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The Global Spread Of Risk Aversion: NZD Heads South |
By:
Murray Nickel |
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The Global Spread Of Risk Aversion: NZD Heads South
by Murray Nickel
On Speculation And Bubbles:
The US sneezes and the world catches a cold: a credit squeeze, sub-prime mortgage woes and fear of what might unfold in the financial derivatives markets has hit the US markets over the last few days. And the ripple effects across the globe swing investors everywhere towards risk aversion and traditional safe havens.
The USD has been a traditional safe haven, but is out of favor at the moment. 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.
Two other obvious and traditional safe havens are the Swiss Franc (CHF) and spot Gold (XAUUSD).
Way back in August 2005 in my article "The Silence Of A Bursting Bubble" I covered the impending slide in the US housing market, and the flow-on impact on the finance sector - see also "Is Banking Tanking?" from early December 2006. At the end of the August 2005 article I noted that if the Fed was fleet-of-foot in managing a recession, then the "speculative bug" might move on from housing into spot Gold and cause the 3rd bubble in a decade (after technology and housing):
"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.
Heard Of The Carry-trade Game?
While on the topic of speculation, here's how the carry-trade game works in the forex market:
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.
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 "risk-aversion" becomes the catch-phrase globally, speculative activities like forex carry-trades are soon abandoned in favor of "safe havens" like USD, spot Gold, or Swiss Francs (CHF).
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 day NZDGBP has declined by 2.5% and nearly 100 points, so the NZD journey south is underway in impressive style.
If 100 points in a day is impressive, the prospect of a 900 point slide is simply mouth watering for a long-term forex trader. I anticipate NZDGBP forming a low in the 0.3000 to 0.3100 range. That's a long journey south from the recent 0.3929 high point.
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 hold a short position in NZDGBP.
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. Click here to get your own unique version of this article.
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Article Source: http://www.statssheet.com/articles/article54447.html |
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