Wednesday, October 22, 2008

It's official: Currency Crunch 2008

I warned 2 weeks ago that a currency crisis could happen. It is now official! The loonie dropped below 80 cents this morning, and most currencies except the US dollar and Yen are sinking.

On September 25th, I was furiously buying US dollars at 96 cents and warning that the loonie could fall to 85 cents. I thought that I was being pessimistic!

Then on October 9th, as we broke below 85 cents, I warned that the loonie could go to 80 cents. I hate getting more bearish as things go lower, but one must adjust his/her views to take into account market realities.

I sold most of my US dollars in mid October (at 84-87), but I have been buying them back at around 83-84 as I saw the 80 cent target coming back in to play.

Now, if the market crashes, I think the loonie is going to go a lot lower. There are some support levels around 78.5 and then a bunch between 72 and 76. Any of these are fair game in a panic.

Does this currency crisis morph into something like in 1997/98? No idea, as this is beyond my comfort zone. Only thing I know is that in this environment, anything is possible. As Mohamed El-Erian of PIMCO said in September: The unthinkable is now thinkable.

Risk remains very high here despite the 40% bear to date.

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