Thursday, September 18, 2008

Market Panic To Market Euphoria?

I'm not certain that euphoria is any wiser than panic, but I do know that the Forex world has changed.

The Fed, Congress and the Senate were meeting earlier this evening and are putting together what is touted to be a comprehensive plan to solve the ongoing financial crisis. Basically, by creating an organization to buy and then auction off troubled assets, the fear and uncertainty in the markets will be abated.

Why? Because pricing information will be visible during the auction process and sales to the Fed will happen from organizations that are not in desperate straights. This puts in a floor and establishes a market.

So, what does this mean with respect to Forex markets? If risk aversion is reduced then you can expect the Japanese Yen to be under pressure. What will that do? It will open up the floodgates to the carry traders.

Guess who's been blogging about accumulating carry trade positions during the recent turmoil?

In any case, you do have to watch out for various risks. The markets will overcompensate. They'll reverse. They'll be disappointed because the solution is not as comprehensive as everyone imagined it would be. Who knows?

Congratulations to everyone that has managed to keep some powder dry... but don't get caught napping, the fire sales will be over just about when everyone wakes up and realizes that there is a fire sale -- or sooner! Just don't load up on too much of anything, because somehow the market gremlins are always watching for this situation and they have ways of punishing the unwary.

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