If you’ve tuned in to pretty much any of the news organizations lately, you’ve heard about how we’re recovering in the United States.
You’ve heard about green shoots. You’ve seen all the newly promising data. You’ve heard a President, Fed Chief and Treasury Secretary trying to convince you about how sturdy the financial ground is.
Indeed, it seems that the world is buying this growth story here in the United States. Right or wrong, that’s what matters at present.
You see, sentiment is a huge driver in the currency markets. How people “feel” about the market actually influences currencies. So, if enough people believe a trend will happen, it tends to happen – at least for a while.
So let’s begin by saying: I’m definitely not fighting the trend here. I’m riding the growth story while it lasts here in the United States.
But I’m keeping my trades on a VERY short leash. I’m also clearing a pathway to the exits just in case reality hits home anytime soon.
The “W” Recovery: Why Reality Hasn’t Sunk In Yet
If I was a speculator, I would be betting on a “W” recovery for the U.S. with a second leg down coming soon. And I tie that to the continuing as well as upcoming crisis in the housing markets.
By the way, my colleague Sean yesterday gave you three currencies to buy for the long-term. I agree with his choices, but like him, I also think there are going to be pullbacks and reversals in the short-term. The next BIG reversal is exactly what I’m talking about here.
Why do I say a reversal is coming? Let’s start with the not so positive data for a moment.
If you believe that we have seen the worst in the housing sector, think again. Remember those pesky adjustable rate mortgages (ARM)? Well, the largest majority of them are up for resets in 2011. Till we are past that hump, no meaningful recovery should be expected. And if we see one, like now, it will most likely not last.
Where I’d Put My Money Instead…
So let’s set the U.S. aside for a moment.
On the other side of the pond, in India the meaningful recovery story just continues to grow. As I have written earlier, the Indian growth story has been tainted by its dominance in the IT and Outsourcing sectors.
Lots of traders have trouble accepting any recovery anywhere else if the U.S. is still suffering. Indeed, many seem to have the “Death by Stereotype” idea. They’re skeptical of any growth story in emerging markets like India because they don’t believe India can grow without the U.S. recovering first.
Let put that idea to rest right now. The internal consumption story in India is well documented. In fact, it’s been India’s saving grace in this global downturn. It has helped India keep its head above the rest of the world as far as growth is concerned, albeit at a lower rate.
Need proof? Just check out some of the data coming out of India…
* The Industrial Production Index (IPI) blasted past what economists expected and grew 7.8% year-over-year in June.
* June IPI growth was the highest since February 2008.
* There were huge increases in the Capital Goods Index (CGI).
* On a yearly basis, the CGI grew by 11.8% year-over-year after three months of contraction.
* Yearly growth in the production of consumer goods was strong at 4% year-over-year with a 15.5% year-over-year increase in consumer durables.
Rain or Shine, This Nation Will Rise
As I have mentioned earlier, India is still heavily dependent on the monsoon (rainy season) for Agriculture, which is an important part of the GDP. And so far, the monsoons have been below average.
However, it seems like the uptick in the industrial activity will likely mitigate the negative impact of poor rains. Several indicators of consumption and investment demand such as the Purchasing Manager’s Index (PMI) and motor vehicle sales have been showing significant upticks for several months now.
No Longer Necessary in India…
All of this economic data in the past few weeks have made me more bullish on India. I am beginning to sense that India’s GDP growth in the next few quarters will blow past the world’s estimate of 6.6% growth for FY 2010.
While this may lag its main rival China’s 8%, I expect Indian GDP growth to come in around 7.5%. Not too shabby! That’s my prediction based on the improved investment outlook in infrastructure and capital goods. Both of these are indicators of laying foundations for an extended and long-term growth story from India.
I also expect tightening interest rates to help slow down the economy and avoid bubble like growth situations.
Unlike the Federal Reserve, which has pledged low interest rates for ‘extended’ periods of time, the Indian Reserve Bank is already signaling that the low interest rate days may be over soon. We may see as much as 200-300 basis points increase in Indian core interest rates in the coming six months. And this will be tremendously positive for the Indian Rupee.
Your Stock Buddies Won’t Believe This…
Years ago, before I was a Forex trader, I did the usual trader stint in the stock market. I watched P/E ratios, tracked company performance and tried to analyze which company might rise next.
Of course, it was my job at the time and I did alright with my trades. But the truth is my portfolio would have performed so much better had I known what I know now. I’ll get to that in a second.
First let’s talk about the transition.
It was a difficult time for me. Mostly I had to change my thinking and how I evaluated trades when I came over from the stock world. I had to stop thinking like a stock trader to start thinking like a currency trader.
In doing so, I learned a few tricks that can not only boost your Forex trades…but can also help you boost your returns on any stock trades you place from now on.
What Separates Currencies from Stocks in Trading
(Beyond the Obvious)
There’s one fundamental truth you need to learn when you’re making the shift from stocks to currencies…
Stocks are relatively micro and currencies are relatively macro.
By that I mean that when you study stocks, you are mainly analyzing industries and individual stocks mainly. In currencies you are analyzing the health of whole economies.
For instance, you usually analyze stocks by choosing a specific group of companies or particular industry of an economy. Then you look to see which sector or industry is performing overall (ex., Healthcare sector, technology sector, energy sector, etc.).
Once you find a leading group or industry, then you’ll usually drill down from there. You’ll start examining a handful of companies within that group or sector to see which are the most fundamentally sound and thus, most likely to be some of the “top performers” out of the group.
You would do this by looking at a company’s earnings, dividend history, etc. You buy the stocks that have a steady (and above average) growing stream of earnings and dividends. On the flipside, you avoid (or sell-short) the companies that have choppy earnings or that didn’t earn money at all yet.
Well, in currencies, you’re looking at not one specific company, but an entire country. Ergo, you have to start with the macro picture and drill down from there.
I like that because you don’t have to worry about 1 CEO or 1 CFO screwing up your overall investment trend. An economy does well because the companies within it as a whole, do well. So it’s like being able to invest in that economy broadly and with less overall risk than an individual stock.
If You Know Nothing Else About Currencies, Learn This…
In currency land, what matters most is if there’s enough inflation (CPI – Consumer Price Index) in the country to cause central bankers to hike interest rates. Currency traders drool over hiked interest rates because they can earn more money on their currency trades than if they were buying a “low yielding” country’s currency.
So inflation and interest rates are the top two things to look at. A third important factor is the economy’s overall growth, which can be found in their GDP (Gross Domestic Product) numbers.
Introducing the Holy Grail of Forex Sites
You can go to one simple site to find that information on any of the major currencies out there: www.tradingeconomics.com .
That FREE site will rank the countries that have the higher inflation, higher interest rates, higher GDP growth, etc.
This way, within seconds you can get an idea of which countries are the strongest from a “currency perspective” and which are the weaker ones.
Then, once you know this, you will improve your currency returns. As an added bonus, when you’re doing your currency research to see which countries are “better off” than others from a fundamental stand point, you’ll also know which countries you might want to “shop for stocks” in.
Frankly, I wish I had known that when I had been buying stocks – my trades would have been that much stronger from a fundamental perspective.
Keep in mind that you can also look for ETFs that will hold a “basket of stocks” from a certain country too. That may be the best way for the newer investor to get their feet wet.
This way, your currency research not only benefits your currency investments but it also helps your stock investments.
Hot Stock Tips from the Currency Trader
After all, if you’re buying stocks in the strongest economy in the world at the time…you automatically stand a better shot of your investment earning profits. In fact, you’re really making an overall investment in the health of the larger economy that the company resides in.
While I always try to pick superior stocks, I also realize that even a mediocre stock in a great economy will many times do better than a great stock in a horrible economy.
Of course, it was my job at the time and I did alright with my trades. But the truth is my portfolio would have performed so much better had I known what I know now. I’ll get to that in a second.
First let’s talk about the transition.
It was a difficult time for me. Mostly I had to change my thinking and how I evaluated trades when I came over from the stock world. I had to stop thinking like a stock trader to start thinking like a currency trader.
In doing so, I learned a few tricks that can not only boost your Forex trades…but can also help you boost your returns on any stock trades you place from now on.
What Separates Currencies from Stocks in Trading
(Beyond the Obvious)
There’s one fundamental truth you need to learn when you’re making the shift from stocks to currencies…
Stocks are relatively micro and currencies are relatively macro.
By that I mean that when you study stocks, you are mainly analyzing industries and individual stocks mainly. In currencies you are analyzing the health of whole economies.
For instance, you usually analyze stocks by choosing a specific group of companies or particular industry of an economy. Then you look to see which sector or industry is performing overall (ex., Healthcare sector, technology sector, energy sector, etc.).
Once you find a leading group or industry, then you’ll usually drill down from there. You’ll start examining a handful of companies within that group or sector to see which are the most fundamentally sound and thus, most likely to be some of the “top performers” out of the group.
You would do this by looking at a company’s earnings, dividend history, etc. You buy the stocks that have a steady (and above average) growing stream of earnings and dividends. On the flipside, you avoid (or sell-short) the companies that have choppy earnings or that didn’t earn money at all yet.
Well, in currencies, you’re looking at not one specific company, but an entire country. Ergo, you have to start with the macro picture and drill down from there.
I like that because you don’t have to worry about 1 CEO or 1 CFO screwing up your overall investment trend. An economy does well because the companies within it as a whole, do well. So it’s like being able to invest in that economy broadly and with less overall risk than an individual stock.
If You Know Nothing Else About Currencies, Learn This…
In currency land, what matters most is if there’s enough inflation (CPI – Consumer Price Index) in the country to cause central bankers to hike interest rates. Currency traders drool over hiked interest rates because they can earn more money on their currency trades than if they were buying a “low yielding” country’s currency.
So inflation and interest rates are the top two things to look at. A third important factor is the economy’s overall growth, which can be found in their GDP (Gross Domestic Product) numbers.
Introducing the Holy Grail of Forex Sites
You can go to one simple site to find that information on any of the major currencies out there: www.tradingeconomics.com .
That FREE site will rank the countries that have the higher inflation, higher interest rates, higher GDP growth, etc.
This way, within seconds you can get an idea of which countries are the strongest from a “currency perspective” and which are the weaker ones.
Then, once you know this, you will improve your currency returns. As an added bonus, when you’re doing your currency research to see which countries are “better off” than others from a fundamental stand point, you’ll also know which countries you might want to “shop for stocks” in.
Frankly, I wish I had known that when I had been buying stocks – my trades would have been that much stronger from a fundamental perspective.
Keep in mind that you can also look for ETFs that will hold a “basket of stocks” from a certain country too. That may be the best way for the newer investor to get their feet wet.
This way, your currency research not only benefits your currency investments but it also helps your stock investments.
Hot Stock Tips from the Currency Trader
After all, if you’re buying stocks in the strongest economy in the world at the time…you automatically stand a better shot of your investment earning profits. In fact, you’re really making an overall investment in the health of the larger economy that the company resides in.
While I always try to pick superior stocks, I also realize that even a mediocre stock in a great economy will many times do better than a great stock in a horrible economy.
Your Trader “Training Wheels”
My students are always after me to teach them how to use key technical indicators.
I usually tell them the same thing: Learning how to use them is just the first step. Learning when to use them…that’s the real trick.
After all, it’s one thing to know what a hammer or screwdriver does and it’s another to know the best time to use each one to get the optimal results.
In a similar fashion, traders learn how to use technical tools. But that doesn’t mean they know how to put all of the pieces together so they know when to pick and choose the best technical tool to evaluate a specific currency pair.
There is one simple tool I wish I had known from the beginning. ALWAYS follow this rule and you will stay “light years” ahead of many other traders out there…
1. The trend’s direction is THE most important indicator out there.
Sounds simple right? Well, it is. But many traders often lose sight of this very simple rule and try to trade against trends. That’s when you get in trouble.
So let’s talk about how to find the trends…
Here’s the easiest way in the world to determine a trend. I call it “trend trading with training wheels.” You can follow the trend just by tracking what’s known as the “simple moving average.”
This is an indicator that you can actually put on your price chart and it will “point the way” to the trend’s direction. It does this by smoothing out the jagged price action and showing you the overall trend where the pair is headed.
One of the more commonly used ones is the 50 day simple moving average (SMA). It can be found on any Forex charting package. Once you pull up the indicator on your charts, all you will have to fill in is the number of periods, which is “50.”
This will show the medium-term trend direction for a currency pair. Let’s take a look below to see what this looks like….
Finding the Trend: Not as Difficult As It Sounds…
So the trend direction is the most important thing to determine. If you never learn nothing else about technicals, learn that.
Because if you will trade in the direction of the trend with good risk management (not risking more than 5% of your account if stopped out in the trade), then you have a huge portion of Forex trading “licked” right there.
I’ll be back tomorrow with my second tool that I use to evaluate technicals. Till then…
I usually tell them the same thing: Learning how to use them is just the first step. Learning when to use them…that’s the real trick.
After all, it’s one thing to know what a hammer or screwdriver does and it’s another to know the best time to use each one to get the optimal results.
In a similar fashion, traders learn how to use technical tools. But that doesn’t mean they know how to put all of the pieces together so they know when to pick and choose the best technical tool to evaluate a specific currency pair.
There is one simple tool I wish I had known from the beginning. ALWAYS follow this rule and you will stay “light years” ahead of many other traders out there…
1. The trend’s direction is THE most important indicator out there.
Sounds simple right? Well, it is. But many traders often lose sight of this very simple rule and try to trade against trends. That’s when you get in trouble.
So let’s talk about how to find the trends…
Here’s the easiest way in the world to determine a trend. I call it “trend trading with training wheels.” You can follow the trend just by tracking what’s known as the “simple moving average.”
This is an indicator that you can actually put on your price chart and it will “point the way” to the trend’s direction. It does this by smoothing out the jagged price action and showing you the overall trend where the pair is headed.
One of the more commonly used ones is the 50 day simple moving average (SMA). It can be found on any Forex charting package. Once you pull up the indicator on your charts, all you will have to fill in is the number of periods, which is “50.”
This will show the medium-term trend direction for a currency pair. Let’s take a look below to see what this looks like….
Finding the Trend: Not as Difficult As It Sounds…
So the trend direction is the most important thing to determine. If you never learn nothing else about technicals, learn that.
Because if you will trade in the direction of the trend with good risk management (not risking more than 5% of your account if stopped out in the trade), then you have a huge portion of Forex trading “licked” right there.
I’ll be back tomorrow with my second tool that I use to evaluate technicals. Till then…
The Latest “Day Trader” Playground
Remember the “day trader mania” when the Internet and Tech bubbles hit back in the late 90s? Remember the Chinese stock market bubble back in 2007 when daytraders couldn’t get their hands on enough China shares?
Well there’s a new “day trader playground” in town in 2009. Only this time it’s in Russia…
You see, last year was tough on the entire world, but it was especially rough on Russia. The “R” of the “BRIC’s” actually had one of its worse years ever for both stocks and its currency, the ruble. Russia is a huge commodities-driven economy with plenty of natural resources to sell to the greater world.
So both Russia’s currency and stocks crashed hard last year when both the global economy and natural resources fell off the map.
After a year of ravaged markets, Russia’s largest stock exchange, the Micex is trading for a song. The Micex trades at an incredible average of 8 times earnings! To put that in perspective, right now the MSCI Emerging Market Index’s is trading at 18 times earnings, China is at 32 times earnings, Brazil stands 24 times earnings or even India is at 18 times earnings.
Traders – particularly day traders – are coming out the woodwork to take advantage of these “deep values.” (Or at least, what they perceive to be “deep values.”) Those day traders are creating some very interesting opportunities in the Forex market at the same time. Let me explain…
Cheap Russian Stocks = MASSIVE Currency Opportunity
The retail trading volume on the Micex has surged six fold this year. In fact, the number of Russian individual trading accounts has grown to over 630,000 as of July. These accounts generate about $1.3 billion in average daily volume, up from $220 million as recent as January.
This “added” volume is attracting traders from big institutions all over the place. Most recently big-time traders from BlackRock and Templeton have been checking out Russian stocks. Why? If you’re a big fish in the sea like these guys are, you need a ton of volume in your chosen market so you can move in and out of stocks without significantly moving the market yourself.
You or I don’t have to worry about this but an institutional money manager that moves in and out of millions of shares has to consider this a lot. It limits where they can effectively invest (which is one of the reasons why they like the currency market so much).
You see, just in ONE emerging market BlackRock fund, they’re moving $1.4 TRILLION around.
In addition to the volume, the huge volatility has investors salivating too. Russia’s Micex has surged 79% this year, which is the steepest gain of any of the indexes that track the world’s 30 biggest markets.
Russian Stock Volatility Ensures Ruble Strength
as Long as the Mania Lasts!
So needless to say, all of this focus and attention on Russian’s stocks is also pushing its ruble around too.
The dollar has been dropping broadly against most currencies since March. Likewise, the dollar has been falling vs. the ruble as well. However, not only have excesses been wrung out of the USD/RUB uptrend but as recent as May, the ruble has pushed the USD/RUB into a downtrend. That’s great news for the ruble going forward. Check it out below.
Trade the Russian Stock Market Mania through the Ruble as a “Safer Play”!
So currency traders too are joining the party by pushing the ruble higher vs. the dollar while all of this “mania” exits.
As this Russian story spreads, even more foreigners and big-name traders will come to the party. That will only cause the ruble to gain further as these foreign traders have to exchange their foreign currencies in for rubles to trade stocks denominated in rubles.
Expect the ruble to continue to gain strength – particularly as key markets around the world continue to recover, global GDP numbers start to expand once again and as energy resources like oil are used to grow these recovering economies once again.
Well there’s a new “day trader playground” in town in 2009. Only this time it’s in Russia…
You see, last year was tough on the entire world, but it was especially rough on Russia. The “R” of the “BRIC’s” actually had one of its worse years ever for both stocks and its currency, the ruble. Russia is a huge commodities-driven economy with plenty of natural resources to sell to the greater world.
So both Russia’s currency and stocks crashed hard last year when both the global economy and natural resources fell off the map.
After a year of ravaged markets, Russia’s largest stock exchange, the Micex is trading for a song. The Micex trades at an incredible average of 8 times earnings! To put that in perspective, right now the MSCI Emerging Market Index’s is trading at 18 times earnings, China is at 32 times earnings, Brazil stands 24 times earnings or even India is at 18 times earnings.
Traders – particularly day traders – are coming out the woodwork to take advantage of these “deep values.” (Or at least, what they perceive to be “deep values.”) Those day traders are creating some very interesting opportunities in the Forex market at the same time. Let me explain…
Cheap Russian Stocks = MASSIVE Currency Opportunity
The retail trading volume on the Micex has surged six fold this year. In fact, the number of Russian individual trading accounts has grown to over 630,000 as of July. These accounts generate about $1.3 billion in average daily volume, up from $220 million as recent as January.
This “added” volume is attracting traders from big institutions all over the place. Most recently big-time traders from BlackRock and Templeton have been checking out Russian stocks. Why? If you’re a big fish in the sea like these guys are, you need a ton of volume in your chosen market so you can move in and out of stocks without significantly moving the market yourself.
You or I don’t have to worry about this but an institutional money manager that moves in and out of millions of shares has to consider this a lot. It limits where they can effectively invest (which is one of the reasons why they like the currency market so much).
You see, just in ONE emerging market BlackRock fund, they’re moving $1.4 TRILLION around.
In addition to the volume, the huge volatility has investors salivating too. Russia’s Micex has surged 79% this year, which is the steepest gain of any of the indexes that track the world’s 30 biggest markets.
Russian Stock Volatility Ensures Ruble Strength
as Long as the Mania Lasts!
So needless to say, all of this focus and attention on Russian’s stocks is also pushing its ruble around too.
The dollar has been dropping broadly against most currencies since March. Likewise, the dollar has been falling vs. the ruble as well. However, not only have excesses been wrung out of the USD/RUB uptrend but as recent as May, the ruble has pushed the USD/RUB into a downtrend. That’s great news for the ruble going forward. Check it out below.
Trade the Russian Stock Market Mania through the Ruble as a “Safer Play”!
So currency traders too are joining the party by pushing the ruble higher vs. the dollar while all of this “mania” exits.
As this Russian story spreads, even more foreigners and big-name traders will come to the party. That will only cause the ruble to gain further as these foreign traders have to exchange their foreign currencies in for rubles to trade stocks denominated in rubles.
Expect the ruble to continue to gain strength – particularly as key markets around the world continue to recover, global GDP numbers start to expand once again and as energy resources like oil are used to grow these recovering economies once again.
A New Reason to Buy the Loonie
Confession: I always love to read about the central bank gatherings.
Whether it’s an all-out European Central Bank meeting or just an informal grouping of Fed-Heads, there is ALWAYS interesting currency information you can learn from these meetings.
Plus, it’s fairly easy to get your hands on information about any central bank gathering considering the media types practically falls over each other to report on anything central bankers say (and out-of-the-mainstream writers like myself focus on what they perhaps don’t say).
“Recovery Coming” According to Leading Central Bankers
Just take the most recent gathering of central bankers in Wyoming last week. Federal Reserve Chairman Ben Bernanke hunkered down with central bank governors from Italy, France and Japan.
Their purpose? To figure out how to stop stimulating the economy without slowing the recovery.
After meeting, the Central Bankers and governors seemed to pat themselves on the backs and agree that the global economy was recovering quite nicely. Nothing to worry about…at least according to them.
What does this tell me? Well, frankly, I’m inclined to believe them. Or at least, trade off their beliefs. Why? Well, even if these central bankers are overly optimistic, there are countless traders out there that are willing to follow what they’re saying. As a Forex trader, you have to follow what the herd is doing or you’ll get trampled.
Again, as I said, there are always interesting tidbits to take from these meetings. As you can see, the Wyoming meeting was no exception. They basically told us to trade as if the global recovery is already underway.
Overall, it’s the very reason I’m betting on the Canadian dollar. Let me explain…
Who’s Currency Will Benefit Here?
If you’re looking at the global economy in terms of a global recovery, then you have to consider which currencies will benefit and suffer from a recovery.
First and foremost, the U.S. dollar and the yen will be the primary currencies that get hurt (in the long run, even though the buck could get a short- term bump up in the near-term).
Meanwhile, any global recovery will mean that nations around the world will start buying oil again. That will push up prices, and a few key commodity currencies including the Canadian dollar.
I believe that you will see USD/CAD suffer from the “fall of the dollar” and from the “rise of oil.” Therefore, those that are short the USD/CAD pair over the coming weeks to months should benefit from these fundamental forces in play.
Short USD/CAD & Watch the Profits Roll In…
As economies expand, money will pour out of the defensive posture that pushed up the dollar and yen last year. That will shove up a handful of riskier currencies that have more upside potential in an expanding economy.
Bottom line: Watch for the Canadian dollar to rise and the greenback and the yen to “fall off” in the weeks ahead, as investors wrap their head around the idea of a recovery.
Happy Trading!
Whether it’s an all-out European Central Bank meeting or just an informal grouping of Fed-Heads, there is ALWAYS interesting currency information you can learn from these meetings.
Plus, it’s fairly easy to get your hands on information about any central bank gathering considering the media types practically falls over each other to report on anything central bankers say (and out-of-the-mainstream writers like myself focus on what they perhaps don’t say).
“Recovery Coming” According to Leading Central Bankers
Just take the most recent gathering of central bankers in Wyoming last week. Federal Reserve Chairman Ben Bernanke hunkered down with central bank governors from Italy, France and Japan.
Their purpose? To figure out how to stop stimulating the economy without slowing the recovery.
After meeting, the Central Bankers and governors seemed to pat themselves on the backs and agree that the global economy was recovering quite nicely. Nothing to worry about…at least according to them.
What does this tell me? Well, frankly, I’m inclined to believe them. Or at least, trade off their beliefs. Why? Well, even if these central bankers are overly optimistic, there are countless traders out there that are willing to follow what they’re saying. As a Forex trader, you have to follow what the herd is doing or you’ll get trampled.
Again, as I said, there are always interesting tidbits to take from these meetings. As you can see, the Wyoming meeting was no exception. They basically told us to trade as if the global recovery is already underway.
Overall, it’s the very reason I’m betting on the Canadian dollar. Let me explain…
Who’s Currency Will Benefit Here?
If you’re looking at the global economy in terms of a global recovery, then you have to consider which currencies will benefit and suffer from a recovery.
First and foremost, the U.S. dollar and the yen will be the primary currencies that get hurt (in the long run, even though the buck could get a short- term bump up in the near-term).
Meanwhile, any global recovery will mean that nations around the world will start buying oil again. That will push up prices, and a few key commodity currencies including the Canadian dollar.
I believe that you will see USD/CAD suffer from the “fall of the dollar” and from the “rise of oil.” Therefore, those that are short the USD/CAD pair over the coming weeks to months should benefit from these fundamental forces in play.
Short USD/CAD & Watch the Profits Roll In…
As economies expand, money will pour out of the defensive posture that pushed up the dollar and yen last year. That will shove up a handful of riskier currencies that have more upside potential in an expanding economy.
Bottom line: Watch for the Canadian dollar to rise and the greenback and the yen to “fall off” in the weeks ahead, as investors wrap their head around the idea of a recovery.
Happy Trading!
EUR/CHF launches another 60+ pips and counting!
Yesterday, I wrote an article and did a YouTube video for our partner, mywealth.com. Since the release of that article, EUR/CHF has launched forward another 60+ pips and counting. It’s literally hitting new highs as of this writing.
To view the full article and video, check it out here: http://www.mywealth.com/blog/post/potentially-safest-forex-play-entire-fx-world
Enjoy!
To view the full article and video, check it out here: http://www.mywealth.com/blog/post/potentially-safest-forex-play-entire-fx-world
Enjoy!
How to decide on which currency pair to trade: EUR/USD or GBP/USD
Many times, traders wonder “which pair is the better pick”. I say, let the charts decide it for you and take all of the guess work out of it.
Since both the EUR/USD and GBP/USD have the USD in common, their differences are EUR and GBP. So if we got a “dollar move” they’re both going to be affected some. However, the real difference comes in when you directly compare EUR to GBP and see which is the stronger/weaker currency.
You can do this by looking to the EUR/GBP pair. Right now, EUR/GBP is in an obvious downtrend. This can be seen by the red downtrend line below. It can be seen by the declining 50 day simple moving average (SMA). It can also be seen by the MACD being below the zero line and its lines crossing over to the downside. This can also be seen, most recently from it breaking down out of its upward correction (red circled area).
Therefore, CLEARLY right now, the stronger of the two is the GBP/USD. So if you feel that these pairs are headed higher, then go with GBP/USD. Right now, GBP/USD’s daily trend is upward, so that would be my pick.
Now if you felt that the trend was downward or turning downward, then you’d pick the “weaker candidate” to pick on which would be EUR/USD (buy strength/short weakness). However, right now, so far their daily trends are still upward as shown by the 50 period simple moving average on their daily charts.
Notice though, how much EUR/USD is struggling and how GBP/USD is starting to pop up higher right now. That’s due to the advantage of buying the stronger candidate. And right now, that’s GBP/USD when you directly compare the two.
You can do this for any pairs. For instance, now if I wanted to see if GBP or AUD were the strongest, I could look to the GBP/AUD pair. This could give me a bias as to whether I’d be better off buying GBP/USD or AUD/USD, for instance.
Currencies are a “comparative/relative” game. In other words, you always want to “rig the fight” with the absolute strongest candidate vs. the absolute weakest candidate and then “bet on that match” by buying the stronger vs. the weaker.
This, coupled with great risk management, will greatly improve your odds of success in trading. In other words, don’t over-leverage your account. You should probably be trading no more than 1 standard mini lot per $2,000-$3,000 in your account OR 1 micro lot per $200 to $300 in your micro account.
Since both the EUR/USD and GBP/USD have the USD in common, their differences are EUR and GBP. So if we got a “dollar move” they’re both going to be affected some. However, the real difference comes in when you directly compare EUR to GBP and see which is the stronger/weaker currency.
You can do this by looking to the EUR/GBP pair. Right now, EUR/GBP is in an obvious downtrend. This can be seen by the red downtrend line below. It can be seen by the declining 50 day simple moving average (SMA). It can also be seen by the MACD being below the zero line and its lines crossing over to the downside. This can also be seen, most recently from it breaking down out of its upward correction (red circled area).
Therefore, CLEARLY right now, the stronger of the two is the GBP/USD. So if you feel that these pairs are headed higher, then go with GBP/USD. Right now, GBP/USD’s daily trend is upward, so that would be my pick.
Now if you felt that the trend was downward or turning downward, then you’d pick the “weaker candidate” to pick on which would be EUR/USD (buy strength/short weakness). However, right now, so far their daily trends are still upward as shown by the 50 period simple moving average on their daily charts.
Notice though, how much EUR/USD is struggling and how GBP/USD is starting to pop up higher right now. That’s due to the advantage of buying the stronger candidate. And right now, that’s GBP/USD when you directly compare the two.
You can do this for any pairs. For instance, now if I wanted to see if GBP or AUD were the strongest, I could look to the GBP/AUD pair. This could give me a bias as to whether I’d be better off buying GBP/USD or AUD/USD, for instance.
Currencies are a “comparative/relative” game. In other words, you always want to “rig the fight” with the absolute strongest candidate vs. the absolute weakest candidate and then “bet on that match” by buying the stronger vs. the weaker.
This, coupled with great risk management, will greatly improve your odds of success in trading. In other words, don’t over-leverage your account. You should probably be trading no more than 1 standard mini lot per $2,000-$3,000 in your account OR 1 micro lot per $200 to $300 in your micro account.
Which is more important? Trend direction or Support/Resistance?
Many traders grapple with this all the time. To me it’s clear. The “trend is the trend” because it continues on and blows through supports in a downtrend and resistances in an uptrend.
A current example of this is AUD/USD. Get ready for the AUD/USD to break higher as the “bottom and top pickers” try to short this pair soon (since they are believers that the resistance will hold). The trend traders will get the last laugh, as the top pickers get caught on the wrong side of the market and have to scramble to cover their losing positions which only “fuels the fire” for the trend trader. Click on the charts to enlarge them.
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This is why “top and bottom pickers” almost always give up their money to the trend followers. Oh sure, there’s eventually ONE of these that will ultimately be the true “top or bottom” but in between ..there are tons of places that appear to be the top or bottom and are losing trades. So the odds are skewed against them and skewed towards the trend trader.
See a historical example of this here.
A current example of this is AUD/USD. Get ready for the AUD/USD to break higher as the “bottom and top pickers” try to short this pair soon (since they are believers that the resistance will hold). The trend traders will get the last laugh, as the top pickers get caught on the wrong side of the market and have to scramble to cover their losing positions which only “fuels the fire” for the trend trader. Click on the charts to enlarge them.
31.JPG
This is why “top and bottom pickers” almost always give up their money to the trend followers. Oh sure, there’s eventually ONE of these that will ultimately be the true “top or bottom” but in between ..there are tons of places that appear to be the top or bottom and are losing trades. So the odds are skewed against them and skewed towards the trend trader.
See a historical example of this here.
Oil rises above $71 from the $62 area just days ago!
Last week we had a huge gain in oil inventories. Now, in theory, that should have held oil lower. However, in reality, the reverse happened.
This tells me that traders are looking to the improvement in GDP numbers lately (particularly that of the U.S.) and how it will effect the demand that’s placed on oil supplies as economies start to actually grow once again (rather than contract).
This has pushed USD/CAD past through what some had thought would be a double bottom. In some of my writings, I’d been cautioning against that thought of a bottom because the fundamentals of many countries have been improving for 3-4 months running now.
So one has to ask themselves…if things are improving and the likelihood for a “return to growth” is around the corner, then what should that do to oil? It should take it higher. Well, that’s bad for the U.S. dollar and at the same time, good for the Canadian dollar since Canada exports tons of oil.
It’s bad for the U.S. dollar because oil is priced in dollars and the two (over time) tend to head in opposite directions. The U.S. Dollar Index has been diving ever since March and its trend is (and has been) downward since then. That trend is unlikely to change.
Therefore, after “dollar rallies” start to fade, they should be shorted (in my opinion) since the main “dollar trend” is downward.
This will likely take USD/CAD back to parity (1.0000) sooner rather than later. It wouldn’t surprise me if we see this reached in the coming weeks to month or two maximum. Click on the chart below to enlarge it.
Don’t try to “catch a falling knife”. Counter trend traders are the food for trend traders. Don’t get caught up in being a counter trend trader and therefore placing the odds against you. Become a “trend trader” and place the odds in your favor.
This tells me that traders are looking to the improvement in GDP numbers lately (particularly that of the U.S.) and how it will effect the demand that’s placed on oil supplies as economies start to actually grow once again (rather than contract).
This has pushed USD/CAD past through what some had thought would be a double bottom. In some of my writings, I’d been cautioning against that thought of a bottom because the fundamentals of many countries have been improving for 3-4 months running now.
So one has to ask themselves…if things are improving and the likelihood for a “return to growth” is around the corner, then what should that do to oil? It should take it higher. Well, that’s bad for the U.S. dollar and at the same time, good for the Canadian dollar since Canada exports tons of oil.
It’s bad for the U.S. dollar because oil is priced in dollars and the two (over time) tend to head in opposite directions. The U.S. Dollar Index has been diving ever since March and its trend is (and has been) downward since then. That trend is unlikely to change.
Therefore, after “dollar rallies” start to fade, they should be shorted (in my opinion) since the main “dollar trend” is downward.
This will likely take USD/CAD back to parity (1.0000) sooner rather than later. It wouldn’t surprise me if we see this reached in the coming weeks to month or two maximum. Click on the chart below to enlarge it.
Don’t try to “catch a falling knife”. Counter trend traders are the food for trend traders. Don’t get caught up in being a counter trend trader and therefore placing the odds against you. Become a “trend trader” and place the odds in your favor.
How much influence does a government really have over its currency?
I’m often asked…”How much influence does a government really have over its currency?”
I say, it has tons to do with it. A government really “sets the tone” for its currency in many respects.
How so? Here are seven major ways that I believe a government greatly influences its currency.
7 Ways a Government Influences its Currency!
They set the tone by the policies that they set. Ex. Sarbanes-Oxley has driven money away from the U.S. stock markets and IPO market into other markets, thus hurting the long term prospects for the U.S. dollar. Europe has been more favorable to corporations, so money has flowed there and not to America as much due to this.
They set the tone by what they do with their printing presses. If a government resists the temptation to print tons of money, then it will retain its value. If it “waters it down” by printing tons of it, then it erodes the value of it away. Australia is not quick to print money, yet the U.S. is!
If it encourages “money inflows” into its country through making products that the outside world wants, it ensures inflows into its currency. If it is a country that is heavily involved mainly in the services sectors and itself is a net importer of goods, then there’s huge likelihood that they are setting their currency up for a fall. This is exactly what we have in the U.S.! Yet Australia actually mines and exports many of the world’s most needed commodities: Gold, Copper, Wheat, etc.
If a nation stores up monetary surpluses, it provides a better sentiment for investors and causes “inflows” of money very easily. However, if the country has blossoming deficits, it discourages money flows into the country and actually scares some of it away and prevents other “new money” that would like to enter that country from entering due to them being so worried about their ability to repay their debts. Again, a problem of the U.S. Yet China has huge surpluses.
The ability of investors to trust a government is another huge one. There is a ton of potential money that COULD go into Russia but WON’T go into Russia because you never know what they will do next. Their government is so corrupt and has such a bad image from the outside world of being so shady in their dealings with much of the rest of the world (and their own people/corporations) that it hinders some “inflows” into their currency. Yet Canada and Australia’s governments have great track records.
What a country does with their interest rates has a HUGE effect upon inflows and outflows in a currency. If interest rates are high and headed higher, it generally encourages money to it as investors seek higher yields on their money. However, if a country holds their rates unusually low, then they’re encouraging outflows. Examples of this right now are the U.S. and Japan. Rates are unusually low and thus money is starting to flow away from them once again. Australia and New Zealand were two of the only major countries that weren’t inclined to take their rates near zero percent like most of the rest of the industrialized world, and they have been rewarded the most as things have started to snap back for their financial markets and currencies.
Governments that are “tax friendly” to residents and especially to corporations are likely to see more inflows than those who aren’t. This is why so many companies are moving away from the U.S. as Obama pours on the taxes and they run towards places like Dublin, Ireland. This hurts the dollar and helps the euro!
These are seven huge areas that come to mind where a government plays a huge role in influencing their currency, whether they realize it or not…and many times they don’t (because they’re politicians and not savvy investors!
I say, it has tons to do with it. A government really “sets the tone” for its currency in many respects.
How so? Here are seven major ways that I believe a government greatly influences its currency.
7 Ways a Government Influences its Currency!
They set the tone by the policies that they set. Ex. Sarbanes-Oxley has driven money away from the U.S. stock markets and IPO market into other markets, thus hurting the long term prospects for the U.S. dollar. Europe has been more favorable to corporations, so money has flowed there and not to America as much due to this.
They set the tone by what they do with their printing presses. If a government resists the temptation to print tons of money, then it will retain its value. If it “waters it down” by printing tons of it, then it erodes the value of it away. Australia is not quick to print money, yet the U.S. is!
If it encourages “money inflows” into its country through making products that the outside world wants, it ensures inflows into its currency. If it is a country that is heavily involved mainly in the services sectors and itself is a net importer of goods, then there’s huge likelihood that they are setting their currency up for a fall. This is exactly what we have in the U.S.! Yet Australia actually mines and exports many of the world’s most needed commodities: Gold, Copper, Wheat, etc.
If a nation stores up monetary surpluses, it provides a better sentiment for investors and causes “inflows” of money very easily. However, if the country has blossoming deficits, it discourages money flows into the country and actually scares some of it away and prevents other “new money” that would like to enter that country from entering due to them being so worried about their ability to repay their debts. Again, a problem of the U.S. Yet China has huge surpluses.
The ability of investors to trust a government is another huge one. There is a ton of potential money that COULD go into Russia but WON’T go into Russia because you never know what they will do next. Their government is so corrupt and has such a bad image from the outside world of being so shady in their dealings with much of the rest of the world (and their own people/corporations) that it hinders some “inflows” into their currency. Yet Canada and Australia’s governments have great track records.
What a country does with their interest rates has a HUGE effect upon inflows and outflows in a currency. If interest rates are high and headed higher, it generally encourages money to it as investors seek higher yields on their money. However, if a country holds their rates unusually low, then they’re encouraging outflows. Examples of this right now are the U.S. and Japan. Rates are unusually low and thus money is starting to flow away from them once again. Australia and New Zealand were two of the only major countries that weren’t inclined to take their rates near zero percent like most of the rest of the industrialized world, and they have been rewarded the most as things have started to snap back for their financial markets and currencies.
Governments that are “tax friendly” to residents and especially to corporations are likely to see more inflows than those who aren’t. This is why so many companies are moving away from the U.S. as Obama pours on the taxes and they run towards places like Dublin, Ireland. This hurts the dollar and helps the euro!
These are seven huge areas that come to mind where a government plays a huge role in influencing their currency, whether they realize it or not…and many times they don’t (because they’re politicians and not savvy investors!
Canada’s central bank is “smoking something”!
Well, “intervention talk” is in the air again! This time it’s the Bank of Canada!
Why are they so concerned with their currency? Well the USD/CAD exchange rate has dropped from 1.30 to 1.07 (2,700 pips) in mere months (5 months to be exact).
This can wreak havoc upon a company that is trying to figure out how to hedge their currency exposure so that it doesn’t eat into the profits of their business…and the central bank realizes this too.
That’s why Central Bank Governor Carney, together with Finance Minister Flaherty are coming together to attempt to “jaw bone” the currency lower (in other words bring the USD/CAD exchange rate higher).
Canada’s Fed Governor has stated that the gain in the currency is a major risk to economic growth…adding that “he has the flexibility to deal with it”. The Finance Minister backed him up by saying “steps could be taken to dampen the (Canadian) dollar”.
Governor Carney is attempting to lessen the appeal of the loonie by stating that interest rates are likely to remain unchanged through at least the 2nd quarter of 2010.
You see, when you are a Canadian company and you’re trying to hedge against currency fluctuations of 5-10% in a short amount of time, it’s tough. (They really need my services. Hehe!)
Canada’s factory orders have been hit (down 29% since last July) as a result of the strengthening currency. That couldn’t come at a worse time because at the same time you’ve had General Motors and Chrysler shut down Canadian plants, dealers and parts suppliers. Manufacturers have had to fire 221,500 workers as a result.
Couldn’t they intervene? History says they won’t…and if they did, it will backfire!
So the central bank wants a lower Canadian dollar to make it easier on these crucial companies. Will they get it? NO! Oh sure, they may be able to influence the USD/CAD up 300-500 pips…but what is that when the pair has moved 2,700 pips downward and will continue that downtrend?
You see, traders know that the global economy is “on the mend” and as it is recovering, it will consume more oil and other commodities that Canada exports. They also know that the U.S. dollar has been in a broad downtrend since March (according to the U.S. Dollar Index). This broad U.S. dollar sell off isn’t going to change just because the Canadian central bank wants it to.
Oh yeah, but they could go in and “sell Canadian dollars” right? Sure they could…but, it would not be effective and the foreign exchange market would simply laugh at them with the trend and fundamentals going in the favor of the traders and against that of the bank.
Also, traders know that there’s a good chance that the bank is bluffing too. Why? The central bank has abandoned intervention policies ever since 1998. They didn’t intervene when the currency reached a record high in 2007 and or when it’s had its biggest gain since the Korean War during May.
Therefore, there are a ton of years there that the bank did nothing when the currency moved to extremes. So they have no reason to believe that it will be any different this time.
Most of the time, they just “jaw bone” the currency by talking about what they “could” do. However, when push comes to shove, they usually don’t anymore.
They stopped intervening in 1998 because it simply ended up causing even more volatility and ended up making it even more difficult for their exporters to hedge their risks.
If they “talk the pair up”, short the rallies!
Therefore, here’s how I see this playing out on the chart below. Sure, they may “talk the currency up” a few hundred pips or more in the near term. It could happen. However, smart traders are “selling rallies” in the USD/CAD pair because the trend is down and the fundamentals overall, are on the mend. Therefore any bounce upward, is likely to result in another big push downward.
So “shorting rallies” is the flavor of the day, these days.
Why are they so concerned with their currency? Well the USD/CAD exchange rate has dropped from 1.30 to 1.07 (2,700 pips) in mere months (5 months to be exact).
This can wreak havoc upon a company that is trying to figure out how to hedge their currency exposure so that it doesn’t eat into the profits of their business…and the central bank realizes this too.
That’s why Central Bank Governor Carney, together with Finance Minister Flaherty are coming together to attempt to “jaw bone” the currency lower (in other words bring the USD/CAD exchange rate higher).
Canada’s Fed Governor has stated that the gain in the currency is a major risk to economic growth…adding that “he has the flexibility to deal with it”. The Finance Minister backed him up by saying “steps could be taken to dampen the (Canadian) dollar”.
Governor Carney is attempting to lessen the appeal of the loonie by stating that interest rates are likely to remain unchanged through at least the 2nd quarter of 2010.
You see, when you are a Canadian company and you’re trying to hedge against currency fluctuations of 5-10% in a short amount of time, it’s tough. (They really need my services. Hehe!)
Canada’s factory orders have been hit (down 29% since last July) as a result of the strengthening currency. That couldn’t come at a worse time because at the same time you’ve had General Motors and Chrysler shut down Canadian plants, dealers and parts suppliers. Manufacturers have had to fire 221,500 workers as a result.
Couldn’t they intervene? History says they won’t…and if they did, it will backfire!
So the central bank wants a lower Canadian dollar to make it easier on these crucial companies. Will they get it? NO! Oh sure, they may be able to influence the USD/CAD up 300-500 pips…but what is that when the pair has moved 2,700 pips downward and will continue that downtrend?
You see, traders know that the global economy is “on the mend” and as it is recovering, it will consume more oil and other commodities that Canada exports. They also know that the U.S. dollar has been in a broad downtrend since March (according to the U.S. Dollar Index). This broad U.S. dollar sell off isn’t going to change just because the Canadian central bank wants it to.
Oh yeah, but they could go in and “sell Canadian dollars” right? Sure they could…but, it would not be effective and the foreign exchange market would simply laugh at them with the trend and fundamentals going in the favor of the traders and against that of the bank.
Also, traders know that there’s a good chance that the bank is bluffing too. Why? The central bank has abandoned intervention policies ever since 1998. They didn’t intervene when the currency reached a record high in 2007 and or when it’s had its biggest gain since the Korean War during May.
Therefore, there are a ton of years there that the bank did nothing when the currency moved to extremes. So they have no reason to believe that it will be any different this time.
Most of the time, they just “jaw bone” the currency by talking about what they “could” do. However, when push comes to shove, they usually don’t anymore.
They stopped intervening in 1998 because it simply ended up causing even more volatility and ended up making it even more difficult for their exporters to hedge their risks.
If they “talk the pair up”, short the rallies!
Therefore, here’s how I see this playing out on the chart below. Sure, they may “talk the currency up” a few hundred pips or more in the near term. It could happen. However, smart traders are “selling rallies” in the USD/CAD pair because the trend is down and the fundamentals overall, are on the mend. Therefore any bounce upward, is likely to result in another big push downward.
So “shorting rallies” is the flavor of the day, these days.
Don’t be fooled by Friday’s “dollar rally”!
The U.S. dollar got a nice “pop” on Friday as a better-than-expected NFP (employment) report came out. However, I call this a “sucker rally” because the dollar’s broad trend has been downward since March (according to the U.S. Dollar Index chart).
Therefore, since the probabilities lie on the side of the trend, it’s best to short the dollar on rallies upward by buying foreign currencies against it: AUD/USD, GBP/USD and NZD/USD being some of the top candidates in my opinion due to them leading the way in their yearly inflation figures. These are likely the countries to have to raise interest rates first and that will only drive more money away from the buck and into these other foreign currencies (which helps the buyers of these pairs).
Another factor that really doesn’t work in the dollar’s favor is the global recovery that’s underway right now. You see, the dollar only ran up when the “sky was falling”. But now that financial markets are stabilizing, that works against the green back and not for it. It does however, work in the favor of currencies that have higher inflation in their economies (vs. the deflationary numbers in the U.S) and it also works in the favor of the higher yielding currencies.
The deflationary Japanese economy is really causing money to pour out of the yen and into these currencies as well, which bodes well for: AUD/JPY, GBP/JPY and NZD/JPY over time.
So keep these pairs on your radar screen. It doesn’t mean that any moment of any day is the time to buy them…but it does mean that they are “fundamentally supported” the most and therefore should be your “top candidates” to consider as your technical entry set-ups occur.
Therefore, since the probabilities lie on the side of the trend, it’s best to short the dollar on rallies upward by buying foreign currencies against it: AUD/USD, GBP/USD and NZD/USD being some of the top candidates in my opinion due to them leading the way in their yearly inflation figures. These are likely the countries to have to raise interest rates first and that will only drive more money away from the buck and into these other foreign currencies (which helps the buyers of these pairs).
Another factor that really doesn’t work in the dollar’s favor is the global recovery that’s underway right now. You see, the dollar only ran up when the “sky was falling”. But now that financial markets are stabilizing, that works against the green back and not for it. It does however, work in the favor of currencies that have higher inflation in their economies (vs. the deflationary numbers in the U.S) and it also works in the favor of the higher yielding currencies.
The deflationary Japanese economy is really causing money to pour out of the yen and into these currencies as well, which bodes well for: AUD/JPY, GBP/JPY and NZD/JPY over time.
So keep these pairs on your radar screen. It doesn’t mean that any moment of any day is the time to buy them…but it does mean that they are “fundamentally supported” the most and therefore should be your “top candidates” to consider as your technical entry set-ups occur.
New Zealand strength starts to emerge!
New Zealand is climbing its way up to the top of the pack of stronger currencies. It has THE highest CPI (year over year) and has the 2nd highest interest rate out there. With the high CPI readings, traders are starting to bet that they will have to hike rates sooner rather than later.
But you can see this NZD strength when you compare it across the board. For instance, NZD/USD’s chart is holding up better than most other dollar pairs, NZD/JPY is holding up better than many yen crosses.
Then when you compare NZD directly with many other pairs, it shows its strength too: EUR/NZD’s downtrend due to NZD strength…AUD/NZD slumping over due to NZD strength,…GBP/NZD breaking lower to on a weaker GBP AND NZD strength.
So whether you’re a position trader (weeks to months), swing trader (days to weeks) or an intraday trader (in and out within the same day typically)…it’s always better to “buy strength” no matter what your holding period.
Therefore, a “technical buy” signal on a NZD pair may be better to take than a technical buy that shows up on a weaker currency.
So while you may look for technical entries…I also want to get you thinking about which currencies may be the best choices to pick from too…when looking for technical entry signals on you
But you can see this NZD strength when you compare it across the board. For instance, NZD/USD’s chart is holding up better than most other dollar pairs, NZD/JPY is holding up better than many yen crosses.
Then when you compare NZD directly with many other pairs, it shows its strength too: EUR/NZD’s downtrend due to NZD strength…AUD/NZD slumping over due to NZD strength,…GBP/NZD breaking lower to on a weaker GBP AND NZD strength.
So whether you’re a position trader (weeks to months), swing trader (days to weeks) or an intraday trader (in and out within the same day typically)…it’s always better to “buy strength” no matter what your holding period.
Therefore, a “technical buy” signal on a NZD pair may be better to take than a technical buy that shows up on a weaker currency.
So while you may look for technical entries…I also want to get you thinking about which currencies may be the best choices to pick from too…when looking for technical entry signals on you
Dollar’s rally is just about to run out of steam!
Even bear markets have rallies. But why would I refer to the dollar’s recent rally as a “bear market rally” and not a rally into a “new trend”? Because there is no technical indication that has surfaced to think otherwise. Click on the chart below to enlarge it.
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Several things worth noting on that chart of the U.S. Dollar Index:
The pair is still downtrending as shown by it trading below BOTH the 50 and 200 Simple Moving Averages. Also, the MACD lines are below the zero line (red boxed area) and the Slow Stochastics are just about to go into the “overbought” territory once again as the dollar approaches its 50 day SMA resistance area.
There’s an old Wall St. saying….”trade the trend until it ends”. However, do realize that there are rallies in every bear market (downtrend). These are to be expected. After all, they usually can’t go “straight down”. Therefore, upward corrections are involved…much like the pull backs that happen within an uptrend.
Therefore, there’s no reason to see this as any other thing unless this technical picture changes. So far it has not. So I’ll stick with the trend “until it ends”.
That means, it’s probably better to be a buyer of strong currencies as these dollar rallies happen and start to roll over once again. Two of the top “strong currencies” right now are NZD and AUD…so being a buyer of NZD/USD and AUD/USD after these dollar rallies (which cause pull backs in these pairs) is to be favored until such time that there’s an actual re-emergence of a “dollar uptrend” which I think is a long ways off.
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Several things worth noting on that chart of the U.S. Dollar Index:
The pair is still downtrending as shown by it trading below BOTH the 50 and 200 Simple Moving Averages. Also, the MACD lines are below the zero line (red boxed area) and the Slow Stochastics are just about to go into the “overbought” territory once again as the dollar approaches its 50 day SMA resistance area.
There’s an old Wall St. saying….”trade the trend until it ends”. However, do realize that there are rallies in every bear market (downtrend). These are to be expected. After all, they usually can’t go “straight down”. Therefore, upward corrections are involved…much like the pull backs that happen within an uptrend.
Therefore, there’s no reason to see this as any other thing unless this technical picture changes. So far it has not. So I’ll stick with the trend “until it ends”.
That means, it’s probably better to be a buyer of strong currencies as these dollar rallies happen and start to roll over once again. Two of the top “strong currencies” right now are NZD and AUD…so being a buyer of NZD/USD and AUD/USD after these dollar rallies (which cause pull backs in these pairs) is to be favored until such time that there’s an actual re-emergence of a “dollar uptrend” which I think is a long ways off.
Here’s what makes the Carry Trade so great!
Many people don’t really get the “carry trade” strategy and why it’s so great. Their focus is on the daily interest and they don’t see themselves getting rich off of the daily interest. However, that’s only ONE of the reasons why traders get into the carry trade.
Think of a carry trade this way. Let’s say you have two banks in the same town. Bank A will offer you 3% in a savings account while Bank B will only offer you 1/2 of 1% (0.50%). Which one are you going to deposit money into?
Now, if you were a betting man or woman…which bank would you bet on having the most “inflows” of deposits? Of course, Bank A…because people aren’t idiots and want to earn the most they can on their money.
Well while the carry trade isn’t a “savings account” by any means…it works off of a similar principle.
Traders and investors alike want to earn the most that they can on their money. After all, the interest earned is the closest thing to a guarantee as you’ll get. So investors look out in the “investing arena” and look to see who has high interest rates when compared to others.
It’s no surprise that investors from all over the world pile into the same, few high yielding currencies.
Look at the chart below and you will see what investors all over the world are looking at. Now which currencies would you look into first? The U.S., Japan?….or Australia and New Zealand? Of course, the latter. Why? Because your mama didn’t raise a dummy and you want to get the highest interest rate possible on your money. Click on the charts below to enlarge them.
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Guess what? So does everyone else out there in the world. So it’s no surprise that money flows away from the U.S. and Japan right now and into Australia and New Zealand. They’re moving their money from “low yields” to “high yields”.
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So now that we can predict the “long term” flow of money…why not jump in the line now and allow all of the other future buyers of Aussie and New Zealand dollars push up our positions in these same currencies over time.
So if I buy any of these (as of the time of this writing): AUD/USD, AUD/JPY, NZD/USD or NZD/JPY then I can enjoy BOTH the money flow AWAY from the U.S. and Japan and the money flow INTO Australia and New Zealand. By capturing both dynamics…my positions ratchet higher over time WHILE at the same time, I’m earning DAILY interest while I wait for further appreciation in the pair.
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When this strategy works: This strategy works when the global economy is coming out of a recession (past the trough of the recession) and in expansionary times when countries are doing good economically.
When the strategy doesn’t work: This strategy doesn’t work when the global economy is about to go into a recession (or for that matter, usually even when it’s just the U.S. going into a recession).
Since expansionary times last longer than recessionary times, the strategy works, more times than not.
When it’s not working….guess what? Short these pairs and you can make money that way.
Think of a carry trade this way. Let’s say you have two banks in the same town. Bank A will offer you 3% in a savings account while Bank B will only offer you 1/2 of 1% (0.50%). Which one are you going to deposit money into?
Now, if you were a betting man or woman…which bank would you bet on having the most “inflows” of deposits? Of course, Bank A…because people aren’t idiots and want to earn the most they can on their money.
Well while the carry trade isn’t a “savings account” by any means…it works off of a similar principle.
Traders and investors alike want to earn the most that they can on their money. After all, the interest earned is the closest thing to a guarantee as you’ll get. So investors look out in the “investing arena” and look to see who has high interest rates when compared to others.
It’s no surprise that investors from all over the world pile into the same, few high yielding currencies.
Look at the chart below and you will see what investors all over the world are looking at. Now which currencies would you look into first? The U.S., Japan?….or Australia and New Zealand? Of course, the latter. Why? Because your mama didn’t raise a dummy and you want to get the highest interest rate possible on your money. Click on the charts below to enlarge them.
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Guess what? So does everyone else out there in the world. So it’s no surprise that money flows away from the U.S. and Japan right now and into Australia and New Zealand. They’re moving their money from “low yields” to “high yields”.
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So now that we can predict the “long term” flow of money…why not jump in the line now and allow all of the other future buyers of Aussie and New Zealand dollars push up our positions in these same currencies over time.
So if I buy any of these (as of the time of this writing): AUD/USD, AUD/JPY, NZD/USD or NZD/JPY then I can enjoy BOTH the money flow AWAY from the U.S. and Japan and the money flow INTO Australia and New Zealand. By capturing both dynamics…my positions ratchet higher over time WHILE at the same time, I’m earning DAILY interest while I wait for further appreciation in the pair.
13.JPG
When this strategy works: This strategy works when the global economy is coming out of a recession (past the trough of the recession) and in expansionary times when countries are doing good economically.
When the strategy doesn’t work: This strategy doesn’t work when the global economy is about to go into a recession (or for that matter, usually even when it’s just the U.S. going into a recession).
Since expansionary times last longer than recessionary times, the strategy works, more times than not.
When it’s not working….guess what? Short these pairs and you can make money that way.
# Opinions - Not Facts This blog consists of contributions from FX EDU staff, executives and people that have a relationship with FX EDU
Good gains today for the Japanese Yen, which of course means losses for the others. Top performing pairs are USD/JPY -1.46%, EUR/JPY -1.34%, AUD/JPY -1.31% and GBP/JPY -1.20%. Look for continued strength in the Yen in the upcoming days/weeks.
Take a look a USD/JPY (click chart to enlarge)
jpysep11.JPG
And also the double top that has formed on GBP/JPY. (click to enlarge)
gbpjpysep11.JPG
Both of these charts show that the trend is positive for the Yen, so I would be long the Yen here. Until any significant news or price pattern tells me otherwise, I want to be a buyer of Yen.
Remember, when looking at charts of the Yen, down means up in relation to other currencies!
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Take a look a USD/JPY (click chart to enlarge)
jpysep11.JPG
And also the double top that has formed on GBP/JPY. (click to enlarge)
gbpjpysep11.JPG
Both of these charts show that the trend is positive for the Yen, so I would be long the Yen here. Until any significant news or price pattern tells me otherwise, I want to be a buyer of Yen.
Remember, when looking at charts of the Yen, down means up in relation to other currencies!
To learn more about how to read charts, click here.
Ready to try your hand at currency trading in a consequence-free environment? Get a real-time practice account here!
Dollar Strength Going Into the FOMC Meeting, G-20
All eyes are on Bernanke and the FED this week as investors are seeking a little more clarity over Federal Reserve Policy going forward and what they plan to do with regard to interest rates. Couple that with the G-20 meeting this week and growing concerns over the rising US fiscal deficit and you have a potentially explosive situation.
However, if you’ve been watching the markets as of late, you would know that the potential for fireworks is highly unlikely. The “Ben Bernanke Show” is in full effect and market contrarians and early participants go through this exercise with every FOMC meeting like clockwork. It basically starts with the US dollar showing signs of early strength, followed by a drop in commodity prices and lower US equity futures. Next, the claim is made that the “fundamentals” are coming back into play and that inflation may be rearing its ugly head. This naturally leads to the conclusion that the Fed may have to start raising interest rates, which send the US dollar higher and all other markets lower—temporarily. I wrote about this earlier as right now there are essentially two trades out there.
Here’s what’s really going to happen:
There is not a snowball’s chance in hell that we’re going to hear anything remotely related to rising inflation. In Bernanke’s mind, we need to RE-flate before we IN-flate. There is no chance that the FED is going to raise rates in this session and it is highly unlikely that he’s going to change the language going forward. Right now the market is still extremely fragile so anything remotely related to the possibility of higher interest rates could send global markets into a death spiral.
Another factor to be considered is that market players are concerned that the FED may signal the end to the stimulus plans. Again, not gonna happen. Bernanke is so concerned with avoiding the Great Depression 2.0 that he will not spook the markets. And even the euro contingent of the G-20 is calling for continued stimulus. It’s more probable that he is going to try to bore market players and break the will of those who attempt to fight the Fed then take action that will potentially harm markets.
Lastly, concern about how the FED is going to wind down its quantitative easing and the potential impact it will have on interest rates is causing investors to take some money off of the table. Bernanke just announced that the recession was likely over last week, so it is also highly unlikely that he would do anything this soon to counter that claim. Today’s markets are more about perception than reality.
So expect the US dollar to strengthen and equities and commodities to weaken going into the FOMC meeting. Smart traders are lightening the load and taking profits, nothing more. While everyone loves to call a market reversal, dollar strength means trouble for stocks and Bernanke just won’t let this happen.
And after the FOMC meeting’s conclusion, be prepared to do just the opposite. The trend for the US dollar is clearly down and should continue for some time, and there appears to be room for stocks to move to the upside.
However, if you’ve been watching the markets as of late, you would know that the potential for fireworks is highly unlikely. The “Ben Bernanke Show” is in full effect and market contrarians and early participants go through this exercise with every FOMC meeting like clockwork. It basically starts with the US dollar showing signs of early strength, followed by a drop in commodity prices and lower US equity futures. Next, the claim is made that the “fundamentals” are coming back into play and that inflation may be rearing its ugly head. This naturally leads to the conclusion that the Fed may have to start raising interest rates, which send the US dollar higher and all other markets lower—temporarily. I wrote about this earlier as right now there are essentially two trades out there.
Here’s what’s really going to happen:
There is not a snowball’s chance in hell that we’re going to hear anything remotely related to rising inflation. In Bernanke’s mind, we need to RE-flate before we IN-flate. There is no chance that the FED is going to raise rates in this session and it is highly unlikely that he’s going to change the language going forward. Right now the market is still extremely fragile so anything remotely related to the possibility of higher interest rates could send global markets into a death spiral.
Another factor to be considered is that market players are concerned that the FED may signal the end to the stimulus plans. Again, not gonna happen. Bernanke is so concerned with avoiding the Great Depression 2.0 that he will not spook the markets. And even the euro contingent of the G-20 is calling for continued stimulus. It’s more probable that he is going to try to bore market players and break the will of those who attempt to fight the Fed then take action that will potentially harm markets.
Lastly, concern about how the FED is going to wind down its quantitative easing and the potential impact it will have on interest rates is causing investors to take some money off of the table. Bernanke just announced that the recession was likely over last week, so it is also highly unlikely that he would do anything this soon to counter that claim. Today’s markets are more about perception than reality.
So expect the US dollar to strengthen and equities and commodities to weaken going into the FOMC meeting. Smart traders are lightening the load and taking profits, nothing more. While everyone loves to call a market reversal, dollar strength means trouble for stocks and Bernanke just won’t let this happen.
And after the FOMC meeting’s conclusion, be prepared to do just the opposite. The trend for the US dollar is clearly down and should continue for some time, and there appears to be room for stocks to move to the upside.
Sound As A Pound….For Now!
Yesterday, the Bank of England vote unanimously to leave the size of its asset purchase plan unchanged at 175 billion pounds and voted to leave interest rates unchanged at 0.5%. This is seemingly good news for the Pound in the near-term, as the currency markets are reflecting this morning with the British pound up vs. other currencies. But what is the outlook for GBP going forward?
Back in August at the BOE, there were some who had wanted even more quantitative easing yet were comfortable with following through with the plans laid out in August, as the September minutes show. So while economic conditions have stabilized just enough to warrant a continuation of policy, is a full blown recovery already underway?
Methinks Not!
Let’s take a look at a few factors that could “weigh heavily” on the British pound and what this means for other markets as well.
For starters, it is commonly known that the British are more “conservative” than their free-wheeling Yankee neighbors across the pond. This means that they usually take more thought-out measures and need more convincing that a dire situation may persist. Thus it is no surprise that they left policy unchanged. Some would argue though that this makes them more re-active than pro-active, and that by the time increased negative forces come to light, it could be too late. Quite the opposite of Bernanke et al. So in this regard, we can’t rule out the possibility of further quantitative easing should conditions deteriorate.
But the British Bankers Association (BBA) just reported that loans for home purchases declined from the previous month and missed expectations, a sign that perhaps their economy is not ticking up or that the QE measures the BOE has taken haven’t taken hold yet as tighter credit conditions haven’t sparked an uptick in demand. Should housing demand continue to fall, then this could prolong the economic recovery they are hoping for.
So if housing prices decline as a result of falling demand, then the BOE might just have to deal with deflationary pressures rather than the inflation they are hoping for. This could mean more QE which would put further pressure on the British pound.
However, in the near-term, I can’t see the GBP falling against the US dollar as Bernanke’s path to dollar destruction has been well-established. As I wrote on Monday, nothing is going to change at today’s FOMC meeting as Bernanke doesn’t want to spook the stock market. And the correlation between the S&P 500 index (SPY) and the British pound (FXB) has been pretty tight. Here’s a 3-year chart (Click to enlarge):
fxb.JPG
So if we are expecting the stock market to advance on Bernanke’s non-action at the FOMC meeting, then it follows that the dollar should decline and the pound should advance.
However, should the stock market run out of gas later this year, this could coincide with British pound weakness as a result of sluggish economic growth in the UK. This could be the double-whammy that the stock market Bears have been looking for.
But until that occurs, keep your eyes on the British economy and don’t fight the Fed!
To learn more about how currencies and foreign economies can affect your investments, be sure to check out our currency trading course.
To get started with a free, real-time practice Forex trading account, click here.
Back in August at the BOE, there were some who had wanted even more quantitative easing yet were comfortable with following through with the plans laid out in August, as the September minutes show. So while economic conditions have stabilized just enough to warrant a continuation of policy, is a full blown recovery already underway?
Methinks Not!
Let’s take a look at a few factors that could “weigh heavily” on the British pound and what this means for other markets as well.
For starters, it is commonly known that the British are more “conservative” than their free-wheeling Yankee neighbors across the pond. This means that they usually take more thought-out measures and need more convincing that a dire situation may persist. Thus it is no surprise that they left policy unchanged. Some would argue though that this makes them more re-active than pro-active, and that by the time increased negative forces come to light, it could be too late. Quite the opposite of Bernanke et al. So in this regard, we can’t rule out the possibility of further quantitative easing should conditions deteriorate.
But the British Bankers Association (BBA) just reported that loans for home purchases declined from the previous month and missed expectations, a sign that perhaps their economy is not ticking up or that the QE measures the BOE has taken haven’t taken hold yet as tighter credit conditions haven’t sparked an uptick in demand. Should housing demand continue to fall, then this could prolong the economic recovery they are hoping for.
So if housing prices decline as a result of falling demand, then the BOE might just have to deal with deflationary pressures rather than the inflation they are hoping for. This could mean more QE which would put further pressure on the British pound.
However, in the near-term, I can’t see the GBP falling against the US dollar as Bernanke’s path to dollar destruction has been well-established. As I wrote on Monday, nothing is going to change at today’s FOMC meeting as Bernanke doesn’t want to spook the stock market. And the correlation between the S&P 500 index (SPY) and the British pound (FXB) has been pretty tight. Here’s a 3-year chart (Click to enlarge):
fxb.JPG
So if we are expecting the stock market to advance on Bernanke’s non-action at the FOMC meeting, then it follows that the dollar should decline and the pound should advance.
However, should the stock market run out of gas later this year, this could coincide with British pound weakness as a result of sluggish economic growth in the UK. This could be the double-whammy that the stock market Bears have been looking for.
But until that occurs, keep your eyes on the British economy and don’t fight the Fed!
To learn more about how currencies and foreign economies can affect your investments, be sure to check out our currency trading course.
To get started with a free, real-time practice Forex trading account, click here.
FOMC Rate Decision at 2:15 EST!
Just a head’s up for the day-traders out there, whom I’m sure are thoroughly familiar with the price action that occurs right around the rate decision. I usually advise that the less-experienced traders sit this event out as the increased volatility can spook even the most seasoned vets.
As I wrote on Monday, its not like that Bernanke will change anything with regard to interest rates or language going forward, but that doesn’t mean that the currency market HAS to respond as expected. Stranger things have happened. The dollar is currently positive vs. all currencies except the GBP, but that could change very rapidly if this announcement goes as expected.
This is always a great time to view the market from the safe confines of your practice account. This will give you a great idea of how much money can be made or lost during these events.
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Good trading to all!
Tough Start for GBP!!
Sometimes in trading you just have to stick with your initial “gut” feeling. Yesterday I wrote in an article below, “Sound As A Pound…. For Now” that I thought the long-term outlook for GBP was negative but that it would probably take a while for the market to catch on before the serious selling would begin.
Apparently not. And I highly doubt its because the market reads this blog, though one never knows! LOL
Anyway, GBP is getting slaughtered this morning, with GBP/JPY (-2.30%), GBP/USD (-1.92%), EUR/GBP (+1.64%), and GBP/CHF (-1.73%).
While I initially thought that GBP would remain positive vs. USD, it appears that they may be playing “catch-up” or “catch down” as it were to USD in the Quantitative easing department.
Any way you slice it, it looks like the GBP selling has begun and it could be a while for it to recover.
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All About Yen!!
Another strong day for the yen today, up against all of the currency pairs commonly followed. Its particularly strong against GBP (+2.07), as I’ve noted over the last couple days the problems facing the Sterling. So while GBP and USD get all of the attention with their QE (quantitative easing) programs, the Yen just quietly chugs along.
A few factors helping the yen:
1) Speculation that Japanes companies (exporters) are repatriating their funds (profits). This is a seasonal factor that is supporting the yen right now.
2) From Bloomberg: “Japan’s Finance Minister Hirohisa Fujii reiterated his opposition to intervention in foreign-exchange markets to curb the yen’s gains yesterday. The yen has added 3 percent versus the dollar this month.” One of the biggest fears of yen traders is BOJ intervention, so this bodes well for the yen… for now.
3) The yen is being replaced in the “carry trade” as traders are now substituting USD as the vehicle of choice.
Overall, Japan hasn’t been affected as badly as the US and UK in the credit crisis, so look for JPY to benefit from the safe harbor trade.
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Aussie Leads the Way on Rate Hike Speculation!
In a Bloomberg report out today, Australian Central Bank Governor Glenn Stevens announced that “government stimulus spending needs to be eased and that interest rates need to be raised” in light of Australian’s expanding economy. This of course is good news for AUD/USD (+.79%) and GBP/AUD (-1.11%) today as the US dollar is now the “carry trade” vehicle of choice and we’ve already discussed British Pound weakness ad nauseam in the blogs articles below.
This means that investors and traders will be selling USD and buying AUD in order to profit from the interest rate differentials. As long as the Australian economy continues to expand, this will be a profitable trade as they are clearly ahead of the US with regard to having a sound economy which will need to “cool off”.
So keep an eye on Aussie strength and both USD and GBP weakness in the days/weeks to come.
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Yen/Yang? IN Forex??
I’ve written recently about the strength of the Japanese yen and some of the reasons behind the move that brought JPY to an eight month high vs. the US dollar (USD). Last week, Japan’s Finance Minister Fuji had voiced his opposition to government intervention to slow the strength of the Yen, but this week he may be changing his tune. And all of this comes on the heels of the G-20 meeting which wrapped up last week, where who knows what was actually discussed.
Today, Japan reported that consumer prices fell a record 2.4% as deflation is putting further pressure on an already fragile Japanese economy. Combined with the strengthening Yen, this could be a recipe for disaster which could derail economic recovery. It’s no wonder that ex- Bank of Japan Officials and others are back-pedaling from those statements and trying to talk down the Yen, whose strength could harm Japan’s exports.
So what’s going on with the Yen and what does that mean for other currencies and markets going forward? Well if the current correlations hold up, there could be some interesting times ahead in both the stock and currency markets.
Let’s start with a chart of USD/JPY (click chart to enlarge):
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This falls right in line with the new comments that are coming out of Japan that in fact they may not be as adverse to currency intervention as Bank Minister Fuji had just claimed. If deflationary pressures increase, then the BOJ may be forced to intervene in order to spur exports to foster growth and increase employment.
This could reverse the notion that the US dollar has now become the vehicle of choice for the carry trade and could send USD higher as the appetite for dollars picks up. And should the dollar strengthen, than it’s possible that the stock market will decline, as will commodities.
The stock market has had a nice run from its March lows, so a bit of a pull-back may be welcomed. Add to the mix the fact that there is increased chatter about replacing the US dollar as the world’s reserve currency and this time Bernanke & Co. may have to take action.
Just today, Dallas Federal Reserve President Richard Fisher said that the Fed policy reversal could be swift, although he is not an FOMC voting member. This is yet another vocal attempt to re-assure the other nations to stay the course and that the US is not going to let the dollar completely tank.
So the million dollar question is at what point does the Fed reverse policy? Well, it may not be as far away as some market participants think.
Some nations appear to be exiting the recession with New Zealand and Australia leading the way. The global recovery is dependent upon the United States exiting recession, so any sign that we have stabilized could inspire confidence to act.
So while other Finance Ministers are also concerned with the big picture, they also have to look out for their own interests. This could force the Fed to act before they are truly ready, which could send the Japanese yen much lower.
With the all of the uncertainty out there, the one thing we can be sure of is a rise in market volatility, and look for USD/JPY to rise. Let’s just hope this doesn’t take all of the other markets down with it!
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