The Best Currencies to Short as the U.S. Economy Slides Towa

Joined : 23 Dec 2007 Posts : 239 Location : Nigeria

Good Day Currency Traders!

It seems Goldman Sachs just caught up Rolling Eyes

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According to their comments today, the venerable Wall Street institution just announced that we’re heading for a recession. What a Face

Eight Reasons Why the Economy is
Headed for a Recession
If you’re watching the economic indicators carefully, you can find more than enough proof to forecast a recession this year.

Here are just a few top indicators that I see…

1. Pending, New and Existing Home Sales all continue to miss their estimates. So the housing market isn’t recovering.

2. Many sectors of the stock market are already hitting 52-week lows.

3. Fed’s Plosser and Lockhart and now Rosengren all stated that the economy is getting worse. They also said the Fed may have to cut rates once again this year. Obviously, the Fed’s men wouldn’t even mention cutting rates, if they saw good times ahead for the U.S. economy. These are the guys that get somewhat real time data from all over the United States.

4. Last month, employment dropped significantly. Only 18,000 people were hired nationwide – out of a population of 300 million people.

5. Unemployment edged higher from 4.7% to 5%. This will continue to move higher.

6. Manufacturing in America is in a contraction phase as shown by the ISM manufacturing numbers. The ISM number was much lower than expected at 47.7. A number below 50 is considered in the “bust” category. It means the demand from our manufacturing sector is shrinking.

7. Consumer Confidence continues to fall. The latest reading was 87.3 vs. the expected 91.5. So the consumer continues to lose confidence in the economy for good reason.

8. Durable Goods missed their expected number as well.

The Numbers Don’t Lie…Unfortunately
What more proof do we need? pirat

For some reason, many analysts are slow to come to grips with the data because they don’t want to believe a recession is coming. By the time they actually call this a “recession,” it could be too late to position yourself and your portfolio.

So take action now. For example, I’ve been saying for a while now that stocks were going to fall and they have. But it’s not over. Make sure you’re not overly exposed to U.S. stocks in this volatile market.

Meanwhile, we can blame falling stocks for carry-trades crashing lately, as I predicted last month. The euro vs. Japanese yen currency pair (EUR/JPY) has fallen about 600 pips since I first alerted you to it. EUR/JPY will continue to fall as stocks continue to fall. Don’t get me wrong. There will be rally days but don’t be fooled. It will still be within an overall downtrend.

EUR/JPY Poised to Fall Even Further! affraid

More U.S. Rate Cuts in the Cards
The Fed will be forced to cut interest rates much further to save the economy in the short term. The problem with this short-term solution? It takes time for these cuts to take effect in the actual economy. And while we’re waiting for this Fed “cure-all” to take effect, we’ll head straight into a recession.

The Fed is always late to the ballgame in my opinion. They portray themselves as forecasters but I see them as market reactors. This is just another example of it. Stocks are falling and the economy continues to miss its estimates. But the Fed has been slow to realize this and slow to respond once they have realized it.

How to Profit from a Recessionary Market
Look for more carry-trades like EUR/JPY, GBP/JPY, EUR/CHF, GBP/CHF to continue to sell off in the near-term. Traders will sell off stocks and these lofty currencies (euro and British pound) and instead invest in beaten down assets like the Japanese yen (JPY) and the Swiss Franc (CHF). So those that are the “short sellers” of these carry-trades that will be the winners in this declining economy.

I feel these carry-trades will fall far harder than the U.S. dollar on the Fed rate cuts. This is why they have been my focus. Remember: It’s not which currency pair will move but which one will move the most. The carry-trades will fall the furthest in the upcoming weeks to months.

Sean Hyman, Currency Director

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Making 'Cents' of the Headlines
Gold Races Closer to US$900/Ounce!

What Happened:

Yesterday, gold rose to a “never seen before” high of US$884 an ounce. Wow!

What I Say:

Why is gold soaring so high? There are several factors involved. The first phase of the rise of gold was due to the falling U.S. dollar since gold is priced in U.S. dollars. So as the dollar falls, it takes more dollars to buy the same amount of gold as before, thus pushing up gold’s price.

However, lately you really can’t blame gold’s high price on the falling dollar. While gold and the dollar do tend to trade inversely…gold made all time highs, yet the U.S. dollar DID NOT take out its 30-year lows that it made recently. So this means there are other factors driving up gold’s price.

Investors see gold as a hedge against inflation. Rising food, oil and energy prices have spurred inflation. When traders want to hedge against inflation, they buy gold. This is one of the additional reasons why gold is rising.

Another reason is because gold is seen as a “safe haven” asset to invest in when economic times become uncertain. Lately, traders have been selling off stocks with a vengeance. Many sectors of the economy are hitting 52-week lows as of this writing. The Dow Jones Industrial Average has shed over 1,500 points lately. So, many traders are shaking in their boots right now.

A recession is coming in America (if we’re not in it already) and money runs to the “safety zone” of gold when this happens. Investors want their money in stable and secure gold during those times.

The Fed will cut rates further to boost the economy but these rate cuts will take time to take effect. This is why we’ll go into a recession in the meantime. Being the case, gold will be well supported in the upcoming weeks to months.

So what currency pair profits from the rise of gold? EUR/USD tends to follow in the general direction of gold. This is because of gold and the U.S. dollar’s inverse correlation. When money runs away from the USD, one of the first currencies it runs to is the euro. afro

While I think the EUR/USD will eventually come down from its lofty perch, it remains supported right now by the rise in gold prices.