I want to take today to talk about a looming problem which could affect, and probably will affect the currency markets moving forward.  Last week, when the US was mulling over its 800 Billion Dollar stimulus bill, there was a clause in the bill which called for a “buy US only” stipulation for companies receiving the funds.  This specifically was related to the infrastructure part of the bill, repairing roads, bridges, building and such – and that all the steel, copper, tin, aluminum used needed to be manufactured in the US.  The clause was put in under pressure from many labor unions and interest groups that work within the mining and manufacturing industries.  Now, Forex traders know very well that idea like this, also known as protectionist clauses, do not help the economy of the country that has it or the countries that conducts trade with it.

Anyway, President Obama had said last Monday that this clause will be taken out as it is not “good for international relations and is exclusionary”.  Needless to say, the bill passed with the clause in it and many people missed that – partly because in the 1100 page document that no one read it was stuck on page 964 all the way on the bottom, and partly because everyone thought President Obama was good for his word.  Well, after a week of reading through this, Canada had realized that it was still in and used threatening language to let the US know that this was unacceptable.  At the G7 last week, the same concerns were thrown towards Timothy Geithner, the US Treasury Secretary and in Asia, there was much talk about instituting their own protectionist clauses.

Brokers trading the Forex understand how this can destroy economies and history can tell us how it prolonged economic turmoil.  In 1930, at the start of the Great Depression, the US enacted a bill by Congressmen Smoot and Hawley that called for the exact same thing.  Smoot-Hawley as it is known today is attributed by many economists as being the one single factor that kept the Depression going up until World War II. 

In a global economy the success always is reliant upon free and fair trade – yet when you begin to restrict trade by denying countries import access of their goods, you end up hindering growth.  President Obama must not have read the Bill he signed on that Tuesday three weeks ago in Denver – or he must have forgotten the promise he made to take out the clause.  His staff now says that “there will be measures in play to ensure that the protectionist clauses are not enacted” – then why put it in?  Those investing and trading the Forex have seen a rise in the dollar – and as I have been saying for a while, this will change.  It will change once the printing presses that are on 24/7 in the US are heard around the world – it will change once Japan and China say NO to lending the US any more money, primarily because they don’t have the money the US is spending, and it will change once the new Smoot-Holley is put into play.

President Obama is spending the weekend in California to try and ease the concerns of the US’s neighbors with a stint on the Tonight Show.  Watch the dollar this week – it might be giving off signs that it the traders are starting to wise up.  

It was fascinating to watch yesterday, as President Obama was signing the 800 Billion Dollar economic stimulus package, the US stock markets were falling – I guess the traders and investors on Wall street were not too happy with the idea of severe regulation combined with massive spending on nonsense. 

Forex brokers trading in the USD though had a different kind of a day.  The US dollar, while it should be falling based on all this spending that the government is doing, was rising – sharply in some instances.

The problem around the world is that there are problems around the world – and they keep getting worse.  Japan, for a while looking to hamper the strength of Yen to offset losses to the export business it thrives on, sobered up when they realized that their economy has fallen more than at any point in 35 years – which is scary because they are still feeling some effects from their 1990’s prolonged recession.  Those investing and trading in the Yen have been hit hard as the Yen has fallen to even the lowly Euro recently.

Speaking of the Euro, yesterday the EU got word from not one, but two rating agencies letting them know that the sovereign debt of many EU members states is in jeopardy of having a ratings cut.  This is not a shock considering that many Western European states are the primary debt holders for much of the Eastern bloc countries who have been hard hit as of late. 

President Obama had said yesterday, I guess to cover himself when this plan does not do what he says it will, that “the economy is going to get worse before it gets better” – in the EU’s case, Forex traders are wondering if it will ever get better or is there some major restructuring of the way they do things that needs to get done.  I expect the Euro to continue its slide.

I still think that Australia and New Zealand are the places to be right now.  Their exposure to much of the issues that are bombarding the European, Japanese and American economies are small and the yield potential is higher. Brokers trading Forex will eventually wise up to the fact the US has its printing presses on all day and all night trying to inject more and more money into the staggering economy – the Dollars status as a safe haven will eventually be eroded and a new king – or interim king until the US and Japan find their way – will need to be crowned.  I am telling you now to look down under for that.

With Japan in flux, Europe and England having new things pop up each day to bring down the mood and the US Dollar relying solely on name recognition at this point, I am putting my money with the Kiwis in Tasmania.  The downside is less than the others and the upside is tremendous.  Its not about technical’s right now but common logic – think about it, I know you all will agree.