Sunday, June 9, 2013

Some Currency Trends to Note in the Future

Yen
Yen (Photo credit: Mr Wabu)
When I trade currencies, I do so with a lot of leverage, usually a 10x leverage ratio. However, if you're a long term investor and still want to try playing with currencies, that is possible. All you have to do is be aware of the long term trends that are happening between different currency pairs. So without further ado, here are some megatrends we're going to see in the next couple of years between the major currencies.
 

US Dollars vs. Euro


As you might know, I'm super bearish on the Euro at this point. I think that one day, the Euro will cease to exist. Why? It's rather simple. The Euro has two big problems.
  • Debt.
  • A Monetary Union but no Fiscal Union.

As you probably know, practically every country in the Euro with the exception of Germany is drowning in debt. That's thanks to the Europeans' policy towards 3 hour lunches and 60 vacation days a year - unproductive! Coupled with the fact that Europeans really like to live the good life, the only way they can do so is to go heavily into debt (which they are). 

Right now, Germany is the only thing that's holding the Euro together. The Germans are the only economic engine that's functioning in Europe. Which means that at this moment, the Germans are taking their surpluses and handing them out to their fellow Europeans who are drowning in debt. But nowadays, the Germans are getting angrier - their attitude towards helping their fellow Europeans is "why should I waste my money bailing you out when this debt problem was created by yourself?" When election time comes, the German politicians will reconsider their handing out economic aid. When the Germans stop the flow of aid, the Euro will crumble and cease to exist. 

In addition, the Euro is inherently flawed. The Euro is a monetary union (money policy) but not a fiscal union (government spending policy). Thus, what happens is that these two policies often clash. Like a dog with two heads, the dog goes nowhere if the two heads have different ideas about what to do. 

Hence, I believe that within the next 5 years, the Euro will cease to exist. Pretty scary forecast, eh? But remember, the impossible has happened in the past. 

Thus, as a long term investor it might be highly profitable if you buy the US dollar and sell the Euro. 

US Dollar vs. Yuan


For those of you who don't know, the Yuan is China's currency (also known as Ren Min Bi). Currently, the Yuan is semi-controlled by the Chinese government. This means that China allows for the Yuan to fluctuate by a maximum range. This, in effect, means that the Yuan is being artificially depressed by the Chinese so that their exports remain strong (devalued Yuan = cheaper Chinese goods = more exports for China). 

In the next 5 years, the Chinese are planning to liberalize their financial laws. And one of these financial reforms includes letting go of controls on the Yuan. China will cease to restrict the Yuan's fluctuation because only then can the Yuan have a serious chance at challenging the U.S. Dollar as the world's reserve currency (something the Chinese are itching to do). 

Thus, when the Chinese government transforms the Yuan into a total free market mechanism (meaning that the government no longer restrict's the Yuan's fluctuation), the first thing the Yuan will do is increase in value because the government is no longer artificially depressing the Yuan's value. Thus, it might be a wise decision for long term investors to load up on the Yuan and sell the US dollar, which is basically a bullish call on the Yuan. 

US Dollar vs. Yen


Not to be confused with the Yuan, the Yen is Japan's currency. In the past few months, the biggest news has been the devaluation of the Yen. Abe (Japanese Prime Minister) is doing everything in his power to depress the value of the Yen and create inflation so that the Japanese economy and exports can become competitive again. 

In the future (meaning for the next 5 years), I expect the Yen to continue devaluing. HOWEVER, the reasons behind the Yen's devaluation will change. 

Right now, the Yen is being devalued because the Japanese government is printing money like there's no tomorrow. HOWEVER, eventually that inflation will get out of control and become hyperinflation. When hyperinflation hits, the Yen will continue to devalue. So for y'all long term investors out there, selling the Yen and buying the USD will be the bonanza of the decade. 

A Note


2 notes, actually. As you might have noticed, all these predictions are the USD vs. something. That's because based on the Bretton Woods agreement, all currencies are valued in USD. 

Hence, one cannot directly say what the value of the Yen to Euro is. The second note is that if you're investing in currencies, you have to use a stop loss. A stop loss will protect your rear end and prevent a small loss from becoming a bigger loss (should you lose some money). 

Troy blogs at Badass Currency Trading, where he discusses the currencies of various nations and other how-to-play-currencies information. So if you're interested in currencies, please check out my site. Cheers, and all the best!


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