The Mad Hedge Fund Trader Interviews Marc Chandler of Brown Brothers Harriman

Featured Trades: (MARC CHANDLER ON FOREIGN EXCHANGE)
South Korea iShares ETF
Singapore iShares ETF
Market Vectors Indonesia Index ETF
Thai Capital Fund, Inc.

1) Marc Chandler of Brown Brothers Harriman on the Foreign Exchange Market. My guest on Hedge Fund Radio this week is Marc Chandler, the global head of currency strategy at the esteemed Wall Street firm, Brown Brothers Harriman.

Marc says that the next big focus in the foreign exchange markets will be a strengthening US economy and another slow down in Europe.? After one last gasp, that could take the euro as high as $1.45, and a great shorting opportunity will set up that could take it as low as $1.10-$1.15 next year. We won't see parity until the Fed announces a convincing exit strategy from its monetary easing, which is some time off.

Strong US growth in Q4, 2009 and Q1, 2010 combined with a major European identity and debt crises in the spring prompted many to predict the end of the Euro prematurely, the spot trading all the way down to $1.17 and change. But then a combination of innovation and institutional reform and a bout of weakness in the US saved the day, taking the European currency back up to $1.40.

But its troubles are far from over. The US elections will remove much uncertainty from the dollar just when American growth is reasserting itself, opening the way for another down leg in the euro. A double dip recession, quantitative easing, and better news in Europe are now fully priced in.

Quantitative easing is virtually a sure thing, thanks to a weak US economy. Banks are earning a risk free 25 basis points lending their money back to the government, so money is not making its way it to the main economy. Corporations are cash rich and don't need to borrow, while small businesses don't fit into a de risking, deleveraging world.

A lot of the good news is already known for the Australian dollar, including the interest rate differential, the health of the banking system, the commodities boom, and exploding trade with China. The market is running a large long position, and the next piece of positive news, like another interest rate rise in November by the Reserve Bank of Australia, could trigger a bout of profit taking.

The currency war is a myth, a media concoction, and is just rhetoric to get China to revalue its currency sooner. We are not seeing the downward spiral that brought drastic measures, like the Smoot-Hawly Tariff Act of 1930, which enforced severe restrictions on international trade during the great depression. Still, the currency markets are an arena where nations slug it out to pursue their own interests. Marc thinks that if China really allowed a free float, appreciation is no sure thing, and in fact the Yuan might sink.

Global investors are cashing in on this conflict by buying emerging market equities and ETF's as a proxy for their currencies, such as in South Korea (EWY), Singapore (EWS), Indonesia (IDX), and Thailand (TF), which are often hard to buy outright. Local central banks have tried to lean against flows, so far, with no effect, some of which are now being driven more by fads than by serious fundamental research. This is planting the seeds for the next crisis.

Marc reveals his most valuable forex trading rules, including keeping tabs on interest rate differentials, monitoring global capital flows, and careful technical analysis, looking for the driver, the direction and the degree on the next move. The people who reliably make money over time are the more disciplined risk managers. You have to draw the line between a good risk/reward ratio and simple greed.

Marc has an undergrad degree from the University of Northern Illinois in history and a master's from the University of Pittsburgh in international political economy. He has worked as the currency strategist at HSBC Bank and Mellon Bank, moving up to his current post at Brown Brothers in 2005. Last year, Marc published a book entitled Making Sense of the Dollar: Exposing Dangerous Myths About Trade and Foreign Exchange. In his free time, he teaches classes at New York University.

To listen to my interview in full with Marc Chandler on Hedge Fund Radio, please click here. If you want to learn more about Marc's FX research product, you can e-mail him directly at marc.c.chandler@gmail.com . To buy Marc's insights on the basics of trading the foreign exchange market, please click here.