"It's not so unusual to run out of someone else's currency."

- Jeffrey Sachs

Issue #249:Tuesday, July 29, 2008

Three Different Ways to Profit
from the Pound's Demise

Today's comment is by Jack Crooks, Editor of World Currency Options and The Money Trader.

Good Day Currency Traders!

I woke up to a rip-roaring dollar this morning in the United States. All kinds of headlines caught my attention.

But there's two I'd like to highlight for you today, and then I want to tell you about the best ways to approach the major trends I see developing in the British pound.

Good Time to Be a British Pound Bear

I continue to receive more and more validation from the U.K.'s dismal economic fundamentals, which tells me I am on the right track with my British pound outlook. I believe the British economy is more exposed to this ongoing credit crisis than any other major developed economy in the world...even more than the United States.

A report came out this morning that showed the U.K. CBI retail sales index dropped to its lowest level in more than 25 years. And like clockwork this bit of information sent the British pound tumbling. It didn't help that earlier in the London session U.K. mortgage approvals for the month of June came in weaker than expected.

The previous couple months haven't been kind to the U.K. either.

* Last week we learned that actual retail sales fell by 3.9% - the most in 22 years. That's on top of the dismal CBI retail sales index figures released this morning.
* The average home price dropped 6.4% from May to June.
* And before this morning's report, we already knew that mortgage approvals fell by 40.5% from April to June.
* The ratio of Residential Mortgage Backed Securities (the consumers' primary funding vehicle for houses) to GDP for the U.K. is over 7% - easily the highest of any developed nation.

A crumbling consumer and a hapless housing market are no good for the British pound. Unfortunately for those whose wallets are full of pounds, there's not really a floor in sight for the real estate market or the British consumer.

Boy oh boy the credit crisis really has complicated things. Considering the myriad of economic problems, the Bank of England (BOE) is only delaying the inevitable at this point. The economic conditions in the U.K. are starting to take precedence over the inflation risks, if they haven't already.

Interest rate hikes have been wiped clean off the table for the foreseeable future. And the U.K. is playing catch-up to the U.S. - trudging their way towards a cyclical trough.

It's my contention that the next policy adjustment for the Bank of England will be a rate cut. And that could even come before the end of the year. With a rate cut on the horizon, British pound adjustment will continue to be made on the downside.

And you want to know how to play it with...

CDs...ETFs...Options...and Forex...Oh My!

Face it: You're not in Kansas anymore! There are so many fresh products bringing color to foreign exchange trading.

The first new product is known as currency CDs. You may or may not have heard of currency CDs yet. Investing in these, like any type of CD you may have heard of before, is good if you're looking to buy and hold. They offer good long-term diversification possibilities.

And while you can gain exposure to a nice variety of currencies through CDs, there currently is no easy way to play the short side of the British pound. But if this particular avenue is appealing to you, then you may also want to consider...

Slow and Steady Currency ETFs

There are now three families of ETFs that offer exposure to all the major currencies and a few exotic currencies. The best part is that the list of currency ETFs continues to grow.

Rydex CurrencyShares offer a British pound Trust, symbol FXB. And depending on the type of brokerage account you have set up, you shouldn't have any trouble shorting this ETF to play the long-term weakness of the British pound.

That's probably the simplest and least complicated way to play this trend. But if you want to take the next step and juice up the potential returns I recommend you consider trading options.

Currency Options:
The Leverage You Need for Triple-Digit Returns

About a year ago the Philadelphia Stock Exchange unleashed a new product that made currency trading far more appealing to the mainstream investor. Their world currency options allow you to place options trades on currencies as easily as you place options trades on any U.S.-listed stock.

Again, you can definitely position yourself to profit as the British pound carves out a major bear market. The simplest strategy would be purchasing British pound put options. Put options increase in value as the underlying asset decreases in value.

Currency options offer leverage, which ultimately means you can realize hefty returns in a relatively short period of time. This is a great product for the investor who wants a little bit more action.

But if you consider yourself a trader, you may want to step up and play with the pros in...

The $3.2 Trillion Forex Market

No need to be intimidated anymore. The growing availability of retail Forex brokers online has made foreign exchange trading simple for the individual investor.

Bottom line: The Forex market is the big leagues for currency traders.

Not only can you quickly and easily position yourself for the British pound to weaken versus the U.S. dollar, as you would in the various other avenues I've already mentioned, but you also have the opportunity to play the British pound versus the euro, the Australian dollar, the Japanese yen and others.

And versatility isn't all you get. You'll get extra leverage, just like with currency options. This combo ultimately results in endless opportunities for profit.

I'll be back here on Thursday...

Until Then,
Jack Crooks,
Editor of World Currency Options and The Money Trader

EDITOR'S NOTE: This is just one example of how you can follow a trend with various trading strategies in the currency markets. Now you can try out all these trading strategies for yourself...for a single price. Get all the details here.

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Making 'Cents' of the Headlines

From Chris Gaffney, CFA and Vice President of World Markets at EverBank

What's Happened:

A story in this week's Economist magazine really demonstrates the possible impacts of runaway inflation.

Zimbabwe, has been experiencing hyperinflation. Stuck in a political and economic quagmire, the country recently introduced a new banknote. Last week Zimbabwe's central bank unveiled a 100 billion dollar banknote to cope with inflation. That is a bank note with 11 zeros!

What I Say:

But as crazy as this sounds, the Zimbabwe dollar banknote still doesn't hold the all-time record. A note issued in post-war Hungary came with a mind-boggling 19 digits!

Thankfully the U.S. is not yet in this type of situation. But still the situation in Zimbabwe and post-war Hungary should be a reminder of what can happen in a country if the central bank continues to ignore inflation.

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