World Currency Watch: FOREX Market, FOREX Trading BLOG

You’re Living in the New Japan

Back in the day when the carry trade was in full force, traders all around the world were looking to sell the yen. They basically rented the yen to buy other high yielding currencies like the Aussie dollar, New Zealand dollar and British pound.

However, today is a new day. Oh sure, the yen is still a great candidate…don’t get me wrong. But as Chuck mentioned on Monday, there’s a new contender in town that is rivaling the yen for the “funding currency” title….

…The U.S. dollar.

Why the greenback? There are plenty of reasons…

For starters, interest rates in the U.S. have never been this low. The Fed has kept interest rates between a range of 0% to 0.25%. (Japan’s rates are at 0.10% right now.)

You see, Japan had low interest rates to borrow at and they had a horrible economy that held their yen down too. On top of that, many of their largest companies LOVE a weak currency because their exporters prosper when their yen is “cheap.”

dWhy Americans Actually Want a Cheaper Dollar

Well what do we have here in America?

1. Low interest rates
2. A horrible economy
3. We love our cheap currency

Let’s talk about reason #3: There are plenty of Americans lobbying for a cheaper currency right now, as strange at that sounds.

The reason? Many of our biggest companies within the Dow and S&P 500 make most of their money overseas…not in America. So these huge U.S. conglomerates earn most of their profits in euros, pounds, etc, but then they have to repatriate their assets. Companies need to convert those foreign profits back into dollars.

If the dollar is weak, it looks like they have a lot more dollars on their U.S. balance sheets. This gives U.S. companies an incentive to push for a weaker dollar too.

Frankly, this all makes us a little TOO much like Japan for comfort. Japanese authorities did the same thing for the better part of the last decade. They pushed down the yen’s value so their Japanese companies could be more competitive on the world stage.

Dollar Takes It Place Among Carry Trade Currencies

Then of course, we also have the super-low interest rate, which means the dollar is now a carry trade candidate.

Why didn’t this happen before? Just two years ago, the U.S. still had a respectable interest rate. As long as the dollar had a higher interest rate, it didn’t make sense for traders to use it as a funding currency for the carry trade.

The whole point of carry trading is to keep the spread between a high yielder and a low yielder. If the spread doesn’t pay, there’s no reason to buy.

After all, would you rather borrow a currency at 0.25% and invest that money at 6%? Or borrow at 3% and invest that money at 6%? In the first example, you get 5.75 basis points (5.75%) in the spread. The second example only gives you 300 basis points (3%).

It’s a no-brainer right? That’s exactly why carry traders were choosing the Japanese yen over the dollar to fund their currency trades until recently.

But in the last two years, our Federal Reserve and Treasury have so fully debased our currency that it makes the dollar a very enticing funding currency for the carry trade now.

In fact, now traders are borrowing both the yen AND the dollar to fund their carry trades. Then they’re buying up higher yielding currencies like the South African rand, Turkish lira, Australian and New Zealand dollars.

Stocks Go Up, the Dollar Goes Down: Perfect time for Dollar Carry Trade

Currency Crosses to Buy as This Carry Trade Takes Off

Now there’s plenty of funding choices for carry trades once the economies of the world start to recover and inflation is spurred once again to a point to where interest rates begin to be raised yet again. When this happens, unfortunately, you can remember the greenback as one of those funding choices.

When this happens, you won’t just be restricted to buying AUD/JPY, NZD/JPY, etc. as before. Now you’ll be able to buy AUD/USD and NZD/USD as your carry trades too.

The only thing that will negate that from happening is if the Fed ends up raising interest rates far sooner and far more aggressively than they’ve stated. When and if that’s the case, then you can just switch back to “old faithful”…the yen carry trade.

Happy Trading,
Sean Hyman, aka “Professor FX”

A Nightmare Scenario for One Currency Pair

(And an IDEAL Shorting Opportunity)…

By Sean Hyman As I was sifting through my charts this past week, one jumped out to me BIG TIME, and I wanted to share it with you. It was if the planets had aligned technically AGAINST one currency pair.

Which pair? The USD/JPY pair! (Or buying the dollar and shorting the yen.)

In other words, the dollar is about to sink, while the yen rallies. Check out the chart below and you’ll see what I mean…

A Technical Nightmare for the Dollar vs. the Yen!

If there were ever a sign that the yen is about to beat up the dollar, this is it! Let me explain…

MANY Technical Patterns Converge All At Once Against the Dollar/Yen!

Gosh, where do I even start?

First, the pair broke its green uptrend line. That means it’s about to fall. Enough said, right there!

However, it gets much worse. The MACD (or moving average convergence divergence) starts to diverge which shows that there’s likely more “follow through” to the downside coming. The MACD further confirmed its negative signal by dropping below the “zero line.” These are all signs that a change in the trend is coming soon.

Then I noticed a Head and Shoulders is also forming. That’s a bearish sign for the USD/JPY as well. See it illustrated above. It confirmed the pattern by breaking the “neck line” (the yellow line). This pattern alone gives the pair a MINIMUM price target of 90.00!

But wait, there’s still more! The pair broke back below its 200 simple moving average which also confirms the downward trend.

The pair has also established its first set of “lower highs” and “lower lows.” That tells me it’s about to drop.

I’m telling you – it’s like the planets have aligned against this pair! The yen is preparing to kick the dollar’s tail!

With so many patterns coming together at once, I’d think that we could see 90 reached on the USD/JPY pair sooner, rather than later. It’s like the perfect storm for this pair – and a perfect shorting opportunity.

Buckle up your seat belts, this ride should be interesting!

Until next time…happy trading!

Related Articles:

Charting Tricks of the Pros I

Charting Tricks of the Pros II

Don’t Baby-Sit Your Trading Screen All Day

Following the BIG Money

Two Free Ways to Copy Forex Pros’ Best Moves

By Sean Hyman Anyone who’s been trading Forex for any length of time will tell you it pays to know where the big money is headed.

In other words, you want to know where the biggest banks, hedge funds, and other market movers are investing their cash, so you can jump on their trades and grab profits when they do. (Trust me – it’s MUCH easier to ride a trend than try to fight the market.)

But the question is,: “How can a retail trader possibly know which currency pairs the big institutional traders are buying?”

Honestly, it’s not as difficult as it sounds. In fact, there are a couple of free tools that I’ve found out there. that allow you to do just that.

Comparing Apples to Apples…the First Free Trick

The best way I know to quantify currencies is on an “apples to apples basis.” In other words, you look at each currency pair in percentage terms (percentage winners/losers).

There’s a handy FREE website that ranks currency pairs that way. It’s called Net Dania. Go to www.netdania.com and click on their “Products” tab. Then go to the “NetStation – Beta” in the left hand column.

After that, just click on the huge “Click Here” button towards the middle of the screen and it will bring up their quote screen. You can click a few times on the “% Change” column and it will rank the currency pairs from the largest winners of the day to the largest losers on the day (in percentage terms).

You can see what I mean in the chart below…

Watch the % Change Column to See What the Big Money Is Buying

The clock resets at around 5pm EST each day and then the ranking begins. Once these pairs have been going some hours into the new day, you can usually see themes emerge. If you see pairs advance more than 1% in the biggest % winners column or fall over 1% in the biggest % losers at the bottom of the list, then you should start paying attention.

Where’s the Money Headed?

Once these pairs reach 1.5% or more gain (or loss on the day), look to see the “common threads” that emerge. For instance, see if a common pair is gaining or losing.

While the day is still young on the chart above, we can still see that the Aussie and U.S. dollars are stronger at the moment and that the euro is one of the bigger losers on the day. Now if this case still holds once these pairs pass the 1.5% mark on the day, then I would take this trend more seriously.

Once a clear pattern emerges, you can tell which currencies the big institutional traders are focusing on. Then you can hop on board with them and buy what they’re buying and sell short what they’re selling.

Once the pairs start to lose their momentum on the charts OR pass the 3-4% mark, I know it’s time to pull the plug on them for the day. Pairs rarely move over 3-4% in any given day. Also, if the charts start to slump over, you can tell the “big boys” may be starting to exit, and therefore you should do the same.

Now, a way to do this on a longer-term basis can be found by using the free tool at forexpeacearmy.com. You can go to their home page and click on their last tab to the right, “Forex Calendar and Tools.” Then choose the “Old Currency Strength Calc.”

To the right of this page you will find a relative strength calculator like the screen shot below. Check it out.

See the Biggest Winners/Biggest Losers on Any Time Frame!

Want to know which currencies are the strongest or weakest on the week, month, year (or any custom period?)? Simply choose that from the red-circled area above and then click on “show” button. It will tell you the biggest % gainers and losers on the time period you chose.

(Please keep in mind: I’m not endorsing these sites or their products. I’m simply giving you some examples of some places that offer free useful information like this.)

For instance, I was curious to know which currency was the biggest gainer so far for 2009 and which one was the biggest loser. As it turns out, my suspicion was right.

The Relative Strength Calculator Indicates the Carry Trade Is Back in Play

I’ve been talking about the carry trade reemerging recently. Well, look at what’s at the top and bottom of the list for this year. The higher yielding Aussie dollar is at the top and the yen is at the bottom!

So for this year, I know that the “pros” have been buying up the Aussie dollar more so than any other currency so far. Since it’s up over 8% and everything else is at least three percentage points below it, I know they have concentrated their positions in the Aussie.

Since the yen is down almost as much as the Aussie is up, I know that they are selling yen “in mass” once again. Again, sounds to me like the carry trade is back on – they’re buying Aussies and selling yen.

Therefore, I know that they’ve been huge buyers of the AUD/JPY pair in particular. So if they are focusing so much on this pair more than others…why shouldn’t I too?

So these are two more “tricks of the trade” that are free to the retail speculator. Whether you’re a short-term trader or a medium to longer-term trader, you each have a tool to fit your needs.

P.S. Looking for more tricks for Forex trading? Click here.

Carry trades get killed due to GE's earnings miss & Goldman's Short Sell recommendation of WAMU!

Wow! What a morning. First, General Electric's (GE) earnings came out before the bell and they MISSED earnings. Man, I don't know of the last time that I heard of GE missing earnings and by so much. The stock dropped almost 5 dollars a share.

Then Goldman Sachs did the "unheard of"....they gave a sell short recommendation to the public. Now in all of my years I've never heard of that one. They recommended selling short Washington Mutual (WM). Wow!

Rarely can you ever get a firm to say "sell" to an existing buy position (long). However, they went a further step and said "short it".

So these two things really sent the stock market plummeting upon the opening.

This "fall" in stocks killed the carry trades too, especially GBP/JPY. It just gave it more reason to continue its downtrend. Check out the daily chart below. Click on it to enlarge it.

The Carry Trades get killed as U.S. stocks sell off!

Remember that we've got the G-7 (Group of 7 largest industrialized countries) meeting today and tomorrow. So they could talk about the dollar or the yuan, etc.

So see what they have to say. Also note the horrible consumer confidence number that came out today. It just keeps getting worse and worse. These readings are now at recessionary levels for sure. The University of Michigan's Consumer Confidence reading came in at 63.2 vs. 69 expected and 69.5 from the previous month.

This "confidence trend" just continues to trend downward very steadily. That's horrible!

Stay tuned...

Sean Hyman
Currency Director
The Sovereign Society

As stocks bottom out and form a range, so do "select" carry trades.

Stocks are starting to "build a base" and trade sideways as some buying finally comes into the market.

Why would fresh buyers come into the environment when the economy stinks? Several reasons.

1. They are betting that the Fed rate cuts that started months ago are about to work their way into the economy.

2. Smart investors "get greedy when others are fearful". Well there's not been this "fearful" of a time for quite a while.

3. Bottoms usually come after something catastrophic happens. We got that when Bear Stearns (one of America's oldest and biggest Investment Banks) bit the dust.

All of this has caused buyers to come into the market which has "somewhat cancelled out" the dominance of the sellers, thus producing a sideways range (or "base" as traders call it). Check out the chart below. Click on it to enlarge it.

The Dow goes into a range and may have even "double bottomed".

Now as investors are coming back into "beaten down stocks" that they believe are of good value, they're doing the same when it comes to carry trades. They're probably not going to come back into every carry trade just yet no more than they would jump into just any stock right now.

One thing for sure is it's a "stock picker's market" right now and it's also the same in currencies. They have to be selective.

One carry trade that I believe they are starting to snatch up again is the New Zealand dollar vs. the Japanese yen (NZD/JPY). Why?

Because it's one of the highest yielding carry trades with some of the best economic conditions. New Zealand has an interest rate of 8.25% on its currency while Japan just has a 0.50% rate on its currency. So a buyer of this currency pair gets to keep the difference between these two rates.

Check out the chart below and I think you'll see that it's a value since it's "lost" a year's worth of gains. Yet it still pumps out about $15 a day in daily interest, 7 days a week. So that's about $460 a month in interest alone. So if the "fall" is over, then you can handle it if it continues sideways for a while  because you're literally making some "head way" every day (even on weekends).

NZD/JPY bottoms as stocks bottom, yet with $15 a day interest

Then once the pair turns upward, of course you're going to gain appreciation in the pair also. So there's two ways to make money in this "beaten down" pair.

New Zealand is expected to keep its rates high for quite some time according to last month's speech by their central banker. So carry trade investors should be "in the clear" for quite some time on this one if he "sticks to his guns" on that.

Sean Hyman
Currency Director
The Sovereign Society

Carry trade "blessing or cursing" will be determined by the Dow.

The breakout of the Dow Jones Industrial Average's range will determine where the "carry trades" head in the near term and how well they do.

Check out the chart below. If the Dow breaks the red resistance line below, then it will enter into the "carry trade friendly" zone and it will be smoother sailing for carry trades like EUR/JPY.

The Dow will determine the road to travel for carry trades.

However, if the recent market rally "tops out" at the red line and then heads lower and even takes out the green support level, you're going to see carry trades enter a "carry trade curse" zone.

Then pairs like EUR/JPY and especially GBP/JPY would have a very tough time.

Sean Hyman
Currency Director
The Sovereign Society

Why trade currencies?

Let's take a look at why one would want to buy currencies over stocks.

For starters you can earn DAILY interest by buying these currency pairs rather than earning QUARTERLY dividends in the stocks. This is a huge advantage.

 You’ll also enjoy better fills on your orders (even market orders) since the currency market has more volume than all stock markets of the world combined.

 You’ll also enjoy the benefit of the extra leverage. Generally in stocks you can leverage 2 to 1 or 4 to 1. In currencies you can leverage up to 400 to 1 with 100 to 1 being much more common.

 Now this doesn’t mean you should use all of this leverage. You know a Corvette may go 190 miles per hour but it doesn’t mean you should drive that fast. You should obey the speed limits instead.

 Well currencies are the same way. They can be highly leveraged. However, when you increase the leverage to just 10 to 1, you’re greatly increasing the DAILY interest that you receive on your position. Plus, if you’re right in your assessment of where the market is going, you’ll gain far more than you would in the actual stock index that it tracks.

 But remember that leverage is a double edged sword. So if you could gain more, you could lose more too. So make sure you remain reasonable about how much leverage you choose to use.

 Now back to the benefits of trading currencies….

 Remember that you can get into a currency pair (or get out of a currency pair) 24 hours a day Sunday evening through Friday evening. So if you hear of some bad news and the stock market is closed, you can still exit your currency position while the stock traders can only bite their nails and wait for the opening. There are minimally several times a year where this facet could be of great help to you.

 Even though you can buy and sell short in stocks, most of the big money is “long only”. That means that they’re really only making money as stocks go up. But they’re losing their shirts when stocks decline.

 However, in currency pairs one is always going up and the other side of the pair is going down (and vice versa). So it’s no big deal to “go short” in currencies like it is in the stock market.

 Keep all of these “perks” in mind as you consider trading currencies. I think you’ll find that it’s a superior market in many ways. I know I did.

The sell off in the markets today is only encouraging those carry trades downward just as I'd said.

Man...the Dow hitting 11.750...oil hitting the $108 area. Wow!

This is all a recipe that is a disaster for the carry trades. EUR/JPY and GBP/JPY has headed lower and is poised to break a very crucial support. When this happens, "look out below" once again.

Check out the EUR/JPY 4 hour chart below. Click on the chart below to enlarge it.

GBP/JPY doesn't look any better. It's ready to head south real fast too. Click on the chart below to enlarge it.

So with Trichet giving "warning signals" with the high euro exchange rate...that's going to encourage the EUR/JPY rate downward.

The shakiness in the financial markets right now is boosting the yen and Swiss franc. This will end up bringing most carry trades down to their knees in the upcoming weeks/months.

So "look out below"! It's going to get ugly and the euro and pound will suffer at the feet of the yen and the Swiss franc.

One quick thing to note.....

I don't want you to get confused between yesterday's post of the AUD/CAD carry trade idea and my thoughts in general on carry trades.

Let me clarify...

Most carry trades are doomed this year because of increased volatility in all financial markets...loads of uncertainty at every turn...new "bombs" are unloaded on the market each day recently....this one has to write off "X" billions of dollars....spreads are widening in the auction market...banks are tightening lending...etc.

This is not the type of market for carry trades in general to do well in. HOWEVER, right now..Australia just stepped into a recent "class of its own" as it hiked rates when the rest of the world is on hold or cutting rates.

Canada will be cutting rates quite a bit more and their dollar has to fall more or their exports are going to get killed.

Therefore, that makes this possibly the only carry trade left standing.

So consider that..the one exception to the rule when I speak of carry trades.

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

Things look grim around the world...not good for the carry trades!

The Nikkei busted through the 13,000 level and plummeted over 430 points. The Dow has plunged over 100 points so far and can't seem to hold the 12,000 level.

More jobs were lost as we found out in this morning's Non-Farm Payroll report. There was a loss of over 60,000 jobs this month and last month's loss was revised even worse also (-22,000).

You can see from the chart below that if the Dow doens't close above the 12,000 level...that it's not going to be good. Look out below!!!

The Dow threatens to break (Dow)n!

This is going to push the EUR/JPY carry trade down towards the 153.00 minimally. Check out it's long term yearly chart support line below.

EUR/JPY heads lower towards its yearly support level.

Hold onto your hat. It's not going to be pretty in stocks...but it can be a great thing for the short sellers of these carry trades such as EUR/JPY.

Unfortunately, things will probably worsen for the U.S. economy in the near term which will just encourage stocks and carry trades lower.

Hiring and firing trends don't usually turn around on a dime. Now sometimes they'll have improved months in the midst of a longer downturn...just like a stock chart can have.  But don't be fooled just because we get a favorable payrolls report here or there over the next few months. Even downtrends have "rallies upward". Yet they're still downtrends. Trends in employment are very much the same.

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