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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
My company:
THE SENSIBLE GUIDE TO FOREX
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THE SENSIBLE GUIDE TO FOREX
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The Sensible Guide To Forex: Safer, Smarter Ways To Survive & Prosper From The Start
  • USD FORECAST FOR 2012: WHAT EVERYONE NEEDS TO KNOW 3 comments
    Jan 28, 2012 3:53 PM | about stocks: UUP, UDN, FXE, ERO, URR, ULE, EUO, DRR, FXA, FXB, FXC, FXD, FXF, FXEN, FXY, JYF, CYB, GLD, CNY, USO, DUG, USL, NBO, DBV, ICI, CEW, SLV, OIL, SPY, SDS, RSW, BXDC, SPXU, SH, DIA, EWC, EWA, TLT, XHB, ITM, IGOV, VGK, TBT
    With so much attention justifiably focused on the EU sovereign debt and banking crisis, it's worth taking break from Europe and considering the USD's prospects for 2012. THE GOOD

    Here are the factors favoring a higher USD.

    Dovish Fed Policy May Actually Aid USD Prospects

    With this week's super-dovish FOMC statement, The USD begins 2012 on a distinct down note, as forex markets anticipate continued low rates, and possibly a full blown QE 3 replacing the current "light" version. While the extended period of low rates and stimulus programs has not brought inflation, it raises inflation risks and so pressures the USD.

    While the heightened threat of more stimulus has pressured the USD recently, we suggest that this development may contribute towards a stronger USD as the year progresses. With expectations already low for rate increases and high for more stimulus, expectations for the USD on these fronts are more likely to move in favor of the greenback, especially if the US economy performs relatively well and so reduces the likelihood of new stimulus coming. Indeed, the White House will be doing all it can to help the US economy over the coming year.

    Moreover, as we note below, most other major central banks are also in easing mode, so the USD's may not look any worse than its fellow majors from this perspective.

    Global Stagnation Bullish for the USD

    If, as predicted by many, US growth is relatively good (though lower than previously hoped) compared to that of the rest of the developed world, then the coming year could be bullish for the USD.

    BAD TIMES FAVOR THE USD

    Economic downturns favor safe haven currencies like the USD. This downturn may be particularly favorable for the greenback because the central banks behind the other two traditional safety currencies, the JPY and CHF, have become more aggressive in devaluing their currencies. This is especially true for the CHF, which over the past year went from being the most stable safe haven to being the most heavily managed one. The SNB remains committed to keeping the CHF down relative to the EUR.

    IT MEANS MOST CENTRAL BANKS ALSO IN EASING MODE

    Also, dovish Fed policy may not be as damaging to USD prices as it has been in prior years, because in 2012 the Fed is no longer alone among the major banks in attempting to expand the monetary supply. The ECB, PBOC, BoE, RBA and BoC among others have all followed the Fed towards more dovish policies.

    In other words, the continued dovishness of the Fed may not harm the USD's relative position vs. the other major currencies at all.

    IT MEANS DECLINING CARRY TRADE

    Carry trading is when you sell of low yielding currencies to fund purchases of higher yielding currencies, and profit on the difference. For example, you buy the AUD/JPY, you buy the AUD which yields 4.5%/year, and sell or borrow the JPY pay out its 0.10% rate, profit on the rate differential as long as you hold the position. This works well as long as the JPY or other funding currency doesn't gain value vs. the AUD or other currency that you bought. If it does, your interest rates gains can be wiped out fast.

    As I discuss at length in my coming book, The Sensible Guide To Forex, carry trades work best in times of rising growth and interest rates that favor the higher yielding risk currencies, not during times of recession when safe haven currencies like the JPY or USD tend to appreciate and thus make carry trades unprofitable.

    In other words, times of stagnation mean reduced carry trade, and that's another reason for increased demand for safety currencies like the USD.

    Effects of the US Election Year on the USD: Historically Positive for the USD

    President Obama's approval ratings at the end of 2011 are well below what's needed to win re-election.

    The quality of both the US economy's performance and his opponent's campaign will determine whether he can overcome his current standing.

    We expect President Obama will, like any politician up for re-election, attempt as much stimulus as possible in order to have the voters feeling as optimistic as possible as they go to vote in November 2012.

    For this reason, stocks and other risk assets usually perform well in election years: 2008 was different because of the financial crisis, but over the past five decades, stocks have declined in only four out of the past 17 election years. Using the deutschmark as a rough proxy for the EUR, we have data on the EUR/USD from the 1970s to now, which covers nine election years. The currency pair weakened eight out of the nine years by an average of 6%. In other words, the dollar tends to perform well in election years. That alone is important for traders to keep in 2012.

    The Bleak Outlook for the EU Favors The USD

    The ongoing crisis in the EU continues to keep markets nervous and thus ready to flee into the relative safety of the USD. It has better long term economic fundamentals than those of the JPY, and the CHF is now linked to the EUR. Together these factors make the USD the most attractive safe haven currency. Moreover, the EU crisis threatens to drive the EUR down further. As I've often noted in prior articles, because the USD and EUR are the most widely held currencies, they tend to push each other in opposite directions. So further declines in the EUR are bullish for the USD

    THE BAD

    Here are the factors that could pull the USD lower.

    TO VIEW THE REST OF THIS ARTICLE PLEASE VISIThttp://globalmarkets.anyoption.com AND FIND ARTICLE BY SAME NAME UNDER THE WEEKLY TAB.

    Our apologies for the inconvenience. My partners want these posts to introduce visitors to our website. Your visit helps keeps these posts coming to you free of charge. Thanks in advance for your help.

    If you want to know more about how to protect yourself against risk of crashing markets and currencies, stay tuned for details about my coming book, THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It's the first book to show how prudent, traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN'T BE TELLING YOU FOR FREE, NOW WOULD WE?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (3)
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  • Forex is volatile and hard to predict. Still, there are things that over time can be predicted with reasonable certainty. You are right that carry trades work when the world economy is in good shape. This is not the case now. Your are incorrect in saying that QE3 can strengthen the dollar. I don't know if the EUR will strengthen vs. the greenback short term because the ECB can print even more money than the FED. Still the FED is a happy money printer which means that the money supply in the US is likely to grow to infinity. This is plain bad for the dollar. If the ECB prints less money than the FED, the EUR will end up being the stronger currency. I think that this is the likely outcome over a longer period of time. There is another reason why the dollar is vulnerable. Foreigners hold about $ 7.5 trillion due to past current account deficits and this number is growing. If these holders of the dollar get nervous due to the repeated QE's and try to exit the $, that would simply be the end of the $, its dominance and purchasing power.
    29 Jan 2012, 10:29 AM Reply Like
  • Author’s reply » Your comments certainly correct in the short term.

     

    However, forex often offers very stable long term trends and trading ranges compared to other markets like equities or commodities. That's because the underlying fundamentals of country (which ultimately drive currency pair prices) change much more slowly than they do for a company or commodity. Case in point: Bernanke acknowledges rates need stay low for years to come - no quick turnaround coming. USD to be pressured vs. currencies of higher growth, lower debt nations. (tho bouts of EU crisis panic could distort that trend, especially in the short term.

     

    FYI in my coming book I discuss in detail how to exploit the stable long term trends in currency pairs via lower risk, simpler, less demanding ways than the standard short term high risk high leverage approaches typically used in online forex trading -either as active traders or passive long term investors.

     

    Hope to have the corrected catalog blurb up on amazon in the coming week,

     

    just search: The Sensible Guide To Forex: Safer, Smarter Ways to Prosper from the Start.

     

    It’s my attempt to deal with a huge problem we all must face: finding more prudent, simpler ways to deal with currency risk diversification, either as active traders or passive longer term investors, than those commonly offered in forex or stock markets.
    2 Feb 2012, 05:29 AM Reply Like
  • Trading currencies actively is not likely to be profitable. I am a professional currency trader and can tell you that. There is no currency likely to beat them all - gold.
    2 Feb 2012, 05:44 AM Reply Like
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