Forex 4 Fun
Currency trading nuggets,
one dollar at a time.
How to Hedge
Your Grocery Bill
FX strikes back at the rising cost of Twinkies.
• According to the Bureau
of Economic Analysis
(BEA), consumer consumption accounts for
65% or more of the U.S. Gross Domestic
Product (GDP). This means that nearly two-
thirds of our entire economy depends on
consumers spending money. When Jane
Public stops buying because loss of employ-
ment, lower wages, decline of confidence,
or simply lower purchasing power of the
income received, GDP is negatively
impacted. Today, consumer purchasing
power is declining significantly. Bottom
line: The same monthly income just doesn’t
go as far today as it did a year ago, particu-
larly when it comes to buying our groceries.
As agricultural prices have climbed
much higher in recent months, consumers
are feeling the pinch. When the dollar’s purchasing power diminishes, the relative commodity prices rise. And when prices rise in
the exchanges, they also rise at the checkout
stand. If the monthly grocery bill is high, the
expendable income for the non-necessities
(items we can live without) declines and
negatively impacts the economy.
But have no fear, forex is here. There is a
way to hedge some of the rising commodity
prices and higher grocery bills within the
ered commodity currencies. These countries export commodities, and their
economies rely on the sales. When commodity prices rise, their economies do well,
and their currencies strengthen. Historically, when commodity prices rise, the U.S.
dollar typically weakens. When this happens, you might consider selling the U.S.
dollar to buy Australian dollars, Canadian
dollars, or New Zealand dollars.
Since it’s the longer-term rise and fall
of agricultural prices that ultimately
impacts prices at the grocery store, look
for confirmation on the weekly charts of
an agricultural index, such as the Nasdaq
OMX Global Agriculture Index (QAGR),
which began to rise in July of 2010. Notice
the correlation study comparing QAGR to
the AUD/USD in Figure 1. The correlation
has remained positive for nearly a year
and has maintained a correlation of over
50% for much of that time.
one mini contract of
the AUD/USD on
July 1 when QAGR
through its highs
would have generated over $1,500 in
the same time
frame. That hedge
would have taken
care of the increase
in grocery prices—
with $500 to spare.
forex spot market
over, this type of
hedge can be left on
for multiple months
if it is monitored
proper money management is in place
(read: set your
Now, who said
that you have to stop buying Twinkies?
FIGURE 1: As the correlation indicator (lower study) shows, from July 2010 to February
2011, as agricultural prices rose, so did Australia’s currency—a country rich in commodities.
The Canadian dollar, the Australian dollar,
and the New Zealand dollar are all consid-
How would this work in the real world?
Suppose you spent on average $500 a
month in groceries and saw your grocery
bill increase incrementally the same 50%
over eight months that the QAGR saw. You
would have paid approximately $1,000
more than “usual.” Meanwhile, purchasing
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