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The liquidity crisis is unfolding - SocGen

FXStreet (Bali) - The liquidity crisis many had waited for is unfolding, notes Sebastien Galy, FX Strategist at Societe Generale.

Key Quotes

"The liquidity crisis many had waited for is unfolding. Theoretically it is an absence of speculators willing to absorb risk, triggering a self feedback loop first identified by Keynes (did my thesis on this).

"The Fed QE fulfilled this function of risk absorption as did foreign reserves buying long dated bonds. While they may be extending duration in the US searching desperately for yield it is not the case in non core euro while they stop buying or reduce eur holdings."

"The most illiquid asset is high yield credit (and its equivalent such as Greece) and it has stated its correction triggering an impact on equity and broad volatility which then becomes self-fulfilling. VIX reach the band of 30 40 or stressed regime. More broadly credit and liquidity are highly interlinked feeding on each other."

"The impact on FX of this risk reduction is to pressure the long usd position with usdjpy still the most at risk. For EUR, reserves needing to offload EUR and a widening of credit spreads should help keep the lid on eurusd and likely pressure it lower as we reach the European time zone."

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