The New Zealand dollar, despite being firmly locked in the grip of its longest and strongest bull market run ever, is frighteningly close to collapsing! When this happens, smart forex traders are going to make a fortune from the crash!

"Yes, I know I'm renowned for my contrarian opinions, but one thing you don't know about me is that I have been trading the global forex markets for over 15 years… and I KNOW when a currency is so 'overbought' that there are almost certainly no buyers left to push it higher!

This is very definitely one of those times.

However, the reasons in favor of a significant move to the downside don't just lie with the technical aspects of the NZ dollar; fundamentals come into play, too.

For example, the high dollar has hurt New Zealand's export community to such an extent that there is now a mass exodus of large businesses to 'cheap labor' countries like Thailand and China.

Secondly, the single largest catalyst behind the NZ dollar's bull run over recent years has been the rise in interest rates - specifically the Official Cash Rate (OCR) increases initiated by the Reserve Bank. Interestingly, after rising over three percentage points in as many years, the OCR may well have experienced its last upside move for quite some time.

The Reserve Bank has become increasingly desperate in its cavalier attempts to single-handedly stop NZ consumer spending 'dead in its tracks' - in particular, the six-year long bull run (alias consumer spending spree) in residential property. Accordingly, it has slam-dunked home owners with two groin-crunching interest rate hikes over the past six weeks.

The increase in interest rates, while hurting home owners and property investors, has provided a bonanza for offshore investors looking to park wholesale funds in high interest bearing accounts. Given that this scenario has been steadily unfolding over the past two to three years, it's fair to say that New Zealand banks are literally 'awash with money!'

WARNING! WARNING! WARNING!

"What took approximately three years to build (i.e. banks finding themselves knee-deep in offshore-sourced funds) could quite feasibly take less than three months to destroy!

Reading between the lines, the New Zealand Reserve Bank is subtly indicating that our currency exchange rate is now at levels that are both "exceptional by historic standards, and unjustified on the basis of medium-term fundamentals".

But here's the clincher…

The Reserve Bank Governor's choice of words yesterday at the Official Cash Rate rise announcement indicated that current conditions met most of the criteria under which it (the Reserve Bank) has said that it would intervene in the New Zealand currency market. I'm willing to bet that the only reason it hasn't intervened as of yet is because the US dollar is also under immense pressure, effectively underpinning our own dollar.

Having said this, how can you capture those pending NZ dollar forex profits?

Answer: SELL the NZD at USD74.80 with a short-stop at USD75.30.

Currently, the dollar is trading around NZD74.60, and you can easily expect another quick move to the upside prior to any regulatory "currency sell-off". One thing I CAN tell you though, and that's that the Reserve Bank of New Zealand has a massive 'short position' in a tight, 30-point band, right around the NZD75.00 mark, waiting patiently for the day when it can hammer the living hell out of that great currency of hours!

So, if you've traded forex in the past and can take a short position as recommended above, do it! I'm sure that it's the most profitable trade-in-waiting.

If you've NEVER traded forex before, please PLEASE don't do it now! It takes years and years to even just become an intermediate level forex trader! Go buy yourself some hard currency (US dollars) and sit on it for as long as you can BEFORE it drops beneath the USD68.00 mark. If and when it does, bring your stop-loss down to NZD69.35.

Happy forex trading:)

 

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