Crunching the numbers behind the myths: The following set of nine past Currency Trader articles collects the work of Howard Simons, president of Rosewood Trading Inc., and strategist for Bianco Research. In these articles, Simons provides detailed analysis of the overlooked dynamics and intermarket relationships in the currency market, and challenges many commonly held assumptions in the forex world.

Note: This is not an article collection for beginners. It contains high-level concepts and analysis directed toward experienced traders, economists, and analysts.

Purchased separately, these nine articles would cost $40.05. Now you can buy them as a set for $28.03 — 30 percent off the regular price. The price shown is the discounted price.


ARTICLE 1: "The dollar index and 'firm' exchange rates" (December 2005)
Summary: The vast majority of currency traders are familiar only with the current floating-rate system. But are we about to enter a new "firm exchange rate" era dominated by the dollar and euro?

Excerpt: No global exchange-rate system lasts forever. Whether a pure gold standard, a single-currency dominated standard such as that enjoyed by the British pound during the 19th century, or the U.S. dollar during the Bretton Woods system of fixed exchange rates after World War II, every system ultimately falls under the weight of its internal stresses and rigidities. A set of events eventually comes along that causes the system to collapse.

Central banks are seldom ahead of the curve; they react to events. Their behavior — and that of associated governments during the transition from the Bretton Woods regime — is instructive in this regard. It will help guide us into the emerging world of two major currencies — the dollar and the Euro. We will also see why the New York Board of Trade (NYBOT) dollar index (DXY) is and will remain the best instrument for tracking and managing the U.S. dollar's course in the years ahead.

Article 2: "What drives the dollar index?" (January 2006)
Summary: Market watchers often point to deficits and interest-rate differentials to explain the dollar's behavior, but analysis shows these supposed market factors might not be in the driver's seat after all.

Excerpt: Never let the facts get in the way of a good story might be good advice in journalism, but it is inexcusable in the financial markets. How many other fields have such a wealth of readily available facts?

Yet market myths and legends abound. Consider the primary one about the U.S. dollar - that its long-term depreciation is connected to the so-called twin deficits of the current account and the federal budget. But is there any evidence supporting this conclusion?

ARTICLE 3: "Canadian dollar: Remember the forgotten currency" (February 2006)
Summary: It's often labeled a "commodity currency," but the Canadian dollar tends to be ruled by other factors.
Excerpt: Nothing infuriates Canadians more than the sense Americans are ignoring them. This indignation is justifiable in light of the importance of the U.S.-Canada bilateral trade flow; each country is the others largest trading partner.

The Canadian dollar (CAD) is an important financial variable, too. Not only does it account for 9.1 percent of the benchmark dollar index (DXY), but it occupies a unique role therein. Once we understand what drives the CAD, we have a critical piece in place for understanding the DXY.

ARTICLE 4: "The index approach to currency risk management" (April 2006)
Summary: Investors can often find superior returns overseas — as long as currency fluctuations don't negate their profits. The dollar index can be an effective tool for managing this risk in non-dollar portfolios.

Excerpt: Would anyone be happier to see a single-currency world than global investment managers? Probably not. There is nothing more frustrating than seeing the hard work of individual asset selection and portfolio creation negated by currency fluctuations.

Like it or not, all investors are currency speculators. For example, Americans investing overseas in 2003 benefited from dollar weakness, only to be harmed by dollar strength in 2005.

ARTICLE 5: "The yen stands alone" (March 2006)
Summary: The usual rules of the currency world don't necessarily apply to the Japanese yen. Will that continue to be the case, or is Japan poised to revamp its economic model in a way that will dramatically alter the yen's long-standing dynamics?

Excerpt: It is fair to note, as the Japanese themselves do, that Japan is one of the more group-oriented societies in the world. An old Japanese proverb warns, "the nail that sticks up will be hammered down." How odd, then, that the Japanese yen, which comprises 13.6 percent of the benchmark dollar index (DXY), is a currency with its own rhythm. It truly marches to the beat of a different drummer.

ARTICLE 6: "The euro index: The dollar index meets its match" (May 2006)
Summary: The launch of tradable euro index futures and options may be the next step in the ascendancy of a new dollar-euro currency regime.

Excerpt: There are a few ways to answer the seemingly simple question, "What's the euro worth?" The first and most reflexive response would be to run over to your nearest quote screen and punch in the exchange rate between the euro (EUR) and the U.S. dollar (USD). This is the standard answer, but it is very incomplete.

A second way, and an attempt at greater completeness, would be to reference several cross-rates between the EUR and the currencies of its major trading partners, such as the British pound (GBP) and the Swiss franc (CHF). While this would provide a more complete answer, it confuses data with information: All those cross-rates — without some measure of their relative importance — just muddle the issue. Also, the relative importance of these cross-rates changes constantly.

ARTICLE 7: "The yen carry trade, currencies, and U.S. bonds" (June 2006)
Summary: What does the future hold for the yen, the yuan, and U.S. debt markets in light of Japan's changing interest-rate stance and continued pressures on China to allow its currency to float?

Excerpt: Bond traders are congenitally anxious people. This derives from the very nature of bond investing: Once you lend someone money, the only acceptable outcome is you will get paid in full on both the coupons and the principal. Anything else is bad. In addition to outright default in the corporate and municipal markets, you have to worry about currency risks for international bonds, inflation risk everywhere, interest rate risk, and the gnawing sense that someone, somewhere, is going to wake up in the morning and say, "Sell!"

ARTICLE 8: "Of commodities and currencies" (July 2006)
Summary: They are often lumped together under the same banner, but analysis indicates something other than commodity prices is driving the Canadian dollar, Australian dollar, South African rand, and other so-called "commodity currencies."

Excerpt: The huge commodity rally of the past four years has affected government finances around the world and has led to significant trade surpluses for exporters, particularly crude oil exporting nations.

In one of the many cruel jokes of economics, only a few resource exporters have even modestly deep and liquid markets for their currencies. Nigeria, Venezuela, and the United Arab Emirates may be significant crude oil exporters, but do currency traders really wish to dabble in the naira, bolivar, and dirham, respectively?

ARTICLE 9: "The dollar and its hidden risks" (August 2006)
Summary: What are historical market relationships telling us about the dollar's prospects?

Excerpt: Let's say you are a hunter confronted with a charging rhinoceros. You take careful aim, squeeze the trigger of your suitably heavy gun, and hit the rhino square in the forehead. He keeps coming.

Who has the problem now?

Currency traders face a similar if less dramatic dilemma on occasion. The fundamentals, or in this discussion the quantitative indicators, behind a given market may look to favor a given currency, but the market starts moving in the other direction. Such was the case for the U.S. dollar (USD) vis- á-vis both the euro (EUR) and the Japanese yen (JPY) by the late spring of 2006. Both currencies were strengthening against the USD and for non-parallel reasons based on the three separate quantitative indicators below. Purchased separately, these nine articles would cost $40.05. Now you can buy them as a set for $28.03 — 30 percent off the regular price.