The amount of response and feedback i have gotten on the Stagflation article i last wrote has been very encouraging. Thank you for your kind words. As trading is a lonely business, i keep myself occupied and connected with many of you via this blog, twitter(twitter.com/seenijg) and on facebook(seenijg) . If you haven’t yet read the article, read it here
Now, back to our topic on Stagflation, when will such a situation recover or when can we look forward to getting out of it?
Well, for this current situation to recover, either one or both of these things should happen;
1) Reduce Spending
2) Increase Growth
With commitments on various fronts(war, restructuring efforts) , Obama Healthcare, rising oilprices and increased deficit financing with more foreclosures and loan defaults only set to continue, reducing spending might not quite seem an option. Increased Growth could be a possibility, but with the current situation and the conservative consumer mindset coupled with the bear markets, we might be looking at 2011(at best)-2013 at best before we see a positive climb in growth yet again.
Having said that, with the PIGS(Portugal, Ireland, Greece, Spain) now having become PIIGS(Portugal, Ireland, Italy, Greece, Spain), the scene out of EuroZone doesn’t quite seem that rosy as well. As we can possibly conclude, we are going to be in this state of stagnant growth for sometime.
What can we do to trade this?
To get the best leverage out of such situations, we use the cross pairing concept as we teach in our class(the F1 Car Chasing concept) , we have to couple the economies(currencies), com-dollars, that will do well which is attributed to cost of rising commodities(oil in particular) such as the CAD, AUD and the NZD against the pairs that will continue to have deflation, such as JPY and CHF to a certain extent.
In a nutshell, in my opinion,
Buy AUD, NZD, CAD
vs
JPY, CHF and maybe, just maybe USD(explained further why)
Though you will argue that the USD is also one such candidate to pair with, i agree on a fundamental basis. However, from a practical view, the current dollar strength is rather upsetting. I see this more of a sentimental bubble rather than that of any strong grounds. Perhaps, when, and a big WHEN(i see this possibly in March, also awaiting the big Tax Relief decision in March), the USD Index starts showing signs of weakening, it might be a good candidate. Until then, i will leave USD out of the picture.
That is just Phase 1, in phase 2….
Now, when the currencies/economies that face growth aggressively, will start having their own internal issues. Which is, in the next phase, they will face inflation(if they already aren’t) . When inflation hits the fan and with rising costs, it surely will, what will happen next? Exactly! Central banks will want to raise interest rates and this will so beautifully work in our favour as this will directly translate into increased strength vs the currencies that we have paired with, which are fighting deflation.
Makes sense?
Isn’t this the true beauty of how FX pairs can be paired to give us the edge over whatever happens?
Well, stay in touch folks and when oil prices rise(just peaked above a 200 daily SMA) with rising AUD and NZD, that is just about when we are looking to get in.
This will be possibly be long term positions, for months, so watch your risk exposure.
God bless,
Seeni
