3 Currency Predictions For Q1 2012

Includes: FXC, FXY, JYN, UDN, UUP
by: Benjamin Trotter

The month of January 2012 has been particularly boring thus far for currency traders - with few notable moves in key currencies and not a whole lot of fundamental information to work with.

News from the Eurozone has been somewhat tedious, with repetitive banter regarding ECB generosity, flailing economies and private negotiations. From the US, non-farm payrolls were 'good', CPI came in as expected and home sales slowed. By far the most exciting US event was watching Newt Gingrich slam CNN and embarrass the living daylights out of John King at the start of the South Carolina GOP debate.

The degree of activity in the markets begs an ominous question: Is this just the calm before the storm?

It probably is. No doubt the Eurozone will spring back to the trader radar the moment a negotiation turns sour and the ever mounting US debt burden will continue to plague news wires as the US general election approaches in November 2012. Apologies for the pessimism, but I can't see a sudden surge of optimism in the near term.

Thankfully, currency markets allow us to profit easily from movements in either direction - so here are the top 3 trades I see given price action at the moment.

1. Long USD/JPY (anywhere below .7720)

Since the last round of intervention by Japanese authorities in 2011, the USD/JPY has remained in a temperamental range between 75.50 and 78.50. Clearly this rate is ridiculously low for all sorts of reasons, not least that it is slowly chewing away at the Japanese economy week by week.

The BoJ and Japanese Finance Ministry are all too aware of the effects of such a low exchange rate (in fact they just lowered FY12 / FY13 growth expectations in the last couple of days). Yet traders continue to hound the pair any time it looks set for a rally. This will soon prove to be an expensive mistake.

Patience is a virtue and in the case of the USD/JPY, patience will be very, very profitable.

The pair is not going to remain at these levels forever. At some point, the pressure building up in the Japanese economy will need to be released - and it is at this moment (whether it be through massive intervention, extreme government policy or a sudden market realization that speculative selling isn't going to yield returns any longer) the pair will skyrocket.

If you're a short term trader, picking an entry point for a long USD/JPY will be important to you. You might like to consider a break-out strategy or an accumulation strategy as prices potentially head lower in the near term. For us longer term traders, just get in. A few pips here or there won't make any difference come a long term trend reversal.

This is my favourite trading idea so far for 2012.

2. Long CAD/JPY (fish for bottoms)

Short term traders - this one isn't for you. Nor is it for conservative or risk-adverse traders. In the short term the CAD/JPY cart could (will) require seat belts and nerves of steel.

But envisage 6 - 12 months down the track, when Eurozone leaders are down on their knees begging for any fiscal deal anyone is willing to offer (never mind a negotiation), US companies have far too much cash on their books, and hedge fund managers realize they are under-invested in "reliable" countries and assets. Hello Canada!

Being a resource based economy, Canada is well set to capitalize on new investment. The currency is relatively cheap - especially versus the almighty Japanese Yen. Interest rates are low and the yield differential is small. This gives plenty of room to move when Canadian interest rates eventually begin to rise again (when the global growth story pretties itself up).

What does this mean for us? It means that now is the perfect time to grab cheap CAD's and throw out stale JPY's. Maybe fish around for a while as prices fluctuate and accumulate a joyous basket of loonies. Oh, and did I mention the rollover bonus you'll get every night? All in all, this is an appealing trade that I'm giving a lot of attention to in my currency portfolio.

3. Short NZD/USD (around about .8400)

Here's a currency pair that knows how to defy logic. The good old New Zealand Dollar has a reputation for completely ignoring everyone and everything - defiantly going places which just seem, well...illogical.

This is why I have absolutely no doubt that despite ghastly fundamentals and no overtly convincing technical story, traders will succeed in pushing the pair to around the .8300 mark (currently at .8110 - not far to go).

When it gets there the most obvious thing you could possibly do is sell the NZD/USD pair. Sure, you'll be losing out on the rollover interest and there's a possibility the pair could visit .9000 before reversing. But the reality is that when the tide turns on the NZD, it turns hard and fast. 0.8300 is an exceptional price for the pair at present, and i'd be personally happy to short it at this level.

For those who haven't traded this pair before, beware the psychological nightmare you're in for. This pair features in many trading categories, ie. carry trade currency, growth & export economy, recent natural disasters, rampant housing market, ambitious central bank, and so on.

Traders alternate between any one of these ideas to justify their trades and the resultant outcome is that what can seem like a perfectly reasonable trade for one person is just totally bizarre to another. Prepare for sleepless nights but know that in the end you'll be laughing.

So how is our idea of shorting the NZD/USD at .8400 different to any other idea out there? Firstly, we're using a longer term model - most aren't. Secondly, we're not focusing on any one of the above categories, we're looking at all of them. Thirdly, New Zealand economic fundamentals seem to have been thrown by the wayside in favour of more dramatic developments in Europe and USA.

An analogy I use to explain this is one with fireworks. Europe and USA fundamental releases tend to light up the sky like a New Years celebration. NZ news releases appear more like a backyard Guy Fawkes display on a tight budget. One morning traders will wake up and realize what's really going on.


So there you have it. Just when you thought FX trading was losing its excitement, I hope I've managed to give you 3 well justified reasons to get back in to the markets.

We'll review in a couple of months to see how things pan out.

Disclosure: I may enter USD/JPY or NZD/USD based on price action at any time. I am currently long CAD/JPY and will accumulate more based on price action.

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