2008 was a watershed for the financial markets: equity markets experienced a massive sell off and credit markets stopped functioning with bank lending coming to a standstill. Central banks had to intervene on an unprecedented scale.
Will the government and central bank interventions reverse the tide? Based on our analysis worse is to come: our biggest fear is that one of the governments of the G6 will default on its debts and that confidence in the financial system will plummet.
Olsen measures tick by tick market volatility: today, the short-term market volatility in currency markets is approximately 10 times higher than in previous years. This indicates that liquidity has declined by roughly 80 percent. At the same time, global capital flows have continued at the original pace or worse are actually increasing, because companies and investors have to rebalance their international exposure. In previous years, it was safe to assume that currency moves would be contained within a range of plus minus 20 percent. Based on our quantitative analysis, we expect price moves of 50% and more for G6 currencies in 2009. We expect that AUD, CAD, CHF and JPY will be beneficiaries and USD, GBP and EUR will be the losers…
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