Currency Diversification & FOREX Trading

  The articles below originally appeared in our montly newsletter, The Sovereign Individual and will give you some of the basics.  You can learn more about the Currency Market in The Sovereign Individual each month by becoming a member of The Sovereign Society. Click here for details on membership.

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• Why You Should Stock Up on the Beleaguered Buck Just Ahead of This Year's Rally - by Jack Crooks
• A Whopping 66% of Forex Brokers Will Close Their Doors This Month - How to Keep Your Account Safe and Protected - by Sean Hyman
• Booming Commodities Leave Their Footprints on a Few, Fortunate Currencies - by Sean Hyman
• Jump into the Currency Markets and Profit from Futher Global Risk with this One Easy Trade - by Jack Crooks
• The Currency Revolution - by Jack Crooks

Why You Should Stock Up on the Beleaguered Buck
Just Ahead of This Year’s Rally

I’d venture to guess that one of the top five global macro themes among investors last year must have been: “Global economic growth no longer depends on the U.S. economy.” After all, how else could you explain investors’ behavior across the various asset classes and markets?

For starters, China won’t stop gobbling up natural resources. China’s new energy habits are pumping life into both developed and emerging markets where China does its buying. And speaking of buying, expansion across Europe bolstered regional demand for Chinese goods.

In the first 11 months of 2007, we watched as the euro rose to record levels, the British pound shot past the US$2 mark and the Canadian dollar sailed beyond dollar-parity because investors are so optimistic about the global economy.

And when it comes to the U.S. economy and the U.S. dollar, the glass is half-empty at best. Price action among all currencies point to the fact the global economy will decouple from America’s economy.

But I see two scenarios set to paint the decoupling theory as either fact or fiction…

Scenario #1: Uh Oh. Recession Time for the U.S. [click here to continue reading]

A Whopping 66% of Forex Brokers Will Close Their Doors This Month: How to Keep Your Forex Account Safe and Protected

By Sean Hyman

The retail forex industry is still in its infancy. It’s only been open to the public since 1998. Many of the largest foreign-exchange firms just opened their doors around 2001.

In the early days, you didn’t need much capital to set up a forex shop and become a forex dealer. However, those days are quickly changing.

Starting this month, U.S. forex dealers will have to meet certain requirements to stay in business. The NFA (National Futures Association) is raising the capital requirements for these U.S.- based firms. According to the new rules, all forex dealers must have US$5 million in “net excess capital” to keep their firms open.

Now, for large forex firms, this won’t be an issue. However, only about 1/3 of the 30 forex dealers in the U.S. are expected to make the cut. In other words, roughly 66% of forex brokers will be forced to close their doors when these rules go into effect later this month.

With these new regulations, many brokers will be scrambling to get more capital on their books so they can remain open. If they can’t meet the newest capital reserves required by their regulators, then they’ll have to close their doors. Many are so small that this will be the case. These new regulatory requirements go into effect Dec. 21st!

So What Can You Do if You Already Have an Account?

1. Check out your broker on this public site to see how much they have in “net excess.” Don’t rely on them to tell you. See for yourself by visiting [click here to continue reading]

Booming Commodities Leaver Their Footprints on a Few, Fortunate Currencies

by Sean Hyman

We haven’t seen a commodity rally like this in years.

Just this fall, we watched as oil climbed above an all-time high of US$83 a barrel. Gold topped US$751 an ounce — the highest it’s been in nearly 30 years. Agricultural commodities and livestock prices soared.

This commodities boom has boosted several of the world’s biggest commodity exporting countries. It’s carried these respective currencies into territories not seen in nearly 30 years. We’re living in amazing times. Just look at what commodities have done overall just this fall. The moves have been parabolic.

The Who’s Who of Gold Miners

As I said, gold recently traded over US$751 an ounce for the first time in nearly 30 years.
Australia is the world’s second-largest miner of gold. So of course, the Aussies love this gold boom. They’re pulling gold out of the ground at their usual fixed price. But their profit margins are soaring as gold continues its steep ascent. So you can imagine what this has done for Australia’s economy. No wonder Australia’s job reports and retail sales have been so strong.

Fortunately for Australia, inflation has also been very high. This has forced the Reserve
Bank of Australia to raise interest rates many times this past year. They’re expected to hike
rates further in the near future. In fact, some economists are saying that a rate hike could
come as soon as November. Since inflation continues to increase, it can’t be ignored. It has to
be tamed. How do you tame inflation? By raising interest rates.

So here’s a question for you. Where would you rather send your money?

1. To a low interest country that is either holding at the same interest rate or possibly cutting interest rates.
2. To a country that has raised rates many times this year and there’s a good likelihood that it will continue.

I can tell you, I’d pick door number two.

This is why money is “attracted” to a country with high interest rates, especially when those
rates are anticipated to go even higher. On top of this, their economy has been very sound.
Their exports have been “blessed” by the extra boost that rising gold prices have given them.

In fact, this may be one of the only major currencies of the world that still has near-term interest rate hikes left to come. So of course, money is flowing into the Aussie, which you can see in the chart on page 3 of the AUD/USD yearly chart. These fresh, yearly highs have not been seen 1982. This is undoubtedly the strongest of all the commodity currencies.

The Wind Beneath the Loonie’s Wings

Oil has been another high flyer. Oil recently hit an ALL-TIME HIGH of over US$83 a barrel. Can you imagine that you’re living in a time when there’s never been a higher oil price? In just the last two months, oil has jumped over US$14 a barrel.

With this in mind, it’s good to know that Canada is a major oil exporter to the world. So of course, the Canadian dollar has been a great beneficiary of this huge run up in oil prices. They are pumping it out of the ground at a fixed price, but what they can sell it for keeps going up as oil trades higher. These huge profits and demand on their oil supplies has bolstered their employment, lowered their unemployment rate further and has increased their inflation overall.

Rising rates and a growing economy have taken the Canadian dollar (“loonie”) to OVER 30-year-highs now. This has catapulted it against the dollar so severely that one U.S. dollar doesn’t even buy you one Canadian dollar anymore.

There’s no doubt that the strength of the loonie is bringing down the U.S. dollar. The question is:
When will the dollar bottom?

The oil problem won’t be fixed tomorrow or this year or the next. More drivers are on the road literally every day, and there hasn’t been a major oil discovery since the 1970s. So there’s a huge fundamental problem that Canadians will be able to exploit for quite some time.

Also, until the U.S. economy turns around, there’s little likelihood that it can put up a good fight against the strength of the Canadian economy and thus the rising loonie.

So given the long-term fundamentals, you should NOT “go long” (buy) the USD/CAD pair. You shouldn’t be trading your bucks for loonies. Instead, you should be looking elsewhere. Even if you’re a dollar bull, you should still pick a very weak currency to trade against the dollar and not a currency with the ferocious strength of the CAD.

Where the Aussie Money Flows…

Agriculture and livestock prices have been rising overall too.

So what currency benefits from rising agricultural and livestock prices? Who is a major exporter of these commodities? The answer: The New Zealand dollar.

For starters, Australia is New Zealand’s biggest trading partner. If you’re doing as well as
Australia is, you can certainly buy what you need and then some.

Australians get most of their goods (like fruits, vegetables, livestock, etc.) from New Zealand.
This alone is a great boost for the New Zealand dollar. The rising prices in agricultural commodities and livestock have also helped their exports.

They are raising crops, sheep and cattle and they can demand a much higher price for them as these commodities trade ever higher. So the New Zealanders’ wallets are growing. They now
have extra money to buy goods. And the consumers are shopping more than they have in years.

This, in turn, has caused inflation to get way out of hand. Therefore, the Reserve Bank of New
Zealand has been forced to raise interest rates to uncomfortably high levels in order to get inflation under control.

This attracts money to a country as investors seek higher yields than they can find in their home country.

For instance, the Japanese only get about one-half percent on their money. You can see where they’d be inclined to convert into Aussie or New Zealand dollars and gain 6.50-8.25% interest.

There’s a huge incentive there. Since these rates are higher than that of many other countries,
there’s been an influx of money coming into these currencies which drive them up even higher.

How to Buy into the “Com-Dollars” with a Single Play

As you can see, there are big macro themes playing out here that are going to infuse both the Aussie and the New Zealand dollar. Now you can buy both of them with the [click here to continue reading]

Sean Hyman now serves as The Sovereign Society’s Currency Director. Over the last 15 years, Sean has worked as a stockbroker, manager, trader and writer. He’s also worked as one of FXCM’s
Power Course Instructors, teaching retail traders about currency trading.

Jump into the Currency Markets and Profit from Further Global Risk with this One Easy Trade

By Jack Crooks

By the looks of it, industry insiders are becoming more and more aware of what really drives global markets — foreign exchange. As the global economy grows stronger, countries become more tightly linked to one another. And that link is based entirely around money changing hands — or, in other words, foreign exchange. The volatile way in which financial markets around the world have been behaving lately can be chalked up to bad loans and collapsing credit. A key driver behind the seemingly unlimited availability of money is once again, foreign exchange.

How bad is the situation in the U.S. financial system? Well let’s put it this way: Jeopardy, the popular TV quiz show, is about the only place you could make money by taking shares of the United States.

I’ll Take ‘Shares of United States’ for US$500, Alex.

The appeal of the U.S. is fading fast. At the end of last year, the fundamental backdrop for the U.S. included depressing figures like:

• Trade deficit of US$765.3 billion
• Current account deficit of US$856.7 billion (a not-so-small 6.5% of GDP)
• A gross national debt of US$8.5 TRILLION and still rising
• Exploding supply of money and credit

It’s now October. The year is winding down, and the situation doesn’t seem to be getting any better. So like most analysts, you may be asking yourself: What’s going to happen next, especially if you think that shares of the U.S. don’t really exist?

Well, in a way, they do exist, and you can capture these “shares” by investing in the U.S. dollar.

Think of a country’s currency as simply a share of stock in that country, with values fluctuating depending on the perceived investment potential of that country. Targeting the fundamentals is the same whether you’re trading shares of a company or currency of a country.

So as an investor, do you usually look to buy companies with pathetic earnings? Do you want the companies that are drowning in their own debts or can’t keep their books in the black? No, of course not. You want companies that have control of their balance sheets and have growth potential.

Same goes for the currency markets. Trades are made depending on how investors perceive a country’s fiscal and economic health. Countries whose economies are very promising attract investment capital. And their currencies, like shares of stock in a bull market, reflect that increasing value.

Borrow Low, Lend High

I’m sure you’ve heard the expression “Buy low, sell high.” It makes sense if you’re trying to earn profits in any market.

But there’s another expression: Borrow low, lend high. Borrowing low and lending high is a strategy that banks have used for quite some time. It’s what their business is based around. And it’s a very simple and effective way to profit.

Imagine you paid 4% to borrow US$1,000. Then you loaned US$1,000 dollars and charged 6% interest. You’re easily sitting on a 2% profit of US$20 (6% interest earned of US$60 minus 4% cost to borrow of US$40). But with banks, these transactions are much larger and more frequent.
Currency participants, institutional and individual investors alike, have been wrapped up in this same banking strategy. It’s become so heavily focused upon that they’ve even given it a name. You’ve likely heard of it — the carry-trade.

The Carry-Trade Lives…and Dies

Unless you’ve been hiding under a rock, or have recently returned from a summer-long vacation, you’re probably aware of the recent credit crunch that has spooked global markets.

Stemming from bad U.S. sub-prime mortgage loans, the unstable credit market has driven a large number of investors to run for cover. These fleeing investors have taken whatever funds they could salvage with them.

A clear sign of liquidation can easily be seen by monitoring the value of the Japanese yen. As
I’ve told my readers many times before, interest rates in Japan are low — very low. And investors have taken advantage of these low rates by enacting the “borrow low, lend high” strategy I talked about earlier.

But instead of making loans, they’re actually making investments in assets that return a much greater yield than the 0.05% it costs to borrow yen. This is the carry-trade and it’s led to a beaten and battered Japanese yen. (Recall that borrowing yen effectively pushes the value of yen lower.)

Score Big from the Coming Yen Appreciation with the Right ETF

The Japanese currency is currently the most undervalued major currency versus the dollar.
Prior to its recent rally, the yen was about 30% undervalued against the buck. That’s a serious undervaluation and signals to me that a change is coming.

It looks as though the yen has begun to reverse course as carry-trade money flows back where it came from — Japan. Japan’s economy is looking stronger all the time too.

You see, Japan is still recovering from a 14-year bear hug of deflation which began in 1989.
However, there are strong signs the economy is recovering. In fact, Japan grew at a 3.1% pace in the first quarter of 2007. So Japan grew at one of the fastest rates among the world’s major industrialized countries (the U.S. grew at only a 1% pace, while the Eurozone grew at just 2.1%).

Once Japan kicks its economy into overdrive, it will be liftoff for this Far East nation’s currency.

To make the most of what I anticipate will be a massive yen appreciation, I like... [click here to continue reading]

The Currency Revolution
by Jack Crooks

There’s a revolution happening in the currency world. Imagine posting double digit profits, with low cost trades and unlimited liquidity without sitting at your computer all day. It’s all possible with the brand new currency exchange traded funds (ETFs). These were just launched a few months ago. In fact, few investors even know they exist. These are truly unique. In fact, I would say they are revolutionary.

Find Your Comfort zone - Then You’ll Know Where to Play

The first step in the process is finding out who you are, in terms of investment style.  Your style shouldn’t necessarily change just because you’re trading in the currency market. What’s worked for you in your stock or bond investments, and the knowledge you gained there, applies to your currency investments. Sure, there are some idiosyncrasies in the way currencies move compared to stocks and bonds, but most of what you know is transferable. So don’t think you need to start from scratch or change your style. 

Once you’ve completed your self-analysis, you need to choose the best way to access the currency market which fits your investment comfort zone. Here are your choices:

1) Multi-currency deposits – This is a flexible and safe way to achieve two primary objectives: 1) Diversifying your risk outside of your home currency, and 2) achieving a respectable yield while protecting the purchasing power of your cash.   

You can park your cash on deposit and denominate it in the single currency of your choice. Or, you can park your cash in a basket of currencies. All you need is a bank account that offers multiple-currency deposits.

2) Currency Exchange Traded Funds (ETFs) – This is the new product leading the revolution.

Currency ETFs open the world of currency trading to everyone who has a standard stock brokerage account. Jump on a hot trend or position for a special situation in currencies. There’s no need for special currency trading accounts anymore.  

Seven currency ETFs are now available and I’m sure this list will grow as ETFs become more popular. Right now, these ETFs include: euro (FXE), British pound (FXB), Mexican peso (FXM), Swedish krona (FXS), Australian dollar (FXA), Canadian dollar (FXC), and Swiss franc (FXF). All are traded on the New York Stock Exchange.

It’s a product that delivers exactly what investors like us want: low cost, easy access, efficiently priced and constant liquidity. Plus, ETFs offer investment strategies that are limited only by your imagination.

3) Currency Options – Currency options are another effective and easy way to play the currency markets. Two key advantages to currency options are: 1) your risk is limited to the amount the premium you pay per option (assuming you only buy calls or puts as the opening transaction), plus your brokerage commission, and 2) options are highly leveraged so your profits can be huge if you pick a winning trade.

I believe currency options are great products for those of you who like to speculate in currency markets, shoot for big profits with limited risk, and don’t want sit in front of a trading screen all day. I recommend using currency options for intermediate-term trading opportunities based on global economic themes that affect currencies. 

4) Currency futures and Spot forex – This is where you can produce big-time returns in a very short period of time. But you also take on higher risk in the form of leverage to do it. Winning in futures and spot forex requires not only good analysis, but extremely disciplined risk control. And positions move fast… so you have to stay connected and highly focused. It’s not unusual to enter and exit a trade in the same day. SO there’s a lot of potential for big profits but you have to be disciplined.   

Currencies – Strategies for Every Investor

Most people believe currencies are inherently risky, because they know or have heard of people who blew out their accounts trading currencies. In actuality, currency prices don’t fluctuate any more than stock prices. In fact, they often change much less during the average trading day. What gets people in to trouble is trading too often, with too much leverage and with too little concern for risk. That’s a recipe for disaster in any type of investment market, not only currencies. So to be very clear, it’s not about the inherent risk embedded in currencies. 

The bottom line is there are boundless opportunities and choices in currencies for almost any type of investor… including you.

China Pushes the Asian Currencies to Power: Five Safe Ways to Profit from
the Asian Domination this Decade
By Jack Crooks

It’s no secret that China is booming. You can’t pick up a financial newspaper these days without reading about China’s trade surplus reaching US$13.7 billion, or why global analysts believe China’s economy will grow three times faster than the U.S. economy in 2007. But even amid all this pro-China news, there’s another story here that few are telling.

Right now, China’s rapid growth is not only driving its monster economy—China’s growth is also driving the rest of the Asian currencies. In fact, this dynamic should drive the Asian currencies sharply higher against the rest of the world’s major currencies for many years to come. So, if you haven’t already secured your own Asian currency sandwich (which was first recommended in TSI last April)—now is a great time to do so.

Chinese Yuan Continues to Appreciate Against U.S. Dollar

The Chinese currency has been trading at its highest value against the U.S. dollar ever since Chinese policymakers lifted its fixed peg against the dollar in July 2005. Even though China has lifted the peg, they still control the currency and ultimately the amount it is allowed to appreciate (or depreciate) against the dollar, whereas all other major currencies are free-floating and driven by market supply and demand. China’s continued “manipulation” of its currency in order to make its exports cheaper, is the key source of political contention between the country and Western nations.

So, though China has not yet freed its currency, it is allowing it to appreciate much faster than before. And currency players are sitting up and taking notice. You can tell because the Singapore dollar, Thai baht, and South Korean won recently put in multi-year highs against the buck, following in the footsteps of the yuan.

So what’s driving China’s boom, and by extension, the rest of the Asian currencies? Here’s a quick look why I see an explosion of wealth in the entire Asian region...

A Look at the Basics Behind the Asian Boom

• Asia is home to many dynamic fast-growing economies.
• World-class manufacturing and infrastructure is becoming the Asian norm.
• Asia has accumulated a massive amount of reserves at US$2.5 trillion. That’s two-thirds of the world’s total reserves!
• Labor is cheap and the skill base is rising.
• A possible explosion in consumerism could drive the next leg-up in growth.

This suggests we are only at the beginning of growth in China. And there is little doubt the Asian countries are in the best position to exploit China’s boom. So as the wealth in China grows, so does the wealth throughout the entire region.

If you believe in the long-term China story—you should believe the currencies throughout the entire region look extremely cheap. I think they are. Here’s a brief look at why.

Untapped Wealth—the Asian Consumer

China is expected to grow at least 8% over the next few years—that’s over twice the expected growth in most Western economies. That’s impressive indeed and should keep the region humming. This growth forecast is based on the existing China/Asia-export model and continued capital investment. This is a very valid forecast, but it misses something big—the explosion in Chinese consumerism.

China has an estimated 1,300,000,000 people. Of that 30,000,000 are living in poverty. They have 170 cities with over 1 million inhabitants or more. They still have an estimated 47% of their population employed in the agricultural sector. And here is the clincher—the GDP per person in China is about 5% of what it is per head in the European Union. Those are incredible statistics that point to an explosion in Chinese consumer growth over the next decade.

Why do a lot of people necessarily equal a boom in consumer growth? Three reasons:

As people move from agriculture employment to industry, their relative productivity soars—creating more wealth for all. According to Societe Generale and Gavekal Research, “Today, average annual returns to labor are US$300 in agriculture; US$900 in services, and US$3,000 in industry. Enormous gains are thus possible simply by moving workers from farms into urban occupations.”

Wow! This is an exciting factoid if you are a potential investor in China’s burgeoning consumer sector. This means it’s very plausible there will be a massive shift from agriculture to industry, because China has and continues to build massive world-class manufacturing capacity and the infrastructure to support it.

The Law of Acceleration—it’s not a straight line. It is a boom!

This law, developed by a French economist, Albert Aftalion, suggests the demand for goods as income reaches a certain threshold is not linear—demand actually explodes upward, or accelerates much more than is commonly expected.

“As incomes rise across Asia, various thresholds will be crossed and consumption will explode. The boom in consumption is boosted further by the fall in certain prices (electronics, automobiles, etc.). Asia is on the verge of such a deflationary boom (i.e. automobile sales in China),” according to Gavekal Research.

Billions of consumers who get a raise will buy more stuff.

There is a growing concern, no doubt, that if U.S. consumer demand wanes (U.S. is China’s key customer), China’s export-driven growth model might produce much slower growth. This is why it is important for Chinese policy makers to diversify their growth—emphasizing more domestic consumption and abandoning its cheap currency policy.

China may have a lot more internal staying power and may not be as dependent on a spendthrift U.S. consumer as many analysts think. To see why, consider the following from Morgan Stanley’s Asian Economist Andy Xie:

“China could switch to consumption-led growth by redistributing government-owned wealth to the household sector. The government owns land, natural resources, and major enterprises. Most of the country’s wealth does not support consumption. This is the most important reason why China’s household consumption is so low, in my view.” Mr. Xie believes if China switches to consumption-led growth by selling assets and distributing to its citizens, it would support growth for at least another decade. It’s estimated China’s government-owned assets exceed 100% of current gross domestic product. Imagine if the government sold-off these assets and packaged them and distributed shares to citizens. It would be a huge boost to household wealth.

Also, the consumption-led growth model is very compatible with a rising currency. A stronger Chinese yuan means billions of Chinese citizens will get a raise, as it would make the cost of imported goods cheaper. It would also make imported raw materials cheaper for domestic producers—and that would support corporate profit margins. 

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