HEADLINE TRADES

HEADLINE TRADES
The BBC commonly refers to the British Broadcasting Corporation; but in
the forex market, it is trader’s nomenclature or slang for the Big Boys Club:
The Business of Trading Money 7
banks, brokers, and corporations. And there is a fourth group: large hedge
funds. Each one has made its mark in history using foreign currencies. Two
milestone trades made headline news. These are the famous curency
trades, both of which took advantage of taking short and long positions.
Let’s look at the hedge fund world when famed financier George Soros
“broke” the Bank of England. He placed an estimated $10 billion bet that
the British pound would lose value, and he won the bet! How about DaimlerChrysler,
the parent company of Chrysler and Mercedes Benz; it reportedly
made more money in the forex market that it did selling cars! Imagine
explaining to your boss that you made more money hedging and trading foreign
currencies than doing what you do best, building cars.
Another milestone event is as recent as early 2005. This involved Warren
Buffett the founder of Berkshire Hathaway (the fourteenth-largest
U.S. company, according to the July 4, 2006, issue of Fortune magazine).
When the financial media was pounding out news stories that the dollar
was in trouble, Warren made a statement that he was heavily short the U.S.
dollar. Unfortunately, once he made that announcement, the dollar gained
value and rallied for most of 2005. If you did not do your own research or
homework and blindly followed his advice, things did not turn out so well
for you.
In the remainder of 2005, the dollar moved higher against most major
currency pairs. What turned the market around? Some of the events that
drove the dollar higher were dictated by monetary policy as the Federal Reserve
continued to raise interest rates. Then there were economic, geopolitical,
and political developments on the domestic front that influenced
the dollar’s value. For starters, the Homeland Investment Act (HIA) was
passed. The HIA is part of the 2004 American Jobs Creation Act and was intended
to entice U.S.–based multiconglomerate corporations to bring
money back into the United States. The window of opportunity for companies
to take advantage of the HIA benefits prompted companies to increase
the pace at which funds are repatriated to the United States. Since companies
had only until the end of 2005, many analysts suspected that companies
would rush to repatriate foreign profits by year’s end and that there
would then be a high dollar demand to convert foreign currencies. Geopolitical
issues arose during the summer of 2005 when there were riots in
France as a result of less support for the euro currency. That contributed to
a very poor market sentiment and a lack of confidence in the euro. This was
grounds for foreign investors to make a flight to financial safety, selling
their currency to buy U.S. dollars. The tone was essentially dollar positive
and euro negative, which is a result of a change in political views and shows
how consumer sentiment can have a negative effect on a currency. I said
earlier that technical analysis will be your “bread and butter” for profiting
in the forex market; but you still need to be aware of fundamental develop-
8 FOREX CONQUERED
ments, economic reports, and the times when these reports hit the
newswires. As this section shows, fiscal policy changes can drive markets
in new directions.
What may have contributed to the dollar rally in 2005 and hurt Mr. Buffett’s
position was the fact that other players may have been preying on his
position. Berkshire Hathaway, Inc., is without a doubt a high-profile player.
So when Warren Buffett announced he was going to cut back speculative
positions against the U.S. dollar after losing profits due to surprising dollar
strength, the buying to cover his shorts boosted the dollar. Keep in mind
that Mr. Buffett had bet that the dollar would continue losing ground, as it
did in 2004; he felt the massive U.S. current account deficit would be dollar
negative. But instead, monetary policy dictated otherwise, as the Federal
Reserve continued to raise interest rates. That was helping to drive demand
as the interest rate differentials widened. In its third-quarter report in 2005,
Berkshire Hathaway said it had cut its foreign-currency exposure from
$21.5 billion to $16.5 billion. That was a significant amount of selling foreign
currencies and buying U.S. dollars.
As you can see from the Dollar Index weekly chart in Figure 1.3, on a
The Business of Trading Money 9
FIGURE 1.3 U.S. Dollar Index Contract (monthly bars)
Used with permission of GenesisFT.com.
year-to-year basis, the dollar did make an outstanding run. However, that
rally fizzled out in 2006. Also, keep in mind the dollar was at a high of 120.80
back in 2002; so depending on where Mr. Buffett was shorting the dollar, he
could still be in a lucrative or profitable position. When I was wrapping
things up for this book, the Dollar Index had managed to decline near the
multidecade lows, and investor sentiment remained longer-term negative
on the dollar. In addition, if you look at the longer-term price direction dating
back since the inception of the Dollar Index contract, the Dollar Index
is in a descending or declining channel.
The focus of this example is how shifts in monetary and fiscal policies
can and do dictate price swings in the market, as happened in 2005 and
2006. Furthermore, foreign currency trading has become an acceptable
asset class and valuable trading vehicle for the large multinational corporations.
Just for your knowledge, the July 4, 2006, issue of Fortune magazine
listed the top-10 largest U.S. corporations as ExxonMobil, Wal-Mart,
General Motors, Chevron, Ford Motor, Conoco Philips, General Electric,
Citigroup, American International Group, and International Business Machines.
Funny that 30 percent of the top-10 businesses consisted of energy
companies. I found this intriguing; Microsoft was ranked number 50 and
Intel number 51. Who was number 100, you ask? John Deere. I think you
can see the trends of investment flows and which sector is the leader as
represented by the amount of a company’s revenue growth. In 2006, the
leader was British Petroleum!
Back in late 1999, money poured into technology stocks. In late 2003
and 2004, money poured into home builders. Then in 2005 and 2006, money
poured into energy stocks, and not just for short-term trading but also for
long-term investment opportunities in exploration and research and development
for new oil fields and infrastructure repairs of pipelines and refineries.
The most important terms to remember here are money flow and
sector leaders. Following money flows, sector leadership among corporations
can help you to determine where we are in a business cycle. We will
talk about how these two concepts are important factors to monitor when
trading foreign currencies. The relationships between how and where
money is being made and which industry it is being made in directly impact
foreign currency values and can help you in your trading decisions.
Money flows into one sector and out of another. If consumer demand
is in technology, as was the case in the middle to late 1990s, then the U.S.
dollar is strong. If demand changes to commodity-based products, such as
crude oil, gold, and construction materials, the Aussie and Canadian dollars
will appreciate. Australia and Canada are both producers of such commodity
products as gold and lumber; and since Canada has vast reserves of
tar sands, its currency benefits from higher crude oil prices.