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Winning at Currencies Is All in Smelling the Fear

Thursday, 29 Jul 2010 04:13 PM

By David Skarica

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I am sure many of the euro bears are shocked by the currency’s rally to above 1.30 Thursday morning.

It’s not surprising to me.

There are some things we must realize about currencies. As we are on a pure fiat system right now, everyone can print and spend as much as they want with no consequences.

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What made me laugh about the dollar bulls calling for a euro collapse was that they were looking for the euro to collapse against the dollar. Like the dollar is some kind of safe haven with the insane policies of endless spending going on at the federal level.

What we must realize is that currencies, for the most part, are just floating abstractions that are linked to nothing. They tend to trade on sentiment.

An indicator I watch is the Daily Sentiment Index, which tracks the sentiment about currencies by traders.

When the consensus is too bearish, you want to buy. When it is too bullish, you want to sell.

Last autumn, when the U.S. dollar was falling, the sentiment index saw a low reading of 4 percent. Not surprisingly, the dollar bottomed and saw a huge rally in early 2010.

The sentiment on the euro then hit 3 percent in May 2010 right before the euro really began to rally big time.

Because there is really no fundamental backing behind most of the currencies, you must buy them on bouts of fear and declines.

The euro saw such extreme sentiment back in May and rallied.

I would not be surprised that — after a short-term pullback — it continues this rally to the 1.35 to 1.40 range.

Remember, when it comes to currencies: buy during negative sentiment.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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