Credit Crunch 2 - Now even crunchier

22 October, 2007 (10:36) | Journal | By: Colin McGinley

The market action today reminds me of the same dynamic that we saw at the start of August when the credit crunch crisis was getting into full swing. We have the yen moving strongly, especially in the crosses against the euro, sterling and New Zealand dollar.

My understanding of the market action that we are seeing is: turmoil in the US stock market causes the carry trade (especially in yen) to unwind, which results in losses for those doing the unwinding. To make up for it they decide to close out profitable positions (in pairs such as EUR-USD, GBP-USD and AUD-USD).

As part of the risk aversion sentiment there is also a flight to safe havens (with the US being probably the biggest and most recognisable safe haven), so money is brought back to the US from both risky locations (all those emerging markets) as well as more main stream ones (Europe, UK, etc).

It is for these two reasons that there has been a big drop in euro and sterling so far today.

I had a resting stop loss in place on my EUR-USD positions at 1.4220. This stop loss was hit before I checked the charts for the first time this morning. In hindsight I should have probably bumped the stop loss up to around the 1.4240 level (to be around 100 pips off the most recent high). I still picked up a few pips on my two Q2 positions, just not as much as I would have liked.

My USD-JPY Q3 position is still open as price hovers around the 114 level.

Related Posts:

Comments

Comment from james
Time 24 October, 2007 at 10:28 am

My take on the wild shorting of other currencies is that speculators are betting on the G7 meeting uplifting the USD. What do you think?

Comment from Colin McGinley
Time 24 October, 2007 at 10:57 am

The G7 has now come and gone and it is probably not much of a surprise that is was another damp squib. All the market action now seemingly takes place in the run up to the meeting, as investors and speculators let their imaginations run wild as to what the politicians are going to complain about next. In the end, only the Chinese Yuan was singled out for a symbolic raking over the hot coals. Even this was almost done just for the sake of it, as the Chinese had sent none of their big shots to the meeting and thus there was never any chance of any meaningful appreciation in the Yuan taking place as a result of the G7.

The only other notable thing that I read about the G7 meeting was that Hank Paulson, the US Treasury Secretary, vetoed a planned statement from the European nations calling for a stronger dollar. I think this nicely sums up the US government’s position on the current dollar weakening: they want it to continue.

To that end I can only see it as business as usual for the appreciation of the euro, sterling, Australian dollar, etc.

I have also heard very little out of the IMF meetings that were to take place earlier this week. I guess there was nothing noteworthy to report on or else I’m sure it would have been picked up by Bloomberg, etc.

Comment from james
Time 26 October, 2007 at 7:48 am

Thanks for the insight. I agree, the G7 is more like a farce and circus show these days. What matters is how the majority of the speculators “think”, in this case they are betting on the USD going up, so those who know better can capitalize on this mentality.

Write a comment

You need to login to post comments!