September 2009

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TRAVEL SOUTH OF THE BORDER
FOR BIG PROFITS!
Just a few hundred miles south of where I live is the Mexican border.

Few things conjure up images like the phrase, “Run for the Border!”  Outlaws in countless westerns made a run for the Mexican border.  Their goal… to evade justice dished out by law enforcement hot on their tail.

Nowadays, a run for the border is usually reserved for a relaxing vacation.

Right now, I know some of my friends are discussing winter vacations to Mexico. Nothing like sunbathing on the Mexican Rivera while the northern half of the nation is freezing.

Places like Acapulco, Ixtapa, and Puerto Vallarta are popular tourist destinations.

As always, traveling to another country involves exchanging your US Dollars for another currency.

I think now might be the perfect time to stock up on Mexican Pesos.  Before long, their value could eclipse the US Dollar.

Why am I so high on Mexico?

First is the economy.  It’s growing steadily and has been for some time.  Mexico is a country with more than 110 million people.  They have the world’s 12th largest economy… and most importantly, it’s growing.

Despite estimates of GDP falling in 2009 (what country’s isn’t facing the same situation?), Mexico is expected to grow just under 4% per year between now and 2013.  That puts estimated US GDP growth rates to shame.

Unlike the Mexico of old, the country has managed to overcome economic stagnation. In fact, progressive economic policies have earned them a highly coveted “Investment Grade” rating from Moody’s and Standard & Poor’s.

Here’s the key to Mexico.

There are two big drivers in the Mexican economy.  The first is oil.  The second is maquiladora.

Oil is easy to explain.

Mexico is the 6th largest oil producing country in the world.  Almost 16% of total GDP is tied to oil and related products.  This is a huge driver for the Mexican economy.  As oil prices move higher (believe me they will), the Mexican economy will thrive.

As a side note, we see the same thing in Canada and Australia.  Strength in commodity prices will help the economy… and that strengthens the currency.

So let's talk about maquiladora.

If you’re like most people, you’re scratching your head wondering what this is.

It’s simply a fancy word in Mexico talking about trade with other countries. Maquiladoras are manufacturing plants near the border or other ports.  They take in goods – tariff free – and export 100% of the imports as finished goods.

Maquiladoras are a result of free trade agreements (like NAFTA) signed by countries in the region.  Amazingly, it accounts for $87 billion worth of manufacturing in Mexico. More than half the country’s total output.

Let’s take this a step further.

It’s not a stretch to say the United States is the largest trading partner with Mexico. As the US economy exits the recession, we’ll see a jump in demand for goods.  Many of those goods will come from Mexico.  And, that means increased trading activity for the maquiladora.

More business activity means a stronger economy.  And a stronger economy means a stronger currency.

Are Pigs Really To Blame?

Let me take a moment here to talk about the latest swine flu news.

The swine flu took the wind out of the sails of the Mexican Peso.  Traders were concerned a widespread pandemic would shut the country down.  The Mexican Peso paid a dear price for those fears.

The Peso fell significantly as news of the outbreak hit.  Obviously it was a little bit exaggerated.  The swine flu is about as harmful as the normal flu… and the sell-off in the Mexican Peso was overdone.

As the worry over the flu dissipates, we’ll see the Peso climb back to normal levels. And that bodes well for our investment.

However, Mexico’s not without its shadier side.

The country is notorious for crime.  As a matter of fact, many major news organizations in the US have been running front page stories about gang warfare.  I guess concerns about the financial crisis don’t sell as well these days.

Without a doubt, future stories about crime waves, drug trafficking, or human smuggling will impact the currency.  The good news is the US government’s teaming up with the Mexican government to curb these problems.  In my opinion, these are great opportunities to add to a position at a discount.

Just one more reason.

I’m going to give you one more great reason for buying the Mexican Peso right now… the yield.

We’ll use US Dollars to buy the Peso ETF.  As our Peso trade earns interest, we’ll reap a very nice dividend.

That yield over the last 12 months is 6.8%!

Not a bad way to make money…

TECHNICALLY SPEAKING

The Mexican Peso is in a solid uptrend.  It’s rallied almost 17% off the lows set back in March.  But, this move is far from over.  I believe the Mexican Peso ETF could return to 2007 levels… close to $90 a share.

Also as you look at the chart, you’ll notice it’s consolidating around the $75 level.  This tells me we’re poised for a breakout… and the fundamentals are pointing to a break higher.

In late July, we also witnessed the 200-day moving average turn higher.  Since then, it’s acted as a form of support pushing the currency up.  Add this all together with a nice yield and we have a great trade on our hands.



 WHAT TO DO NOW:

The CurrencyShares Mexican Peso Trust (FXM) is trading at $75.10.
Buy FXM up to $77.15 per share.
Our Profit Target is $90.
Don't forget your position sizing.


CURRENCY SPOTLIGHT
  Japanese Yen - The Carry Trade Resumes!

The Yen is one currency everyone should be keeping an eye on.  Japan is the second largest economy in the world… right behind the US.  However, their economy has been stuck in a rut for decades.

And the current outlook isn’t very exciting.

Economic growth is nonexistent.  As a matter of fact, deflation was a problem for some time.  From 2000 to 2005, annual inflation was running at a blistering negative 0.4%.

Trying to pry themselves out of a deflationary spiral, the Bank of Japan lowered long term interest rates to near zero.  The hope was cheap money would drive economic growth.

The Bank of Japan started pushing rates lower and lower.  By 1995, interest rates were a depressing 1%.  Then in September of 1995, rates hit 0.50%.  Since that time (almost 15 years), Japanese rates have never climbed above the 1% level.

But here’s the problem.

With rates that low, the carry trade accelerated.

Global investors found it easy (and cheap) to borrow in Japanese Yen and invest overseas.  Countries like Australia and even the US offered rates paying 3 to 5 times the cost of borrowing money.

This created huge selling pressure on the Japanese Yen.

The current global recession has brought fearful investors back into the currencies of the most stable countries (the US and Japan namely).  This flight to safety has caused demand to rise and the Yen to climb.

Before the global recession hit, the Yen traded comfortably in a tight range.  Now, its value has been pushed way up – more than 23% – by fearful investors.  All of those original carry trade investments were unwound (this also helped push the currency higher).

Now we’re seeing the light at the end of the tunnel.  As investors become less fearful, they’ll once again begin establishing the carry trade.  And that means the Yen will soon be trading lower.

As the global economic recovery takes hold, risk takers emerge.  These global hedge funds can bet billions on the carry trade.  That means billions and billions of dollars selling the Japanese Yen and buying other currencies.

Now some people think recent political winds in Japan will change the direction of the Yen.  Recent elections provided landside results for the challenging party.

After ruling Japan for more than 50 years, the LDP party is on the way out.  Of course, now analysts are predicting big changes.  Everyone’s assuming the new ruling party will do something different.

Not a chance if you ask me.

I don’t see this election changing much.  Sweeping change may be called for, but we all know how slow the political gears turn.  Eventually the excitement surrounding the new government will wear off.

And that’s why the Yen is poised for a long slow trend downward.

Watch this currency closely… I am.


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