Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets
By Ashraf Laidi
Wiley, 278 pages, $70.
Ashraf Laidi is a highly regarded currency analyst whose focus spans the full range of global markets. This welcome text won’t tell you how to get rich trading forex but it does furnish penetrating insight into the fundamental forces that determine exchange rates.
Laidi closely tracks global equity, credit, and commodity markets and shows how trends in these sectors impact currencies, the largest market in the world. His discussion of commodities is particularly helpful. Laidi focuses chiefly on gold and oil but also touches on agricultural and other commodities. To cite one example of his rich perspective, Laidi says it is a folly to forecast Australian dollar trends without factoring in wheat production and consumption.
Laidi then turns the logic around and shows how currencies in turn impact equities, fixed-income and commodities. For example, OPEC has frequently hiked the price of oil in response to weakness in the U.S. dollar. As the title suggests, Laidi draws heavily on intermarket analysis. Early on Laidi acknowledges the pioneering work of intermarket analyst John Murphy.
Laidi is an authority on exchange rate fundamentals. Here’s an example. Most of the time gold and the U.S. dollar move in opposite directions. On those rare occasions of positive correlation, it takes a skilled market analyst to account for the temporary anomaly. Laidi is up to the task. He notes that gold and the dollar trended higher for much of 2005, defying the inverse pattern. Why? Laidi cites one common sense clue. In 2005, the Federal Reserve was tightening, giving the dollar a competitive edge over lower-yielding currencies. A second, more subtle factor attests to Laidi’s unique insight. He cites the 2005 Homeland Investment Act, which slashed the tax on U.S. multinationals’ overseas profits from 35% to 5%. As a result of this one-time tax cut, multinationals “repatriated an estimated $600 billion, prompting a surge of inflows into U.S. dollars from euros.”
There are a few disappointments in the text. Laidi furnishes dozens of line graphs, some portraying as many as six or seven data fields. All graphs are rendered in gray-scale, making it difficult to differentiate individual fields. Color line graphs would have been helpful. There are also some editing errors. In one passage Laidi says Mexico provides 8% of U.S. oil supplies. Later he puts the number at 14%. Laidi is an expert currency analyst but his prose can be awkward. He describes Japan as “loath in exacerbating” deflation. He speaks of “inexistent corporate profits.”
The substance of the analysis more than compensates for these lapses. One claim Laidi probably now regrets is his forecast of a looming commodity super cycle. Writing in mid-2008, Laidi predicts soaring commodity prices for years to come. He specifically says that “OPEC is unlikely to allow prices to drop considerably below $100 per barrel.” Obviously, this scenario was overtaken by events; commodities including oil soon crashed. Laidi’s commodity and hyper-inflation forecast may ultimately play out, but his scenario shows how even an expert can get the timing wrong.
Nelson Freeburg is editor of Formula Research, a financial letter that builds and tests quantitative timing models for stocks, bonds, and commodities. Formula Research serves systematic traders and institutional money managers in 27 countries.