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Volatility Spells Opportunity in the Currency Trading Market

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Chris’ notes: Thirteen trades… and every one a winner. That’s the track record currency trader Imre Gams has racked up over the past four months. Had you followed each one, you could have turned a $5,000 stake into $10,815 – more than doubling your money.

Imre is a veteran trader who now works with friend of Legacy Research and master trader Jeff Clark. And as you’ll hear from Imre in the Q&A below, trading currencies allows you to sidestep the bear market in stocks.

That’s because you can always find at least one currency going up against another. And thanks to the Fed’s aggressive rate hikes… the currency markets have gone from sleepy backwater to trader’s paradise.

If you’re looking for a way to profit that’s not tied to stocks… pay special attention to what Imre has to say. And to learn more about how he handed Jeff’s subscribes the chance to more than double their money on his trade recommendations, check out his on-camera interview with Jeff here.

Q&A With Imre Gams, Editor, Currency Trader

Chris Lowe: There’s a lot of buzz around Legacy Research about your new currency trading advisory. In beta testing, you scored wins on 13 straight trades. For folks who are unfamiliar with currency trading, why should it be on their radar today?

imre: Most of the biggest and most profitable trades in history happened in the currency market.

Take Andy Krieger. He’s the brilliant trader I had the pleasure of working with for years. In 1987, he became famous for shorting the New Zealand dollar. He walked away from that trade with $300 million in profits for his firm.

Or hedge fund manager Stan Druckenmiller… He’s made millions of dollars from single currency trades – multiple times. And Bill Lipschutz used to earn his firm $300 million a year in foreign exchange (forex) trading.

Then there’s George Soros. He’s famous for “breaking the Bank of England.” He bet against the British pound to the tune of $10 billion and netted more than $1 billion dollars in profit. He remains one of the 300 wealthiest people in the world largely thanks to that trade.

Currency trading is also unrelated to stocks. That’s just a fancy way of saying currencies and stocks don’t systematically move in the same direction. So it doesn’t matter if stocks are falling, like they have been all year. You can still find a currency going up or down against another currency.

But currency trading is so attractive right now because of the big the moves off zero we’re seeing in interest rates around the world. Since it started hiking in March, the Fed has raised its policy rate from 0.5% to 3.2%. Now, other central banks are following suit.

Interest rates are a big factor in determining a currency’s value versus another currency. So, these moves in interest rates are causing huge moves in currencies relative to one another.

And that’s what we look for as traders. We profit from currency moves. The more movement, the bigger the opportunity.

Chris: Can you unpack that for readers who may not be up to speed on what’s happening with interest rates?

imre: Currencies died as an exciting market to trade in the wake of the 2008 financial crisis.

That’s because many global central banks were dropping interest rates to zero in the wake of the crisis. And that started a race to the bottom for global currencies. There was an incentive for all these central banks to devalue their currencies as much as possible.

And when every central bank is doing the same thing… and pushing interesting rates down to zero… it has a chilling effect on currency moves.

Low interest rates mean low energy… and low volatility… in currency markets. Higher interest rates mean higher energy, and higher volatility.

And now, 14 years after the 2008 crash, we’re going from low to high energy. Central banks are strengthening currencies instead of weakening them. They’re trying to combat the inflationary pressure we’re seeing around the world.

Chris: The Fed has been leading the charge on raising rates to combat inflation. Can you talk about the pressure this creates for other central banks and other currencies?

imre: This is where it gets really interesting. The US government issues the world’s reserve currency – the US dollar. So every central bank around the world is holding US dollars in reserve.

Foreign governments use these reserves to buy commodities, which are priced in dollars. They also use them for trade. Just like English is the international language of business, the US dollar is the international currency of business.

A lot of countries also hold US-dollar-denominated debt. So if the Fed is making the dollar stronger by raising interest rates, there will be a lot of added pressure on these countries to repay those debts.

That means they must raise interest rates to strengthen their own currencies, just to defend themselves.

But what happens if you’re in an economy like Japan, which has seen persistent deflation since the 1990s?

They haven’t been able to get their economy going. They can’t afford to raise rates. But at some point, they’re forced to.

That’s what we’re seeing in Europe. It’s what we’re seeing in Australia and Canada, too, to an extent.

The Fed is bullying other central banks into submission. The Fed doesn’t care if the European Central Bank or the Bank of Japan increases rates or not. But they will have to increase rates to stay economically competitive.

Chris: Why does raising interest rates strengthen a currency?

imre: In a nutshell, the higher the interest rate, the more interest you can earn by parking your capital in that currency.

One of the most famous currency trades used to be the Australian dollar/Japanese yen carry trade. Historically, Australia had higher interest rates than Japan. So traders borrowed in yen and then sold those yen in the foreign exchange market to buy Australian dollars.

Because the interest rate on the yen is so low, it’s virtually free to borrow. Then all you have to do to make a profit is switch into Australian dollar assets with higher yields.

And the more trades that sell yen, the lower it goes. Conversely, if lots of people are buying Australian dollars to benefit from the higher yields there, the stronger that currency becomes.

We’re now seeing those kinds of “spreads” – or differences between interest rates – again. That’s why currency trading is so exciting now. It used to be a relatively stable market. Now, it’s anything but stable.

The British pound is the most recent example of wild currency market volatility. After the country’s former prime minister, Liz Truss, announced about $50 billion in unfunded tax cuts, the pound crashed to its lowest level ever against the dollar.

This led to a rout in British government bonds… It frightened the life out of pension fund managers, who own a lot of those bonds… And it led to Truss resigning as prime minster after just six weeks in the position.

We can point to the unfunded tax cuts… or the lack of confidence in Truss’s ability to manage the British pound. But thanks to the big moves in interest rates in the US, the market didn’t know how to value the British currency properly anymore. So, we see these volatile swings.

Chris: And you’ve been able to profit 13 times in a row on these swings. That’s impressive. How do you calculate the gains on a currency trade like that?

imre: As currency traders, we measure our gains and losses in “pips.” That stands for “percentage-in-point.” A pip refers to the fourth decimal place of an exchange rate quote.

For example, if the euro/US dollar currency pair moves from 1.2050 to 1.2051, then the pair appreciated by 1 pip. The dollar value of each pip depends on different factors, including the value of the trade.

Since our testing began in July, my currency trade recommendations have netted a total of 1,163 pips.

A modest pip value would be $5 per pip. In this case, our trades so far would have netted $5,815 (1,163 pips x $5). A $5 pip value would be suitable for beginner traders… or folks with a relatively small account balance of $2,500 to $5,000.

A larger pip value of $10 per pip would have netted us a gain of $11,630 on these trades, while a $20 value per pip would have resulted in a gain of $23,260.

The best part it’s possible to achieve these kinds of results with a relatively minimal balance in your brokerage account.

Chris: Thanks for that great introduction to currency trading. It’s not something we’ve looked closely at before here at the Cut. And your track record so far proves it can be highly lucrative, even with a bear market raging on Wall Street.

imre: You’re welcome. I go into much more detail on everything in the interview I recorded with Jeff Clark. So I’d encourage folks interested in the types of gains I’ve been able to deliver in this market to check that out here.