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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). 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." At the time I wrote that article in 2005 Gold was around $430 per ounce. 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? 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. Forex Carry-trades: Another Form Of Speculation. While on the topic of speculation and bubbles, here's how the forex carry-trade 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. They bank the 2-3% rate differential. Meanwhile the buying of NZD by all these carry-trade speculators drives up the NZD (and down the JPY), so they bank further gains. But if the NZD weakens, that 2-3% margin is quickly lost and our speculator friends are left frantically trying to cover all their short JPYNZD positions. To do this they buy JPY and sell NZD. This simply adds fuel to the fire and further accelerates the demise 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. 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. 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 trade could last over five months and be one of those rare money-making trading opportunities that unfold 4-5 times a year and form the foundation of the long-term forex traders success. So it can pay to take a long-term perspective and give the market room to move as it zig-zags down. The alternative is to conduct a series of trades throughout the journey south. This can reduce trading risk, but may increase the risk of losing sight of the bigger picture during the perturbations encountered during the journey. The complete article, including a technical chart and trading strategy for NZDGBP is available at www.TrendSensor.com/MarketBrief/ DISCLOSURE: I currently hold a short position in NZDGBP.
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Murray Nickel is a mathematician, statistician, and professional trend trader. He offers a free trial of trading signals for market indexes and index ETFs, spot Forex, and spot Gold. He also mentors trend traders aiming to build consistent success at trading global markets. This and other unique content forex articles are available with free reprint rights.
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