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Welcome traders and investors to 2011, a year that I believe will provide some big moves and great money making opportunities in the currency markets.
Those of you who have been following the financial markets for any period of time have doubtless heard plenty of negative talk on the current state of the US Dollar. There are also concerns in Europe over the strength and sustainability of the Euro as a currency.
In currency trading, you are always trading one currency against the value of another currency. For example, you might compare the value of one US Dollar against the Euro, or the value of one Australian Dollar against one New Zealand Dollar.
So if both the Euro and the US Dollar look to have some challenging times ahead, we need to find a stronger currency (or currencies) to trade against them.
In the long term, I expect the Australian Dollar and the Japanese Yen to be quite strong. Note that my analysis is purely technical, as you will see when we get to the price chart in just a moment.
Of the Euro and the US Dollar, I believe the Euro still to be stronger, and with the high interest rates of the Australian Dollar, and no signs of this weakening just yet, it would make sense for long trades to favour the Australian Dollar over the Yen.
So over the next couple of years, the trade or investment I think offers the most potential return would have to be the Australian Dollar against the US Dollar – though not quite yet.
Let’s take a look at the Australian Dollar futures contract below in Chart 1. Chart 1
click to enlarge
You can see that the Australian Dollar has reached a level just above parity with the US Dollar (that is, one Australian Dollar buys one US Dollar).
There has been a lot of talk about this currency moving on to 1.10 US Dollars and beyond, and while I agree with this (I think 1.20 is more likely), I do think the Australian Dollar is overbought at the moment, and needs to have a pullback.
If you take another look at Chart 1 above, you will notice a common technical analysis pattern known as a Double Top, with the November 5 top and December 31 tops.
Double Tops are a strong bearish signal, just like Double Bottoms are a strong bullish signal.
To me, this suggests that the Australian Dollar will have a pullback, meaning the US Dollar will rise – for a time.
Safety in the Market students would do well to apply David Bowden’s Double Top forecasting rule here (from the Smarter Starter Pack), to get an idea as to how far this initial pullback may go.
When we do see the Australian Dollar pullback to a strong support area, I believe it will be one of the better placed currencies to trade long against the US Dollar.
If you have never placed a currency trade before, you might consider practising first, using the Virtual Trading Account feature in an OptionsXpress Trading Account.
This enables you to place real live trades and watch them unfold in a virtual trading environment, allowing you to experience all the ins and outs of a currency trade without risking any of your money while you get started and learn the ropes.
I’d like to wish all our readers an abundance of success in 2011.
Be Prepared!
Mathew Barnes
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