A Tidal Wave of Cash - Headed for the U.S.

Joined : 23 Dec 2007 Posts : 241 Location : Nigeria

Today's commentary is by Sean Hyman, Currency Director and editor of The Money Trader.

Good Day Currency Traders!

For months now, the foreign cash flowing into the U.S. has not been enough to cover our deficit. Our deficit is just under US$58 billion. However, the money coming in from foreigners has only been about US$27 billion. So we're left with US$31 billion in unpaid bills. Ouch!

Imagine a spendthrift who has a dozen maxed out credit cards - and not enough income. This is exactly what the U.S. has been like over the past several months.

A Tidal Wave of Cash Crashes onto U.S. Shores
However, we just got the data in from October. The Treasury International Capital (TIC) report showed that US$114 billion flowed into the country vs. US$50 billion expected. That's a huge leap past expectations.

So thankfully, it looks like the U.S. got a year-end bonus check. That will help put a dent in our huge deficit. The influx of foreign capital also caused the U.S. dollar to rally even further against the euro and the British pound.

Foreigners are starting to get more of an appetite for U.S. assets such as U.S. Treasuries. When investors want to buy something in the U.S., they first have to convert their currency into U.S. dollars. They have to sell their currency to buy dollars, and this in turn boosts the U.S. dollar.

The Dollar Bounce that We Predicted Has Begun!

Just when everyone was about to put the "buck" on the endangered species list, the U.S. dollar came back with a vengeance. Lately, the hunted dollar has actually become the hunter.

As stock markets start to soften up more overseas, I think you'll see more Americans and foreigners bring money back into the U.S. - and that will also boost the dollar.

Don't Wait on the Media to
Tell You the Buck Will Rally

Not many are talking about the sell-off in foreign currencies yet because they are still so high overall. The media is very slow to catch on. However, the euro exchange rate has gone down from 1.4946 to 1.4375. That's over 500 pips!

Then the British pound came down from 2.1143 to 2.0149. That's almost a thousand pips in about a month and a half. So the U.S. dollar has come back lately in a major way.

Once most of the move is over, you'll finally start to hear the media say "the dollar is coming back!" However, like always, they are late to the ballgame. It's a good thing they aren't traders.

What's So "Great" about Britain These Days?
Recently, Great Britain hasn't been so "great." The U.K.'s housing market is falling off the map lately. In Europe, manufacturing and the services sector are starting to slump. All these areas are being crushed by the high exchange rates. It happened just as I predicted here in My Two Cents. Sooner or later, what's positive is taken to an extreme, and then it suddenly becomes a negative.

When a currency becomes so strong, it's almost as bad as a currency becoming too weak. Think of a stock or commodity that soars through the roof - that particular asset has to correct at some point. So in a way, the euro and the pound jumped into the same hole that the U.S. dollar had fallen into - just in a different way.

Now it's time for the pendulum to swing the other way. You'll see the dollar get a bit of a breather and recoup some of the ground that it's lost. You'll also see the euro and especially the pound continue to edge lower.

I've been predicting a near-term dollar bounce for a while now. Well, here it is. A thousand pips off of the GBP/USD exchange rate is a pretty big bounce.

Market Extremes Eventually Correct Themselves
Any time there are market extremes, the market also (in time) self corrects these imbalances.

For instance, the dollar fell so low and the British pound climbed so high that Brits could buy twice as much over here in America as they could at home.

So what have they done this Christmas season? The savvy British shoppers hopped on a plane with empty suitcases in hand and bought their gifts over here. This is putting a dent in the U.K. retail sales but it's boosting U.S. retail sales.

It's causing pounds to be sold and dollars to be bought. This is just one example of how the imbalance is beginning to be corrected.

Look for the dollar to gain more strength in the coming weeks. And while the dollar's strong, remember it's the best time to stock up on foreign currencies. Your dollar buys more. For 2008, I'd use my strong dollars to stock up on Japanese yen.

SEAN HYMAN, Currency Director

Making 'Cents' of the Headlines
Commodities Stall and Give the U.S. Dollar a Break!

What Happened:
Commodities overall have hit a wall recently. You can see this illustrated on the Commodities Research Bureau (CRB) index chart below. The CRB index tracks a basket of commodities.

The CRB index hit a wall at 355 and can't seem to overcome it so far. It's also very extended from major moving average which makes the index overbought in the short-term. This means the index is likely to head lower in the short-term.

What We Say:
Why is this important to currencies? Commodities and the U.S. dollar trade somewhat inversely. So if commodities are stalling, then the U.S. dollar catches its second wind.

Also, when commodities go up, the Aussie and New Zealand dollars tend to go up as well. The reason is because they are commodity exporting countries. However, when commodities stall, they have an uphill battle. So it can really bring the AUD/USD and NZD/USD exchange rates down during those times. This is exactly what we've seen in the last month as commodities hit a wall.

So if commodities fall back in the short term, look for Australia, New Zealand, Canada and Brazil to struggle with their currency's upside potential.

With last week's retail sales numbers increasing from the huge amount of foreigners coming to America doing their Christmas shopping, the U.S. dollar prospered.

Also, the hotter than expected Producer Price Index and Consumer Price Index numbers really made the dollar well supported as inflation fears came back into the market.

So with all of this happening, there could be some year end support for the dollar this year.

Note that with the year starting to wrap up, currency volumes will start to trickle down and this could cause more volatility in the market than usual. So be sure to consider that when you're placing trades. Stops will need to be wider than usual since prices will be more erratic.