This “compass” for the global economy is about to tell us where the global economy will turn next. We’re right around the corner from getting a reading on it.
What is it? The compass is the Australian dollar vs. the Japanese yen (AUD/JPY) currency pair. Why?
Australia’s currency is a very stock-market-sensitive currency. You can plot it over a chart of the S&P 500 and you’ll see a high correlation.
The Australian dollar is known to track copper very closely, too. You see, both of these (stocks and copper) tend to do best in a “risk on” scenario.
In other words, when the world is growing, more demand is placed upon the limited supplies of copper, and the price of copper increases. But when the global economy slows down and the demand backs off of the supplies of copper, the price of copper sinks.
3,981 People Received Millionaire Status Yesterday. Today is Your Turn. Get Your New Millionaire Success Kit 100% FREE. Click Here.
Copper is important to watch for two reasons. First, copper is in almost everything: cars, electronics, homes, offices, etc. It’s so woven into the fabric of our society that it is tracks the heartbeat of the economy. Second, Australia is a huge copper exporter. So as copper goes up in price, it’s good for Australia’s exporters and economy, which translates into more faith in their dollar, and therefore their dollar (AUD) goes higher.
However, the opposite also is true. If copper plummets, it weighs upon the Aussie dollar.
Now why the Japanese yen, too? The yen is known to prosper when the world is falling apart, and it’s known to “take it on the chin” when times are good.
The main reason this phenomenon happens is because the yen is typically the lowest-yielding currency out of the largest (G-7) industrialized nations. So when times are good, investors are “seeking yield” but when times are bad, they are “seeking safety”.
So when times are good, they buy a high-yielding currency like the Aussie dollar (which is almost always one of the highest-yielding major currencies out there) and they short the lowest-yielding currencies (like the yen).
Well, when times are bad, they have to reverse those positions to close them out. That means they have to close out that trade by shorting the Aussie and buying the yen. This is why the yen tends to get a huge boost when the world is coming apart at the seams.
Therefore, when you combine these dynamics in one pairing (AUD/JPY), you get a great compass for the global economy.
So when AUD/JPY is trending higher, things are good or getting better in the global economy, and it’s safer to buy stocks and commodities, etc.
However, when AUD/JPY is trending lower, then times are bad or getting worse, and it’s safer to buy more defensive assets during that time.
BUT…there are times when AUD/JPY gets stuck in a range when the world is in a transition. And that’s where we are right now.
The last “transition” took place over a year and a half, and then AUD/JPY broke out to the downside and tipped investors off that the global economy was worsening and to take shelter in more defensive assets.
That’s exactly where we’re at now: in another transition period. AUD/JPY has been stuck in a wide sideways range for three years. A breakout is imminent! Let’s take a look at it below.
For the World’s Sake…Let’s Hope the Breakout is Upward!
These sideways ranges typically go back and forth roughly five times before breaking out. Elliotticians call it an a-b-c-d-e pattern.
During the last range breakout, the pair went back and forth that many times and then broke out. While the range has taken longer this time around, it’s now completed five moves back and forth, too.
That tells us that in the upcoming weeks to months, we’re going to see AUD/JPY finally break out big-time! When it does, for the world’s sake, hopefully it will break to the upside.
If that happens, then you know the global economy is mending and it’s safer to buy riskier assets like stocks and commodities.
However, if it breaks down through the lower side of the range, then hold onto your hat…and get defensive.
Right now, I’ve got my Ultimate Wealth Report subscribers actually poised to handle things well no matter which way it breaks out. How?
Editor's Note: Join the 3.5% of Americans who are truly wealthy and financially secure.
It’s because I’ve got them in some stocks that benefit from global expansion BUT I’ve bought these positions at “fire sale” prices—well below their book values (liquidation values). Also, several of my positions pay a 4-5 percent dividend yield, which gives us a cushion, too.
You see, if you’ve got a 5 percent dividend-yielding stock and you hold it three years, you’ve made 15 percent just because of the dividends alone.
So I’m buying great assets that will benefit when the world grows again and inflation kicks back in. But I’ve bought them right—at fire-sale prices and yielding fat dividends. I’ve bought only some of the largest, multi-billion dollar companies out there that have billions in cash on their books. Therefore, we’ll weather the storm just fine either way.
But most people out there had better be praying for a breakout to the upside in AUD/JPY, because a downside breakout is going to be hard for them to maneuver through.
I’ve maneuvered successfully through many bear markets through the years, so I’m prepared for the next one should the breakout be to the downside. But watch the AUD/JPY pair and you’ll get a great gauge of where the global economy heads next.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
© 2013 Moneynews. All rights reserved.