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Last week, I said the U.S. dollar could get whacked by blows from both the Middle East and the Far East. I told you how Saudi Arabia was backing away from its allegiance to the greenback and that other countries throughout the Gulf — and Asia — could soon do the same thing.
Now, we’re hearing even more rumblings from both fronts …
First, The Saigon Times just reported that the State Bank of Vietnam will no longer try to hold down the value of its currency against the greenback.
Until now, they’ve been buying dollars in large quantities. Now, they will probably stop.
Second, oil-rich Qatar said its $50-billion sovereign wealth fund cut its dollar allocation by more than half — from 99% to 40%!
Where did it shift the money? Into investments in China, Japan, and other Asian countries.
Third, Iran announced that it will stop accepting dollars for its oil exports in the near future.
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This move is not a surprise, but Iran’s insistence on being paid in a “more credible currency” is starting to sound less fanatical every day.
With all this happening, no wonder the dollar keeps working its way lower and lower. Now, more than ever, it’s absolutely critical that you …
Pay Close Attention to Relationships
Between Different Currencies and Assets
I spend every day watching the interplay of various currencies and other investments. And in all my years of trading, I have found these interplays to be extremely powerful indicators. Seemingly small moves often signal very large future surges … tiny imbalances often become major disconnects.
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Let’s stick with the dollar’s decline for a moment. As you can see from this chart, the greenback has been moving in one direction for a long time …
At the same time, oil prices have been rocketing higher and higher …
Is this a coincidence? Absolutely not!
Crude oil and the U.S. dollar are locked into a symbiotic trading relationship because oil is priced in dollars. Each barrel of black gold must sell for more dollars to maintain its value.
End result: Oil goes up as the dollar goes down.
Next in this chain: A series of other currencies that are, themselves, driven higher by rising oil prices! To see the correlation, just take a look at this chart of the Canadian dollar, based on the same timeframe as my first two charts …
As you can see, oil and the Canadian dollar are also closely aligned. But in this case, they’re rising in tandem.
Reason: Canada is a commodity-rich country, and it naturally moves higher as the prices of its natural resource exports rise.
Important: When you’re looking at these relationships, you have to figure out which asset is in the driver’s seat. And in this case, it’s pretty cut and dried: Oil is leading. The Canadian dollar is following.
Warning: Just because there are close relationships between multiple assets doesn’t mean you should immediately jump on the bandwagon and join the trend already in progress.
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Instead, use these relationships as a way to validate the additional fundamental analysis you’ve already done. That way, you’re effectively increasing the odds of placing a winning trade.
If you can do that, and use discipline to keep your losses in check, you will win over time.
To Trade Currencies,
Follow the Money Trail
My point is that as an investor, you can no longer think of each investment class and each region as an independent fiefdom. These days, the financial system is one giant global concern.
Money easily changes forms from dollars to yen to euros … it flows into gold and oil one day … then to tech stocks the next. Like an endless river, it’s always leaving one destination for another, cascading over obstacles and filling up every undervalued nook and cranny it comes across.
It’s absolutely necessary to know where the world’s capital is going … and why.
For instance, the fact that Saudi Arabia, Vietnam, Qatar, Iran, and other countries are all moving away from the U.S. dollar tells you something. It says the greenback is ready to head even lower.
Similarly, when all the world is using Japan as a place to borrow cheaply, and when they suddenly rush to pay back those loans, it tells you the yen’s value is about to surge.
In and of itself, that simple fact isn’t enough to help you make an investment decision. But when you put it into historical context, the profit picture gets remarkably clearer.
Indeed, as I showed you in “One of the Greatest Market Moves of All Time,” the rush back into the yen could be massive. We’ve seen it happen before, and investors who anticipated the move reaped windfall profits.
There’s no way to know exactly when the big move will happen and some patience is required. But it’s better to be ahead of the pack than to get trampled on your way through the door.
Best wishes,
Jack
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, and Julie Trudeau.
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