Do you hate the business section? Do your eyes glaze over at the mere mention of economic data and mind-numbing accounting numbers? Fear not. The currency market is the only market in the world that can be successfully traded on political news as well as economic releases. Because currencies represent countries rather than companies, they are political as well as economic assets and are therefore very responsive to any disturbance in the political landscape.
The key to understanding speculative behavior with respect to any geopolitical unrest is that speculators run first and ask questions later. In other words, whenever investors fear any threat to their capital, they will quickly retreat to the sidelines until they are certain that the political risk has disappeared. Therefore, the general rule of thumb in the currency market is that politics almost always trumps economics. The history of FX is littered with examples of political trades. Let’s take a look at some examples over the past few years.
No-Confidence Vote Depresses Loonie
The end of May 2005 was not a happy time for the Liberal Party government of Canada’s Prime Minister, Paul Martin. After having guided the country to its best economic performance in 30 years, Martin was facing the fight of his life as his party prepared for a no-confidence vote stemming from accusations of past Liberal Party corruption.
Meanwhile, Canada’s economy was becoming a star performer, spurred by the massive rises in the price of oil. As the number one exporter of crude to the US, Canada was benefiting mightily from this newfound wealth. Yet despite the great economic news, the Canadian dollar remained weak against the greenback as traders worried about the implications of the fall of the Liberals.
On May 26, 2005, Martin’s government survived the no-confidence vote and theCanadian dollar rallied, causing the USD/CAD* to plunge 200 points in less than a week as the market once again focused on Canada’s stellar economic fundamentals.
BoJ Governor Fukui Responsible for Floundering Yen
At the beginning of June 2006, Bank of Japan Governor Fukui revealed to the Diet that he had invested 10 million yen in 1999 in a fund founded by financier Yoshiaki Murakami. Murakami was later indicted on charges of insider trading and although Fukui was not involved in any illegal activity, the mere appearance of impropriety in image-conscious Japan greatly damaged his reputation.
As the principal of Japan’s monetary policy during its recovery from a decade-long battle with deflation, Fukui was considered one of the most powerful men in the currency markets. His forced resignation would do great damage to the prospects of further recovery in Japan.
Meanwhile, Japanese economic data continued to show stellar economic performance as exports and business investment continued to grow, unemployment reached decade-long lows, and consumer sentiment improved. Talk spread through the markets that Japan would soon abandon its zero-interest rate policy and would actually have positive interest rates for the first time this century.
Despite all the positive speculation, the yen floundered, continuing to decline against the dollar as traders feared that Fukui would have to step down. Fukui stolidly refused, and as the furor passed and the market realized that he would stay on, the yen’s strength returned, showing once again that when it comes to currencies, politics can often be more important than economics.
If you enjoy predicting changes to the political landscape, your talents could be well utilized as a Forex trader. Recently, we predicted a strengthening of the Canadian dollar and earned close to 70 points in less than 24 hours. At 10 to 1 leverage you could have profited along with us, making a 7% return or $700 on a $10,000 trade.
How OPEC Made Us 70 Points
Geopolitical risk can mean wars, terrorist attacks, or missile launches, but it can also relate to milder yet still politically powerful events such as G7 meetings and OPEC announcements. In October 2006, Saudi Arabia announced that they would back OPEC’s plans to cut oil production by one million barrels a day after oil prices dropped more than 10% in just seven trading days. The cuts were to take effect on November 1, 2006, with more to come in December.
As Canada is a major exporter and producer of oil, we believed that this policy change would be very positive for the Canadian dollar. Therefore we went short the US dollar and long the Canadian on October 19, 2006. Over the next 24 hours, based upon the geopolitical theme, we earned close to 70 points on the trade.
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