Brad Bechtel, a managing director at Connecticut- based Faros Trading, gave IBTimes his forex trading recommendations for 2011.

He recommends shorting the U.S. dollar or euro versus the Canadian dollar or Australian dollar.

Below are the reasons behind his recommendations and broad general trends he sees.

‘Debt-Monetization’

“Japan, U.K., the European Central Bank (ECB), and the U.S. are engaged in significant amounts of -- call it what you want -- quantitative easing, monetization of debt, printing money, however people want to refer to it -- that is going to devalue their currencies,” said Bechtel.

He said out of these four currencies, it is difficult to forecast which one will devalue the fastest.  Therefore, he recommends shorting it against the Australian dollar or the Canadian dollar.   

The central banks of Australia and Canada are engaged in monetizing their government debt.  Moreover, their currencies are backed by commodities like oil and gold. 

While Australia and Canada do face pressures on the housing front, these are secondary compared to the currency-devaluating policies of the U.S. and Europe, said Bechtel.

Furthermore, because the Australian dollar and the Canadian dollar have higher interest rates than the U.S. dollar and euro, they will pay investors the interest rate differential. 

Pressures Against U.S. Dollar

Bechtel thinks emerging markets' central banks will diversify their foreign exchange reserves out of the dollar and into currencies like the pound sterling, the euro, and the yen.

This will be positive for these currencies and negative for the dollar.

The main driver of this, according to Faros, is China allowing its currency to appreciate more rapidly in response to domestic inflationary pressures.

As China does this, other exporting emerging markets countries will in turn allow their currencies to appreciate. One, they will be able to do so without losing competitiveness to China. Two, they will need to do so in response to their own domestic inflationary pressures.

As all these currencies are allowed to appreciate against the dollar, their country’s demand for the dollar will diminish.

Carry Trades

Carry trades are popular strategies used by institutional traders.  This strategy involves borrowing (going long on) low-yielding currencies, typically the Japanese yen or the Swiss franc, and lending (going short on) high-yielding currencies like the Australian dollar.

Now, because the interest rate on the U.S. dollar is so low, investors executing the carry trade are shifting from the yen and Swiss franc as funding (borrowing) currencies and using the dollar instead.

As traders unwind their yen/franc denominated ‘legacy carry trades’ by buying back the yen and franc, these currencies will experience intermittent rallies.  Meanwhile, as they put on new carry trades using the dollar as the funding currency, the dollar may experience intermittent bouts of weakness.

Email Hao Li at hao.li@ibtimes.com