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2008 Trade of the Year
Many of the world's major currencies have enjoyed fantastic returns at the expense of the U.S. Dollar in recent years, and one could justifiably say that many of the Asian currencies would have enjoyed similar returns if their values were determined by the open market, instead of by governments that are manipulating their currencies to one degree or another. When a country artificially softens its currency, this can create imbalances that need to be dealt with, and like a pot on a stove with the lid closed tightly, inflationary pressures begin to build. Some Asian quasi-central bankers such as the Monetary Authority of Singapore have "let off the steam" recently by allowing their currencies to strengthen against the greenback, and the smart money is betting that this trend will continue in 2008.
On Friday, Goldman Sachs recognized these facts and announced its trade of the year for 2008 – sell the U.S. Dollar vs. the Singapore Dollar, Malaysian Ringgit and Taiwan Dollar. Normally I don't care what any currency analyst has to say, but GS has made quite a few good calls in the recent past. Goldman feels that rising inflation and the expense of intervention will cause these countries to allow their currencies to strengthen rapidly in the coming year, gaining 5% to 10% against the USD. While that might not sound like much of a gain, please understand that the use of leverage is not factored into the equation – it can't be, since different traders use varying degrees of leverage. Since many Forex traders use leverage of 100-to-1 or higher, the potential profit from a move of 5 to 10 percent in these currency pairs could prove to be astronomical. Of course, using a high degree of leverage increases the risk as well as the reward.
One of the picks for trade of the year, The U.S. Dollar – Singapore Dollar (USD/SGD) currency pair, is now consolidating near ten-year lows. Note how the pair's descent has accelerated in recent months; this is what I mean when I say the Monetary Authority of Singapore is "letting off steam." (see figure 1).
Figure 1: USD/SGD has been in a steady decline in recent years. Source: Saxo Bank
What other trades does Goldman like for 2008? The investment bank is bullish on the Brazilian Real, the Russian Ruble and the Czech Koruna, and bearish on the Great Britain Pound, Canadian Dollar and the U.S. Dollar. Goldman, in its annual selection of the top 10 trades, also recommended that investors sell the Great Britain Pound against the Japanese Yen as U.K. growth slows, and predicts the Bank of England will be forced to cut interest rates. Maybe they also see the massive, ominous head and shoulders pattern in the GBP/JPY currency pair – a sign that this pair may be in for a precipitous decline (see figure 2).
Figure 2: GBP/JPY chart shows a massive head and shoulders. Source Saxo Bank
"Bueller? Bueller?"
Goldman remains one of the most respected names on Wall Street, and has thus far remained relatively unscathed by the ongoing subprime/credit crisis. However, unscathed and unaccountable are not necessarily the same thing. An interesting piece in the New York Times from economist Ben Stein this weekend suggests that Goldman may have sold as much as $100 billion worth of collateralized mortgage obligations, or CMOs, in recent years. Citing a recent piece in Fortune magazine, Mr. Stein notes that as Goldman was peddling CMOs, it was also shorting the junk on a titanic scale through index sales — showing, he argues, how horrible a product it believed it was selling. Stein, whose dry wit and deadpan delivery made him a comedy staple in movies such as "Ferris Bueller's Day Off", points out that none other than Henry M. Paulson Jr., the current U.S. Treasury secretary, was in charge at Goldman when this alleged practice occurred. I don't know if Mr. Stein has an agenda here (who knows, maybe he invested in one of Bear Stearns' disastrous CMO hedge funds), but we need to recognize that this subprime toxic waste came from somewhere, it didn't just fall from the sky. If it can be proven that Goldman or anyone else was offering these investments while simultaneously shorting them, then these investment companies must be taken to task.
Don't Pop the Champagne Just Yet
Hugo Chavez lost the election. Oil is back under $90 per barrel. Gold has fallen below $800 per ounce. And the U.S. Dollar is on the rise. These are all very good things, to be sure, but does this mean that the coast is now clear and everything will be OK? Please keep in mind that oil, gold, and the greenback are all still in well-established trends that have been intact for many months. A couple of good days do not a reversal make. For example, take a look at the Euro – U.S. Dollar (EUR/USD) currency pair on the daily chart (see figure 3).
Figure 3: EUR/USD pulls back to major trend and Fibonacci lines. Source: Saxo Bank
On the daily chart, we see that the action of the past few days has only pulled EUR/USD back to its trend line. We also see support from the 38.2% Fibonacci retracement of the most recent rally higher. I'd love to see the USD gain strength and break this trend line, but as a trader I must remain objective, and I see this trend as still intact. As traders we should never try to anticipate the breakdown of a trend, or indeed predict any future event. Instead, consider what you will do if the trend does in fact break down. In other words, don't try to predict outcomes, but rather react to what you see on the chart.
Question of the Week
Q) Ed, I recently heard that it is possible to short real estate in a manner similar to shorting stocks or currencies. I'm not talking about shorting real estate through stocks or indexes, but the short sale of actual property. Is this true?
Ed Ponsi) Thank you for your question. It's true that there is such a thing as short selling a house, but that's very different from short selling in the world of trading. In this case, the seller may be about to default or is otherwise unable to make payments on a property. Since the lender would prefer not to take possession of the real estate, it may agree to an arrangement where the house can be sold for less than the total amount due on the mortgage. This might allow our homeowner to avoid bankruptcy and salvage his or her credit score, while keeping the lender out of the business of real estate ownership. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose. So, while you may want to sell short a stock or a currency, you definitely do not want to be in a position where you'd consider selling your house short.
I Love New York! Pop quiz – which Online Trading Academy location was voted Franchise of the Year for 2007? Why, New York of course! John Bang, Tony Michaels, and the whole gang at Online Trading Academy New York would like to invite you to attend a free seminar and book-signing event with me on Wednesday January 9, 2008. Hey, what else would you expect from the Online Trading Academy's Franchise of the Year? Mark your calendars and don't miss this event - I can't wait to see all of my friends in the New York area!
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through