The Currency “Trade of the Decade”
james davidson on Mar 13 2009 at 4:16 pm | Filed under: Reports
The currency “trade of the decade” is a chance to make 42 times your money as the eastern European debt crisis slams the value of European currencies, such as the euro and the British pound.
This may sound farfetched. But when you unlock the secrets of 200x leverage, these kinds of profits can be made very, very quickly.
As I’ve said before, it’s how George Soros was able to bank $1.1 billion in a single day by shorting the pound in July 1992.
And it was how readers of my previous investment research service, Strategic Investment, were able to bank gains of over 500% on the devaluation of the pound.
The set up is simple.
Many of western Europe’s banks have extended massive loans to “Subprime Europe” – places like Latvia, Estonia, Hungary, Bulgaria and Lithuania.
Why are these nations “subprime”? Because they now have external debt to GDP ratios of between 130% and 40%.
Just as U.S. banks did with subprime mortgages, European banks failed to grasp the high-risk nature of the loans they were making. They sacrificed sustainable profits for short-term gains.
It’s their loss and our gain.
The Implosion of Eastern Europe
The global depression has crushed eastern Europe.
This region was particularly vulnerable because it is made up of mainly export driven economies.
During the boom, eastern European nations exported goods to Germany, France and the rest of Europe. But as soon as the recession hit, European demand plummeted and export growth reversed.
The impact this has had on eastern Europe has been massive.
Latvia, for example, grew by double digits over the last two years.
Last quarter, it shrunk by 10.3%.
If Latvia doesn’t get a loan within the next three months, the country will go bankrupt.
Latvia isn’t alone. According to Reuters:
Estonia, another small Baltic country badly hit by a halt in credit flows, reported a 9.7 percent slump in fourth-quarter gross domestic product year-on-year, led by a collapse of household demand and investments.
Its central bank said it was leaning towards a bleak scenario forecasting an 8.9 percent slump for all of 2009.
According to Agata Urbanska, an analyst at ING Bank:
There is nothing yet that would signify a turnaround in this region, or abroad in fact. It is still too early to say where the bottom is; we are not there yet.
Increasingly it is not differentiation between one economy growing and another contracting; it’s just differentiation between how much economies are going to contract.
What we’re seeing is the slow-motion implosion of eastern Europe.
Now, this is bad for region and the people who live there. But it’s also bad for western European banks that have issued debt to their eastern neighbors.
Austrian banks, for example, have the equivalent of 70% of Austria’s entire GDP invested in emerging markets such as eastern Europe (mainly Hungary).
Italian, Scandinavian, German and French banks have also over a trillion euro worth of debt ($1.5 trillion) to these nations.
These are huge developments. The shock of a debt default of this size would dwarf the subprime mortgage collapse and drive down the value of European currencies.
Profit from the Largest and Most Liquid Market in the World
You can’t participate in this trade if you don’t know how to get involved in the forex markets.
Luckily, trading forex is relatively simple.
The forex market is the largest market in the world. According to the Bank for International Settlements, daily turnover is well over $3 trillion.
This makes sense, considering the forex market is active 24 hours a day, five days a week.
Unlike the stock market, where you trade individual stocks, in the forex markets you trade currency pairs such as EUR/USD (euro/dollar).
The first currency in the pair is the transaction currency. The second currency is the quote.
If the EUR/USD is trading at $1.27, it takes $1.27 to equal one euro.
Also, profits in the forex market are calculated differently.
In stocks, you measure an increase in cents or dollars. But in the forex market you measure in pips.
For most currencies, a pip equals 1/100th of one percent (or one basis point).
So if the EUR/USD moves from 1.2788 to 1.2789, it increases by one pip.
Don’t worry about doing any complex math to figure out if you’ve made a profit or not. All of that is calculated automatically by your forex broker.
Another great thing about the forex market is that commissions are virtually nonexistent. Forex brokers make money off the bid/ask spread – not entry or exit fees.
That means more money in your pocket.
You can start an account with as little as $25. But we recommend you fund with at least $2,000 to $5,000.
You can never lose more money than you put in. So don’t worry: you won’t owe the brokerage a dime if a trade goes against you.
Typically, when you decide to join a forex brokerage, account approval and funding happens within 48 hours.
You can even fund your account with a credit card. Although, CSA does not recommend you invest with debt.
Some good forex brokerages to consider are:
Micro-Lot or Standard Account?
When you first start a forex account, the first big decision you’ll make is whether to open a “micro-lot account” or a standard account.
- Micro-lot Account: Micro accounts are designed for investors new to forex. They are designed to put only a small sum of money at risk (and leverage it by up to 400 times). With these accounts, the smallest forex lot you can trade is 1,000k. Every pip increase = ten cents.
- Standard Account: The standard account is for experienced forex traders. A standard account allows you to trade lots of up to 10,000k and leverage your investment by 200 times. Every pip increase equals one dollar. If you decide to go with a standard account, have at least $5,000 to $10,000 to fund your account with.
The choice should be easy.
If you’ve never done this before, pick the micro-lot account. If you feel comfortable taking on more risk, set up a standard account.
How Leverage Works
Before you get started, you should know that forex trades are highly leveraged. They have to be, since you’re typically trying to make a big return from a move only half a percent wide.
Let me show what you what I mean.
In the EUR/USD example, let’s say the pair is trading at 1.2677.
Now I tell you to sell the pair short and the pair falls to 1.2623
1.2677 – 1.2633 = 44 pip move.
If you had put money on that trade and were not leveraged, you would have made a paltry third of a percent profit.
But if you were in a mini-lot account – thanks to leverage – you could’ve made up to 132% on that very small move.
Clearly, the profit potential is there. But you do need to be careful with how you deploy your trading funds.
The general rule with forex trading is this: If this is your first time trading forex, don’t use more than 20% of your funds on any forex trade.
By doing so, you reduce your leverage (and risk) to 40 to 1 (with a standard account).
And if you want to be even more conservative, you can simply use 10% of your funds. That should bring your leverage down to 20 to 1 (with a standard account).
Why would you want to cut back on your leverage? Because you can’t make money if you’re broke..
For example, if you get a micro-lot account and fund it with $300, and then use that entire $300 on just one trade, a currency move that goes against you by a third of a percent will wipe you out.
The best strategy is to pare down leverage until the position is in your favor. Then, you can boost your leverage and maximize your return.
So, if we issue a forex trade and the position gains 5% in the first week, you may decide to double your leverage.
Now, if you’ve some experience in the forex markets, you may even employ 100x leverage or more. This is fine as long as you’re comfortable with it and understand the risks.
But if you’re starting out, play it safe and you won’t be disappointed.
Shorting the Euro Versus the Dollar
Right now, the CSA research team is looking at two or three different opportunities in the forex markets – all of which will take advantage of a European decline.
The first one we’re looking at is a short on the EUR/USD. With this one, we’re looking for the euro to lose value against the buck.
Today, this pair is trading at around 1.2700. But if eastern Europe begins its collapse as we expect, then the euro will fall against the dollar.
Our research suggests the coming European debt crisis could ultimately take the euro to parity with the dollar.
This would leave the EUR/USD trading for 1.0000 – a 21% move.
Leveraged by 50 times, that’s a 1,050% gain. Leveraged by 100 times, that’s a 2,100% move. Leveraged by 200 times, that’s a 4,200% move.
But I have to admit that I’m giving you a conservative estimation.
Because this eastern European collapse – if left unchecked – could destroy the very fabric holding the European Union together.
That means – during the peak of this panic – we could see the euro trading at levels not seen since it was first introduced to the market – I’m talking a EURUSD level of 80 –a 37% drop.
Leveraged by 50 times, that’s a 1,850% gain.
Leveraged by 100 times, that’s a 3,700% gain.
Leveraged by 200 times, that’s a jaw-dropping 7,400% gain.
While this is an amazing gain, there is an important G20 summit coming up on April 2nd that could certainly affect the valuation of the Euro.
A drama is already beginning before the summit has even started.
President Obama wants Europe to spend more money to save the economy. But the leaders of France and Germany disagree.
And if they continue to disagree – they could hamper funding another $250 billion for the International Monetary Fund (IMF).
That would spell very, very bad news for eastern Europe (since the IMF has already bailed out Hungary, and various other nations).
The Brits are Debasing their Currency!
Another position we may get into is a short on the British pound via the currency pair GBP/USD.
The reason we like this potential trade so much is because the Bank of England is printing money willy-nilly (also known as “quantitative easing” to those with doctorates). And it’s hammering the pound against the dollar.
You might think to yourself, “Well, hey, isn’t the United States printing money willy-nilly too?”
Yes. But there’s a difference.
The dollar is the world’s reserve currency and because of that is seen as a safe haven.
When the derivatives market blew up (after the collapse of Lehman), traders and funds around the world ran for the exits.
In a desperate search for a safe haven they poured into the dollar.
So now all of these banks, funds, and institutions are sitting on a pile of dollars… dollars no longer in circulation.
And that has limited available supply and pushed the value of the buck higher.
Now, the Bank of England is forced to print in order to bail out its banks. This might work– but it’ll have the nasty side effect of slamming the value of the British pound.
That’s because unlike the buck, the pound is no safe haven. And it’s no reserve currency. There’s nothing fundamental to keep the pound from dropping more.
Soros made billions shorting the pound. Now we can short the pound and make a killing too.
We don’t advise that you pull the trigger on this trade just yet.
We’re waiting to see the pound hit new lows against the dollar. This could happen as soon as the next two weeks.
In the meantime, set up your forex account, read over any materials you need too and get familiar with the ins and outs of forex trading, if you’re not already.
Then wait for our buy signal before entering into either one of the trades we talked about..
You should see it within the next two to three weeks.
If you have any questions, feel free to send them into info@crisisstrategyalert.com and we’ll answer them in our weekly Crisis Strategy Alert Updates.
To your success,
James Dale Davidson
Editor
Crisis Strategy Alert