World Currency Watch: FOREX Market, FOREX Trading BLOG

A Tale of Two Exotics

By Ashish Advani I want to take you on a tour today of two of the most popular exotic currencies in the Forex market. These currencies happen to be complete opposites in almost every way.

The first currency offers some of the most compelling long-term buying opportunities in the world right now with healthy balance sheets, wealthy benefactors, and a positive long-term growth story.

The second…well, let’s just say it’s a great shorting opportunity if nothing else.

In fact, the only thing these two currencies have in common is they’re both considered commodity plays.

Let’s start with the buying opportunity. To go there, let’s head to the land of Samba and Feijoada first. Yes we are in Brazil.

As I told you yesterday, the Australian dollar has leapt 15% since the beginning of the year (indeed, that’s one reason why the Aussie is my favorite currency over the next six months). But while the Aussie has climbed 15%, the Brazilian real has shot up 22.5% year to date. It is running hotter than all currencies against the U.S. dollar.

You can attribute a lot of this to the world’s insatiable demand for Brazilian commodities – especially the ones China and India are gobbling up. China’s influence in Brazil has reached such an extent that you could be buying a Brazilian stock as a China play these days.

In fact, a Chinese company recently granted a $10 Billion loan to Petrobas (Brazil’s largest oil company) in exchange for first rights to the oil that Brazil will drill at its new found reserves.

The theme that I introduced yesterday in Australia (China buying up the world’s commodity reserves strategically) is alive and kicking in Brazil too. As I have said before, as China continues its strategic grab for world power, Brazil will remain relevant in the global economy.

The Currency to Forget (Or Short)

I’ve heard traders say they wouldn’t touch the South African rand with a 10-foot pole. The reason?

For starters, South African does not have one of the more efficient economies in the world. There is far too much influence on economic policies by outside vested interests, which interfere in their ability to carry out true reforms. This is a major problem for South Africa.

The Central Bank policy and decision making is heavily influenced by vested interests who do not want decisions being made that hurt their business interests. This creates ambiguous messages from the economy.

Recession has taken a strong hold in the South African economy and is creating a major slowdown spiral, which will really hurt the future prospects of South Africa.

While the currency has not yet shown the effects of the slowdown of the economy, I expect that this will happen soon and the world cannot continue to sweep the problems under the rug forever.

I think it goes without saying that I would be very reluctant to invest in South Africa or in the South African rand for now. There is too much bad economic news that has not been factored in, which will create huge uncertainty in these markets.

We can effectively utilize our capital allocation around the globe without having to invest in South Africa and I would give it a pass for now.
I’ll be back soon with more insider looks at countries around the world. Till then…

Yours in FX Profits,

Ashish Advani

P.S. Currency Capitalist members, please be sure to check out your new issue online this weekend. I’ve uncovered a way to tap into one commodity-rich nation and grab a 9% yield! Please see all details in your August issue. Don’t receive our monthly newsletter? Click here to test-drive this next issue…completely risk-free.

The 500% Difference

By Sean Hyman Strange but true…

Many Forex traders – even professional Forex traders – don’t trade exotic currencies.

There are several reasons why. Some traders simply don’t understand the profit potential of trading exotic currencies from smaller emerging market countries.

Emerging Market or “Exotic Currency” World…

Some traders like to stick to currencies they know. So if they’ve been tracking the euro or yen for the last 10 years, they’re not willing to switch over to another batch of currencies from smaller, more out-of-the-way countries.

But let me be the first to say…they don’t know what they’re missing. As I’ve written here in FX University in the past, the single most profitable trade of my entire Forex career was an exotic currency trade.

In fact, the truth is if you catch a trend in exotic currencies, these exotic currencies can regularly hand out as much as five times more profits (or 500% more!) than regular major currencies.

Reason: There are key differences between exotic currencies and regular majors that give them much more profit potential.

Just take a look at the charts below. I’ve included a chart of a traditional exotic currency, the South African rand (USD/ZAR), and a chart from the oldest major currency in the world, the British pound (GBP/USD). While the squiggly lines on the chart appear the same, there are several important differences that we need to talk about.

South African Rand Makes Leaps…

…While the British Pound Strolls

The Strange But VERY Profitable Difference

The first thing traders notice about exotics is how many pips these amazing currencies can move on any given day.

The top chart shows that the South African rand has an average daily range (ATR indicator) of 1,000 pips a DAY during a normal trading year. Last year, during the credit crisis, the South African rand was moving over 7,000 pips in a day!

During the same timeframe, the British pound varied from moving 150 pips a day to 550 pips a day at the height of the credit crisis.

So the actual number of pips these currencies move per day is far more in the exotic pairs than the majors…even volatile majors like the British pound.

Note: The reason for so much volatility is exotic currencies traditionally have thinner volumes than the majors. As such, news events move these exotic currencies more than the major currencies.

Also, when you’re watching exotic currencies, you’ll notice that these currencies tend to have a bit more erratic behavior. That’s because traders in exotic currencies tend to dive in and out faster. In other words, Forex traders want the higher yields and pip movements that only exotic currencies can offer. However, if traders sense trouble, they are quick to bailout of their positions.

Exotics Actually Present LESS Risk to Your Account on a Pip-to-Pip Basis

Some currency investors are drawn to exotics because of that very volatility, while others shy way from them for that very reason. However, when it comes to exotics, the payout in dollars in these currencies varies significantly from their pip value.

For instance, when you buy a major currency pair like the euro (EUR/USD) or British pound (GBP/USD), you usually risk about a $1 every time your pair moves a single pip in a mini-account. You also earn about $1 a pip every time it moves in your favor.

You Risk Less In Dollar Terms With Exotics…

However, many exotics only pay out about 12 to 63 cents per pip of movement on average. So how many dollars you’re actually winning or losing per pip is vastly different than a major. Most traders don’t acknowledge that.

Therefore, your actual dollar risk is “toned down” more than you think when you play exotics. Especially considering you’re only risking 10-60% of a pip compared to a major currency pair (in dollar terms).

So if you were trading the South African rand, you would have to trade about eight times the typical number of mini-lots in order to equal 1 mini-lot of the typical British pound (GBP/USD) trade.

In the case of the Turkish lira, I’d have to trade about twice as many lots as I did for the GBP/USD to be about the same risk dollar wise.

False Argument Against Exotics: The Spread Is Too wide! Wrong!

Another huge difference at first glance is the pip spread difference between the major currency pairs and the exotics.

And yes, there is a big difference in pips.

The spreads on exotics may be between 50 – 200 pips vs. majors being 2-5 pips for instance. However, when you convert those “exotic pips” into dollars, you’ll find that the cost is about $24-$31. Yes, that’s more than the majors BUT it’s not nearly as much as it sounds when we were talking about the number of pips that it cost per trade.

Now some argue that they wouldn’t trade an exotic pair due to that cost difference because a major pair would be $2 to $5. However, again, they’re not considering how volatile, and how potentially profitable exotic pairs can be.

Many of these exotic pairs can move 500 to 3,000 pips in a day. So just like you can cover the 2-5-spread cost in a major currency pair that moves 180 to 250 pips in a day, you can do the same thing with an exotic pair. Any currency pair that moves 500 to 3,000 pips in a day can easily erase its 50-200 pip spread cost.

The point being…an exotic pair with a high pip spread is also volatile enough to cover that spread cost and then some. In fact, an exotic currency can quickly cover its cost just as fast as the lower volatile majors cover their spreads.

So exotics have higher volatility, higher spreads, YET the pip cost is lower. That helps lower the dollar amount of the spread.

Another bonus: The daily interest earned on these pairs is generally significantly higher. So if you call the direction right and earn significantly more interest along the way, it does help to compensate for any added risk.

Fundamentals Aside, You Need to Watch Investor Sentiment!

One final difference in exotics over the majors is the ability to get fundamental data on the currency. Oh yeah, you can get it from their central bank’s site. And you can get some info from Bloomberg, etc.

But other than that…it’s sometimes hard to gain all of the fundamental data that you can readily get from a major industrialized country.

However, with that said, the main, big overriding factor with exotics is usually how risky investors are willing to be. When economies are recovering or in a boom, exotic currencies tend to push higher (pushing the USD/ZAR, USD/TRY, etc. downward as the foreign currency rises up against the dollar).

But, when “times are tough” around the world and investors get cautious, the exotics are some of the first ones they run from (which gives a great tradable opportunity too as these pairs shoot up as they run to the dollar).

So in either case, exotics can be a great trade. Indeed, they can be five times more profitable than majors. Right now, may be the best time to trade them…as economies are pulling out of a recession and stock markets are showing signs of recovery again.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. BIG NEWS: Our Exotic FX Alert – that regularly averages as much as 230% winners – is finally open to new traders. Get all the details here.

A Tipping Point for Russia

By Sean Hyman I love sitting back and watching exotic currencies when they near a tipping point. By that, I mean that they could easily (and quickly) go either way, depending upon how investors perceive the global economy in the near-term.

So what’s going on? Russia’s Micex stock index has now dropped just over 20% from its 2009 highs, which technically puts it back into bear market territory.

If this trend continues, it could really scare investors back out of Russia…its stocks…and of course, its ruble! In fact, you can see this story already starting to play out on the chart below…

The Ruble Nears Another “Tipping Point”

If the scare continues on, then the USD/RUB pair will bounce back upward off of that green uptrend line as traders sell rubles and buy dollars.

On the other hand, if the pair traded down into the bottom circled area, below the uptrend line…then it means that investors are willing to stick it out and hold onto their rubles for the time being.

But honestly, I just don’t see that happening. The 22% drop since its June 1st peak has been swift. It’s scaring the pants off of many investors right now. That’s what makes this ruble story so interesting.

You see, formerly this Russian index of 30 companies roared upward 135% since last October and that caused the USD/RUB pair to dive. However, if this downdraft continues onward, then rubles will be sold, as investors flee Russia for greener pastures in other currencies abroad. The first stop out of Russia’s ruble will most certainly be the U.S. dollar.

It turns out that my colleague Ashish Advani agrees with me. He posted his own bearish views on the ruble on his blog this morning. Let’s listen in…

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Why the Ruble Is Heading South…

The recent drop of over 20% on the Russian stock market has me thinking about Russia and what’s coming next for Russia in the coming months and quarters…

The Russian Central Bank has been trying to help with the liquidity crises. They’ve been slashing interest rates in a big way. Of course, that’s also caused the ruble to drop dramatically in value.

The recent economic data suggests some tough times ahead for Russia (even with oil climbing higher!) Andrei Klepach, Russia’s deputy minister of economic development, just announced that real GDP contracted by 11% year-over-year (YOY) in May. Real GDP also contracted by 10.2% YOY over the first five months of this year.

That’s not all. It’s expected that Russia’s second quarter GDP number will decline about 8%. For the whole year 2009, economists are saying GDP could contract by 6-8% year-over-year. Meanwhile the IMF has forecast the drop to be around the 6% mark. All of this seems to clearly indicate that the recession is deepening in Russia.

Let’s see what other indications we can get on the economy:

1. Industrial output fell by 17.1% YOY in May. Output also dropped by 16.9% YOY in April, and 15% over the first four months of this year.
2. Retail sales dropped by 5.6% YOY in May, after falling 4.5% YOY in April, and after falling around 1.4% YOY over the first four months of the year.
3. The only silver lining on the horizon is that unemployment rate eased back to 9.9% in May, from 10.1% the month earlier.
4. The trade deficit has slowed down to $9.8 billion in May. For the first five months of 2009 this put the trade surplus at $36.3 billion. It stood at S$83.3 billion one year earlier. Exports were lower by 47% YOY over the first five months of the year, with imports down by 40% YOY.

The combination of the weak real economy outlook, plus the dramatically lower trade surplus suggests a coming weakness for the ruble.

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Thanks Ashish! Okay, back to me…

Here’s Why I’m Watching the Ruble Right Now

I bring the focus to the ruble because of the BRIC nations that have rebounded so well…Brazil has only fallen about 8% off of its 2009 peak. India has dropped about 7% and China is roaring on and is at its higher levels for 2009.

So Russia’s currency would be the first to “feel the pain” if investors panic and head for the hills.

Keep an eye out on this one to see what traders and investors alike do with the ruble from this point. Get out your popcorn, folks…it should be interesting.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. If you haven’t checked it out yet, I urge you to visit Ashish Advani’s new blog. He’s answering reader questions, uploading FREE trading videos, and he just finished his latest letter to all his readers. You can view it all here FREE right now.

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Let’s Talk Turkey

By Ashish Advani For years, Turkey has been an odd in-between country – traditionally the bridge between Europe and Asia for trading, traveling, etc. The Turkish lira itself has been an interesting currency play for Forex traders in the past.

But of course, that all changed with the global recession. Like most emerging market nations, the Turkish economy has been struggling ever since. That’s leading many Forex traders to wonder if the Turkish lira is even worth trading anymore.

However, I’m starting to see some signs of promise in the Turkish economy. In fact, I’m cautiously bullish on the Turkish lira at this point. I believe this area of the world holds significant possibilities and the Turkish lira is just one of several currencies that look to benefit.

Why do I say that? Well, first of all, Turkey seems to be weathering the storm reasonably well. The country may actually come out stronger at the other end of this recession.

At this point, everyone has already accepted that the global credit crunch fallout has hit Turkey rather significantly. Indeed, the economy is expected to decline by 4-5% in 2009, which is higher than previously estimated (2% by the World Bank).

But still I see some promise hiding there. Right now, exports are down but so are imports. In other words, they’re not selling as much, but they’re not buying either. That gives Turkey a subtle edge.

Specifically, the reduction in oil prices from $100 a barrel down to $60 has put a huge dent in their imports. In fact, Turkey will save $16 billion in the import bill for 2009 just because of cheaper oil.

Turkey Uses the Recession to Pay Off Their Debts

Lower exports and imports are critical to improving Turkey’s balance of payments and trade deficit.

From its peak of a deficit of $49 billion back in August 2008 the deficit has plummeted to around $27 billion in April 2009. This lower deficit has helped the country roll over its debt obligations as they come due.

Given its neighbors in the region, Turkey seems to have created a great track record for easily refinancing its debt. Just the fact that Turkey can refinance debt has been a huge confidence booster for the country.

The lower trade deficit has also helped reduce pressure on the foreign exchange rate. That’s kept the Turkish Lira rather stable since the initial decline back in August - November period. (Recall, the dollar was on a rampage during that time period, and all currencies declined against the dollar worldwide with or without merit.)

It Does NOT Look Like Turkey Will Accept Handouts This Summer

The recent debate in the country has been around the on-going discussion that Turkey is having with the IMF (International monetary Fund). There is a heated debate on whether Turkey should accept new FCL (Flexible Credit Line) facility from the IMF.

Of course, the IMF won’t offer a flexible credit line without strings attached. If Turkey accepted, there would be regular stringent reviews of the line of credit. That could hamper Turkey’s growth and flexibility in the future.

However, right now it’s so easy to rollover Turkey’s external debt liability that officials are debating whether the benefits of such a new line are really worth it. The May 2008 facility is still working and there seems to be no rush for the country to enter into a new facility.

A Central Bank In Control…

Finally, I’m looking at Turkey because of the country’s prudent central bank.

The Turkish central bank seems to be very comfortable with inflation in the country as well as the current FX prices in the market.

Unlike some other central banks around the world, the central bank has some room to breathe. They have several inflation-fighting arrows left in their quiver including regular U.S. dollar auctions. They can also directly intervene in the market if necessary.

So I doubt the central bank will do anything to weaken the Turkish lira anytime soon.

All things considered, I am cautiously optimistic on Turkey’s economy. I expect the country to come out of this recession much stronger than what the current situation is. I’m also bullish on the Turkish lira. I expect the lira to strengthen somewhat slowly but steadily in the coming months at least till October of this year.

In October, the IMF will hold its annual general meeting in Turkey and may sign the new FCL around then. And depending on which side wins the agreement terms, we can continue to build our views on Turkey, or reverse course then.

Yours in FX Profits,
Ashish Advani

P.S. I just posted my second video on my new “Big-Game Hunting” blog! In this video, I’m giving you an insider’s glimpse at a couple of actual exotic trades in the Forex market…including why I chose them, the thinking behind my stop-losses, how I dealt with the market uncertainty while in these trades…everything. This video is yours to enjoy FREE with my compliments. Click here to watch now.

The New “Recovery Currency”

By Ashish Advani As an exotic Forex trader, I’m constantly searching the globe for opportunities in the world’s smallest, most overlooked economies.

It’s my job to find these countries and identify their trends so I can either buy or short their currencies in the Forex market. These emerging market or “exotic” currencies tend to have less volume, so their currencies have the potential to move a lot faster than your normal major currencies.

Frankly, I don’t care if these smaller currencies are rising or falling. I can make money either way as long as I can find a sustained trend.

So where can you find sustained exotic trends right now?

As you probably know, most exotic currencies sank right along with the majors for the better part of the last year. In fact, some of my fellow Forex traders made a killing just going long the dollar versus most exotic currencies.

However, that looks like it’s all about to change. The “strong dollar story” has already started to fall apart since March. And it looks like the dollar is going to continue to weaken overall for at least several months.

The easiest way to play the falling dollar is to buy the exotic currency that looks to recover first from this global recession.

Here’s the good news: I’m starting to see major signs of recovery for a few specific exotic currencies – including the Brazilian real.

$661 Million Flowed Into Brazil in Just the Last Two Weeks

So why Brazil?

For starters, let’s look at Brazil’s cashflows. The Central Bank of Brazil (BACEN) just reported net FX flows into Brazil through June 12. The figures show that net FX inflows declined to $110.9 million in the second week of June, from $550 million in the first week.

Now this may not sound like good news. But if you take a step back you’ll see a very different picture…

In the first half of June, commercial surplus was driving the net FX flows. That surplus actually amounted to $866 million, which was four times larger than the net financial outflow right now (or $205 million).

On top of that, the net inflow of $661 million in the first half of June 2009 was better than the net outflow of $143 million a year ago.

In other words, more money is flowing into the country this year than in June of 2008. This means Forex traders around the world are starting to recognize the promise coming out of Latin America’s largest economy.

More capital flowing into Brazil is VERY good news for the Brazilian real going forward.

China – Brazil’s Quiet Benefactor

As you’ve heard Chuck say here in FX University many times, China looks like it’s going to be the first country out of this global recession. Indeed, China is one of the few countries where I’m seeing true signs of “green shoots” right now.

And fortunately for Brazil, as China recovers, it has been buying up goods from countries around the world. China started ordering more goods from Brazil in February of this year. Ever since, Brazil’s economy has been improving.

In fact, in my opinion, China is the biggest contributor to Brazil’s recent increase in cashflow this month. Specifically, China is buying Brazil’s iron ore, airplanes, and even raw materials and agricultural products.

In short, Brazil is benefiting from China’s growth. And this is only the beginning. In the months to come, I see China buying even more of Brazil’s goods.

On top of that, Brazil also boasts a very wise central bank that has behaved prudently for the most part. With a strong central bank at the helm to control inflation and manage these cashflows, I expect great growth stories to come out of Brazil in the next few quarters.

This all will lead to significant strengthening of the Brazilian real.

How to Buy Into Brazil’s Strength

This Brazilian real story should continue to play out for several months, as the dollar continues to sink.

Indeed, that’s why I recently recommended our Currency Capitalist readers buy into Brazil’s strength with a long-term play that offers 6.5% APY interest. This long-term currency play also lets you invest in the Brazilian real indefinitely tax-free, until you’re ready to collect on your investment. Members, please check your recent issue for full details, if you haven’t already.

However, there is another strategy you can use to buy the Brazilian real for the long run. If you’re just looking for a quick and easy way to buy the real this afternoon, you can buy the WisdomTree Brazilian Real ETF (NYSE: BZF) right through your normal stock brokerage account.

There is very little on the horizon that will put a dent in Brazil’s growth story. Even if the Chinese growth story stalls a little and the Brazilian orders slow down a bit, the long-term growth prospects in Brazil are tremendously strong.

Bottom line: stay long Brazilian real and short U.S. dollar.

Yours in FX Profits,
Ashish Advani

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Could This Be the First Country to Emerge from the Recession?

Why You SHOULD Care What’s Happening in Latvia

(And How You Can Profit…)

By Ashish Advani Latvia’s currency is called the Lat (LVL) and in case you haven’t heard, the currency, and indeed the entire country are facing significant pressures these days.

With its external debt rising to 128% of GDP, Latvia’s problem was they drank a bit too much of the ‘cheap credit’ Kool-aid major countries were passing around the last few years.

While the current account has “turned around,” they are feeling the price of the adjustment not only in the real economy but in public finances. The budget deficit has thus spiraled out of control as budget revenues have collapsed.

The original IMF program had targeted a budget deficit of 4.9% of GDP. But to date, the budget performance is seriously lagging that estimate. That’s why officials originally requested that the IMF adjust this up to 7% of GDP. Now it appears the government is now targeting a deficit of over 9% of GDP.

Meanwhile forecasts warn of a deficit in excess of 11% of GDP.

This Could All Actually Be a Boon for the Country…

Latvia had adopted a fixed peg for its currency. This worked well when the going was good in the world economy. It was obvious to most that it was only a matter of time before the peg would come under pressure.

The real question now is whether the economy can grow under the current fixed exchange rate regime. The government had the support of the opposition for the currency peg. But now that a former prime minister is calling for a currency regime change and supporting the merits of devaluation, it is only a matter of time before the peg falls.

This is particularly important for the Swedish Banking system and the Swedish Krone. Sweden and its banking system has the largest exposure to Latvia and will feel the pain and embarrassment when Latvia devalues.

For Sweden, developments in the Baltics could prove embarrassing if the line is pushed and the Latvian real economy is in effect being sacrificed in the best interests of Sweden’s banks.

After all, a currency devaluation in Latvia, would see non-performing loans (NPLs) rise. But here’s the interesting thing: It would be Swedish banks, and not the Latvian government, which would be expected to pick up the tab on recapitalizing of local subsidiaries. That means Sweden will suffer.

Latvia’s entry into the Eurozone in 2012 is still on track. With the devaluation of the currency, it may actually prove to be a boon rather than the bane of Latvia.

Watch for the consequences of a Latvia Lat devaluation on the Swedish Krone.

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(World Currency Watch) How I Personally Choose My Next Winners in Forex…

Mirror, Mirror on the Wall, Who’s the “Best Looker” of Them All?

By Chuck Butler, Editor
www.worldcurrencywatch.com

Long-time readers know my affection for the surplus/positive balance of payment countries and their respective currencies. Well, Norway always drifts to the top of those discussions because of their impressive balance sheets.

But then last night I came across a report by the research team at HSBC that graded the currencies. Their pick for best currency? Norwegian krone! 

Let’s listen in to what the HSBC researchers are saying…

"The world is in total flux and, as such, we have released our new interim forecasts for the global economy today. Based on these numbers, which make depressing reading, we look at who comes out the best amongst the G10. We give all the variables an equal weight.

“We could have quite easily given CDS spreads a higher weight, which we believe is a key driver of the FX market at the present time, but even with equal weights the answer is still the same - Norway wins hands down.

“In addition, the Japanese yen and the Swiss franc are both losing their safe haven status and the best safe haven currency is the Norwegian krone. The Norwegian krone is our preferred G10 currency where we expect a sustained appreciation over the next 18 months."

So, my colors are already pinned to Norway's mast. This is simply a choice based on the country’s excellent fundamentals and booming surplus. It has been, and will continue to be, until something changes...

An Insider Look at the Original Surplus Country

By the way, I first wrote about the surplus countries being at the top of my currency list way back in 2006. And I wrote about how surplus countries looked to withstand this credit crunch back in October in my monthly newsletter, Currency Capitalist.

And which surplus country did I mention both times? Norway!

Here’s a snippet of what I told my Currency Capitalist members six months ago…

“Norway, with their North Sea Oil, has a very healthy balance sheet. In fact, it’s so healthy that policymakers are creating one of the most enviable pension plans on earth. They actually have enough money in this mega-pension fund to guarantee every citizen receives a pension — including the next generation of Norwegians who aren’t even born yet!

“Norway’s Central Bank…now takes their place among the world’s most influential central bankers and provides price stability and effectively fights inflation.”

Looking back today, a currency like the krone really needs the euro to be underpinned for the krone to outperform the single unit. So, all I'm really saying here is that the dollar isn't the "Best Looker" in the currency world right now. That claim to fame belongs to the Norwegian krone.

Another Icelandic Crisis: And Yet, the Krona Doesn’t Seem to Care

By Sean Hyman, Currency Analyst
www.worldcurrencywatch.com

As of yesterday, Iceland is facing an outright political crisis. (The Prime Minister was forced to resign in the aftermath of their financial crisis, and he doesn’t have a replacement.)

But strangely, the krona doesn’t seem to be responding to the added turmoil like it should. Let me explain…

The Krona Is Holding Its Own – Even Without a Prime Minister

Normally, all of that economic and political instability would be enough to cause the currency to go into a tailspin.

So why didn’t the currency sell off when the news broke that Iceland will live without a Prime Minister until May?

After all, Iceland’s economic crisis is far from over. The last time I wrote about Iceland, Iceland’s authorities were trying to secure a loan from the IMF, which is still pending. The IMF gave them certain stipulations before they would give Iceland any funding. The loan is up for revisions every three months and you can bet that the next guy in the prime minister office will likely try to work a revision.

However, with all of this going on, today traders are scratching their heads because the Icelandic krona is holding its own. In fact, any Forex trader who placed “sell short” orders for the krona yesterday were disappointed. (In the Forex market, you would short the krona by buying the USD/ISK pair.) The pair broke its uptrend the very same day!

Check out a daily, 1 year chart of the USD/ISK below. The panic in the krona coupled with the defensive play that the U.S. dollar was enjoying put a double whammy on the krona until Monday.

So let’s look at why the krona actually gained strength. You see, when the Prime Minister (Geir Haarde) resigned that day, the market got some hope that change could now come.

While currencies usually hate any major changes, it’s a bit different when those changes promise to fix a broken economy. In other words, Forex traders believe a new political situation in Iceland could actually help the economy. And the krona benefited from this belief.

All the Crisis Was Already Priced Into the Krona Anyway

See, everyone already knows about Iceland’s credit crisis, banking woes, etc., so all this bad news was already priced into the krona’s low price. So when the news broke yesterday that Iceland was facing a political crisis on top of everything else, nobody panicked.

In fact, it seems many traders took this as a sign of relief because it showed the markets that change can begin in Iceland.

Also, the fears are starting to calm down in the markets. When that happens, it will work against the U.S. dollar and benefit higher yielding currencies as money becomes a bit more risky and ventures back into currencies like the krona.

Now, I’ll readily admit that I wouldn’t be investing in the krona right now. I’d check into Norway’s currency or even Turkey’s currency before diving into this one. At least those currencies handled the credit crisis a bit better than the Icelandic krona.

But it’s important to note that many investors will eventually creep back into the krona at these beaten-down levels – especially now that IMF has given Iceland a loan. In fact, some are starting to tiptoe back in even now. That’s why the uptrend in the USD/ISK is likely broken.

Ask Yourself: “Does the Market Already Know About This Bad News?”

Iceland isn’t fully out of the woods yet. They still have to follow the guidelines of the IMF or they won’t receive their US$6 billion loan. Their credit rating hangs one notch above the level to lose “investment grade” status. So they’ve got to be careful here.

One thing that you always have to ask yourself about a currency is, “Does the market already know what’s happening to this currency and if so, has it had time to discount it and factor it in?” If not, then the market will most likely react to the new information.

So I’ll admit that a country without a political leader would usually kill a currency’s value. But Iceland is a special case right now. This soap-opera currency has endured so much already, that a new political situation is actually helping.

Iceland’s usual political situation leaves the door open for new thinking to come into that country and possibly help Iceland’s currency and economy. And that’s why the currency didn’t collapse when this latest crisis hit the news. 

Best Regards,
Sean

One Country Managed to Default on $3.9 Billion in Bonds

By Sean Hyman, Currency Analyst
www.worldcurrencywatch.com

If you want to talk about cautionary tales, you have to start in Ecuador.

Currently Ecuador uses the U.S. dollar for their currency. But even with the dollar’s strength in the second half of 2008, Ecuador is still facing major economic problems (kind of like the U.S.).

Ecuador just defaulted on US$3.9 billion of international bonds. Not only is this bad for all of their international creditors but it also may cut off their access to U.S. dollars. If they can’t secure U.S. dollars to buy what they need, then they are going to have troubles providing credit to their economy.

This means they may have no choice but to abandon using dollars altogether. If so, it’s going to get much worse for Ecuador before it gets better.

Not to mention, oil is one of Ecuador’s main store of wealth. Even now, their oil revenues are drying up as the price hovers around US$38 a barrel. The problem? They need US$95 a barrel oil to cover their budget! Oops! A bit of a miscalculation there on their part I’d say.

Bet You’ve Never Heard of This Currency…

Not familiar with hryvnia? If so, you’re not alone. It’s one of the more obscure currencies trading in the world today.

The hryvnia is Ukraine’s currency, and it just took a nosedive. In the last two days, Ukraine’s currency plunged 17%. And even though Ukraine’s President pledged to support the currency, it fell to an all-time lows versus the U.S. dollar.

You can check out the Bloomberg story if you want to read more on how the International Monetary Fund tried bailing out Ukraine, or how Ukrainian credit is currently the third most risky in the world behind Argentina and Ecuador.

You can also hear all about how Ukraine’s President is forcing the central bank to crack down on Forex speculators.

But what is most important to take from this is Ukrainian credit is hugely at risk of default (sounds familiar right?). And a swooning currency makes domestic loans denominated in other currencies that much more expensive to afford.

Why Bother Watching Ukraine – or Ecuador?

This whole story reminds me of Ecuador. Recently, Ecuador officials admitted they couldn’t break even on large amounts of debt, and now Ukraine is walking a similarly ominous line.

So why is this important? Why should you care what’s happening in Ukraine right now – or Ecuador for that matter? (Much less what’s happening with their currencies?)

Well, these two examples highlight a good part of what’s shifting in this global economy. This tells me that things will probably get worse in emerging economies still before they get better.