From the April 01, 2010 issue of Futures Magazine • Subscribe!

Why we need a global currency

Until the recent financial crisis broke, there was a trend in world markets towards free market principles and a light touch regulatory regime. Political, social and economic factors had been leading to the creation of a world currency.

A devaluation of currency has occurred in what has been for many years the base currency for the entire world, the U.S. dollar. Because of the spread of American culture throughout the globe, this drop in the dollar may be a major step towards a globalized currency.

This becomes visible by looking at complex elements present in our financial markets, mainly through global equity indexes and leading companies within them. When compared, the outcomes of this combination of indicators tells us a lot about what is going to be happening in the future.

How to use it?
We use a set of modulating algorithms that forecast various elements of the market in different times. These forecasting models, when traded individually, consistently produce large returns for the investor who applies them to their trading regime, but when taken from a macro perspective, lead to a closer understanding of the position of the dollar and the movement toward a global currency.

As a portfolio manager, the two most important factors in watching the markets globalize and converge are watching volume and volatility, both macro and micro-economically. We implement this theory by charting the major volume movers on each major world exchange, and watching the volatility of those markets, and then comparing them to each other. For instance, the Hong Kong Market (HSI) tends to bounce back and forth between leading and lagging as compared to the Dow Jones Industrial Average and Nasdaq 100. However, major issues on the exchange tend to trade in tandem when sector volumes are compared. Technology and communications companies traded on HSI tend to have similar volume to communications companies traded on Nasdaq. Noticing this, we delve more deeply into the communications sector and find out what companies on the Nasdaq do business with companies in the same sector on the HSI or other foreign markets. Watching these patterns can give us a clearer idea of where money is moving. Watching the volatility of these companies gives us the idea of how much trade is occurring between the currencies of the trade.

This is true in the alternative energy sector, and is exemplified when examining companies that are foreign-based, but trade in domestic markets, or companies that trade both internationally and domestically. Examples of this are Sun Tech Power Holdings (STP) and Yingli Green Energy Holdings (YGE), companies that are traded on U.S. exchanges but have international exposure. Looking at the “Energy across borders,” you can see how these companies fare against both U.S. and international markets. It is important to monitor the volume to see how money has moved with these companies in tandem with movement in indexes.

These foreign-based solar companies have exposure to both markets, but trade domestically. When you research these companies and find out what raw materials they are using to produce their products, there is additional globalization.

This is consistent throughout the most voluminous and volatile markets throughout the world. Other examples of companies correlated with global indexes were found simply by doing research on the largest percentage gainers over a one-year period of time that fit our sector screen parameters, then comparing them to the HSI market. Overall, we can notice that sector leaders tend to follow the market indexes worldwide.

We can make money on this kind of analysis by placing trades in either the raw commodities that are being consumed by the most voluminous companies in the most volatile sectors, or by making sector-wide trades in the most voluminous or volatile sectors as compared market-to-market. An additional way to play this analysis is to trade index futures based on the market-to-market comparisons where the dollar is the denomination currency between the majority of the most voluminous or volatile companies within the markets.
Or compare FedEx to indexes (see “Follow the leader”). FedEx is a domestic company with strong brand recognition, regular high volume and volatility, and extensive international exposure that also is dependant upon jet fuel, which is tied directly to oil.

The chart shows that there are tight ties to sector leaders, indexes and even the raw materials used by the leader. For the most part, we find that the most voluminous and volatile sector leaders correlate with major indexes. Another thing to notice is how closely the major markets of the world have moved together (see “New world order”).

Applications of this theory have produced positive results and can be applied to almost any trading or
investing program.

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