Analyzing the close-to-close behavior revealed AUD/USD closed unchanged three times, had a largest one-day decline of -0.0120 points (May 15, 2006), and had a largest one-day gain of +0.0095 points (April 15, 2006) — which happened to be the day after the day with the smallest range in the analysis period. Figure 4 shows the frequency distribution of the close-to-close differences. The most closing differences were in the +0.0025 category, which includes all moves from 0.0001 to 0.0025 points.

There were 61 close-to-close changes in this category. Eighty-four percent of the close-to-close differences were between -0.0050 and +0.0050 points. The AUD/USD pair closed up 54 percent of the time in the analysis period. Net closing gains exceeded +0.0050 points just 12 percent of the time, and net closing losses were -0.0050 points or larger four percent of the time.

Up-closing days

AUD/USD closed in positive territory on 142 days. Figure 5 shows these days, adjusted so the previous day’s closing price is used as the opening price (the 0.000 line); this highlights how much of each day’s range was above or below the previous close. The chart highlights the fact that on up-closing days, price usually never declined more than -0.0025 points below the previous close.

Moves -0.0050 or more below the previous close were even rarer: The low was
-0.0050 or more points below the previous close only four times on days that closed higher. This translates to a mere 2.8-percent chance the AUD/USD pair will close higher if it is more than -0.0050 points below yesterday’s close. Figure 6 shows the frequency distribution of the lows’ up-closing days. There was only one day on
which the low was the same as the previous day’s close, and there were no gap-up openings.

The single largest intraday decline from which the AUD/USD pair was able to recover and close higher was -0.0063 points. On up-closing days the low was between unchanged and -0.0024 points below the previous close 81 percent of the time. Also, 52 sessions (37 percent of the time) the low was - 0.0010 or less below the previous close. If the pair traded more than -0.0030 points below the previous day’s close, it closed up for the day just nine percent of the time.

Still, we need to keep an eye on any stock market that is overpriced on unrealistic
expectations and irrational exuberance. Cross-border stock market contamination is always possible because of the fear factor. The U.S. stock markets are more deeply vulnerable to another danger — that foreigners increasingly shun U.S. equities as already fully valued, whereas other markets offer opportunities. The German DAX index, for example, is up by triple the amount of the S&P 500 since the beginning of the year, and more than double over the past two years (Table 1).

Over those two years, if you were a dollar-based investor, you got an additional 5.25 percent from being in the euro, which rose from 1.2885 to 1.3562 over the period. On the whole, we are accustomed to an environment in which the U.S. stock market leads the world. The correlation of other stock markets with the U.S. is quite remarkable, especially if you consider stock valuations “should” be based on earnings and other fundamentals. Why would a bounce in a U.S. index be mirrored in some other country’s index, where earnings and other fundamentals are different — and not even reported on the same schedule?

Figure 2 shows the DAX and the S&P 500, converted to show the percentage changes over the past 500 days. The two indices move in lockstep. Nowhere is this more evident than in the Nasdaq and the Nikkei 225, although this has some fundamental justification. The Nasdaq is full of hightech names that buy products (such as chip-making equipment) from the companies in the Nikkei. Higher sales and earnings by Nasdaq companies mean higher sales and earnings down the road for Nikkei companies (Figure 3).

While prevailing wisdom dictates that stock markets and currencies usually move in tandem, that’s far from the case. What “should” happen often bears no resemblance to what actually happens, as myriad factors need to be taken into consideration. Every once in a while, we hear the stock market is falling because the dollar is falling, or the falling stock market will lead to a falling dollar, or rising currencies and rising stock markets elsewhere will lead to the dollar and U.S. stock market falling together.

You’d think that the linkage between two important asset classes such as currencies and stock markets would be straightforward, but it’s not. For one thing, both markets respond to many economic factors the same way, which is not to say a move in one causes the same move in the other. But they don’t move in sync on every factor. A rise in inflation and inflation expectations that is serious enough to trigger talk of rate hikes is currencyfavorable but stock market-negative. A stock-market crisis exacerbates existing confusion.

A stock-market crisis usually causes safe-haven flows into fixed income notes and bonds, driving the price down and the yield up. A rising yield favors the currency,
but so does the knee-jerk flow out of the crisis currency into a safe-haven currency. If a crisis in a foreign stock market causes a safe-haven flow into U.S. fixed income, by definition it’s also a flow into U.S. dollars. You’d have to be a forensic accountant to figure out how much flight capital goes into notes and bonds and how much goes into plain old dollar cash accounts.

Prior to the April 23 release of the Australian consumer price index (CPI)
data, it had been widely expected that the Reserve Bank of Australia (RBA) would hike rates at its May 1 central bank meeting. However, underscoring how perceptions within the financial arena can shift on a dime, better-thanexpected inflation numbers dashed hopes of another rate hike; bond prices surged that day, while the Aussie dollar fell.

As widely expected among economists and market players, the RBA left its cash rate steady at 6.25 percent at its May 1 meeting. Looking at the recent
inflation numbers compelling the RBA’s steady stance, CPI rose 0.1 percent in the first quarter and 2.4 percent year-over-year. That compares to pre-report expectations of a 0.6-percent jump in the first quarter and a 3.1-percent year-over-year reading.

The latest inflation report nudged the CPI back within the RBA’s target range of 2 to 3 percent. Another factor for currency traders is the fact that Australia has moved into what market watchers call the “election window,” which makes shifts in monetary policy unlikely in coming months. The next general election for Parliament of Australia is expected to be called for later this year, and must occur ahead of Jan. 19, 2008.

Overall, the economic outlook has been improving for Australia. Ideaglobal’s Sofat forecasts an Australian 2007 gross domestic product (GDP) reading of 3.3 percent vs. 2006’s 2.7 percent reading. “The main driver of growth remains investment and personal consumption expenditure,” Sofat says. Ruth Stroppiana, director of Asia Pacific Economics at Moody’s Economy.com, adds, “Business investment has been a key driver of the Aussie economy in recent years as mining companies have poured money into plants and machinery in order to increase production and take advantage of the global commodity boom.”

Stroppiana forecasts Australian GDP growth at 3.1 percent in 2007. “While export prices have soared, helping to drive Aussie terms of trade to 50-year highs, export volumes have been somewhat sluggish, restricted by numerous capacity constraints and infrastructure bottlenecks,” she says. “In the opening months of the year, Aussie exporters continued to struggle to increase outbound shipments. Australia’s exporters are also battling a higher currency.”

Ideaglobal’s Sofat agrees. “The key will be whether we get the much awaited boost in export volumes so that the external sector starts making a sizeable contribution to economic expansion,” she says.

You can know a market by a “gut feel” and also by analysis. The latter provides
an understanding of typical behavior, which makes it easier to recognize when market conditions are changing. The typical behavior statistics for the NZD/USD pair are summarized in “Currency characteristics.” Because changing market conditions will impact this kind of analysis, these reviews should be performed on a regular basis (e.g., once a quarter).

The NZD/USD intraday analysis is based on hourly (60-minute bar) data from March 1 through April 30, 2007 (Figure 9). This analysis was based on a 24- hour trading session using Central Time (CT). On Fridays, the market closes at 15:00 (3:00 p.m. CT) and reopens at 16:00 (4:00 p.m.) on Sundays. Otherwise, the close is at 23:59:59 (11:59:59 p.m.) and reopens at 00:00 (midnight). Following the early-March decline the NZD/USD pair climbed until midto late April, after which it moved sideways to slightly lower.

Sellers have appeared each time price approached 0.7500. To determine if there is a time of day when the market is the most volatile, the high-low range for each 60-minute bar was calculated and sorted by hour. Next, both the average and the median ranges were calculated for each hour. (The median is included because it measures the center point in the hourly ranges and if the average differs significantly from the median, then outliers are skewing the data.) Figure 10 shows the average and median ranges of the 60-minute bars sorted by time.

Similar to most of the other curren- cy pairs analyzed in past issues of Currency Trader, the NZD/USD’s three peak-volatility hours are 7, 8, and 9 a.m. The average range for the 7 and 8 hours is 0.0020 points, while the 9 a.m. hour has a range of 0.0021 points. The difference between the average and the median range for the 7 a.m. hour was 0.0003 points, the difference between the average and the median for the 8 a.m. hour was 0.0001 points, and the difference between the two for the 9 a.m. hour was 0.0002 points — all very close, indicating these statistics are reliable.

Figure 11 shows the individual ranges for the 7, 8, and 9 hours. These three periods consisted of very narrow and very wide hourly ranges. The 7 a.m. hour had a range of 0.0050 points twice. Figure 12 shows distribution of the hourly ranges during the same three hours. The greatest number of ranges (18) fell in the 0.0020 category (0.0019 to 0.0020 points), and these hourly ranges were between 0.0011 and 0.0024 points 71 percent of the time. The hourly ranges during this period were greater than 0.0030 points just 14 times (11 percent).

The NZD/USD pair closed down 107 times during the review period. Figure 7 shows all the down-closing days during the analysis period and, as in Figure 5, the bars are adjusted relative to the previous day’s close. Figure 8 shows the distribution of the intraday highs on down-closing days. On down-closing days, the NZD/USD pair failed to trade more than +0.0020 points above the previous close 70 percent of the time. If the pair traded 0.0030 points above the previous day’s close, it closed down for the day just 13 percent of the time.

The NZD/USD pair closed higher 150 times. Figure 5 shows all the up-closing days in the analysis period, adjusted so the previous day’s closing price is used as the opening price (the 0.000 line); this highlights how much of each day’s range was above or below the previous close. There were only five days on which the market dropped more than -0.0050 points below the previous close and rallied to close higher on the day.

Figure 6 is the frequency distribution of the lows on up-closing days. The NZD/USD pair traded below the previous session’s close only four times. The largest intraday decline from which the market reversed direction and closed in positive territory was a loss of -0.0072 points. The low on up-closing days was between -0.0024 below the previous close and unchanged 69 percent of the time; it was between -0.0014 below the previous close and unchanged 24 percent of the time.

If the pair traded more than -0.0030 points below the previous day’s close, it closed up for the day just 11 percent of the time.

The NZD/USD pair closed unchanged only three times during the analysis period, and it closed up 59 percent of the time. The largest one-day close-to-close loss was a decline of -0.0134 points on March 5, 2007, and the largest one-day closing gain was +0.0152 points on Sept. 14, 2006.

Figure 4 shows the frequency distribution for close-to-close differences. The greatest number of closing differences (68) fell in the +0.0025 category (+0.0001 to 0.0025 points).Eighty percent of the close-to-close differences were between -0.0049 and +0.0050 points. The closeto- close changes exceeded +0.0050 points 14 percent of the time and exceeded -0.0050 points or more to the downside only six percent of the time.

Figure 2 shows the NZD/USD’s daily ranges sorted from smallest to largest. The average range was 0.0072 points and the median range was 0.0068 points. The smallest range, 0.0025 points, occurred on May 29, 2006, while the largest daily range was 0.0189 on Sept. 14, 2006. Figure 3 shows the distribution of the daily ranges. A frequency distribution measures the number of occurrences of a certain observation — in this case, the number of daily ranges that fall into different-sized categories.

The horizontal axis divides the daily ranges into different- sized categories and the vertical axis shows how many daily ranges occurred in each category. For example, the column labeled 0.0060, which is the peak reading, represents the daily ranges that were larger than 0.0050 points up to and including 0.0060 points (i.e., 0.0051 through 0.0060). There were 55 days with ranges in this category. Eighty-one percent of the daily ranges were between 0.0041 and 0.0100 points, and the range exceeded 0.0100 points only 35 times (14 percent).

Few currencies — with the exception of the Canadian dollar — have enjoyed as strong a run vs. the U.S. buck as the New Zealand dollar’s (NZD) in recent months. As detailed in “How many g’days do Aussie, kiwi have left?” Currency Trader, May 2007), the “kiwi” dollar has been in an uptrend since mid- 2006, with an incredible upside burst occurring in March through mid-April 2007.

Figure 1 shows the kiwi dipped below 0.6000 in June 2006, but steadily rallied — with the exception of the early-2007 consolidation — to eventually top just below 0.7500 in April 2007. As New Zealand is a trade-dependent country (its largest export being agriculture products), its currency has benefited from recent global economic expansion. Not surprisingly, New Zealand’s largest trading partner is
Australia, followed by the U.S., Japan, and China.

To understand the New Zealand dollar, we will review the daily data for the New Zealand dollar/U.S. dollar (NZD/USD) pair from May 1, 2006 through April 30, 2007 — a total of 260 trading days. The analysis will cover four aspects of price behavior:
daily ranges, close-to-close changes, the lows on days that closed higher, and the highs on days that closed lower. To expand on the daily analysis, we will also analyze intraday price action from March 1 through April 30, 2007 to identify which hours of the trading session offer the most volatility.