The State of the Emerging Markets Carry Trade:
"The Fund seeks to achieve total returns reflective of both money market rates in selected emerging market countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar. "
As it was leading up to Lehman, Wall Street firms were very reticent about their losses right up until the funds were closed. Because as soon as the rest of Wall Street finds out about losses, they mercilessly short all of the damaged' fund's positions and/or withdraw their funds, until it's forced to capitulate and liquidate positions. We saw it over and over again in 2008.
What we know right now, is the tip of the iceberg for who got bludgeoned this week.
FXCM is the biggest known casualty of this week's Swiss National Bank "Black Swan" event. This brokerage firm allowed small "investors" aka. gamblers to trade currencies using astronomical leverage.
"FXCM Inc., a major U.S. retail foreign-exchange broker, emerged as the biggest victim so far and had to be rescued by an emergency $300 million lifeline from investment firm Leucadia National Corp."
"FXCM was among several firms that fought CFTC efforts to limit leverage at 10 to 1"
"The limit eventually was set at 50 to 1, meaning an investor could borrow $50 for every dollar put in."
At 50:1 leverage, a 2% move in the underlying currency, wipes out all equity
Forbes: Jan. 17, 2015
"FXCM was one of those lobbying against the very regulatory change that might have saved the firm"
Where did all this 'hot money' go? Does anyone really know?
Swiss National Bank money printing since 2009:
With $400 billion in hot money just revalued upwards by 20% (at 1:1 leverage), we can rest assured that a retail currency trading brokerage was by no means the most impacted financial entity this week.
The blood is in the water and the liquidation begins Monday.
