My Name is Ed, and I’m a Capitalist
By Ed Ponsi, FXEducator.com
Cheers from London! It's been an exciting week, complete with visiting dignitaries, rioting in the streets, and the cracking of a major terrorist plot right here in the U.K. I love it here in London, one of the greatest cities in the world, but all things considered, I'm ready to go home!
On the Steps of the Bank of England
On April 2, one day after the G20 riots in London, I made my way from my hotel to the headquarters of the Bank of England. On the previous day, at that same location, thousands of protesters clashed with police and vandalized a retail office of the Royal Bank of Scotland. When I arrived, a few hundred protesters remained, accompanied by nearly as many police. The walls of the BoE bore graffiti such as "Break the Bank" and "Fight Inflation, Eat the Rich." The protesters I spoke with were young, intelligent, and committed, and they truly seemed to believe that capitalism is the root of all evil. A young lady wore a shirt proclaiming her status as a "Free Range Human." One young man handed out flyers purporting to explain in a rational manner the evils of capitalism and extolling the virtues of communism and anarchy (does it really qualify as anarchy if someone is handing out flyers?). None of the protesters appeared to be over the age of 25.
As an unrepentant, lifelong capitalist, I was not upset that these folks were disparaging my way of life. These people were not evil, just misguided and inexperienced in the ways of the world. It's easy to be a committed anarchist when you're living in the basement of your parents' suburban home. These kids don't know that communism enslaves people into poverty, and that for many people around the world, capitalism represents the only hope of freedom. I would love for them to speak with one of the many thousands of people who risked their lives to escape communism for a chance at a better life.
I imagine that five years from now, many of those protesters will have children, and will need a place to call home. By then, I wonder how many of them will be seeking loans from – or even working for – the very banks that they now denounce and despise. Perhaps by tasting the rotten fruit of communism, these young lads and ladies will learn how morally bankrupt that failed system truly is. I imagine that down the line, some of them will become staunch free-marketers, once they have seen for themselves that despite its flaws and its wounded reputation, capitalism still is the greatest economic system on earth.
For Those About To Rock
When the global downturn hit, the prices of commodities such as gold, copper, and other base metals were crushed, and commodity currencies such as the Australian Dollar were hammered right along with them. Now that some analysts claim to see the first "green shoots" of economic recovery, will demand for those metals rise again? Let's connect the dots; a strengthening world economy should lead to increased construction, especially in China. This would in turn lead to increased demand for base metals, a crucial construction component and a major export of Australia. As demand increases for Australia's exports, the economy down under should kick into gear, thereby justifying a rise in the Aussie currency.
While economic figures remain grim, markets do not necessarily reflect the current environment; many analysts believe that markets are predictive, and any improvement in the economy will be foreshadowed by the markets prior to its actual occurrence. With that in mind, it's interesting to note that the Australian Dollar has formed a rather massive double-bottom formation, a possible indication of better things to come (see figure 1).
Figure 1: AUD/USD weekly chart shows a bullish double-bottom formation. Source: Trade Station
Whether or not the AUD/USD pair can break out of this formation is not the issue, in my opinion. Even if Aussie pulls back to the area below .6500, there could be limited downside risk because Australia's central bank, the Reserve Bank of Australia, has openly admitted to boosting the currency several times when it reached that area in late 2008. The RBA is committed to preventing the Aussie from tumbling below .6000, after nearly reaching parity vs. the USD last summer. Also, this trade currently has positive carry (meaning that traders can collect interest, similar to a stock dividend except currency traders collect it every day) because Australia's benchmark interest rate, currently 3.25%, is higher than the U.S. Fed Funds rate of 0.25%. So, traders who are long Aussie vs. the greenback can capture interest in addition to any appreciation they might receive from the trade. This would certainly be a long-term trade with very wide targets and stops (ideally beneath .6000), but the upside potential is huge – potentially back to last year's high near .9850 – and there is little nearby resistance if the double-top can be completed.
Question of the Week
Q) Just read your article on the Reserve Currency Debate and had a general question. If in fact that proposal would go through for a super currency and all nations would be on board, what would happen to the Forex market, would it still be there?
Ed Ponsi) Thank you for your question. Yes, the U.S. Dollar would still exist, along with the Euro, the British Pound, and all of the familiar currencies, but the USD would be supplanted as the reserve currency of the world. This might not occur by official decree but over a period of time; for example, at one time the British Pound was the world's reserve currency. The greenback did not suddenly replace the Pound Sterling; it was a gradual process that occurred over a period of years. Likewise, there was a time when the sun never set on the British Empire. Empires rise and fall, and the British Empire was no exception. In my opinion, the reserve currency issue is about more than money, it is a question of economic power and influence: Will America remain a powerful and influential nation in the future, or will the U.S. choose to let her economic empire fall?
