World Currency Watch: FOREX Market, FOREX Trading BLOG

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

The Euro gets ready to diverge away from the New Zealand and the Aussie dollars!

Lately the euro has been tracking the New Zealand and Aussie dollars. You can see this from the charts below. The EUR/NZD on the left and the EUR/AUD on the right have been range bound as none of these currencies seem to get a leg up on one another.

However, that's about to change. These currency pairs are coiling up into a symmetrical triangle pattern. In fact, the EUR/NZD has already broken to the downside. The EUR/AUD may head the same way but that remains to be seen yet.

As these pairs break out, there will be significant moves which means there's a significant room for a huge profit to be made.

This will also show you which currencies end up being the strongest when trading the "majors" related to these pairs (EUR/USD, AUD/USD and NZD/USD). The one that ends up being the strongest is the one that you'd want to be long against the dollar.

However, in the mean time, these crosses are going to produce some huge profits as traders hop on board. These pairs will move hundreds of pips in a relatively short amount of time. That could be in a matter of hours to a maximum of two or three days I'd think.

Someone is about to win this tug of war. Shortly you'll find out. It may be the "commodity crosses" that team up on the euro.

So get ready and watch for the break on EUR/AUD and get poised into the EUR/NZD which has already broken to the downside. EUR/NZD could target 1.8800. That would be huge...but that's where the triangle's targets are pointing to.

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

The New Zealand dollar is poised to break higher as the "risk appetite" returns to the market!

The New Zealand dollar gets ready to head higher based off of two concepts:

1. The risk appetite has returned to the markets after the U.S. Fed announcement yesterday. The market sees that the U.S. Fed, along with central banks all over the world, are trying "collectively" to crush the credit crunch problem and jump start the financial markets again. The New Zealand dollar is "king of the carry" because it earns such a high interest rate in its country.

2. The U.S. Fed is most likely going to lower rates some 50 to 75 basis points this next week. This will widen the interest rate differential between the two countries in the favor of New Zealand. So this means that NZD/USD traders will soon be earning more daily interest than they have in a long time. That's a huge thing and will put some support under the NZD/USD.

Here's an extra "bonus" thought for you technicians out there. The Hourly chart has a "bullish flag" formation that just formed. So when this pair breaks above the black lines in the chart below, it should head to the higher target minimally (horizontal black line).

New Zealand gets ready to enjoy the stock market
bounce and lower U.S. interest rates.

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