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.

Often in the past, when investors have fled to traditional safe havens, the USD has benefited. Of course in this case it's the US economy that appears to be verging on the brink of a recession, so one could argue that a flight to the USD may not unfold. Maybe not, but then again, maybe yes: old habits die hard and if the BRICs block (Brazil, Russia, India and China) stock markets start to get the speed wobbles, trusty old USD may re-emerge as a haven.

But 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."

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!

The counter view is that speculation has been driven by easy money, and a credit squeeze will kill off the speculative bug for a long long time. I suspect that's true, eventually, it's just a question of when the bug will die? It's likely that pockets of speculation will continue awhile (Gold, China's stock market - SSEC Index?), but be participated in by fewer and fewer of the worlds investors.

Forex Carry-trades: Another Form Of Speculation.

While on the topic of speculation and bubbles, here's how the forex carry-trade 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.

As the flight to safety takes hold globally, activities like forex carry-trades quickly become spurned in favor of traditional safe havens like spot Gold, the Swiss Franc (CHF) - or even the currently unfashionable 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.

Less than 24 hours later and NZDGBP has declined by 2.5% and nearly 100 points, so the NZD journey south has begun in earnest.

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.

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.