Currencies and Commodities Part 1

Currencies and commodities are more entwined than most people think. With a lot of optimism toward energy and commodities for 2010, I think its only right to see why exactly these are the trades of the year. We will start with currencies to get to our current situation. Later we will follow up with commodities and the potential trades to make cash money.

The US Dollar had been on the fall before strengthening over the past month. I think we can contribute this to record deficits. Deficits affect currency markets more than anything else. As we saw stimulus, healthcare, and financial plans and bailouts roll out, the dollar took a hit as the currency depreciated. Going forward, if we are able to reduce the deficit, the dollar could continue to strengthen. Until then, corporations should benefit as a cheap dollar summons foreign investment and sales.

The more important factor is interest rates. The dollar kept falling as interest rates started to fall at the end of 2007. It continued its descent until the rest of the world started feeling the global recession as they too decreased their rates. This led to a rally in the dollar. As interest rates have remained at all time lows, the dollar has begun to fall again. It only rises amid talks of an interest rate increase. Looking ahead, interest rates are not expected to rise until Q3 at the earliest.

Gold, oil, and other commodities have been rallying and are expected to lead the market next year according to most investors. As interest rates remain low and account deficits remain high, we can expect this to occur. The only risk lies with any interest rates increases. I think we can put any reductions in the deficit on hold until the economy turns back around. Any economy is an economy to make cash money. You just need to take what is thrown at you and exploit it.