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2007 was the year of the carry trade. 2008 was the year of the safe haven trade. 2009, meanwhile, is shaping up to be the year of the deflation trade. In other words, traders have completed an about-face in their collective approach to forex, such that those currencies with the lowest rates are now favored, because they are perceived to best hedge against deflation.

The New Zealand Dollar illustrates this trend perfectly. For most of 2008, it collapsed as investors pulled money from risky, high-yielding currencies, in favor of a capital preservation strategy: accepting limited or zero return in exchange for security. Beginning at the tail-end of last year, however, it stabilized around the psychological level of .5 USD/NZD, failing to breach the important technical level of .4915.

While such technical factors undoubtedly have played a role in the reversal of fortune, the NZD has benefited by the aggressive interest rate cuts effected by the Bank of New Zealand, which today cut its benchmark rate yet again by 50 basis points, to 3%. While it’s too early to speculate whether the Central Bank will cut rates again at its next meeting, all signs point to further cuts. The economy is in a paltry state, having contracted for five consecutive quarters. Chinese demand for commodities is abating quickly, and the most recent numbers suggest it will continue to erode.

Based on investors’ current priorities, however, the most important indicator is the monetary situation, which appears under control. “The expectation that the RBNZ will be more moderate with cuts going ahead has provided support to the currency.” said…a currency strategist at Bank of New Zealand…“For a sustained bounce above 52 U.S. cents we’ll have to see an improvement in the global backdrop and evidence that equity markets have stopped falling and risk appetite is rebounding.”

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Posted on March 16, 2009
at 7:32 pm
Written / posted by: Simon
Filed under: Currency Trading, News, forex trading

Prevailing wisdom has long held that the accumulation of foreign exchange reserves has helped stabilize emerging market economies by cushioning them against economic shocks. The economies of Asia, in particular, were praised by economists for responding to the 1997 Southeast Asian economic crisis by building up their reserves to guard against runs on their currencies in the future. In hindsight, however, the accumulation of reserves may have actually contributed to the current economic crisis, by facilitating the formation of massive global economic imbalances. High savings rates in Asia, for example, enabled western countries to run continuous current account deficits. Now, the chickens are coming home to roost, and developing economies are once again finding themselves vulnerable to recession, since their forex reserve policies came at the expense of developing domestic economic bases.

Re-balancing means that Asian countries must stop piling up ever-rising forex reserves (and trade surpluses). Such reserves represent excessive saving, excessive exports and insufficient imports.

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Posted on February 17, 2009
at 1:48 pm
Written / posted by: Simon
Filed under: Currency Trading, forex trading

While the year-long surge in the Dollar has been a welcome development for American consumers and the US government (in terms of cheaper imports and easy credit, respectively), American businesses are not smiling. The strong Dollar has resulted in decreased competitiveness in the eyes of foreign consumers, and consequently, lower exports. For this reason, the US trade deficit has not shrunk significantly, despite a slight down-tick in imports. One must also look at the overseas earnings of American multinational corporations, which are frequently repatriated to the US and booked in Dollar-terms. In fact, as much as 50% of S&P 500 member company profits now come from overseas. Simply, lower exchange rates mean lower profits. In short, investing in the stocks of companies as a proxy for the markets in which they do business is not (as) profitable when the Dollar is strong.

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Posted on February 12, 2009
at 5:34 pm
Written / posted by: Simon
Filed under: Credit Crisis, Currency Trading, News, forex trading

Only last year, Greece, Ireland, Italy, Portugal and Spain were collectively the pride of the EU, boasting strong growth characteristics and buoyant capital markets. In hindsight, this was but a mirage, as the stability of Euro-membership allowed such “peripheral” economies to embark on a colossal building boom and spending spree that was ultimately baseless. Greece, which is perhaps in the worst shape of the lot, witnessed its twin deficits (government debt and trade) rise to dangerous levels; given its membership in the EU, it is unable to resort to currency depreciation to rectify the problem.

The illusion has since been shattered, and it seems investors are trying to overcompensate for their previous naivete. Yields on government bonds for all five countries have begun to creep up, and a handful of speculators are betting on the possibility of default. Most experts insist that such a scenario is unlikely, but at the very least, the credit crisis has exposed the chinks in the armor of the EU, demonstrating that the currency also has its drawbacks.

While sharing a currency with some of the mightiest economies in the world helped Europe’s poorer nations share in the wealth, a boon during boom times, in hard times the rules of membership are keeping them from doing what countries normally do to ride out economic storms, including enormous spending.

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Posted on January 30, 2009
at 1:21 pm
Written / posted by: Simon
Filed under: Currency Trading, News, forex trading

The deepening of the credit crisis in the EU has triggered a wave of self-reflection, prompting those on the inside to ponder life without the Euro and those on the outside pondering life with the Euro. Their opinions couldn’t be any more divergent. Countries like Italy, Spain, and Ireland, for example, have blamed the Euro for their economic woes, arguing that easy monetary policy and cheap credit were responsible for their real estate bubbles. Some commentators, accordingly, have argued that structural differences between these countries and the economic powerhouses of Germany and France are so large that it doesn’t make sense for them to share a common currency. Meanwhile, Eastern European countries, most of which are still outside the Euro, are clamoring to join as sudden depreciations in their respective currencies have exposed them to massive economic instability.

What happened, in effect, was rapid economic isolation. This began as investors moved money from more risky regional stock and currency markets into safer, often euro-denominated, assets, in what economists call a “flight to quality.”

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Posted on January 27, 2009
at 1:31 pm
Written / posted by: Simon
Filed under: Currency Trading, News, forex trading