The currency market is extremely difficult to predict. So many fundamental factors play a role that making consistently profitable trades is as much luck as it is skill. This is why technical traders love the FX market. Its movements are so random that technicals start to have significance. Even Warren Buffett got his bet against the dollar wrong – it cost him close to $500 million.
One trend that has been consistent in the currency market has been that money follows interest rates. Higher yields and anticipation of higher yields raise currency. The correlation with deficits and trade balances is a much less reliable guide. This is mainly to do the popularity of the “carry trade” where traders borrow in a lower yielding currency to speculate in a higher yielding one.
The carry currency of choice is the Yen. It’s very liquid and has low interest rates. With interest rates anticipated to rise the Yen may go up as well. It’s a slow process, but ,”economists estimate the Bank of Japan will raise interest rates at least twice by the end of March.”
The yen may jump 8 percent to 109 against the dollar in 2007, the most in three years, and climb for the first time since 1999 versus the euro, according to the median of forecasts in a Bloomberg survey of 40 analysts.
Posted: January 2nd, 2007 under Currency, General.
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