Currency Trading and Intermarket Analysis

Ashraf Laidi is the head FX Strategist at CMC Markets, where he oversees the analysis and forecasting functions of G-10 currency pairs as well as decisions and trends of the major global central banks. His online FX analysis has received wide following for more than a decade, centering on G-10 currencies and economies. Prior to joining CMC, Laidi monitored the performance of a multi-FX portfolio at the United Nations, assessed sovereign and project investment risk for Hagler Bailly and the World Bank, and analyzed emerging market bonds at Reuters. He also created the first 24-hour currency Web site for traders and researchers during the inception of the Euro. He is the founder of AshrafLaidi.com.

• Foreword xiPreface xiiiAcknowledgments xviiChapter 1 Gold and the Dollar 1End of Bretton Woods System Marks Gold’s Takeoff 2Fed Tightening and FX Interventions Rein in Gold Rally 3Central Banks’ Gold Sale Agreements 5Gold-USD Inverse Relation 6Recent Exceptions to the Inverse Rule 6Using Gold to Identify Currency Leaders and Laggards 8Gold’s Secular Performance 11Valuing Currencies via Gold 13Golden Correlations 14Don’t Forget Falling Gold Production 16Gold and Equities: Hard versus Monetary Assets 16Equity-to-Gold Ratios 19TheRoleoftheSpeculators 21Gold Is Part of a Larger Story 22Chapter 2 Oil Fundamentals in the Currency Market 25From a Gold Standard to an Oil Standard (1970s–1980s) 26Oil Glut and Price Collapse (1981–1986) 32The Super Dollar of 1980–1984: The World’s Third Oil Shock 34World Intervenes against Strong Dollar (1985–1987) 39Iraq’s Invasion of Kuwait and the Gulf War (1990–1991) 41The Asian Crisis and OPEC’s Miscalculation (1997–1998) 44Oil Thrives on World Growth, Dot-Com Boom (1999–2000) 46Iraq War Fuels Oil Rally, Dollar Flounders, China Takes Over (2002 to Present) 46Summary 49Chapter 3 When the Dollar Was King (1999–2001) 51The Major Theories 52Annual Performance Analysis of Individual Currencies 53Summary 70Chapter 4 The Dollar Bear Awakens (2002–2007) 712002: The Beginning of the Dollar Bear Market 712003: Dollar Extends Damage, Commodity Currencies Soar 782004: Global Recovery Boosts Currencies against U.S. Dollar 842005: Commodities Soar alongside Dollar, Carry Trades Emerge 902006: Dollar Vulnerable as Fed Ends Two-Year Tightening 942007: Record Oil Boosts Loonie, Helpless Fed Hits Greenback 102Lessons Learned 108Chapter 5 Risk Appetite in the Markets 111Carry Trades in Foreign Exchange 112Using Risk Appetite to Gauge FX Flows 121Tying It All Together: 1999–2007 134Chapter 6 Reading the Fed via Yield Curves, Equities, and Commodities 137Yield Curves and the Economy 138Types of Yield Curves 139Rationale of Inverted Yield Curve Implications 142Effectiveness of Yield Curve Signals’ Implications 142Greenspan’s “Conundrum” Proved Bernanke’s Problem 143Implications for Growth, Stocks, and Currencies 145Tying Interest Rates to the Gold-Oil Ratio 153Conclusion 158Chapter 7 U.S. Imbalances, FX Reserve Diversification, and the U.S. Dollar 161The U.S. Twin Deficits 162U.S. Current Account Deficit: Old Problem, New Challenges 165Adding the Budget Balance to the mix 169Financing the Deficits: The Path to Unsustainability? 170Dissecting U.S.-Bound Foreign Capital Flows 172U.S. Stocks and Bonds Vie for Foreign Money 173Capital Flows Shift Identities 177Foreign Direct Investment and M&As 179How Long Will Foreign Capital Be Available on the Cheap? 181Don’t Ignore U.S. Investors’ Flows Abroad 182Currency Reserve Diversification: OPEC and the Middle East 185Further Currency Diversification Is Inevitable 187The View Ahead 189Chapter 8 Commodities Supercycles and Currencies 191The Current Commodity Cycle versus Previous Cycles 193Dissecting Commodity Classes 196Commodities and their Currencies 207Developing World to Maintain Ripe Outlook for Food and Grains 208Energy Efficiency Not Enough to Halt High Oil 214Copper and Gold to Shine on Long-Term Fundamentals 219Commanding Heights or Common Bubbles? 223Chapter 9 Selected Topics in Foreign Exchange 225Revisiting Yield Curves 225Is Dollar Stability a Necessity? 230How Far Will Commodities Outstrip Equities? 236U.S. Politics and the U.S. Dollar 240Conclusion 247Bibliography 249About the Author 251Index 253