Currency Trading and Intermarket Analysis

06/01/2009 12:27 pm EST

Focus: STRATEGIES

Ashraf Laidi

Chief Global Strategist, CIty Index/FX Solutions

Many of you have seen Ashraf Laidi as he frequently appears on the financial news networks after important economic data is released. In his new book, Currency Trading and Intermarket Analysis, Ashraf gives the reader a clear idea of all the factors that go into his analysis. The first several chapters of the book deal with the history of the financial markets, which is quite interesting. There is an extensive review of the relationship between gold and the dollar that includes charts of gold in other currencies. Ashraf points out that the highest correlations are with the Australian dollar and the euro. There are tables showing the aggregate returns versus various currencies and it should be pointed out that throughout the book there are excellent charts, many of them long-term, to illustrate the relationships he discusses.

In the second chapter, he discusses the fundamentals of crude oil and how they impact the currency markets. The discussion goes back to the late 1970's and early 1980's, covering Volcker at the Fed, the Plaza Accord, and the impact of the first Iraq war. He looks at both the supply and demand picture and concludes that everything is in place for a prolonged bull market in crude and a bear market in the dollar.

Chapters three and four concentrate on the dollar starting with the major theories of international economics that are used to explain foreign exchange valuations. This is followed by the annual performance of the dollar and other major currencies through the dollar bull market from 1999 to 2001. For each of the currencies, Ashraf supplies a brief explanation of the factors that were impacting that country and its currency during the year. For those traders who are interested in understanding long-term trends, this book is a wealth of information. In the next chapter, Ashraf shares the same analysis covering the dollar bear markets from 2002 to 2007. In Chapter four, he notes "The strong positive correlation between copper prices and the Australian dollar was instrumental in identifying turnarounds in the aussie that may have not been anticipated via interest rates."

With the events of 2008, risk is now on everyone's mind, however, it has always been a factor in the currency markets. Chapter five, which covers risk appetite in the markets, proves to be very timely. It discusses the rationale behind carry trades, as the yen carry trade over the past two years has gained much attention from both the equity and FX traders. The author explains that when risk appetites are high, the carry trades are very popular, but when one is looking to reduce their risk exposure, these trades are closed out. Of course, the unwinding of the yen carry trade was often blamed for sharp market declines during 2008. The VIX is also explored as a measure of the risk appetite as Ashraf makes a very valid point that while most focus on the rising VIX as an indication of fear, he believes a falling VIX should get equal attention for indicating an increased appetite for risk.

As you can probably tell from my brief review of the first few chapters, the focus of this book is on factors that impact the macro trends in the economy, currencies, and other investment markets. Therefore, much of what is covered may not suit the casual investor or short-term FX speculator, as the book was not meant to be an easy read. In fact, one chapter at a sitting might be enough, especially if the topics are totally new to the reader. In later chapters, Ashraf covers understanding the yield curve, how equities and commodities can be used to analyze Fed action, commodity and currency super-cycles and the role of what he calls US imbalances (current account, trade, and budget) on the future of the US dollar.

I have had the pleasure of meeting the author several times and have noted that he takes a very serious approach to the markets, and his analysis has always been extremely thorough. Though the book lived up to my expectations, it is not a trading book, but is more suited to those who want to understand past economic trends and intermarket relationships in order to be better able to forecast future trends. The historical charts are tremendous because they allow you to easily view little discussed relationships like the Aussie/VIX, Kiwi/Milk or the USD/Yen versus the Fed Funds rate in an historical context. If you are committed to the understanding of longer-term trends and correlations in the financial markets, this excellent book will be essential.

 

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