This was one wild and hairy year for currencies, to say the least. I've never seen such volatility in all of my years. When looking at charts that go back 30 years, I still can't find volatility like we had this year. So, literally, 2008 was a historic year.
One thing I find in listening to people talk about any market be it stocks, commodities, or currencies, is that they can never seem to be "forward looking."
They always can see what has happened and for some reason feel it will almost always continue that way. They can't see a time when it will change. They will argue with you when you even allude to a change coming.
But this is why the masses just don't get it and it's why only few small percentage of investors usually end up "getting it" longer term.
When I told some currency investors that the dollar would rally in 2008 and that the yen would too, they laughed at me. Why? Because the two currencies had gone down for years back-to-back. In fact, against some pairs, the dollar and yen had gone down for seven consecutive years. So, currency investors thought it would always continue.
So, why did I get it right in 2008 when so many got it wrong? I'm a "macro" kind of guy. I look at the whole pie and not just an isolated piece.
I use my success in the stock market to aid me in the currency market. Many currency traders never see the ties, but I do.
I saw a rough patch coming for stocks in 2008, and I got myself and my relatives out of stocks. We wound up not losing a penny.
Now, when stocks do badly, generally so do highe-yielding currencies. However, when stocks do badly, lower-yielding currencies or currencies that have been beaten down for years tend to benefit. Therefore, the dollar and the yen rose.
In 2009, I see stocks recovering and at least trading sideways as they build a base for the next rally..
Therefore, I think the U.S. dollar is going to take a hit because of the stabilization of stocks. Money will run out of this defensive play and will tiptoe back into stocks and higher-yielding currencies.
Also, since the U.S. interest rate is effectively around zero percent now, there's certainly no incentive to hold the dollar.
The same goes for the yen. It was a great defensive currency play in 2008, in fact, a better play than the dollar. However, Japan has lowered its interest rates to 0.10% (effectively zero percent also) from 0.50 percent and that will only cause the yen to lose its edge.
On top of this, Japanese exporters (like Toyota, Honda, Sony) need a dollar-to-yen rate (USD/JPY) of at least 92.00. Lately, we've been in the 88 to 90 range. Therefore, these guys are hurting. So, these companies can't reach their potential and recover like they should with a yen that is so high to the dollar.
Therefore, I think the yen has to come down due to low rates, the stabilization of stocks (making it lose its defensive luster), and because major corporations just can't grow with the exchange rate being as low as it is due to a high yen.
That's what's going down for 2009 which will provide shorting opportunities to the currency traders who see this coming. Hopefully, my readers will be alert to these changes, see the big picture, and profit from it.
So what's going up in 2009? In other words, what should you consider buying?
Some higher-yielding currencies will prosper during 2009. The first one will be the euro. The recent rallies that we've seen begin in the past week or two will generally continue throughout 2009 as there is literally no reason to hold dollars at this point.
When traders exit the U.S. dollar, they have to go somewhere. The first stop is almost always the euro because it's the next most liquid currency in the world. Therefore, it's a good starting point almost every time. So, it's no wonder that it's been one of the first to start to rally again this time too. I think that will continue overall. Don't get me wrong, it will have its pull backs along the way as, every once in a while, it gets ahead of itself.
Some other currencies that I see benefiting from the "dollar dumping" are the Aussie dollar, Canadian dollar, and the Turkish lira. Could others prosper? Sure, and they likely will. However, these are some of the biggest beneficiaries that I see. I'll tell you why.
The Australian dollar is a commodity haven. As the Fed's printing of money really starts to take effect (and the effects of ultra-low rates), it's going to put a huge demand on commodities again, particularly in the latter part of the year as tons of dollars chase a limited (finite) amount of goods. We will have the return of real inflation.
As this happens, the Aussie dollar and Canadian dollar will benefit. After all, prices in the $30s to $40s will likely be the bottom on oil. That will help to put a floor under the Canadian dollar as dollars are diluted due to the printing of money by the Fed.
Also, OPEC will see to it that oil eventually reachs the levels it needs (in the price of dollars per barrel) to meet their budgets. Saudi Arabia needs $75 oil in order to do this and Kuwait and Qatar need around $55 oil for their budgetary needs. Therefore, we'll see them attempt to get as close to these levels as they can in 2009. This will eventually stabilize oil and put a floor under it and get oil eventually headed back (gradually) higher.
Other commodities will follow. Also, as inflation rears its ugly head again, it will be good for commodities like gold and copper, which Australia mines quite a bit of. Therefore, the Aussie dollar will benefit greatly from it over 2009.
Now, these currencies could have their own wide ranges this year just as stocks do. However, do realize that you will earn daily interest off of holding these higher yielding currencies vs. the dollar.
Why would I mention the Turkish lira? It's one of the highest yielding exotic currencies in the world. Therefore, as investors around the world tred ever so carefully back into a diversified portfolio of riskier assets in 2009, they will gather up a little bit of the lira in their portfolios too, especially since the dollar will dive against it (as is starting already even now). So the USD/TRY pair will plummet as this high yielding currency flies once again.
When the carry trade comes back, as it's starting to now, the USD/TRY pair is one of the first to benefit because it has an interest rate differential that is one of the widest against the dollar. Therefore investors earn huge amounts of daily interest on this pair as long as the lira is either steady or headed higher vs. the dollar. In 2008, this wasn't the case until lately.
Therefore, you can benefit from having small positions being long (buying) AUD/USD, EUR/JPY, and short the USD/CAD, USD/TRY. These will put you short the yen and dollar and long the Aussie and Canadian dollars along with the lira. You will earn daily interest on all of these positions too.
The key is to make these positions very small in proportion to what you would normally trade so that you can hold them through longer periods of time and handle larger swings along the way.
I hope you have a Merry Christmas and a prosperous New Year!
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