Currencies: A Seriously Misunderstood Market

110 miles an hour, by cab. I can now say I’ve experienced that…thanks to a misunderstanding last year.

I had just finished speaking at a wealth symposium in Montreal. Right after my speech, my wife had our bags waiting, so we could head straight to the airport to catch our flight.

We jumped in a cab, and I asked the driver to “take us to the airport, and don’t delay,” because I knew it would take us a while to get through customs and security.

Big mistake. Apparently the driver thought we were about to miss our flight…

We jumped in and the driver floored it. My wife and I flew off our seats. Suddenly we were passing every single car, as our driver weaved in and out of traffic.

Man, you would have thought we were in a Dukes of Hazzard car chase scene with Enos and Boss Hogg trailing us!

At one point, I looked at the speedometer and it said 180 km/h. That’s about 110 mp/h!

Needless to say, we made it to the airport in record time. But honestly, I was just relieved we made it there at all.

Just as my cab driver misunderstood me, I find most investors misunderstand the currency market.

They believe the currency market is an elite market that’s completely out of reach for the normal investor. Frankly, they couldn’t be more wrong.

There are plenty of easy ways to jumpstart your trading in this misunderstood, often overlooked market.

In particular, I have one extremely simple way to know what’s going on in foreign currencies. I watch this market as closely as I was eying that cab driver’s speedometer. I’m talking about the commodities market.

The commodity market gives me a “real time” look at what’s happening in the global economy – about three months in advance. Commodity prices will rise first, and then data in certain economies will reflect that rise in the upcoming quarter or two.

But I like getting the “heads up” as quickly as I can. It helps me a lot in my currency trading. Even better, certain currencies closely track commodity prices. That can give you a unique edge when you’re just starting out in currency investing…

Now why in the world would some currencies track commodities anyway? It’s because several of these major economies are commodity-exporting nations, like Australia, Canada and New Zealand.

These countries mine and farm certain commodities to export them. Their production costs stay fairly stable overall, so their commodity exports generally cost the same amount to produce.

But when commodity prices rally, their profit margins widen and their overall earnings increase. This hands a huge windfall to commodity-exporting nations.

Therefore, in one sense, you will know how these three particular economies are faring based on which direction their commodity exports are heading. If their economies are booming, that’s great news for the currencies in this region too.

Right now we have a perfect example of this commodity-currency relationship in the Canadian dollar…

It’s no secret that I love the Canadian dollar this year – but it’s hard not to when oil prices are rallying above $110 a barrel.

Canada is a huge oil exporter, not just to the U.S. but to the rest of the world. So when oil prices are high, Canada makes money hand over fist. As a direct result, the Canadian dollar has a field day.

But when oil prices head lower, Canada’s economy takes it on the chin and so does their currency. Take a look at the chart below. It shows oil, the Canadian dollar, and another Canadian export, lumber.

When oil and lumber prices are heading higher on the chart, more and more cash enters Canada’s economy and lines Canadians’ pockets. So I know the Canadian dollar will rally too. You can see this by the emphasized green lines above.

Then when oil and lumber prices drop, I know there is less money flowing into Canada for their exports. You can see this drop in export prices shows up in the value of their currency too…like it did between April and June of 2010 (see the red lines above).

See how simple this is? You didn’t have to watch all the data flowing out of Canada or know a lot about technical indicators to see this one coming. You just had to note the overall direction in a couple of commodities.

So the next time you think that currency trading is hard to understand or “over your head” remember this secret: watch commodities. They give you a three-month warning.