Balance of volatility is the key to unlocking profits in the foreign exchange market; too little and your returns are scant, too much and you could get caught out and lose everything.
Recent months have seen extreme swings in the markets with previous safe havens no longer offering sanctuary for investors and economies that promised so much failing to deliver.
With global growth so stunted, procuring a return has become increasingly difficult for foreign exchange traders, particularly with the US dollar and euro both struggling to combat the effects of the debt crisis and fiscal weakness. It has become increasingly difficult to trade profitably in developed economies, with many investors turning their attention to emerging markets instead.
Brazil was originally considered as a very viable alternative with its political climate one of the steadiest in Latin America. However, the surge in demand for its currency has led to the government taking active steps to tamper its climb and means that it no longer offers a substantially high yield.
The price of oil has continued to climb in 2011 and remains elevated, with no sign of a retracement. While some developed countries whose economy is strongly linked to the oil, such as the US, may not be the right vehicle of choice, their partners may be worth considering.
Canada is a good example and as the United States’ close neighbor, it benefits from close trading links while remaining separate from many of the problems the world’s super-power has experienced. Canada has a huge reserve of minerals and commodities and a stable economy with a much smaller deficit (in 2010 it had a trade balance of just -$8.7 billion), a fact that has led many experts to tip the Canadian dollar as one to watch. It has also retained the top-notch credit rating of AAA.
Another good oil-related currency and also suitable alternative to the Brazilian real could be the Mexican peso. Mexico supplies the second largest amount of crude oil in the world and its economy depends on the commodity. The country has a trade deficit of just $3 billion and a debt equivalent to just 37%.
The Russian Ruble has also drawn a significant amount of attention, with some sources suggesting a pairing with the euro. The Russian economy has a debt equivalent to just 9% of GDP, compared to 63% for the US and has strong commodity exports. The economy is expected to outperform all other nations in Central and Eastern Europe, as well as the Middle East and Africa, with predictions around 5%. The current central bank leaders are also expected to boost foreign exchange by relaxing their tight grip on rates during 2012.
The South Korean won is a currency tipped by some experts, with the country holding a trade surplus, controlled inflation and low debts, equivalent to just 23% of GDP. The country has a strong credit rating with all of the top agencies and is a major exporter.
However, there have also been concerns over the political instability of the country, with the ongoing hostilities with its close neighbor, North Korea always a concern. With the recent death of North Korea’s dictatorial leader, Kim Jong-Il and the subsequent appointment of his youngest and very inexperienced son, Kim Jong-un, there are some uncertainties about whether the fragile balance between the two warring nations will be disturbed. The current uncertainty over the political climate in North Korea may well mean that the South Korean won gains could be capped or short-lived.
Experts in foreign exchange have suggested that 2012 may not be as tumultuous as 2011, but there is no doubt that in order to make a significant gain, emerging markets should be considered. While they attract a much higher level of risk, developed economies, as a general rule, are being thumped much harder by the instability in the global economy and gains could be pared.