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Carry Trade Meltdown: Comparing August 2007 with October 1998

Thursday, 16 August 2007 17:43:05 GMT | Kathy Lien, Chief Strategist

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The losses in carry trades have exacerbated by a few hundred pips after the flat Philly Fed reading and continual tumble in the Dow. Even the VIX index hit a 2003 high. Everyone is comparing today’s move to October 1998, when the Yen crosses fell from 1000 to 3000 pips over the course of a few trading days.

October 1998 is the closest comparison to the current financial crisis. That was the year thatRussia defaulted on its debt and Long Term Capital faced major losses. At the time, the Federal Reserve responded with multiple interest rate cuts. Below a comparison of the most recent price action against the price action in October 1998. The moves over the past few days still pale in comparison to the moves that we saw nine years ago. Therefore now is not the time to increase risk. Big moves like today necessitate lower leverage.

EURJPY

October 1998: 2,878 pips

EURJPY1998