Like Charles Dickens said in his famous novel The Tale of Two Cities, “It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness”. And that is exactly how it would be for many FX traders out there after the last few weeks. Its been another week of incredible volatility in FX Land and volatility can mean the best of times for a successful FX Strategy but it can also cause the worst of times if the market moves against your strategy. So for some they would have thrived through the volatility and displayed their wisdom and unfortunately for others it would have been a nasty and trying time where they well may have felt foolish.

If it’s any conciliation all investors great and small have there good runs and their bad runs as well.

The impending global slowdown has spelt bad news for many commodity linked currencies. The AUD, CAD & NZD were all down, with the AUD falling a whopping 5.5% against the USD last week. As one eloquent market commentator summed it up – “That is just stupid!!”

And that is pretty much the crux of it. The USD is stronger across the board against most major currencies. Indeed the USD hit a 7 month high against a basket of currencies in the past week.

Basically there is no decoupling – that theory, although probably weak to begin with is now well and truly dead. The Euro zone troubles are highlighting the potential for a global slowdown (and perhaps a global meltdown!) this has led to a sell off in most emerging countries equity markets and is now spilling over into their currency markets too. The rand, real, zloty, forint are all down over 9% against the USD in September. The Brazillian Real is the big surprise here – it’s interest rate is 12% - and with its commodity linked economy- it seemed to be a haven for investors till recently- but that hope has been shot too.

With only a few days left in September, markets will this week be eagerly awaiting an IMF statement regarding European Banks funding positions. The head of the IMF, Christine Lagarde spoke out earlier in the month denying a report that an internal IMF document stated that European banks were nearly US$300 Billion short of capital. Lagarde said that the IMF would conduct its own stress tests and publish the results by the end of September.

So all eyes will be on Europe again this week, with the right policy announcements they may be able to calm nerves but getting all those politicians to agree is never easy.  Expect more volatility and adjust your FX Strategy accordingly.

By Friday Fundamentalist, Published on 25th of September 2011
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