With the global economic crises continuing, central banks worldwide are attempting to stimulate growth and loosen credit through monetary policy. The monetary policies being used currently weaken each country's currency. Weakening currencies equates to lower purchasing power and, in turn, inflation. Inflation, by definition, is an increase in costs usually defined by the Consumer Price Index (CPI) and Purchasing Price Index (PPI). Although CPI and PPI vary by country, there is a core or commodity-based items in all CPI and PPI numbers including energy.

Because pressure on commodities to rise is growing and concern of global inflation is increasing, commodities and commodity-based currencies are attractive. For the purpose of this report, the Great Britain pound (GBP) and Australian aussie (AUD) represent the commodity currencies and the euro (EUR) and Japanese yen (JPY) are the two counter currencies.

The British pound has a historical correlation to oil prices. When oil prices and oil companies' prices rise, British Petroleum (BP) and the British pound follow suit. Last month's article discussed the GBP/CHF's potential bullish sentiment as it formed a wedge. The EUR/GBP has shown increased demand for the British pound and decreased demand for the euro, similar to what was expected on the GBP/CHF (see Figure 1). Over the past few weeks, price continued to edge lower and may continue in this direction if the fundamentals at play remain consistent. The pullback could find resistance near 90.75 and then fall further. If the pair breaks support near 87, the next support level is near 82.50 - a potential move of 825 pips. Not only is this a significant move, this pair's pips are currently worth $1.45 per mini contract, making the potential move worth $1,196.00.

Figure 1 -- EUR/GBP Moving Lower, Experiencing a Potential Pullback

The AUD/JPY pair has a similar scenario. If inflation is manifest in the markets, investors often run to gold first. Japan currently has the worst fundamentals in the world. Just two days ago, I was talking to a friend from Australia and he said we don't hear a lot of bad news out of Australia because there isn't any. He felt the economy and housing are stable and employment is solid. If all of this is true, then this pair's fundamentals should be bullish. As shown in Figure 2, price reflected this bullish sentiment with a significant sell-off back to support. If support holds and the trend continues, a move back to recent resistance near 73 would provide a 440-pip move. Both of these scenarios need commodities to remain stable or rise with recent trend lines holding.


Figure 2 -- AUD/JPY Testing Support in a Strong Uptrend

Both of the above can be traded using the forex spot market or combing futures properly via futures by buying the pound futures (/6B) and selling the euro futures (/6E) for the EUR/GBP pair and by buying Australian dollar futures (/6A) and selling yen futures (/6J) for the AUD/JPY pair.

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