Category Archives: Fundamental Analysis

The Complex Japanese Yen

japanese yen

Trading foreign currencies in the derivative markets is not an easy pie to devour. As a lone individual trader along with many others, you have to compete with well-established banks, trading houses and other financial institutions that have developed years of experience in trading currencies. You cannot hope to make gains while you remain uninformed. To be successful you must benchmark the way operations take place in well-established players of the market.

This means that your fundamental knowledge must cover the basic and major aspects in your analysis; as such big players do it. The knowledge includes current economic data of the country, the effects of dynamic interaction between economies and any other unique elements affecting currencies.

The Japanese Yen is among the eight most traded currencies of the world. These eight currencies account for more than 80% of the global trades. The Bank of Japan, mandated to monitor JPY, faces damning problems when it comes to stabilizing JPY. It has to keep interest rates lower to allow its exports to run, to spur growth and fight deflation and to keep employment figures up.

You need to dig more in to Japanese economy to trade JPY successfully. From being oldest economy in the world to being the leader in electronics, automobile manufacturing and ship construction, Japan still lacks the energy to give it a strong economic growth. For most of the past decade, Japanese economy has lingered at meager growth rates, up to 2% at max and sometimes even contracting. Since the burgeoning economy of China started to overshadow global economy, Japan with its dwindling fertility rates and older workforce has to rely more and more on economic partnership with regional powerhouses such as South Korea.

You also need to understand that many countries around the globe, particularly in Asia, keep large reserves of Japanese Yen to help them in import Japanese goods and meeting trade obligations. That said, Japan generates huge trade surpluses and altogether garners a lot of positive strength for its currency. At the same time, Japanese economy is heavily entangled in domestic debt. Its domestic nature of debt, that does not create alarm bells with the traders; however, it has caused political turmoil in the country.

There are specific elements that drive the demand and supply of the JPY in foreign exchange market. Just like the consumer / business confidence report is released in the USA, the Bank of Japan issues Tankan Report every quarter which explains the Japanese business mood. The Japanese stocks and trading are particularly responsive to this report. Second major driver for JPY is the carry trading carried out by Bank of Japan. The Bank of Japan offers its own currency to traders around the globe, to enable them to benefit from other high yielding currencies, against some premium of course.

Among other important aspects, affecting Japanese stock and currency are the natural disaster the country faces. It has been affected countless times with powerful earthquakes, hurricanes and even tsunamis.

If you are a long-term trader, such fundamental information is beneficial for you. However, even the short-term traders must know, what actually is going on behind a currency when they attempt to explain price bars with technical tools.

Author Bio:

By Free Forex trading – intellitraders.com

Yen likely to continue weakening

japanese yen

Greetings fellow traders!

I hope you’ve been paying attention to the forex market lately because there is a massive profit opportunity ripe for the taking. The Japanese Yen has been taking a beating lately. It has been falling in value since July of 2012 and in my opinion the conditions are such that it will most likely continue its downtrend for a bit longer. Japan’s new PM (Prime Minister) Shinzo Abe is determined to stop the nation’s past rampant deflation. In order to achieve this long term goal he has recently been putting a lot of pressure on the BoJ (Bank of Japan) to set it minimum inflation target at 2%. We will know for sure if this policy is adopted or not at the next rate review  meeting which should take place January 21 to 22. Once this policy is officially adopted and announced to the world it pretty much guarantees continued easing by the BoJ most likely in the form of an increase in its 101 trillion Yen ($1.2 trillion) asset buying and lending program.

Now the question is, should we put on further short Yen positions? Personally I’ve been short Yen since November 2012 (ie long gbp/jpy, eur/jpy, usd/jpy). I think yen pairs will continue to rise and this is what I’m betting on. Is it too late to get in this if you missed the train two months ago? It’s tough to say, but most likely not. You gotta make sure you get in on retracements and set a fairly wide stop loss and wait it out.

Feel free to tell me what you think and share your trading idea(s) or your opinion regarding my current yen bearish position.

Join me in the Interactive Trading section of my forum and let’s chat:

http://www.forexnirvana.com/f50/

Now if you’ll excuse me it’s time to get back to my trading.

Happy trading and many pips to you all!

Alan out.

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It is an exciting time of year for forex traders who are in the know:

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  • And the ongoing European debt crisis

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About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

What a German Departure Could Mean for Currency Investors

Jack Crooks

We all remember the term “Grexit.” It was coined when investors began thinking Greece might soon exit the euro zone. Not long after came similar headwinds in Spain. And analysts began talking of Spain possibly leaving the euro zone, too.

At about that time I looked hard at whether Germany might in fact be the first country to bow out. I wondered if they would take their ball and go home. And I wondered if the lackluster potential of Germany’s intra-euro trade partners was worth the headache.

Now …

Others Are Wondering
Those Same Things

I came across an article in the Financial Times this week written by Martin Wolf, who is widely considered to be one of the world’s most influential writers on economics. He was expounding upon a Centre for European Policy Studies (CEPS) working paper suggesting German exposure to its fellow euro-zone members is not as substantial as feared.

Wolf mostly agrees. But Wolf and the CEPS go their separate ways at the bottom line.

You see, Germany holds claims on euro-zone periphery nations. Those claims are driven to some degree by Germany’s current account surplus — the amount they export over the amount they import — and by speculative capital flows. In other words: Germany’s trading partners owe them money. And these trading partners are dumping boatloads of cash into the safety of German assets.

If the claims were based mostly on current account surplus, Germany’s risk would be substantial. But since speculative flows have become a larger part of these claims, Germany could survive if the euro zone fell apart or if they decided to exit.

They would, however, need to carefully manage converting inflows into their new currency, thereby pushing losses on said claims onto the periphery nations via a devalued euro.

Here is the difference between Wolf and CEPS …

CEPS believes fear over German claims are over-exaggerated and suggests Germany should be able to finance and manage euro-zone recovery efforts without taking on undue risk should the euro zone fall apart.

Wolf also believes fears over German claims are over-exaggerated. But he suggests Germany should be able to exit the euro zone instead of dealing with the years of agony in managing euro-zone recovery efforts.

We can’t underestimate the political will of key players in this crisis. Indeed, this is without doubt the highest, and perhaps insurmountable, hurdle. But I think a German exit is looking better and better each day while …

The Euro Zone Is Looking
Worse and Worse Each Day

Will Germany be the first one to exit the euro  zone?
Will Germany be the first one to exit the euro zone?

The IMF continues to scold Greece for not meeting its budget goals. And they continue threatening to withhold the latest promise of bailout funding. The Greek political scene is a mess, and the people aren’t too happy either. But Greece is small potatoes.

Take Spain, where everything is going wrong …

Spanish 10-year note yields are back above 6 percent. Every step above this level adds pressure to Spain’s debt obligations. Capital is rapidly fleeing the banking system. Regional governments are requesting bailout money from the central government. Catalonia, by output the largest of Spain’s 17 autonomous regions, is considering breaking off and seeking independence from Spain.

Italy isn’t in much better shape. France is laying low because they can’t afford assisting the least of these euro-zone countries. The relatively better off countries maintain significantly more exposure to the periphery nations than Germany does.

Still, Germans bear most of the responsibility for bailouts. But remember: there are all kinds of conditions on the ECB bond buying and the upcoming European Stability Mechanism (ESM). It’s already been determined that Germany can’t legally be required to front more cash than what has already been decided.

I suppose we should expect more meetings, more decisions, and more can kicking … to find a solution. We could be talking years of this stuff. And for what end? It changes nothing.

Is the Captive Market
Worth the Pain?

Clearly, Germany has made hay off of the common currency. It’s had a captive market to sell its goods. Many would question why Germany would exit the euro and forfeit this advantage.

A reasonable question. But the market seems to be forcing a slow, painful rebalancing anyway. The acquired mercantilist policy Germany lucked into is losing its appeal.

Germans are quick to tout the discipline, dedication, and financial prudence of their countrymen. I won’t disagree. But consider where they are now:

  • The pace of real disposable income growth is slow; wage growth is stagnant.
  • Consumption growth is also slow.
  • Productivity is not significantly increasing relative to some other developed economies.
  • Fiscal austerity is keeping demand constrained.

There is nothing inherently wrong with the above bullets taken in isolation. In fact, I very much respect a producer-oriented culture instead of a consumer-oriented one.

But at a time when the end result of prosperity is slowly slipping out of reach for a growing percentage of the population, expect a change. Enter the policymaking superheroes. It is time for them to swoop in and promise a better standard of living for Germans.

If they don’t, they’ll eventually be up against potentially higher inflation, a loss of productivity, risky claims on external surpluses, and growing bailout obligations to euro-zone members mired in prolonged recessions.

A German Exit Leads the Way …
to Competitiveness

A German exit means Germany abandons the euro and adopts its own national currency, say the deutschemark. Since Germany’s economy is far more solid than remaining euro-zone members, the deutschemark would appreciate relative to the euro.

A stronger deutschemark brings about a higher standard of living in Germany. It helps them avoid inflation and better balance their economy.

A cheaper euro makes the producers in periphery nations more competitive. That then gives them a growth outlet to escape more quickly the grip of deflationary recession.

Seems like a decent compromise.

If things stay as they are now, the periphery becomes desperate for German assistance; Germany becomes insistent upon the periphery forfeiting sovereignty; at best, the current economic imbalances are perpetuated and lead to deeper recession for the periphery as well as greater internal and external headaches for Germany.

So is it time for Germany to go?

We’ll have to wait and see. But if Germany goes, there is no doubt in my mind that the euro will fall off a cliff … a very deep one.

Best wishes,

JR

Source: http://www.moneyandmarkets.com

As China goes, so goes oil; as oil goes, up goes the U.S. dollar!

by Jack Crooks
Saturday, September 1, 2012 at 7:30am

Jack Crooks

I realize it’s never easy and rarely simple. But today I’m going to help you understand why global money-flow drives key markets and how that flow could be reversing. If I am right, it is good news for long-term dollar bulls like me, bad news for China bulls, and terrible news if you are still riding on the Peak Oil bandwagon expecting oil to hit $200 barrel soon.

Three major realities lead me to those conclusions:

Reality #1—
Foreign exchange reserves and
growth is falling in China

Some experts estimate that up to $50 billion a month is exiting China. Keep in mind, when money leaves China, it leaves as dollars for the most part. Investors exchange yuan for dollars inside China, or Hong Kong, then move those dollars to safe haven areas, such as U.S. Treasuries, U.S. farmland, or Vancouver apartment buildings.

Year-on-year change in Chinese
Foreign Exchange Reserves Growth

Chinese foreign exchange reserves

Reality #2—
Demand for oil is falling along with
global growth, and the U.S. is leading the way

China’s crude oil imports fell 3 percent in July from a month ago to a nine-month low.

The slowdown in growth is hitting oil demand hard in the country that has driven the increase in global fuel consumption for a decade. In fact, the International Energy Agency slashed its forecast for Chinese oil demand growth in 2012 by a third to 240,000 barrels per day (bpd) in its August monthly report. Just a month earlier, the agency had forecast growth of 360,000 bpd.

And in the U.S., according to Reuters, oil demand in July fell to its lowest level in nearly four years.

If demand is already low and appears to be heading lower, I think it is time to mark down oil prices.

The chart below shows oil hit a brick wall of resistance at around $98 per barrel; that happens to be a key retracement level. Plus, the price oscillators are turning down from an “overbought” level. This price action seems to be confirming bearish fundamental news.

Oil Futures Daily

Reality #3—
The dollar is the
world’s monetary standard

The demand for dollars is poised to rise as the supply falls. I say that because:

  • Dollar-based funding (supply) for trade finance and other credit lines is falling as European banks reduce the percentage of debt on their balance sheets.
  • As I explained above, dollars are leaving China. And I expect China’s foreign exchange reserve hoard to continue to decline.
  • Falling oil prices are dollar bullish, as countries that buy oil on world markets — priced in dollars — can reduce their dollar credit lines, which reduces the potential of a new supply of dollars from coming on the market.
  • If a global credit crunch similar to the credit crunch of 2007 materializes, demand for dollars and dollar-safe havens will soar.

Now, take a look at the chart below, which shows how all of these global money-flow factors discussed above relate to each other.

Chinese foreign exchange reserve growth (red line);
oil prices (black line); and the U.S. dollar index (blue line)

US dollar, oil, China FX

As you can see …

There is a lagging correlation between Chinese FX reserve growth and oil prices, with Chinese FX growth leading.

There is a tight negative correlation between oil prices and the dollar i.e. as oil prices rise the dollar tends to fall and vice versa.

If these macro trends continue to play out as I expect, your decision is easy: Sell oil, buy the dollar, and hold those positions until the trend changes.

Have a safe and happy Labor Day weekend,

Jack

Source: http://www.moneyandmarkets.com

Pros and Cons of Fundamental Forex Trading

Many forex traders are technical traders, but there is a school of thought that says fundamental analysis is the best route. Fundamental analysis is the process of analyzing the market using both qualitative and quantitative factors that take into account economic and political factors.

Fundamental traders are concerned more with how the economy and political landscape shapes the world and affects trading activity. In forex, fundamental traders look at the macro and micro economic factors that affect a nation’s currency to determine the value of that currency relative to another currency. Since fundamental indicators don’t always result in instant market reactions, fundamental traders tend to have a more long-term view of the market.

While there is no shortage of trading software and tools for the technical analyst, fundamental analysts often find that they must put in more manual labor to realize a profit. Is it worth the effort?

The Benefits of Fundamental Analysis

There is a certain kind of romanticism surrounding fundamental analysis. The idea that politics and the economy drive financial decisions means that there’s more than just numbers that move the world along. This lends an artistic element to the process of analysis. Still, fundamental traders do look at numbers including:

  • the measure of overall economic growth for a country.
  • trade and current account balances.
  • interest rates and investment (i.e. bond) yields.
  • political stability.

The measure of economic growth for a nation is often measured by its GDP, but traders will often look at unemployment rates as well. Any decrease in the employment rate is seen as a weakening of the economy. When economies weaken, central banks have a history of lowering interest rates to spur growth. For traders, this means inflation. Inflation destroys the value of a currency causing traders to bet against that currency. If enough traders have the same view of a weak nation, that nation’s currency value could drop.

Trade balance can dramatically affect a nation’s currency. When a country has a trade deficit, it will generally result in a weak currency since that country will have continuous commercial selling of its money.

GDP, or Gross Domestic Product, can foretell a strong or weak nation. If GDP rises, there is an expectation of higher interest rates. These higher rates may be positive for a country. As interest rates rise, borrowers must pay more for their debt. Some businesses will default. Even so, the rising rates curb inflation by reducing the incentive to borrow. By curbing inflation, a currency grows stronger because it is not being devalued as much. Taken to the extreme, a deflationary environment would make a currency grow (sometimes rapidly) in value as fewer currency units become available in the marketplace.

An economy can still grow under high interest rate environments. This growth would be good for the economy, thus signaling a buying opportunity for forex investors.

The Disadvantages of Fundamental Analysis

Some critics of fundamental analysis point out that:

  • fundamental analysis requires a background knowledge of economics and is difficult to understand.
  • fundamental analysis is time consuming.
  • the information unearthed by fundamental analysis is already priced into the market.
  • it fails to give traders objective trading signals.

Economics is not an easy subject to master. There are two basic competing theories of economics: the Keynesian school of economics and the Austrian school. Keynesians believe that economic growth can be achieved through government stimulus. When an economy is sluggish, the central bank can “grease the grooves” by providing an infusion of capital to the market. The market then invests this money thus contributing to a recovery.

The Austrian school holds the opposite view. Instead of government stimulus helping the economy, it plants the seeds of its own destruction. The boom created by an influx of capital is really just a sign of malinvestment waiting to crash. This, according to the Austrians, is why central bank-induced boom periods are always followed by busts.

Many economists study just one theory for their entire life and still never master it enough to predict market trends. For traders, they must be able to pick the correct economic theory and know how it will impact the markets – a tough job at best.

Because of the nature of fundamental analysis, it’s time consuming. While some calculations can be done to assess the health of an economy, much of the analysis is qualitative. In other words, the trader has to know how to interpret the news and political speeches. This could take years of practice not to mention the fact that economic and political news may or may not have an immediate effect on the currency markets.

Many technical traders argue that markets are perfect and that this means that all of the fundamental indicators are already priced into the marketplace. This line of thinking is closely related to the efficient market hypothesis which states that financial markets are not over or undervalued. All relevant information is instantaneously priced into the markets. If that’s true, then fundamental analysis is a waste of time.

Technical traders also believe that fundamental analysis does not give investors the ability to make objective trading goals. Since much of the work is qualitative in nature, fundamental analysts are often perpetual “buy and hold” investors that seek gains over a long period of time. Because there’s no software that tracks historical trends, there’s no data mining. It’s this lack of historical data that accounts for this criticism of fundamental analysis.

Making a Choice

One option that you have open to you is to blend both technical and fundamental analysis into a new trading strategy. You don’t have to choose just one. In fact, an increasing number of traders use technical analysis to spot trends, then use fundamental analysis to confirm the validity of the trend before investing. A combination of the two methods might yield good results and provide flexibility in your trading strategy.

Author Bio:

Guest post contributed by Stacy Pruitt, a freelance forex strategy and finance writer. Stacy writes about advanced trading. Learn more about forex trading.

Is the Yuan Ready for Prime Time?

by Jack Crooks
Saturday, April 21, 2012 at 7:30am

Jack Crooks

Many commentators who follow the global markets were very excited on the recent announcement that China would “widen the trade band” for its currency.

The People’s Bank of China, China’s central bank, said it would allow the yuan to trade up to 1 percent on either side of a midpoint price it sets every trading day. Previously the currency was allowed to fluctuate 0.5 percent.

Some were so overwhelmed, they pronounced this must be proof positive China is not headed for a hard economic landing, and soon its currency will be replacing the dollar as global reserve currency. That is a bit of hyperbole, to say the least.

If the Chinese currency is going to lift the Chinese economy out of trouble, it will take a lot more than a 1 percent change in the trading band. The country requires a major restructuring of its growth model, to which its currency is only one component; albeit a very important one. The belief that this move is a reflection of the fact the yuan will displace the dollar in the near future seems farcical.

China’s Desire for World Status

I don’t think there is any doubt that China would someday love to attain world reserve currency status with the yuan. And indeed, they have taken some minor steps in the process of internationalizing their currency.

For example, China has established currency swap arrangements with some of its key trading partners, so both countries can bypass the U.S. dollar. It has also allowed a Chinese yuan Hong Kong deposit to be created; it trades freely in Hong Kong. And then there is the widened trading band, which I discussed at the beginning.

These actions, plus their general disgust with being locked into the U.S. dollar reserve system (the U.S. Treasury/Federal Reserve implicit weaker dollar policy means China must pay more for imported commodities as most currencies are priced in dollars), means China would jump at the chance to have an alternative.

Given the dismal status of the global monetary system, China isn’t the only one unhappy with the U.S. dollar as the global reserve currency. But if history is any guide, shifts in the global monetary system take much longer than we expect …

One reason is because they are haphazard. Changes in global monetary status morph, or at least it has been that way historically. All we have to do is watch the G-20 to see how difficult serious, multi-global planning can be …

The handoff from pound Sterling to the U.S. dollar was an unplanned evolving event that accelerated after WWI.

And there was no great planning when President Richard Nixon took us off the gold standard, which ushered in the error of floating rate currencies. The gold was draining out of Fort Knox, something had to be done. Game over. Dirty float for a couple of years, then no pretense whatsoever of anything backing the currencies of the world’s major powers. Just faith in governments to repay!

>From that point onward it was clear to all that money was not a store of value, but simply a unit of exchange once it became de-linked from real value.

So it leaves us where we are: Stuck with a global system of money that can be created and destroyed at the whim of governments and central bankers with the U.S. dollar the core of the system.

It’s no wonder many are looking for something better.

But even if the Chinese yuan is something better (I don’t believe it is), let me explore the myth that …

The Chinese Currency Will
Soon Replace the Buck

Rather than turn this into a LONG essay, I will break it down into seven bite-size chunks — the reasons why I think the Chinese yuan is a very long way from world reserve currency status.

Reason #1—
Size isn’t everything

It is never as simple as “the world reserve currency goes to the country with the largest global GDP.” The U.S. surpassed the U.K. in terms of total GDP back in the 1870s. Yet pound Sterling remained the reserve currency for another 40 years or so.

Reason #2—
Wrong growth model

Remember, the world reserve currency country is saddled with a consistent current account deficit. Thus, China must push out trillions of renminbi and renminbi-based assets into the world economy. Fine if your model is open and based on consumption. Not so good if it is driven primarily by exports, as China’s is. So we will need to see a big shift in China’s growth model. That will be a wrenching long-term process.

Reason #3—
Lack of free market capitalism

The reserve currency country must open its market to allow foreign investors to hold local assets. This means China will have to make a complete change to its current political structure to allow much more freedoms for citizens (not only allow money to flow in, but allow its citizens money to flow out freely).

The system in place is not something that is likely to change anytime soon despite the window dressing. The communist party still maintains absolute power, even though comments from visitors claim there was free market capitalism during their trip to the Orwellian Hall of Mirrors. It shows just how well the central committee is doing its job.

The West in general is duped by the Chinese leadership. If you want a better insight into this issue, I strongly suggest you read, The Party: The Secret World of China’s Communist Rulers, by Richard McGregor.

The latest scandal regarding the powerful Bo Xiang and the death of a British businessman, highlights the fact the Chinese leadership is less than meets the eye.

Reason #4—
The U.S. is becoming wealthier
relative to China

Say what? All true. The fact is that the average Chinese citizen is more than $17,000 poorer relative to the average American than he was in 1991. Per capita income for relatively large states is the best single determinant of competitiveness long term. So until this trend changes, it is highly unlikely the U.S. will give up the mantle of currency reserve status.

Reason #5—
Low projections

Even optimistic assumptions from those who should know, assuming China’s growth remains on track, suggest by 2035 up to 12 percent of global reserves may be held in yuan. Indeed, a far cry from world reserves status.

Reason #6—
China’s debt bomb

Officially, all is good. But unofficially, China may be facing its own debt bomb that could dampen growth for years, not just one or two quarters. Never say never … it happened to Japan.

According to Reuters Breakingviews,

“The government’s official debt is only 15 percent of GDP, but it adds up quickly. Ratings agency Fitch estimates a bailout could cost 20 percent of GDP. Add the unpaid cost of the last bailout, debts at state-owned entities, local governments and pension liabilities, and a Breakingviews calculation suggests Beijing’s debt rises to roughly 130 percent of GDP.”

Reason #7—
Offshore deposits may backfire!

The current attempts at internationalization of the yuan seem backwards. Normally a country opens its capital account and upgrades its domestic financial system before attempting to internationalize its currency. Instead China is offering bi-lateral exchange deals with some trade partners, and that gets a lot of press.

But that seems to be mere window dressing as countries are really taking up the credit China is offering. And the developing offshore yuan deposits in Hong Kong may actually backfire, as the unofficial yuan rate in Hong Kong (CNH) is fluctuating around the official rate in China (CNY). This may force China’s central bank to actually hold more dollars.

BUSTED!

China’s decision to widen the trading band on its currency is a step in the right direction. But it doesn’t mean the yuan will be a real challenger to the dollar anytime soon.

So as far as I’m concerned, the myth that the yuan will soon replace the dollar as the world’s reserve currency is clearly busted.

My advice: Don’t get caught up in the hype. It will be a long time before the Chinese currency is allowed to fluctuate much against the U.S. dollar. If you want action in the currency markets, the yuan is not the place to be.

Best wishes,

Jack

Source: http://www.moneyandmarkets.com

Grab 50% Gains with This Unpopular Currency

By Evaldo Albuquerque, Editor, Exotic FX Alert and Currency Capitalist

Mr. Market is a very tricky character.

He always does what you least expect.

Take last year, for example. The consensus at the beginning of 2011 was that global economic growth would be healthy, and that it would be a good year for stocks.

We all know it didn’t turn out that way. The market had lots of ups and downs, and finished the year at breakeven.

This year started with the consensus that global growth would face a lot of challenges, so stocks and commodities would have a tough time. So the least thing anyone expected was for the market to begin the year with a big rally in stocks and other risky assets.

And of course that’s exactly what we’re getting. That’s how Mr. Market operates. And that’s why it pays to bet on unpopular assets. It’s no different in the currency market.

One of the most unpopular currencies has just started a big rally.

It’s Time to Love This Hated Currency

When looking for trading opportunities, it’s always a good idea to start asking “what is it that everyone hates right now?”

Late last year, I asked myself that question. What is the most hated emerging-market currency right now?

The Mexican peso was on the top of the list. It was one of the worst-performing currencies of 2011, losing about 18% of its value just in the second half of the year alone.

That’s a huge move in the currency market. To put it in perspective, the euro, also a contender for the most hated currency in the world, lost less than half of that during the same period.

The least thing anyone expected late last year was for the Mexican peso to start a big rally. So I jumped right into the trade.

There are two particular assets that helped me make that decision. Let me explain.

Finding Something Fishy in the Charts

When I trade the Mexican peso, I always have to check how two other assets are doing: stocks and oil. The reason is simple.

The Mexican economy still depends a lot on the U.S. economy. We buy about 80% of their exports. So if our economy is doing well, their economy tends to do well too. So far this year, economic data has been surprisingly strong in the U.S. No wonder stocks have been rallying.

The Mexican government is also very dependent on oil revenues. As a major oil producer, its economy tends to do well when the price of oil is rising.

So both the stock market and oil have been rallying. With the S&P 500 trading above 1,300 and oil above $100, the Mexican peso should be shooting through the roof, right?

But it didn’t happen. Check out the chart below.

Mexican Peso Has a Lot of Catching Up to Do

It’s clear there’s a pretty strong correlation between the Mexican peso, stocks, and oil. They moved together for the past 3 years. But while oil and stocks started a major rally in October of last year, the peso just moved sideways and was left behind.

It didn’t make any sense.

It’s Not Too Late to Profit

The Mexican peso is only now starting to move in the “right” direction. So it still has a long way to go catch up with the S&P 500 and oil.

An easy way to profit from that in the spot market is to short the pair USD/MXN. By shorting the pair, you will be betting the peso will appreciate against the dollar.

In fact, that’s exactly what I did when I saw this divergence in the chart. I recommended that my Exotic FX subscribers buy the peso.
We now have open profits of about 60%, using 20:1 leverage. And we’re shooting for tripe digit gains.

But it’s not too late to bet on the peso.

According to my analysis, the pair USD/MXN will move down to 12.90, at least. That’s a potential profit of 50% from current levels, using 20:1 leverage. And if stocks continue to move higher, the pair will drop much lower than that. It is now oversold, but I would short USD/MXN on any pullbacks.

This year we will see lots of ups and downs in the S&P 500. Trading the Mexican peso will be one of the easiest ways to play that volatility in the stock market.

Stocks have started the year on the right foot. And so has the peso. Until very recently, everyone hated the Mexican currency. But now it’s starting to get some love.

Under this positive investment sentiment, the peso remains a very good bet.

Best Regards,


Evaldo Albuquerque
Editor, Exotic FX Alert and Currency Capitalist