the currency futures contract are displayedin the middle and bottom sections respectively.
The above offers only a preliminary visual comparison between Forex activity andfutures volume. Exhaustive studies between spot and futures currency prices may re-veal a plethora of trading opportunities, particularly when anomalies occur.
FIGURE 21.3 EURUSD versus ECM4
Major Currencies and Currency Futures
181
FIGURE 21.4 GBPUSD versus BPM4
CHAPTER 22
Major Currenciesand Precious Metals
OVERVIEW
Universal  fascination  with  gold  is  an  obvious  understatement.  All  Forex  and  futurestraders are very intrigued about the correlation between precious metal prices and cur-rency prices.
The ISO (International Standards Organization) designation for gold is XAU, where“X” is the identiﬁer for ﬁnancial vehicles other than currencies and “AU” is short for au-rum, Latin for gold. Spot gold prices are represented in the same manner as Forex cur-rency pairs: base currency on the left and quote currency on the right. XAU is alwaysthe  base  currency  in  the  pair  when  quoting  gold  prices.  Examples  are  XAUUSD,XAUEUR, XAUGBP, and XAUCHF.
Live spot gold prices are available through several gold dealers and news services
such as those shown in Table 22.1.
TABLE 22.1 Major U.S. and British Spot Gold Dealers
Gold Information Network KitcoAmerican Precious Metals ExchangeGold MastersGold PricesLondon Metal ExchangeBullion Direct
www.goldinfo.netwww.kitco.comwww.ampex.comwww.goldmasters.comwww.goldprices.comwww.metalprices.comwww.bulliondirect.com
183
184
COMPARATIVE STUDIES
The streaming spot prices represent what gold customers are willing to pay at the
current moment in time for gold coins, bullion, ingots, bars, wafers, and so on.
Historical  data  on  compact  disks  for  spot  gold  prices  is  available  through  DiskTrading, Ltd., and the quotes are supplied in the identical format as currency pairs.Thus  upticks  and  downticks  are  supplied  with  time  intervals  of  one  minute  andhigher.
GOLD CHARTS
All Figures in this chapter use the same time frame from 1/1/2006 to 4/14/2006 with aconstant time interval of one day. (See Figures 22.1 through 22.6.)
Major Currencies and Precious Metals
185
FIGURE 22.1 XAUUSD OHLC and Activity
XAUUSD Properties
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation
517.0200604.3000515.0200599.8000559.2728559.660089.280015.952516.9720
186
COMPARATIVE STUDIES
FIGURE 22.2 XAUEUR OHLC and Range
XAUEUR Properties
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation
436.3406497.1208432.9051495.2523464.1988465.012964.215713.809412.8796
Major Currencies and Precious Metals
187
FIGURE 22.3 XAUGBP OHLC and Range
XAUGBP Properties
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation
300.0348345.3932298.6238342.5667319.1775322.008546.769414.52439.8857
188
COMPARATIVE STUDIES
FIGURE 22.4 XAUCHF OHLC and Range
XAUCHF Properties
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation
679.1575788.4906662.7868778.7803725.0443725.6387125.703817.323223.6191
Major Currencies and Precious Metals
189
FIGURE 22.5 XAUJPY OHLC and Range
XAUJPY Properties
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation
60879.105071863.356059731.349071190.262065472.605265797.352512132.007018.43842351.3307
190
COMPARATIVE STUDIES
GOLD STATISTICS
There  are  a  couple  of  statistical  methods  to  determine  just  how  closely  an  individualcurrency follows the price of a precious metal. The one that we will employ here is thecoefﬁcient of variation:
Coefﬁcient of Variation = 100 × Standard Deviation
Mean
The reasoning behind this choice is based upon the fact that the coefﬁcient of varia-tion is a percentage or a dimensionless index number, while all the other statistical val-ues given beneath each chart above are values expressed in terms of the quote currency(relative range is the only exception).
The rationale for correlation is straightforward: The lower the coefﬁcient of varia-tion,  the  higher  the  correlation  between  that  currency  and  the  precious  metal.  (SeeTable 22.2.)
These  values  are  interesting  from  a  statistical  viewpoint  but  may  not  carry  muchweight as a forecasting indicator since numerous fundamental factors also inﬂuence goldand  silver  prices,  such  as  production,  mining,  reserves,  imports,  exports,  price-ﬁxing,and so on.
TABLE 22.2 Major Currency Correlationwith Gold
Currency
Coefﬁcient of Variation
XAUEURXAUUSDXAUGBPXAUCHFXAUJPY
2.773.033.103.263.59
Major Currencies and Precious Metals
191
SILVER CHARTS
The  ISO  designation  for  silver  is  XAG,  from  argentum,  Latin  for  silver.  The  followinganalysis employs the same methodology and time frame as the gold study above. (SeeFigures 22.6 through 22.10.)
FIGURE 22.6 XAGUSD OHLC and Activity
XAGUSD Properties
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation
8.825013.03008.695012.925010.041110.86254.335039.90791.0431
192
COMPARATIVE STUDIES
FIGURE 22.7 XAGEUR OHLC and Range
XAGEUR Properties
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation
7.447910.71907.206810.67218.33308.96293.512239.18590.8443
Major Currencies and Precious Metals
193
FIGURE 22.8 XAGGBP OHLC and Range
XAGGBP Properties
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation:
5.12137.44744.96737.38195.73216.20742.480139.95440.6122
194
COMPARATIVE STUDIES
FIGURE 22.9 XAGCHF OHLC and Range
XAGCHF Properties
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation
11.592517.001511.045416.781813.021614.02355.956242.47281.4000
Major Currencies and Precious Metals
195
FIGURE 22.10 XAGJPY OHLC and Range
XAGJPY Properties
OpenHighLow CloseMeanMidrangeAbsolute RangeRelative RangeStandard Deviation
1039.14381549.5276995.42731534.06831176.02291272.4775554.100343.5450129.5541
196
COMPARATIVE STUDIES
TABLE 22.3 Major Currency Correlationwith Silver
Currency
Coefﬁcient of Variation
XAGEURXAGUSDXAGGBPXAGCHFXAGJPY
10.1310.3910.6310.7511.02
SILVER STATISTICS
Analogous to the gold study above, we will again use the coefﬁcient of variation as anindicator to determine how closely major currencies follow the prevailing price of sil-ver. (See Table 22.3.)
It is interesting to note that after the coefﬁcients of variation for both gold and sil-ver were sorted with the highest correlation at the top, the major currencies are in thesame  order.  However,  none  of  the  coefﬁcients  exhibited  enough  deviation  or  unique-ness to devise any hard and fast rules that traders can employ presently. We intend toprobe this side venue of currency trading in more detail.
CAVEAT
Both trading in spot precious metals and currency trading have their intrinsic risk/re-ward factors. Readers should be aware of one interesting historical note on the volatil-ity of silver prices.
In 1973 the Hunt family of Texas began taking delivery on silver futures contracts asa hedge against inﬂation when silver was in the $1.95 per ounce range. By 1979, the Huntbrothers  (Nelson  Bunker  and  William  Herbert),  with  the  assistance  of  some  wealthyArabs,  amassed  over  200  million  ounces  of  silver,  accounting  for  nearly  half  of  theworld’s deliverable supply.
In early 1980, silver peaked at $54 per ounce, then plummeted on March 17 from$21.62  to  $10.80  in  a  single  day.  A  combination  of  changed  trading  rules  on  the  NewYork Metals Market (COMEX) and the intervention of the Federal Reserve brought theentire ﬁasco to a close and in 1988 the Hunt brothers were convicted of conspiring tomanipulate the market when their liabilities had grown to $2.5 billion against assets of$1.5 billion.
Amazingly, there is an upside to this rather scary tale. Numerous economists pro-claim that market prices are merely the result of random walk theory and that technicalanalysis  is  simply  human  folly.  The  history  of  silver  prices  alone  refutes  this  myopicclaim, since the rise and collapse of silver prices in the 1970s and 1980s can be attrib-
Major Currencies and Precious Metals
197
uted directly to supply and demand, a fundamental inﬂuence directly related to techni-cal  analysis.  Given  the  history  of  silver  prices  from  1789  to  1973  as  a  mathematicaldatabase, the likelihood of hitting a price of $54 in the subsequent seven years is notimpossible using random walk theory, merely astronomically small. The moral is sim-ple: Never initiate a currency trade without a stop loss limit order. Also, it is not wise totrade securities under SEC investigation regardless of how lucrative they may appearto be.
CHAPTER 23
The Mundo Currency
OVERVIEW
The Mundo is a pragmatic concoction of co-author Jim Bickford and represents a syn-thetic  global  spot  currency.  In  some  ways  it  is  analogous  to  the  U.S.  Dollar  Index(ticker  symbol  DX),  which  is  an  openly  traded  futures  contract  offered  by  the  NewYork  Board  of  Trade  since  1973.  The  U.S.  Dollar  Index  is  computed  using  a  trade-weighted  geometric  average  of  the  forward  futures  contracts  of  the  six  currencieslisted in Table 23.1.
IMM  currency  futures  traders  monitor  the  U.S.  Dollar  Index  to  gauge  the  dollar’soverall  performance  in  world  currency  markets.  If  the  U.S.  Dollar  Index  is  tradinglower, then it is very likely that a major currency that is a component of the Index istrading higher.
TABLE 23.1 U.S. Dollar Index
Components
Currency
Weight %
Euro CurrencyJapanese YenBritish PoundCanadian DollarSwedish KronaSwiss Franc
57.613.611.99.14.21.6
199
200
COMPARATIVE STUDIES
INTERNATIONAL CURRENCY UNIT
Stock and commodity traders have numerous composite indices which can be used asbarometers in the selection of which securities to trade. Outside of the U.S. Dollar In-dex, spot currency traders have none. For that purpose, we created the hypotheticalcurrency, the International Currency Unit, and nicknamed it the Mundo for short. Wewill  give  it  a  ﬁctitious  ISO  (International  Standards  Organization)  designation  of“ICU.” The Mundo will be used to deﬁne the arithmetic average of a selection of spotcurrency pairs.
MUNDO CALCULATION
In this study of U.S. major currency pairs, we will restrict our selection of Mundo com-ponents to EURUSD, GBPUSD, USDCHF, and USDJPY.
The ﬁrst step is to ensure that the USD is the quote currency in each pair, whichmeans  the  arithmetic  reciprocal  must  be  substituted  for  the  USDCHF  and  USDJPYpairs.
The  second  step  is  to  convert  all  exchange  rates  to  integral  pip  amounts.  Thismeans  multiplying  10,000  times  the  exchange  rates  for  the  EURUSD,  GBPUSD,  andCHFUSD pairs. Multiply the JPYUSD by 100,000.
The ﬁnal step is to sum the four pairs and divide by four. To convert the pips back to
an exchange rate, divide by 10,000.
Because the Mundo is an aggregate currency, it is natural to think that anomaliesin  the  individual  component  currency  pairs  would  be  smoothed  over  for  the  mostpart. Yet a closer examination of the Mundo chart shows that anomalies appear to beaccentuated.
In Figure 23.1, note that the average activity is represented at the bottom.
The Mundo Currency
201
FIGURE 23.1 Mundo OHLC and Activity Chart
202
COMPARATIVE STUDIES
MUNDO DIFFERENTIAL CHART
The  Mundo  Differential  Chart  is  a  new  addition  to  the  technical  analysis  of  spot  cur-rency pairs. Its purpose is to determine the degree of divergence that one USD majorcurrency pair deviates from the Mundo currency comprised of the EURUSD, GBPUSD,CHFUSD, and JPYUSD pairs. (See Figures 23.2 through 23.5.)
In the upper portion of Figure 23.2 are two curves, one solid and one dotted. Thesolid  line  represents  the  daily  closes  in  the  EURUSD  currency  pair  after  the  ﬁrstclose in the time series has been subtracted from all the subsequent closes. The sameis true for the dotted line except that it represents the Mundo currency. This scalingoperation coerces both time series to start at the same point on the left side of thechart.
FIGURE 23.2 Mundo Differential Chart (EURUSD)
The Mundo Currency
203
The solid curve in the lower portion of the chart is the difference between the twoupper  curves,  that  is,  the  scaled  Mundo  data  is  subtracted  from  the  scaled  EURUSDdata.
FIGURE 23.3 Mundo Differential Chart (GBPUSD)
204
COMPARATIVE STUDIES
FIGURE 23.4 Mundo Differential Chart (CHFUSD)
The Mundo Currency
205
FIGURE 23.5 Mundo Differential Chart (JPYUSD)
206
COMPARATIVE STUDIES
The premise of the differential chart is based upon transitivity, the crucial elementin arbitrage which relies on the equilibrium formula to keep all currency pairs in bal-ance  with  each  other.  The  simplest  form  of  transitivity  occurs  in  triangular  arbitrage,which involves exactly three currencies:
EURUSD = EURGBP × GBPUSD
An example of equilibrium involving all ﬁve major currencies is:
EURUSD = (EURGBP / GBPCHF) × (CHFJPY/USDJPY)
Note that each single currency appears exactly twice in the formula above.
USAGE
The differential chart is experimental and still requires thorough testing. One observa-tion is that when the scaled major currency pair exceeds an arbitrary number of pipsabove the scaled Mundo currency, an upward trend is indicated. The converse appearstrue for a downward trend also.
Leader/lagger  relationships  (also  called  dominance  and  dependence)  may  also  be
detected by the use of the Mundo differential chart. (See Figure 23.6.)
The authors are currently involved in writing online software that will test the devi-ation  of  a  single  currency  pair  from  the  Mundo  as  a  potential  market  entry  indicator.The difﬁculty is that, while arbitrage opportunities are frequently present, they are usu-ally very short-lived.
Lastly, the authors wish to state that the readers should not restrict themselves totrades that involve only the major currencies. There are numerous trading opportunitieswith the minor currency pairs also (such as the Canadian Dollar, the Australian Dollar,the New Zealand Dollar, the Swedish Krona, the Hong Kong Dollar, the Singapore Dol-lar, and several others). In fact, many of these exhibit greater volatility than the majorcurrency pairs. The disadvantage, though, is their diminished liquidity. So it is expedientto schedule trading sessions during periods of peak activity when dealing with the mi-nor currency pairs.
The Mundo Currency
207
FIGURE 23.6 All Four USD Majors
Legend:
USD Major
Line Style
Close
GBPUSDEURUSDCHFUSDJPYUSD
Dots and DashesSolid LineDots OnlyDashes Only
27524881–82
Appendixes
APPENDIX A
ISO Currencies Pairs
T his is a list of global currencies and the three-character currency codes that we
have found are generally used to represent them. Often, but not always, this codeis the same as the ISO 4217 standard. (The ISO, or International Organization for
Standardization, is a worldwide federation of national standards.)
In most cases, the currency code is composed of the country’s two-character inter-net country code plus an extra character to denote the currency unit. For example, thecode  for  Canadian  Dollars  is  simply  Canada’s  two-character  internet  country  code(“CA”) plus a one-character currency designator (“D”).
We have endeavored to list the codes that, in our experience, are actually in generalindustry use to represent the currencies. Currency names are given in the plural form.This list does not contain obsolete Euro-zone currencies.
211
212
APPENDIX A
TABLE A.1 World Currencies
Symbol
Region
Currency Name
AEDAFAALLAMDANGAOAARSAUDAWGAZMBAMBBDBDTBGNBHDBIFBMDBNDBOBBRLBSDBTNBWPBYRBZDCADCDFCHFCLPCNYCOPCRCCUPCVECYPCZKDJFDKKDOPDZDEEKEGPERNETBEURFJD
United Arab EmiratesAfghanistanAlbaniaArmeniaNetherlands AntillesAngolaArgentinaAustraliaArubaAzerbaijanBosnia, HerzegovinaBarbadosBangladeshBulgariaBahrainBurundiBermudaBrunei DarussalamBoliviaBrazilBahamasBhutanBotswanaBelarusBelizeCanadaCongo/KinshasaSwitzerlandChileChinaColombiaCosta RicaCubaCape VerdeCyprusCzech RepublicDjiboutiDenmarkDominican RepublicAlgeriaEstoniaEgyptEritreaEthiopiaEuro Member CountriesFiji
DirhamsAfghanisLekeDramsGuildersKwanzaPesosDollarsGuildersManatsConvertible MarkaDollarsTakaLevaDinarsFrancsDollarsDollarsBolivianosBrazil RealDollarsNgultrumPulasRublesDollarsDollarsCongolese FrancsFrancsPesosRenminbiPesosColonesPesosEscudosPoundsKorunyFrancsKronerPesosAlgeria DinarsKrooniPoundsNakfaBirrEuroDollars
(continues)
ISO Currencies Pairs
213
TABLE A.1 (Continued)
Symbol
Region
Currency Name
FKPGBPGELGGPGHCGIPGMDGNFGTQGYDHKDHNLHRKHTGHUFIDRILSIMPINRIQDIRRISKJEPJMDJODJPYKESKGSKHRKMFKPWKRWKWDKYDKZTLAKLBPLKRLRDLSLLTLLVLLYDMADMDLMGA
Falkland IslandsUnited KingdomGeorgiaGuernseyGhanaGibraltarGambiaGuineaGuatemalaGuyanaHong KongHondurasCroatiaHaitiHungaryIndonesiaIsraelIsle of ManIndiaIraqIranIcelandJerseyJamaicaJordanJapanKenyaKyrgyzstanCambodiaComorosKorea (North)Korea (South)KuwaitCayman IslandsKazakstanLaosLebanonSri LankaLiberiaLesothoLithuaniaLatviaLibyaMoroccoMoldovaMadagascar
PoundsPoundsLariPoundsCedisPoundsDalasiFrancsQuetzalesDollarsDollarsLempirasKunaGourdesForintRupiahsNew ShekelsPoundsRupeesDinarsRialsKronurPoundsDollarsDinarsYenShillingsSomsRielsFrancsWonWonDinarsDollarsTengeKipsPoundsRupeesDollarsMalotiLitaiLatiDinarsDirhamsLeiAriary
(continues)
214
APPENDIX A
TABLE A.1 (Continued)
Symbol
Region
Currency Name
MKDMMKMNTMOPMROMTLMURMVRMWKMXNMYRMZMNADNGNNIONOKNPRNZDOMRPABPENPGKPHPPKRPLNPYGQARROLRURRWFSARSBDSCRSDDSEKSGDSHPSITSKKSLLSOSSPLSRGSTDSVCSYP
MacedoniaMyanmar (Burma)MongoliaMacauMauritaniaMaltaMauritiusMaldivesMalawiMexicoMalaysiaMozambiqueNamibiaNigeriaNicaraguaNorwayNepalNew ZealandOmanPanamaPeruPapua New GuineaPhilippinesPakistanPolandParaguayQatarRomaniaRussiaRwandaSaudi ArabiaSolomon IslandsSeychellesSudanSwedenSingaporeSaint HelenaSloveniaSlovakiaSierra LeoneSomaliaSeborgaSurinameSão Tome, PrincipeEl SalvadorSyria
DenarsKyatsTugriksPatacasOuguiyasLiriRupeesRuﬁyaaKwachasPesosRinggitsMeticaisDollarsNairasGold CordobasKroneNepal RupeesDollarsRialsBalboaNuevos SolesKinaPesosRupeesZlotychGuaraniRialsLeiRublesRwanda FrancsRiyalsDollarsRupeesDinarsKronorDollarsPoundsTolarsKorunyLeonesShillingsLuiginiGuildersDobrasColonesPounds
(continues)
ISO Currencies Pairs
215
TABLE A.1 (Continued)
Symbol
Region
Currency Name
SZLTHBTJSTMMTNDTOPTRLTTDTVDTWDTZSUAHUGXUSDUYUUZSVEBVNDVUVWSTYERYUMZARZMKZWD
SwazilandThailandTajikistanTurkmenistanTunisiaTongaTurkeyTrinidad, TobagoTuvaluTaiwanTanzaniaUkraineUgandaUnited States of AmericaUruguayUzbekistanVenezuelaViet NamVanuatuSamoaYemenYugoslaviaSouth AfricaZambiaZimbabwe
EmalangeniBahtSomoniManatsDinarsPa’angaLirasDollarsTuvalu DollarsNew DollarsShillingsHryvniaShillingsDollarsPesosSumsBolivaresDongVatuTalaRialsNew DinarsRandKwachaZimbabwe Dollars
APPENDIX B
Exchange Rates
T he  following  table  shows  the  international  foreign  exchange  rates  on  4/21/2006
compared with the USD.
TABLE B.1 Exchange Rates
Currency
Units/USD
USD/Units
Algerian DinarArgentine PesoAustralian DollarBaharaini DinarBolivian BolivianoBrazilian RealBritish PoundBotswana PulaCanadian DollarChilean PesoChinese YuanColumbian PesoCypriot PoundCzech KorunaDanish KroneEcuador SucreEuroGhanaian CediGuatemalan QuetzalHong Kong Dollar
0.013790.327010.744202.652660.125080.472791.782800.187140.878270.001930.124770.000432.147770.043590.165470.000041.234500.000110.132010.12897
72.525003.058001.343730.376987.995002.115100.560925.343601.13860517.549998.014502,337.000040.4656022.942006.0435025,000.000630.810059,106.999887.575007.75400(continues)
217
218
APPENDIX B
TABLE B.1 (Continued)
Currency
Units/USD
USD/Units
Hungarian ForintIsraeli ShekelIndian RupeeIndonesian RupiahJapanese YenJordanian DinarKenyan ShillingKuwaiti DinarMalaysian RinggitMexican PesoMoroccan DirhamNamibian DollarNew Zealand DollarNorwegian KroneOmani RialPakistan RupeePeruvian Nuevo SolQatari RialRussian RoubleSaudi RiyalSingapore DollarSouth African RandSouth Korean WonSwedish KronaSwiss FrancTaiwan DollarAlgerian DinarTanzanian ShillingThai BahtTunisian DinarTurkish LiraUAR Emirati DirhamUS DollarVenezualan BolivarVietnamese DongZimbabwe Dollar
0.004670.220150.022160.000110.008551.411430.014043.424070.273190.090160.111910.165870.633300.157482.597740.016680.302330.274670.036390.266630.626610.167070.001060.132480.784750.030980.013790.000830.026450.747380.756830.272281.000000.000470.000060.00001
213.960014.5423045.135008,882.99974116.930010.7085071.220000.292053.6605011.091208.935506.029001.579036.350000.3849559.970003.307703.6407027.480003.750501.595905.98550948.000057.548601.2743032.2750072.525001,211.9999637.810001.338001.321303.672701.000002,144.0000515,924.999