What is the next move?
This is one of the most important question being asked to me by traders as everyone wants to make money.
"I've attended wealth seminars and attempted my level best to follow everything that has being taught. It works to a certain level but after a while, it's already too late for me to turn back. I made losses later"
I told the traders that making money is easier said than done.
Those who are involved in currency trading need to take into account a lot of things rather than be "sitting at your pc, laptop or any other gadgets and look at the charts" (and 'look like a professional' and hope that passers by looking at you would deem highly of you while you're sitting at Starbucks or some 5 Star Hotel Lobby wearing smartly using free wi-fi facility without buying any refreshments)
Economy still and will play an important role - all rules apply - export, demand and supply, growth, interest rates, GDP etc. Without all these (FX + Economy), then the next step would probably be is - to justify how politics play a role in what we termed as "sentiment".
All sentiments have a justification. Without justification - the sentiment is equivalent to a rumour or turned against you as speculation and irrational hedging.
Understand that commodity can play a big role in the market.
Once you see that a certain currency has a weaker correlation (with commodity price), then put them aside immediately. Don't take any further risk. (in short - don't try to be a hero)
What about Oil and Gold?
Yes, two of the most popular benchmark. Here's the deal :
Fluctuation of Commodity Price = Sudden surge of oil price
Sudden Surge of Oil Price is most likely TEMPORARY (trust me) - yes, at least a year or so, it will plummet back.
Gold hit a high price (again TEMPORARY) = and again hit a low price also in a year or so (every year I see this trend)
Once again the price of commodity; taking into account - global recession; plays a role in understanding the bearish and the bullish situation.
USD and oil are closely related but the correlation tends to break on daily basis - but it becomes stronger in the long run. This however requires patience and no panicking. USD is an inverse trading instrument thus making the 'strangest' thing happening - USD go down, oil price goes up - vice versa.
(Japan)
(I need to point out that whenever oil price skyrocketted will make some countries suffer for example Japan. A fully industrialized nation but depending on the imports for primary energy. Just look at the trading history of USD against Yen - it's important that that oil price 'to fall' to ensure break a certain level to hit lower)
Which Currency correlated with Gold in a harmonious way?
You don't need 3 guesses for that - it's definitely Australian Dollar. (it's not surprising that they are the top 3 gold producers) Australian dollar appreciates as much as the rising of gold prices. New Zealand is getting advantage out of Australia's prosperity and NZ never had much problem exporting its goods. Again seeing the fine commodity trend in Australia, I'm not a bit surprised that they will always be the FIRST to be out of the recession. So again, commodity!
Political Sentiment?
Neutrality and Uncertainty of Politics do play a big role in correlating gold prices and the currency.
Here's my simple formula :
1) A healthy politics (in the eyes of the traders) will usually turn gold as a support a certain currency
2) Unhealthy politics will usually switch the trading of that particular currency to another currency which is backed up by gold during 'healthy politics'.
The only thing that can break this relationship is decoupling (refer 09/2005 when USD decoupled from gold price movements)
Closing
Smart experienced traders tend to switch commodity and currency or vice versa. The earn interest with high margin but taking into account countries having interest rates. Again, I didn't say that there is no risk.
e.g.
3% from e.g. Central Bank
= amount earned subtract 0% rates paid (shorting USD for e.g.)
= 10X leverage (underleveraged rates).
= surge of interest income whenever net of exchange rate changes.
But don't count on this - you will see how dangerous this situation to you when the trade turns against you.
Play safe : Although the effects are slow, commodity prices can still be used as a benchmark on gold, oil and currency market.
