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Barbara Rockefeller. The Foreign Exchange Matrix
Publishing details
About the Authors. Barbara Rockefeller
Vicki Schmelzer
Foreword
Introduction
Easy answers. What is the purpose of FX trading volume?
Does the FX market drive other markets, or is it a passive end-product? Why do FX markets overshoot?
How do the reputational aspects of money affect FX trading and is it justified that the dollar is in perpetual crisis?
Decoding how the FX market really works
Risk aversion
Information overload
The FX market is not what you think
Chapter 1 – The Matrix Concept
What is the matrix?
Why the matrix is useful
The primitive matrix
The matrix process
Perversity of the FX market
Understanding this perversity
Technical analysis in the FX market
The pinball effect
The actors
Positions
Making sense of the information
Endnotes
Chapter 2 – Review of Risks
Risk and contagion. Contagion arises from the Asian Crisis
Globalisation of risk
Explaining large-scale contagion
Risk gauges
1. The VIX
2. Risk reversals
3. Federal Reserve stress indexes
Kansas City Federal Reserve Financial Stress Index (KCFSI)
St. Louis Federal Reserve Financial Stress Index (STLFSI)
Cleveland Federal Reserve Financial Stress Index (CFSI)
4. Bank stress indexes
Goldman Sachs Financial Stress Index (GSFSI)
BofA/Merrill Lynch Global Financial Stress Index
Citicorp’s Macro Risk Index
5. Inflation breakevens and inflation swaps
6. Corporate spreads/credit default swaps
7. Price of commodities
Conclusion
Endnotes
Chapter 3 – Global Attitude Toward Risk
Overview of risks
1. Settlement risk
2. Price risk
3. Country risk and sovereign risk
A history of sovereign default
How FX traders react to country risk
Why FX traders worry about country risk
Banking sector risk
4. Credit risk. Defining credit risk
Harbingers of credit risk
Credit risk in practice
5. Liquidity risk
6. Political risk
Intervention as political risk
7. Contagion risk
8. Technology risk
Summary
Endnotes
Chapter 4 – Interest Rates and Interest Rate Differentials
Why interest rates matter
Inflation dynamics
Interest rate curve shifts as FX drivers
Greenspan’s yield curve conundrum and what it means for foreign exchange
Rising global FX reserves and the effect on FX
Inflation expectations and what the market watches
Inflation swaps
Inflation breakevens
Federal Reserve banks and traders watching breakevens
When safe-haven trumps yield
Conclusions
Endnotes
Chapter 5 – Forecasting FX
Traders, economists and theories. Traders with shifting worldviews
The misalignment of exchange rates
Economic theories on FX
The absence of a single, tell-all theory
The disconnect puzzle
The overshooting paper – Dornbusch’s solution
Pragmatic acceptance of disequilibrium
Purchasing power parity
Those who observe fair value – PPP forecasts
The Big Mac Index
Eurostat purchasing power parity and advance applications of PPP
The Taylor Rule
Institutional overrides
Markets for other assets
Central banks
Political events
War
International conferences
Government intervention in the FX Market. The uniqueness of FX intervention
Intervention in practice
Sterilisation
Why governments intervene
The efficacy of intervention
Emerging market interventions
Summary
Endnotes
Chapter 6 – Positions and Flows
Observing positions and flows
The players
Volume in Retail FX. How traders utilise volume data
Volume data
Where FX traders can find information on positions and flows
Report 1: Commodity Futures Trading Commission (CFTC)
2. Japanese flow data
3. EPFR weekly data
4. BofA Merrill Lynch Monthly Fund Manager Survey
5. TICS Data
6. IMF COFER report
Using the COFER data to assess reserve diversification
7. Sovereign wealth funds
8. BIS triennial report
9. Corporate/Institutional/Retail FX/Hedge funds
Other flow reports
Conclusion
Endnotes
Chapter 7 – Intermarket Analysis
Overview of big-picture intermarket ideas. Origins of intermarket analysis
Where intermarket analysis falls flat
Where intermarket analysis comes good
Changing correlations
Considering notable ‘correlated’ markets
The dollar and oil
When the dollar and oil are correlated
Flawed analysis of the dollar-oil relationship
A digression on commodities
Gold – the third rail of currency analysis
Conclusion
Endnotes
Chapter 8 – Technical Analysis in Foreign Exchange
The prevalence of TA in FX
Why technical analysis is pervasive in FX
Timing matters
No benchmark
Technical analysis is empirical
No fight between technicals and fundamentals in FX
How to go with the flow – technical analysis in action
Moving averages
Combining fundamentals and MAs
Breakouts and support and resistance
Moving average convergence divergence (MACD)
Bands and channels
Overbought and oversold
Cyclicality and waves
Mean reversion
Moves and countermoves
Manipulating bars
The timeframe problem
Fads and fashions
Ichimoku clouds
Systematic, rule-based trading
A riff on sentiment
The bandwagon effect
Self-fulfilling prophecies
Market extremes
Equilibrium is hokum
Market leaders and positional bias
Secret technicals at work
Conclusion
Endnotes
Chapter 9 – The FX Files of Trading
FX roots
Enter the electronic dealing platforms
FX gets wired
Algomania
Bigger is better – effect of bank size on FX trading
Price discovery
Last look
Algo news
Conclusion
Endnotes
Chapter 10 – Be Careful What You Wish For: Reserve Diversification and the Future of the Dollar
Introduction
What is a reserve currency?
How to qualify for reserve currency status
Predictions of the dollar’s fall
Unlikelihood of change
Reserve currencies are always doomed
Somebody has to lead
The debate over gold vs. paper money
The real lender of last resort
The gold standard is a non-starter
Exorbitant privilege
The SDR is a non-starter, too
Other reserve currencies
The changing shape of how currency reserves are held
China holds the ace
Military power and reserve currency status
Hard vs. soft power
Evaluating China’s prospects as a reserve currency issuer
What’s next
Endnotes
Chapter 11 – The Euro and the New Gold Standard
The euro as a reserve currency
The EMU as a sovereign
Country risk
Judging sovereigns
Hegemony and reserve currency investors
The new gold standard
Evaluating the euro zone debt crisis
Contagion
Conclusion
Chapter 12 – The Central Bank Tool Kit and How it Affects Foreign Exchange
Non-standard measures
Quantitative easing
It came from Japan
Other banks use QE too
Spreads drive policy
QE2
Capital controls
Peg-o-my-heart. The SNB’s battle to control the franc’s strength
Ineffective use of capital controls by the SNB in the 1970s
Pegs have a place
Intervention
Cold hard cash vs. jawboning and the announcement effect
Intervention – Does it work? Yes and No. The efficacy debate
Japan
China
Conclusion
Endnotes
