Cross-ing Over in 2013: Foreign-Exchange Trades for a New Year

A new year means new foreign exchange trading ideas -- which some experts say should avoid the U.S. dollar.

Yes, the wrangling in Washington over the U.S.'s fiscal outlook makes for good drama. For more solid trading ideas in 2013, however, it's time to look past the "fiscal cliff-hanger."

Kathy Lien, a managing director at BK Asset Management, has compiled a list of trading ideas for the new year, and there is a theme: steer clear of the euro-dollar pair.

"For most forex traders, the most interesting currency pairs are the majors. However the trend of these pairs are generally determined by the market's appetite for risk and U.S. dollars, and not relative fundamentals," she wrote in a note to clients.

"Therefore we believe that the clearer and perhaps cleaner forex trading opportunities for 2013 are in the crosses," she added. Crosses are units that trade against units other than the U.S. dollar, and are often less-liquid than major currencies.

Lien's favorite idea is to buy the euro against the British pound. "For the first time in years, it finally feels like Europe's sovereign debt crisis could be in the rearview mirror," she says, thanks in part to actions by the European Central Bank beginning last July that helped restore investor confidence.

Before that, Lien says, investors were selling euro zone assets and buying the pound, calling the British currency a new safe haven. "Now that the risks are receding, the money is beginning to flow back into euro and we believe that this trend will continue in 2013," she says.

Another recommendation is to buy the Australian dollar against the New Zealand dollar. The two are generally highly correlated, but Lien thinks the Aussie will benefit from its closer trading relationship with China.

"One of the biggest "calls" by economists in 2013 is for slower growth in China, but we have seen Asia's largest economy outperform grim economic forecasts time after time," she said. "We believe the risk next year is for stronger and not weaker Chinese growth."

A rising tide from China should help to lift boats in Australia, Lien said, primarily because of its economy's strong reliance on Beijing. At the same time, she says, recent economic reports from New Zealand -- Australia's closest neighbor -- have been disappointing, and the country has a large current account deficit.

Like many traders, Lien likes buying the dollar against the yen. Japan's new prime minister is eager to jumpstart the economy, and he is pressing hard for new stimulus measures and a higher inflation target.

Yet the very popularity of this idea is making her cautious, and she recommends waiting for a pullback before initiating a trade.

The yen's weakness is leading Lien to one more recommendation: to buy the dollar against the South Korean won.

"Economists have grown extremely worried about the outlook for Korea's economy in recent months because the currency appreciated nearly 8% since the beginning of the year," she says.

Also, Korea has a major trading relationship with Japan, so "a weakening yen will also hurt Japan's demand for Korean goods, creating a double blow for Korea." The dollar has been weakening relative to the won's sharp rise, but Lien expects the pair to reverse course soon.

There you have it - a basket of ideas to take into 2013. Happy new year!

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