximate and will change along with the fluctuations of the constituent currencies. To get exact current weights, refer to the IMF’s current valuation page (see below). Weights can be calculated by dividing the US-$ equivalent amount of each currency by the sum of US-$ equivalent amounts.|
How can one calculate the value of an SDR?
|To calculate the value of the SDR in national currency (say, ABC), multiply the four exchange rates of the home country vis-à-vis the basket-currency countries (i.e., ABC/USD, ABC/EUR, ABC/JPY, and ABC/GBP) with the basket values indicated in the above table. Add these four numbers together to obtain the ABC/SDR exchange rate.|
What is today’s value of the SDR?
|The International Monetary Fund prepares a daily web page with today’s SDR valuation. A full SDR valuation history is also available on thhis web page as an Excel file.|
|How can one calculate the value of an SDR?|
|To calculate the value of the SDR in national currency (say, ABC), multiply the four exchange rates of the home country vis-à-vis the basket-currency countries (i.e., ABC/USD, ABC/EUR, ABC/JPY, and ABC/GBP) with the basket values indicated in the above table. Add these four numbers together to obtain the ABC/SDR exchange rate.|
The SDR value in terms of the U.S. dollar is determined daily based on the spot exchange rates observed at around noon London time, and posted on the IMF website.
|Special Drawing Rights|
The SDR Fact Sheet
|© 2020 by Werner Antweiler, University of British Columbia. All rights reserved.|
The Pacific Exchange Rate Service is located in Vancouver, Canada.
Pacific Home Page | About this service | Contact Pacific
|Monday, July 27, 2020|
|Currency Unit||Currency amount under Rule O-1||Exchange rate 1||U.S. dollar equivalent||Percent change in exchange rate against U.S. dollar from previous calculation|
|U.S.$1.00 = SDR||0.711813 2||-0.586 3|
|SDR1 = US$||1.404860 4|
|1||The exchange rates for the Japanese yen and the Chinese renminbi are expressed in terms of currency units per U.S. dollar; other rates are expressed as U.S. dollars per currency unit. Chinese renminbi refers to the name of the currency, while Chinese yuan refers to the currency unit.|
|2||IMF Rule O-2(a) defines the value of the U.S. dollar in terms of the SDR as the reciprocal of the sum of the equivalents in U.S. dollars of the amounts of the currencies in the SDR basket. Under current IMF procedures, each U.S. dollar equivalent is calculated on the basis of the mid-market rates, as provided to the IMF by the Bank of England, based on spot exchange rates observed at around noon London time (see Bank of England website); the value of the U.S. dollar in terms of the SDR is rounded to six significant digits. The Federal Reserve Bank of New York and the European Central Bank serve as backup providers for these exchange rates. For further details see Method of Collecting Exchange Rates for the Calculation of the Value of the SDR for the Purposes of Rule O-2(a).|
|3||Percent change from previous calculation.|
|4||The reciprocal of the value of the U.S dollar in terms of the SDR, rounded to six significant digits.|
n accordance with the adopted formula, the following weights will be used to determine the amounts of each of the five currencies in the new SDR basket that will take effect on October 1, 2016:
- U.S. dollar 41.73 percent
- Euro 30.93 percent
- Chinese renminbi 10.92 percent
- Japanese yen 8.33 percent
- Pound sterling 8.09 percent
SDR Interest Rate
The Executive Board decided that the RMB would be represented in the SDR interest rate basket by the three-month benchmark yield for China Treasury bonds. The interest rate on the three-month Treasury bills of the United States, United Kingdom, and Japan, and the three-month spot rate for euro area central government bonds with a rating of AA and above (published by the European Central Bank) will continue to serve as the representative interest rates for the U.S. dollar, pound sterling, Japanese yen, and euro, respectively. The change will take effect on October 1, 2016.
The next review of the method of valuation of the SDR will take place by September 30, 2021, unless an earlier review is warranted by developments in the interim.
Table 1. Calculation of Illustrative Currency Amounts
|Currency||Percentage Weights1||Base Period Average Exchange Rates (BEX)2||Transition Date Exchange Rates (TEX) on|
September 26, 2016
|Illustrative Currency Amounts3||U.S. Dollar Equivalents on September 26, 2016|
|SDR1 = US$ 1.399624|
Rates Query Output
for July 28, 2020
|Edit Query New Query|
Viewing Page 1 of 1
|Effective Period||Financial Quarter||SDR Interest Rate||Rate Of Remuneration 1||Rate of Charge 1||Quarterly Average SDR Interest Rate 2, 5||Quarterly Average Rate of Remuneration 1, 2, 5||Quarterly Average Rate of Charge 1, 2, 5|
|From||To||Basic Rate||Adjustment for Deferred Charges 3||Adjustment for SCA-1 3||Adjusted Rate of Remuneration||Basic Rate4||Adjustment for Deferred Charges 3||Adjustment for SCA-1 3||Adjusted Rate of Charge||Basic Rate||Adjustment for Deferred Charges 3||Adjustment for SCA-1 3||Adjusted Rate of Remuneration||Basic Rate4||Adjustment for Deferred Charges 3||Adjustment for SCA-1 3||Adjusted Rate of Charge|
|July 27, 2020||July 31, 2020||Q1 FY21||0.066||0.066||0.000||0.000||0.066||1.066||0.000||0.000||1.066||0.071||0.071||0.000||0.000||0.071||1.071||0.000||0.000||1.071|
|1||The rate of remuneration and the rate of charge are adjusted for the financial consequences of protracted arrears under the burden sharing mechanism. The adjustments for the current quarter are estimates only and are finalized after the end of the financial quarter (July 31, October 31, January 31 and April 30).|
|2||The average rates in the current quarter are recalculated weekly and reflect the latest estimates of the burden sharing adjustments to the rate of charge and remuneration for the quarter.|
|3||The adjustments for Deferred Charges, for SCA-1, and for SCA-2 constitute the Burden Sharing mechanism which is used by the IMF to compensate for income lost due to unpaid charges and to build up precautionary balances through contributions to the Special Contingent Accounts (SCAs). The mechanism works by providing for deductions and additions to the rates of remuneration and charge, respectively. Initially introduced in 1986, the adjustments for deferred charges collect resources from debtors and lenders to cover unpaid charges of members in arrears. Also introduced in 1986, the adjustments for SCA-1 protects the IMF against potential losses from members’ ultimate failure to settle overdue repurchase obligations. Finally, the adjustments to SCA-2 were designed to safeguard the IMF against the risk of loss associated with the encashment rights and it was formally abolished in 2000. As a result, SCA-2 data is shown as N/A starting on January 3, 2000.|
|4||The basic rates of charge presented in the Rates Query from May 1, 1995 to April 30, 2003 are the effective rates following the retroactive reductions that were implemented after the end of each of those financial years. The basic rate of charge before the retroactive reduction for the financial years 1996, 1997, 1998, 1999, 2000, 2001, 2002 and 2003 were set as 102.5%, 109.4%, 109.6%, 107%, 113.7%, 115.9%, 117.6% and 128% of the SDR interest rate, respectively.|
|5||Quarterly average rates are not available for periods prior to August 1, 1983.|
SDRs per Currency unit and Currency units per SDR
Currency units per SDR for July 2020
|The value of the U.S. dollar in terms of the SDR is the reciprocal of the sum of the dollar values, based on market exchange rates, of specified quantities of the SDR basket currencies. See SDR Valuation.|
|These rates are the official rates used by the Fund to conduct operations with member countries. The rates are derived from the currency’s representative exchange rate, as reported by the central bank, normally against the U.S. dollar at spot market rates and rounded to six significant digits. See Representative Exchange Rates for Selected Currencies.|
|The value in terms of each national currency of the SDR (shown above) is the reciprocal of the value in terms of the SDR of each national currency, rounded to six significant digits.|
|Exchange rates are published daily except on IMF holidays or whenever the IMF is closed for business.|
Representative Exchange Rates for Selected
|These representative exchange rates, which are reported to the Fund by the issuing central bank, are expressed in terms of currency units per U.S. dollar, except for those indicated by|
|(1) which are in terms of U.S. dollars per currency unit.|
As posted Tuesday for the S&P’s
1. Long Red Candle Imminent. It happened Thursday.
2. Top and short at 3233.99, dropped today from 3223.44.
3. Target 2736.59 and 2661.62
4. Must break 3054.55, 2913.95 and 2845.35.
5. Lows 2999.14
6. 200 points to target
6. Trade runs +224 Points
S&P’s only offers normally 1, 2 pr even 3 big trades per year and upon review, we hit every big trade since 2018. As posted for inspection.
Posted above was the last S&P trade. A quick 1 day trade and +224 points.
Current S&P Trade
Holding S&P’s from a big drop are averages as follows: 3186.12, 3139.43 and 3130.45. Below 3130.45 targets 3080.58 and 3065.20.
A larger move lower must break 3082.34 and 3041.91 to then target 2975.90 and 2915.89.
Today’s target from the close at 3215.63 is located at 3222.26.
Strategy from 3222.26 is short to target 3198.28, 3195.70, 3188.78, 3149.97 and 3167.93.
Longer range and best strategy is short 3294.54, 3315.98 and 3326.20 to target above points at 3198.28, 3195.70, 3188.78, 3149.97 and 3167.93.
The S&P’s are overbought at current 3215.63 and higher prices brings with it far higher degrees of overbought.
As can be seen, the big trade short for 100’s of points is currently non existent as was seen in June. Only 1 or 3 times a year are those trades available. The best trade is roughly a 96 point short from 3294 to 3198.
The overall trade position remains the same as June and to adopt a short only strategy due to current overbought status.
The lowest GBP/USD price from averages 5 day to 253 is the 100 day average at 1.2459. The 100 day is a misplaced average and its proper place should be located at the 253 day average. because it is the lowest price among all averages.
The 200 and 253 day averages are located at 1.2599 and 1.2684. A crossover occurred. From the 1.2790 close, all averages are lower.
GBP/NZD. The 50 day average at 1.9272 is the average holding GBP/NZD from moving higher to target averages at 100 day, 200 and 253. Those averages are located at 1.9773, 2.0010 and 2.0001. A minor discrepancy by 9 pips exists to the 200 and 253 day averages.
EUR/CAD is perfectly working on all cylinders as the 200 and 253 day averages are located at 1.5088 and 1.5000.
GBP/CHF 200 and 253 day averages are located at 1.2124 and 1.2267. All averages 5 to 253 day are perfectly aligned.
GBP/JPY. 200 and 253 day averages are located at 136.20 and 137.34. All averages 5 to 253 day are perfectly aligned.
GBP/CAD 200 and 253 day averages are located at 1.7172 and 1.7180. All averages point straight down for GBP/CAD. The 5 day averages is located at 1.7088 and 50 day at 1.7005. GBP/CAD is a problem currency pair and won’t perform as averages don’t align properly.
GBP/AUD 200 and 253 day averages are located at 1.9036 and 1.9034. GBP/AUD averages are working perfectly and all point straight up from 5 to 253 day.
EURUSD 200 and 253 day averages are located at 1.1064 and 1.1069. All averages from 5 to 253 day are aligned perfectly.
EUR/JPY 200 and 253 day averages are located at 119.59 and 119.83. All averages from 5 to 253 day are aligned perfectly.
EUR/CHF 200 and 253 day averages are located at 1.0645 and 1.0702. The 50 day is located at 1.0699. EUR/CHF averages fail any sense of normal alignment and therefore a problem currency pair as it won’t perform to expectations.
EUR/NZD 200 and 253 day averages are located at 1.7578 and 1.7462. However the 100 day is located at 1.7644. The 100 day averages is misplaced and should be located at the 253 day.
EUR/AUD 200 and 253 day averages are located at 1.6721 and 1.6617. A 100 pip discrepancy as the 200 averages should be located at the 253 day. Overall averages are aligned.
EUR/GBP is excluded purposefully as its a non trade able currency pair.