World Currency Watch: FOREX Market, FOREX Trading BLOG

The Foreigners Want Our Stocks Again... But How Long Will That Last?

From Chuck Butler, President of WorldMarkets at EverBank:

What Happened:

For a long time (before August 2007), the U.S. didn't have any problems attracting enough foreign investment.

What I Say:

This led people who should know better to say things like "deficits don't matter"... I've said this before, and I say it in all my presentations, that when I hear people say that, they remind me of the guy standing on top of the Empire State Building. He decides to jump off and as he passes the 56th floor he says, "so far... So good!"

But the ability to attract foreign investment to finance the deficit came to an abrupt halt last August. The sub-prime meltdown hit the streets leading to a liquidity and credit crunch.

The credit crunch led to a drying up of the Corporate Bond and Commercial Paper issuance, which is exactly what foreigners loved to buy because those vehicles normally had a nice "spread" over U.S. Treasuries and stocks...

Here's what I think is beginning to happen: The U.S. has done a great job of pulling the wool over everyone's eyes, including foreigners.

The U.S. keeps telling anyone who will listen that "everything is beautiful" and all is "right in the world." The mortgage bill has passed and that's the end of all the misery, folks!"

That's what government officials want everyone to believe. And right now, everyone is taking the bait, hook, line and sinker! That's leading to U.S. stock market strength, which is probably being fueled by foreign investment, and that's all good for the dollar.

This could work... In 1995, the dollar had been sold for 10-years, and the fundamentals weren't anything to get excited about, but a guy by the name of Robert Rubin, then U.S. Treasury Sec., began a campaign to "prop up the dollar."

He insisted that a "strong dollar is in the best interest of the U.S." He didn't use the weak kneed, yellow bellied, Treasury Sec. Paulson's line that goes: "The U.S. believes in a strong dollar policy, but wants the Chinese to allow their currency to get stronger vs. the dollar" stuff!

Rubin's campaign worked, and before you knew it, investment money flowed into the U.S. like a tidal wave. We had the best dollar buying in seven years.

Of course old "Bubbles" Greenspan had a lot to say about that with his insistence to target interest rates to help the stock market. Remember what people said then. They said the "Greenspan Put" would bailout stocks, so the markets traded with the perception that there was no risk.

So, I guess the question now is: Will the campaign to pull the wool over the market's eyes here in the U.S. work again? So far, the answer is yes, it's working.

But, what happens if someone balks? What happens if another bank is taken over by the FDIC, or financial institution has to be bailed out by the Fed again? Well, then the rot on the vine will be exposed, and all this dollar buying will get reversed...

What’s the Difference Between a Dollar CD and a Foreign Currency CD?

From our Currency Research Team:

As you may have heard, a foreign-currency CD is one of the simplest ways to buy foreign currencies.

You’re not really trading one currency for another like in the foreign-exchange market. Nor are you investing with leverage like a currency option.

Instead, you’re just buying and holding a foreign currency - just as if you were holding an average dollar-based CD.

Really, it’s just a four-step process:

1. Decide to invest in a certain currency
2. Call your bank
3. Apply for the CD in a particular currency
4. Forget about your CD until it’s time to report your holdings on your taxes each year.

In fact, it’s so similar to your average dollar CD that it’s easy to forget the extra benefits you’re receiving by investing in a foreign currency CD.

So we thought we’d review these benefits quickly.

Benefit #1: You can actually beat inflation with a foreign-currency CD. Right now, you’re average dollar-based CD only pays 2 - 4%. If inflation is soaring above 6%, then you’re actually LOSING money over the long haul. But with a foreign currency CD, you can choose a stronger currency that has the power to appreciate faster than inflation.

Benefit #2: Two ways to profit. A foreign-currency CD earns interest similar to a normal dollar-based CD, but you also get an extra profit bonus if your foreign-currency appreciates in value vs. the U.S. dollar. In this way, your foreign-currency CD actually gives you two ways to profit.

Benefit #3: Instant diversification. If your entire portfolio is in dollars, then a simple foreign-currency CD gives you instant diversification to other stronger currencies around the globe. It’s one of the best ways to inch into the currency markets, if you’re not interested in trading.

Don’t know which CD to invest in? Check out EverBank’s All-Weather Portfolio - that includes diversification across many foreign currencies plus gold.

The Biggest Loser in this Dollar Rally

From Chuck Butler, President of World Markets at EverBank

What Happened:

One of the currencies hardest hit by the dollar’s rally has been the Aussie dollar.

Add to the U.S. dollar strength the fact that the Reserve Bank of Australia (RBA) announced an easing bias following last week’s board meeting.

What I Say:

I have to question the markets’ motive here: Does an announcement of an easing bias automatically mean that the RBA takes rates lower at subsequent meetings this year?

I don’t think so, but that’s what the markets think. And that’s what matters. Together, it’s created the Perfect Storm for the Australian dollar. The aussie is getting hit with storm fronts from the U.S. dollar rally, the RBA’s announcement, and commodity prices. All these forces are converging on the once proud and ready to hit parity to the greenback, Aussie dollar.

Don’t you think that the RBA saw the Australian dollar knocking on parity’s door, and freaked out? I do! And I think that led the RBA to make that announcement on rate bias.

Prior to that announcement, the RBA was all over the “inflation fighting” side of the ledger, so this kind of came from left field. But in reality, the Aussie dollar has fallen 11 straight days, that’s the longest run of sell offs for it since 1975!

The aussie was the star of the currency boards just a few months ago, and now it’s the loser across the board. Will it continue? Stay tuned…

A New Anomaly Breaks Out Down Under

From Guest Writer and Swiss Macroeconomist Karl Weber

What Happened:

Both the New Zealand dollar (NZD) and the Australian dollar (AUD) have fallen from favor among carry traders lately.

Australia’s and New Zealand’s central banks look increasingly likely to cut their key rates from over 7% and 8% respectively as a response to the rapid economic cooling.

But something is happening here. Real interest rates in both the Aussie and New Zealand dollar still stand around 2-3%. That’s the highest among any currencies worldwide.What I Say:

A rare anomaly has taken place: This pair of currencies tends to move in tandem versus the U.S. dollar.

Since March the NZD/USD currency pair has performed badly compared to the Australian dollar. The NZD/USD has already lost 10%, which is a stark contrast to the higher trending AUD/USD.

But this anomaly will not last for long. The New Zealand dollar looks oversold from a technical perspective and should soon start to shine again. Be on the lookout for a stronger kiwi in the months to come…

Your 30 Second Introduction to the Seven Major Currencies…and the Dollar

From Our Currency Research Team:

The most important part of investing is “understand what you’re investing in.” When you’re talking about investing in currencies, most currency traders will talk about the “seven” majors.

The seven majors are the currencies that are traded most often on major dealing desks around the world. The seven majors are generally paired with the dollar (so technically if you could the dollar as a “major,” you have eight).

Here’s your 30 second introduction to these major currencies…

U.S. Dollar (USD): Otherwise known as the world’s reserve currency. The majority of trades in the Forex market involve the U.S. dollar against a different currency because the U.S. economy is still the largest. However, traders do this less, when the euro rises.

Euro (EUR): This is the new kid of the currency block. Lately, as the dollar has fallen, the euro has been stepping up to take its place as reference currency, as well as a larger component of foreign reserves by banks. It is also known as the anti-dollar because the euro tends to appreciate, as the dollar depreciates.

Japanese Yen (JPY): The yen is also known as the carry-trade currency because for years, investors have borrowed yen to fund their carry-trades. Because Japan imports all of its oil, when crude oil prices begin to climb this hurts its economy and greatly impacts the value of the yen.

Swiss Franc (CHF): Also known as Swissie, it is sometimes called a ‘safe heaven,’ due to Switzerland following an independent policy, economy isolation, and private banking system. This in turn has made their currency very neutral.

The British pound (GBP): Frequently called, Cable or Sterling, the pound first got these nicknames because it was the first currency the Forex market traded through ‘cables’ across the Atlantic. The pound is the fourth most traded currency on the market and Great Britain’s economy is one of the strongest in Europe.

Canadian dollar (CAD): This currencies unusual nickname, Loonie, comes from the coins appearance, which features a loon on the coins backside, a common Canadian bird. Canada is a resource-focused economy, so the price of oil drives this currency along with commodities.

Australian dollar (AUD): Known as the Aussie, and is popular in the Forex market because of Australia’s high interest rates and its generally stable economy. In addition, the Australian dollar is greatly influenced and driven by gold prices.

New Zealand dollar (NZD): Also known as the “kiwi,” the New Zealand dollar traditionally tracks the Aussie dollar’s path because these economies are tied together through exports. However, sometimes (like recently) the New Zealand can fall while the Aussie dollar rises.

Every day, Jack Crooks watches all eight of these currencies so he can recommend the next double or triple-digit winners for his subscribers. Interested in how he does it? Learn how here.

The Next Shoe to Drop in This Bruised Economy

From our friend at EverBank, Chris Gaffney

What Happened:

Yesterday's NY Times had a lead article warning about how housing lenders now fear a bigger wave of loan defaults.

Homeowners with good credit are falling behind on their payments in growing numbers. This is happening even though the problems with mortgages made to people with weak, or sub-prime credit are looking like they're beginning to level off.

The article states that while it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in sub-prime loans suggests that the problems in the broader market may not peak for another year or two.

Sub-prime was just the tip of the iceberg, and since prime loans account for a majority of the US $12 trillion market, any increase in defaults in this sector will have an even more dramatic impact.

What I Say:

And the housing sector isn't the only area which is a drag on the economy. As my colleague Chuck Butler reported a couple of months ago, the next shoe to drop in the ongoing credit crisis is consumer credit cards. Consumers are getting squeezed by rising energy and food prices and falling income.

So they're turning to their plastic for everyday items. In years past, consumers were able to max out one card and move on to another. But banks have started to tighten up lending standards, and the number of offers for new cards showing up in the mail has declined dramatically.

Banks are now predicting higher charge off rates across the credit industry, much more than previously anticipated. And like the mortgage mess, these credit card loans have been securitized and repackaged to be sold out to investors. What a mess...

One Small Piece of Good Dollar News... Hidden in the VIX

From Currency Analyst, Sean Hyman

What Happened:

Isn't the market just as shaky as last year?

Well, not according to the VIX. One way we can measure this is by looking at the ultimate gauge of volatility, the VIX. The volatility index peaked way back in August 2007. See the chart below.

While Volatility Is Still High, It's Much Lower
Than This Time Last Year

Yeah back then, the sub-prime scare was in full swing. Bank stocks were diving extremely hard and mortgage companies were failing right and left.

Then Bear Stearns failed in early 2008 and the Fed had to go in and save what was left so volatility spiked once again. But I couldn't help but notice at that time it was a hair less than last time.

Much more recently we had the IndyMac scare. The FDIC had to come out and make a speech and reassure the U.S. of its deposits, etc. At this time the volatility spiked once again. Yet it was less than before.

What I Say:

So it seems now that the worst is behind us (volatility wise) and that much of the bad news has already been priced into the markets. After all, you have had a lot of banks priced in the teens recently and trading at or even below their book values.

During this time in currency land, money started to come out of the Japanese yen and Swiss franc since the worst of the storm has past and it's now found its way back into the dollar.

What? The dollar? Yes, and that is one of the big reasons why the dollar has consolidated lately and stopped dropping, even though it has several pieces of data stacked against it.