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.

The Ultimate Stock Cheat Sheet

By Sean Hyman As many of you know, the foreign currency market is my domain. I’ve been a professional Forex trader and instructor for years, so everything I do in the financial markets revolves around foreign currencies in some way.

But the truth is even if I quit Forex trading cold turkey tomorrow and never placed another Forex trade again, I would still pay attention to the currency markets. And it’s not because I happen to love currencies.

It’s because just watching the foreign currency markets boosts my stock returns.

Not many retail investors know this, but studying the foreign currency market is one of the easiest ways to gain an edge in your stock investing.

By tracking which currencies are appreciating and depreciating around the world, you can tell exactly where global capital is flowing. When a currency is going up, it’s because money is flowing into it. When a currency is going down, it’s because money is leaving it.

When money is leaving it, all you have to do is look to see where global capital seems to be heading and you can bet that country’s stock market is about to profit.

Let me give you a visual below and you’ll see what I mean.

Money Travels from the U.S. to the Land Down Under

As you’ll see from the visual above, money is currently leaving the U.S. and other countries too, like Japan. Right now, that cash seems to be headed down under to Australia if you look at the appreciation in the Aussie dollar’s price.

I can also verify this by looking to the AUD/USD pair. As it goes up, money is leaving the U.S. and heading to Australia.

You see, the currency is the “door” or entrance into a country. Before you invest in a country’s stocks, bonds, real estate, etc. you have to FIRST convert your investment funds into “their money”.

Want to see another great visual? Here’s a chart that shows Australian stocks vs. U.S. stocks. When the red line climbs, it means Aussie stocks are gaining the upper hand over U.S. stocks. When it goes down, the U.S. stocks are gaining ground on the Aussie stocks. Also, there is a line chart that shows the AUD/USD currency pair too. Check it all out below.

The Aussie Dollar Closely Tracks Aussie Stocks

Australia’s stocks have been gaining on U.S. stocks ever since last February to March. Notice the Aussie dollar started rising vs. the U.S. dollar (line chart)…around the same time!

Notice how closely the two track each other.

Don’t Know Enough about Foreign Countries to Buy? Watch Currencies

Even if you didn’t know anything about Australia’s fundamentals, you could look at the major currency pairs to see where the money was flowing and pinpoint Australia. That would tell you where you’d find the biggest edge and overall technical strength.

The savvy currency trader, of course, knows that Australia has a positive GDP, while the U.S. doesn’t. Currency traders also know that Australia actually has some inflation while the U.S. still has deflation.

They know that Australia has a lower unemployment rate than the U.S. does. They know that China is recovering and buying many of its goods from Australia and not the U.S. So that’s why the AUD/USD is going up over time.

However, even if a stock investor didn’t know anything about the foreign market, they could still tell money is flowing into that country (Australia) more than the U.S. just by looking at the AUD/USD currency pair’s price. Therefore the stock investor would know that the Aussie stock market is about to get a boost from these global capital flows.

In fact, the U.S. stock investor will likely make gains in two ways: through the Aussie stock appreciation AND on the gains from the Aussie dollar. You would make extra money on the currency appreciation when you convert their Aussie profits back into U.S. dollars.

Bottom line: Whether you’re into bonds, stocks, currencies, real estate investments, etc. the currency market tips you off to where the money is flowing. The currency market is the “gate” that it has to go through before going into ANY of these other investments… and it’s the ultimate cheat sheet when you want to see where money is flowing next.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. This is really just the beginning of what currencies can do for your overall portfolio. My colleagues in the Currency Capitalist are constantly uncovering ways to boost your overall stock returns with key currency strategies in foreign bonds, CDs and more. Click here to get a look at their overall strategy.

What Your Retirement Planner Won’t Tell You…

How to Buy the RIGHT Commodities  and Currencies for Your IRA

By Sean Hyman

I just read that over US$2 Trillion was lost in retirement funds during the 2008 investment year.

So if your retirement plan is hemorrhaging, trust me – it’s not your fault. After all, who could have predicted that stocks would drop like a rock around the entire world?

No, the problem is most retirement advisors only tell their clients to buy stocks or stock-based funds for their retirement portfolios.

However, you need greater diversity in your portfolios more now than ever before. You need to be able to take advantage of growth that lies outside of the typical “stock realm.”

So how can you do this in your IRA accounts? You can prepare for the next inflationary cycle to come NOW, so that when it comes, you will be there to take advantage of it.

Allow the “Money Printing” Fed to be Your Retirement Account’s Best Friend!

What do we know thus far? We know that the Fed is printing money like madmen. So we know inflation is coming even though we can’t set our watches and say it’s coming on a certain day and time.

We know that commodities (which are essentially inflation embodied) will benefit from this move as a glut of dollars chase a finite amount of goods.

Knowing this, what benefits and more importantly, what instruments do you need to place in your retirement account to take full advantage of this?

For starters, you need to own the commodities that will directly benefit from this inflationary wave such as gold, oil and even silver.

How can the regular investor do this? You can buy these commodities through their ETFs within your IRA at your stock brokerage firm. Here are a few to consider: GLD (one of many gold ETFs), SLV (silver ETF) and USO or USL are both Oil-based ETFs.

However, to further broaden your diversification, you need to own the country’s currencies that benefit from the rise of these commodities and the fall of the U.S. dollar.

Aussie Dollar – the First to Profit When Inflation Hits the Fan

So which ones are they and how can you buy them in your IRA? You will want to consider owning the Australian dollar. Why? Because it’s one of the countries that will benefit from the rise in commodity prices, when we hit the next inflationary cycle.

Australia also hasn’t gotten as banged up as other countries have in this global slowdown. Therefore it will be one of the first to benefit from the next inflationary boom. Also, China will ramp back up quicker than many nations and they will be buying huge sums of commodities from Australia once again.

In your retirement plan, there are a couple ways to invest in Australia. You can do so through an Australian dollar ETF or an Australian dollar CD. Australian dollar ETFs are simple to buy – they’re available on the major exchanges. So you only need to call your tockbroker and request it for your IRA.

And CDs are available through both foreign banks, and EverBank here in the United States. To invest, you simply call the bank of your choice and fill out the appropriate paperwork. Make sure to ask them about retirement plan options.

Why Bet on the Anti-Dollar for the Long-Run

Any type of inflationary cycle is bad news for the buck, and all the other dollar-based investments in your retirement plan. But there’s another foreign currency you can use to minimize your exposure to the buck.

Remember, the best “anti-dollar” out there is the euro. Since the U.S. Fed is bent on printing money, and there’s nothing that you or I can do to stop it, we might as well benefit from the outcome by essentially selling dollars and buying euros.

In the Forex market, you would do this by buying the EUR/USD pair. But in your retirement plan, you need to get a bit more creative. You can buy a euro ETF (there are several available through Rydex, ProShares, WisdomTree and others), or hold euros in a CD or portfolio.

I know Europe is in a mess, no denying that. But I also know that the U.S. Fed will out-print any central bank out there.

As commodities benefit from the glut of dollars chasing a finite amount of commodities, inflation returns. As it does, your dollars become diluted and it will be better to be in other foreign currencies than it will be to be solely in dollars.

Therefore you can bring about a lot of upside to your retirement account and further diversify by buying in the handful of investments that look to benefit (namely the Aussie dollar, euro, and key commodities).

fact, we are starting to see some strengthening of these currencies against the buck already. Check out the chart below.

The Euro and Aussie dollar recently
Broke Downtrends vs. the U.S. dollar!

Plus, it’s worth noting that the dollar has lost more than 80% of its purchasing power since Nixon took us off the gold standard in 1971. That’s because the Fed has continued to print money to cover our debts ever since, and it stands to reason they will continue to do so in the future.

Knowing this, it means that your dollar denominated retirement account will buy less and less as you approach retirement UNLESS you do something about it now.

The course of action NOW will determine when you can retire. By buying other country’s currencies, you will be preserving your net worth as most Americans lose their purchasing power by holding 100% dollars. Ingenious isn’t it?

EDITOR’S NOTE: Few people know that it’s actually fairly simple to diversify your IRA into foreign currencies. You can do so with ETFs, currency CDs or portfolios and even more speculative investments like principle-protected notes. Our just-published currency course, Cracking the Currency Vault explains how to dive into all these investments…and gives you beginner’s tricks and tips for Forex trading, currency options trading and more. Click here for the full details on this new course.

That Sinking Feeling Down Under…

By John Ross Crooks, Currency Analyst
www.worldcurrencywatch.com

Over the next six to eight months, our core trading strategy is based on three key ideas:

1.    Global demand will continue to deteriorate
2.    China will surprise on the downside
3.    Commodities prices will sink back to their 2001 levels

Based on these three views, my trading partner Jack Crooks and I are bearish on currencies that depend on commodities to support their growth. And within the pack of commodity players we are most bearish on the Australian dollar.

Right now, Australia is effectively a satellite country of China. In my opinion, the market is not even close to pricing in the plunging growth in either country just yet. But when the market does, I believe the Australian dollar will get pounded lower.

Now might be a great time to consider put options on the Aussie. Here’s a more detailed look at why…

The economy is in trouble and sinking fast. “The deterioration of the country’s terms of trade is crunching national income.

Recession now seems a formality: Growth last quarter, at 10 basis points, was the weakest in eight years. Households and farms are over-borrowed, and companies are even worse. Their financing requirement blew out to an all-time high last year of almost 8% of output.

With debt hard to come by, companies have three choices: Stop spending, raise equity or go broke,” according the Financial Times.

And the fact that Australia’s current account deficit is already the highest among the major currencies, estimated at 4.8% of 2008 gross domestic product (GDP), makes the currency vulnerable. (Note: the U.S. current account is estimated at 4.5% of GDP, but players have to hold U.S. dollars in order to transact trade and capital flow. They do NOT have to hold Australian dollars.)

China’s “Hard Landing” Will Clobber Australia: Not too long ago, China was everybody’s darling economy. But the crowd of China cheerleaders may be in for a very big surprise — a hard economic landing! Already Australia is suffering from the Chinese slowdown, but the probability that it will get much worse is rising fast as China’s growth numbers continue to fade.

“The one-time engine of global economic growth has been sputtering as a result of dented global demand for exports and over-zealous tightening policy at home. A hard landing, like recession, adds new fear to the mix. With shares and real estate worth sharply less, unemployment rising and deflation round the corner, companies and households are already reluctant spenders; household savings deposits rose by more than 20% in the year to November,” is how the Financial Times recently summed up the rising problems facing China.

As China goes, so goes the demand for commodities and the source of Australia’s growth. China’s troubles are the key reason I believe commodity prices will further to fall. And looking at a long-term chart of the Commodities Index, I think it will revisit 2001 territory — the year commodities prices blasted off.

Commodities Index vs. Australian $ Weekly—Round Trip to 2001! 

Aussie yield support could fade fast. Australia has been a great place to park money during the past seven years. The country was growing along with commodities and the Reserve Bank of Australia kept their rates high to rein in inflation during this boom period.

The Aussie dollar has been the highest yielding of all the major currencies for many years, and still is. But the rapid deterioration in Aussie growth and the fact that governments are fighting deflation, not inflation, leads me to believe Australia’s central bank will hack much more off its official policy rate, which now stands at 4.25%.

I am not sure how far the RBA will cut rates, but I do believe the bank will aggressively cut rates. When they’re done cutting rates, the high yield differential that created such a seeming “no-brainer” demand for Aussie dollars will be gone.

When that happens, the Australian dollar should accelerate to the downside.

Bottom line: Australia’s growth should soon go into negative territory. The country’s already ugly current account deficit should grow worse. Australia’s key customer — China — will likely be buying a lot fewer commodities. At the same time, the Reserve Bank of Australia will likely cut interest rates much faster than now expected in an effort to generate growth.

All of this is bad news for the Aussie over the next several months.

Regards,
John Ross Crooks, Currency Analyst

Those Stock Jockeys Aren’t Quite So Cocky This Morning

By Chuck Butler, editor of Currency Capitalist
www.worldcurrencywatch.com

There’s something else I need to address this morning that deserves front page notice. It’s the ADP jobs report that printed yesterday.

Up until this report hit the news, the stock jockeys were feeling pretty cocky. The risk takers were back in the driver’s seat in the market. (You could tell risk takers were back because the Aussie dollar rose to .7270!)

But then this ADP report came out. Traders dumped their holdings. Suddenly the DOW lost all its 2009 gains. In the currency market, the risk takers lost their nerve. The Aussie dollar is barely holding on to 70-cents!

I bet by now you'd like for me to tell you what the ADP report showed, eh? Well, good things come to those who wait... According to ADP, private payrolls collapsed during December by 693,000, far exceeding the expectations for a very poor report (-495,000 forecast).

This report is NOT the Jobs Jamboree by the Bureau of Labor Statistics (BLS). We’ll finally get to see that report tomorrow. But this report supposedly changed their methodology to mirror the BLS. So, if that's true, we're in for trouble tomorrow morning!

Roughly 2.5 million jobs were lost in 2008. Most likely the worst year for jobs since 1945...We'll have to wait-n-see tomorrow, but this isn't a good indication of what to expect, eh?

So, foreign currencies rallied at first yesterday when the CBO made their announcement about the Budget Deficit. But most of the majors handed those gains right back when this dismal ADP Report came out. The report forced the risk takers to take their bat and ball and go home, leaving the currencies to back off.

Of course, in an opposite action of most currencies, the Japanese yen rallied yesterday and last night. Nothing new here. Right now, either the risk takers are buying and causing the yen to drop. Or they’re not in the market causing yen to gain. Very simple.

Australia Isn’t Really on Life Support Like Everyone Thought

By Chuck Butler

Down Under in the South Pacific, Australia saw a very nice rise in Consumer Confidence of 7.6%. This was tacked on to November's 4.3% gain. The index collapsed this summer, but the recent rate cuts from the Reserve Bank of Australia (RBA) seem to be rounding back into shape.

In New Zealand, Reserve Bank of New Zealand (RBNZ) Gov. Bollard, gave a speech titled "Everyone needs to play their part." In the speech, Bollard, reminded everyone that New Zealand's inflation rate is still very high (5.1%).

Hmmm... Do you think that was that the "wink and nod" that interest rates are not going to go much lower? I think it was. But I guess that depends on whether the rest of the world continues to cut rates so they will unlock the credit crisis! Both of these things could underpin the Aussie and New Zealand dollars at current levels.

And another "Commodity Currency" the Brazilian real really put on the Ritz yesterday with a very strong rally. This is just another sign that the risk takers are dipping their toes again.

All this tells me that the dollar rally, while strong and powerful, could be on its way out in 2009. Now, it probably won’t happen right away. But if risk-takers are already starting to inch back in, then the foreign currencies actually could make a comeback by mid-2009 – and reward any long-term investors who are buying these currencies for a song right now.

Why a Dollar Correction? Why Now?

By John Ross Crooks III

Since July, a few days of indecision strung together have been the only reprieve from this powerful U.S. dollar rally. So what’s going on today that might signal the start of something bigger?

Well, it’s a little something we like to call adverse price action. In other words, price action inconsistent with recently released economic matters. In this case, we learned that the Reserve Bank of Australia got a little rambunctious and cut interest rates by more than expected. Instead of slashing their benchmark rate by 50 basis points, they went for 75 basis points.

Typically, the foreign exchange market is dominated in the near-term and long-term by interest rate dynamics. Lower interest rates, or expectations for interest rates to be cut, are negative for a currency; and vice versa.

But today, after the RBA’s earlier decision, the Australian dollar is rallying sharply. On a 60-minute chart, you can see that the Aussie popped above a near-term resistance level:

The Aussie Dollar Is Ready for a Breakout!

A breakout from these levels might offer up enough steam to move the Australian dollar higher for a while longer. After all, it has been beaten down as much or more than most other major currencies paired against the buck.

But it’s not only Australia’s dollar that’s pushing higher versus the greenback today. The entire pack, with exception of the yen, is considerably higher.

Dollar Weakness = Aussie, Kiwi Strength and More Carry Trades

By Chuck Butler

I've been around the currencies since 1985. I’ve been trading them since 1992 and I've never seen the volatility that I see every day since July in the Forex market.

For instance, I just saw the euro gap up from 1.3075 to 1.3135 in a heartbeat! Crazy! Why can't these currency traders make up their minds?

I'm not complaining – this volatility is great for grabbing quick gains. But, really, this past Monday we were looking at some devastating currency levels, and by today they have reversed about 6%!

And you know what all this dollar weakness and euphoria brings to the currency table don't you? Risk trades, carry trades, dollar and yen weakness, Aussie, Kiwi, and other higher yielders strength.

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…