By Evaldo Albuquerque
Dear Sovereign Investor,
In 1989, Stanley Druckenmiller, former money manager for George Soros, made millions off the German deutschemark after the Berlin wall fell.
In 1992, Soros did even better. He became an overnight legend when he grabbed a sweet $1 billion in a single day just by shorting the British pound.
What do these two traders have in common?
You could argue they applied their big macro themes to the currency market. But in reality, it’s even simpler.
They just followed the investment money. They knew the countries with the strongest fundamentals would attract the most investors – and the most cash. And the weakest countries would chase investors (and their money) away.
So they simply bought the currencies from the fundamentally strong countries and shorted the currencies from the fundamentally weak countries.
Simple, but brilliant.
Years later, it’s still embarrassingly easy to copy this killer strategy. But you need to know where the investment money is flowing. Today, it’s flowing straight into emerging markets like never before.
A New Era of Emerging Markets Has Already Begun
It’s no secret that emerging markets have done a complete 180 over the last decade. Take Brazil for example.
When I was growing up in Brazil, the country was a mess. We had very high unemployment rate, hyperinflation, political instability, you name it.
Today, Brazil has an all-time low unemployment rate, record consumer confidence, and an uncontested thriving economy.
Brazil is not alone. Many other emerging market nations are going through the same experience. What happened to them? They simply learned from their past mistakes.
During the 1990s, there was no better place to find economic turmoil than emerging markets. The Mexican peso crisis in 1994, the Asian crisis in 1997, and the Russian debt default in 1998 were some of that decade’s highlights.
Surviving a crisis is a harsh lesson for everyone involved.
Naturally after enduring a crisis, most emerging markets wanted to ensure it never happened again. So leaders started making some serious reforms.
Today most emerging markets are collecting the fruits of those reforms. Most are sitting on piles of cash.
That’s one of the reasons most emerging markets recovered so quickly from the recent global recession especially compared to the big developed nations like the U.S. and E.U.
Emerging Markets: Where The Action Is
The contrasting situation between emerging market and developed nations creates a mixture of push and pull factors.
Developed nations are plagued with very high levels of debt, weak economic growth, and rock bottom interest rates. This bad scenario doesn’t attract investors. Instead it pushes investment cash outside the country.
Emerging markets have low levels of debt, very healthy economic growth, and rising interest rates. That’s why more and more investors are turning to emerging markets.
In the last few quarters investors have been pouring billions of dollars into emerging market nations. The graph below shows how these countries’ stronger growth is attracting investment cash, according to the estimates from the Institute of International Finance.
As you can see, these emerging markets are becoming little cash cows for investors from all around the world…
The Best Way to Profit From These
It’s amazing how much money is flowing into these emerging markets. These capital flows are very important to currency traders because it practically guarantees these countries’ currencies will rise against the dollar.
They create very profitable trends for those who are trading in the spot market, especially when there’s a well defined trend in the dollar. And that’s exactly what we have right now.
Thanks to Bernanke’s new $600 billion quantitative easing plan, you know the dollar is heading no place but lower.
As a currency trader, you can simply pair these stronger emerging market or “exotic” currencies with the weak dollar for some decent gains.
During the last weak dollar trend over the summer, I helped my Exotic FX Alert subscribers pair the weak dollar with the stronger Mexican peso and Polish zloty for gains of 46% and 108% (among others).
It’s a simple strategy. But it really is as easy as watching where the capital flows will head next and being ready to jump on these opportunities in the spot Forex market.
Bottom line: Emerging markets are where the money is heading.
Evaldo Albuquerque, Editor
Exotic FX Alert