Aussie Dollar Climbs, US Dollar Falls (FXA)

Long-term investing can be confusing. It’s hard to step back and consider the big picture – details like government reports, Fibonacci indicators, and Ponzi-scheme progenitors can divert your attention away from important trends. We at Invest With An Edge look for larger explanations when appropriate. Today we offer a wide-angle view that could result in some nice profits – maybe soon.

Here is a sad fact: the US dollar is collapsing. As a result of profligate federal spending, the dollar is losing its stature as the world’s reserve currency. It’s no longer a matter of if, but when. Other events also indicate a crashing greenback – events that are both government and market-driven. Consider the following…

First, our national debt almost doubled in the last ten years. Bush, Obama, and a compliant Congress have pushed current obligations to over $11 trillion. Sadly, the last $2 trillion was added after January 1, 2009 – with trillions more in debt coming down the pike. Where do we get the money? China once gladly bought our T-bills. Now, with exports drying up, Chinese demand for dollars is shrinking quickly. Our debt-hungry Congress and Federal Reserve now make money the old-fashioned way – they print it. We’ve yet to see the full-force of that inflationary monster forged in our nation’s capital, but we will.

Second, interest rates are finally moving up again. The 10-Year Treasury yield is staying above 3% for the first time since last fall. This move looks like the foundation for a gradual climb up the charts. Home mortgages and business loans depend on low interest rates. Any recovery will be hampered if rates rise significantly. That does not bode well for the greenback. The Federal Reserve will probably create more funny money to keep rates at bay. Translation: more inflation.

Third, commodities are climbing again. Overpriced oil, precious metals, and other goods could not be sustained by slack global demand in a global recession. Now things are turning around. Today, NYMEX Crude Oil closed at $57.89. Gold is also climbing after holding above the $870 lows. Rising commodity prices are another indicator of a weakening dollar and more inflation.

So how do you play a falling currency? You buy a competing currency. One very attractive possibility is the currency of a commodity-rich nation down under: the Australian Dollar. Australia’s economy is driven by abundant natural resources. As commodities rise and the US dollar falls, the Aussie dollar should appreciate well. In addition, Australia’s higher interest rates and the relative government stability make its currency worth our attention.

We recommend CurrencyShares Australian Dollar Trust (FXA). This ETF tracks the Aussie dollar’s spot price on the Foreign Exchange. FXA has been trending up since March. A pullback is possible, but we think FXA is a good intermediate-to-long term play for the current inflationary environment. To profit from a declining dollar and rising commodities, go with FXA.