One of my all-time favorite financial books is Roger Lowenstein’s seminal volume, “When Genius Failed: The Rise and Fall of Long-Term Capital Management.” The book recounts the rise and fall of Long-Term Capital Management (LTCM), a wildly popular hedge fund made up of an all-star team of Nobel-Prize-winning PhDs, central bankers, and traders. As the title implies, the venture eventually collapsed in the late ‘90s, and one of the primary catalysts of the collapse was a crisis in emerging market FX.
The ’97-‘98 EM FX crisis began in Southeast Asia, but eventually spread to larger and more significant currencies like the Russian ruble. In an eerie parallel to today, the ruble was particularly vulnerable to a panic due to debts built up after a war with a former soviet neighbor (Chechnya then, Ukraine now), an above-market managed exchange rate (recently abandoned by Russia’s central bank), and falling oil prices.
One of my all-time favorite financial books is Roger Lowenstein’s seminal volume, “When Genius Failed: The Rise and Fall of Long-Term Capital Management.” The book recounts the rise and fall of Long-Term Capital Management (LTCM), a wildly popular hedge fund made up of an all-star team of Nobel-Prize-winning PhDs, central bankers, and traders. As the title implies, the venture eventually collapsed in the late ‘90s, and one of the primary catalysts of the collapse was a crisis in emerging market FX.
The ’97-‘98 EM FX crisis began in Southeast Asia, but eventually spread to larger and more significant currencies like the Russian ruble. In an eerie parallel to today, the ruble was particularly vulnerable to a panic due to debts built up after a war with a former soviet neighbor (Chechnya then, Ukraine now), an above-market managed exchange rate (recently abandoned by Russia’s central bank), and falling oil prices.
Flashing forward to today, the ruble has been absolutely demolished. Russia’s currency has shed an incredible 14% of its value against the dollar in less than 24 hours, driving USDRUB from 58.00 to 66.00 this week alone. There’s no obvious fundamental catalyst for such a dramatic move; instead traders’ collective greed and fear is driving the ruble today. Where else can you find a currency that is capable of moving so much in just one day? Certainly not the EURUSD, as I noted on twitter earlier:
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