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Home | Finance | Currency Trading The US sneezes and the world catches a cold: a credit squeeze, sub-prime mortgage woes and fear of what might unfold in the financial derivatives markets has hit the US markets over the last few days. And the ripple effects across the globe swing investors everywhere towards risk aversion and traditional safe havens. While the USD is out of favor at the moment, it may return to its role of traditional safe haven if economic crises unfold in some of the many developing countries with impressively bubble-like stock markets. But there are two more obvious safe havens: the Swiss Franc (CHF) and spot Gold (XAUUSD). Way back in August 2005 in my article "The Silence Of A Bursting Bubble" I covered the impending slide in the US housing market, and the flow-on impact on the finance sector - see also "Is Banking Tanking?" from early December 2006. At the end of the August 2005 article I noted that if the Fed was fleet-of-foot in managing a recession, then the "speculative bug" might move on from housing into spot Gold and cause the 3rd bubble in a decade (after technology and housing): "If the Fed is remarkably fleet-of-foot they may just be able to avoid a nasty recession . but would that just lead to a third bubble this decade? Gold at US$1000 an ounce? No that's NOT a forecast! All I can say for sure is we're in for some interesting times ahead." Back then in 2005 Gold was at $430 an ounce - it's since been to $730, so maybe $1000 isn't so unobtainable after all? Yes, interesting times ahead indeed! In the midst of all the excitement about declining markets in the US and Europe, the press seems to have overlooked the fact that the China market index (SSEC) has just pushed to an all-time high. And this markets over-night response to the US declines of over 2%? A decline of 0.03%! Well maybe not ALL markets are freaked out by the concerns in the US. SSEC is currently near 4300 and could easily push into the 6000 to 7500 range before topping and crashing. SSEC and spot Gold are examples of markets that could still form bubbles, albeit with a much lower level of participation from global investors than the earlier technology and housing bubbles. Heard Of The Carry-trade Game? While on the topic of speculation, here's how the carry-trade game works in the forex market: Large, professional investors (apparently largely Japan-based) borrow Yen at 2-3% per annum, sell the Yen (JPY) and buy the New Zealand Dollar (NZD), earning 4-5% on their NZD holdings as interest rates in NZ are much higher than those in Japan. They pocket the 2-3% rate differential, and their NZD buying activity drives up the NZD and down the JPY - so they pocket further gains. This all works well so long as the NZD is rising, or stable vs the JPY, but if it weakens it soon wipes away that 2-3% rate margin and these speculators are forced to cover their short JPYNZD positions: ie they buy JPY and sell NZD to close out their positions. When global markets move towards risk aversion, the speculative arenas like carry-trades are abandoned in favor of safe havens like Gold, Swiss Francs or (traditionally) the USD. Down Under For The NZD: My TrendSensor trading systems generate buy and sell signals based on technical analysis of markets. My trading signal clients receive these signals and we currently have an open short position in NZDGBP. Add in the fundamental analysis on carry-trades covered above, and you have a pretty strong case for a short position in NZDGBP - or NZD vs any major currency for that matter. In the last 24 hours NZDGBP has declined by nearly 100 points (2.5%), so the NZD slide south has begun in impressive fashion. If 100 points in a day is impressive, the prospect of a 900 point slide is simply mouth watering for a long-term forex trader. I anticipate NZDGBP forming a low in the 0.3000 to 0.3100 range. That's a long journey south from the recent 0.3929 high point. This has the potential to be a 5-8 month trade and deliver a rare money-making opportunity, so maintaining the long-term view as NZDGBP wends its way south will be critical. The complete article, including a technical chart and trading strategy for NZDGBP is available at www.TrendSensor.com/MarketBrief/ DISCLOSURE: I hold a short position in NZDGBP. Article Source: http://www.articlewheel.com
Murray Nickel is a mathematician, statistician, and professional trend trader. He offers a free trial of trading signals for global market indexes and index ETFs, spot Forex, and spot Gold. He also mentors trend traders aiming to build consistent success at trading global markets.
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