Top Forex Trades for 2009
In 2008, a perfect storm hit the world financial markets, flooding hundreds of firms to the level of bankruptcy and forcing many investors to liquidate their leveraged positions. In 2009, We expect more pain, possibly triggered by a second wave of de-leveraging in the financial sector and by more payment defaults in the U.S. mortgage sector.
Chief Strategist - Antonio Sousa
Taking Advantage of Risk Aversion
In 2008, a perfect storm hit the world financial markets, flooding hundreds of firms to the level of bankruptcy and forcing many investors to liquidate their leveraged positions. Many were quick to blame Wall Street, but only history will tell what was the real cause behind such a terrible year from an economic stand point. The truth is that the biggest housing and credit bubble in history continues to threat the entire global financial system and the once resilient global economy is slowly succumbing to tight credit conditions. In fact, I expect more pain in 2009, possibly triggered by a second wave of de-leveraging in the financial sector and by more payment defaults in the U.S. mortgage sector. Having said that, I expect risk aversion to dictate most of next year's price action in the currency market which will probably help lower yielding currencies like the Japanese yen and safe-heaven currencies like the U.S. dollar. On the other hand, with the global economy slowing down is reasonable to think that the demand for commodities will also begin to slow down which could make the Australian and the Canadian Dollars very vulnerable going forward. I have been short AUD/JPY since the beginning of October 2008 and I expect the Australian dollar to fall to 50 yen in the first half of 2009.
Senior Currency Strategist - Jamie Saettele
Technicals Support a Rally on EUR/CAD
The decline from the 1995 high to the 2000 low is in 3 waves (2.0564-1.2450), which is the very definition of a correction. The 3 wave decline indicates with a high probability that 2.0564 will eventually be broken. Additional evidence that supports a bullish bias is the rally from 1.2450 to 1.6971, which is in 5 waves (confirming that the larger trend is up) and the decline from 1.6971, which is also a ‘3' (of smaller degree than the decline from 2.0564). Having just broke above 1.6971, the EURCAD should remain above 1.4711 on its way to a break above 2.0564. The bullish case is supported by the long term trendline (log scale) as well as Bollinger Band difference (plotted below price). BBDiff is turning up from low levels, which supports expectations for a breakout. A sizeable correction is probable at the beginning of the year (daily RSI is at 83 as I write this on December 18th). Former resistance in the 1.63-1.65 area is probable support. The minimum objective for this trade is above 2.0564. I will assess bullish potential as the pattern plays out.
Currency Strategist - John Kicklighter
The Rise And Fall Of Volatility
Looking ahead to 2009, the fundamentals and technicals behind the market are far too uncertain to simply offer a forecast on any single currency and expect it to play out with any respectable level of probability. What can be projected with a reasonable level of accuracy however is how volatility will shape the currency market. Currently, we can see that volatility in the currency market has surged going into the end of the year. A sharp increase in activity isn't unusual during this period considering the thin levels of liquidity that usually prevails. However, this is not just a temporary surge in activity over a one or two week period due to seasonality. Volatility has been steadily rising since the financial crisis took hold back in the summer of 2007; and the market really hit its pace through the fourth quarter of this year.
Fundamentally, these levels of activity are justified by the equally dizzying heights of uncertainty that still pervades the global economy and credit markets. Heading into the first half of 2009, such issues will have to be solved before the currency market returns to normal. This entails a rebound in global growth and a thawing of lending. For economic activity, the ensuing recession is deeply rooted and will just have to play out on its own (policy officials will realistically have little control over such a trend). The slump will likely accelerate through the opening months of the year before bottoming out in the second quarter. For lending, there are a lot of unknowns. However, with governments providing near unlimited liquidity and constantly broadening their guarantees for riskier market loans, banks will eventually begin to lend to each other, businesses and consumers as the economy begins to turn and the threat of bankruptcy passes. To translate this into market activity, volatility behind breakouts and trend development will remain until the second quarter the year. After that, cautious investors who have seen their capital shrink through this crisis will limit speculation and leverage. This will likely lead to a slump in volatility that supports long-term congestion - best exploited through range, event-risk and carry trade strategies.
Currency Strategist - Terri Belkas
Risk appetite may improve, but beware of buying into it blindly
The developments in the financial markets over the past year have been monumental, and to me, the subsequent impact on currencies has been fascinating. The Japanese yen has arguably benefited the most from all of the turmoil. The low-yielding currency was once the prime component of the carry trade, but as soon as risk aversion started to increase mid-year and volatility surged to record levels during the fall, massive deleveraging led the Japanese yen to gain 17% against the greenback, 24% versus the euro, 36% against the British pound, and an incredibly 40% versus the Australian dollar over the past six months.
At the time of writing, volatility has cooled but the Japanese yen has continued to rally, which has spurred speculation that Japan will intervene in the currency markets. Will the country do it? Probably. Is it an event worth trading? No. Simply put, it's very risky.
Now, on to what I think will be the best trade in 2009...I think the JPY crosses, stock markets, and other risky assets could see a massive bullish retracement at the start of the year. This could be the result of a variety of factors, including a bailout for the US auto industry or indications of resilience in emerging market economies. There are sure to be great shorter-term opportunities to buy into these assets, including the JPY crosses, but I'm not so optimistic about the outlook for the financial markets in the long run. As a result, I'll be treating a strong bounce in the JPY crosses as a selling opportunity.
In short, growth in the world's major economies is going to take a long time to recover. Using the US as an example, job losses have risen to historically high levels, which has impacted consumption. This drop in consumption hurts nearly every facet of the economy, including the services, manufacturing, and housing sectors. The bottom line of businesses will subsequently be impacted, and when we see publicly listed firms report Q4 2008 and Q1 2009 earnings and profits, the results may be very disappointing. Thus, I think that any bottom we see in the stock markets in the near-term and optimism that results will be short-lived. Instead, risk aversion will start to make a comeback in the middle of the first half of 2009, and that will be the time to buy the Japanese yen once again.
Currency Analyst - David Rodriguez
US dollar Could Continue to Strengthen in 2009
With global financial and economic outlook wrought with uncertainty, picking a trade that will last the duration of the upcoming year is hardly an easy task. Most of the straightforward trades - like those benefiting from the worst financial crisis in our time - have arguably made their big moves. I personally believe that global stock markets will continue their declines through 2009, but extreme trough-to-peak volatility makes it difficult to establish a lasting short position. The same can be said for the currencies; though I remain a more medium to long-term US Dollar bull, the recently violent wave of Euro strength leaves me reluctant to hold a long-term US dollar position.
That being said, I do believe that the US dollar will continue to strengthen through 2009. There remains clear danger that the US economy sinks further into financial and economic distress, but I believe that other major global economies will be similarly affected. In times of extreme global risk aversion, I believe that investors will continue to move towards the safe haven status of US holdings. This will especially be the case if we see continued duress in emerging market economies - forcing investors to withdraw assets held in exotic currencies.
I propose going long the US dollar against a basket of currencies - those I believe to be the most exposed to the ongoing financial market crisis. My first choice is the British Pound. Though it remains substantially off of its recent highs, the UK currency continues to suffer due to the fact that the domestic economy is effectively the financial hub for Europe and other parts of the world. Though it will likely recover further against the US dollar in the first months of 2009, I believe the British Pound/US Dollar will finish the year significantly lower. The next two currencies are the Australian and Canadian dollars. Both are heavily trade and commodity dependent, with the Canadian dollar especially dependent on US demand. Given a sharp drop in global growth rates, demand for both currencies will continue to falter into the new year. I will look for the US dollar to slide further against the Australian Dollar and Canadian Dollar through the early months of the year, but the Greenback will likely finish the year significantly higher on global economic distress.
Currency Analyst - John Rivera
Despite the Euro's recent strength I am anticipating further losses in EUR/USD
European fundamentals continue to weaken and forecasts for growth in the region continue to be downgraded. The Institute of International Finance recently forecasted a contraction of 1.5% for the economic union in 2009. Indeed, the latest German IFO reading fell to a record low of 85.8 as business continue to grow pessimistic. As business leaders outlooks dim they will look to cut costs which will result in more job losses. The ECB recently cut their benchmark rate to 2.00%, but many feel that the central bank is behind the curve in its easing policy as the Fed and BoJ have slashed their rate close to zero and the BoE is expected to follow soon. Yet the ECB continues to fear that cutting rate too low will trap them and leave them without recourse if things deteriorate further. However, they are risking that h their economy may be the last to emerge from the current crisis and could have an extended recession. Despite the Euro's recent strength I am anticipating that it will resume the weakness that we saw from July through November. The single currency found support at 1.2302 the 50.0% Fibo extension of the 0.8568 - 1.6041 rally. However, the pair ran into staunch resistance at the 200-Day SMA and appears to be headed for a re-test of the Fibo support level. A break of this level is very possible with 1.14440 as the next level of support.
Currency Analyst - Ilya Spivak
Return of a Strong US Dollar; Strategy: Short EURUSD
Having trended higher since the beginning of 2002 to test dizzying heights above 1.60 in mid-July of this year, EURUSD collapsed as the greenback gained across spectrum currencies. The sudden change in direction came as the market realized and priced in the fact that the world would not "decouple" from US turmoil. The dollar was a "least worst" play in a global recession scenario because US policy makers were first to cut rates, offer fiscal stimulus, and otherwise stimulate the economy, suggesting the US would lead the rebound. The best way to express a broad-based pro-USD bias is EURUSD: the pair has only seen two instances since 1989 when its inverse correlation to the wider US Dollar Index dropped below -90%, and even then at its worst it never got weaker than -76%. Although the pair has fallen considerably through 2008 and has recently put in a historic rally, we see this as corrective and expect EURUSD weakness to carry through most of next year (and possibly beyond).
In the medium term, we expect continued risk aversion to drive the US dollar higher. Global demand will continued to weaken at least through the first part of 2009, leading to dour earnings reports that will weigh on stock markets. As capital leaves equities and other risky assets, it will again seek haven in the greenback: the US continues to have the deepest, most developed capital markets and the most stable geopolitical profile, making dollar-based assets the venue of choice for risk-averse investors.
The long-term outlook suggests that the Euro is likely to extend loses even as risk-driven volatility gives way to fundamentals-guided trading. Germany and the greater Euro Zone have been confirmed in recession and economists expect real GDP to continue to shrink throughout 2009 even as the US begins a slow recovery in the second half of the year. The ECB has insisted on being behind the ball with misplaced hawkishness but is still forecast to cut rates by another 150 basis over the next 12 months (the most of any major central bank). The Fed is likely to change gears faster than Trichet and company, with overnight index swaps suggesting the Euro / US Dollar yield gap will widen by 200-225 basis points in a year from now. The Euro Zone's external surplus has turned to deficit, adding to downward pressure on the Euro: if imports outpace exports, there is a net outflow of Euros which invariably floods the market with currency and drives down its value. Meanwhile, the US trade gap has been narrowing considerably and is expected to continue to do so. Looking at relative purchasing power as a loose guide to currency valuation, we see that the "fair" EURUSD exchange rate is near 1.1640, suggesting the single currency is overvalued by over 2000 pips.
Technical Outlook:
EURUSD has broken below the trend line guiding the multi-year bullish trend established in 2002. Prices have now completed a 50% bullish correction, retested support-turned-resistance, and is positioned to resume downward momentum.
DailyFX
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