The USD keeps dropping! How far can it go? Well, it can go as low as it goes. Trend Following Forex traders will continue to profit from this slide. As a long term trend following forex trader, I am only really interested in what price is doing, not what it MIGHT do. However, I think it is very important to understand why it is moving up, down or sideways. Having this knowledge helps me to identify tops and bottoms by simply reading. As of this morning, our two open trades are up by 1,421 pips.  We didn’t get there by bucking the reality of the market.  We got there because I blend economic fundamentals with my Helix trend following system.   

With interest rates near zero and jobs data still not improving the Fed may resort to a second round of Quantitative Easing (QE), which in the long term CAN help the USD, but in the short term will reduce the relative value of the Dollar vs other currencies, energy, minerals and other assets.

What is Quantitative Easing? It may sound like some magical system but it’s pretty simple, actually. Central banks, such as the Federal Reserve (Fed) use Quantitative Easing to stimulate a troubled economy when traditional methods have failed. Traditional methods include reduction of various interest rates. Basically when a central bank implements QE, they just print money. That’s right. They just “create” money that didn’t exist before. (how cool would that be?)They use this money to buy various assets such as governmnt bonds, corporate bonds, mortgage backed securities, etc. When they buy these assets, they deposit this newly created money into the banks from which they purchased the assets. The banks in turn have this new cash available in their capital reserves to create new loans. The hope is that these loans will provide money to companies to for job creation, and individuals for purchasing new products and services from those same companies. Since the process of QE increases the supply of USD without changing the demand, it also reduces its value.

A weakened Dollar increases the cost of purchasing imports while decreasing the cost of our exports. This, in turn, makes it less profitable for domestic businesses to outsource, which in turn could (should) bring jobs back to the US.

This all sounds great. There are, however, several risks associated with QE.

1. First, by creating more money without it being backed up by new assets or new production, it reduces the value of the dollar and can cause hyperinflation. Imagine spending $15.00 for a gallon of gasoline or $10.00 for a loaf of bread. These are extreme examples, but you get my point. If hte banks distribute too many Dollars, their relative value drops.

2. Second, and most likely in my opinion, it just won’t work. the banks will simply allow this new money to sit in their capital reserves, and not distribute it in the way of new loans. In times like we face today, with increasing default rates, it is likely that banks will simply take the new money and sit on it.

What does all of this mean to trend following traders? It means that we continue to sell USD! We can’t worry ourselves about whether or not the monetary policies will work. We can profit from being short USD until QE starts to work, then get long USD. It’s really that simple. Either way, trend following traders will profit.