World Currency Watch: FOREX Market, FOREX Trading BLOG

The Golden Currency Cross

I suggest everyone gets comfortable with $1,000 gold. We’re not likely to see gold drop below that anytime soon. As gold continues to rise, key currencies will also prosper.

One is the South African rand, because South Africa happens to be one of the world’s largest miners/exporters of gold.

However, I like this one better…Australia.

As you probably know Australia is a major miner/exporter of gold to the entire world, and has one of the major currencies of the world. But Australia has one added benefit: The Reserve Bank of Australia is currently raising their interest rates.

But the Aussie dollar becomes even more attractive when paired with the right weak gold currency in the Forex market…

The “No Brainer” Currency Cross

Now of course you could just buy the AUD/USD pair to play this trend. But then, you have to worry about the constant stream of dollar-moving news that can shift your trade one way or the other.

It’s ultimately more strategic to pair the Aussie dollar with currency cross (non-dollar pair). In this case, there’s no better weak currency than the Japanese yen.

The reason why I like pairing the Aussie with the Japanese yen is Japan is not going to raise interest rates anytime soon. Also, when the Bank of Japan does finally raise rates, it’s usually no more than ½ of 1%.

This means there will be an expanding interest differential between the Aussie and yen as Australia continues to hike rates, and Japan holds their rates around 0-1%.

Add in the fact that Australia’s main export (gold) will continue to rise, and that makes AUD/JPY the pair to watch. Check it out below.

The Rise of Gold Supports the AUD/JPY Trade!

Many other countries will go as far as 4-8% on their rate hikes once they start down that path….not Japan though. That would crush their economy and everyone knows it.

Therefore the expanding interest rate differential and high gold prices mean that a trader can buy AUD/JPY on sizable dips and “hang on” and they’ll likely come out very well. After all, this Australian rate hike cycle is just getting started!

Look for More Great Days Ahead of AUD/JPY!

On top of this, the shiny metal, gold formerly built a base between $900 & $1,000 for about eight months before this latest breakout.

Once a breakout occurs from a very long sideways basing pattern, it usually rallies for some time to come. Of course, there will be pullbacks, but overall gold will continue to rise.

That means the AUD/JPY will soar for a long time to come!

Happy Trading,
Sean Hyman, Professor FX

P.S. Looking for another way to play gold’s next big breakout? My friends at The Sovereign Society just unveiled a new research technique that has been picking the best gold stocks for the past 23 years. Find out specifically which mining stocks will rise next here.

Yes, a Strong Currency Can Kill an Economy Just Look at the Japanese Yen…

By Sean Hyman, Currency Analyst
www.worldcurrencywatch.com   

Common sense says a strong currency should help a country right? Well, not always.

It actually depends on whether you import or export most of your goods. If your country is a net exporter of goods, then a strong currency could help your economy. But if your country is a net importer of goods, then a strong currency could wreak havoc on your economy.

So it all depends on how your country operates. Here in the U.S. we tend to benefit from a stronger currency overall because as consumers, we can use stronger dollars to buy up foreign goods abroad. And you know we like to buy up some stuff overseas.

(Image 4) However, if your country depends upon exporting goods for the bulk of your income, then a strong currency could seriously hurt your economy. Why? Because you want your exported goods to appear cheap, and a strong currency makes your exports expensive.

If potential buyers think that your goods are too costly, then they will take their business to another cheaper country and avoid yours.

This has been happening in Japan for over a year now, and continues to this day. Last year, the yen outperformed every major currency of the world (even the dollar). In fact, it has grown a full 19% against the dollar in just five months. Check out the chart below and you’ll see the dollar plummeting versus the Japanese yen. After all, a picture is worth a thousand words.

If you were the CEO of Toyota, Sony, etc. this is what you would toss and turn in your bed at night about. Think I’m exaggerating? Let’s take a look and see.

The Strong Yen Causes Record Losses for the Big-Name Japanese Stocks

Hitachi just plunged to a 28 ½ year low and NEC fell to a level not seen since 1978. Sony is projecting a RECORD operating loss this year.  

Hitachi’s loss was so bad that they are now projecting a 700 billion yen loss after formerly forecasting a 15 billion yen profit. Big difference, right? 

NEC said its loss will reach 290 billion yen vs. a former forecast of 15 billion yen. They are also cutting a whopping 20,000 jobs. Ouch!

Fujitsu will likely book a 20 billion net loss vs. a former forecast of a 60 billion yen profit. That’s incredible.

Honda cut its full year profit forecast by 57% last week because the company originally based its earnings on a USD/JPY rate of 96.00. In case that sounds kind of close to you…every yen (1.00) away from the current price reduces Honda’s operating profit by 18 billion yen. Huge difference huh?

I told you it was a nightmare!

Can You Say “Intervention?”

The soaring yen is causing the deepest recession in Japan since 1945. Obviously, it’s not your average recession for them. While I agree that there are other factors involved such as the overall global slowdown, the yen is a HUGE part of the problem.

You see, the exporters really need the yen at around 100 to 110 to the dollar to stay competitive. Right now, the problem is that the yen is under 90 to the dollar.

As a result of the “fast and furious” yen, exports have fallen an unprecedented 35% just since December from a year earlier.

Literally, the manufacturers are campaigning for the government to step into the Forex market and intervene. The last time they did this was back in 2004 when the yen was at 103. At the time, they sold 14.8 billion yen in the first three months of the year to push down the yen’s value. The yen is already much lower than that now.

The End of the Year Boost Is About to Drive the Yen Higher

Another problem plaguing the Japanese is that historically the yen rises between now and the end of their fiscal year (March 31st). It’s customary for exporters to buy the currency to hedge revenues and for money managers in Japan to repatriate their funds.

This is a nightmare that I wouldn’t wish on anyone, and what has been the biggest root cause of it all? The enormous rise of their currency.

This is a classic example of how knowing about currencies can help you in other markets. As a currency trader, I already know the USD/JPY rate, so I know whether these exporters have the wind to their backs or the currency will crush their stocks.

For the past year, it’s been obvious that Japanese stocks would sink under the pressure of the stronger yen. This is why all stock traders and currency traders should know more about what is going on in currency land. 

And it’s also important to know that a strong currency doesn’t always equal a strong economy. Sometimes it’s just the opposite…

Regards,
Sean Hyman

The Ultimate Crisis Currency to Own As Bailouts Continue

By Chuck Butler

As I said above, most of the major currencies got whacked yesterday. But not Japanese yen! When things get really dark in the U.S., that's when the dollar and Japanese yen shine.

To me, that is still a strange phenomenon. The dollar can be strong vs. almost every currency on the face of the earth, but losing ground to yen. You would think that the other currencies would get some love just based on the dollar / yen cross!

Recall, I've explained the currency pairs and crosses before, and how one major pair's (like dollar / yen) usually carries over to the other currencies.

But the dollar and yen were the two major currencies used to fund the carry trade, so they are getting bought at the same time. This is causing all kinds of ripples in the currency karma.

Why Own the Yen Right Now!

The Bank of Japan (BOJ) has a tendency for setting the country's interest rates low, so the yen has been a popular currency with investors during the past decade to use for carry trades.

Fortunately for yen, the carry trade is considered a "risk trade." And in today's market environment, with the financial meltdown, "risk trades" are being unwound. In other words, investors are taking them off their books.

This simply means that investors are covering all those short yen positions, so traders have to buy back yen. This unwinding of carry trades has already fueled a 13% rise in yen VS the dollar.

But we’re not done yet. There’s plenty of good news left for the yen. The carry trade is nowhere near finished unwinding. In addition, there are a number of "risk events" that have happened in 2008, and many believe there will be a number more as the U.S. economy is dragged through the mud of a protracted recession.

The prospects for further gains in yen VS dollars look good. But please keep in mind that the BOJ has been known to intervene. At any time, the BOJ can use their vast treasure chest of reserves, to stem the yen's rise.

However, the force of the carry trade unwinding could be too large a force to control. Either way, the Japanese yen is still the best currency to own throughout the duration of this crisis. 

Ding Dong, the Carry Trade Is Dead!

By Chuck Butler

The Japanese yen, and Chinese renminbi are the only currencies posting gains vs. the dollar. China, just back from a week of holidays, allowed the renminbi to gain vs. the dollar overnight. That's a good sign, considering the rumors circling about a slowdown in China.

But the Japanese yen is the big Kahuna moving against the dollar. Don't look now, but yen has a 103 handle! This begs the question: Is the carry trade truly dead in the water?

Just like the munchkins in the Wizard of Oz, we’ll have to wait and see if it is truly dead. As Glenda said, "Let the joyous news be spread, The Wicked Old Witch at last is dead!"

Seriously though, the Carry Trade does truly, look dead in the water, as the credit squeeze takes its toll on this once favorite investment strategy. Carry trades are "risk trades" as I've explained a hundred times before. That’s why the credit squeeze wiped them out.

Finally, the Asian currencies will be the next shoe to drop for the dollar. It looks like the carry trade is dead, and the Asian currencies, led by Japanese yen, can finally be left alone to trade straight up vs. the dollar.

So, we’re taking on water with the other currencies that have been so profitable for holders for over six years now, but Japanese yen is finally cut free of the carry trade.

The Bank of Japan Is More Likely to Hike than the Fed! - Bloomberg

From Chuck Butler, our Friend at EverBank

What's Happening:

While the Aussie dollar rose to 98 cents, the euro hit an all-time high of US$1.60, and the pound held its own around US$2, "the poor, downtrodden," Japanese yen, is having its own success story.

The yen is right around the 105 handle. And it's looking like the Japanese yen could rise to 104 yen/dollar. I had to laugh at a story I saw flash across the screen.

The title was: "Yen may gain as Bank of Japan (BOJ) is more likely to raise rates than the Fed." HAHA! Now that's funny!

What I Say:

Ok, stay with me on this... A month ago, traders were buying the dollar like Pet Rocks in the 70s because Fed Chairman, Big Ben Bernanke hinted that he was going to be an inflation fighter. Thus interest rates would go higher.

But here we are a month later; there's been NO sign that Big Ben is really an inflation fighter. And now analysts believe the BOJ could raise rates before the Fed!

And the dollar bulls wonder why their currency is getting sold like funnel cakes at a state fair?

Why don't the dollar bulls give Big Ben a call, and see if he can't help them out? Oh, that's right, Big Ben doesn't take calls from just anyone.

According to my friend, Jim Rogers, on his Bloomberg TV interview yesterday morning. "Ben Bernanke and Paulson only take calls from their Wall Street Buddies." HA!

The Yen is At the Mercy of the Carry-Trade…For Now

From Our Friends at EverBank…

The FOMC wasn't the only central bank meeting yesterday, the Bank of Japan announced they would leave rates unchanged. This was again largely expected by the markets, but some of the accompanying language showed their concern with inflation.

The BOJ predicted inflation would accelerate but also cut its economic growth forecast. The report tried to downplay any predictions of interest rate moves, and the markets seem to think the BOJ will leave rates unchanged through the end of the year.

The yen didn’t really react to the news, as markets had already predicted the outcome.

The Japanese yen will continue to be at the mercy of the carry trade for now. As you know, carry trades only work in low-risk markets. Once risk returns to the markets, traders have to reverse their carry trades and money rushes back to the Japanese yen. When that happens, the yen rallies.

But right now, risk is coming back in style in the markets. Traders are placing more carry trades, so the yen has been sold.

But we believe there will be another Bear Stearns-type event which will remind the markets that everything is not ok right now. When that happens, these carry trades will again be reversed and the current 104 levels on the yen will look cheap.

Click here for more on why Bernanke may actually help this process along this year.

The Ferrari of Carry Trades prepares to break out once again!

GBP/JPY (British pound vs. Japanese yen) attracts traders like stock traders used to chase after internet stocks.

This currency offers a high amount of interest paid out DAILY if you're a buyer of the pair. However, either direction that you trade the pair...it has huge swings.

Traders love these enormous swings that this currency has. Well it's just about to make another big push as it breaks out of its current range.

Get ready to hop on board once the pair closes a candle inside one of the boxes shown below. Then "hold onto your hat" and enjoy the ride. It's sure to be a volatile one. Don't trade this one if you have a weak heart. ha-ha.

Get ready to hop on the Pound Yen Train!

Sean Hyman
Currency DIrector
The Sovereign Society

Retail Sales may be the catalyst that drives USD/JPY out of its slumber!

Lately the USD/JPY has been comfortably resting in a calm range while most currencies have been whipping all over the map.

One thing is certain. Periods of low volatility beget periods of high volatility and vice versa. Look for USD/JPY to break its recent range very soon. As a matter of fact, it may have a great chance at breaking it when the U.S. Retail Sales numbers come out at 8:30 am EST on Wednesday.

News events can be great catalysts for a range to breakout. After all, big traders want to see something that causes them to get bullish or bearish on the currency. Given the "new data" to work with, that can be the catalyst that's needed.

Don't get me wrong, it could break out sooner or later than that. But watch to see how it deals with the Retail Sales this week if it hasn't broken that range shown below by then. Click on the chart below to enlarge it.

USD/JPY idles as it awaits a catalyst.

Look for a close inside one of the boxes in the chart and you'll likely have your direction for the near term on USD/JPY.

Lately, money has been flowing into both of them which is what has been equalizing each of them against each other lately. So the Retail Sales number could be the "tipping point".

Later on this week, the Bank of Japan will announce interest rates. It's not expected that they'll change rates. However, there have been rumors flying around that Japan will actually cut rates to stimulate the economy. We'll know soon if that's a load of crap or if there's something to it.

Sean Hyman
Editor/Trader
www.money-trader.com

The Japanese yen is "eating up" the 550 point drop in the Nikkei and 370 point drop in the Dow today. Those that are selling short EUR/JPY are happy.

The Dow plunged today on more recessionary fears that the ISM Services placed on the market. It showed that the Services sector (which accounts for 88% of the U.S. economy) fell into a deep contraction with a reading of 41.9. A reading of 50 or below is the "bust" level. Above 50 means the sector is growing.

This "sucker punched" stocks that were already down for the count today. The Dow Jones Industrial Average fell over 370 points. It's going to take more interest rate cuts and Congress better get those checks mailed out quickly. Yesterday would have been fine. However, those will still likely mail sometime between May and July. 

Meanwhile the Nikkei took its lead from the Dow today and has fallen over 550 points so far in the Asian session. The sell off has been harsh. However, if the U.S. slumps, so does Japan. For the United States is one of its biggest customers. If your customers are hurting, so are you.

This stock market sell off is causing money to run and hide in all of the beaten down assets including the Japanese yen (mainly), the Swiss franc (secondarily) and lastly the U.S. dollar.

Therefore, the yen is rallying against everything basically. EUR/JPY is about to break a multi year trend line if it falls much further. GBP/JPY is one step ahead of EUR/JPY in that its already broken a major uptrend line. Even the Euro is having a hard time holding up to the U.S. dollar due to all of this...as traders run from the "lofty" assets into what is deemed to be "beaten down".

Don't expect this to stop today. For there's more where that came from.

Now you can see why the seven biggest industrialized economies are all meeting together in Tokyo this weekend. All of those central banks are shaking in their boots. They are realizing that this is such a huge problem that they're going to have to "team up" in order to tackle it. Even then it won't provide an instant solution....and anything they "fix" in the short term always causes the markets to "pay up" in the long run.

Alll of the "pumping of money" into the economy and making the price of money cheap by cutting interest rates will eventually save these economies from deep recessions in the short term, even though it won't stop at least a mild recession in the near term. However, because they're trying to buffer the fall, it will cause tougher times on down the road, as this "cheap money" inflates things once again and causes yet another asset bubble later on. Sometimes it takes years for the next bubble to arise...but you can bet it will come.

That's one thing the central bankers either don't realize or don't care about at the moment. Just as Greenspan lowered rates to 1% to give the economy a shot in the arm, the cheap money caused housing prices to inflate and form a bubble. Now the economy is suffering. So what do we do...we make money cheap again to save the economy again....yet we're going to have another bubble down the road because of it. It's just a matter of "where" and "when". That's the only real question.

In the mean time, those that are "short selling" EUR/JPY are particularly happy right now. If you have a long term stock portfolio, selling short EUR/JPY could be a great way to hedge the losses that are incurred in the stock portfolio too.

 

Sean Hyman
Editor/Trader
www.money-trader.com

NZD/JPY erases all of yesterday's losses after the FOMC meeting!

NZD/JPY and many other yen pairs fell hard after the FOMC meeting. Many of the yen pairs lost 150-300 pips within hours (on yen strength). Traders didn't feel that the Fed did enough to stimulate the economy so they sold stocks with a fury. The Dow dropped a whopping 300 points.

The NZD/JPY pair dropped 200 pips within 3 hours following the rate announcement out of the U.S. Money was running to the yen as fast as possible.

However, overnight as markets recovered, NZD/JPY regained all of its losses that it incurred after the rate announcement. That resilience is quite impressive.

The EUR/USD held up better than most in the aftermath. This morning's U.S. Trade Balance numbers will be out within minutes. Let's see how it affects the EUR/USD.

Sean Hyman
Editor/Trader, www.money-trader.com