Wednesday, May 20, 2009

When Oil Holds Above $60

By Sean Hyman Yesterday, we talked about the major currencies that would prosper if oil holds above US$60 a barrel in the coming months ahead.

Today, I want to look at which exotic currencies will prosper if oil holds above US$60. First why bother with the exotics when you can buy the majors?

Most exotic currencies come from emerging markets that have a smaller trade volume and wider spreads, so individual factors (like oil rising in price) can have a huge impact on their currencies.

With smaller trading volume, these currencies are extremely volatile. That means exotic currencies can move fast – and make much bigger leaps (and much quicker drops) than the major currencies. Definitely worth noting if you’re looking to recoup your losses from 2008 this year.

There are four currencies that could benefit, some directly…some indirectly from a spike in oil prices.

Norway (USD/NOK), Mexico (USD/MXN) and Russia (USD/RUB) all export oil and oil products. While Norway and Mexico’s oil reserves are in decline, they will still benefit from the rise of oil and other commodities.

Russia on the other hand is finally coming back from the ashes after oil dove from US$147 down to US$33 a barrel. The drop of more than US$100 a barrel within months almost killed the ruble.

Were it not for the Russian central bank continually intervening in the ruble and slowing its decline, even more panic would have set in on it. Check out the chart below and you’ll see what I mean. Keep in mind that as oil fell, the ruble fell and pushed up the USD/RUB pair. So as oil recovers, it causes USD/RUB to fall.

As Oil Fell Off of a Cliff, So Did the Ruble!

The ruble fell hard and oil did the same. This pushed the U.S. dollar up against a falling ruble (RUB).

These other oil exports have somewhat similar looking charts. As oil fell, the dollar soared. USD/NOK, USD/RUB and USD/MXN all headed for the sky.

Now the tables are turning (finally) now that oil has almost doubled off of its lows!

Another “Odd Ball” Out Currency Promises to Soar Too!

Another currency that benefits from the rise of commodities is the South African rand (USD/ZAR).

While South Africa is not really known for exporting oil, it is known for exporting many other commodities such as gold. South Africa is usually in the top three to four gold exporters in the world. They used to be the world’s largest but then Australia and China overtook it in gold exports.

Remember yesterday, I said that when oil rises, other commodities tend to rise with it. As commodities rise, so does inflation. Gold is one of the best inflation hedges out there. It helps to preserve your purchasing power when the dollar is eroding. That’s why the rand will benefit as oil and other commodities rise.

If you want to take advantage of this in the Forex market, you would short the USD/NOK, USD/MXN, USD/RUB and USD/ZAR as oil climbs. By short-selling any of these pairs, it effectively means you’re shorting the dollar, and buying these other commodity exporting countries.

So if you believe, as I do…that oil will hold above US$60 in the months ahead, then you will want to stock up on the major currencies that will benefit. And if you have a bit of trader’s blood in you (and can handle the extra volatility), then you may want to stock up on these currency pairs too!

Until next time…happy trading!
Sean

P.S. My colleague, Ashish Advani is a master at picking out these small profit stories in the exotic currency market. In fact, just two weeks ago, he helped his Exotic FX Alert subscribers earn gains of 135%, 225%, and 382% in just the span of a week. He recently filmed a short video to explain the special “trade secrets” he used to recommend these winners. You can view the video for yourself FREE here.

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.