Tag Archives: Currency Cross Trader

The Currency to Own this Decade

(Hint: It’s Not the Iraqi Dinar)

By Sean Hyman, Editor, Currency Cross Trader

It’s a strange currency world we live in.

The two most traded currencies – the dollar and euro – are both suffering. The euro is fighting an uphill battle with a sovereign debt crisis, while the dollar is paying the price for all the Fed’s currency meddling over the last few years.

At the same time, other currencies have the exact opposite problem – they’re too strong. The Japanese yen has gained so much in value that the Bank of Japan had to intervene several times over the past year to drag down its value.

With all these currency crises in full swing, it’s no surprise that investors are looking for alternative currencies to buy and hold.

But unfortunately, some are finding the Iraqi dinar…

Thanks to some slick marketing campaigns, first-time currency investors are pouring their savings into the Iraqi dinar because they believe it “will revalue and hand them a fortune” a few years down the line.

Personally, I don’t buy into this dinar story.

For my money, there are much stronger alternative currencies to buy and hold for the long-run. I’ll introduce you to one in just a second. First, let’s take a closer look at the dinar…

The “Big Boys” Steer Clear of the Dinar

The short answer is, as a currency investment, the Iraqi dinar is sorely lacking in the fundamentals that you want when you buy a currency for the long-term.

Besides being an oil nation (and let’s face it, there are plenty more desirable oil nations out there), Iraq is not what we would classify as a politically sound country. After all, they just put their new constitution together in 2005.

And long-term growth? Stability? That’s all debatable in Iraq.

But all that aside, what’s more important is you can’t trade the Iraqi dinar. The dinar is NOT one of the 60 tradable currency pairs in the $4 trillion Forex market.

That means the big institutional players don’t want anything to do with this currency. If they did, you would be able to trade it.

Instead, only the most speculative retail, individual investors are buying into this Iraqi dinar theory. That’s a bit concerning. It tells me that these retail investors have been sold a bill of goods – not a real asset with long-term value.

In fact, I look at this currency more like a penny stock than anything else. It’s extremely risky, more like a shot in the dark than a long-term currency play. That’s why none of my currency colleagues recommend it.

Just Because It Revalues,
Doesn’t Mean You Profit

As a currency, most speculators have been buying the Iraqi dinar because they are hanging their hats on a potential revaluation. Various websites have been claiming this revaluation will happen since 2004.

But let’s assume for a second that Iraq did revalue their currency. That does NOT mean the currency will necessarily leap in value compared to the U.S. dollar.

After all, “revaluing the currency” didn’t help anyone holding the Turkish lira a few years back.

In 2005, the Turkish government revalued the lira from 1,350,000 lira to 1.35 lira.

In other words, the government slashed six zeroes off the price of the lira. But in reality, the “new lira” was still worth the same amount as the old lira in dollar terms. Before the revaluation, one dollar bought you 1.3 million lira. After the revaluation, one dollar bought you 1.35 lira.

But whether it was a million lira or a single lira, this revalued currency was still worth the same in dollars.

Now could the same thing happen in Iraq? Absolutely.

That’s why I would much rather focus on more stable emerging markets with currencies that have a much higher statistical probability of rising in value.

For instance, the Chinese renminbi…

Forget the Dinar, Buy This Instead…

At this year’s Global Currency Expo, five different currency experts recommended you buy and hold the Chinese renminbi for the next 10 years (that includes yours truly).

(By the way, not one expert at our sold-out currency conference recommended you buy the Iraqi dinar – and these guys are the top of their fields.)

So why buy the renminbi? It’s more than just the real possibility the Chinese will revalue their renminbi once again, or even let it free-float.

The most respected financial minds in the industry are saying that the Chinese renminbi will eventually replace the U.S. dollar as either the next, or one of the next reserve currencies of the world.

That means central banks which currently hold dollars, euros, and gold in their coffers will be able to stockpile tradable Chinese renminbi instead. Scary thought, right? It would be a devastating blow to the U.S. dollar, and would force the dollar/renminbi exchange rate to plummet.

More importantly, it also means the dollar will have some competition for pricing of the world’s commodities.

If commodities were priced in anything but dollars, everything you buy on a daily basis would skyrocket in price. As a country, we would be forced to pay for real commodities with real assets (not just more printed dollars), like all other countries in the world do now.

Buying the Iraqi dinar wouldn’t help you there. But buying the currency that commodities could potentially be priced in (like the renminbi) would offer some protection.

Again, no “revaluation” necessary… just the steady moving hand of the market.

Bottom line: there are plenty of reasons NOT to buy the Iraqi dinar this year, and plenty of great reasons to buy renminbi instead. So I say stick to the currencies that have value, and leave the dinar for the speculators who don’t know any better.

Have a Nice Day!

Sean Hyman
Editor, Currency Cross Trader

How to Make a Killing in the Yen

Japan Is About to Cry “Uncle!”

Make a Killing as Japan
Intervenes in the Yen Once Again

By Sean Hyman, Editor, Currency Cross Trader

Everyone wants to stay competitive.

Target wants to keep their prices somewhat in line with Wal-Mart. Burger King wants to keep their pricing somewhat in line with McDonalds. Otherwise, they lose customers to their competitors.

The same thing happens in the currency world.

All throughout Asia, many countries do tons of business with the U.S. and Europe. These Asian exporters have to keep their pricing somewhat in-line with each other.

Otherwise, their big export customers in Europe and the U.S. will do their shopping elsewhere.

How does a whole country keep their pricing competitive? Easy. They keep their currencies valued about the same.

An Overly Strong Currency
Can Destroy an Economy

If a country doesn’t manage their currency, their major export goods will start looking “expensive” to the rest of the world. If that happens, their best export customers will look elsewhere for cheaper goods.

This wreaks havoc on export countries.

Businesses slow down. Companies lay off workers. Unemployment levels eventually rise. It also slows down that nation’s overall growth.

So there’s a lot riding on these countries to “get it right” and keep their exchanges rates somewhat in-line with one another. Otherwise, they lose business to another exporting country who managed their exchange rates more effectively.

Japan is one of the Asian exporters that occasionally loses its competitive edge in the global market.

It’s all because of the Japanese yen.

The Japanese yen is seen as a “safe haven” currency. So when stock markets drop, or disaster strikes in some part of the world, traders pile into the yen and force it to climb against the dollar. Suddenly Japan loses its competitive advantage.

To make matters worse, Japan is a big export country. Japan has big-name exporters like Toyota, Sony, and Panasonic. Each of these exporters stands to lose billions in business as the yen strengthens in value.

So it’s no surprise that these companies scream at the Bank of Japan to do something when the yen gains in value.

They demand the Bank of Japan (BOJ) “intervene” in the currency market to force the dollar to rise against the yen. They want to push the USD/JPY exchange rate up enough to get the U.S. to buy Japanese goods again.

What Intervention Looks Like

To intervene in the markets, the BOJ must sell the Japanese yen aggressively in the market to try to manipulate the yen’s price.

The Bank of Japan did this back in 2004 for instance. They were very successful in the short-term. Check out the chart below, and you’ll see what a “currency intervention” looks like.

Japan Intervened Twice in 2004!

Click here to view larger image

As USD/JPY goes lower on the chart, it means the dollar is dropping like a rock, while the yen gets even stronger.

So when the central bank intervenes, the Bank of Japan dumps Japanese yen and buys up dollars as quickly as possible. That tends to shoot the USD/JPY higher on the chart, at least in the short-term.

For example, in February 2004, the Bank of Japan intervened in the markets and pushed the dollar up 6.71% against the yen in just 12 days. That’s an unleveraged return.

However, even with a modest 100-to-1 leverage, you could have made over six times your money in the Forex market.

Even without doing the math, you can see Forex traders made a killing in 2004, simply by buying the USD/JPY. (In effect, just following the BOJ’s lead.)

For the Forex traders out there… that was a move of over 700 pips. So if you were trading five mini-lots, you would have made $3,500. Trading 10 mini-lots, you would have made $7,000.

In April of 2004, the central bank dug their heels in and really taught the USD/JPY short sellers another lesson.

They intervened in the market and forced the USD/JPY pair to climb over 1,100 pips or 11.05% in under two months. So if you had bought the pair, you would have potentially made $1,100 per mini lot traded in the Forex market.

Now the Bank of Japan doesn’t intervene in the market very often. In fact, they didn’t intervene again until September 2010. Then they did again in March of this year.

The Bank of Japan is at it Again!

Please click here to view larger image

As you can see from the chart above, the Bank of Japan has intervened twice in the past year. The Bank of Japan intervened by themselves in Sept. 2010 as they typically do.

But in March, earthquakes, tsunami and a nuclear incident made the yen stronger than ever, as traders rushed for the safe haven. That caused many G-7 central banks to join in on the party…and all intervene in the yen at the same time.

That forced a much larger leap in the USD/JPY as you can see above.

The Strong Yen is Back in
the “Intervention Zone” Yet Again

Well, that “stubborn yen” has continued to strengthen yet again. Right now, we’re right in the middle of the intervention zone (the green area), where the Bank of Japan typically intervenes in the currency.

That means it’s very possible the Bank of Japan will intervene again to push up the yen’s value. Now there’s no way to know if they will intervene tomorrow, or next month, or later this year.

But as a trader, I know those Japanese exporters must be crying uncle now. That means I’m watching and listening for any whisper of another intervention.

I know it’s coming. It’s just a matter of when.

They could intervene tomorrow, considering the USD/JPY exchange rate has hit the 78-79s (as of this writing). Or they may wait until the USD/JPY hits the 76 level like last time. Or they could even wait for a new all-time low before they act.

But honestly, I don’t care when they intervene. It’s more of a question of reacting when they do.

Once you hear about an intervention happening, there are some serious profits to be made, simply by buying the USD/JPY pair in the Forex market.

And as a long-term investor, you can short the yen in the short-term with a simple ETF.  Again, it’s as easy as shorting the yen at the proper time.

Bottom line: an intervention is coming soon. When it comes, you can make a killing simply by following the Bank of Japan’s lead and shorting the yen.

Have a Nice Day!

Sean Hyman
Editor, Currency Cross Trader

The Quick-Start Guide to Trading Currencies

forex trading

By Sean Hyman, Editor, Currency Cross Trader

Imagine for a moment you own and race thoroughbred horses.

Your pride and joy thoroughbred has been training for the past two years for the race of a lifetime – and now your horse will soon be racing for a million-dollar prize.

Naturally, in any race, there are winners and there are losers. Typically, you think about betting on the winning horse.

But what if you could place a bet when that losing horse will … well … lose?

This is where it gets interesting. And, in a moment, you’ll see how it’s possible to win on both bets. And even better, fix the horse-race in your favor.

A Stable of Opportunities

Think about it. What if you could choose your opponent for this million-dollar race? The best part: You can assign your opponent any horse you want.

Now, would you give your opponent the second-fastest horse in the world? Or would you instead give him a broken-down old donkey that could hardly run?

Yeah, I’d give him the donkey, too.

It’s kind of common sense that, if you pair the fastest against the slowest, your odds of winning will skyrocket. Or if you pair the healthiest/strongest horse against an old, weak horse that you gain an enormous edge.

After all, who wouldn’t take that bet?

Strangely, the same-exact method can work in your portfolio. It’s the secret to earning 25%…79%…even 100% more on each trade in a matter of weeks. Not months or years.

Position Yourself to Profit from Winners and Losers

When you invest in stocks, for the most part you do so with the hope that they are going up. When stocks are dropping, you can either short them (a risky endeavor) or buy put options (a much better solution).

Anyway you slice it, though, you know that some stocks are rising and falling simultaneously.

The same thing is true of currencies.

Everyone talks about the U.S. dollar and its changing value, especially in comparison to other currencies around the world. And a very savvy way to benefit from moves in the dollar is to play the currencies market.

Just like in our example of the horse race above, you would pit the dollar against another currency in the same race (or trade).

In other words, if you thought the dollar was stronger than another currency, you could buy the dollar and short another currency in the same trade. Or, you could short the dollar against a stronger-performing currency.

This takes place in the foreign-exchange market, also called the Forex or FX market.

Turn a Cracked Currency into a Portfolio Winner

Every Forex trade involves two currencies. You’re always buying one and selling another against it.

For instance, by “buying the GBP/USD,” you’re really betting the British pound will rise against the dollar – or, in effect, you are buying the pound and selling the dollar.

Now, there are about 60 tradable currency pairs worldwide. How do you choose which to trade? Well, it comes down to choosing your opponents wisely…

If you’re trading two currencies from economies that are growing at a similar pace, then you are decreasing your odds of success.

After all, if it’s a close race, and both economies are healthy, who knows which will pull ahead first?

But on the other hand, you could pair the currency from the most-pristine economy in the G-7 with the worst debt-ridden nation that can’t seem to do anything right.

After all, you can pick your opponents. You can choose any currency you want. Why not pick the “more favorable” opponent to help you win the race?

Do that and you’ve essentially got a “fixed” currency position. Just like a rigged horse race.

It’s not a gamble anymore – it’s pairing your most prized thoroughbred against an arthritic donkey.

4 Things You Need to Know to Engineer
Your Own Fixed Race

Now how to do you find the weakest and strongest countries so you can set up your own fixed currency trades?

The first thing to look at is interest rates. Currencies love higher interest rates because Forex traders are always looking for a higher yield on their trades.

As FX traders pour money into a higher-yielding currency, the currency’s price goes up. So if you’re looking for the healthiest “thoroughbred” currency, check out the one with the highest interest rates first.

On the flipside, currency traders tend to dump low-yielding currencies if there’s nothing else to bolster the price. That’s why the U.S. dollar started to sink in 2007 when the Fed first started cutting rates. So if you’re looking for the “loser” currencies, check out the ones with the lowest interest rates.

You also want to look at a country’s unemployment, and GDP growth when you’re evaluating a currency’s strength.

The healthiest currency will come from a country with low unemployment, and solid long-term GDP growth. The weakest currency will have rising unemployment, low or negative GDP growth.

So as a trader, you typically want to pair:

  • High interest rate countries with low interest rate countries.
  • Countries with low unemployment against those with high unemployment.
  • Countries with positive GDP growth against those that have a negative GDP growth (a shrinking economy) or slower GDP growth.

Here’s where it gets interesting, though…

My No. 1 Tip for “Fixed” Currency Trading

Even though there are over 60 tradable currency pairs in the world, 90% of all daily transactions involve trading the G-7 currencies (i.e., the “major currencies”).

And as I’m sure you can guess, a significant chunk of those daily trades involves the U.S. dollar. It makes sense. Traders want to pair the dollar against other currencies because the world’s reserve currency promises to be the most liquid and readily available.

However, if you’re looking to pair the weakest with the strongest, it helps to cut the U.S. dollar out of your trading.

A the most overtraded currency, it can be difficult to see where the dollar lies on any given trading day.

Also, there’s just simply more opportunity to trading non-dollar pairs (also known as “cross rates” or “crosses”).

Some of the most-commonly traded crosses include:

1. EUR/JPY (euro vs. Japanese yen)
2. EUR/CHF (euro vs. Swiss franc)
3. CAD/JPY (Canadian dollar vs. Japanese yen)
4. AUD/JPY (Aussie dollar vs. Japanese yen)
4. NZD/JPY (New Zealand dollar vs. Japanese yen)
5. GBP/JPY (British pound vs. Japanese yen)

And the best part is, any kind of “dollar-moving event” isn’t going to have much impact on these crosses. This is a great way to get portfolio diversity while spreading out your risk.

If you’re not sure whether to bet on or against the dollar, you don’t even have to go near it to participate in the currency market.

Thanks for reading,

Sean Hyman
Editor, Currency Cross Trader

Rollover Interest – Become Your Own Bank 365 Days a Year

carry trade yen dollar
By Sean Hyman, Editor, Currency Cross Trader

Dear Sovereign Investor,

When I was young, probably 9 or 10 years old, I revered my grandfather, Dwight Meeks.

A man with an 8th grade education, my grandfather was an extremely successful landlord in our little town of 16,000 people. He used to say…

“If you can learn to spend less than you make and put the difference in something that will go up over time, you’ll become rich over time.”

What was my grandfather doing? He had found a way to become his own bank. He made his money earn interest and work for him.

So after years of saving and living beneath his means, he built up some nice interest. That interest allowed him to eventually buy more than 100 rental houses in our town.

He was so well known in our little town that you would think he was the mayor. But no, this was just a smart man who learned the power of compound interest.

That way, he was working and so was his money. Most people work for money… but never have money work for them. He learned the value of doing both. It made him rich and famous (at least in our little community).

Even as a kid, I was in awe. I wanted to do the exact same thing. It took me a couple decades – but I figured it out.

A Secret My Grandfather Missed in
the Currency Markets

In my early 30’s, I discovered a completely unique way to become my own bank. Up until that point in my life, I was a stock trader. So I was used to my stocks paying me quarterly dividends four times a year.

But in my 30’s, I learned about the currency market and how you could earn “daily interest” through your Forex account on currency trades.

I was fascinated. I’d never heard of anyone earning DAILY interest except for my bank.

If fact, after I heard this, I assumed this meant I could earn interest on each business day (5 days a week). But no! It was even better. With currency trading, I could earn interest seven days a week!

It’s a little-known fact in the currency market, but you can earn what’s called “rollover interest” on certain high-yielding currencies. All you have to do is hold these currency pairs overnight. Then your FX dealer pays you for holding these pairs.

I couldn’t believe it. This was simply amazing. How many investment strategies let you earn income every 24 hours that’s paid out five times a week? Not many.

Let me explain how it works…

The Nuts and Bolts of Being Your Own Bank

All you have to do is open up a Forex account with one of the brokers like FXCM, DBFX, Forex, etc. You can do this online through their websites.

Once you’ve funded your account… all you have to do is buy a high interest bearing currency vs. a low interest bearing currency.

For instance, the Australian dollar earns about 4.75% and the U.S. dollar earns less than 0.25%. So buy buying the AUD/USD pair, you’re earning 4.75% but only paying out 0.25% of that. So you’re netting roughly 4.50% on the position just from the interest differential alone.

Even better, you’re earning interest not on the amount you put down on the trade, but on the large position you’re controlling with your trade.

While you may only have a few hundred dollars of your money tied up in a $10,000 trade (by buying 1 mini lot), you’re earning interest on the position as if you owned the entire $10,000 position outright. Yet it only took a few hundred dollars in your account to control that position.

Now that’s exciting… putting up a few hundred dollars to earn interest on $10,000. I’ll do that all day long!

With most of the major economies yielding 1% or lower, the clear leaders in the “yield game” are Australia and New Zealand. They stand out above the rest.

Japan, Switzerland and the U.S. are the lowest yielders to pair against these high yielders. And with the distinct downtrend in the dollar, it’s made it the number one candidate.

When the Cash Register Rings Each Day

Okay, so you open your account online and you fund your account (via wire, credit or debit card, etc.). Then you’ve bought your first interest bearing pair… for instance, AUD/USD.

So when do you starting getting interest delivered to your account? This will happen at the end of each international trading day, which is at 5pm EST.

Your firm takes a snapshot of your account at 5pm EST. If you’re still holding the position at that time, then your account will be credited with that day’s interest on your position usually within the next hour or two.

It’s at that moment that you’ve just become the bank.

Imagine earning interest 365 days a year like a bank. When you sleep, you’re earning interest. When you’re on vacation, you’re earning interest. When you’re working… so is your money, at the same time.

Once you allow the interest to stack up over the course of a year or two, you’ll start to realize why some call “compound interest” the 8th wonder of the world.

Have a Nice Day,

Sean Hyman
Editor, Currency Cross Trader

What’s Your Dollar Really Worth?

green dollar sign

By Sean Hyman, editor, Currency Cross Trader

As you guys know, I’m a trader. I eat, sleep and breathe the $4 trillion Forex market on any given day.

But that’s just my day job.

The other half of my life is spent at home. I live in Texas. I’m married, I have four kids and I’m paid in U.S. dollars like 300 million or so other Americans.

That means my wife and I have to pay for our groceries, gas, kids’ school supplies, DVD rentals, etc. with dollars just like everyone else here in the U.S.

So like you, I have a vested interest when the U.S. dollar buys me less. In economic terms, that’s known as purchasing power.

Now as a trader, I can tell you the dollar has lost against nearly all major currencies in the Forex market since the late ‘90s. (See the sidebar below for more.)

But I’d like to step outside of the Forex world for just a moment and discuss just how the dollar has sunk beyond of the realm of currency trading, for all of you, who like me have to pay for your items with dollars…

1998 Dollars and 2011 Dollars Are NOT the Same Thing

Just to show you how weak the dollar is for consumers, let’s look at how many “extra dollars” it now takes to buy things nowadays.

To illustrate this, let’s review the common goods you would have purchased roughly 10 years ago (1998 actually).

Back in 1998…

How Currencies Have Jumped vs. the Dollar in the Forex Market

(From 1998 – Present Day)

Japanese yen: Up 57%
Aussie dollar: Up 51.9%
Swiss franc: Up 51.4%
Canadian dollar: Up 44%
New Zealand dollar: Up 31%
Norwegian krone: Up 26%
Euro: Up 22%
Swedish krona: Up 19%

An average house cost $129,000. Now it’s $172,000 (33% increase)…and that’s after the real estate market crashed.

A gallon of gas was $1.15 and now it’s almost three times that at $3.15 (actually 274% higher)!

A loaf of bread was $1.26. It’s now $2.79 (121% higher).

A dozen eggs cost 88 cents, now $2.89 (228% higher).

A postage stamp was 32 cents.
Fast forward to 2011, and its 44 cents (38% higher).

What can we thank for the higher prices?

Well, as strange as it sounds in this current post-recession, still deflationary environment, inflation stole your dollar’s value over the last decade.

Why Most Americans Don’t See the Dollar is Dropping

Inflation – especially over the years – is so subtle that most people don’t notice.

It’s a lot like boiling a lobster in a pot.

If you drop a lobster into boiling water, your lobster will try to escape. But if you drop a lobster into warm water, and slowly turn up the heat, lobsters won’t realize it and before they know it…they are boiling.

Guess who’s the lobster now? The American consumer.

The U.S. government and its close cousin, the Federal Reserve is pretty slick. They turn up the inflation heat by eroding your dollars slowly. But it’s consistent enough to where your dollar is worth much less just 10 short years later.

Think about it. If I’d told you that tomorrow morning you will pay 274% higher for gas and 121% higher for a loaf of bread…you would freak out. There would be rioting in the streets. (A lot like what’s happening in Tunisia today.)

Of course, the U.S. government knows that too.

So the Federal Reserve ratchets up inflation just fast enough to help their causes (like paying back their debts with cheaper dollars)…but they do it slow enough to where most Americans won’t notice.

The Dollar’s Purchasing Power Has Dropped 27% Since 1998

Now sure you can look at gas prices, and see inflation creeping back into the market. But the reality is the costs of EVERYTHING you need are going up astronomically and the dollars in your pocket buy less and less all the time.

What’s even worse is that while the costs of goods are on the rise again…unemployment is hitting its highest levels in 26 years. So that means that companies won’t raise salaries to keep up with the ever-rising cost of living.

And unfortunately prices are only going higher from here. In fact, in the next decade, prices could be another 50-100% higher than they are now.

Three Ways to Protect You and Your
Family Against the Falling Dollar

You don’t have to be a Forex trader to be affected by the falling dollar. No, just make a trip to the grocery store or try to fill up your tank, and you also have a vested interest in how the dollar performs.

Now of course, none of us can stop inflation. But there is a way to hedge against it, and the falling dollar. Here are a few ideas how…

• Diversify at least 15% of your portfolio into stronger foreign currencies including the Canadian dollar and Aussie dollar. You can do this easily with currency ETFs if you’re not ready to jump into FX trading.• Calculate how much you have to spend on stocks and bonds for the next year, and then drop 5-10% of that into gold or silver. Again, you can easily do this with gold or silver ETFs.

• Look at your retirement plan. If your entire IRA is in dollars, consider upgrading with a long-term foreign currency CD.

Bottom line: The dollar is losing on all counts. As a trader, I can see the dollar’s overall decline happening on a day-to-day basis. But as a consumer, you can feel the dollar dropping where it really hurts – your wallet. Take action now to protect yourself.

Thanks for reading!
Sean Hyman, Editor Currency Cross Trader
Blog: http://wcw.worldcurrencywatch.com/