World Currency Watch: FOREX Market, FOREX Trading BLOG

An Uncomfortable Truth

Here’s an uncomfortable truth for you: Bankers here in the U.S. still refuse to lend.

As I told you yesterday, just my own personal banker refused 40 different loan seekers this year. He’s refusing loans for one reason: The economy just isn’t recovering as the powers that be would like to believe.

It’s not just bankers either. Oil traders aren’t convinced this recovery is real either. Any real recovery would mean a spike in oil prices, so they would be buying. Instead, we’re seeing an oil stock fire-sale.

The guys who normally buy up transportation stocks aren’t buying the recovery party-line either. Last Friday, more traders were dumping transportation stocks than any other time in the last year.

This is just one of several events that Forex traders may have missed over the past week. So let’s take a second to review some of the pivotal changes.

One of the biggest changes promises to not only drive stocks lower, but drive one currency down too…

Oil Falls Apart…and Drags Down the CAD

Oil has not only broken its uptrend line now but it’s also broken down through its ascending triangle pattern on its daily chart. It all happened around Thursday and Friday of last week.

Therefore, there’s likely more downside in store for the price of oil in the near term. As I mentioned yesterday, this is driving one currency lower too – the Canadian dollar.

In fact, this ONE important change caused the dollar to break higher, while the Canadian dollar broke down across the board. This is pretty normal. Oil is priced in dollars, so oil prices tend to fall when the dollar rises in value and vice versa.

The Canadian dollar booms and busts with oil because oil is one of Canada’s biggest exports. When those exports fetch a high price, their profit margins widen. When times are good and oil rises, you can see that action in the Canadian dollar’s price.

On the flipside of the coin, if oil plummets then their profit margins shrink. All of the sudden, Canada’s main export is cheaper and its currency reflects that too.

So when I saw the breakdown in the price of oil, of course, I turned to the USD/CAD chart and saw it break its downtrend. You can see it on the chart below.

A Break DOWN in oil caused a Break UPWARD in USD/CAD!

But then I took this a step further and checked out some other CAD pairs. Sure enough, AUD/CAD was flying high and EUR/CAD broke its downtrend that same day!

This is just one example of how currency crosses (non-dollar pairs) can break out even farther than regular dollar majors.

Reason? They’re more volatile, so they tend to trend better than your normal dollar-based pair. Also, dollar-based pairs tend to be affected by tiny changes in U.S. policy so that can ensure they don’t move quite as far as non-dollar pairs.

What You Can Expect Next

Get set for stocks to drop. We’re already seeing it in oil and transportation, and I feel we’re about to have an across-the-board correction soon.

When it crumbles once again…Canadian-dollar currency pairs will fall hard also. Get set to short all CAD pairs when that happens.

Happy Trading,
Sean Hyman, aka Professor FX

EDITOR’S NOTE: For a limited time, you have a chance to get in on all Sean’s next currency cross winners and every single currency trade Ashish and the rest of our currency team release every week….for one low price. Click here for details.

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!
Sean Hyman, Professor FX

Dollar Horrors & Loonie Tunes: When to Buy the Loonie and Dump Your Dollars

By Sean Hyman You may have heard us call the Canadian dollar “the loonie” here in FX University on occasion. That’s because our neighbors to the north nicknamed their currency after the Canadian Loon depicted on their dollars and coins.

Frankly, the name fits – and not just because of the bird. The currency itself acts kind of “looney.” In fact, I think of it as bipolar.

You see there are two major “pulls” on the Canadian economy. First of all, Canada is a huge commodity-exporting nation, so major commodity prices including oil can influence their currency one way or other.

But on the other hand, Canada is also influenced by their biggest trading partner: us, the United States. So the second “pull” on their currency is based on how the U.S. is doing at any given time.

As a Forex investor, the tough thing to figure out is whether the Canadian dollar will trade based on commodity prices or what’s happening in the U.S.

As you know, the U.S. led the world into the latest recession. This was a horror story for Canada. After all, when the U.S. slows down, Americans don’t need as many goods or nearly as many commodities – including the oil, petroleum products and timber from Canada.

You can see this easily on the visual below.

As Goes the U.S., Eventually Goes Canada!

You can see by the GDP chart above, as the U.S. went into negative GDP growth (-2.5%), that Canada ended up in the same boat (-2.13%).

However, on the other hand, the loonie can also do well when commodities do well. So how does one figure out this currency?!? Actually, it’s easy to see which has a bigger pull on the economy at any given time.

Let’s go to the chart for details…

Invest in the Loonie when Both U.S. Stocks & Commodities Head Higher!

If you’re trying to figure out what the loonie will do next, you have to look at both the U.S.’s situation and commodity prices. And right now, I’d say whatever is happening in the U.S. has more pull on the loonie’s overall strength.

Why do I say that? Well take a look at the chart above. As you can see, in 2006 and most of 2007, commodities (like oil) and U.S. stocks (like the S&P 500) were going up…and the Canadian dollar (on this chart, the Canadian dollar fund, NYSE: FXC) ate this up.

Note: As FXC goes up, you would want to be short the USD/CAD pair in the Forex market to have the equivalent direction.

However, towards the end of 2007, of course U.S. stocks peaked and then fell off the map. You can see this in the top of the chart above. However, in the very bottom of the chart , you see that oil continued to rally for another 6 -9 months, yet the loonie still dropped off anyway. In other words, high-priced oil was NOT enough to help the Canadian dollar when the U.S. was suffering.

That’s why I say, when U.S. stocks are doing well (and especially when both U.S. stocks AND commodities are doing well), it’s time buy the loonie.

But, even if commodities continue to head higher, you still need to look at what’s happening in the United States to gauge the loonie’s strength. If U.S. stocks start to slump and the U.S. economy starts to slow down, it’s time to bail out of the Canadian dollar trade.

The Ultimate “Recovery” Play of the Year

By the way, if the central bankers have it right…and we’re past the worst and “green shoots” are starting to pop up once again, then it’s time to buy the loonie once again. And this is exactly why investors have poured back into it. Because BOTH stocks and commodities have stabilized recently. Also, Canadian exports have picked up lately.

Of course, it could go the other way too. If that happens, I suggest you bail out of this trade. Watch both U.S. stocks and oil for the signal. If they pullback, take your profits and run for a not so “bipolar currency.”

Bottom line: As long as stocks and commodities continue to perform well, then shorting the USD/CAD pair should do just fine. If, for some reason, U.S. stocks lose their momentum and start to head south again, then it would be time to bail out of your USD/CAD short position.

Happy Trading!

Sean Hyman aka Professor FX

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The Bi-Polar Currency

By Sean Hyman

The USD/CAD (U.S. dollar vs. the Canadian dollar) pair is sometimes called the “bi-polar” currency because it’s driven by Canada’s largest and most influential export – oil. And at other times, it takes its lead from its biggest trading partner, the United States.

The tough part is figuring out if the Canadian dollar (CAD) is trading based on oil prices or the U.S. economy. Usually, when the U.S. economy is in (or nearing) a recession, the CAD slumps because a slowdown in the U.S. usually predicts a slowdown in Canada’s economy. A U.S. slowdown means Canada loses its biggest customer, the United States.

When things are on the “up and up” and the U.S. isn’t facing major economic difficulties, the CAD tends to trade based on oil prices. If oil is headed higher during these times, then the CAD tends to strengthen against the dollar and bring the USD/CAD pair down.

However, the CAD tends to drop and the buck tends to rise when oil is falling (like it is right now). As a result, the USD/CAD pair heads higher.

The Dawn of the latest Carry Trade....

While most of the world's major economies are either lowering interest rates (or about to do so), Australia remains the ONLY country still in "rate hike" mode.

They also have one of the highest interest rates of any industrialized nation 7.25%.

Then I got to thinking....okay, who (on the other hand) is lowering interest rates. Because if we "paired these guys up" it would be the only remaining carry trade left standing.

The Bank of England has been cutting rates. But as of today, they went "on hold". Plus their rates are still far too high to make a good "funding currency".

Then I thought of the U.S....After all, they'll be cutting rates more...but the only problem is that the exchange rate is already at 30 year lows. So if you believe that the USD could fall a lot further, then of course AUD/USD could be your current "carry trade candidate"...and there may be some more room left in that one of course.

However, the Bank of Canada is cutting rates like that of the U.S. ..The only difference is that it is coming off of some of the highest levels we've seen in a number of years. So anyone could see where the CAD could fall quite a bit more as they continue to cut interest rates. Plus their currency has an interest rate of 3.50 currently and they'll probably "chop" that by another 50 basis points in the coming months.

If it's true that the global economy is slowing (and I think it is)....then oil won't remain above $100 a barrel. I'm with Boone Pickens on this one. A global slow down will "cool" the demand that's being placed upon oil right now. As that happens, this oil exporter...Canada..will have their currency fall downward.

We also know that the U.S. will continue to slow down a bit further also in the near term. This will only help bring Canada down (as we're their biggest trading partner). When their "buyer" suffers, they suffer as a "seller" to the U.S.

The ultra high exchange rate of the CAD to the USD is hurting their exports and aiding in their economic slowdown.

So there's a lot of reasons why Canada should "cool off" especially when you're comparing it directly to the economy of Australia.

This makes AUD/CAD the "perfect carry trade" for the moment when ALL others are failing.

Now this trade would need to be bought on pull backs in AUD/CAD. You can see that it started a new upward move...but it's also forming a triangular consolidation on a larger scale.

So buy this pair on pull backs and earn the daily interest. Remember that you'll probably have to only buy 1 mini lot per 10 to 20,000 dollars in your account. Carry trades are long term positions that last for months to years. Therefore they take quite wide swings along the way. Your account balance will have to be able to handle these along the way. So the biggest mistake would be to over-leverage or to have too close of a stop.

A stop would literally have to be below the black triangle pattern forming. So you need a "strong stomach" to handle the wide swings....but the daily interest starts to add up over the coming months and actually helps to make your entry price much lower when you take this into account.

However, the key is to buy it on a good dip and not today.

Click on the weekly, 10 year chart below to enlarge it.

AUD/CAD: The New Carry Trade with the right ingredients to succeed where others (are and will continue to) fail.

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

Interest rate decisions are making this a volatile week in Currencyland!

This week Australia has been the one major economy to raise interest rates...this puts them in a class of their own right now.

The Bank of Canada surprisingly cut by 50 basis points when 25 basis points were expecgt. Boy, that new central banker there doesn't mess around. This was his first interest rate decision to make. Wow! What a way to start...

Tonight, New Zealand just kept rates on hold. However, they are the "highest rates in the land" when it comes to the major economies. So their rates are still at an "eye popping" 8.25% which is what was expected.

Then bright and early tomorrow morning we'll get the rate decisions from the U.K. and the Euro Zone. These will come out at 7am EST and 7:45am EST respectively. No changes are expected from either one...but be forewarned...the Bank of England doesn't mind surprising the market and they've had a history of it.

My guess is that they'll keep rates on hold this time...but honestly, with them...only they truly know.

Then on the 18th we'll get the interest rate decision from the U.S. Fed. Many are expecting as much as 75 basis points lopped off. Wow!

If so....when Bernanke takes it down....he takes it down. Of course, he doesn't have much of a choice. He's having to face a very difficult situation. Stagnating growth along with rising inflation (especially food and energy/commodity inflation).

One pair that I'm in right now is dodging all of those land mines...it's AUD/CAD. We already know that the Aussie has raised rates and will again sometime in the future IF inflation continues on its fast pace higher. The Bank of Canada cut more than expected and has already said they may have to cut rates further. (I like this new guy so far. So far he speaks plain English and not in "code" and tells you what he's thinking).

So therefore, over time, the rate differential will work in Australia's favor and away from Canada. It also doesn't hurt that gold is outpacing oil on its way up. Since Australia exports tons of gold and Canada exports "tons" of oil...this works in Aussie's edge over Canada as well....

But it doesn't stop there. Australia has a tighter labor market...more demand placed on it from China..wages are high...so things are good in "the land down under".

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

Canada knocks the ball out of the park with its employment report!

Canada's employment report came out over 5 times better than expected. The numbers came in at over 42,000 vs. 8,000 expected. Pretty good, Aye!

Click to enlarge the chart below.

So Canada won this round. Watch next month to see who wins that round.

Note: These reports are typically reported on the first Friday of each month. Canada's usually comes out first at 7am EST and then later on the U.S. report comes out at 8:30am EST.

Sean Hyman
Currency Director,  The Sovereign Society
Editor and Trader at www.money-trader.com 

USD/CAD consolidates into a sideways triangle pattern.

Lately, the USD/CAD has been taking a breather after surging upward finally on some weak CAD economic data. The quesion is...which way does it break out next? The answer may lie in the upcoming data.

On Wednesday we'll have the Gross Domestic Product numbers out of Canada. That could throw it outside of the triangle to one side or the other depending on how that turns out.

Also, a couple of other events could do it too. Wednesday's U.S. Existing Housing numbers could do it or Thursday's New Home Sales in the U.S. could also spur a breakout of this pair.

While it could come as soon as Tuesday's National Home Price Index, it's unlikely. It will probably wait for the more important existing and new home sales numbers or CAD's GDP. Any of these news events could be the catalyst that pulls USD/CAD outside of the triangular pattern of consolidation. It could move 150+ pips once it breaks out. Hang on! We could be in for a ride. (Click on the chart below to enlarge it.)

More central bank talk

China announced today they support a strong "U.S. dollar". So we'll see if they back it up by not pulling out of the dollar even more. Their comments can be very fickle, so we'll see in the upcoming months if they mean it or not.

Also, see these comments below from the Bank of Canada:

Bank of Canada Governor David Dodge raised the possibility of cutting interest rates because of rising ``risks'' to global growth.

``Risks are clearly higher than what we thought four weeks ago,'' Dodge said at a meeting of central bankers in Cape Town today. There is a ``lot of volatility in currencies in the last couple of weeks. These are going to contribute additional pressures. We are all a little bit more worried.''S

So at this point we've got Aussie claiming more rate hikes may come.
Trichet has said their could  be another hike for the Euro. However, so far it's been just talk.
The U.S. is cutting rates at this point so far.
Canada is talking about cutting rates.
The Bank of England (GBP) is talking about cutting rates in 2008.

Remember that money tends to go away from those cutting rates and towards those raising rates (in general and over time).

Sean Hyman
Currency Director
www.money-trader.com

Watch for the Canadian Retail Sales at 830 A.M. EST

It's been a light calendar this week so far so the market hasn't had a lot fundamentally to go off of. They've largely taken their lead from the Dow and the Nikkei both of which were up mildly. So there's two things to watch for in currency land.

1. Watch to see how the Dow trades today. If its upwards, it encourages carry trading/risk seeking. If it trades downwards, it encourages risk aversion (which is good for JPY and CHF).

2. Watch the Canadian Retail Sales numbers. Formerly CAD numbers have been very strong. See if the strong CAD exchange rate helped the Retail Sales or not. CAD has kind of a dual personality that makes it somewhat unique. Sometimes it follows the lead of the U.S. So when the U.S (its large trading parter) is doing good, it tends to do good. Then at other times it follows its commodity brothers (AUD, NZD). This is what its done in the past couple of months. However, if the U.S. continues to slow down, it may eventually pull CAD down with it, especially if oil prices turn downward.