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An article on Currency Trading and related topics

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Risk Aversion Ripples Across the Globe: NZD Heads South

By: Murray Nickel

On Speculation And Bubbles:

As the credit squeeze takes hold in the US and the sub-prime/derivative markets unravel a swing towards risk aversion is rippling out across the globe.

Often in the past, when investors have fled to traditional safe havens, the USD has benefited. Of course in this case it's the US economy that appears to be verging on the brink of a recession, so one could argue that a flight to the USD may not unfold. Maybe not, but then again, maybe yes: old habits die hard and if the BRICs block (Brazil, Russia, India and China) stock markets start to get the speed wobbles, trusty old USD may re-emerge as a haven.

Right now, however, there are two more obvious safe havens: the Swiss Franc (CHF) and spot Gold (XAUUSD).

It's a long time ago that I wrote an article about the impending slide in the US housing market. In fact it was August 2005 that I penned "The Silence Of A Bursting Bubble". At the end of that article I wrote:

"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.

He pockets the 2-3% rate differential. Meanwhile the combined buying activities of all these carry-trade speculators drives up the NZD (and down the JPY), so he pockets further gains. But if the NZD weakens, that 2-3% margin is quickly lost and our speculator friend is left frantically trying to close out (cover) all his short JPYNZD positions. To do this he buys JPY and sells NZD, which simply adds fuel to the fire and further accelerates the decline of the NZD.

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.

NZD Heads South:

Since New Zealand has some of the highest interest rates within the "stable", developed countries, it is a key target for carry trade speculation. If the carry-trade business unwinds rapidly, the NZD will fall against all major currencies. My systems have recently thrown three short signals for the NZDGBP pair, and my signal clients currently have a short NZDGBP position open (as do I). These signals were based on technical analysis considerations, but when you add in the fundamental analysis outlined above, the case for a decline in NZDGBP becomes very strong indeed.

In the last day NZDGBP has declined by 2.5% and nearly 100 points, so the NZD journey south is underway in impressive style.

How far might it go? 900 points or more is a distinct possibility: I'm looking for a low in the 0.3000 to 0.3100 range - well down from the recent 0.3929 high.

For a trading strategy in this kind of situation, it pays to take a longer-term perspective as this trade could last 5-8 months and be one of those 4-5 great trading opportunities each year.

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://ezine-articles-planet.com

Murray Nickel is a mathematician, statistician, and professional trader. He offers a free trial of trading signals for global market indexes and index ETFs, spot Forex, and spot Gold. He also mentors traders aiming to succeed at trading global markets.
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