In simplest terms, what’s happening in Greece right now?

Think of it like this: Imagine a major state like California went bankrupt and needed a bailout from the federal government — but Congress was considering not doing it. A crisis of confidence would arise, both for the United States and the state involved. Investors would fear that the U.S. deficit would grow even bigger, and that would drag down U.S. growth expectations.

This is the situation playing out in Europe. Greece is having trouble paying its bills because its spending is way too excessive. How bad is it? Consider this — Greek citizens are able to retire (and collect government pension benefits) at just 53 years old! Needless to say, Greece is on the hook for decades of unfunded entitlements.

The result is a budget deficit (public debt as a percent of GDP) of 120%. To put that into perspective, take a look at the chart below. Compared to other European nations, including Bulgaria, Estonia, etc., Greece’s budget problems are off the scale.

So the country needs a bailout to meet the strict requirements that being part of the eurozone imposes. But not surprisingly, Germany, France and other members of the European Union don’t want to bear the cost of Greece’s excesses. And now Greece is openly threatening to leave the euro.

The reaction is fear of disruption to the European economy, a flight of capital away from the euro and an increase in the cost of business. Lack of trust is causing the Greek bond market to price in a hefty fear premium.

What’s at stake?

The question of what’s at stake certainly depends on the stakeholder…

For Greece, it’s a mess. The country can’t get out trouble the way other countries do, by devaluing their currency. As part of the eurozone, it has no control over the euro’s value.

So instead the country has been forced to make massive budget cuts, which is politically hard in a socialist welfare state. The Greeks have grown used to their government entitlements, and they don’t want them taken away. It’s like pulling a pacifier from a baby’s mouth.

The situation is also a big headache for banks and other holders of Greek sovereign debt. Greece’s money problems could lead to default. As the old adage says, if you owe a bank a small amount of money, you are in trouble. If you owe the bank a huge amount of money, they are in trouble! At the most extreme, Greece leaving the euro would cause an even bigger disaster.

That’s why Greek bonds are registering shocking levels. Last week, Bloomberg reported that the yield on Greece’s 10-year bond rose to 15.8% — twice the rate it was a year ago. The country’s two-year bond yields almost 25%.

As the Financial Times put it:

Greece is at present getting the worst of all possible worlds: it is incurring the political and economic costs of austerity without gaining investors’ confidence that there is light at the end of the tunnel. It is on financial life support and on its way to becoming a ward of Europe. Yields on Greek paper suggest a default is near-certain, which cannot but dampen investment in the country.

Then there are the other debt-ridden eurozone nations, Spain, Portugal and Italy. They face the fear of contagion. With all the attention on debt, they can’t escape the scrutiny of the bond-rating agencies. So they, too, need to worry about a downgrade in their sovereign debt risk.

What does this mean for the greater eurozone — and the euro as it relates to other currencies around the world?

The Greek situation will be very tough for the eurozone because any solution is a drag on its collective economy. European Central Bank President Jean-Claude Tichet is trying to control inflation and growth, which means interest rates need to go up. But Greece needs the stimulus created by lower interest rates.

For these reasons, Europe remains very uncompetitive compared to emerging markets right now, and they have to make structural reforms to keep capital from leaving the euro in the long run.

What does that mean for currency traders?

Quite simply, this is all great news for traders. Remember, the keys to big currency profits are surprise and uncertainty. And the clash of expectations between Greece and the eurozone play right into those two keys. Higher interest rates in the eurzone would create greater value in the euro, but the ongoing problems in Greece counter any of that optimism.

The result is volatility for the EURUSD, and greater ranges. Just look at the EURUSD daily chart.

The sentiment battle is under way. It has a 600 pip wide range between highs and lows in a downward channel.

This is a prelude to a breakout… so watch for bounces!

[Editor’s Note: If you’re not familiar with currency trading, Abe’s mastered a simple yet powerful way to tap moves in the currency market with limited risk and incredibly quick turnaround times. As a result, Abe’s service is the only one of its kind in North America right now. If you’d like to learn more, I’d strongly suggest you click here to learn how to take advantage of the flux in the euro.]

Sincerely,
Abe Cofnas
Currency Analyst for the Penny Sleuth

May 31, 2011

How to Trade Greece’s Currency Conundrum was originally featured in the Penny Sleuth.

Today, I want to share some of the concepts that I utilize in my analysis of the markets when I look at trading opportunities for my Strategic Currency Trader subscribers. Sentiment is a crucial element of my strategy, but the challenge is to detect its shape…

There are very exciting new ways of detecting and charting the shape of sentiment and emotion in the market!

Price charts are the common way to look at market sentiment. They reveal a lot about emotions and sentiment. How fast a price moves becomes a way to trace the momentum behind it. You can see the reaction to Trichet’s statement about “vigilance” regarding inflation in the Eurozone a couple of weeks ago. The EURUSD spiked up. The sentiment in this case was “surprise”. But more importantly, the price went into a sideways channel-signifying the emotion of stability.

In many ways, many of you already know a lot about market sentiment, because price action often follows the laws of physics which all of us are familiar with. Trader behavior often mimics the crowd behavior exhibited in the animal world. For example, traders and investors rush to join the crowd as if to protect themselves from predators. Buyers and Sellers carry out predator-prey scenarios.

There certainly is a lot of emotion in the market. At any moment, there is a battle between those who are buying and those who are selling. This is referred to as pressure. Buying pressure is often referred to as being bullish. Selling pressure is referred to as bearish. So we can use the concept of pressure to understand price action.

Another example from the sciences is the reference to a channel pattern in prices. When a price is in a channel pattern, lets say upward channel, it can bounce off each side as it moves up! We know the idea of a channel from river channels with meandering sides. Actually, the geometric equation showing the forces of the water moving against channel banks are exactly the same equations for a price channel.

Using Google Trends to Predict Market Action

There are almost countless other examples of price and sentiment. But I want to show you something that is very exciting and never before available. Because of the internet, there is a completely new tool to use that gives us clues regarding market movements. I use this to gain insight into the darker forces of opinion that moves the market.

Google Trends provides data visualization on key words that appear as searches or on news references. This provides a finger on the “pulse” of “chatter”. If the frequency of occurrences increases, there is a surge in the level of awareness about a concept. The key is the rate of change in occurrences and not necessarily the level. Let’s look at charting of the words” US Deficit”, “inflation” and “deflation”.

What we see at once are spikes in their occurrences, and an almost cyclical nature. These patterns are not accidental. Awareness levels reflect concern and there are peaks and trough in regarding the emotions associated with the terms. Fear of US Deficit, and inflation are, according to the last patterns, in an upward cycle, while fear of deflation is at a bottoming out.

You can use these patterns in many ways and I use them to create further confirmation of my binary plays.

A good use for Google Trends is to confirm a directional decision based on fundamentals. If fear of US Deficit is increasing, then an appropriate bearish focus on the dollar is more appropriate as a strategy. If a spike occurs, such as the deflation occurrence spike in late 2008, expect that the spike will be temporary and be more careful in investments that anticipate a longer term effect.

The old adage that sticks and stones can break out bones, but words can never harm us, doesn’t apply to this new age of the globalization of attitudes.

Clearly fundamental analysis can no longer be a simple subset of economic analysis. Rather, it now must include real-time Internet chatter and word count frequencies. Words are the new charts, and we’d better learn to use them!

Sincerely,
Abe Cofnas
Currency Analyst for the Penny Sleuth

March 15, 2011

Profit from New Methods of Visualizing Sentiment was originally featured in the Penny Sleuth.

When putting together a binary option portfolio strategy, we confront one of the most important factors for success: profit control. That is, how do we maximize our profits without exposing ourselves to maximum risk? That’s where the rule of three comes in.

The number three represents a universal idea of completeness. For example, one of the most stable structures is a tripod. The third leg gives it the stability it lacked with two legs. In trading and technical analysis, three points of confirmation are considered necessary to provide confidence for drawing a trend line or confirming an entry or exit.

Now let’s apply the rule of three to weekly binary option plays.

My rule is, put on three contracts for each binary position and assign a different profit target for each.

By entering three binary contracts for a trade, you automatically create a managed exit strategy. This is very important, because the returns in our binary plays can be substantial, but they are not linear. In many cases, our Monday entry becomes profitable on Tuesday or Wednesday because of a surprise news event.

Having three separate contracts gives you the ability to ride this surprise sentiment wave and lighten up automatically if the price hits the first lower profit target. In this case you have one or two binaries left to ride a bigger move. I think taking profits earlier on some of the positions is prudent since there is no guarantee that the rest of the move will continue our way.

Where should you set the profit target for each binary? I have two variations for you.

One strategy is to set the first binary’s profit target at 50%, the second at 100% and the third at 300%. In other words, sell if your first binary gains 50%… sell the next one if it doubles… and sell your remaining binary if the price jumps 300%.

The logic behind this is that once a binary option play goes through a 100% return, the sentiment momentum is very much in our favor and is likely to continue through expiration. These profit allocations also help you capture a big surprise without watching if the market makes a 300% move (which it can easily do in our five-day options).

A second strategy is to leave the third binary without a profit limit. It allows us to manage the last leg and fulfills a deep psychological desire to engage in the trade! It is important to remember that we can also close any or all of the positions at any time.

So, how can you put this plan to work for your own portfolio in the New Year?

If you haven’t already, take a look at my tutorial on binary options in the Penny Sleuth. In it, I break down exactly how these exciting investments work. I also tell you where you can go to open a demo trading account. Basically, this account lets you practice trading binary options without putting your real cash on the line prematurely.

When you place your first demo trade, aim to put on three trades – one where you sell at 50% gains, one where you sell at 100% gains, and one where you let your profits ride to 300% (or more, if you opt to take my alternative approach).

Obviously, it’ll take some practice before you’re able to consistently pick winning trades in the binary world. The good news is that you can practice with no risk – and the trades are short enough in duration (just a week) that you can keep working at it quickly.

I am back-testing a lot of variations of profit-taking strategies and will let you know if others are more promising!

Sincerely,
Abe Cofnas
Currency Trading Analyst, Penny Sleuth

December 23, 2010

Increase Your Trading Profitability By Using the “Rule of 3″ was originally featured in the Penny Sleuth.

While more complex than buy-and-hold stocks, binary option strategies can be incredibly lucrative for investors who know how to use them. And contrary to popular belief, they don’t necessarily need to be incredibly risky either.

Today I want to show you how you can profit from a binary range trade.

A binary option range play is a bet that the price of the underlying currency (or index, or commodity) will be below resistance and above support when the binaries expire. Remember, to technical analysts, resistance represents the “ceiling” — a technical price point that it will have trouble breaching. Support is the technical “floor.”

So with a binary option range play, you want the currency to stay between the barriers.

This kind of play is more likely to work if the strike barriers are far away from the market price. Of course, since it is more likely to work out, it will cost more to enter the trade. The binary option range trade, therefore, can be a lower total return play. But that doesn’t mean it can’t be incredibly lucrative if you use it right…

Let’s look at an example based on the EURUSD.

The chart above shows the EURUSD. The red lines represent the most out-of-the-money binaries offered by the Nadex this week. The resistance strike price is 1.3525 and the support strike price is 1.2925.

Since they are farthest out, the premiums will be higher. Betting that the EURUSD will be above 1.2925 by Friday at 3:00 p.m. costs about $80. A bet that the EURUSD will be below 1.3525 costs about $85. In total, the binary option range play would cost $165. We’d see a small loss if just one side plays out. But if both sides work out, the total payout would be $200. That is a 21% net total return in just five days!

So, as you can see, binary option range plays are a more conservative binary option trading strategy. But gains can also be large for binary range bets. My goal is to help you make binary options a bigger part of your investment portfolio — offering plays that fit your risk tolerance while offering weekly returns.

Stay tuned for more strategies that you can use in your own binary portfolio!

Abe Cofnas
Currency Trading Analyst for the Penny Sleuth

December 16, 2010

P.S.: If you missed my initial tutorial on binary options, and how to open your own demo account, you can read the whole Binary Options tutorial right here…

How to Profit from a Range Trade was originally featured in the Penny Sleuth.

As a trader, sometimes a string of success can lead to doubts… did we earn these gains, or were they just luck? It’s a fair question, so let’s take a look.

My theory of how to trade currency markets, and binaries in particular, is based on the fact that the markets are not random walks, and they do not move a linear fashion. They behave more like a chemical reaction-diffusion script, a system where the actions of one thing changes under the influence of several others.

The biggest mover of the currency market, therefore, is the reaction to economic data releases. This is because the “big money” wants to avoid being on the wrong side of event releases. Instead of acting, they wait. So a lot built-up energy is released as soon as the data comes out.

Lately, the markets have followed this script perfectly. The U.S. elections and then the Federal Open Market Committee’s (FOMC) announcement of a new round of quantitative easing (QE2) combined to be a high-impact event releasing a sort of “sentiment tsunami.”

That’s what’s been spiking the volatility on a number of markets – from stocks to currencies to commodities – and providing ample opportunities for traders.

So how can you get an edge?

As promised, here’s a brief peek into a new type of analysis I’m exploring.

Just like a technical analyst closely examines price movement to detect patterns, I believe we can detect patterns by closely examining word choice.

Consider the FOMC statement that accompanied the QE2 $600 billion asset purchasing decision. I have called these statements, “Drops of Bernanke in a lake of hesitation.” The mental picture turns Ben Bernanke’s words into stones that cause ripples in the market. Since investors pay close attention to these statements, they are very carefully drafted. Every word counts — literally.

Breaking it down, we can see that inflation is used the most frequently (excluding the word “committee,” which is simply a reference to themselves, and articles like “the” and “a”). The words economic and pace are the next most frequent words. The words investment and rates receive only one mention each.

See for yourself. Here is the FOMC word frequency count:

By analyzing the word content, we can detect sentiment in ways not obvious. The actions of the Federal Reserve have inflation as a major parameter that can trigger a change in their position. The economic pace of U.S. growth is a major concern.

The coming era will be a battle of expectations of whether the Federal Reserve can have its cake and eat it, too. Can they trigger just enough inflation (2% target) and stop there? Will QE2 simulate employment growth with an acceptable pace? Stay tuned!

Sincerely,
Abe Cofnas
Penny Sleuth

November 9, 2010

A New Way of Predicting Price Movements was originally featured in the Penny Sleuth.

This chart says it all:

It shows that global sentiment is moving away from the U.S. dollar and into gold. A weaker dollar cascades into other markets and inflates value of other products. Export-based sectors increase.

In fact, the Standard & Poor’s GSCI Index of 24 raw materials reached its highest level since October 2008. Even corn and soybeans are getting a lift from a weaker dollar.

But clearly, the U.S. dollar-gold nexus has become the main theater of action and is getting all the attention. The key strategic currency question is whether this dynamic is becoming a major “outlier” event that ultimately cannot last.

Nobody knows the answer.

We do know that it can last a lot longer than most people believe because of how market sentiment feeds upon itself. Right now, the crowd is rushing into gold and running from the dollar. When “buy your gold” ads and booths are everywhere, it’s a sign that a top, at least from a sentiment point of view, is being formed.

A great deal of the near-term U.S. dollar’s weakness is also due to the “expectation” that the Federal Reserve will proceed with quantitative easing. But any surprises on the level of easing, or even surprise statements by Fed Chairman Ben Bernanke hinting at the level of easing, could cause a major sell-off in either the U.S. dollar or gold.

Also, do not ignore the continuing political and economic pressures now becoming known as “currency wars” to keep a currency low in value. Globally, it’s good politics, but we can’t have all the currencies simultaneously lower in value.

As I have also pointed out, the upcoming U.S. elections will very likely have an impact on “expectations” regarding U.S. fiscal policy toward spending. Fear of debt expansion is part of the pessimism driving the dollar down. A strong reversal of power may be a catalyst for stemming the flight away from the dollar.

All this benefits us as currency traders, because, in a real sense, we simply look for opportunities that provide high rewards and known and minimum risks.

There is no doubt that U.S. dollar scenarios offer short-term as well as longer-term currency option plays. Strategies and tactics also exist that allow us to play short-term countertrend moves and still be in long-term timeframes — in either direction or both directions.

Let’s not forget though, that the U.S. dollar is not the only currency option game in town. Other opportunities are forming for further winning plays on the Aussie and Canadian dollar as both are probing parity. (I’ll chime in on this in a future edition of the Penny Sleuth.)

For now, enjoy your weekend!

Sincerely,
Abe Cofnas
Penny Sleuth

October 15, 2010

The Dollar-Gold Trade: How to Play Gold’s Upcoming Slide was originally featured in the Penny Sleuth.

For starters, let’s take a look at the U.S. Dollar Index (DXY).

The DXY acts as a bipolar sentiment gauge. In a crisis, when the market fears uncertainty, the DXY sees capital inflows, pushing the index up. We saw this after the collapse of Lehman Bros. in September 2008.

On the other hand, if investors fear increased deficits and weak U.S. financial conditions, the DXY falls. That is the case now as investors wrestle with a U.S. “recovery” that hasn’t seen an improvement in unemployment — a textbook jobless recovery. As investors struggle to figure out what it means, the DXY is reaching six-month lows this week, as the chart shows.

This is strategically interesting for us because the fall of the U.S. dollar sets up reasons for a rise in the future.

If job recovery improves, and if there are expectations that the United States will not continue on a path of increased monetary easing — which are two big ifs — the U.S. dollar becomes relatively more attractive.

This mix of economic fears and fiscal expectations makes the upcoming midyear elections even more important as a currency event. A shift in the political control of Congress will imply a shift in economic prospects. All this adds to market uncertainty. It also points to the big advantage of currencies as an alternative asset category. While the equity markets suffer with uncertainty — currency markets thrive and break out of ranges.

But let’s get back to the dollar’s potential rise for a minute…

The dollar is gaining today on the heels of worse-than-expected jobs numbers that hit the market this morning. As investors sell their stocks in favor of safer assets, like treasuries, the dollar is seeing a boost at a key time. We could see an attractive trade materialize from this in the near future.

[Editor’s Note: As usual, currency ETFs can provide stock investors with exposure to forex without the need to be an expert – for dollar bulls, the PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP) gives investors access to an instrument that rallies when the dollar is doing well.]

Sincerely,
Abe Cofnas
Penny Sleuth

September 23, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

How to Trade an October 2010 Rise in the Dollar was originally featured in the Penny Sleuth.

We are now in the pre-election sentiment period, where the world markets will focus on U.S. elections and possible shifts in fiscal policy. As you know, it makes this a perfect time to start thinking about currency plays on the election. I will soon have a very direct focus on this matter.

In the meantime, let’s turn to three key currency markets I have focused on and see what is on the forex horizon as the fall begins. Notice how basic patterns give us very good insight on price direction.

USDJPY

The dollar–yen remains a major part of global fundamentals on the world economy. And the last few weeks it’s been all about the yen, with the Japanese currency hitting a 15-year high against the U.S. dollar the last week of August – and more significantly the Bank of Japan’s intervention to devalue the currency and keep export demand high.

Now a bottom looks like it is forming. The upside potential is large, and as you already know, I think there is a lot of action in this pair. I’m betting that the yen will continue to fall in the short-term.

USDCAD

The Canadian dollar is clearly a prisoner of U.S. economic expectations. While parity with the U.S. dollar looked probable in May and July, it is now far away. The key thing to look for in the coming weeks will be whether the USDCAD can get even weaker.

We will watch this one for breakout potential.

EURUSD

The EURUSD is coming into a breakout period, and the technical conditions are now commanding our attention. With the German economy doing very well, can the EURUSD pair be far behind?

Europe’s sovereign debt woes continue to drive direction in this currency pair – and will likely continue to for some time. Last week’s relatively successful (read less bad) Portuguese bond auction should bring some optimists back to this currency pair in September – you can bet I’ll be watching this one closely.

It’s still too early to tell whether this fall will bring with it the kind of forex trading volume that we’ve seen this summer – but if this month is any indication already, we could see continued interest in these markets. With world economies teetering on the brink of major news on any given day, forex traders should be presented with plenty of opportunities to rake in gains…

And as always, I’ll be here to fill you in on how to trade them.

Sincerely,
Abe Cofnas
Penny Sleuth

September 17, 2010

P.S.: If you’re not familiar with trading currencies, there are plenty of ETF options out there that can give you exposure to currency moves without having to deal with the nuances of the currency market. For investors who want to make more direct plays, I’ll have more details very soon…

How to Trade 3 Key Currency Pairs in September was originally featured in the Penny Sleuth.

This may be unwelcome news for stock traders, but it is not bad news for investors who take part in forex currency trading. The swings from risk aversion to risk appetite are always with us. It may change from day to day and week to week, but it is not a surprise. The key to success is to correlate the prevailing sentiment with the trading opportunity. Let’s look a bit closer at the current risk-aversion sentiment.

The chart below shows an interesting co-movement between the S&P 500 and the USDJPY from October 2009. When the S&P strengthens, the USDJPY chart also moves up. When the S&P weakens, the USDJPY chart moves down. This is clearly showing that the yen is acting as a “safe-haven” basket when the market is risk averse.

For equity investors, this is a significant contemporary correlation. It means that equity portfolios can be protected with currency options. That is, a put on the USDJPY becomes a protective strategy for those fearing further declines in the U.S. equity markets. If the S&P falls, you can expect the USDJPY to fall in tandem – increasing the value of your protective put.

A Reuters article last week provides further insight into the dynamics of how risk aversion plays out in the currency markets. Under the headline, “U.S. Dollar Rises Broadly On Global Growth Fears,” it says:

The U.S. dollar rose against major currencies on Thursday, extending the previous day’s gains, as an unexpected rise in U.S. weekly jobless claims and weaker-than-expected euro zone data spurred safe-haven demand.

Why would the U.S. dollar get stronger when the U.S. economy is weakening? I’ve discussed this before – from a global perspective, money still has to go to where it is protected. In times of trouble, the U.S. dollar becomes, like the yen, a “safe-haven” basket. That is why holding the DB U.S. Dollar Index Bullish Fund (UUP) is a risk-aversion play. The U.S. Dollar Index is breaking out of a downside trend and has the potential of moving 10% within weeks, taking UUP along for the ride.

What we have, however, is a very interesting situation. We have the dollar weakening against the yen, but also strengthening as a global basket. It is a balancing act and very delicate. Too strong a yen provides great problems for the Japanese economy. As a result, intervention expectations are being voiced. The USDJPY pair is nearing major support at 84.60.

All this bodes well for formulating option-trading strategies – I think a USDJPY play could deliver impressive gains for investors in the next few days. If you’re new to playing forex options, stay tuned; I’ll have more details on this lucrative investment strategy in a future edition of the Penny Sleuth…

Sincerely,
Abe Cofnas
Penny Sleuth

August 17, 2010

The Risk Aversion Investment Strategy was originally featured in the Penny Sleuth.

In fact, recent economic uncertainty regarding a U.S. recovery is causing an increase in bearish sentiment on the U.S. dollar. The U.S. dollar index is approaching a key support level of 80, as you can see in the USDX chart below:

Below 80, we enter virtually new territory from a technical and psychological level. However, option strategies should always consider alternative scenarios. Just as the crowd is bearish on the dollar, it’s useful to see what scenarios could point to a bullish dollar countermove.

Part of a contrarian view on the U.S. dollar is understanding that dollar valuations are based on more than just economic news. Even if the economy is weak, the U.S. dollar can still go up. We saw this in September 2008, when the market breakdown was followed by a surge in the U.S. dollar.

Today there is increasing attention on government deficits. And those emotions and can become as important as economic data in impacting the value of the U.S. dollar. It’s all leading to a major “event-risk” that is now on the horizon – the U.S. mid-term elections in November 2010. Elections always have an impact on currencies. They affect currency values because they introduce uncertainty regarding the outcome, and therefore more volatility.

It is not too early to start thinking about the upcoming U.S. elections and how they can affect the U.S. dollar.

To see why, let’s look at some recent history — more specifically, the British elections of May 6.

The election resulted in a shift in control of government to the Conservatives, in a coalition with the Liberals.

On May 6, the pound sterling was at 1.4470. Since then, it has proceeded to climb in a clear upward channel to 1.5835. The fiscal austerity budget and policy that new U.K. Prime Minister David Cameron introduced to Parliament on June 22 provided even more momentum in the pound sterling.

This is not a coincidence. In effect, the currency market also voted its approval of Britain’s departure from the era of stimulus spending to an era of fiscal prudence. This sentiment shift is now global in nature, and has pitted traditional Keynesians who champion public sector spending to trigger growth against public sector deficit hawks who urge the contraction of the public sector.

EU central bank president Jean-Claude Trichet is an example of the anti-Keynesians, while Nobel Prize-winning economist Paul Krugman and Financial Times economist Martin Wolf have championed further spending. There should be no doubt that this debate will dominate the attention of the markets in the coming months.

So, then, how will the U.S. midterm elections impact the U.S. dollar?

If the elections result in a shift in control of the House of Representatives, from the Democrat party to the Republicans, a policy shift will surely occur – taking away fiscal stimulus and increasing prospects of a deficit spending reductions. If the Senate also falls to Republican control, the magnitude of a sentiment wave expecting fiscal “austerity” is even more probable. Such a total shift in control of the Congress will represent a political earthquake. It will also represent unique trading opportunities in the currency market.

In the near future I will be articulating several trading scenarios that relate to the U.S. elections and the U.S. dollar.

It could be an unprecedented opportunity for option trading. Stay tuned!

Best,
Abe Cofnas
Penny Sleuth

August 12, 2010

Event Risk: How Elections Could Impact the Dollar Trade was originally featured in the Penny Sleuth.