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."

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!

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 pocket the 2-3% rate differential, and their NZD buying activity drives up the NZD and down the JPY - so they pocket further gains. 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.

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:

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 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.