A Crash Course in Trading Currencies

Today's comment is by Sean Hyman, Currency Director and Editor of The Money Trader.

Dear A-Letter Reader,

Currencies are traded in pairs because you only really know what one nation's currency is worth if you compare it against another currency.

For example, in the last few years, you would have no idea how much the dollar fell versus the euro, Swiss franc, Canadian dollar etc. unless you compared the various currencies' values against the U.S. dollar.

Once a Pair, Always a Pair

So many years ago, when currencies were first traded, the industry created a trading standard that's still used today. Industry players decided how currency pairs would be quoted. For instance, if you're trading the U.S. dollar vs. the Japanese yen, then that pair is always listed as USD/JPY, not JPY/USD.

Let's take a moment to review the major currencies and their symbols:

USD = U.S. dollar (nicknamed the "buck" or "greenback")
EUR = euro (nicknamed the "anti-dollar")
GBP = Great British pound (nicknamed "cable" or "sterling")
JPY = Japanese yen
CHF = Swiss franc (nicknamed "the Swissie")
CAD = Canadian dollar (nicknamed "the loonie")
AUD = Australian dollar (nicknamed "Aussie")
NZD = New Zealand dollar (nicknamed "Kiwi")
SGD = Singapore dollar
HKD = Hong Kong dollar

As I mentioned before, these currencies are always listed in pairs. Just by looking a certain pair, you can tell if one currency is gaining strength or weakening vs. the second currency listed in the pair.

For example, say you wanted to know how the euro was performing vs. the U.S. dollar. First, you would look at the quote for the EUR/USD currency pair. If you see the price is going up, that means the euro is gaining strength against the greenback. If the price is falling, that means the euro is weakening - and the dollar is growing stronger.

If you look at chart of a particular currency pair, you're seeing how the first currency in the pair is performing vs. the second currency. So for instance, if the EUR/USD chart shows a line moving upward, that means that the euro is gaining strength against the U.S. dollar.

One Goes Down, the Other Must Come Up

In viewing currency pairs, it helps me to view them on a seesaw. See the visual below.

So when one currency goes up, another currency must fall against it and vice versa.

Well I hope this helps demystify trading currency pairs. Once you get used to them, they are as easy to follow as stocks.

I hope you've had a Merry Christmas. Have a Happy New Year!

SEAN HYMAN, Currency Director

P.S. Fascinated by currencies? Want to find out how money shifts and moves around the world (including in and out of your pocket)? Sign up for our FREE currency E-Letter - My Two Cents five days a week. Click here to receive all our currency insights absolutely FREE.

Communists Bailout Capitalist J.P. Morgan Part II

As I said yesterday, J.P. Morgan is probably spinning in his grave.

In addition to the billions lost on bad sub-prime related investments, Morgan Stanley just sold off a chunk of the firm to the Communist People's Republic of China - to help save themselves from the financial debacle.

And that's just the beginning.

Look for the Communist Peoples Republic of China to buy more American businesses, banks and properties in the coming months and years. You can also expect them to make more direct Chinese investments in U.S. stocks and bonds. It will make the Japanese real estate buying sprees in the U.S. of 20 years back look tame.

China just now has eased control on overseas investments by opening the door for its banks to invest in British stocks and mutual funds. Britain this week became only the second destination, after Hong Kong, where Chinese banks can invest their clients' money.

But Chinese banks will soon receive permission to invest funds in U.S. stocks and mutual funds as well. Chinese brokers and mutual funds with a total quota of nearly US$40 billion are already allowed to invest their customers' funds in stocks in 33 countries.

J.P. Morgan, China's newest U.S. acquisition, estimates that about US$90 billion of funds will come from China by the end of 2008, much of that directed to United States investments.

Possibly related news: The Republic of Panama has just decided that the Chinese language must be taught to kids in all its schools. Should we wonder how soon Chinese also will become the second language for U.S. school kids - after Spanish?

BOB BAUMAN, Legal Counsel

Wealth

Don't Throw the Baby Out With the Bathwater

There is no question that the financial sector has taken a severe beating recently. Banks like Citigroup and Bank of America have seen their share prices drop significantly since the first rumbles of sub-prime problems started to surface.

The U.S. S&P Bank Index is now down some 30% year-to-date. Some analysts have started saying that this sell-off is overdone and you can find values with such low prices.

The only problem is that no one can say for certain that we are out of the woods just yet. The real damage might still be headed for these financial institutions, so there could be further downward pressure in share prices to go.

With this uncertainty in the air, you might be hesitant to add one of these beaten up U.S. banks to your portfolio just yet. There are, however, some opportunities in non-U.S. banks. Canadian banks have undergone the same pressure as their U.S. counterparts.

But this might very well be a case of throwing the baby out with the bathwater. While some Canadian banks did indeed have significant exposure to sub-prime, such as the Canadian Imperial Bank of Commerce. Other Canadian banks had very little sub-prime exposure, especially when compared to those firms south of the border.

The result is that these Canadian financial institutions are now trading with historically low P/E ratios of under 11. What is more, many of the banks are trading with historically low dividend yields.

For example, the National Bank of Canada, which has seen a substantial sell-off since earlier this summer, is trading with a dividend yield of 4.72%. Below is a table comparing yields on National Bank going back five years:

NATIONAL BANK PRICE & DIVIDEND YIELD HISTORY
Calendar Year 2007 2006 2005 2004 2003 2002
High Price 66.50 66.80 64.00 49.75 43.48 35.15
Low Price 49.01 55.89 47.70 42.21 31.05 26.09
Dividend Yield 4.7% 2.9% 2.8% 2.9% 2.5% 2.9%

You can see how today's yield is certainly attractive, especially for such a quality institution. With yields approaching 5%, low P/E's, and little sub-prime exposure, it might be best not to throw these Canadian Bank stocks out with the "U.S. mortgage-backed bathwater."

ERIC ROSEMAN, Investment Director

P.S. Click here for dozens of investment ideas about how to tap into the best sectors of 2008 without "throwing the baby out with the bathwater."