Table of Contents
Additional Praise for Currency Trading and Intermarket Analysis
Ashraf Ladi shows his deep and broad knowledge of the currency markets in this book. As one of the most prolific analysts on the Forex markets, Ladi outlines the historical linkage of monetary policy, world finance, and currency markets into a readable primer for any student of the global markets.
Ginger Szala, Publisher/Editorial Director, Futures Magazine Group
Barrons readers often ask if there is a book to explain to them how markets really work. After plowing through textbooks and graduate studies, it took three-plus decades of covering markets to learn that academics live in a different world than the day-to-day markets. Ashraf Ladi has produced a work that is accessible to the layperson but at the same time provides a sophisticated view of all marketscommodities, precious metals, credit, and equitiesand how they interact with the biggest market of all, currencies. If only I had this book when I started out!
Randall W. Forsyth, Editor, Barrons Online
A very detailed book with an important flow of information and specific details related to some well-known periods of the USD changes. It should clearly please beginners seeking a better understanding of FX movements over the last decades. For sophisticated investors, they will appreciate discovering the new angles introduced in dissecting the major developments in currencies.
Hamid Bousba, Director, Senior Portfolio Counsellor,
Citi Private Bank, Citibank (Switzerland)
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding.
The Wiley Trading series features books by traders who have survived the markets ever changing temperament and have prosperedsome by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.
For a list of available titles, please visit our Web site at www.WileyFinance.com.
To my parents Ahmed & Aisha Ladi
Foreword
On the day of my birth, Good Friday March 31st, 1961, the Dow Jones Industrial Average was sitting at 678.5. The dollar was still anchored to gold, exchangeable at $35 an ounce. Interest rates were regulated and low, the economy was strong and steady in the fifteen years after the end of World War II.
The Bretton Woods global currency system of fixed exchange rates was in place and there was relative stability in the pre-Vietnam, pre-hippie years.
Ten years later, the next, and only, time my birthday would fall on Good Friday, such stability was no longer assured. A few short months later, the stability fostered by the 1944 Bretton Woods Accord would be shattered when President Richard Nixon abandoned the gold standard on August 15, 1971.
I was ten years old and dont remember the event. I only remember the ramifications.
Within a matter of months, I recall that inflation became a national issue. As a young boy growing up in blue collar Buffalo, New York, I was perplexed as to why, so suddenly, food and energy costs were rising in a way that hurt my familys finances.
My father never made that much money to begin with, so the incipient inflation that would rage another 10 years, hurt us in ways I never understood.
We began crossing the PeaceBridge, a span that connected Buffalo to the edge of Canada and bought groceries in another country where they were cheaper.
Shortly thereafter came the first of two oil shocks, wage and price controls, Whip Inflation Now buttons, and an economy so ragged and uneven we left a dying town for the presumed land of milk and honey, California.
But even there, another oil shock hit in 1979, gas lines were long and mean, social unrest set in, my first car loan, $2,000 for a tan 4-door, 1979 Chevy Nova (a babe magnet if ever there was one) cost me 20 percent in interest.
The economic calm of my birth year had turned to chaos and nearly ruinous chaos, at that.
Much of it came amid a radical departure from the sound money principles that drove our economy in the post-War years.
After twenty years of relative calm, from 1981 to 2001, again we find ourselves in a similar predicament, though with different root causes. The dollar, until recently, was falling precipitously as this latest credit crisis dramatically weakened the U.S. economy. A combustible mix of financial engineering and excess leverage has cost us dearly.
Among the fixes that may one day be necessary may be a more formal, global foreign exchange regime. While I am not necessarily a fan of returning to the gold standard, I do understand and personally appreciate the need for a more stable global monetary system that contains and restrains some of the more animal spirits of markets gone wild.
It is my fervent hope that in the ensuing months and years we will find new and better ways to limit the damage that financial market panics have wrought, particularly the one of most recent vintage, which I believe has the capacity to entirely destabilize the world economy.
We need a much more enlightened, coordinated, and concerted global policy response to the financial market meltdown we are now enduring. Part of it may include a reform of our currency trading system. The currency markets are the biggest and most liquid markets in the world. And even though in a free-floating exchange rate system, a countrys currency, rather than its interest rates or its real economy, acts as the shock absorber during times of stress. That shock absorber is being tested today.
Hopefully it will survive the test. Nearly half a century into my life, I am hoping that my ten-year-old daughter and my other two children do not have to face the wrenching dislocations I did some thirty-seven years ago, and will instead enjoy the serene calm that existed on the day of my birth, not the chaos that erupted just after my tenth birthday.
Ron Insana
Preface
As the weakness in the U.S. dollar becomes a prolonged trend in the foreign exchange market and the euro assumes an increasingly credible position in global exchanges, currencies are no longer a topic restricted to economists or bank traders. With the multiyear bull markets in stocks, bonds, and real estate having largely concluded their upward run, global investors remain on a continuous quest for yield. In the United States, individual investors have more than quadrupled their holdings of non-U.S. stocks between 1996 and 2007, elevating their awareness of foreign economies and currencies to new heights. Meanwhile, the multitude of banks and brokerage houses offering currency trading services for investors has increasingly integrated foreign exchange into investor portfolios worldwide.
Academics and market professionals have done their bit in producing literature about the mechanics of foreign exchange markets and the theories underpinning them. But relatively little is written on how to explore the practical intermarket relationships that shape currencies via interest rates, equities, and commodities. Most investors have come across the notion of interest rates impact on foreign exchange rates, but have yet to grasp the situations when interest rates and central bank policy are displaced by shifting risk appetite and economic growth. While central banks aim to manage expectations in bond and currency markets, they tend to misread such risks as asset price inflation and financial market contagion, leaving professional and institutional investors wrong-footed. Integrating commodities into the mix, record-breaking prices have significantly driven the foreign exchange market, raising the need for investors to determine the currencies most responsive to price developments in energy, metals, food, and agricultural raw materials. And given the plethora of media types generating constant financial market information and advice, investors need to separate noise from sound market and economic signals.
