The US Dollar made few major directional moves across the majors during the month of April, leading the FXCM Enhanced Dollar-Bear Index to show only very mild changes. Nevertheless, the FXCM Enhanced Dollar-Bear Index outperformed holding a short position in the NYBOT’s DXY Index, as the former ended the month up over 9% since February, while the DXY finished up almost 4%.
[B]
View the Enhanced Dollar-Bear Index’s performance since 2003 [/B]here.
The US Dollar made few major directional moves across the majors during the month of April, leading the FXCM Enhanced Dollar-Bear Index to show only very mild changes. Nevertheless, the FXCM Enhanced Dollar-Bear Index outperformed holding a short position in the NYBOT’s DXY Index, as the former ended the month up over 9% since February, while the DXY finished up almost 4%. Since trading of the FXCM Enhanced Dollar-Bear Index contains “carry-trade” components, investors holding positions in this index benefit from yield differentials, along with changes in spot price.
View the Enhanced Dollar-Bull Index’s performance since 2003 here.
Meanwhile, the lack of price action in the greenback wasn’t beneficial for those aggressively long the US Dollar. Indeed, the FXCM Enhanced Dollar-Bull Index ended the month down 4.6%, comparable losses to that of holding long positions in the DXY Index, which finished down approximately 4%. This was due primarily to the fact that trading of the FXCM Enhanced Dollar-Bull Index is based on our Speculative Sentiment Index (SSI) indicator, which does not always perform well in range-bound markets – something we saw during the month of May.
Do you have an opinion on where the US Dollar will go next? Find out more about the FXCM Enhanced Dollar-Bull Index Program and the FXCM Enhanced Dollar-Bear Index Program.
US Dollar Market Activity In May
During the month of May, the US dollar generally consolidated against the majors, with day-to-day price action centered broadly surprising US economic data. However, toward the end of the month, the US dollar rebounded as the futures markets eliminated bets that the Federal Reserve would cut rates any further.
Taking a closer look at what specifically we saw drive the markets, the US dollar started off on a strong note as US non-farm payrolls – the most market-moving indicator for the greenback – fell 20,000, which was much less than expected. Furthermore, the unemployment rate eased back to 5.0 percent from 5.1 percent, as labor market conditions in the services sector proved to be resilient. Indeed, this pick up in services employment helped push the ISM Non-Manufacturing index back above the 50 level to 52.0 from 49.6, signaling expansion in the sector. The US dollar initially gained on the news, but fell back later on as the headline index reading was actually a bit misleading. A further breakdown of the report shows that business activity/production and new orders grew at a slower pace, while the component measuring new export orders tumbled to 48.5 from 55, signaling contraction. Other intra-day market-movers for the US dollar included US Advance Retail Sales excluding Autos, which surprisingly rose 0.5 percent (dollar bullish), and the Consumer Price Index, which indicated that headline and core consumer price growth had slowed (dollar bearish).
However, the biggest driver for a shift in market sentiment came at the end of the month upon the release of the minutes from the Federal Open Market Committee’s April 29-30 meeting, which supported expectations that the central bank would leave rates steady at 2.00 percent when they meet again in June. Indeed, the minutes said that “most members viewed the decision to reduce interest rates at this meeting as a close call. The substantial easing of monetary policy since last September, the ongoing steps taken by the Federal Reserve to provide liquidity and support market functioning, and the imminent fiscal stimulus would help to support economic activity.” Looking ahead, the FOMC judged that economic growth would be “weakest over the next few months, with many participants judging that real GDP was likely to contract slightly in the first half of 2008.” Furthermore, the FOMC was extremely bearish on the housing sector and “participants saw little indication of a bottoming out in either housing activity or prices.” Consumption was also judged to be a soft spot for the US, and the “restraint on spending emanating from weakness in labor markets was expected to increase over coming quarters, with participants projecting the unemployment rate to pick up further this year and to remain elevated in 2009.” Indeed, projections for the unemployment rate in 2008 were revised up to 5.5 - 5.7 percent from 5.2 - 5.3 percent. Likewise, real GDP forecasts for 2008 were slashed all the way down to 0.3 - 1.2 percent from 1.3 - 2.0 percent.
Clearly, the downside risks for the economy loom very large and conditions are widely anticipated to get worse before they get better. However, the FOMC also revised their inflation expectations higher, with PCE anticipated to hit 3.1 - 3.4 percent, versus January’s estimate of 2.1 - 2.4 percent. As a result, the hesitance of the FOMC to cut rates in April along with a broad pick up in price pressures was judged to be enough to prevent the Federal Reserve from cutting rates again in June.
For a comprehensive list of upcoming event risk for the US Dollar, visit the DailyFX Economic Calendar.
Why Enhanced Dollar Index Programs from FXCM?
• Managed accounts provide diversification, eliminating specific currency risk
• In careful backtests the Programs outperformed the benchmark in both bull and bear markets
• Amplifies returns by seeking to earn interest on positions
• Uses proprietary FXCM sentiment data to optimize entries and exits
Even if you are convinced that being a dollar bull could prove to be a profitable investment in 2008, why should you choose the Enhanced Dollar Index Programs from FXCM to express that point of view? One great reason is that this FXCM product provides all of the benefits of a broadly diversified index. Instead of being forced to guess whether the dollar will rally against the euro, the British pound, or the Japanese yen, the index serves as a weighted average of the key components, and through diversification, it eliminates much of the individual currency risk. Many large banks publish their own versions of the dollar index, but most indices are just an academic exercise, not a real tradable instrument, such as FXCM’s Enhanced Dollar Index Programs
How does the FXCM Dollar-Bull Index Program fare against other dollar index products that are tradable, such as the famous DXY index on NYBOT? In carefully back tested results, FXCM’s Enhanced Dollar-Bull Index Program reduced downside risks by losing less during periods of decline and amplified upside returns by gaining more than the benchmark when the dollar rallied. For those that are bearish on the greenback, the FXCM Enhanced Dollar-Bear Index reduced downside risks by losing less when the dollar rallied and amplified upside returns by gaining more than the benchmark during periods of decline.
View the Enhanced Yen-Bear Index’s performance since 2003 here.
During the month of May, the FXCM Yen Bear Enhanced Management Accounts continued to outperform its benchmark, with the Yen Bear Managed Account up nearly 2.5% since February, while the Synthetic Yen-Bear Index didn’t even manage to crack more than a 1% gain.
View the Enhanced Yen-Bull Index’s performance since 2003 here.
Risk aversion continued to work in favor of those long the Japanese yen during May, and the FXCM Yen Bull Enhanced Management Account ended the month with a more than 4% gain, while the Synthetic Yen-Bull Index actually fell more than 1% during the same period.
Do you have an opinion on where the Japanese Yen will go next? Find out more about the FXCM Enhanced Yen-Bull Index Program and the FXCM Enhanced Yen-Bear Index Program.
Japanese Yen Market Activity in May
In May, the global markets experienced a return to risk appetite, subsequently leading forex carry trades to rise despite sharp declines early in the month. More specifically, USDJPY consolidated around the 104.00 mark for most of May, and only managed to break above 105.00 towards the end of the month. This sort of behavior can be attributed to improvements across the markets, as equity indexes around the world generally stabilized. Indeed, stock markets can usually provide a comprehensive view of sentiments, and given the rebound in US shares during the month, it is clear that optimism returned for the time. In fact, the DJIA closed above the 13,000 level for the first time in 5 months and Germany’s Xetra DAX index rose above the 7,000 mark.
Meanwhile, the Japanese economy faced similar conditions to many other economies in the world: rising inflation and a slowdown in overall growth. While Japan’s national CPI rate actually slowed to 0.8 percent in April, down from 1.2 percent in March, it was clear that record oil and food prices were having a major impact on the economy as core consumer price inflation – which excludes food and energy – remained tepid. As a result, it is clear that the commodity boom, rather than rising domestic demand, is responsible for the increase in prices. Meanwhile, the Japanese unemployment rate hit a 7-month high of 4.0 percent, household spending, industrial output and housing starts all contracted further, while retail trade figures showed growth slowing to a crawl. Likewise, consumer and business confidence continued to signal broad-based pessimism, suggesting that both household and business spending would wane. As a result, the Bank of Japan confirmed that expectations for the Japanese economy were weak, as they cut their growth forecasts from 2.1 percent to a tepid 1.5 percent for the year.
For a comprehensive list of upcoming event risk, visit the DailyFX Economic Calendar.
Why Enhanced Index Managed Accounts From FXCM?
• Managed Accounts Provide Diversification Eliminating Specific Currency Risk
• In Careful Backtests Outperformed The Benchmark in Both Bull and Bear Markets
• Amplifies Returns by Seeking to Earn Interest on Positions
• Uses Proprietary FXCM Sentiment Data to Optimize Entries and Exits
One great reason is that the FXCM product provides all of the benefits of a broadly diversified index. Instead of being forced to guess whether the yen will rise or decline against the euro or the British pound or the Australian dollar, the indices serve as a weighted average of the key components and through diversification, eliminate much of the individual currency risk. Many large banks publish their own versions of the yen index, but most indices are just an academic exercise and not a real tradable instrument like FXCM’s Yen Bull and Bear Enhanced Management Account.
How does the FXCM Yen Enhanced Management Account fare against yen index products? In carefully back tested results the FXCM Yen Enhanced Index reduces downside risks by losing less during periods of decline and amplified upside returns by gaining more than the benchmark when the yen rallied.
Over the past five year period – a time of extreme yen weakness – the FXCM Enhanced Yen Bear Index outperformed the Synthetic Yen Bear Index during 3 of the past 5 years. In 2004, a very choppy year for the Japanese Yen, the FXCM Enhanced Yen Bear Index gained 7.49 percent against only a 0.87 percent rise in the Synthetic Yen Bear Index. Meanwhile the FXCM Enhanced Yen Bull Index significantly outperformed the Synthetic Yen Bull Index by registering far smaller losses. In 2007 – an extremely volatile year for the Japanese yen – the FXCM Enhanced Yen Bull Index rose 4.59 percent against a 4.88 percent decline in the Synthetic Yen Bull Index.
How is the FXCM Enhanced Yen Index able to achieve such stable and consistent outperformance over relatively long periods of time? The product relies on an important tool to help improve performance: FXCM’s own proprietary Speculative Sentiment Index indicator, which optimizes entries and exits. As one of the largest non-bank foreign exchange dealers in the world servicing more than 90,000 accounts, FXCM is privy to the aggregate positioning of its traders. In the past, shifts in positioning signaling a change in speculator sentiment have proven to be accurate signals for a turn in the price of the underlying currency pair. While past performance is no means a guarantee of future success, FXCM Enhanced Yen Index stands as time tested, attractive strategy for those investors looking to get sell short the yen index while trying to outperform the benchmark.
[B]Written by Terri Belkas, Currency Analyst and Abhigyan Chakraborty, DailyFX.com
Questions? Comments? E-mail: <[email protected]>[/B]