USD Drop: A Butterfly Effect
So here we sit and see that the USD has dropped and breached the 1.30 mark against the Euro. The question is why? I would have responded on this question earlier, but could not. Last Friday my oldest English Bulldog Patches (11.2 years) went into the doggy hospital, and she died on Monday. Until Wednesday I have been a bit of a vegetable as Patches was my first real dog that I bonded with. So I have been oblivious to what is going on in the markets.
So why did the dollar drop? Is the answer here? Or how about here? What about here? Or what about here? Notice how nowhere you will find the reason why the dollar dropped? I find that really odd! Of course some will say, “Oh its the huge deficits of the US”, or “This drop was long in coming and finally somebody did.” Great love the comments (NOT) as they still do not make it any clearer. Many now say that this is the longer trend, and the drop will be bigger.
I am tempted to believe that this USD drop was the result of a butterfly effect.
Last night my sister called me and asked how I was doing after Patches death, and then asked how my Latin America fund was doing (NOTE: for those that do not know my sister lives in Ecuador and she is my Latin America connection). I had no idea how my Latin America fund was doing because I had not looked at my funds, but was fearing the worst due to the dollar drop. I asked her why she was concerned. She responded because Correra won.
Correra is the butterfly effect that I think caused the dollar to drop and markets to come crashing. Many of you readers will be thinking, “huh, what the heck does Ecuador have to do with the rest of the world?” Quite a bit because Ecuador is dollarized and the USD is the currency of Ecuador. As said in the referenced article:
Ecuador’s bonds however have lost almost half their total gains so far this year after the Nov. 26 runoff election results.
Correra is a weenie, like his friends Chavez and Morales are weenies. To fully understand the scope of the problem you need to read the articles: (1, 2, 3) What surprised me a bit was that Correra won and I asked my sister what happened as Noboa was in the lead. She said about a week or so ago Noboa had a Howard Dean scream moment. That cost him the election.
Here is what I think happened to the markets:
- Noboa has a Howard Dean Scream moment shifting the electoral from Noboa to Correra. Correra a leftist has made many anti-capitalist statements including clamping down on the financial system, making investors nervous.
- With the vote on Sunday looming and Correra still in the lead some money people became very nervous and moved a large sum of money out of Ecuador on the Friday before. Who did the moving I do not know, but it could have been banks, hedge funds or very wealthy people.
- The monies were moved to Europe and the Euro in particular. I am guessing in a bigger picture sense the amount of monies moved were small (eg a few billion), but due to the urgency of moving the money it caused the dollar to drop across the 1.30 boundary.
- Traders see the drop across the 1.30 boundary sense that something is happening and jump on the bandwagon. After all traders *would never* panic as a herd.
- As more traders jump on the bandwagon the dollar drops and causes panic because of how fast the dollar dropped.
- Panic sets in among traders as many chart technicians in Europe Wednesday one week ago predicted that the markets will drop by a large amount.
- Traders begin selling equities locking into profits and their year end bonuses.
- More panic and people sell left right and center.
- Panic subsides and selling stops.
Many of you will be skeptical of what I am writing, and you should be! Tell me if you think I am off my rocker. The reason why I think these sequence of events did happen is because the traders were trigger happy and nervous. With Jim Cramer saying, “This is the best market ever”, I myself became nervous as traders always like to take a opposite viewpoint.
So does this mean the Dollar is on a slide? I think not! I think we are in a slow-down, but things are still pretty good.
UPDATE: The traders seem to think that the dollar will continue to slide, and while I don’t agree with it, the market is always right!
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6 Comments Add your ownSubscribe
1. Jason | November 30th, 2006 at 8:16 pm
Sorry to hear about Patches, Christian. Thanks for posting here lately.
2. Dylan Clayton | December 6th, 2006 at 4:50 pm
According to the CIA world factbook (2005 data) the ecuadorian GDP is about .25% of the combined US-Ecuador GDP and obviously, not much more of just the US GDP. I think it’s a bit much to say “that is the (sole) original cause.” But hey, that just illustrates our poor undestanding of complex systems. I’d even doubt if it was one of the larger reasons.
3. Smarter Duder than you'er | December 7th, 2006 at 7:07 pm
How about the democrats winning both houses and a lame duck president. Sad to say but republicans = dollar goes up, democrats = dollar goes down. go ahead look at history if you dont believe me!
4. Christian Gross | December 7th, 2006 at 8:01 pm
Smarter: I disagree with respect to the Euro, which was the focus of my article. Look at what has happened to the USD since the introduction of Euro. There is no pattern correlation of the USD vs the Euro with respect to the America elections.
Also the hit happened quite a bit delayed from the election results. If the slide was slow then I would have maybe agreed with you. But the hit was sudden.
Dylan: I think you are missing my point of the butterfly effect. Yes the ecuadorian GDP is not that big. But that a sudden effect can cause quite a bit of stir.
Grace Cheng (where I saw the action) talked about how quickly these things happened.
http://www.gracecheng.com/
She made comments like the following:
“Big market players have been hard at work today, having a field day running stops across all the majors. They took the opportunity to drive US dollar down across the board, with USD/CHF breaking support after support to a 3-month low, while EUR/USD rallied to a 5-month high. With liquidity drying up for the rest of the week, and even month, moves can become..
very exaggerated, hence, do actively monitor your positions if you have any open.
.”
and
“A truly magnificent breakout indeed, and one that is based on both..
technicals (option barriers played a role too) and fundamentals.
My guess is that big European players like hedge funds took the opportunity to run stops before US traders trickle back to work today (most will be on leave). As USD falls lower, more and more carry traders are forced to be stopped out, fueling the slide even more.”
This is what got me to thinking in retrospect that some trades happened and that started a sequence of events causing a drop in the USD. I found the timing circumspect because the actions happened during the last working days before the Ecuadorian election. When I talked to my sister regarding this possibility she said, “It could be a definite possibility since people with money are concerned that Correra will clamp down on the banks.”
5. Dylan Clayton | December 11th, 2006 at 4:58 pm
Thanks for the response.
I can see that the political situation in Ecuador might cause capital flight, both among the elite of Ecuador and among foreign investors, I don’t see how it can have such a huge effect on the US. The first issue is that to keep the ecuadorian currency pegged requires some amount of purchasing and selling of dollar holdings to regulate other market activity, we all know that. As Ecuadorian wealth moves out of Ecuador the central bank will either have to buy more dollars or unpeg themselves. so in the long term, there should be little effect assuming they stay pegged (except for the people who depend on services that get crowded out by currency holdings). Obviously we’re not talking about long term, but so-called butterfly effects don’t usually happen in the short term, they are never the only causal event by their very nature, and there have been much larger possible events recently. Smarter named our own election as one, I don’t agree with her/his analysis but it is a possibility and, seemingly to me, a more likely possibility. I don’t think you can nix the possibility of an effect because of our election just because it didn’t happen immediately, there is still one district that hasn’t been decided and we don’t exist in a perfect market where information travels freely so there should be a time lag for market effects of non-market events. I’m not saying that that this is the effect, just that I’m feeling realy unimaginative at the moment and can’t think of another even that happened recently (or might happen soon) that might have a similar effect.
Anyhow, ceteris paribus, if Correra lost I doubt we would have seen much different. And my main point has always been that in a complex system multiple causes cause any effect and any action is also the “cause” of multiple events. It is seeking for the “one cause” that we need to move away from since these systems don’t work like that.
I’m not offering a better system, just trashing the one we’ve got, hoping it’ll bear fruit.
6. poo | July 16th, 2008 at 10:48 am
“we don’t exist in a perfect market where information travels freely so there should be a time lag for market effects of non-market events.”
Maybe before internet time, result of the winning party was on yahoo, msn and any others as soon as it was reported.
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