Buy Anything!
By Mike Conlon | November 23, 2009
From Bloomberg:
Nov. 23 (Bloomberg) — The dollar fell the most in two weeks against the euro after President James Bullard of the Federal Reserve Bank of St. Louis said policy makers should keep stimulus measures in place beyond March.
“It’s probably been weighing on the dollar,” said Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG. “It’s another sign that they’re trying to go slowly on this.”
The U.S. currency slid against almost all of its 16 major counterparts as Bullard said in New York yesterday that the central bank should extend its purchases of mortgage-backed securities to give the Fed “the option to react to future news.” The yen and dollar weakened against currencies led by the South African rand and New Zealand dollar as commodities and stocks advanced, spurring demand for higher-yielding assets.
So in a nutshell– the Fed plans to encourage inflation by keeping rates so low that it no longer makes sense to hold dollars and you’d be better off invested in just about anything else.
So the risk-taking trade is on the table to today, with the USD down against all major currencies. Also to note is that gold made a new high and that for the first time in 7 DECADES, US Treasury Bills have NO yield and are paying NO interest.
Yikes. So expect the path to US dollar destruction to speed up as investors seek out higher yields.
To learn more about how to protect your wealth and take advantage of the this disturbing trend, check out our currency trading courses.
To get set up with a free, real-time practice account, click here.
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Topics: What To Look At In The Market | 1 Comment »
Vexed by the Vix!
By Mike Conlon | October 14, 2009
Market Shows Little Fear. Time to Be Worried?
The CBOE Volatility Index, otherwise known as “the Vix”, is commonly referred to as the fear index as it measures the market’s expectation of volatility using S&P 500 index options. Generally speaking, the value of the Vix at any given moment is the amount that the market thinks the S&P 500 can rise or fall over the next 30 days.
While the Vix (VXX, VXZ) can measure uncertainty over market gains or losses, it is typically associated with bear markets, as investor psychology tends to worsen when the market is falling as opposed to rising. To see proof of this, look no further back to October of 2008 when the stock markets were collapsing during the height of the credit crisis. It was at that point that the Vix reached its highest levels by far, and justifiably so.
Since that time, the equities markets have rebounded from their March lows, and the Vix has returned “to earth” from its stratospheric levels of last October. But has it come back too far? Is this Vix telling us that we’ve now returned to reasonable levels of uncertainty, and that market conditions have stabilized? (click chart to enlarge)
There are two major reasons why the equity market should be more “fearful” than it is right now.
“Strong Dollar Policy”. In what has become somewhat of a running joke, the Fed’s stance that the U.S. has a strong dollar policy despite having record low interest rates, quantitative easing programs which probably should show negative interest rates were it possible, and ballooning deficits is the greatest threat to market stability.
This joke might actually be funny, were it not so serious. Increased calls from China, Russia, et al. for a new world reserve currency haven’t phased Bernanke in the least. Should you be worried when the equity markets don’t appear to be? Absolutely. Especially when you see headlines like this one.
One of the reasons why the equity markets seem to be shrugging off this news is because a weak dollar has been good for the equity and commodity markets. A quick look at this chart shows the inverse correlation between the US dollar (UUP) and the S&P 500 Index (SPY). (click chart to enlarge)
So as long as Bernanke keeps on printing dollars, the markets should continue to go up, right?
Wrong. Should the major holders of US dollars abroad (China)get Fed Up (pun intended) start dumping dollars and the dollar loses its status as the world’s reserve currency, tangible assets and physical goods and commodities will benefit in what would become a hyper-inflationary environment. Would you want to own shares in a US company, which trades in dollars? Me neither.
While this scenario is highly unlikely, the only way to prevent this from happening is for the Fed to raise interest rates. And while they are loathe to do so in the face of rising unemployment, pretty soon the tactic of jaw-boning of the dollar higher will no longer work and they will not be able to control the massive sell-off. This leads to the second scenario which should cause fear in the equity markets.
A rising interest rate environment. It is become apparent that Bernanke is running out of time and there are too many holes in the dam for him to plug. To think that he is going to be able to control inflation and dollar devaluation when he does decide it matters by raising interest rates 25 bp at a clip is naïve. Once the ball gets rolling, he will have to take drastic action and this could mean major rate hikes. Thus we would see a move out of equities and into bonds, which could also derail the gains in the stock market and could push us towards the dreaded ‘W’ market recovery.
Either way you slice it; these are two “doomsday” scenarios which could have major negative implications for the stock market. Investors and traders alike will have short memories this time and rush for the door at the first sign of panic, which will in turn help move the market lower.
This brings me back to the current level of the Vix, which is sitting somewhere around 22.5 at the time of this writing. If the high of the Vix reading was 89.53 last October, then shouldn’t it be higher considering all of the negative factors facing the market?
Yep I thought so too.
To learn more about the correlations between the US dollar and the equities markets, be sure to check out our currency trading courses.
Already know how the game works but want to practice in a live, consequence-free environment? Click here for a free demo account.
Tags: account, blog, commodities, currency, demo, dollar, dow, fed, forex, forextrading, fx, fxedu, index, interest, interest rate, interest rates, invest, market, Mike Conlon, pair, practice, ssi, time, trade, trader, trades, U.S., Yen
Topics: What To Look At In The Market | 1 Comment »
Nothing Safe About the US Dollar!
By Mike Conlon | September 9, 2009
A lot is made about the safe-haven status of the US dollar and the inverse correlation it has with stocks and commodities. When the economy is seemingly doing well, risk-takers look to sell dollars and buy higher-yielding, riskier currencies to earn interest. This is more commonly known as a “carry trade” and I described it in an article last week.
The carry trade is a very easy way to make money and it was formerly only available to sophisticated investors. Now, you can participate from the privacy of your own home! The basic premise behind the carry trade is that you want to borrow a low-yielding currency and invest in a higher-yielding currency. You make the difference in interest. Sounds better than putting your cash in a bank savings account, doesn’t it?
*Do you know what one of the lowest yielding currencies is right now? That’s right, it’s the US dollar!
And this is likely to continue for some time. If the dollar is going to continue to decline, it doesn’t sound very safe at all, does it? Here are a few reasons why the dollar decline will continue and why you should be concerned.
1. The United Nations at their most recent meeting asserts the role of the US dollar should be reduced as the world’s reserve currency. While this is “nothing new”, this time it may be different. If the dollar continues to fall then alternate solutions may be sought.
2. The Chinese are now “alarmed” at U.S. money printing. This may cause them to take alternate forms of action and could lead to them not only not purchasing future US debt, but actually selling out of the dollar. This could trigger a massive sell-off in the dollar as the Chinese are one of the largest holders of US dollars.
3. The US Fed and Bernanke are going to keep interest rates artificially low for as long as it takes for the economy to recover. While analysts can make projections about when this might be, it could be a very long time before we recover. This will lead to inflation, which could put a damper on the recovery if the Fed is forced to raise interest rates. This would send the housing market into further decline so at this point they are extremely reluctant to do so.
So how do you protect yourself from this game of chicken the Fed and the government have put us on?
Learn about the currency markets! Diversify away from the dollar! Because the only way that the dollar is going to “do well” in the near future is if everything else does extremely poorly.
Now that doesn’t sound very safe at all, does it?
To learn more about the currency markets and how you can protect yourself from dollar deterioration and rising inflation, check out our affordable currency course here.
And at the very least be sure to also get yourself set-up for a free, real-time practice account. You owe it to yourself to at least see how easy it is to get started!
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Here’s what makes the Carry Trade so great!
By Sean Hyman | August 13, 2009
Many people don’t really get the “carry trade” strategy and why it’s so great. Their focus is on the daily interest and they don’t see themselves getting rich off of the daily interest. However, that’s only ONE of the reasons why traders get into the carry trade.
Think of a carry trade this way. Let’s say you have two banks in the same town. Bank A will offer you 3% in a savings account while Bank B will only offer you 1/2 of 1% (0.50%). Which one are you going to deposit money into?
Now, if you were a betting man or woman…which bank would you bet on having the most “inflows” of deposits? Of course, Bank A…because people aren’t idiots and want to earn the most they can on their money.
Well while the carry trade isn’t a “savings account” by any means…it works off of a similar principle.
Traders and investors alike want to earn the most that they can on their money. After all, the interest earned is the closest thing to a guarantee as you’ll get. So investors look out in the “investing arena” and look to see who has high interest rates when compared to others.
It’s no surprise that investors from all over the world pile into the same, few high yielding currencies.
Look at the chart below and you will see what investors all over the world are looking at. Now which currencies would you look into first? The U.S., Japan?….or Australia and New Zealand? Of course, the latter. Why? Because your mama didn’t raise a dummy and you want to get the highest interest rate possible on your money. Click on the charts below to enlarge them.
Guess what? So does everyone else out there in the world. So it’s no surprise that money flows away from the U.S. and Japan right now and into Australia and New Zealand. They’re moving their money from “low yields” to “high yields”.
So now that we can predict the “long term” flow of money…why not jump in the line now and allow all of the other future buyers of Aussie and New Zealand dollars push up our positions in these same currencies over time.
So if I buy any of these (as of the time of this writing): AUD/USD, AUD/JPY, NZD/USD or NZD/JPY then I can enjoy BOTH the money flow AWAY from the U.S. and Japan and the money flow INTO Australia and New Zealand. By capturing both dynamics…my positions ratchet higher over time WHILE at the same time, I’m earning DAILY interest while I wait for further appreciation in the pair.
When this strategy works: This strategy works when the global economy is coming out of a recession (past the trough of the recession) and in expansionary times when countries are doing good economically.
When the strategy doesn’t work: This strategy doesn’t work when the global economy is about to go into a recession (or for that matter, usually even when it’s just the U.S. going into a recession).
Since expansionary times last longer than recessionary times, the strategy works, more times than not.
When it’s not working….guess what? Short these pairs and you can make money that way.
Sean Hyman
Tags: account, AUD, Aussie, blog, currencies, dollar, economy, forex, forextrading, Hyman, interest, interest rate, interest rates, invest, investor, jpy, money, nzd, pair, recession, Sean, Sean Hyman, ssi, time, trade, trader, U.S., USD
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Dollar’s rally is just about to run out of steam!
By Sean Hyman | August 12, 2009
Even bear markets have rallies. But why would I refer to the dollar’s recent rally as a “bear market rally” and not a rally into a “new trend”? Because there is no technical indication that has surfaced to think otherwise. Click on the chart below to enlarge it.
Several things worth noting on that chart of the U.S. Dollar Index:
The pair is still downtrending as shown by it trading below BOTH the 50 and 200 Simple Moving Averages. Also, the MACD lines are below the zero line (red boxed area) and the Slow Stochastics are just about to go into the “overbought” territory once again as the dollar approaches its 50 day SMA resistance area.
There’s an old Wall St. saying….”trade the trend until it ends”. However, do realize that there are rallies in every bear market (downtrend). These are to be expected. After all, they usually can’t go “straight down”. Therefore, upward corrections are involved…much like the pull backs that happen within an uptrend.
Therefore, there’s no reason to see this as any other thing unless this technical picture changes. So far it has not. So I’ll stick with the trend “until it ends”.
That means, it’s probably better to be a buyer of strong currencies as these dollar rallies happen and start to roll over once again. Two of the top “strong currencies” right now are NZD and AUD…so being a buyer of NZD/USD and AUD/USD after these dollar rallies (which cause pull backs in these pairs) is to be favored until such time that there’s an actual re-emergence of a “dollar uptrend” which I think is a long ways off.
Sean Hyman
www.forextradingblog.com
Tags: AUD, blog, currencies, dollar, dow, downtrend, forex, forextrading, Hyman, index, market, nzd, pair, pairs, Sean, Sean Hyman, time, trade, U.S., uptrend, USD
Topics: What To Look At In The Market | 1 Comment »
Don’t be fooled by Friday’s “dollar rally”!
By Sean Hyman | August 9, 2009
The U.S. dollar got a nice “pop” on Friday as a better-than-expected NFP (employment) report came out. However, I call this a “sucker rally” because the dollar’s broad trend has been downward since March (according to the U.S. Dollar Index chart).
Therefore, since the probabilities lie on the side of the trend, it’s best to short the dollar on rallies upward by buying foreign currencies against it: AUD/USD, GBP/USD and NZD/USD being some of the top candidates in my opinion due to them leading the way in their yearly inflation figures. These are likely the countries to have to raise interest rates first and that will only drive more money away from the buck and into these other foreign currencies (which helps the buyers of these pairs).
Another factor that really doesn’t work in the dollar’s favor is the global recovery that’s underway right now. You see, the dollar only ran up when the “sky was falling”. But now that financial markets are stabilizing, that works against the green back and not for it. It does however, work in the favor of currencies that have higher inflation in their economies (vs. the deflationary numbers in the U.S) and it also works in the favor of the higher yielding currencies.
The deflationary Japanese economy is really causing money to pour out of the yen and into these currencies as well, which bodes well for: AUD/JPY, GBP/JPY and NZD/JPY over time.
So keep these pairs on your radar screen. It doesn’t mean that any moment of any day is the time to buy them…but it does mean that they are “fundamentally supported” the most and therefore should be your “top candidates” to consider as your technical entry set-ups occur.
Sean Hyman
www.forextradingblog.com
Tags: AUD, blog, currencies, dollar, dow, economy, forex, forextrading, fundamental, gbp, Hyman, index, interest, interest rate, interest rates, jpy, market, money, nzd, pair, Sean, Sean Hyman, technical, time, trend, U.S., USD, Yen
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Canada’s central bank is “smoking something”!
By Sean Hyman | August 6, 2009
Well, “intervention talk” is in the air again! This time it’s the Bank of Canada!
Why are they so concerned with their currency? Well the USD/CAD exchange rate has dropped from 1.30 to 1.07 (2,700 pips) in mere months (5 months to be exact).
This can wreak havoc upon a company that is trying to figure out how to hedge their currency exposure so that it doesn’t eat into the profits of their business…and the central bank realizes this too.
That’s why Central Bank Governor Carney, together with Finance Minister Flaherty are coming together to attempt to “jaw bone” the currency lower (in other words bring the USD/CAD exchange rate higher).
Canada’s Fed Governor has stated that the gain in the currency is a major risk to economic growth…adding that “he has the flexibility to deal with it”. The Finance Minister backed him up by saying “steps could be taken to dampen the (Canadian) dollar”.
Governor Carney is attempting to lessen the appeal of the loonie by stating that interest rates are likely to remain unchanged through at least the 2nd quarter of 2010.
You see, when you are a Canadian company and you’re trying to hedge against currency fluctuations of 5-10% in a short amount of time, it’s tough. (They really need my services. Hehe!)
Canada’s factory orders have been hit (down 29% since last July) as a result of the strengthening currency. That couldn’t come at a worse time because at the same time you’ve had General Motors and Chrysler shut down Canadian plants, dealers and parts suppliers. Manufacturers have had to fire 221,500 workers as a result.
Couldn’t they intervene? History says they won’t…and if they did, it will backfire!
So the central bank wants a lower Canadian dollar to make it easier on these crucial companies. Will they get it? NO! Oh sure, they may be able to influence the USD/CAD up 300-500 pips…but what is that when the pair has moved 2,700 pips downward and will continue that downtrend?
You see, traders know that the global economy is “on the mend” and as it is recovering, it will consume more oil and other commodities that Canada exports. They also know that the U.S. dollar has been in a broad downtrend since March (according to the U.S. Dollar Index). This broad U.S. dollar sell off isn’t going to change just because the Canadian central bank wants it to.
Oh yeah, but they could go in and “sell Canadian dollars” right? Sure they could…but, it would not be effective and the foreign exchange market would simply laugh at them with the trend and fundamentals going in the favor of the traders and against that of the bank.
Also, traders know that there’s a good chance that the bank is bluffing too. Why? The central bank has abandoned intervention policies ever since 1998. They didn’t intervene when the currency reached a record high in 2007 and or when it’s had its biggest gain since the Korean War during May.
Therefore, there are a ton of years there that the bank did nothing when the currency moved to extremes. So they have no reason to believe that it will be any different this time.
Most of the time, they just “jaw bone” the currency by talking about what they “could” do. However, when push comes to shove, they usually don’t anymore.
They stopped intervening in 1998 because it simply ended up causing even more volatility and ended up making it even more difficult for their exporters to hedge their risks.
If they “talk the pair up”, short the rallies!
Therefore, here’s how I see this playing out on the chart below. Sure, they may “talk the currency up” a few hundred pips or more in the near term. It could happen. However, smart traders are “selling rallies” in the USD/CAD pair because the trend is down and the fundamentals overall, are on the mend. Therefore any bounce upward, is likely to result in another big push downward.
So “shorting rallies” is the flavor of the day, these days.Click on the chart below to enlarge it.
Sean Hyman
www.forextradingblog.com
Tags: blog, cad, commodities, currency, dollar, dow, fed, forextrading, fundamental, fx, Hyman, interest, interest rate, interest rates, lower, market, pips, Sean, Sean Hyman, time, trade, trader, trend, U.S., USD
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How much influence does a government really have over its currency?
By Sean Hyman | August 4, 2009
I’m often asked…”How much influence does a government really have over its currency?”
I say, it has tons to do with it. A government really “sets the tone” for its currency in many respects.
How so? Here are seven major ways that I believe a government greatly influences its currency.
7 Ways a Government Influences its Currency!
They set the tone by the policies that they set. Ex. Sarbanes-Oxley has driven money away from the
They set the tone by what they do with their printing presses. If a government resists the temptation to print tons of money, then it will retain its value. If it “waters it down” by printing tons of it, then it erodes the value of it away.
If it encourages “money inflows” into its country through making products that the outside world wants, it ensures inflows into its currency. If it is a country that is heavily involved mainly in the services sectors and itself is a net importer of goods, then there’s huge likelihood that they are setting their currency up for a fall. This is exactly what we have in the
If a nation stores up monetary surpluses, it provides a better sentiment for investors and causes “inflows” of money very easily. However, if the country has blossoming deficits, it discourages money flows into the country and actually scares some of it away and prevents other “new money” that would like to enter that country from entering due to them being so worried about their ability to repay their debts. Again, a problem of the
The ability of investors to trust a government is another huge one. There is a ton of potential money that COULD go into
What a country does with their interest rates has a HUGE effect upon inflows and outflows in a currency. If interest rates are high and headed higher, it generally encourages money to it as investors seek higher yields on their money. However, if a country holds their rates unusually low, then they’re encouraging outflows. Examples of this right now are the
Governments that are “tax friendly” to residents and especially to corporations are likely to see more inflows than those who aren’t. This is why so many companies are moving away from the
These are seven huge areas that come to mind where a government plays a huge role in influencing their currency, whether they realize it or not…and many times they don’t (because they’re politicians and not savvy investors!
Sean Hyman
Tags: canada, China, commodities, currencies, currency, dollar, dow, EUR, Europe, financial, fx, Hyman, interest, interest rate, investor, Japan, market, money, new zealand, Sean, Sean Hyman, sentiment, ssi, stock, U.S.
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Oil rises above $71 from the $62 area just days ago!
By Sean Hyman | August 3, 2009
Last week we had a huge gain in oil inventories. Now, in theory, that should have held oil lower. However, in reality, the reverse happened.
This tells me that traders are looking to the improvement in GDP numbers lately (particularly that of the U.S.) and how it will effect the demand that’s placed on oil supplies as economies start to actually grow once again (rather than contract).
This has pushed USD/CAD past through what some had thought would be a double bottom. In some of my writings, I’d been cautioning against that thought of a bottom because the fundamentals of many countries have been improving for 3-4 months running now.
So one has to ask themselves…if things are improving and the likelihood for a “return to growth” is around the corner, then what should that do to oil? It should take it higher. Well, that’s bad for the U.S. dollar and at the same time, good for the Canadian dollar since Canada exports tons of oil.
It’s bad for the U.S. dollar because oil is priced in dollars and the two (over time) tend to head in opposite directions. The U.S. Dollar Index has been diving ever since March and its trend is (and has been) downward since then. That trend is unlikely to change.
Therefore, after “dollar rallies” start to fade, they should be shorted (in my opinion) since the main “dollar trend” is downward.
This will likely take USD/CAD back to parity (1.0000) sooner rather than later. It wouldn’t surprise me if we see this reached in the coming weeks to month or two maximum. Click on the chart below to enlarge it.
Don’t try to “catch a falling knife”. Counter trend traders are the food for trend traders. Don’t get caught up in being a counter trend trader and therefore placing the odds against you. Become a “trend trader” and place the odds in your favor.
Sean Hyman
www.forextradingblog.com
Tags: blog, cad, canada, dollar, dow, forex, forextrading, fundamental, Hyman, lower, oil, Sean, Sean Hyman, short, time, trade, trader, trend, U.S., USD
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AUD/USD broke higher as expected!
By Sean Hyman | July 28, 2009
AUD/USD broke higher as expected. It’s superior fundamentals have continued to cause it to head higher, especially when directly compared to the weak fundamentals of the U.S. and its dollar.
See the comments from RBA Governor Stevens below:
Reserve Bank of Australia Governor Glenn Stevens struck a decidedly hawkish tone at a speech in Sydney, driving home the point that going forward the central bank is now actively trying to time a return to higher interest rates. Stevens said Australia is faring better through the global downturn than other developed economies, noting that “confidence has recovered ground” and boasting that “unemployment is rising slower than expected”. He went on to stress that central banks should not relax their commitment to keep inflation anchored through the recession, a clear hint that global tightening of monetary policy should now be on the table. That said, Stevens conceded that some stimulus needs to remain in place for now and conceded that the timing of unwinding expansionary policy presents a challenge. The market greeted the RBA chief’s comments, with the Australian Dollar surging 50 pips in a mere 30 minutes.
EUR/CHF continues its overall ascent, as expected. The SNB continues to hold the pair above 1.52 and its only a matter of time before we see the high 1.53’s. Keep in mind too, that through our broker, you do earn some interest on this on a daily basis too (on their standard mini accounts). Not all have this on this pair right now.
Sean Hyman
www.forextradingblog.com
Tags: account, AUD, blog, central bank, CHF, dollar, dow, EUR, forex, forextrading, fundamental, home, Hyman, interest, lower, market, pair, pip, pips, rate, recession, Sean, Sean Hyman, ssi, time, U.S., unemployment, USD
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