The worries of the housing sector are starting to show overseas.  Today the Bank of England announced a package very similar to the Federal Reserve’s action to swap treasuries for mortgage debt.  The BoE acted to fund up to $100 Billion of government bonds for trade with mortgage backed securities.  This comes just weeks after Northern Rock was absorbed by the English government and the Federal Reserve’s actions for swap plan.

The Bank of England has been resetting rates alongside the Federal Reserve.  Since December, the Bank of England has lowered rates 3 times in an effort to spur borrowing and cut into liquidity problems that are plaguing banks and borrowers alike.  The Federal Reserve offered $200 Billion in guaranteed loans which is double the amount the BoE is currently offering, though there are many more houses and thus owners who are upside-down on loans in the US than in the UK.

This is comparatively good news for the United States.  As we’ve seen in recent weeks, the stock market has rallied on comparative news, that the market has gotten better though still doing worse than the long term average.  While we’re much better off now than in late 2007, many lenders are still writing off huge amounts of debt and assuming large losses.

It is hard to say how this will affect things in the UK.  The Pound has favored well against the other currencies, trading at nearly twice the value of the USD but losing much of its value to the Euro.  Investors who sought protection from a fallout in the US markets fled to Europe, many into the Eurozone and a few into the UK.  If housing problems persist in England, the chance of a drop in the value of the GBP becomes even more likely.

A quick fix of $100 Billion will help English lenders, but at the cost of inflation.  US consumers have already seen the cost of high inflation on the price of commodities such as food and oil but also on consumer goods which require more and more money to ship and produce.  The new funds will be made available to banks who want to temporarily “loan” the government their bad loans while using the new funds for further investment or to ease negative liquidity.

The US dollar has been strong, very strong up until the last five years.  Now that the US dollar is making new lows, trade has increased for many US based companies that can now compete with foreign manufacturers.  The low value of the US dollar is great for many industries, automakers, travel and resort companies and now chipmakers.

IBM released very promising news today that their first quarter earnings jumped 26 percent from a year ago.  The higher sales are attributed to a weak dollar which allows IBM to compete with countries like Japan and China which have enjoyed devalued currencies to grow their tech industry.

Automakers
Automakers are the companies that can benefit most from a cheap dollar.  GM and Ford sell many of their compact cars in Europe, now that the Euro is worth twice as many dollars as it was just a few years ago, more orders are likely to flood these US based businesses.   Even after pension costs of over $1000 per car for General Motors, the currency market should bring more business from foreigners.  This turnaround of trade certainly helps these two businesses, but the US economy as a whole.  Devalued currency brings more trade to the United States.

Travel and resorts
Travel companies also benefit from a weak dollar.  Europeans are quick to take advantage of cheaper US vacations.  Popular travel sites in the United States are bringing in less Americans but more travelors from Europe and Asia.  While a hotel room might have cost 100 Euro in 2003, that price is now down to 50 Euro.

A weak dollar is not entirely bad.  Although domestic inflation might worry some Americans, its helping US exports gain an advantage against cheaper nations.  We might finally see a shift from made in China to made in the USA.  This can be nothing but good.

Last year brought much news about the USDJPY carry trade, or holding a trade merely to gain interest.  At the time, the Japanese lending interest was far below the borrowing interest paid by US banks, investors could simply borrow in Japanese yen to deposit into US accounts and make money on the interest.

Carry trades are usually highly leveraged, forex accounts allow up to 400:1 leverage at some brokers.  This kind of leverage allows an individual to control $1,000,000 in currency with just $250 down.  This kind of investing is very dangerous and also compounds the effect when the markets turnover, or the trade becomes unprofitable for carry trade investors.

The dollar faces a critical problem, at this point the Federal Reserve Board is pushing rates so low that it may soon be privy to being the new carry trade currency.  This has already happened with the Eurozone and the pound as the dollar is now pushing low interest rates that are a few points lower than the central bank rates in other countries.  This creates unnecessary selling pressure when investors go to sell dollars and buy other currencies to profit from the interest rate difference.

When the USDJPY carry trade broke down, investors quickly bought back Japanese Yen to cover positions.  This caused the yen to advance by 20% in 2007.  As rates were lowered and investors lost confidence, the dollar was sold to buy yen which moved the exchange rate from 120 yen to the dollar to less than 100.

This puts a daunting strain on an already hurting US Dollar.  If the same carry trade that perpetuated with the yen persists in the opposite direction with the Euro and GBP, the value of the dollar will continue to slide.  In this kind of position, investors borrow dollars to deposit in Euro banks.  This puts artificial selling pressure on the value of the US Dollar, causing it to correct.

Further action by the Federal Reserve to cut interest rates will only hurt the dollars value, pump up the price of commodities and cause a dollar sell off in favor of other currencies.  The difference between interest rates is still tight, but a further move of 50 or 75 basis points will be the beginning of a large, multi-year carry trade.  We’ll have to see how the Fed responds, surely they know that further action will create a large difference in interest rates and more selling pressure.

The Yuan or Renminbi is the Chinese currency and might as well be the next hot investment.  The run into metals, commodities, oil and the Eurozone has brought huge gains to those areas, but the Chinese Yuan is something that has yet to be exploited.

The Renminbi was subject to a peg to the dollar for decades.  The old peg was valued at about 8 Renminbi to one US Dollar and was in effect to keep a low Chinese currency value.  If the currency was always devalued against the dollar, US consumers would look first to China for the production of goods.  Thus so many “Made in China” stickers appear on virtually everything you own.  The drop in the dollar’s value went unnoticed against the Yuan because its always been pegged to the US Dollar.  Never has it been allowed to free float against the USD so its value has remained the same.  Lately, the Yuan has been on top of the headlines as the main reason for the large trade deficit between the United States and China.

Now that the economy is on the forefront of political discussion it has been made public that US legislators are looking for a way to let the Yuan free-float against the value of the dollar to bring back the manufacturing base to the United States.  The currency is being artificially devalued in an attempt to keep China’s booming manufacturing district, well, booming.

One proposal was to create an import tax on Chinese goods to make them more expensive to US consumers and thus, force companies to send the manufacturing jobs back home.  In response, China allowed its currency to now float against a “basket” of different currencies including the pound, euro, and 6 other large currencies.  At the font of the basket is around a trillion dollars worth of US Treasuries which has for the most part maintained the value of the Yuan to about 7 Yuan to the dollar.

If the market were to let the Reminbi free-float, an instant 30-40% correction is expected.  Economists predict that the value of the Yuan would jump quickly to 4-5 Reminbi to the dollar, instead of today’s value of around 7 to the dollar.

It is certain that the Yuan will eventually be set to free float.  The new tax legislation and pressure from the rest of the world to go to a floating currency will eventually send China to let the currency float.  When it does, huge overnight gains will occur for anyone with a position in the Chinese currency.

Everyone should have some exposure to the currency market by making a direct investment into the currency, buying Chinese stock such as Petrochina or taking a position on the spot markets.  I would recommend making an investment on the spot markets through Oanda forex.  With Oanda, it is possible to enter a position at 30:1 leverage, meaning it will only cost $100 to control $3000 of currency.  A modest investment of $1000 to buy $15000 in Reminbi would be suggested as this provides a position against the currency and provides a great return if the Reminbi does get revalued.

A move from 7:1 to 5:1 would mean that the value of your investment ($1000) would turn into $5500 if the currency was revalued to 5 Yuan to the dollar.  Using $1000 to buy $15000 in Reminbi has a huge upside potential with the only possible loss of $1000.  Get in, its inevitable.

Many of us have heard the term “making money on Forex”, and most affiliate sites say it’s easy as pie - just put in at least $500 (or $50 for micro-Forex) and you’ll be making thousands of dollars in no time. While that does have some truth, it’s not really that easy.

There’s this famous expression that came from a Poker guru:

“1 day in poker consists of 90% luck and 10% skill
1 year in poker consists of 90% skill and 10% luck”

This can also be applied to Forex. While I - as a newbie Forex player - have managed to make $4k in my first week, I eventually lost all that cash because I started thinking “well, hey, this is just TOO easy!” and just became too ignorant.

I’d say that the Poker expression is the number 2 rule of Forex, with the first being very simple:

DON’T PLAY IF YOU CAN’T AFFORD TO LOSE!

This is something the affiliates just don’t get - they promise you huge wealth with no risk, all you have to do is put your savings to great risk and presto. This is possible though, like 10% possible.

What you have to learn is that money makes money - and more money makes even more money. This is exactly why you shouldn’t get the impression that if you invest $500 you’ll be getting thousands in return. Why do you think banks offer you savings accounts at the rate of a max of 10%/year? If they were making 1,000% per year, that would be ripping off, wouldn’t it?

My personal goal was to establish a strategy that would work for me. For this I opened up a training account with $10k on it, flushed the balance down to $1k and set a target of 10%/week. The markets close every weekend, so setting weekly targets is a good idea. Also you can play at the longer-term exchange rate variations. Of course, there was this temptation once I got the 10% in day 1 to go “MO MONEY!!!!” - but that’s not how strategies work. Once you’ve reached your daily/weekly/monthly target - just sit back, relax and start reading forums/blogs (such as this one) about Forex strategies.

This is the first thing you must do - learn to be patient and not greedy. So for now, open up your first (or not) training account, flush it down to $1k and try to make 10% in a week from it.