Issue #54: Friday, April 3, 2009

(And What It Means for the Aussie Dollar)

By Sean Hyman Forex traders spend every waking trading hour trying to figure out what where cash is flowing around the world. And even though speculators (aka, “Forex traders”) only govern a small part of that cash, it helps to know where traders are investing as well.

The reason? If you know where Forex traders will send their money next, you can jump aboard that trend – ahead of the investment herd – and grab some nice gains before they even know what’s going on.

Right now, I’m seeing an opportunity to do just that. There’s a transition slowly happening in the global markets that few investors have noticed yet. The media sure hasn’t been reporting on it, nor will they until after the fact.

I’m talking about commodities firming up.

During the past couple of months and past few trading days especially, several major commodities have broken their downward moves and have even begun new uptrends.

What’s moving higher? Gold recently broke its downward correction in January and has resumed its uptrend. It won’t be long before we see it break through US$1,000 an ounce again and head for US$1,200.

What else is moving? Silver! It started moving up even before gold did. Silver broke its downward spiral back in December of last year. So it’s been in an uptrend now for over three months.

What else? Oil broke its downtrend and sideways range this month by climbing back up above the $50 a barrel mark. (As of yesterday, we closed over $53 a barrel).

Here’s one more: Copper recently started making higher highs and higher lows on its chart as of February.

Why do I point all this out? Because this recent stabilization of commodities will help the profits of the major commodity exporters like Australia, especially against the U.S dollar.

Check out the chart below. I’ve put them all into one big chart so you can see what I’m talking about.

Quiet, Gradual Shift in Global Demand Is Changing for Commodities

In the chart above, you will see the downtrends emphasized by the red lines and the uptrends emphasized by the blue lines. As you can see above, demand for silver (bottom) picked up first, then gold and finally copper.

When copper made the shift, the U.S. dollar finally did too. Now the demand for the dollar is waning while the demand for commodities is just beginning once again.

You see, commodity-producing nations usually mine gold, silver and copper at a semi-fixed costs. However, the price that they can get for these commodities is NOT fixed. As you know, that varies significantly in the market.

Well, this past year has been a tough one for these nations as commodities simply fell off the map. However, commodities are starting to firm up slightly. That indicates that money will soon start heading for the commodity-based currencies (like the Aussie).

Now, with that said, I want to emphasize that economies turn around like ships and not like speed boats. Therefore, this will be a process and will still take time.

However, these commodity producing/exporting nations will start to enjoy increased profit margins shortly. As they do, it will start to help their economic data, which will in turn help the sentiment for those nations and also their currencies.

Investors that don’t follow all markets won’t realize this until later. However, I want to make sure you know what is going on NOW!

So here’s how this will spill over into the currency market.

Recent Fed Action Assures Dollar Selling & Commodity Demand

As commodities rise and the U.S. Fed “out-prints” other nations by printing money out of thin air, the U.S. dollar will be diluted with the oversupply of dollars.

The glut of dollars chasing a finite supply of commodities will drive up gold, silver and other commodity prices.

Therefore, you will start to see the AUD/USD break its downtrend as the Aussie in heads higher against the dollar.

Why do I say Australia will be first? Because it has already broken its downtrend line and consolidated sideways ahead of even its neighbor, the New Zealand dollar. The kiwi dollar is still making lower lows and highs at this point while the same cannot be said for Australia. Also, from a fundamental perspective, Australia didn’t get banged up as bad in this global slowdown as did New Zealand.

Bottom line: You can’t just watch the Forex charts – you need to know what’s going on in other markets to track currencies. Right now, the biggest clues are coming out of the commodity markets…especially as far as the Aussie dollar is concerned.

Sean Hyman, “Professor FX” and Long-Time Currency Analyst Explaining How You Can Succeed in the Currency Markets.
Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.