Melt down in the US = Lots of Volitility + Potential Gains.

Posted on March 17th, 2008 by Yours Truly under Forex

What a spectacular Friday we had last week with the announcement of a pending Fed bail out of the 5th largest American investment banking company, Bear Stearns, which subsequently allowed another American bank, JP Morgan & Chase, to purchase the company for a fire sale price of $2/share ~ $236 million.Â Even more hilarious was that the buyout was brokered by none other than the Federal Reserve at this stunning low price as many analysts predicted that the company was still worth a good $30/share.

So how does this relate to the Forex world?

Massive risk in the market signified by the Dow Jones Industrial Average Volitility Index (^VXD) spiking to the 28.62 area caused traders/investors/speculators to bail out of their positions which was financed by the carry trade leading to appreciation in the Yen and Swiss Franc pairs.Â Such drops of 1,000 pips were noticed on a majority of these carry trade crosses stemming on Friday until Sunday night.Â Meanwhile, the U.S. Dollar continues its free fall into oblivion as seen by the US Dollar Index (^DX-Y) approaching a critical 70.000 support level shortly.Â Next week the market will follow the Bear story and will then quickly turn its focus to the FOMC rate decision on Tuesday.Â Most analysis were looking for a 50bp cut, but with Fridayâ€™s news now affecting trade, expectations have ratcheted to 75bp or even an unprecedented 100bp cut.

USD

So how can I capitalize off this?

I’d be looking to exploit further USD weakness especially pertaining to the commodity pairs such as the Canadian, Australian and New Zealand dollars simply due to the fact that Gold is approaching the critical $1,000/oz tag and Oil trading at record highs on an almost daily basis currently at $120/barrell.Â The risks on any carry trade based pairs are simply too risky at this moment in time and I shall be staying far away from those.

Potential Setups:

NZD/USD (Kiwi) on the Daily Chart