Thursday, October 09, 2008

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.


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

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