…and Why It’s Dynamite News for the Rupee

As a native Indian, I’m a junkie for all Indian programming – both online and on TV. A few weeks ago, I was flipping channels and I came across the New Delhi Marathon.

What I saw just blew my mind away…

The race had just ended, so they were awarding prizes to the runners. I expected to see some kind of gold or silver medals passed out.

Instead, they asked the 1st prize winner to stand on a scale. On the other side of the scale, they were loading…SUGAR of all things.

Apparently that sugar was part of his prize! The winning runner, Deep Chand was being weighed so he could receive his weight in sugar, along with his coveted gold medal.

Now I lived in India for years, so I can tell you this is not normal. It’s a brand new development.

My mind started racing. I was soon connecting the dots to everything I know about India, and why suddenly sugar had become so important that it “outweighed” even a gold medal.

Hold on! Hold on! I am getting ahead of myself. Let me back up just a bit…

All my colleagues and I pride ourselves on giving you information that you can’t find anywhere else. And I am about to unfold another aspect of the markets that very few investors know about…yet, this area of the world is and will continue to yield double digit gains for everyone in the know.

I’ll give you a hint: It’s the same place where they believe sugar is “prize-worthy.” It’s my home country, India…

You Wouldn’t Think Monsoons Are a “Good Thing” But…

I have been writing to you for nearly a year now to extol the virtues of India. But there’s another side to this investment story, and it’s affecting all the consumers in the nation.

Lately, food prices have soared throughout India. This situation has become a major issue in the last few months. That’s why sugar is now considered a luxury. No matter what the local authorities try, food prices remain stubbornly high.

Let me explain. India is heavily dependent on agriculture for its overall growth. About 17% of its projected annual GDP growth originates in agriculture as well as related industries. Agriculture also accounts for about 52% of the total employment in India.

India ranks second worldwide for its farm output. India is the largest producer of milk, cashew nuts, coconuts, tea, ginger, turmeric and black pepper. India is the second largest producer of wheat, rice, sugar, peanuts and inland fish. India also has the largest population of cattle in any one country. India accounts for 10% of the world fruits and the largest producer of bananas.

So every year, India bets a great deal on its agricultural output.

When you’re a big farming nation, you need rain to cultivate your crops. Fortunately, India is located in a place where the annual monsoons between June and September can either make or break the harvest. If India has a strong monsoon season, food production remains normal, and food prices hold steady.

However, if India has a weak monsoon season, you can see the effect in all India’s food prices. This is exactly what happened in 2009. Rainfall was significantly lower than it should have been.

As a consequence, we have seen food prices rise sharply including a significant jump in the price of sugar. This has created a high level of food price inflation in India. We have seen food price inflation rise to as high as 20% recently.

Why Inflation Is Actually Great News for the Rupee

Now inflation is considered both a problem and a curse for a currency in general. And I would conditionally agree with that statement.

If you live in the nation, inflation can steal your purchasing power. That’s why Indians have to pay more for their grocery bills now. But if you’re a currency investor (especially a foreign currency investor), inflation means that the central bank will soon have to hike rates to deal with that local inflation.

Higher rates = more Forex traders buying that currency. That means the local currency, the Indian rupee is about to shoot up in price.

Also, there is a key difference to note in types of inflation here. We’re not seeing an excessive amount of cash chasing too few goods and services in India. If that were the case, I’d be calling for a bubble.

Instead, we’re seeing a shortage in the food supply. That shortage is driving up prices. End of story. Strangely, this can be healthy for an economy as long as this is not long-term and does not reach epidemic proportions.

Also, it’s worth noting that while India is facing minor setbacks in its agriculture, other sections of India continue to soar.

For example, the stocks of sugar manufacturers in India have rocketed up and investors have been making some sweet profits there. Also, there are several food related sectors that are soaring due to the amazing profit potential in the short-term.

Also, as I mentioned, the central bank will soon have to deal with this inflation. The Reserve Bank of India has ready increased the reverse repo rate in India by 75 basis points. Next target will be the base interest rates. And I am expecting a full 2 % increase in rates over the next several months.

Obviously, as this occurs, we will see the Indian rupee strengthen as well.

Also, the Indian GDP growth is still expected to finish strong at over 7%. India has recorded a strong 6.5% for the year. And India is also laying the foundation for an even better 2010-11 year.

There is tremendous opportunity brewing in India, and this inflation is just one more reason that I’m buying the rupee (and sugar stocks) for the long haul. Stay long India!

Oh! And by the way, if you still want the details, the time for Deep Chand’s victory in the New Delhi Marathon was 2 Hrs, 22 Minutes, 33 seconds.

Yours in FX Profits,
Ashish Advani

P.S. Talk about a slam-dunk! India just released their 2010-2011 Annual Budget. This report was stuffed with goodies for businessmen, citizens, local investors and foreign investors like me! In short, this report has confirmed that India is set to soar in the coming years. Find out how you can profit from this dynamite information flowing from India in my newly updated report on India.

But due to a few technical difficulties, I see you weren’t able to check out this dynamite video from our Currency Cross editor, Sean Hyman yesterday. Frankly, it’s too good to miss, so I’m resending it with my apologies for any confusion.

Please enjoy it now with my compliments.

Have a great weekend!
Kat Von Rohr, Managing Editor
FX University Daily

…And How to Cash in On Their Success

The financial press is inundated with news from central bankers. The professional traders around the world hang on central bankers’ words to place their next trades.

But very few stop to ponder, what is a central bank? What does a central banker do and what makes them so important?

A brief trip back in history shows us that the concept of central banks formalized in 1668 when the Swedes established the “Riksbank.” This central bank still exists today. In 1694, the Brits launched their own version with the Bank of England. Such banks acted as the government’s banker or debt manager.

Fast forward a few centuries and we have a completely different concept of what a central bank is. This modern-day idea for central banks became popular after the collapse of the gold standard back in 1913. Coincidentally, that is also when the U.S. launched the Federal Reserve Bank on December 13, 1913.

Australia followed in 1920, Mexico in 1925, Canada and New Zealand in 1935 and Brazil in 1945. Even in China, the Peoples Bank of China developed its role as central bankers in 1979.

Now after decades (and in some cases centuries) of experience, you would think that the best central bankers in the world come from the large financial powerhouses of the world. Possibly in the E.U. or Australia, maybe even in the U.K.

But that’s simply not the case…

The World’s Best Central Bankers Are NOT Here…

The best central bank in the world actually comes from a relatively small, modest nation.

In my opinion, these bankers are miles ahead of the race. This central bank was established in 1935 – 12 years before even the birth of the country.

Today, these bankers are the best stewards for their already promising currency. Given the situation we have in the U.S., I would say that these bankers run circles around the Fed-Heads who continue to debase the dollar year after year.

Over the next few years, they look to transport their currency light-years ahead of the competitors around the world.

I’m talking about the Reserve Bank of India. These bankers are some of finest money managers in the world – especially for a central bank.

The Masters of Beating a Flawed System

For the most part, all central banks deal with paper money or fiat currency. You may have heard that all fiat currencies depreciate over time. That is 100% true. Without the backing of real, tangible assets, such as gold or silver, the vast majority of currencies continue to depreciate over the long haul.

As stewards of that paper money, central bankers have a tough job.

They must ensure a country’s economy and stability with what is essentially a flawed money system. They do this through multitudes of ways including maintaining the reserves, balancing between growth and employment, managing the currency’s strength via inflation, etc.

And each central bank guards also must guard its independence from political influences within the country.

Or at least they are supposed to!

Not everyone does. Some pander to political influences while others corrupt their existence to market influences. For example, the U.S. Federal Reserve kept interest rates too low after 2001 for a very long time.

That helped the enormous housing and stock market bubbles. All parts of society in America (people, banks, mortgage brokers) over-indulged at the party while the central banker (Mr. Alan “Bubbles” Greenspan) was found asleep at the wheel.

But that’s what makes Indian central bankers so different…

The Central Bank that Denied Derivatives!

In India, the Reserve Bank of India (RBI) has always maintained its distance from both political and market forces and kept its independence.

When the whole banking system around the globe was drinking the real estate bubble Kool- Aid, the RBI refused to allow Indian banks use derivative instruments to run wild in the markets.

Old fashioned, as it seemed, they prevented the extensive development of instruments that were impossible to understand. As a consequence, the banks had virtually no write down of toxic real estate based assets. Further, there are signs of overheating in the real estate market, but no bubbles.

Further, the Reserve Bank of India bankers did not pander to the markets by allowing interest rates to remain at excessively low levels for any major long period of time. It has always watched inflation like a hawk and acted prudently to control this as early in the cycle as possible.

During the late 2008 and 2009 days, it had to reduce its interest rates down to record lows.

Then it watched the economy slow down to its lowest point of a GDP growth of 5.5%. Since then we have seen the Indian economy rebound.

The Master Inflation Fighters, and How to

The RBI does not fool the people with shifting definitions of “core inflation” that the Feds play with us here. They measure inflation in the good ole’ way as we used to back in the 1970s. Recently, they acknowledged that inflation is too high, and they have begun prudently raising rates to manage that inflation.

The markets complain that it will kill the rally. Businesses grumble that borrowing costs will rise.

The RBI says, “The raise in interest rates will be gradual and will be sustainable in the markets. This rise will be well orchestrated, whereby giving the businesses to amend their business model as time progresses.”

Bravo RBI!!!

These bankers are a welcome breath of fresh air after the market manipulation of their counterparts in the West. You can bet that in the next few years, these bankers will ensure their currency remains stable…even as other currencies around the world continue to lose value.

You can cash in on this prudent money management by buying the Indian rupee with an ETF or CD for the long haul.

On Monday, I’ll be back with dozens of more long-term “currency plays” to profit off the Indian rupee.

Till then – Stay long and strong India!
Ashish Advani
Editor, Dalal Street Insider

According to Sean, it’s the Forex trading technique that’s like “picking dollar bills up off the road.”

You can view the free charting video here…

Good Currency Investing!
Kat Von Rohr, Managing Editor
FX University Daily

P.S. Did you know you can view these videos every day here in FX University Daily? Just click on the link in the sidebar, and you’ll gain instant access to these free videos.

Why China Can‘t Afford to Abandon the Buck Just Yet

China’s back at it again! In the news this week, China is making noise about dropping their peg to the U.S. dollar.

If you’re new to currency trading, a “peg” simply means that China’s currency somewhat tracks the performance of the U.S. dollar. Doesn’t sound that intriguing, but the implications of this could turn the entire currency market on its head.

We’ll get to that. First, let’s look at their most recent claim…

First of all, the timing is convenient at best. Recently China’s leaders warned President Obama not to visit the Dalai Lama, but Obama did anyway. Now suddenly they want to drop their currency peg to the dollar.

However, China has been threatening to drop their peg to the dollar almost since they established it. Every couple of years several Middle Eastern countries follow their example. They all talk about how they are going to drop their dollar pegs.

But in the end, they never do.

Drop the Peg? They Won’t Even Let Their Currency Free-Float

China’s leaders know they can’t afford to drop their dollar peg right now. They can’t even afford to free-float their own currency just yet.

China’s currency, the renminbi is the most managed currency on earth. This means the central bank only allows the currency to trade within a certain band of prices.

Also, once China’s leaders do finally get to a point to where they can free-float their currency, they know it’s likely to get “fairly valued” by the market. In other words, traders would likely run the price of the renminbi up quite a bit.

After all, most countries seem to believe that the renminbi is undervalued right now. It’s one thing that has given China such an edge over its competitors and has allowed them to grow so quickly.

If you listen to the Chinese Premiere, you’d think Mr. Wen could do whatever he wanted whenever he wanted. But it’s just not that easy.

Wen has recently been quoted as saying that the dollar peg is “temporary” and said it was a “special policy to weather the financial crisis.”

Now, the only problem with that is that they had (and needed) the dollar peg long before there ever was a financial crisis.

One Day, They Will Drop the Dollar Peg…But Not Anytime Soon!

Now don’t get me wrong. There will finally come a day when China is able to drop its peg to the dollar. But that day is not today, next week, next month or even next year.

However, China’s leaders know how to play the game. They will continue to flex their muscles in their speeches because they have many differences with us over issues like Taiwan, Tibet, climate change and human rights.

So we don’t see eye-to-eye with China on issues, but what’s new about that, right?

In fact, recently China is now saying that U.S. must improve the relations between their two countries. That’s the equivalent of a child pitching a temper tantrum. Pathetic!

But in the meantime, they need the U.S. too much to be able to cast the U.S. aside. But don’t get me wrong…day by day, they try to make changes to where they can free themselves all the more from the United States.

In fact, this year, they are supposed to have an oil pipeline completed between China and Russia. It’s amazing how well they get along with “fellow communists” next door.

If China Makes a Move, This Currency Will Leap…

So how will this story play out in the Forex market?

First of all, while China can’t drop their peg, they can revalue their currency periodically.
If they choose to do this, the Japanese yen will move the most…particularly the USD/JPY pair.

For instance, look back in 2006 when China revalued their currency last time. The daily chart of the USD/JPY gapped down 100 pips. The pair continued to fall ANOTHER 650 pips over the following few weeks. That means the dollar was plummeting as the Japanese yen rose.

A Rare Occurrence: A Huge Gap on the Daily Chart!

This could happen again IF the Chinese do a quick revaluation like they did back in 2006. So while a “drop of the dollar peg” isn’t going to happen soon and won’t affect the currency market…a revaluation could.

Therefore, keep a watchful eye on China, and listen to what they’re saying. If you hear any “revaluation talk,” the USD/JPY may take a beating.

If you think the USD/JPY rate is low now, just wait until China’s leaders get their wish.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. China’s leaders have mastered the fine art of making slow, deliberate moves against our currency. My colleague Ashish calls this “Death by a Thousand Cuts” for the dollar. You can read more about their latest plans to sink our currency in our free report here.

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As a CFP and CIMA, I’ve watched as Wall Street guys vie for your retirement plan for years.

Like snake-oil salesman on crack, they peddled their wares on unsuspecting, hard-working Americans. Naturally they wanted their clients to buy the investments that would hand them the most fees.

So these smooth talkers pushed the most boring U.S. blue-chips, the “safest” (read: lowest yielding) bonds, and recommended the “tried and true” mutual funds that had seen their heyday years prior for all retirement plans. (Not even currencies or commodities were on the menu.) It was textbook rear-view mirror investing.

For the most part they got away with it – that is until the credit market crashed in 2008, and everyone learned how fickle those stocks and mutual funds were.

Yes, it was disgusting to watch.

But as annoying as this Wall Street pandering was, it’s nothing compared to what Washington is trying to do to your retirement plans right now.

In short, they want to govern your retirement plans with the same arrogance and stupidity that made us the world’s biggest financial deadbeats in the first place. More on that in a moment. First let me set the scene for you…

Uncle Sam Needs Another Sugar Daddy

The guys in Washington are getting desperate.

For years, our government has relied on the major Asian players like China and Japan to finance our debt. I’m sure you’ve heard this story. We bought their stuff, and they bought our Treasuries and other U.S. paper.

This system worked out great for us.

We spent like teenagers with our Daddy’s credit card, and then foreign investors essentially picked up the bill. All we had to do was offer them to pay them back at some later date (and honestly, with the world’s reserve currency – we could afford to print whatever we owe them in the future).

But some funny things happened as politicians wallowed in their own brilliance for arranging this deal…

Financial Losers Scream “Hey! Buy Our Debt!”

First, we quickly became the biggest financial losers on earth.

As of yesterday, our debt stands at $12.5 trillion. It’s estimated our country-wide debt will climb to $14 trillion by the end of this year. So complacency happened – we became used to the idea of being in debt.

Then, 2008 happened. Subprime happened. The credit crunch happened. Worldwide recession happened. And now trillions of dollars in bailouts later…

Suddenly the U.S. issues Treasuries like crazy to pay for all that debt. Many of my colleagues are calling this massive Treasury issuance the biggest financial bubble of all time – very close to popping.

But there’s another phase to this Treasury Bubble. Right now, we’re in danger of losing our best customers who pay for all that debt. China and Japan have already started scaling back their Treasury purchases – at the worst possible time.

In February, the “tepid” 30-year Treasury auction was so bad that the Federal Reserve had to dive in to the market and buy up the long-dated Treasuries that didn’t sell.

In short, they need Treasury buyers. So the guys in Washington are turning to you..and your cash-rich retirement plan to buy up those unwanted Treasuries.

The Logistics of the Greatest Government Theft in Years

Now I need to give a caveat: This is NOT happening yet. But the proposals themselves are scary enough.

The Department of Labor and U.S, Treasury Department are looking into ways to promote the conversion of retirement plans into an “annuity payment.” You can read about that in sources like Business Week and Bloomberg.

But here’s what you need to know: An “annuity payment” is really government speak for forcing you to buy U.S. Treasuries with your retirement plans.

And most likely, the government wants to lock you into those low-yielding 30-year Treasuries that foreign investors no longer want. That way, they can finance a mountain of deficits for decades to come.

This isn’t the only government move to force the purchase of Treasuries. They also announced recently that money market accounts will soon have to hold 10% of their assets in Treasuries or equivalents.

Imagine that, 100% of your retirement tied to the dollar, a declining asset and backed by a practically worthless government IOU. It’s the last asset you’d want to own for your retirement.

What’s more, the timing coincides with the beginning of the retirement of the Baby Boomers. This could create economic strains to an entire generation if they’re limited to such low-yielding investments.

Also, remember the Treasury Bubble? If the government forces you to hold Treasuries in both retirement plans and money market accounts, you can bet the ranch that this bubble will just to continue to swell to the breaking point.

Defend Yourself Now!

Right now, it’s 100% legal to pick up your retirement plan and move it outside the United States.

In my opinion, that’s the best plan of action to defend yourself against this attack on your retirement plans because if Uncle Sam does go forward with this plan, chances are you will be exempt if your plan is already set up offshore.

But if you’re not interested in the offshore option, keep in mind that you can help hedge against these moves by investing some of your other assets outside the U.S. dollar.

One of the easiest ways to do that is by buying foreign currencies and precious metals. Specifically I like commodity-backed currencies above all – currencies like the Australian dollar and Canadian dollar.

You can also short U.S. Treasuries. (All this U.S. paper is likely to drop in price as the government forces you to buy them wholesale.) The only way you can short treasuries in a retirement plan is through a short ETF or mutual fund.

But whatever you do, don’t let yourself be a victim to all this. You can’t afford to be complacent when the government talks about using your life savings to pay their bills.

Best Regards,
Larry Grossman, CFP®, CIMA®
www.offshoreira.com
lgrossman@offshoreira.com
727-784-4841

About the Author: Today’s guest writer, Larry Grossman is the world’s leading expert on liberating your retirement offshore. A CFP and CIMA, he has spent the last two decades creating customized retirement plans for high net worth individuals. For more details on how to liberate your retirement plan, please see our latest special report.

While I was dining there with all of the movers and shakers in Palm Beach, someone let it slip that I’m a Forex trader.

Suddenly the entire table wanted to know “how I find the really big trends” coming in foreign currencies. Well, I could only describe so much at the table (after all I was eating lunch at the time).

Also, I’d rather save those tips for you. So let’s jump right in to this.

Let the SMA Point the Way to More Winning Trades

FIRST, you want to see what the daily chart has to say.

Look at a daily chart going back one year in time and put a 50 period simple moving average (SMA) on it. This tells you the direction of the trend. You can see this on the GBP/JPY daily chart below.

The 50 period SMA Gives You Clear Direction – DOWN!

So you can see that earlier on in the year, the trend was up (as emphasized by the green line). However, later on, the pair started to trend downward as the 50 period SMA turned downward (emphasized by the red line).

This shows us that the present trend in GBP/JPY is going down. So you will have a higher probability trades looking for “short sells” as opposed to buys.

With the daily trend as our frame of reference, we can slip down to the 4 hour chart and look for entry signals.

To devise a simple “trigger system,” for when to buy and sell, you can place a 20 and 50 period SMA on that chart. These will hug more closely to the price action and give us signals that change with the trend more rapidly.

Check it out below.

Grab Gains with the 20 SMA / 50 SMA Crossover

Sell signals come when the short moving average (the black 20 SMA) crosses below the purple 50 SMA. We want to favor sell entries over buy entries since the daily chart’s trend was down as shown by the 50 period SMA.

So the daily chart’s moving average gives you your trading bias. The 4-hour chart gives you the entry signal into the direction of that trend.

With this trend signaling system, you now know the direction of the trend AND how and when to enter into the trend. From there, periodically move your stop down as the trade progresses and that will allow you to lock in more profit as you allow your profits to run.

Putting It All Together…

One final thought…

Flip through the daily charts of all pairs with the 50-period SMA on it and find the trend that is the clearest to you. You don’t have to have a “read” on all of them. You just need one good trade at a time.

So pick the best-looking chart that you have the most confidence in.

Then drill down to the 4-hour chart and patiently await the next signal which has the ability to fatten your account. And whatever you do, DON”T trade too many lots.

When in doubt, trade one mini lot per $5,000 in your account. Traders never mess up by under-levering their accounts but they commonly mess up by over-leveraging their accounts.
In short, look at the charts, go with the trends, and trade fewer lots. Do that, and you will significantly increase your chances of success.

Happy Trading!

Sean Hyman, aka Professor FX

Last December, I mentioned here in FX University that 2010 would be the year for volatility. I explained why the markets would zig and zag this year, as the impacts from these desperate government bailouts reached the markets.

So far, we have not been disappointed.

Now more than ever, I can see that while the 2008 financial crisis may be over, we will still feel its effects for years to come.

One important development is already taking shape: investors are becoming more and more concerned about country risk.

Country risk is the fear that a country could face some sort of crisis – the black swan event that can destroy a country’s reputation and damage its stock, bond markets or currency.

This year, country risks are already emerging all over the world.

Here’s the good news: As a Forex trader, you can actually use these risks to your advantage. I’ll explain how to do that in a moment. First, let’s take a look at how these risks are erupting around the world…

Back in a Simpler Time Before We Cared About This…

Five years ago, nobody worried about country risk when making investment decisions. And for good reason: Country risks almost disappeared as we were growing the credit bubble.

The imbalance between China and the U.S. played a key role in growing that credit bubble. In short, Asia sold us cheap exports, and used the income to buy our Treasuries and finance our debt. That resulted in low and comparable rates across the West.

With low rates, country risk simply didn’t exist.

Also, low rates were a great excuse for consumers and governments to borrow like there was no tomorrow. So they did. We went from being the world’s creditors to the world’s largest debtors. Our savings rate plummeted, and suddenly Americans were using their houses as their own personal ATMs.

Then the housing bubble burst. Western consumers quickly realized that they would need to tighten their belts and start saving.

Right now, governments are doing the same thing. They spent like there was no tomorrow and built the credit bubble. Then they spent indiscriminately to fix this credit crisis. Now they have to start scaling back.

Bond vigilantes are not making this easy. These rogue bond investors are like unforgivable creditors who chase consumers who are past due. They are now putting pressure on highly leveraged governments.

Investors are now requiring a risk premium to invest in those countries’ assets, including their currencies.

Eurozone: Where Country Risk Suddenly Matters

There are several examples around the world that indicates investors are now starting to account for country risk in a more significant way.

Maybe the best example is the Eurozone. During the credit bubble, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were able to borrow at rates similar to what the healthy giant Germany was paying.

Traders never penalized the deteriorating public finances of those countries. Why would they? Overall, traders believed there was no currency risk in the Eurozone.

But now the market is realizing that currency risk has been replaced by default risk. The market knows the PIIGS can no longer finance themselves at the same cost that Germany does.

Investors are focusing once again on country macro risks. You can see that in today’s diverging interest cost on the chart below. Investments in deficit countries now carry a higher risk premium. And currencies of such countries are no exception.

Diverging yields on 10-year sovereign debt shows country risk is back on investors agenda.

U.K. – the Greatest Cautionary Tale

Bailouts are expensive.

That’s why the global financial crisis hit the developed world harder than emerging markets. For the most part, the emerging markets waited out the storm, while the developed nations shelled out trillions to bail us out.

Of course, all this cash eventually lead to higher fiscal and public debts. Now many major economies are in an extremely fragile position, particularly countries at the periphery of the Eurozone and the U.K.

By far the greatest deterioration in public finances is in the U.K.

Now the market is punishing U.K. assets – especially their bond markets (known as the “gilt market” in the U.K.). Yields on “gilts” are rising. Last week, U.K. gilts were no longer trading like AAA rated bonds.

This means the U.K. is inching closer to a possible failed gilt auction or even an outright default. This increasing risk has pushed the price of insurance against a British default higher over the past few days.

In this case, rising yields of U.K. bonds is not good news for the British pound.

Of course, currency investors like currencies that pay a higher yield. But when rising yields is a result of rising risk premiums, currencies tend to suffer. That’s exactly what happened with the British pound recently.

What This All Means for Forex Traders

The increasing importance of sovereign risk will have a major impact in currencies in the months to come.

The divergence in cost of capital and fiscal situations will lead to well-defined trends in the Forex market. Traders who can spot the right trends can grab a quick 50% to 100%, if they’re on the right side of the trend.

So what trends are shaping up today?

Well, Asia has probably the lowest country risk in today’s world. Most Asian countries have little government debt, strong currency reserves, and few long-term liabilities, such as healthcare and pension.

On the other hand, EU countries, the U.S., Japan, and the U.K., will have to address their fiscal deficit in the years to come. Pressure from bond vigilantes is already forcing governments in Europe to take drastic measures to pay off their debts.

For example, the Portuguese government recently announced that it will present a ‘brave and upfront’ Stability and Growth Plan to reduce deficits. Spain and Greece also announced new austerity measures recently. In the short-term, these announcements should reduce country risk and be positive for the euro.

But there’s no such a thing as a free lunch in economics.

These drastic moves will very likely result in a decline in growth and employment. The decline in risk of a default will come at expense of economic growth. The ECB will have to keep rates at low levels to compensate for the higher taxes and lower government spending.

Bond vigilantes made their first appearance in the Eurozone. These rogue investors are forcing the EU nations to clean up their act fast. Most recently, bond vigilantes also made a visit to the U.K., with the British pound falling by nearly 4% in the last week of February.

Where will they visit next? California? Illinois? Or will they visit the U.K. again? No one knows.

But as a FX investor, I’m looking to short the currencies where bond vigilantes show up next, and buy the nations they avoid for the long run.

Bottom line: Country risks have returned to the market. As a FX trader, be aware of which countries are facing these challenges next. It will hold the key to which currencies you need to buy and sell as this volatility continues.

Best Regards,
Evaldo Albuquerque

About the Author: A recent MBA, Evaldo Albuquerque spends every waking hour monitoring the $4 trillion foreign-exchange market. He specializes in spotting trends in emerging market currencies for his Exotic FX Alert subscribers. You can read about his latest findings in his special report.