UltraSimple Currencies

The ETF Solution to Harness the DollarBusting Power of Foreign Currencies

Published by: World Currency Watch Currency Capitalist 98 S.E. 6th Avenue, Suite 2 Delray Beach, FL 33483 USA USA Toll Free Tel: 800-818-6934 Email: info@currencycapitalist.com Web site: www.worldcurrencywatch.com Copyright 2010 by Currency Capitalist. All international and domestic rights reserved. No part of this publication may be reproduced in any form, printed or electronic, without prior written permission from the publisher, Currency Capitalist. Notice: This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold and distributed with the understanding that the authors, publisher and sellers are not engaged in rendering legal, accounting or other professional advice or service. If legal or other expert assistance is required, the services of a competent professional advisor should be sought. The information and recommendations contained in this brochure have been compiled from sources considered reliable. Employees, officers, and directors of Currency Capitalist do not receive fees or commissions for any recommendations of services or products in this brochure. Investment and other recommendations carry inherent risks. As no investment recommendation can be guaranteed, Currency Capitalist takes no responsibility for any loss or inconvenience if one chooses to accept them. Any information or statements contained in this publication are not to be considered by the reader as personalized investment advice. The authors and any agents of Currency Capitalist are not licensed under U.S. or other securities laws to address particular investment situations and nothing herein should be deemed as personalized investment advice.

Currencies Made ULTRA-Simple

The Solution that can start you on your way to trading currencies RIGHT NOW Congratulations! Youve just taken your first step in what is without a doubt the easiest way to take advantage of the foreign exchange or currency market. The investment vehicle discussed in this report is currency ETFs, or what we call International Vouchers. For years, the foreign exchange market was a trillion dollar inter-bank market. That meant currencies were bought and sold between banks and large financial institutions for sums starting in the millions. Literally, if you didnt have upwards of US$10,000,000, you were simply locked out of all the incredible benefits that currencies could afford. But all that has changed in recent years with the introduction of currency ETFs. Now with a simple, single investment you can harness all the power and benefits that institutional investors had at their disposal. With no special accounts. And with very modest minimums So What Is an ETF? An ETF, or an Exchange Traded Fund, is essentially a basket of securities that are designed to mimic or track an underlying product an index or average, for example. In this case, they are designed to replicate individual foreign currencies. This is easy for them to do because each fund holds large sums of the actual currencies that they represent. Its bought or sold just like any other type of fund. Each unit of an ETF that you buy lets you control 100 units of the underlying currency. This makes them an extraordinarily easy way to get into the currency markets. There are ETFs that represent all the major currencies traded around the world and then some. Even better, they provide an extremely affordable way to take advantage of this limitless market. Ill explain in more detail in a minute. ETFs are so simple that you can probably get started with them right away. But first give me just a second to explain exactly why Im sure youll want to make use of these fantastic vehicles. The Beauty of Currency ETFs There are many compelling reasons to make currency ETFs part of your investment arsenal. But here are just a few of the major ones for you to consider 1. They give you hassle-free access to the currency market. Now, with currency ETFs, even 1

conservative, risk-conscious investors can feel comfortable using the currency market in their investing. Every recommendation can be traded on either the American Stock Exchange or the NYSE-Arca. Accessible either through your current online account or via your broker, currency ETFs require no special accounts or other requirements. In other words, you can now trade a currency just as easily as you would any stock. 2. They let you diversify your investments and grab yield to boot. Investing in currency ETFs can protect a good deal of your purchasing power against a collapsing U.S. dollar. Just like the big boys in the foreign exchange market, you can now hedge against the bucks long-term decline. After all, no matter how well your U.S. dollar based investments perform, youre losing out on even larger profit potential as the greenback sinks lower. But theyre not only for dollar bear markets. You can just as easily take advantage of a dollar rally against any major currency by selling currency ETFs. And thats another fantastic benefit of ETFs the ability to sell them short. There are no special restrictions on short selling like in the stock market. Simply sell the ETF, drop a stop in the market, and youll be able to profit from any dollar rally against that currency. Its that simple. And an added bonus of holding certain currency-specific ETFs is the dividend yield. Thats right! Those select currency ETFs sponsored by Rydex Fund Company pay a monthly dividend based upon the yield in the local currency market. To check out the current yield of each of these ETFs, simply type this link into your web browser and discover Rydex sponsored ETFs for yourself: http://www.currencyshares.com/Home/CurrencyShares.rails. 3. Youve heard it before, The trend is your friend. Taking a longer-term approach with currency ETFs means you can ride the trend. This way you can get in on the sweet spot of long term currency market trends. That is exactly one of the main advantages currencies tend to have over stocks and bonds they trend over the long term. If you get the fundamentals right in this market, you can ride those trends for many months, or even years. Often for substantial profits. And currency ETFs are the perfect vehicle to do this because, unlike options or futures, they have no expiration date. Simply get in and ride the trend for as far as it takes you. The average market cycle in the dollar is about six years. That means you will have plenty of trending opportunities to make money even with a very conservative approach. A typical holding period could range from a few months to a year or more. If the fundamentals support the trend, theres no reason to hop off the gravy train. 4. They are generally uncorrelated to stocks and bonds. Thats rightthe currency market is almost entirely uncorrelated to the stock and bond markets. And at a time when investors are growing increasingly concerned about the outlook for stocks, currencies are vital to a well-diversified,
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global portfolio. No matter what happens in the stock or bond market, currencies will always be moving and providing you opportunities for profit. Just have a look at the performance of the British pound versus the yield on a ten year treasury note. Treasuries are all over the place, while the trend in the pound has been long and strong completely unaffected by the whips of the U.S. market.

And Currency ETFs Offer Even More Benefits, Including: Continuous liquid markets during trading hours that means its easy to get in and out Theres no minimum investment and they all offer very reasonable prices you can get in for as little as US$100 Ability to sell short no restrictions on short selling so you can take advantage of up and downward trends You can buy on margin to enhance your leverage if you maintain a margin account with your broker, you can easily double the returns you get with currency ETFs They closely follow the price of the underlying currency so you get the full benefit of the moves in the Forex market You can easily use them to hedge currency risk in an international stock portfolio Their simplicity will allow you to create a diversified currency portfolio just like sophisticated institutional investors in an instant Currency Pricing Made (Extremely) Simple One of the greatest advantages of currency ETFs is how simple they are to understand. The Forex market is filled with peculiarities that, while not rocket science, can be very confusing. Currencies are traded in pairs and you have to understand their particular pricing method known as pips. Intimidating to say the least. And thats bad because it often scares many investors away from spectacular profit opportunities. ETFs eliminate all of that. Currency ETFs are all priced in U.S. dollars and represent 100 units of the foreign currency. So disregarding fees or commissions for the moment, a price quote of 149.55 in the euro ETF means you pay US$149.55 per ETF contract. And at 100 units of currency per ETF, every penny change in the price of the underlying currency is worth US$1 to you.
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Lets take a look at an historical price movement in the euro ETF. In February of 2007 you could have bought the FXE ETF for under US$130. Less than a year later, the ETF rallied to just below US$150. Thats a 15.5% return on your money in less than one year. And it can get even better. Because if you have a margin account set up you could leverage your position at 2-to-1 so your return doubles to nearly 31%!

Investors and traders are quickly waking up to the power within the currency markets. And ETFs are truly the next big thing. The universe of available currency ETFs are expanding rapidly. So much so that WisdomTree Dreyfus recently added a whole new lineup that allows exposure to some currencies once very much off-limits to the average investor. So What ETFs are Available to You Today? There are three groups of funds for you to choose from: 1. Rydex Investments now offers their Rydex CurrencyShares all available on NYSEArca. This group of ETFs includes: euro (FXE) British pound (FXB) Mexican peso (FXM) Swedish krona (FXS) Australian dollar (FXA) Canadian dollar (FXC) Swiss franc (FXF) Japanese yen (FXY) You can get more detailed information on these investment vehicles at: http://www.CurrencyShares.com/. 2. WisdomTree Investments offers their WisdomTree Dreyfus Currency Income Funds. These can all be traded on NYSE Arca and include: Chinese yuan (CYB)
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Indian rupee (ICN) Brazilian real (BZF) euro (EU) South African rand (SZR) New Zealand dollar (BNZ) U.S. Current Income (USY) Japanese yen (JYF) You can get more detailed information on these investment vehicles at: www.wisdomtree.com/etfs/index-currency.asp. 3. Invesco PowerShares include specialized funds available on the American Stock Exchange: DB U.S. Dollar Bearish (UDN) DB U.S. Dollar Bullish (UUP) DB G10 Currency Harvest (DBV) You can get more detailed information on these investment vehicles at: www.InvescoPowerShares.com/products/. Your Hot Off the Press ETF Recommendation Time to Take Advantage of the Crumbling euro After more than seven years of consistent strength against the U.S. dollar, the euro has become significantly overvalued, given the current economic conditions surrounding it. We continue to receive more and more validation, based on dismal economic news from Europe. And that tells us we are on the right track when we consider any rally in the euro against the dollar as another excellent opportunity to sell the currency. European Banking Sector: a Ticking Bomb Financial markets sentiment has recently improved considerably in Europe. Equities markets have rallied since early 2009, property prices are leveling off, and signs of a recovery in consumer and industrial confidence are starting to surface. But make no mistake. The next European crisis is right around the corner. The European Central Bank (ECB), which oversees the 16-country bloc that uses the euro, recently released a report showing that euro-zone banks could still record a further $398 billion in write downs by the end of next year, predominantly from defaulting corporate and consumer loans. The decline in consumer spending is already leading to rising loan-default rates. With more and more people losing their jobs, this problem will certainly aggravate. ECBs latest six-monthly financial stability review suggests euro-zone banks have absorbed barely 60% of losses estimated for 2007-2010. The spike in non performing loans will lead to tighter credit conditions, which in turn will undermine any tentative recovery. This rise in loan losses will certainly spill over to the economy; thousands of jobs in the financial service industry will be shed, adding to the already high unemployment and leading to a dangerous
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cycle. The IMF already predicted that the euro region will be the worst performing major economy next year as rising unemployment reduces consumer spending. There is a rising chorus in the financial industry that suspects that some of the major banks might be undercapitalized. In plain English, that means these institutions wont have enough cash to cover their losses and will probably need a bailout to survive. The region has already seen what a devastating effect a banking crisis can have. Last year, when credit started to dry up, banks quickly cut off funding, leading many of the worst-hit countries, such as Hungary and Ukraine, to tap the International Monetary Fund for multibillion-dollar bailouts. But more write-downs will soon loom and when this happen, it will be a dj-vu crisis! Accounting rules allowing banks to delay write downs and the murky High ratios show that bank s dont outlook for bank have enough capital to co ver fu tur e profits add an losses unwelcome layer of uncertainty. According to Audit Integrity, an accounting and governance research firm, most of Europes biggest financial companies employ aggressive accounting practices that may mask their true financial condition. Since banks dont have to write down loans until borrowers stop making repayments, European institutions have been able to delay the recognition of losses. But that strategy is not sustainable and those banks can only hide their problems for so long; with unemployment on the rise, loan losses will swell and banks will no longer be able to conceal their weak financial health from investors. The European Bank for Reconstruction and Development recently warned that Eastern European economies face a rise in nonperforming loans and corporate defaults severe enough to destabilize their already shaky banking systems. The Wall Street Journal recently published an article about this possible second wave of financial crisis. The article reports that nonperforming loans are rising across Eastern European countries and have doubled in the past year in Turkey, Romania, Ukraine and Albania. This lack of transparency and the lingering uncertainty about the extent of future losses are already
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choking off supplies of fresh credit to the economy, putting additional stress on the economy. There are signs that a massive credit crunch is still taking place. Recent credit data, specifically the collapse of the money supply (which is viewed as a sign of deflation), suggests that loans to non-financials are still contracting. In the graph below, if you look only at the aggregate numbers, you will mistakenly conclude that there is no credit crunch in Germany, the euro zones economic powerhouse. But take a closer look! Loans are being made primarily to low risk financial institutions, limiting the financing options of the corporate sector.
Germany s till s u ffer s fro m a ful l-blown cr edit crunch

Banks are providing loans to financial institutions, but not to corporations

While in the U.S. most credit is supplied by capital markets, in Europe corporations depend much more on bank loans. This higher exposure to corporate loans will accentuate the banking crisis. To make matters worse, European banks in general are less profitable than American institutions. In countries such as Germany, for example, basic retail banking is only marginally profitable, which means it will take longer for banks to build a buffer that can absorb future losses. European Governments are drowning in debt Another huge problem in the euro zone is the rising public deficit. The public debt of various nations is beginning to climb perilously close to 100% of GDP. Some analysts estimate that the protracted recession could push the debt levels in Spain to 90% by 2011. In Italy the numbers are rising to 116%, Greece to 109%, Belgium to 101% and France to 86%. Standard & Poors, the ratings agency, has already downgraded Spain, Portugal and Greeces sovereign debt ratings along with Ireland, which was downgraded twice in three months. With all these problems looming at the euro zone, the current levels of the euro are not justified by fundamentals. The market will soon correct the mispricing of the currency, which is clearly overvalued. The recent improvement in market sentiment has driven the euro up to the 1.42 area, as
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You can easily profit from the correction of an overvalued euro

T h i s r e c e nt r ec o ver y is not su p por ted b y f u n d a m e nta l s

indicated by the graph below. But weak fundamentals will ultimately be the catalyst of a correction in the euro. The CurrencyShares Euro Trust (FXE) is a great way to play the depreciation of the euro. If we are right about the dismal fundamental backdrop for the euro zone, profiting by going short this ETF is practically a lock. Recommendation: Sell-short CurrencyShares Euro Trust (FXE) and place a trailing stop-loss of 20%.