Is the worst behind us?

Today was another rather calm day for the markets. Libor rates continued to come down, stock markets rallied, Emerging Market currencies strengthened and interest rates continued to fall. Sitting back one might think that everything is good and it is "Safe to enter the water again".

Mexico. I like recieving positons in rates, specifically Mexico and Brazil. Today Mexican rates came off hard, primarily in the back end of the curve. This caused the curve to flatten as the shorter end was unchanged. I have been seeing alot of customers buying Mexican CD's as the implied rates offshore are considerably higher then the onshore rates. I will be watching short dates for more direction on the curve, if they stay around these levels then the curve will steepen out again, but I am leaning toward short end rates coming lower (as the currency strengthens) and a further flattening of the curve ensues.

Brazil. Interest Rates went higher today in a move that I can only clarify as strange. I think these were weak shorts getting squeezed out and I think that they will begin to move lower in the days to come. The currency is being effected by numerous flows. It seems the Central Bank is doing all it can to keep it from running away. There have been many newspaper articles written about the trouble of local corporates who speculated on a stronger Real only to have severe mark to market issues of late. The CB are well aware of this and doing everything in their power to provide ample liquidity to the market. Tommorrow is the fixing of the Nov BMF contract. The roll has gone exceptionally bid and I think it could be paid up by banks trying to accumulate dollars in an effort to "close out" these corporates. This is pure speculation. As such I think there is a good chance we see sub 2.00 in the next two days, after that I have no idea.

Euro. I think that the Euro reached a temporary top (1.3100 ish) and will begin to move lower testing 1.2500 by the end of next week. The market still needs dollars and I think this will be the catalist to move the Euro lower.


Good Luck and Good Currency Trading.

Fed Cuts Rates

The Fed came in today and cut rates 50bp as expected. Market pricing was split between 50 and 75bp. Today's move is in line with what the rest of the world has been doing, that is cutting rates in an attempt to shorten the economic slowdown we have been experiencing.

Their statement was quite clear. We will "monitor economic and financial developments
carefully and will act as needed to promote sustainable economic
growth and price stability."

The Fed clearly believes that the multiple policy initiatives that have been put in place will help to alleviate the slowdown which we are currently experiencing.

The Fed also said that it stands ready to ease further if economic and financial markets warrent as "downside risks to growth remain". I think that economic activity will remain soft and there is a good possibilty of further rate cuts in December.

I look for Emerging Markets currencies to improve going into the weekend but clearly we are not out of the woods yet.

Good Luck and Good Currency Trading.

The Fed to the Rescue

The Fed has just set up dollar swaps with Brazil, S Korea, Singapore, and Mexico. This took the dollar lower against all of these currencies.

Overall another step toward calming the waters and getting everyone lending again.


Well at least lets hope so.


CLICK HERE to read more.


Good Luck and Good Currency Trading

Laugh or Cry

Young Chuck moved to Texas and bought a Donkey from a farmer for $100.
The farmer agreed to deliver the Donkey the next day.
The next day the farmer drove up and said, 'Sorry son, but I have some bad news, the donkey died.'
Chuck replied, 'Well, then just give me my money back.'
The farmer said, 'Can't do that. I went and spent it already.'
Chuck said, 'Ok, then, just bring me the dead donkey.'
The farmer asked, 'What ya gonna do with him?
Chuck said, 'I'm going to raffle him off.'
The farmer said, 'You can't raffle off a dead donkey!'
Chuck said, 'Sure I can Watch me. I just won't tell anybody he's dead.'
A month later, the farmer met up with Chuck and asked, 'What happened with that dead donkey?'
Chuck said, 'I raffled him off. I sold 500 tickets at two dollars a piece and made $998.'
The farmer said, 'Didn't anyone complain?'
Chuck said, 'Just the guy who won. So I gave him his two dollars back.'
Chuck now leads the US bank bailout team.

Good Luck and Good Currency Trading.

Stocks move Higher

Stocks had a great day yesterday closing up almost 900 points. Alot of people were calling this the bottom and saying that we were now going to turn up....well I hope so (and think so) but don't be so quick to that conclusion. This to me was a relief rally. It happened across a few different assets classes. The Dollar moved lower. Emerging Markets strengthened and interest rates (in EM) came off. This is a good first step but I think we need a little follow through in the days ahead. I like that this all occurred after the terrible confidence number we saw today (38 expected 58 , I think were the numbers). To me those were to be expected. Equities were off considerable and that is how people judge there wealth. Sure you house price can fall, but as long as you can pay the mortgage (I know that is a big IF these days)it really doesn't matter, but when your 401k is falling in value people stop spending...fearing for their future.

I am looking for the Dollar to continue under pressure and for the U.S. yield curve to steepen out a bit. The Fed will cut tomorrow, probably 50bp which I do not see doing alot now, but would cripple stocks if they didn't and the Fed knows this.

Good Luck and Good Currency Trading.

Emerging Markets

Mexico. The Mexican CB announced they were going to pare back the sales of longer term bonds (in excess of 10 years) and increase the supply of shorter end bill auctions in an effort to increase liquidity. Interest rates fell aggressively.

The government also plans to borrow as much as an additional $5 billion from multilateral lenders by 2009 because the financing terms are ``particularly attractive in current market conditions,'' the ministry and central bank said.

Brazil. The Bovespa dropped below 30,000 for the first time in 3 years. This is occurring because of a weakening economy and talk that many local corporations have large derivatives losses sitting on their books. With less credit around and commodity prices falling Latin America is a prime area to sustain considerable losses. The CB has been in providing liquidity to both the spot and short date market. This has clearly helped, but when they stop this aggressive intervention I think the upside for this currency pair is substantial.

Argentina. Argentine lawmakers are set to begin debate on President Kirchner's proposal to nationalize the pension plans of the country. This was done in an effort to bridge the gap in financing the Government needs to continue paying their debt. Without this it is feared that Argentina will suffer a second debt default in the last 7 years. The market doesn't like this move and has driven their debt market to default levels. The currency has been weakening steadily the last few days and implied interest rates are over 100%. All in all this is a currency to stay away from.

Trades.

Long Usd/Brl and Usd/Mxn. If it not for intervention from the Central Banks these currency pairs would be higher. I think eventually we will in that direction.

Euro. I am totally square here but something is telling me to get long. I will not though, as I tend to trade this currency pair very poorly. I will however try and "scape" a few points during the day by attacking it from the long side.

Good Luck and Good Currency Trading.

Market awaits Fed Rate Cut

The Fed is expected to cut rates at their meeting this week as the markets are looking for help anywhere they can find it. I for one do not think it will have a big impact near term, but possible (I repeat possible) in a few months. This of course all depends on if the Banks and Financial Institutions begin to lend and we get some stability in the equity markets. Everyone I talk to is very concerned by the equity "crash" and are being more selective on where they will spend their money.

Here is a story from AOL.COM. It is a good read.

CLICK HERE

Good Luck and Good Currency Trading.

Another Week begins

Well here goes another week. I see no reason to expect anything different from what has occurred the last few. Stocks should remain unstable and currencies erratic with thin liquidity. I plan on trading this week as I have the past few, with a short term time frame and a small tolerance for losses. Here are a few thoughts before the open.

I look for the Euro to do better during the course of the week. For no other reason then it has been beaten up a bit lately. This is going against the trend so I will not be taking a large position and I will not run it long if it starts to go my way.

Latam America. I expect further weakening in this region as the week progresses. I think that Argentina has the biggest amount of upside in the region as it has not weakened of late as the Central Bank has kept it under control (with the interest rates taking the hit). Over the last two trading sessions the spot market has weakened by five big figures, telling me there could be more to come this week.

Overall get ready as I think this wild ride is not close to being over.

Good Luck and Good Currency Trading.

Brazil

Here is an interesting commentary by an Economist Tony Volpon who is located in Brazil. The situation there is not good. The Central Bank is doing all it can to hold things together, but it isn't easy. Here is the perspective of someone on the ground.


The incomprehensibly bad timing of the decision to publish a government decree
allowing for the purchase of private sector banks by public sector institutions
annouced this morning has led to serious doubts about the quality of Brazil's
banking sector even as both Fin Min Mantega and Central Bank Pres Meirelles
assured the market that this is just a "preventive" measure.
The decision to do this can only be attributeed to a very bad error in judgement
given the hyper sensitive market environment or the fact that, ministerial
claims notwithstanding, there are in fact problems in the Brazilian banking
system.
Given the massive moves seen today, especially in interest rate markets (which,
unlike the much more commented stock market, really matters for the economy) the
morbid joke making the rounds is that if there were no banks broke yesterday,
there are today.
Of course none of this is a joking matter. While we cannot say with any
certainty that there are no problems in the banking system, the truth is that
Brazil's banking system is very concentrated in very large, well capitalized
banks. The recent market volatility, the likely hit as bad FX derivative trades
are unwound, and the credit losses that we will see as the economy slows will
certaily take their hits on our banks, but it is not conceivable that there is
now any type of systemic issue here, at least not even for the more pessimistic
likely scenarios.
The government has unfortunately not been very forthright about the real risks
that the Brazilian economy faces. Let us remember that there are key second
round elections to take place this Sunday. We can only hope they will be more
realistic afterwards. To still talk about 4-4.5% growth in 2009, as the Min Fin
still insists, does nothing but damage HIS credibility in a period where
credebility is a key necessity for fiscal and monetary authorities.
We see the panic and are running for cover. A lot of damage is being done, and a
lot of this is like a glass cup: easy to shatter, very difficult to put back
together again. The small glimmer of hope is the still on track normalization of
external credit markets. It is sad and unfortunate that we now have to deal with
this type of local bad judgement.

Good Luck and Good Currency Trading

Financial Armageddon

I just read a very good post on Financial Armageddon.com. It discusses Volvo, the worlds second largest truck maker, and how they "won just 115 European orders in the third quarter down from 41,970 a year earlier". WOW !

If that doesn't tell you that we are in a very bad situation no thing does.

CLICK HERE to read the post. It is well worth the time.


Good Luck and Good Currency Trading.

Latest Read

A few weeks ago I finished the book Sole Survivors of the Sea (Blue Jacket Books). It is by James E. Wise Jr.. The book is a series of short stories about sole survivors of sunken ships, mostly from WWII. The book appealed to me initially as it is usually what I read, a series of non fiction survival tales. In reality it was a bit slow with alot more technical jargon then I like. Clearly these were very brave men, doing some incredible things to survive, the book just never really grabbed my attention. If you are a history buff, especially about WWII this book might appeal to you.



Good Luck and Good Currency Trading.

Market comment to follow.

Latin America

Well today started like yesterday ended.....in a meltdown. But some serious intervention prevented a disaster from occurring.

Brazil opened at 2.5000 after ended the previous day at 2.2640. The market quickly traded to limit up 2.5305 before a serious intervention occurred in the market. Usd/Brl actually touched limit down at 2.2450 which in itself it quite amazing. Rates also came off very high levels as the central bank intervened in the forwards as well as the spot.

Mexico went through very similar movements before ending the day at the lows. Short dates have become quite managablewhich has enabled the curve to steepen with the short end doing all the work.

The "Big Dollar". I am becomeing convinced that the Euro is in for a relief rally heading into the weekend. I have cut my short and remain square. I will get small long tomorrow morning BUT will go home square for the weekemd.


Good Luck and Good Currency Trading.

Another Day, another Meltdown.

The market wasted no time in buying dollars yesterday. There was almost no currency spared when paired against the greenback. The Euro was trading sub 1.2900 when I walked in and continued to sell off throughout the session. Clearly the trend has been established and the Euro should be traded going forward from the short side. I have been short for a while but cut back on my position some what today. As I have said before markets do not move in on direction only and this market is no exception. Actually this market is exetremely prone to sharp retracements. As such I like to cut positions as they move into the money. This one is no exception. I have a 30% allocation and will add if it moves against me.

The Latam markets are a real mess. Liquidity is terrible and spreads are very wide. Brazil opened at 2.3700 (BMF) after a close yesterday at 2.2620. By days end we were limit up (2.3900) with the offshore market closing at 2.4200/4400. Interest rates were up 150bp in the back end with the front end "lagging" with only a 45bp move. Here as in Mexico the curves steepened out quite abit. Short end liquidity seems to be drifting back into the market. Today o/n traded at 20 points and t/n traded at 30 points. This is a good sign and a symptom of the squeeze from last week into this week. With the curve severely inverted market participants grabbed liquidity along the curve. This steepened out the curve and has now left Financial Institutions long cash day to day. I suspect that the market will continue flush and the front end of the curve will come off hard. Therfore a further steepening with the short end doing all the work.

As I have said previously, these are the craziest markets I have ever seen. Today there was a discussion on the desk that this is "Way over done". I was quick to point out, Why? Rational thought has no place in this discussion. Corporations are having big mark to market issues based on taking bets on the currency rather then doing what they were meant to do. This is only the beginning. There is more to come.

But what happens when all this is over. I think that rates in the Emerging Markets world have to come down in a big way. The global economy is fractured and will not heal overnight. It will also not heal with high interest rates. I for one to not expect Mexico or Brazil to hike rates at their next meeting as some have argued. A 25 or 50bp hike will not stop the run on the currency (see Huf who raised rates 300bp today). No one is enticed to buy the currency for an extra few bp's of yield, why, when the currency is moving 3-4% in a few hours!

Stay nimble and you will be in a better position to take advantage of these markets.

Good Luck and Good Currency Trading.

Latin America

It ain't pretty out there.

These markets are under continued and very steady pressure. Brazil and Mexico are leading the weakening trend but only because they are the most developed and had the most invested in them to start. I think the big reasons for this are

1. Commodity prices. They have been consistently trending lower for the last few months and as such currencies dependent on them have come off. Brazil, Mexico, Chile, Australia, New Zealand to name a few.

2. Over speculation by local corporates. Just reading articles on Bloomberg and the WSJ is enough to tell you that alot of local currencies leveraged themselves thinking that their local currencies would continue to appreciate. Alot of these trades had no thing to do with hedging exposures but rather it was outright speculation on the movement of currency. Now that the currency has changed direction the corporates for lack of a better word are F*cked! This becomes a self fulfilling prophecy, the banks that sold the currency products to the corporates know that they have a problem and begin to worry about margin calls (are we going to receive our money?) and such. Word starts to spread, hedge funds try to front run the market and this triggers margin calls which then force the corporates to close out their position (if they have the money to pay back the losses). All the while everyone is buying dollars.

Today the Brazil flirted with limit up for a good deal of the day and closed within spitting distance of the level. It the market was open another 30 minutes or so it certainly would have closed there. Mexico closed near the highs of the day also and I see little that will prevent the market from opening considerably higher tomorrow morning.

TRADES.

Remain short Euro. I am still looking for us to trade sub 1.3000 (we closed at 1.3070 ish yesterday) and think it will happen today.

Long dollars against all Latin American currencies. I think you start with Usd/Mxn, follow with Usd/Brl....do a little Usd/Clp and Usd/Cop for good measure. There is no reason to be short dollars in this region. Please remember that I am keeping my positions on the smaller side and will take profits quicker then usual as the market dynamics are changing quite quickly. No need to be a hero.

Good Luck and Good Currency Trading.

Paul Volker

In today's Wall Sreet Journal there was a very interesting article about the effect Paul Volker is having on Barack Obama's fiscal policies. Paul Volker the man credited with crushing inflation in the 1980's has been out of the spot light for many years but his reemergence in this election has many Republicans rethinking their vote.

The Obama-Volcker relationship continues to evolve, campaign advisers say. At the start, Sen. Obama sought advice from Mr. Volcker and other outside voices through his economic adviser, Austan Goolsbee, a 39-year-old University of Chicago professor. But starting with the demise of Bear Stearns Cos. in March and continuing today, Sen. Obama speaks directly and often with Mr. Volcker about the intricacies of the financial crisis and possible solutions. They've become "collaborators," as one aide puts it.

His discussions with Mr Volker are credited with his vision that the housing downturn would escalate into a financial crisis.

In a September 2007 speech at Nasdaq, Sen. Obama predicted that because of oversight lapses and abusive practices that cause the public to doubt financial results, "the markets will be ravaged by a crisis in confidence."

This was a direct result of conversations with Mr Volker.

I think it is very important to know who the candidates are listening to. One man does not run the country, rather it is a man who is capable of making informed decisions.

All in all a very interesting read.


CLICK HERE to read the article.

Brazil...A crisis brewing....

Local newspapers are talking more and more about the highly leveraged operations of the Brazilian Corporates. This is causing serious difficulties for the local economy and is weighing heavy on market liquidity and credit quality. Basically local corporates put on a series of trades that go poorly if the dollar strengthens against the Real. Market talk puts the amount at between 20-40 billion usd. Many corporates are being forced to close these transactions at large losses and most do not have the capital to pay these losses off. This is causing the dollar to move even higher. The biggest problem as with here in the United States is that the corporate credit worthiness is hard to quantify. As such are banks going to lend to these corporates to allow them to stay in buisness?

I think this all points to a weaker Real and lower rates in Brazil. I cannot see how they can raise rates in such an environment. I think the currency will take the hit here so my trading view is to buy Usd/Brl and to recieve rates in the two year sector.

I have a similar view in Mexico as corporates in this country put on similar trades and as such should have a similar effect on the economy...to slow it down. The Mexican Central Bank has already begun to intervene in the market selling dollars (unlike Brazil where they have not had to do that yet). The Mexican CB has sold around 9 billion of its 90 billion dollars reserves. I think this points to a much weaker Peso in the coming weeks and a steeper yield curve out to two years.

Also the dollar looks strong against the major currencies. Look for the Euro to break 1.3000 in the next week or so.

Good Luck and Good Currency Trading.

The Final Nail in the Coffin

I think that Colin Powell has delivered the final nail into John McCains coffin. This election is done. Having a man like Colin Powell come out and endorse you in such a positive manner should and will carry considerable weight. With just three weeks left before election day Mr. Powell has come out and taken away any doubt that Barack Obama can handle the office of the President. This, in my opinion, is further bad news for the markets. One of my favorite expressions is "Perception is reality" as such big business traditionally looks at Democrats as being bad for them. Barack Obama has come out and used the term "Income redistribution" and has made it clear that he intends to raise taxes on more wealthy Americans. Couple this with the high probability that the Democrats will also capture the Senate (they already control the house) and you are looking at a clean sweep for control of all three branches of the government. I believe that the Democrats will not only win this election....but win convincingly. As I said before this will be viewed negatively by the market now, BUT another favorite expression of mine is, "Sell the Rumour....Buy the Fact" ans I expect the markets to rebound (at least temporally) after the election.

I remember this happening after Lula was elected President of Brazil a few years back. The markets were in terrible turmoil. The currency was weakening, stocks were under pressure and the bond market had no bid at all. After he came into office, people realized that he wasn't as bad as expected and the markets turned around for an extended period of time. I hope that happens here, for now I will continue to trade very short term until a more stable market develops.


Good Luck and Good Currency Trading.

Colin Powell....on Meet The Press

Colin Powell, former Secretary of State for George W Bush, and advisor to the last three Republican Presidents is scheduled to appear on Meet the Press tomorrow morning. He has been "courted" by both candidates for months, looking for an endorsement. Talk on the street is that he may come out in favour of Senator Obama tomorrow on the show.

“It’s going to make a lot of news, and certainly be personally embarrassing for McCain," a McCain official said. "It comes at a time when we need momentum, and it would create momentum against us.”

This would be a huge boost to the Obama (like he really needs it) as it could sway any voters unsure of his foreign policy and national security credentials.

If Mr Powell does come out in favour of Barack Obama, it would be yet another nail in McCain's coffin. The markets, which many are saying are suffering PARTLY because of the expected win by Obama (and a whole lot of other Democrats in the House and Senate) could do worse in the coming weeks.

Senator Obama's plans for the economy are seen by Wall Street as being anti business and as such could stale the economy even more and for a longer period of time.

I suspect that Colin Powell will not come out with an all out endorsement of Obama. Also I think that the markets will continue to suffer in anticipation of an Obama win, but will rebound once he is elected in a classic "sell the rumour, buy the fact" scenario.

Keep your positions small and your time frame short.

Good Luck and Good Currency Trading.

Cooler Heads Prevail

Well the markets although not calm traded in a more reasonable manner today. Mexico was still the center piece of my world as short date rates remained extremely tight. The Central Bank came in numerous times to add liquidity and try to correct the situation. It helped a bit and from what my contacts at the CB said "We know the situation and are working on it". Hhhhmmm, I sure hope so.

Check back later for an update.....

Good Luck and Good Currecny Trading.

PANIC

Wow....what a day. One of utter panic and it is leaving me to think...What Next?

The meltdown was universal. Usd/Mxn started at 12.4000 and ended the day at 13.20.
Usd/Zar opened at 9.05 closed at 10.7800 ! This is an all time new high. Short date Mexico traded as high as 90% today. Hearing that the Mexican finance minsiter is looking to inject 40billion peso into the local market this morning (lets hope so). This will hopefully allow short dates to trade lower but how low I am not sure. From my conversations it sounds like a few Mexican corps may have defaulted and as such the market needed to cover those short dollar positions, both spot and forward. This of course is all speculation but from the market movements seems logical.

I think from a trading perspective you need to keep positions small and look to take profits and cut losses quickly. This is no time to be a hero.

Good Luck and Good Currency Trading.

U.S. Banks

At a meeting on Monday afternoon the Fed "suggested" that the Major U.S. Banks take a cash injection. The cash came in the form of the U.S. Government taking a stack in the Banks by purchasing preferred shares.

Here is and interesting article from the Wall Street Journal. Some seem to be not to happy, but eventually all went along for the benefit of the Economy.

It is a good and interesting read.


READ MORE

Good Luck and Good Currency Trading

DJIA Rebounds

Stocks had an excellent day today up over 11% on the day. This moved followed a similar move by Asian and European stock markets and coupled with Latin American markets all up similar amounts. So now we need to see some follow through and I think the only way we see that is to see some action coming out of the Central Banks.

Once again all the major market moving news began over the weekend. The news thou had little to no concrete details.

The CB's will use "All available tools to support systemically important financial institutions and prevent their failure" while also stating that

Financial institutions will "Have broad access to liquidity and funding".

This signals to me that another Lehman situation is not in the cards. I think the Fed learned from allowing Lehman to fail that the consquenses are worse then bailing them out. This is what really caused the confidence problem.

In Europe the ECB agreed to guarentee until the end of 2009 bank debt inssuance with maturites up to 5 years, allowed governments to buy stakes in banks and committed to recapitalise critiscal banks in distress.

Australia and New Zealand offered guarantees on all bank deposits

These are all very good steps and I hope enough to stabilize the markets. It looks to me as the risk is that markets get disappointed once specific details are released. Lets hope not.

Good Luck and Good Currency Trading.

Brazil lowers Reserve Requirements

The BACEN announced the third round of measures to address the tightening of cred conditions in Brazil. The BACEN announced the suspension of reserve requirements on time deposits and leasing companies.

This is a very positive reaction to the market situation and as such should be viewed as positive. Today the Bovespa was up 14% and the currency closed at limit down (2.1835 BM&F). Remember three days last week it closed limit up!

There are many that are calling for a 50bp rate rise on Oct 29. I am not sure that will happen but, if done, add to a positive reaction for the Real. Therefore I am currently short Usd/Brl at 2.2100(BMF). I have no level for T/P but will stop myself out above 2.2800(BMF). I think it is still to early to think we are out of the woods and as such would think the Central Bank would hold off on and rate rise.

Good Luck and Good Currency Trading

All is Well....

Markets are looking positive this morning as a combination of European and U.S. plans to restore confidence hit the news wires.

U.S. equity futures gained after the worst week for stocks in 75 years, boosted by the government's plan to buy stakes in banks and a Federal Reserve officials pledge to ``consider every option'' for restoring confidence.

This is the key restoring confidence. Nothing is more important at this time !

Financials, led by Morgan Stanley (up 34%) and Merrill Lynch (up 10%) are all up in pre market trading.

``The measures that they've said they're going to take are important,'' said Quincy Krosby, who helps manage about $380 billion as chief investment strategist at the Hartford in Hartford, Connecticut. ``When we say stabilize the financial system, we're talking about money flowing, banks lending. That's what the market is waiting for.''

It is very important to have a positive day today in stocks.

Emerging Market currencies should trade stronger today also. There is a call from locals in Brazil that we will trade back down to 1.9000 in the next few weeks. If a credible plan is announced, I think we could be there sooner then later.


Good Luck and Good Currency Trading.

G7, Lots of Statements.....No Details.

``We'll have some volatility for a while'' Paulson said. ``We need to restore confidence.

Truer words were never spoken. This Crisis is now all about confidence. Right now there is none. So far this G7 meeting is setting up to be a big disappointment. The markets needs and wants a concrete plan to get us out of this. So far we have heard

``The current situation calls for urgent and exceptional action,''

They pledged to ``take all necessary steps to unfreeze credit and money markets'' without detailing how that would be accomplished.

Great....Agreed.....but we need to hear what all the necessary steps will be!

I truly believe that everyone is aware of the severity of the situation. Stocks have lost over 40% of their value. That is people who are about to retire needing to put it off (if they can find a job). That is also people who have retired in big trouble. That is on top of the millions of Americans who have mortgages and car payments that they cannot afford. Where does it end !

We need to hear some concrete steps, starting with,

The Fed buying equity stakes in financial institutions.

``We're going to do it as soon as we can do it and do it properly and do it effectively and right,'' Paulson said.

Expect this to happen soon, it will also not involve the Fed being en voled in the management of the institution. They would be buying senior preferred shares of non-voting stock from the financial companies. This would be the quickest way to get money to the firms as well as the best way to protect tax payers. I truly believe that once the Fed puts tax payers money into these firms they will not allow them to fail.

Here's hoping the the G7 come out with a great confidence booster later today, I doubt it and as such expect to be in the office tomorrow to begin another long week.

Good Luck and Good Currency Trading.

G7....Stock Market.....and the Finacial Crisis.

Wow what a week. I have never seen volatility, driven by such fear and uncertainty as I have over the last couple of weeks. From my perspective the "market" is blaming the majority of the uncertainty on the Lehman failure. Any way you look at it the shareholder loses, but the fallout from Lehman bankruptcy is that financial institutions do not want to lend money to anyone who can fall into the same situation. Morgan Stanley, Merril Lynch, Wachovia etc etc etc. Why take the chance of lending money which you will never get back. Better to let it sit on your balance sheet and lend it back to the Fed overnight (at 0% in alot of cases)just in case the market begins to make a run on you.

As all the talking heads are saying, this crisis will stabilize once banks begin lending to each other in a meaningful and consistent way.

Yesterday a meeting of the G7 convened in Washington, the first statement came out as follows.

``The current situation calls for urgent and exceptional action,'' the finance ministers and central bankers said in a statement after talks in Washington yesterday. They pledged to ``take all necessary steps to unfreeze credit and money markets'' without detailing how that would be accomplished.

Notice the last line WITHOUT DETAILING HOW THAT WOULD BE ACCOMPLISHED. The market wants tangible solutions.

As Jeff Pantages, chief investment officer at Alaska Permanent Capital Management said

``They've seen what Lehman did and the repercussions, if you're a bondholder, you've got to feel better. If you're a shareholder, you're not so sure.''

This is what I said above, the government probably will not let another large institution file bankruptcy (see AIG, GM, Chrysler,Ford....)but will allow a takeover/merger at extremely low valuations causing great pain for the shareholder.

``We have taken a lot of actions,'' European Central Bank President Jean-Claude Trichet said. ``My experience of markets is that it always takes a little time to capture the elements,'' of the decisions taken, he said.

Paulson signaled his top priority is getting his plan to buy financial stocks running as soon as he can. ``This is a plan that I'm quite confident will work,'' he said. The Treasury chief also said ``we have more to do in the liquidity area.''

The American plan follows U.K. Prime Minister Gordon Brown's 50 billion pound ($87 billion) program that will partly nationalize at least eight lenders.

As for these statements I tend to agree with Trichet, there is no way the $700 billion Bailout program could be working already. The Treasury hasn't started an auction or bought one financial stock yet. But do you really want to be short Morgan Stanley at $3.00 a share when the Federal Government has a vested interest in is surviving? Not me.

Stocks recovered at the close yesterday to post moderate losses for the 8th straight day. Can we go lower, yes. Will we go lower, probably. But overall valuations for these companies are at all time lows. In any other situation these stocks are screaming buys (I am not suggesting anyone go out and buy)so eventually as market volatility lessens and banks begin lending stocks will move higher again.

Check back later as I am working on a post about my thoughts on a clearing house approach toward bank lending and updates from the G7 meeting.

Good Luck and Good Currency Trading.

Dow Jones continues to sink....

Today the Fed cut interest rates 50bp in a coordinated effort with other central banks from around the world. Also participating were the U.K.,ECB,BOC,SNB and Sveriges Riksbank all cutting rates 50bp also. This follows the 100bp cut by Australia's CB the other day. The Bank of Japan expressed strong support for these policy actions.

This was encouraged by the IMF to make a coordinated response to the situation. This is very similar to the approach that the world had after September 11. A coordinated global interest rate cut happened on the following Monday. That day too stocks fell but ultimately things turned around. Although this situation is totally different, lets hope the same results play out.

The move by the Fed was widely expected as Bernanke said in his comments on Tuesday that the Fed would have to lower rates do to the negative impact ot the credit crunch and the financial market turmoil on growth prospects.

The market definitely wanted this and it was well received initially. At the close the Dow Jones fell 2% closing down for the sixth day in a row. This says to me that although lower rates will help it is fear and a lack of trust that is ultimately preventing the banks from lending to each other. I think it will be weeks before any positive effects are felt from the TARP program and until then we will be seeing weak economic numbers.

THE MARKETS-LATAM

Mexico. Total panic and position squaring took place today. We closed on Tuesday at 12.3000 and opened on Wednesday at 11.7500. Trading very quickly up to 12.9000. The coordinated rate cuts were announced and the market traded down to 12.5000. After that a short squeeze ensued. We traded up to 14.3000, followed by the CB of Mexico announcing dollar sales which began to drive the market lower. We traded as low as 11.9000 before settling at 12.3000. Sorry to bore everyone with the price action but I wanted to demonstrate the crazy nature of these markets. The CB also stated that they would sell 400 usd everyday the currency moved more then 2%.

Brazil. For the third day in a row the currency opened limit up. This caused the Central Bank to come into the market three times to intervene each time with positive effects. The currency closed off limit up at 2.3300 but the market remains ver choppy with thin volume.

Colombia. The Central Bank stopped it's dollar buying program. For the last few months they have been buying 20 mio usd per day to stem the currency appreciation. In the current environment they have wisely chosen to stop this program.

Argentina. The bond market is in a total tailspin. No bids for this market at all. They are basically at default levels and the implied interest rates through the forwards are at 100% in the near end moving gradually lower to 40% in the 12months. EVERYONE is looking to buy dollars, and there are very few to be had. This is a market to stay away from at all costs.

I tend to be a bit to optimistic. I never saw this type of a meltdown coming and have been surprised by its continuation. This reminds me very much of the 1997 Asian crisis. Many times I would hear people say "It cant go any higher" only to see the market paid and bid at that level. Panic takes over and rational thinking goes away. That is where I think we are now. No one is thinking rationally, therefore I think things will get worse before they get better. Anyone who thought that after the Bailout Package was passed the economy would take off and stocks would rise, didn't and doesn't understand what is going on. It will help but it needs time.

Euro. We have seen it bounce in recent sessions and I think it will continue to rise in the days/weeks to come. Again I think it will be on the back of a slowing global economy and the market realizing that we have to issue alot of debt to pay for this Bailout Package. I do not have a position in this currency as I do not have that strong of an opinion.

Good Luck and Good Currency Trading

The Presidential Debate

Is it me or is anyone else getting sick of the Presidential Election. Last night I watched the Debate and was disappointed by the candidates, both of them. Stop blaming everyone else for the economic crisis. why don't we blame the people who are at fault.

Lets start with the Investment Houses themselves. The firms over levereged themselves to generate over sized profits on a small capital base. To keep this formula you need to produce profits and have the public confidence. Who allowed this to happen? Washington ? Congress?? The House???.....How about the board of directors of these firms who signed off on the business plan and allowed it to happen. How about the stock holders who if they read the prospectus would know how these firms went about generating profits and how they funded them. At anytime the Board if Directors could have stood up and said, no more of this. Or said we need to cut back of the leverage we are using? Stock holders who were uncomfortable with the risk didn't have to own the stock. I do hold Stockholders much less to blame. Many of these shares were owned through pension plans and mutual funds and to research every corporation owned would be next to impossible, so the blame in this case should fall to the pension fund manager.

OK, maybe Washington should have had more regulation, but in my opinion the blame rest's squarely on the shoulders of the management and board of directors of each firm. They knew (or should have know) how money was being made and what risks were on the table. It seems to me they were just greatly underestimated.

Good Luck and Good Currency Trading

Another Day Another Meltdown

ECB’s Kranjec says Financial Crisis will be long
ECB doesn’t talk about negative growth at the moment but that growth is close to zero.

ECB’s Ordonez sees problems spreading to multinational companies.
ECB’s Quaden says had not anticipated how bad the financial crisis would be.

A few headlines from the ECB yesterday morning.

I am becoming convinced that rates globally will have to come lower ! The global economy is slowing drastically. Crude and commodities in general are coming off, therefore inflation will follow. Bernanke said that the Fed is ready to lower rates when needed. I expect at the next meeting (Oct29) the Fed will cut.....But time will tell

Not much else to add.

Good Luck and Good Currency Trading.

Bailout a bust for now....

The markets yesterday were chaotic. The dollar was king once again with the "Big Dollar" trading up against the Euro to the 1.3450 level. The Latam Currencies could not be sold fast enough.

Mexico. The day started with the currency at 11.3300. This quickly moved higher eventually topping out at 12.0000 (lots of trading up here). As stocks recovered so did the currency closing the day around 11.7800/8000 level. I think we could have put in a temporary top. I went home tiny short and will reassess tomorrow morning.

Chile/Colombia. Both currencies weakened against the dollar in a steady fashion. These are two currency pairs which are suffering from severe lack of liquidity. I will attack from the side of being long dollars. Current position is Long Usd/Clp and Short Usd/Cop. Dollar neutral. No real reason for this, but a "basically" hedged position.

Brazil. UGH. The dollar was limit up for most of the session with the BMF contract pinned at 2.1920. Offshore trading was reported at 2.2200 but once we hit limit up only very small size went through. Risk aversion and a horrible Stock market (limit down today also), at one point down over 15% make this a currency one should only short. My current position here is short Usd/Brl. I know I just said the opposite, but I am looking for us to open lower tomorrow morning as the Stock markets recovered late in the session. This is a position I will exit tomorrow whether I am in the money or out.

Argentina. No liquidity and massive spreads. I am small short dollars which I buy back at the end of the week naturally. My 01 risk is next to zero. This is a good situation for this currency pair for now.

I think the market is reacting this way because the Economy is clearly weak and the Europeans seem unable to help their situation. There was talk amongst a few friends today whether the Euro will be able to hold together. I think it will as there is so much invested in it, but could this discourage Asia and Middle East, both currently looking at a similar setup, from pursuing this route in the near future. I think so.


Good Luck and Good Currency Trading

Richard Fuld Jr. Lehman CEO.

Today Richard S. Fuld Jr., the Lehman chief executive sat through a congressional hearing about the collapse of Lehman bros. The questioning was not pretty and was quite to the point:

"You made all this money by taking risks with other people's money," Rep. Henry Waxman, D-Calif., the panel's chairman, said. "The system worked for you, but it didn't seem to work for the rest of the country and the taxpayers, who now have to pay $700 billion to bail out our economy."

I must admit I think this type of questioning and accusations are wrong. Mr Fuld was paid to run the company and that is what he did. Sure the system worked for him. Mr Fuld worked hard got promoted and was able to negotiate a fine pay package for himself. If the board of directors at Lehman Bros didn't think he was worth it they didn't have to pay him. I really think limiting executive pay is against the American way. Work hard, succeed and you should be paid whatever the market dictates. This is kind of like the NBA not allowing 18 year olds to enter the league. If the young men are talented enough to play....let them. I do understand it is in effect "a club" (the NBA) and as such can make whatever rules they want for entry, but the American way is to let people find their way to succeed in whatever chosen field they want.

By limiting executive pay you could divert strong candidates from applying for these jobs. Again I use a sports analogy. In the U.S. we struggle to have a top level mens soccer team. In a country with 300,000,000 people I find it hard to believe that we cannot get 15-20 young men and train them to compete on the world stage. We can that is for sure but these young men can get paid a much better wage by entering other sports or careers. Soccer here in the U.S. just does not pay enough (and there are not quite as many female groupies) for these men to pursue it as a full time career.

Don't limit executive pay. Sure Mr Fuld should be blamed for the failure at Lehman. If he misled the public then he should be prosecuted. But don't punish him because he made alot of money. Remember this is America !

Good Luck and Good Currency Trading

It's the Economy, Stupid !

With all the talk about the $700 Billion Dollar Bailout by the Senate and the House, I think the market is missing a very important issue, THE ECONOMY IS SLOWING! Not just a little but in rapid fashion, so much so that it would not surprise me to see a 50bp inter meeting cut in the near future. The September ISM Manufacturing number published on Oct 1 showed a contraction from 49.8% in August to 43.5% in September. This number was much weaker then expected. The employment component declined to 41.8% from 49.7%. This should result in further declines in the overall employment rate and that of the manufacturing sector in coming months. The price paid index slowed significantly from 53.5% from 77.0%. This on the back of much lower oil prices. The Employment numbers released Friday were also pretty bad. Non Farm payrolls fell 159k in September against an expected fall of 105k. This included Good producing jobs which fell 77k and a decline in service producing jobs of 82k. Strength from export demand is fading and manufacturing growth will probably continue to slow. The reason for all these statistics is to point out the the economy is slowing broadly. I haven't mentioned Construction employment (down 607,000 since its peak 2 years ago) as everyone expects that to be lower.

The Fed has been saying that they are trying to fight a battle on two front, Inflation and a slowing economy. It seems now that the inflation battle is being won. Remember the prices paid index is down big and with employment falling sharply who has any money to spend. I walk from Grand Central Station everyday to my office. More and more store fronts are empty (forget my local downtown). With the news talking about failing banks, takeovers and the tremendous volatility in stocks, who feels confident enough to spend extra money these days?

This is the reason I think the Fed will begin to cut rates very soon. The cut will not be to stem the panic from the Credit Crisis. Nor will it be intended to help the Credit Crunch. It is simply to help get the economy moving again. The Fed has already been holding the Fed Funds rate below the 2.00% target for a week or so, so why not cut it and give a boost to the market.

Trades.

So if I am correct what will happen to the market?

The "Big Dollar". This is an interesting one. Lowering rates and the huge Bailout should put pressure back on the dollar BUT Europe is clearly having its own problems and is not moving as quickly or decisively to deal with them. As such I think this is a tossup and I prefer to be slightly short dollars but I say this with little conviction.

Latam/Asia. One of my rules of trading is "The Trend is your Friend". As such I feel no reason to be short dollars against any Latam currency. All closed very weak on Friday and I expect when I arrive at my desk they will be weaker.

I think it is going to be a very long week !

Good Luck and Good Currency Trading.

Europe is next for a Bailout plan...

With the U.S. $700 Billion dollar bailout completed attention has now turned to Europe to help their financial institutions. Our markets faired pretty poorly after the vote on Friday but I think that is more of a Buy the rumour sell the fact, senario. Aslo the realization has to be setting in that we have to pay for this and our economy is weakening at a rapid pace.

Yeesterday European leaders met to discuss ways to help the situation. The Group deceided that:

``Each government will act according to its own methods and its own means but in a coordinated manner with the other European states,'' French President Nicolas Sarkozy, who called the meeting, told reporters.

This comes as the initial stages of helping financial institutions begins to unravel.
Hypo Real Estate Holdings announced that a government backed (35 Billion Euro)deal to save the institution collapsed when banks withdrew their support.

Although European leaders are saying all the right things action is needed. As Laurence Boone, an economist at Barclays Capital in Paris puts it:

The statement on supporting banks ``is not a progress. It's the same as before the summit.''

I do not see how the markets take any of this as a positive come Sunday night/Monday morning. It looks like we are in for another long week.

Good Luck and Good Currency Trading.

Obama vs. McCain T-Shirt Throwdown

I just came across this You-Tube Video. I think it is interesting how this election has captivated the American People. No matter who you support, the message is get out and Vote.

Emerging Market Currencies under Pressure

The market is in full blown Risk Aversion. With the U.S. Senate passing legislation last night on the Bailout Bill I was expecting a slightly better opening to the market. But I guess all the "add-ons" were viewed as negative and the market got hammered pretty good. It does amaze me that Senators can say that they cannot vote for a $700 billion Bailout but can vote for a $850 billion one! The Latin American currencies led the way down.

Brazil. Brazil reported its largest monthly decline in industrial production this year. It fell a seasonally adjusted 1.3% in August. This increased expectations that the next move in rates will be lower. Economic growth is clearly slowing in Brazil and the U.S. rates need to come down. This will add pressure to the currency. We broke 2.0000 today (current level 2.0200) and it looks like there is alot more to go.

Chile. The Peso fell to its lowest level in three years. This was in part because of the Bailout (how are we going to pay for it ?)and the general lack of risk appitite in the region.

``The package announced here in the U.S. doesn't have as much to do with Latin America these days,'' said Aryam Vazquez, an emerging markets economist with Wells Fargo & Co. in New York. Investors in Latin America ``are more focused on the pace of U.S. growth in general.''

Mexico. Dollar funding was quite flush today in the short dates and the effect was felt in the Mexican forward market. Short date points that were trading at par just two days ago shifted hard to the right and traded at +35 per day. Using 1% dollar rates that implies 12.25% in the Peso.

I have very little on and am playing mostly defense at the moment.

Good Luck and Good Currency Trading.

Bailout Bill

U.S. House Republican Group says seeks to slash financial bailout bill by $250 billion from $700 Billion.

This just came across the tape and the markets are not taking the news very good. With an expected poor employment number do out tomorrow morning this is not looking pretty. I guess the U.S. Senate does not carry much weight !

I can just see Hank Paulson shaking his head now !!

Good Luck and Good Currency Trading

LIBOR

London Interbank Offered R ate

The definition is very simple, where banks are willing to lend money to each other. The reality is that a tremendous amount of loans are fixed using these rates everyday but currently little to no lending is going on at all. The rates which are set at 11:00am London time daily are sky rocketing. Moving interest rate differentials from discount to premium and in most cases tremendous premiums.

Let's take an example of the Euro ag the Dollar. In normal markets o/n dollar rates should be about 2.00%, the Euro 4.00%. This means that by being long Euro ag Usd you would earn (on the differential) on a daily basis (4.00% ag paying 2% for dollars.) In the current market where everyone is scrambling for dollars the Euro continues to trade at about 4.00% but dollars are trading at 8-10%. This now enables you to earn on te differential by being short Euro/Usd.

The LIBOR fixes are not even really representative of where the markets are. They are being fixed way below where any financial institution is willing to lend dollars. This really needs to be fixed to get the market moving again. If Banks are not willing to lend to each other, to consumers and to small businesses then the economy will crumble. You think things are bad now, I truly believe this is nothing compared to what can happen.

TRADES.

I am thinking that the Euro might begin to be a buy sometime real soon. If (when) this package goes through it will mean alot more supply of Treasuries in the market. I think this will lead to a severe steepening of the U.S. interest rate curve as well as and increase in inflation and a weakening dollar. This is more of me thinking longer term. I went home last night long small Euro. No real reason and it was probably ill timed if the Senate approves the Bailout Bill, but over the next few weeks I think there is a strong possibility for the market to move the Euro higher.

Good Luck and Good Currency Trading.

Dow Jones, FDIC and the Bailout

Some interesting commentary in today’s WSJ on the $700 Billion Dollar Bailout. Once again I refer back to the Main Street vs. Wall Street debate. James B Stewart writes an article that I basically agree with. He states that although he doesn’t like the Bill he supports it as doing nothing is far worse then doing it. He talks about the anger coming from Middle America against the package:

“I don’t believe anyone should be bailed out”

“Let overextended banks fail”

Both from Letter are to the editor in the WSJ. He raises an excellent point about revenge being the main driver of this rage. Rather then thinking about what is best for the economy (understandable) or the American people, they seem to be looking to extract as much pain as possible on the banks. Unfortunately it rolls back on the people in one way or another.

Look at the story of Grace Pace. Her husband invested in a local bank many years ago. Through the many mergers that have occurred she ended up with Wachovia shares. For her retirement years she has relied on 1/3 of her income coming from dividends from these shares. Now there is no thing. She is understandable distraught and I am afraid that this story is playing out all across the country. Quite frequently these shares are accumulated over years and reluctantly sold as ownership is seen as a source of pride for many people. This pride is costing many Americans dearly. We cannot go back, but we can attempt to fix the problem going forward to help alleviate the problem. This Bailout Bill, coupled with an increase in FDIC insurance from 100,000 usd to 250,000 usd (?) could provide stability to the markets.

Here are the Stories


BAILOUT UNPOPULAR

GRACE PACE

Good Luck and Good Currecny Trading

So who needs a Bailout Package?

The market rebounded close to 500 points yesterday and all without a Package. Amazing huh? Well really it is not. There were clear signs throughout the day that new deal will be reach, possible Thursday, but clearly to me one will be passed. President Bush as well as members of Congress (both Republicans and Democrat's) were on the tapes letting it be known that all hope was not lost. Also came a report that members of Congress's phones were ringing all day telling their representative to VOTE FOR THE PACKAGE ! I think this goes back to what I was saying yesterday. The average American doesn't understand exactly what is going on. They hear what is said on TV and except it as true. I believe that most people did not (and most still do not) understand the serious situation the U.S. economy is in. When they hear their congress man say that the package is to rescue the fat cats on Wall Street, to save their seven figure bonus they think it is true. As I said yesterday, without this bailout Main street feels this as much if not more then Wall Street. People felt the pain of the stock market drop on Monday. They also fear what lies ahead if no thing gets done.

As for the markets, the dollar did very well on the back of all this. The Euro and Gbp sold off aggressively as European markets look to be in the beginning stages of fragile markets while the U.S. quite possible is nearing the end. I have cut my Short Euro position and am now square. Emerging markets all performed well. Usd/Mxn and Usd/Brl opened lower and never looked back. Both stock markets performed well. In Chile, the Central Bank came out and announce that they would suspend dollar purchases (they were in the market buying 50 usd per day). This caused the market to open 13 big figures lower (547 against a previous close of 560). As trading went along it moved back to 550-551 and basically closed there.

One last note, in yesterday's WSJ it talked about JPMorgan raising capital to buy WaMu. It also stated how they raised a few billion extra and said,

Many investors, including J. Christopher Flowers and his old shop Goldman Sachs, are gearing up to bid for the masses of distressed bank assets expected to flood the market in coming months. Will JPMorgan be a buyer again?

I think this is a recurring theme "Don't panic"...."Now is the time to buy...not sell". This may or may not be true, but I think the important thing to remember is what I call the sleep factor. If you are worried about your position, be it Stocks, bond or currency, and you cannot sleep you have to much.

You cannot win the fight if you are not able to participate.

Good Luck and Good Currency Trading.