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Throw The Ball Away!
The quarterback takes his position behind the center, and calls out signals to his team. He takes the snap, and drops behind his wall of blockers, searching for a target. Suddenly, two huge defensive linemen surround him. Unable to find an open receiver, the quarterback runs for his life, all the while moving further away from the line of scrimmage. If the defenders catch him back here, he will take a huge loss, moving his team out of field goal range, and possibly costing his team the game. What would a good quarterback do in this situation? What is the phrase that thousands of fans are screaming at this very moment, from the bleachers and from living rooms and dens across America and around the world?
"THROW THE BALL AWAY!"
Isn't it amazing how, from the comfort of our living rooms, we always know which course of action our favorite athletes and sports teams should take? Yet when it comes to trading, many of us are just like that quarterback. Because of our desire to "make something happen" and go for the "big play", we hang on to a trade long after we should simply throw it away. Because of our unwillingness to take a small loss (the equivalent of the loss of a down), we expose ourselves to a loss that could potentially be much larger – one that could affect the outcome of the entire "game" – except that in this case, it is not a game that is on the line, it is our trading account.
So the next time that you are in a trade, and you are tempted to hold on to a losing position, I want you to imagine that you are standing on the frozen tundra of Lambeau Field in Green Bay, or Soldier Field in Chicago, or some other such hallowed ground in American football folklore. Imagine that the defenders are closing in, the receivers are covered, and the crowd is screaming. Then do the right thing, and throw the ball away.
A Sign of Things to Come?
Last week, a popular New Jersey based banking institution, Commerce Bancorp, was sold to Canadian banking powerhouse Toronto Dominion. Toronto-based TD Bank Financial Group announced plans to acquire Commerce for $8.5 billion USD, and in a statement, TD Bank said it was in position to acquire Commerce because the Canadian dollar's value has risen against the U.S. dollar. Consider this; at today's exchange rate of nearly 1:1 (parity), Commerce Bancorp's price of $8.5 billion U.S. Dollars is equal to about C$8.5 billion Canadian Dollars. However, if the deal had occurred in March at the same price of $8.5 billion USD, at a time when one U.S. Dollar was equal to 1.18 Canadian Dollars, the deal would have cost Toronto Dominion the equivalent of C$10 billion in Canadian dollars (8.5 billion x 1.18 = 10.03 billion) Essentially, TD Bank saved 1.5 billion Canadian dollars by waiting seven months. Because of the falling U.S. Dollar, Commerce Bank – and every other U.S. company – is "on sale" to foreign buyers who are looking for bargains based on the weak U.S. currency. By the same measure, it will become more difficult for U.S. companies to acquire their overseas counterparts, because for them, the exchange rate is becoming less favorable. Expect to see more U.S. companies swallowed up by overseas buyers due to the sustained weakness of the U.S. dollar (see figure 1)
Figure 1: USD/CAD's breathtaking fall from 1.18 to below 1.00. Source: Saxo Bank
Who's Next?
Now that the Canadian Dollar has achieved parity with the greenback, who's next? Most analysts agree that the next currency to gain equal footing with the buck will be the Australian Dollar, which reached the .90-cent plateau last week for the first time since June of 1984 (see figure 2). The Australian Dollar – U.S. Dollar (AUD/USD) currency pair has since pulled back to just below the .90-cent handle, but it has been in a ferocious uptrend for the past six years (see figure 3). The Aussie, along with the Canadian Dollar, has been skyrocketing in recent years because of the insatiable demand for commodities such as gold and copper. As long as growth remains strong in China and India, those countries will need so-called base metals like copper to wire the many buildings that are springing up all across their respective countries. Not content to merely bash weaklings like the U.S. Dollar and the Japanese Yen, the Aussie is also holding its ground when matched against stout currencies like the Euro and Great Britain Pound. With Australia's benchmark interest rate expected to remain at 6.5% while U.S. rates fall, expect to see further appreciation of the AUD/USD currency pair for the rest of the year and into 2008.
Figure 2: AUD/USD climbs above 90 cents before pulling back. Source: Saxo Bank
Figure 3: Recent move continues a six-year uptrend in AUD/USD. Source: Saxo Bank
Question of the Week
First of all, I just want to thank you for the many questions about my recent series of articles, titled "The U.S. Dollar and the Thief in the Night". If I were to answer all of these questions, we would never make it on to the next topic! Thank you one and all, and my apologies to those of you who we didn't have time or space to answer. Frankly, the subject matter was getting me down just a bit! On to this week's question…
Q) As I watch the purchasing power of my savings evaporate I would like to know if there is a simple way to convert dollars held in savings accounts to Euros or Pounds for someone who doesn't trade the currency market?
Ed Ponsi) Thank you, that's a great question. Some U.S. banks offer a Certificate of Deposit that is denominated in a currency other than U.S. dollars for purposes of diversification. The downside of these instruments is that there is a risk that the currency you are invested in will decline. So, let's suppose you have $100,000 to put into a CD; you could place $50,000 into a U.S. Dollar-based CD, and another $50,000 into a Euro denominated CD. That way, you'll be partially hedged against continued weakness in the U.S. Dollar. However, if the U.S. Dollar were to gain strength vs. the Euro while you were holding the CD, you would lose money on the exchange rate for the Euro-based CD.
Some banks even offer CD's that are denominated in multiple currencies, similar to the U.S. Dollar Index. So, an individual could hedge his or her self against across-the-board USD weakness in this manner, but again, there is risk that the USD could strengthen, which could create a loss.
One last option is a CD that will appreciate if the U.S. Dollar gains. That's right, there is an investment product on the market that allows an individual to "borrow" money from a foreign country and invest that money in a U.S. dollar denominated CD. The holder of the CD will benefit if the U.S. dollar appreciates against that currency. The risk here is that if the U.S. Dollar weakens, you could lose money on the exchange rate. When considering investment vehicles of this nature, or of any nature for that matter, please consult your tax advisor.
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