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.

Fundamental Analysis Of This Factor Is One Of The More Important

Traders in the Forex market generally rely on two basic forms of evaluation which are used to study the markets and predict price movement: fundamental and technical analysis. The idea of this" Big Picture" approach is that the strength of a nations's economy will affect the supply and demand for its currency, which will in turn affect the price of the currency.

Fundamental analysis is essentially the study of a nation's overall economy. On the other side of the" fence" is technical analysis where the currency price is assumed to reflect all news and fundamental factors, and the charts are the objects of analysis. This article will present some general discussion of both areas of analysis and summarize some of the more popular indicators used to predict currency movements. The core belief here is that prices tend to follow patterns and by analyzing past price patterns a trader can predict the future direction of the price. First of all, employing fundamental analysis strategies requires a basic understanding of supply. and demand, which is the most elemental force behind all financial markets. Several factors can have a strong influence on rates. Since the value of a currency comes from the economic health of its respective country, macroeconomic changes can have a significant impact on currency rates.

Some of the more significant are: politics, speculation, economic strength, economic projections, capital movement, inflation rates, interest rates, and quotas and tariffs. A country's capital flows are the net quantity of currency being traded through various investments: capital, fixed income market, equity market, etc. Fundamental analysis itself can be broken down into two broad subcategories: capital flows and trade flows. Trade flows measure the net of imports and exports of a particular country, and the resulting effects that such flows can have on a nation's currency. A Country which has a positive trade flow( more exports than imports) runs surpluses that serve to increase their currency while the opposite is true for the net importer. The reason that trade plays such a strong role in determining strength of a currency is that importers. are required to sell currency used to purchase goods and services which are exported.

Fundamental analysis of this factor is one of the more important. Some of the more significant indicators include: The Gross Domestic Product( represents the total market value of all goods and services produced) , Retail Sales( measures the total receipts of all retail stores) , Industrial Production( shows the change in production of factories, mines and utilities) , and Consumer's Price Index( measure of the change in prices of consumer goods) . Traders who perform Fundamental analysis study various economic indicators to evaluate economic strength. Although there are other significant indicators that may be monitored, these are the most common and provide a basic analysis of a country's economic strength and hence currency stability. A trader who utilizes fundamental analysis typically will have the report schedules on hand and closely monitor the reports as well as the effects they may have on currency prices. These reports are released on a regular basis by various government agencies and non- government organizations.

Following this for a period of time will help the trader determine better what impact on the currency prices each of the reports may provide. Candlestick Charts are widely used by Forex traders. Technical analysts quite often will use price charts and patterns to anticipate price changes in both direction and range. Consisting of a rectangle that indicates the opening. and closing prices( "candle" ) and the" wicks" that represent the highs and the lows, Candlestick charts allow the trader to find out a great deal about the market and to make effective decisions. Some of the more popular indicators are the following: MACD( Moving Average Convergence Divergence) consists of two moving averages. When conducting Technical analysis of the Forex Market, most traders utilize one or more technical indicators to evaluate market direction and strength. When one moving average crosses over the other one, a change of trend for that currency may be expected.

The two may be used together to confirm a trend change. Stochastics operates much the same way as the MACD. Relative Strength Indicator( RSI) provides information on whether the currency is overbought or oversold as well as whether it is likely in an uptrend or downtrend. Consisting of three lines( the middle line is a moving average) , this indicator can provide useful information on market volatility. Bollinger Bands are somewhat unique. Fibonacci evaluation can provide a retracement projection. Bond Spreads may also be useful as a LEADING indicator.

Unlike most other indicators, the Fibonacci analysis is a LEADING indicator yielding a determination of future market direction, not past. A bond spread is typically viewed on the difference between the five year and ten year bonds of two currencies. While both Fundamental and Technical analysis of the Forex market provide very useful information, they each. have their strengths and weaknesses. The limitation of using Bond spreads as an indicator is it may take several months, even over a year for the anticipated currency change to actually take place. The" Big Picture" of Fundamental analysis is good at identifying general long- term trends in price movement, but it does not give enough detail to provide entry and exit points for a trader. Combining both Fundamental and Technical analysis of the Forex market may give the Forex Trader the best balance in his trading plan.

Technical analysis on the other hand is typically more effective in predicting short- term trends( under three months) ,but it can suffer by being" blind sided" by significant price swings brought about by one or more fundamental factors. By monitoring various indicators on both sides of the" fence" over time, the trader may gain a better understanding of what will work best for his particular trading plan and style.