7 Ways a Government Influences its Currency!

They set the tone by the policies that they set. Ex. Sarbanes-Oxley has driven money away from the U.S. stock markets and IPO market into other markets, thus hurting the long term prospects for the U.S. dollar. Europe has been more favorable to corporations, so money has flowed there and not to America as much due to this.

They set the tone by what they do with their printing presses. If a government resists the temptation to print tons of money, then it will retain its value. If it “waters it down” by printing tons of it, then it erodes the value of it away. Australia is not quick to print money, yet the U.S. is!



If it encourages “money inflows” into its country through making products that the outside world wants, it ensures inflows into its currency. If it is a country that is heavily involved mainly in the services sectors and itself is a net importer of goods, then there’s huge likelihood that they are setting their currency up for a fall. This is exactly what we have in the U.S.! Yet Australia actually mines and exports many of the world’s most needed commodities: Gold, Copper, Wheat, etc.



If a nation stores up monetary surpluses, it provides a better sentiment for investors and causes “inflows” of money very easily. However, if the country has blossoming deficits, it discourages money flows into the country and actually scares some of it away and prevents other “new money” that would like to enter that country from entering due to them being so worried about their ability to repay their debts. Again, a problem of the U.S. Yet China has huge surpluses.



The ability of investors to trust a government is another huge one. There is a ton of potential money that COULD go into Russia but WON’T go into Russia because you never know what they will do next. Their government is so corrupt and has such a bad image from the outside world of being so shady in their dealings with much of the rest of the world (and their own people/corporations) that it hinders some “inflows” into their currency. Yet Canada and Australia’s governments have great track records.



What a country does with their interest rates has a HUGE effect upon inflows and outflows in a currency. If interest rates are high and headed higher, it generally encourages money to it as investors seek higher yields on their money. However, if a country holds their rates unusually low, then they’re encouraging outflows. Examples of this right now are the U.S. and Japan. Rates are unusually low and thus money is starting to flow away from them once again. Australia and New Zealand were two of the only major countries that weren’t inclined to take their rates near zero percent like most of the rest of the industrialized world, and they have been rewarded the most as things have started to snap back for their financial markets and currencies.



Governments that are “tax friendly” to residents and especially to corporations are likely to see more inflows than those who aren’t. This is why so many companies are moving away from the U.S. as Obama pours on the taxes and they run towards places like Dublin, Ireland. This hurts the dollar and helps the euro!



These are seven huge areas that come to mind where a government plays a huge role in influencing their currency, whether they realize it or not…and many times they don’t (because they’re politicians and not savvy investors!

Couldn’t they intervene? History says they won’t…and if they did, it will backfire!

So the central bank wants a lower Canadian dollar to make it easier on these crucial companies. Will they get it? NO! Oh sure, they may be able to influence the USD/CAD up 300-500 pips…but what is that when the pair has moved 2,700 pips downward and will continue that downtrend?



You see, traders know that the global economy is “on the mend” and as it is recovering, it will consume more oil and other commodities that Canada exports. They also know that the U.S. dollar has been in a broad downtrend since March (according to the U.S. Dollar Index). This broad U.S. dollar sell off isn’t going to change just because the Canadian central bank wants it to.



Oh yeah, but they could go in and “sell Canadian dollars” right? Sure they could…but, it would not be effective and the foreign exchange market would simply laugh at them with the trend and fundamentals going in the favor of the traders and against that of the bank.



Also, traders know that there’s a good chance that the bank is bluffing too. Why? The central bank has abandoned intervention policies ever since 1998. They didn’t intervene when the currency reached a record high in 2007 and or when it’s had its biggest gain since the Korean War during May.



Therefore, there are a ton of years there that the bank did nothing when the currency moved to extremes. So they have no reason to believe that it will be any different this time.



Most of the time, they just “jaw bone” the currency by talking about what they “could” do. However, when push comes to shove, they usually don’t anymore.



They stopped intervening in 1998 because it simply ended up causing even more volatility and ended up making it even more difficult for their exporters to hedge their risks.



If they “talk the pair up”, short the rallies!



Therefore, here’s how I see this playing out on the chart below. Sure, they may “talk the currency up” a few hundred pips or more in the near term. It could happen. However, smart traders are “selling rallies” in the USD/CAD pair because the trend is down and the fundamentals overall, are on the mend. Therefore any bounce upward, is likely to result in another big push downward.

Canada’s central bank is “smoking something”!

Well, “intervention talk” is in the air again! This time it’s the Bank of Canada!



Why are they so concerned with their currency? Well the USD/CAD exchange rate has dropped from 1.30 to 1.07 (2,700 pips) in mere months (5 months to be exact).



This can wreak havoc upon a company that is trying to figure out how to hedge their currency exposure so that it doesn’t eat into the profits of their business…and the central bank realizes this too.



That’s why Central Bank Governor Carney, together with Finance Minister Flaherty are coming together to attempt to “jaw bone” the currency lower (in other words bring the USD/CAD exchange rate higher).



Canada’s Fed Governor has stated that the gain in the currency is a major risk to economic growth…adding that “he has the flexibility to deal with it”. The Finance Minister backed him up by saying “steps could be taken to dampen the (Canadian) dollar”.



Governor Carney is attempting to lessen the appeal of the loonie by stating that interest rates are likely to remain unchanged through at least the 2nd quarter of 2010.



You see, when you are a Canadian company and you’re trying to hedge against currency fluctuations of 5-10% in a short amount of time, it’s tough. (They really need my services. Hehe!)



Canada’s factory orders have been hit (down 29% since last July) as a result of the strengthening currency. That couldn’t come at a worse time because at the same time you’ve had General Motors and Chrysler shut down Canadian plants, dealers and parts suppliers. Manufacturers have had to fire 221,500 workers as a result.

Don’t be fooled by Friday’s “dollar rally”!

The U.S. dollar got a nice “pop” on Friday as a better-than-expected NFP (employment) report came out. However, I call this a “sucker rally” because the dollar’s broad trend has been downward since March (according to the U.S. Dollar Index chart).

Therefore, since the probabilities lie on the side of the trend, it’s best to short the dollar on rallies upward by buying foreign currencies against it: AUD/USD, GBP/USD and NZD/USD being some of the top candidates in my opinion due to them leading the way in their yearly inflation figures. These are likely the countries to have to raise interest rates first and that will only drive more money away from the buck and into these other foreign currencies (which helps the buyers of these pairs).

Another factor that really doesn’t work in the dollar’s favor is the global recovery that’s underway right now. You see, the dollar only ran up when the “sky was falling”. But now that financial markets are stabilizing, that works against the green back and not for it. It does however, work in the favor of currencies that have higher inflation in their economies (vs. the deflationary numbers in the U.S) and it also works in the favor of the higher yielding currencies.

The deflationary Japanese economy is really causing money to pour out of the yen and into these currencies as well, which bodes well for: AUD/JPY, GBP/JPY and NZD/JPY over time.

So keep these pairs on your radar screen. It doesn’t mean that any moment of any day is the time to buy them…but it does mean that they are “fundamentally supported” the most and therefore should be your “top candidates” to consider as your technical entry set-ups occur.

New Zealand strength starts to emerge!

New Zealand is climbing its way up to the top of the pack of stronger currencies. It has THE highest CPI (year over year) and has the 2nd highest interest rate out there. With the high CPI readings, traders are starting to bet that they will have to hike rates sooner rather than later.

But you can see this NZD strength when you compare it across the board. For instance, NZD/USD’s chart is holding up better than most other dollar pairs, NZD/JPY is holding up better than many yen crosses.

Then when you compare NZD directly with many other pairs, it shows its strength too: EUR/NZD’s downtrend due to NZD strength…AUD/NZD slumping over due to NZD strength,…GBP/NZD breaking lower to on a weaker GBP AND NZD strength.

So whether you’re a position trader (weeks to months), swing trader (days to weeks) or an intraday trader (in and out within the same day typically)…it’s always better to “buy strength” no matter what your holding period.

Therefore, a “technical buy” signal on a NZD pair may be better to take than a technical buy that shows up on a weaker currency.

So while you may look for technical entries…I also want to get you thinking about which currencies may be the best choices to pick from too…when looking for technical entry signals on your charts. Click on the chart to enlarge it.

Dollar’s rally is just about to run out of steam!

Even bear markets have rallies. But why would I refer to the dollar’s recent rally as a “bear market rally” and not a rally into a “new trend”? Because there is no technical indication that has surfaced to think otherwise. Click on the chart below to enlarge everal things worth noting on that chart of the U.S. Dollar Index:

The pair is still downtrending as shown by it trading below BOTH the 50 and 200 Simple Moving Averages. Also, the MACD lines are below the zero line (red boxed area) and the Slow Stochastics are just about to go into the “overbought” territory once again as the dollar approaches its 50 day SMA resistance area.

There’s an old Wall St. saying….”trade the trend until it ends”. However, do realize that there are rallies in every bear market (downtrend). These are to be expected. After all, they usually can’t go “straight down”. Therefore, upward corrections are involved…much like the pull backs that happen within an uptrend.

Therefore, there’s no reason to see this as any other thing unless this technical picture changes. So far it has not. So I’ll stick with the trend “until it ends”.

That means, it’s probably better to be a buyer of strong currencies as these dollar rallies happen and start to roll over once again. Two of the top “strong currencies” right now are NZD and AUD…so being a buyer of NZD/USD and AUD/USD after these dollar rallies (which cause pull backs in these pairs) is to be favored until such time that there’s an actual re-emergence of a “dollar uptrend” which I think is a long ways off.

Here’s what makes the Carry Trade so great!

So now that we can predict the “long term” flow of money…why not jump in the line now and allow all of the other future buyers of Aussie and New Zealand dollars push up our positions in these same currencies over time.

So if I buy any of these (as of the time of this writing): AUD/USD, AUD/JPY, NZD/USD or NZD/JPY then I can enjoy BOTH the money flow AWAY from the U.S. and Japan and the money flow INTO Australia and New Zealand. By capturing both dynamics…my positions ratchet higher over time WHILE at the same time, I’m earning DAILY interest while I wait for further appreciation in the pair. When this strategy works: This strategy works when the global economy is coming out of a recession (past the trough of the recession) and in expansionary times when countries are doing good economically.

When the strategy doesn’t work: This strategy doesn’t work when the global economy is about to go into a recession (or for that matter, usually even when it’s just the U.S. going into a recession).

Since expansionary times last longer than recessionary times, the strategy works, more times than not.

When it’s not working….guess what? Short these pairs and you can make money that way.