2007 in Review

The year 2007 was a wild year for Forex trading. In 2007 we saw the US Dollar fall from the sky against almost every major world currency including the Euro, British Pound, Swiss Franc, and Canadian Dollar just to name a few. In turn, all of these other world currencies hit record highs. Trading the Forex market was pretty much the norm until the second week of August when the “Credit Crisis” hit sending the fear to Wall Street that the financial sector was on the brink of complete disaster due to the rising interest rates and massive defaults on mortgage loans. Things did stabilize, but the fear of another crash still lurks in the air. All-in-all it was a great year of volatility and there were plenty of opportunities to make money.

 

Until August 2007 forecasts were quite easy to make with nothing really on the books to bring interest to the US Dollar. In January 2007, we predicted the highs in both the Euro and British Pound calling 2007 “The Year of the Pound”. The run on the Canadian Dollar was quite a surprise, yet could be expected when you reach $100 a barrel in oil as the Canadian currency seems to trend with oil prices. After August the systematic trader seemed to struggle just a bit with up and down moves on the smallest of news. We heard of other traders busting their accounts due to bad money management during the Credit Crisis fall. Our On Target System did struggle into the end of the year as well, as markets trends switch direction on every wind of news. The Premier system also saw several drawdown periods, yet the Premier system was able to weather the storms quite well and we saw several double digit return months in this trading strategies short history. But enough about the past, let’s explore what the future has to offer.

 

Outlook 2008 

Unlike the beginnings of 2007, the trading year of 2008 is a bit harder to predict. There are two key factors that make predictions a bit more difficult: The Credit Crisis and Government Intervention.

 

Credit Crisis in 2008

As detailed in many earlier newsletters, the Credit Crisis hurts trading due to the wild and large moves in a short period of time. For day-traders (EurAsia Strategy) these types of market conditions are the perfect storm with large moves and shorter stop losses. For the Swing trader (On Target Strategy) and the long-term trader (Premier Strategy), trading is a bit more difficult as stops usually widen and accuracy drops. The Credit Crisis in 2008 could be the cause of some rough trading, but it could also be the catalyst that moves markets into profits. The key is the “Carry Trade”. Literally trillions of dollars have been made on currency cross pairs namely GBPJPY, EURJPY, NZDUSD, and AUDJPY in what is called the Carry Trade Currencies. These currencies when bought pay a good interest just by holding them in your portfolio, therefore investors from the stay-at-home daytrader to large worldwide corporations have invested in these currencies sending them through the roof over the last 18 months. These runs have been triggered by interest rates. The Credit Crisis changed the playing field almost overnight. If there is fear of mortgage foreclosures in the United States, Great Britain, or the Euro Zone, then investors flight to quality – moving funds to the strongest currency – is the Japanese Yen (JPY). When people begin to sell in masses the Carry Trade positions, and begin buying the Japanese Yen, the floor lets go on the Carry Trade. We saw this happen three times in the last half of the year of 2007: second week of August, first part of November, and first part of December. To give you an example of the drastic fall, the NZDUSD in August gave back 110 percent of its annual gains in a matter of a few days (Over 18%). The flip side is that within two months the NZDUSD returned back to its highs again – this drawdown and return to original value is where the Premier Strategy really thrives.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Click here to see chart bigger.

 

What is holding everything back from falling from the sky? Intervention. Government Intervention.

  

Government Intervention in 2008

Intervention is the other key factor that makes predicting 2008 markets hard to evaluate. Due to the Credit Crisis, the Federal Reserve has already started to drop interest rates to soften the burden on large mortgage bankers and to give the average Joe a better chance at refinancing his loan. In addition, Congress is working with government sponsored mortgage securitization companies like Fannie Mae and Freddie Mac to come up with new mortgage programs to help people facing foreclosure. Furthermore, as mentioned above, the flight to the Japanese Yen isn’t welcomed by the Japanese as much as you would think. A stronger currency for the Japanese means higher priced exports. As the Japanese is an exporter nation, a stronger currency does not encourage importer nations, like the US, to buy Japanese because it is more expensive. The Japanese have proposed to actually manipulate the Forex markets by selling their own currency to reduce the demand and therefore push the JPY down. This intervention would keep the Carry Trades moving in the upward direction for most of 2008.

 

As you can see the jury is still out on what is going to happen with most of the played currency pairs.

 

US Dollar Outlook 

As for the US Dollar we are still heading for further decline.

-          Lower interest rates means weaker currency

-          Economy falling into recession means weaker currency

-          Unresolved war issues in Iraq, Iran and now possibly Pakistan means weaker currency

-          Federal deficits and money printing mean weaker currency

-          Uncertainty of potential President means weaker currency

 

Watch videos on the Falling US Dollar in the news.


 

See for yourself the Falling Dollar since 2002 in this chart study.

 

Predictions 2008

It is always fun to try to predict the markets, but remember that we are Pro Financial FX trade with rule based systems and not on emotions. By trading the On Target, Premier, and EurAsia strategies we have the ability to capture profits across all market movements – diversification is key. Also it is important to note that past performance is no guarantee of future profits and these predictions and nothing more than educated guess therefore, do not make trading decisions on these predictions. With that said, here are my predictions of what will happen in 2008.

  1. The US Dollar will decline at least another 25 percent against major world currencies including the Euro, British Pound, Swiss Franc, and Canadian Dollar
  2. Oil will reach $150 a barrel within the first 8 months of the year. This will send the Canadian Dollar to record highs once again
  3. The 2008 Presidential elections will not change the outlook of 2008
    (Unless Ron Paul wins).
  4. Trading the Forex market will become main stream as investors will have to look to investing in other currencies if they want to protect their wealth against the falling dollar.

 

Strategy Outlook

 

Premier Trading Strategy (Long-term Strategy)

The Premier has done amazingly well in weathering the storm through the Credit Crisis and has put up profits each month with the exception of one. This is what is to be expected in 2008. There is however, the potential for a switch on some of the carry trades if the bottom falls out due to credit woes. The switch will cause a delay in growth on these currency pairs (EURJPY, NZDUSD, AUDCAD). You will note that the EURJPY and NZDUSD did make a switch in September due to the August Credit Crisis move and then switch right back in October and the Premier still pulled out positive returns. This is evidence that the Premier strategy can withstand some bumpy roads. The hope will be if there is a switch it will continue into the end of the year making money as it retraces the last 3 or 4 years of growth. The diversification is the supporting factor in this strategy when trading all seven currencies. The Canadian crosses will also do well if oil continues its upward trend in 2008. In addition, the Euro crosses should continue up as well, as the Euro Zone currently offers good stability and growth. The Premier will continue much as it did in 2007 with monthly drawdown periods of 4 – 12% on open trades, during those times we add new positions and see the profit results as markets correct back in their long-term direction. Should be a fun year!

 

On Target Trading System (Swing Strategy)

The On Target struggled the last five months of the year due to the change in market momentum as a result of the “Credit Crisis”. We have noticed just the last five weeks of the year, including over Christmas break, that the swing moves of the market are beginning to smooth out and the rules of the Elliot Wave Theory are playing more true. The On Target Trading System is a robust trading system that can withstand all types of markets, although we are not seeing double digits right now in this strategy we still believe that it will pull its weight in maintaining a strong diversified portfolio of currency strategies. Look to see the On Target take a slow start in January and February as the market figures out its initial direction for the year. Then in March we will see the On Target come alive again and start putting up the numbers. The key is the break out, if the credit woes take hold then we will see a break out to the downside with downward trading for anywhere from 4 weeks to 4 months. This will be optimum trading for the swing traders on the JPY cross pairs (GBPJPY and EURJPY). The US Dollar crosses that we trade will most likely be range bound for the first two months and then we will see the US Dollar begin its slide and see numbers that we saw the first 7 months of trading in 2007 on the GBPUSD and EURUSD due to the falling Dollar. Patience is key, as is good money management. 2008 should be a great year for the On Target.

 

EurAsia (Day-Trading Strategy)

The EurAsia is so tightly linked to the markets that it really doesn’t matter what happens to the Forex market, just as long as markets move we will have opportunities to make money. We did make a few adjustments in the last few weeks of December to avoid tight channeling markets which is a potential downfall of this strategy. The changes hold back trading during tight channels and stay out of the market. Although these changes may limit potential profits somewhat, our ultimate goal with this strategy is consistent weekly profits in our accounts with limited drawdown potential. In the end, the EurAsia has the greatest potential of consistent profits in 2008 of all our strategies and should show very well in the return category.

 

To open a managed account, please visit us on the web at www.profinancialfx.com or call us directly at

1-800-557-9776.

 

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