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.
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.
Right now, however, there are two more obvious safe havens: the Swiss Franc (CHF) and spot Gold (XAUUSD).
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. It also covered the flow-on impact on the finance sector. 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? 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!
Of course, speculation is fueled by easy money, and a credit squeeze could kill off the speculative fervor for a long, long time. Well EVENTUALLY it probably will. But pockets of speculation should continue for a while yet - perhaps they'll be participated in by less and less of the worlds investors. 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.
Forex Carry-trades: Another Form Of Speculation.
While on the topic of speculative games, here's how the carry-trade forex game works:
A Japan-based currency trader borrows Yen at 2-3% per annum, sells the Yen (JPY) on the forex market and buys New Zealand Dollars (NZD). He earns 4-5% on his NZD holdings as interest rates in NZ are 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.
Carry-trade Casualty: NZD
Anticipating this move to safe havens added to the technical picture and short signals I had received recently for NZDGBP. When reviewing the NZDGBP chart yesterday, I came up with six technical reasons why NZDGBP should decline soon, as per the recent short signals my signal clients have received. Add in the fundamental picture above re the flight to safety, and it was a pretty convincing argument.
In the last 24 hours NZDGBP has declined by nearly 100 points (2.5%), so the NZD slide south has begun in impressive fashion.
While 100 points in one day is impressive, the possibility of a 900 point slide is mouth watering! I expect NZDGBP to bottom in the 0.3000 to 0.3100 band - a long way south of the recent 0.3929 peak.
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.
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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.
The complete article, including a technical chart and trading strategy for NZDGBP is available at www.TrendSensor.com/MarketBrief/
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