The Australian Dollar and the Brazilian Real - sell off on the cards.

The foreign exchange markets are for short term trading . They are suited for institutional traders, banks and brokerage firms that trade in FX. Otherwise they are high risk environments for a sole trader. The high risk reasons is because bigger institutions that trade in FX usually have larger margins and trade on a narrow daily trading range.

The best way to trade foreign exchange for the everyday investor is to look at FX warrants or derivatives that follow the FX markets. These warrants are traded on stock indices or other listed indices that trades warrants. The advantage with trading FX warrants (puts or calls) is you don't have a margin, it is not option trading e.g no stop loss or take profit and no margin calls. Like a stock it either increases in value of deceases in value, depending on the changes in the FX market. So if you are not a 5 day week FX trader the best way to look at the FX market, is to trade with currency warrants especially for long term trades.

There are not many high yield currencies left since the globally economy contracted rapidly in 2008. Most central banks went on a rate cutting spree, the list as follows:

(*includes next central bank meeting dates)
*

Bank of Canada	Jun 04 2009	Apr 21 2009	0.25%
Bank of England	Jun 04 2009	Mar 05 2009	0.5%
Bank of Japan	Jun 16 2009	Dec 19 2008	0.1%
European Central Bank	Jun 04 2009	May 07 2009	1%
Federal Reserve	Jun 24 2009	Dec 16 2008	0.25%
Swiss National Bank	Jun 18 2009	Mar 12 2009	0.25%
The Reserve Bank of Australia	Jun 02 2009	Apr 07 2009	3%

As the Federal Reserve loses control on trying to bring down interest rates and narrow credit spreads (by buying treasuries and printing money) the Treasury Yield curve widens for Government debt. This means that inflation (which is already here in a stagflation form) will rise further. To the point that either the Federal Reserve will have to raise interest rates to contain a total hyperinflation breakout. But the Fed is stuck in a money printing mode in which they will find it very hard to get out of; so this will effect the US dollar hence the current trading range and lows, please refer to graph (note trading range between 81 and 77
77 being support, any fall below a psychological support of 77 could extend to further selling):














The US dollar will not be replaced anytime soon. The conspiracy theory could be said, that US dollar weakness will extend to other currencies as the it will be impossible to remove the USD as the global base currency. If the USD was removed (extremely unlikely in the medium term) it would throw the FX markets and trade markets into complete turmoil. This would essentially be a far worst meltdown than anything the credit crisis could achieve. So the USD will remain as the base currency, only to ensure that other currencies will weaken to compete in export markets. So across the board currency depreciation is more likely as a stagflated style of hyperinflation occurs globally.

In saying this, the last risk appetite currencies could be sold off in earnest. Particularly currencies that compete in export markets. The Aussie and the Brazilian Real have done well with USD weakness. But I am long term bearish on both the Real and the AUD, please refer to graph of AUS and BRL (Brazil Real) - (note a divergence between the AUD and the BRL, with the AUD stronger against the USD and the BRL weaker against the USD). Eventually will see both currencies weaker against the USD. Depending on how weak both the Australian and Brazilian economies get over a period of time, as both economies will attempt to devalue their currencies to protect their export (commodity markets) markets.















I hold put currency warrants on the AUD and Real.


*morbius glass does not give investment advice. Trade at your own risk