Forex Trading Tips: FX in 2009

FX Market Outlook

As the year starts I am going to steal a page from Kathy who performed a Herculean job this week while I was away on vacation by putting out the full G-11 forecast for 2009 all by herself. The full report can be found here but allow me to highlight some key points that she makes.

1. The Dollar will be trapped between the themes of safety and yield.

As Kathy writes, “The dollar’s rally in the second half of 2008 has been largely driven by risk aversion, deleveraging and repatriation. In other words, despite the next to nothing yield offered by dollar denominated investments, a flight safety into US dollars and government bonds has kept the greenback from collapsing against other currencies like the British pound, Canadian and Australian dollars. The concern for safety was so high that investors were willing to take negative yields just to park their money with the US government. A bubble is brewing in the Treasury market and any improvement in risk appetite will take the market’s focus away from safety and back to return on money at which time ultra low interest rates could become a detriment for the US dollar. The dollar’s performance against other currencies would be contingent upon growth in the rest of the world. For example, if the UK economy is in the process of recovering, demand for yield and the prospect of return could send the GBP/USD higher, but if there is a prolonged recession in the Eurozone, then the Euro may no longer be the flavor of the month. “

I would only add one point here. The dollar’s strength is intrinsically dependent on Chinese and Japanese demand for Treasuries. If the Chinese refuse to recycle their export earnings into Treasuries, the bubble in US government debt will burst. Yields will rise. Typically higher yields would be beneficial to the currency, but in this case the impact on the dollar will likely be negative as investors begin to shun US assets -- think Argentinian peso and you begin to understand that an increase in yield does not always translate into rally in the currency market. In fact the single greatest event risk for the dollar in 2009 will be the prospect of a failed Treasury auction which could trigger a run on the greenback as global investors finally say, “Enough!”

2. The Eurozone economy will get much worse.

As Kathy writes, “It is no secret that 2009 will be a tough year for many countries, but things will be particularly difficult in the Eurozone. Every major central bank has cut interest aggressively, driving their currencies significantly lower in 2008. The ECB on the other hand has been reluctant to follow suit, leaving the Euro only marginally lower for the year. Although the Eurozone is in a recession, growth has not been nearly as weak as the US. Annualized GDP growth in the Eurozone during the third quarter was +0.6 percent, compared to -0.5 percent in the US. The Eurozone’s outperformance in 2008 however could be short-lived as the central bank forecasts a 1 percent contraction in growth next year. As an export dependent region, the strength of the Euro will make a recovery difficult. German companies have already scaled back production as global demand eases. Looking ahead, unemployment is expected to rise, slowing consumer spending and forcing the ECB to continue to cut interest rates. If German unemployment hits 9 percent, we could easily see Eurozone rates hit 1 percent.”

Here is a fact for some euro bulls to consider. One out of seven jobs in Germany depends on the auto sector. So far German unemployment has not increased, but at 1.40 EURUSD and a complete collapse of global demand for cars -- it is just a matter of time. The moment German unemployment starts to spike, all the tough talk from ECB will disappear and EZ rates will quickly move toward 1%. The euro will therefore suffer but not so much against the dollar as against the Swiss franc and the pound as the market re-adjusts to the new European interest rate regime.

3. Japan Could be the Worst Performing Country in 2009

As Kathy writes, “Of all the countries in the developed world, Japan will probably have the toughest time in 2009 because of the strength of its currency. As an export dependent nation, Japan typically runs a trade surplus but this year we have seen the country report trade deficits, which is extremely rare. Toyota, the world’s largest carmaker is the highest profile casualty of Yen strength. The automaker reported their first lost in 70 years as sales plummeted and the Yen soared. The toxic combination of a weak economy and a 16 percent rise in the yen against the US dollar has been disastrous for the automaker. Although Toyota is probably the most high profile, they are certainly not the only major Japanese corporation to be hit by the double whammy of a slowing global economy and a strong currency. Business sentiment across the country has already fallen to a 7 year low as exports decline by a record amount. Unless the Yen’s strength is suddenly reversed, we expect Japanese corporations to report more losses in the months to come. As of the third quarter of 2008, Japan is in a recession with growth shrinking by an annualized pace of 1.8 percent. Next year, GDP growth is expected to fall by 2.5 to 4 percent as weak domestic and international demand hits the economy. However it is important for currency traders to realize that the Japanese Yen does not always trade off economic fundamentals. The outlook for Japan has been bleak for months now, yet the currency is rallying because risk appetite has been the dominant driver of the currency’s price action. If the market is very nervous about the global economy, the Yen could still rise even if Japan’s economy continues to deteriorate.”

My own opinion on the yen can be found here
Boris on Yen

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—————--The First Rule Of Winning—————

The evidence was as incontrovertible as it was disheartening. Wherever I looked -- there it was. A glance at the mirror, the latest photograph from the company Christmas party, even the video clips from CNBC showed it clearly. I was getting a double chin. For someone as vain as I, this was a rude wake up call. There was no doubt about it -- I was getting fat. Too much sitting on my butt, staring at trading screens, drinking countless cups of bad coffee and consuming the empty calories of multiple cherry danishes.

Fortunately I knew what to do. Forget the idealistic form of my college youth. Forget the muscles built on 200 push ups and 200 sit ups per day. I was old enough to know better that I did not have the time, nor the motivation to follow a serious work out. But I could set a much more realistic goal. I may not be able to quickly lose weight, but I felt confident that I could at least stop myself from becoming fatter.

I spent 20 minutes on the elliptical each day (about all I could realistically muster), forced myself to do 60 situps afterward and cut myself down to just one cherry danish a day. Sure enough within a week, my weight stabilized and the double chin began to recede.

Trading is very similar. We spend countless hours trying to figure out how we can turn $100,000 into a 1 Million, but in the process forget that the first rule of winning is simply to learn how to stop losing. Take a look at any trading account and you will quickly realize that most traders fail, not because they misread the market, but rather because they allowed one bad trade to blow up their whole account.

The single most important trait for long term success as a trader is to control your losses. There is always another day and you can always come back if you have the capital. That’s why the road to winning starts with learning to minimize your losses. And that means always having a stop. There may be numerous times when stops will cost you money, as price moves through them only to recover and rally in favor of your position. If you can not accept that fact, you will never win as a trader because sooner or later your position without stops will move so violently against you that you will lose all of your profits and all of your equity.

Before you can get thin you must stop yourself from becoming fatter. Before you start winning in trading you must learn how to just keep your account at even. As we start the New trading Year this may be the most important resolution for us to make.

Happy New Year. Videos will resume next week.

Boris Schlossberg forex blog forex signals forex strategies FX Weekly Reports

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