Thursday, October 23, 2008

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.

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