TrendSensor. Com/ MarketBrief/ DISCLOSURE: I Hold A Short Position In NZDGBP

Category: Finance, Currency Trading.

The Speculation Game: 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.

Don' t be surprised if it swings back into favor as the search for safe havens continues, and especially if the focus of economic woes moves offshore- eg: to one of the many developing countries with overheated stock markets. The USD has been a traditional safe haven, but is out of favor at the moment. But there are two more obvious safe havens: the Swiss Franc( CHF) and spot Gold( XAUUSD) . It also covered the flow- on impact on the finance sector. Way back in August 2005 I wrote" The Silence Of A Bursting Bubble" which covered the US housing market bubble and the first signs of it bursting. At the end of the article I noted that: "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?

No that's NOT a forecast! Gold at US$ 1000 an ounce? All I can say for sure is we' re in for some interesting times ahead. " At the time I wrote that article in 2005 Gold was around$ 430 per ounce. Yes, interesting times ahead indeed! It eventually spiked to$ 730 per ounce and if I' m right about it becoming a safe haven for investors, maybe$ 1000 per ounce isn' t far- fetched after all? Of course, speculation is fueled by easy money, and a credit squeeze could kill off the speculative fervor for a long, long time. But pockets of speculation should continue for a while yet- perhaps they' ll be participated in by less and less of the worlds investors.

Well EVENTUALLY it probably will. Chinas stock market and spot Gold are two examples where speculation may continue and bubbles may form, but participation will be much narrower than in the technology or housing bubbles. While on the topic of speculative games, here's how the carry- trade forex game works: 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. Forex Carry- trades: Another Form Of Speculation. 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. 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. 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.

Down Under For The NZD: Since New Zealand has some of the highest interest rates within the" stable" , developed countries, it is a key target for carry trade speculation. 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) . If the carry- trade business unwinds rapidly, the NZD will fall against all major currencies. 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. While 100 points in one day is impressive, the possibility of a 900 point slide is mouth watering! In the last day NZDGBP has declined by 5% and nearly 100 points, so the NZD journey south is underway in impressive style.

I expect NZDGBP to bottom in the 3000 to 3100 band- a long way south of the recent 3929 peak. The complete article, including a technical chart and trading strategy for NZDGBP is available at www. 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. TrendSensor. com/ MarketBrief/ DISCLOSURE: I hold a short position in NZDGBP.