Currencies

I was asked about Foreign Currencies and I wanted to address the issue. I have written about this topic a lot this year, but again I have not been able to get the information out to everybody and that is why I started the blog, to aggregate all of the information I send out to people.

Here is the historic chart of the US Dollar ($USD) relative to a basket of foreign currencies. As you can see, the Dollar was able to hold support at 80 on several occasions (1991, 1992, 1995 and 2005). The Dollar broke down in September 2007, after the Fed decided to use its balance sheet to rescue the US Financial Sector. Foreigners took the August 2007 emergency rate cut as their cue to abandon their holdings in the US Dollar.

The Dollar is now rallying up into the old breakdown point. That is an extremely Bearish pattern. Normally a security will break support, then rally back into the breakdown level to “kiss it goodbye” and then implode.

The mirror image of the US Dollar is the Australian Dollar. I think this is because Australia is a commodity-based economy selling into the Asian economic expansion. The Australian Dollar ($XAD) broke out above historic resistance and has now pulled back into massive support – potentially very Bullish.

The ETF (Exchange Traded Fund) which tracks the Australian Dollar (FXA) is now yielding 6.87% and appears to have little downside from here. I will be looking to see if good entry points show up in FXA. I love the yield and the potential for appreciation as a US Dollar hedge.

The Euro ($XEU) is also pulling back into long term support. This is also Bullish and may set up as a great hedge against a falling Dollar.

The Japanese Yen ($XJY) has been sitting in a trading range for 12 year. This has been the result of Japan keeping interest rates artificially low (basically zero) to allow investors to borrow cheaply in Yen and buy the Nikki (part of the mystical “Yen Carry Trade”). At some point, Japan will get their interest rates back in line with reality, and when they do, the currency should break out of this trading range.

The bottom line is that the chart of the US Dollar is extremely Bearish and the charts of the Yen, Euro and Australian Dollar are extremely Bullish. That is not good news for you if the majority of your assets (your house, your 401k, your savings accounts) are priced in US Dollars. So, going forward you may need to focus on hedging your US Dollar-based holdings relative to other currencies or a basket of real assets (commodities like foods and metals).