Friday, May 22, 2009

(Part II)

By Sean Hyman As I told you yesterday, the best Forex traders never wait for the market herd to notice the trends.

No they’re always about three or four steps ahead of the retail trading market. That’s how they get the best values in their trading.

Right now, you have an opportunity to jump on board with these leading professionals, but you have to have a bit of trader’s blood in you. More importantly, you have to be willing to trade on the knowledge that the recession could be on its way out (at least out of a few key currencies)…

The Recession Is Already Long in the Tooth (If History Is Any Indication)

The National Bureau of Economic Research (NBER) establishes when recessions begin and end. While they drag their feet to tell you we have entered a recession, they usually are quick to point out when we’re about to exit one. (For obvious reasons – they don’t want to spook the markets.)

They’ve dubbed December of 2007 as the beginning of this current recession. That puts us about 17 months into this recession. Since there are only a few recessions since 1900 that have lasted 20-23 months and only ONE that has lasted longer than that, I’m willing to bet that we’re going to see a few signs of recovery soon.

Why? The Fed was quicker to respond to the economic downturn this time than they were in some of these past recessions. They lowered rates significantly and kept them there. They’ve enacted a stimulus plan and other government programs to help get America back on track.

While I’m not convinced that what they are doing will be a long term success (over the next 10+ years), I do feel it will bolster the economy in the short-term.

Here’s another reason why I think we’re about at the turning point.

Since 1959, an increase in the monetary base has resulted in an increase in industrial production within six months. Well in this case, we’re nine months down the road, but it looks like the tide is about to turn and you want to have your currency portfolio ready to ride that wave.

So, if you believe as I do, that we’re not far from seeing the beginnings of a recovery (at least in the Forex market), then you want to get back into the offensive plays. What are these? They are the currencies that tend to benefit in good times for the economy.

Formerly, we’ve had the defensive team out on the field that benefits during bad economic times. Those currencies were the dollar, yen and Swiss franc. Now it’s time to retire those jerseys and bring out the offense.

Introducing Your Currency “Offensive Line”…

Who are the offensive players? In my opinion, the star quarterback is the Australian dollar.

The Aussie dollar has the best fundamentals and will be one of the biggest beneficiaries to all the monetary stimulus that has happened all around the world. Central banks’ lower rates and habit of printing money all around the globe will boost inflation. And that inflation will benefit the commodity currencies.

Who else? The euro. It’s called the “anti-dollar” for a reason. By definition, if you hate the dollar, you have to love the euro. It’s the first currency that institutions look to as they leave the dollar and head elsewhere. So it will benefit as the dollar continues a downtrend that started about 15 trading days ago.

Now back to the other commodity currencies: the New Zealand dollar and the Canadian dollar. As the U.S. and global economy improves and commodities continue their gradual ascent, these “commodity currencies” will benefit too.

And lastly…the British pound. I know: It’s been the dog for the last year or so. I wouldn’t argue with that. However, traders are known for “over-shooting” when it comes to the pound.

They trade it way too high (like 2.11 for instance) but then they punish it unduly too (1.35, for instance). The pound has not only broken its downtrend but has started an uptrend as it finally pierced 1.50 and sustained itself above that level.

Now we have “higher highs and higher lows” on the GBP/USD pair so I’d add it to the list too.

I’d weight my portfolio the heaviest with the Aussie dollar firstly and the euro secondarily. Then I’d sprinkle in the other commodity currencies (New Zealand dollar and Canadian dollar) and have a small percentage in the pound, bringing up the rear.

Your own risk temperament will determine how much (percentage wise) that you pour into each currency, but this is how I’d align myself for the next 2-3 years if it were me.

Until next time…happy trading!
Sean

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