Lazy Man's Way to Make Money on Currencies: Make Double Digit Gains on a $900 Investment in Less than Six Weeks
By Jack Crooks
Courtesy of Crooks Currency Group
If what we’ve seen so far this year says anything about the year ahead, it’s going to be a great time to be trading currencies in 2007. The volatility in the market has hiked up dramatically, after a historically docile market last year. That means there are great opportunities for us, no matter how you trade your currencies.
When you get volatility, you can make small, simple, and low-risk bets in currency options (buying calls and puts), and these seemingly simple bets can rocket higher in a matter of a few days. And if the volatility is a catalyst for only a five or 10-day trend, you can easily double and triple your returns. A well-placed call option bought today could easily hand you triple-digit gains by holding it only a couple of weeks. That’s why I’m so juiced about what I’m seeing in the market now.
First, let me tell you about the one currency that I believe will rocket higher against the U.S. dollar in the next few weeks. And, if this currency breaks out of its long downtrend, as I expect, this currency will soar higher.
Four Reasons Why I’m Jazzed About This Currency
Just look at the underlying fundamentals of the country supporting this currency:
1) Jobs Galore: The unemployment rate is at a 30-year low.
2) Real Estate Cranking: Total value of building permits recently hit an all-time high.
3) Solid International Financial Position: It sports a hefty current account surplus and foreign investment into the country is soaring.
4) Strong Growth Momentum: The country’s index of leading indicators surged most recently, way beyond expectations.
Given that litany of impressive economic performance, you’d think this country’s currency would be soaring already. Yet in fact, over the last five months, this currency has been among the weakest major currencies in the world. It dropped a whopping 6.5% against the U.S. dollar since June of last year. That makes this currency second only to the yen, which lost 9.7% against the dollar over the same period.
Considering the U.S. dollar was weaker than most currencies in 2006, you can imagine how this currency performed against the world’s other stronger major currencies. This currency fell a whopping 10.2% against the euro since last June. And this country’s economy is in much better shape than Europe’s!
Just Loonie for the Loonie
So what currency am I talking about? The Canadian dollar, or in forex lingo—the loonie.
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The loonie’s been whacked against the U.S. dollar, the euro, Australian dollar, and the pound. And as far as I can see, there has been no good fundamental reason why the Canadian dollar should have fallen at all. The only thing that could have possibly prompted that kind of consistently poor performances is the obvious—crude oil prices. The Canadian dollar tracks closely with the price of crude oil because oil is a major Canadian export. And crude oil peaked in June of last year, along with the currency. Both have staged a dramatic decline since then.
The Canadian dollar is now trading at around 85.5 cents against the buck, after hitting an all-time high of 91.5 cents in June 2006.
But I still think the Canadian dollar is extremely cheap compared to the U.S. dollar. And this decline gives us a great chance to profit from the loonie when it rallies again.
Here’s why I see a rally on the horizon…
1) Canada’s economy is strong and has plenty of momentum. Metals and commodities exports have continued on steady clip. That indicates there is still plenty of growth in the global economy. And given the U.S. economic numbers so far, Canada’s largest trading partner will likely continue to suck up Canada’s exports.
2) If global growth proves anywhere as strong as forecasted, crude oil prices look very, very cheap. And if the Canadian dollar continues to track on crude, both should move sharply higher in the weeks ahead—validating a breakout in the currency.
The profits from the loonie are yours for the taking, no matter how you decide to play it. But here are a few ideas. Multi-currency accounts are, by far, the easiest way to invest in currencies. You simply open a bank account that holds different currencies other than the U.S. dollar. Then you sit back and watch your bank account grow in value as the currencies in your account appreciate in value against the U.S. dollar. If you already have a multi-currency account, you simply call them and ask them to allocate part of your personal assets in your currency of choice. In this case, you would stock up on the loonie.
If you don’t have a multi-currency account yet, you can invest in one either offshore through an offshore bank account like Jyske Bank in Denmark, or you can invest domestically through Everbank. There are other investment vehicles available, which give you access to the currency markets with varying degrees of difficulty, including Exchange Traded Funds and spot market currency trades. But these have limitations, too. Instead, I’m going to suggest something better…
The Best Option to Make Double-Digit Profits
I’m going to give you the most profitable way to invest in the loonie right now—buying options. While it’s not the easiest way to play the loonie, this is the way you’re going to get the biggest potential return over the next few weeks.
By using options, we can buy ourselves some time by choosing options that won’t expire for two, three or even six months. This time frame should allow the powerful economic force driving Canada’s growth to push the loonie higher. It also gives us some time for crude oil to rebound which should really provide a boost to this currency. Finally, it gives the market some time to wakeup to what we already have recognized: the Canadian dollar is trading cheap! This is a great setup for investing in the loonie. Here’s how I’d recommend you play it…
Canadian dollar call option, expiring in March ’07, with a strike price of 8750, will cost about US$900 per option traded on the Philadelphia Stock Exchange (PSE). Basically, the same option will cost roughly US$1,800 if purchased on the Chicago Mercantile Exchange (CME). (That’s because the size of the basket of Canadian dollars you control is twice as large on the CME, as it is on the PSE. Therefore the price of the option is roughly doubled.)
If the Canadian dollar moves higher over the next couple of weeks, say 1.5 to 2 cents, this option could double in value very quickly. And that’s very possible considering how volatile the markets are now and how quickly this currency can move. Take a look at the chart on this page. I think it shows us the Canadian dollar is poised for a breakout higher.
No doubt we are doing a bit of bottom picking with the loonie. But the fundamentals are screaming “BUY THE CANADIAN DOLLAR” because it’s cheap at this level.
Now the one caveat to jumping into this recommendation is the fact that currency markets move fast, and options contracts on currencies can move even faster. This is exactly what gives you so much upside profit potential in the first place—because of the leverage involved in trading options on currencies.
The bottom line is that by using options to take advantage of timely currency trading opportunities, like the one I see now in the Canadian dollar, your risk is limited in case the markets don’t sway our way. Plus, you also have unlimited upside profit potential if the loonie soars higher. That makes this an excellent risk/reward trading opportunity. And that’s what this game is all about.