Chaos and Currencies

10/11/2013 9:00 am EST

Focus: STRATEGIES

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

The market hates uncertainty and, currently, the ongoing political feud makes the overall situation very uncertain. The world is watching and they don't like what they see, cautions Mary Anne and Pamela Aden, editors of The Aden Forecast.

This uncertainty puts downward pressure on the dollar. The dollar index broke its two-year uptrend and it's approaching its mega moving average at 79.60. This shows the dollar is vulnerable.

This is being confirmed by the dollar's leading indicator, which has turned bearish. And since it has a long way to drop before it's oversold, it too suggests the dollar's drop will likely be a steep one.

The euro and the Australian dollar look the best so far. The Eurozone's engine is Germany and it's doing well. Plus, Angela Merkel's reelection was a vote of confidence for the euro.

The euro is now likely headed to 1.40 as its next target. And if the euro's able to break above that level, it could continue up to near 1.50.

The Swiss franc is also looking good. We like it, it's a safe haven, but since it's linked to the euro, we're staying with the euro instead.

The Australian dollar is totally bombed out, compared to just about every other currency. That alone makes it attractive, but there's much more.

The bottom line is, if China is doing well, then so is the Australian dollar. That's because China is Australia's biggest trading partner.

As you may know, China had been slowing down this year and many felt the economy was in trouble. This weighed heavily on the Aussie dollar, driving it down sharply.

But that's no longer the case. China's economy is recovering, especially its manufacturing sector, which means more demand for Australia's natural resources. That's now boosting the Australian dollar, and it looks like this will continue.

They'll be offering CDs in the international market, and they're going to set up an exchange for Chinese banks to do offshore business in a free trading zone.

More importantly, China is now selling oil in yuan instead of US dollars, which oil is priced in internationally. Russia is supplying China with the oil and this is a huge deal in the oil world. It could not only have geopolitical repercussions, but global reserve currency consequences as well.

Many believe these are China's latest steps in its plan to one day replace the US dollar as the world's reserve currency, and based on their ongoing actions, we'd have to agree.

The US dollar hit an eight-month low. It's turning bearish and it's likely headed lower. We now recommend buying the euro and Australian dollar, equally divided, using 25% of your previous cash position.

We also like the ETFs—CurrencyShares Euro Trust (FXE) and CurrencyShares Australian Dollar Trust (FXA). So, for now, our current recommended cash position is 55% of your total portfolio. Of that, 25% should be in the euro and Aussie dollars, and 30% in US dollars.

Assuming the bull market stays intact, which it likely will with the Fed behind it, wait for a better buying opportunity at lower prices.

This bull market has not yet had a speculative phase. Most bull markets do, and if Nasdaq breaks out into record-high territory, it'll also be a strong sign that the speculative phase is underway, which could drive stocks higher than most people expect.

Then the small caps would become even more attractive. That's because they tend to outperform during this phase. The emerging markets would also likely be top performers.

Many of these markets, like China and Brazil, have been beat down. They're currently cheap compared to the developed countries and they could make up for lost time, especially since the Fed is unlikely to be tapering any time soon.

US interest rates will stay low, which is positive for the emerging markets, making them more attractive. But like all of the global markets, they too are on pins and needles, waiting to see how developments in the US unfold. So until we get a green light, we'll stay on the sidelines for now.

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