The year of 2010 has played out to be a massive year in the world of currencies. The currency or foreign exchange market represents the most liquid trading instrument on the planet, that has many fundamental factors affecting it.
For example, the political pressures a currency endures can be seen in the Yen where the Bank of Japan is well known to intervene in the value of its currency. The Aussie dollar has rocked to above parity and back below. I for one said earlier this year I did not expect to see the Aussie dollar at parity or above, so I'm happy to concede that I got that wrong.
As a trader, trying to be right all the time is not in the job description. With any investment, you have to have an opinion and they will relate to what direction it's heading. And a plan to enter that investment involves timing.
The weak greenback
Finally, a system that allows for being wrong in your original decision and allows you to cut and run is critical. In the last few weeks, as the Aussie dollar gained parity we saw the pundits describing how weak the US dollar was and how they were ringing the final bells on the US dollar.
I guess we could say it's hard to bet against the underdog. In the last few weeks not only has the US dollar gained strength against most of the major currencies, the woes of the Euro have seen a great rally in the value of the US to the Euro. A quick glance at the chart below shows how the US dollar against the Euro has weakened in two sections from the highs in May this year.
The move south was down from 84 to 70, and was approximately a 17% decline in 150 days. The second section down fell 100% in price of the first section but took longer in time to do so. Think like a marathon runner over 42kms; the longer they take to complete, the slower they are travelling, etc.
We can look at the upside runs and see that they are now moving further in price and time than the previous up moves. So this strength measure technically comes from the underlying fundamentals of the Euro Zone with many of the smaller nations in danger of sovereign debt default, with the likes of Ireland needing a bailout for its economy.
A safer asset
It's an interesting world we live in, where money is returning to the US dollar as it is seen as a safer asset.
The impact of a higher US dollar is generally bearish for commodities as they are mainly priced in US dollars. This could have a knock-on effect to our resources sector and the overall strength of our stock market if the US dollar gets on a runaway freight train.
There is likely more upside potential in the US dollar, and this could be into early next year using some time projections forward of previous moves. However, if the US dollar rallies too much then the markets will likely refocus their attention on the state of the US economy over the Euro Zone, and again another ebb and flow of funds will move from weak to strong.
The bottom line
It's this money flow that creates opportunities for trading. Some by keeping an eye on the major markets. This can allow you to shape a view that's helpful all the way down to individual shares you are trading. 2011 is likely to see continued movement and volatility in the currency environment, including the Aussie dollar. And commodities could be poised for some big moves again next year.
Good Trading.
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All recommendations are provided without consideration of any specific reader's investment objectives, financial situation or particular needs. Those acting upon such recommendations do so entirely at their own risk.
