Today I want shed some light on the commodity currencies and the impressive rally we’ve seen lately…

As you probably know commodity currencies started rallying hard this past March (along with just about every other asset under the sun).

But in just the past few days, we’ve started to see a reversal. As of this morning, the Aussie dollar was around 81 cents. The Canadian dollar was at 90 cents. Even the Brazilian real gave back some of its impressive gains.

Now of course, there are several valid short-term reasons for why commodities should be pulling back. You can point to steel developments in China (see Chuck Butler’s comment below for more)…or the strong dollar stunting our commodity exports…or weak consumer confidence slamming stocks and commodities.

But notice: I said “short-term.” In other words, this is just a blip folks.

In the longer-term, I see this commodity currency rally lasting for at least the third quarter. I’ll explain why in just a moment.

First let’s take a look at how high the commodity currencies have soared in just the last few months. Check out the chart below.

As the Dollar Fell, Key Currencies Have Climbed

As you can see above, commodity currencies have been on an almost a straight shot upward trend for months…and I see that continuing.

Now of course, reversals will come in the short-term. In fact, my colleague Ashish is using this pullback to help his Global Currency Options subscribers make a tidy profit.

But in the long-term, the fundamental forces driving this commodity currency rally have NOT ended yet. Therefore, I’d say hold onto your long-term commodity currency plays.

Not to mention, uptrends like this don’t quickly change. Economies just don’t turnaround on a dime like speedboats. They’re more like huge cruise ships that turnaround extremely slowly. That’s why it’s always better to take the cruise and follow the trend rather than to get out too early.

All Three Currencies Are Still 17% Off Their Highs

Let me put this into perspective. Yes, these currencies have run up a lot but let’s look at it another way. How far off are they from where they peaked last? Are they anywhere close to those levels yet? Heck no!

In fact, I ran the numbers last week – before the recent pullback – and Australia was still 17.8% (unleveraged appreciation) off its pre-credit crisis peak! Brazil still has 17.4% before it reaches its former peak and Canada has 16.8% before it reaches its old peak!

Again, that was BEFORE commodities started pulling back in the last couple of days. That means these currencies are even cheaper now, especially if you’re a long-term buyer and you like to buy currencies for months on end or even years.

Trend Traders Eat Top & Bottom Pickers for Lunch

Here’s the truth: You have to be a REALLY great, usually professional, trader to pick tops and bottoms in the market. Most retail traders just don’t have the time or experience to time the markets correctly. This is why “top and bottom pickers” don’t last for the long haul and trend traders do in the retail market.

Trends last much longer than you (or even I) think. However, you should still trade in the direction that they are going….until they stop going in that direction.

If you think about it, there’s only one “true” turning point in a trend but plenty of places for traders to get “faked out” by thinking that “this is the one” all along the way. So you can “top pick” your account all the way to a zero balance OR you can hop on trends that could still advance another 17% overall. And there’s nothing that says that they couldn’t do more .

This is why I say trend traders eat top and bottom pickers for lunch. When you’re trying to pick a top and get stopped out, you have to reverse your position. In other words, you’re helping the trend traders who are playing the other side. That means you’re actually helping fuel the trend.

The moral of the story? Trade the trend until it ends…

Happy Trading!
Sean Hyman, Professor FX

P.S. Just to be clear: Yes, reversals happen even in a long-term trend like this. The right trader can take advantage of those short-term reversals as my friend Ashish is doing right now. (You can get details on his strategy here.) But if you’re a buy-and-hold type investor, I suggest holding on to your long-term Brazilian real, Canadian dollar and Aussie dollar bullish plays for now. They will pay off in the months and years to come.