Well, what a week it was…
I’m sure you’re aware by now the Swiss National Bank’s shock decision to un-peg the franc from the euro sent the markets, and the trading industry at large, reeling last Thursday.
It came without warning and thumped experienced traders and respected Forex firms alike.
But what to make of it all?
In uncertain times there’s often only one place to turn to for solace: the old Monty Python sketch. And I don’t mean ‘always look on the bright side of life’!
Have you ever seen their Spanish Inquisition sketch?
They usually start with one character annoyed at the questioning of another declaring they “didn’t expect a Spanish Inquisition!”
The door bursts open and three red cardinals swoop into the room…
“NOBODY expects the Spanish Inquisition. Our chief weapon is surprise. Surprise and fear…and ruthless efficiency… and nice red uniforms”
I wonder if Thomas Jordan (head of the SNB) had been watching Monty Python last week. He certainly got the surprise and fear bit right!
So anyone affected by the event shouldn’t feel bad over a failure to spot it coming.
Sometimes there’s just no way of anticipating events like this, especially if they’re calculated to have maximum effect on an unsuspecting market. Because the whisper is the SNB knew exactly what they were doing. And if you follow the crumb trail and do a bit of sleuth-like thinking, do you think it could be true?
Was the SNB decision a deliberate market-hostile ‘shock and awe’ tactic?
One question asked by Bruce Krasting (ex-institutional Forex trader) is why they chose Thursday morning to drop the bombshell.
Firstly, as I reported on Friday, an SNB spokesman comforted the market just days before the shock announcement.
He said: “The minimum exchange rate must remain the cornerstone of our monetary policy.”
So had they not yet made the decision to un-peg? Or on a more sinister note, did he know full well what was coming and was simply luring the market into a false sense of security with his words?
Remember, his comments came just three days before the SNB took the exact opposite action. Can a central bank really turn-tail so quickly with no single high-threat event driving the decision?
And why make the announcement at 09:30 on a Thursday morning?
This is where Bruce raises some good points. He says the Forex market has two different risk profiles in place during the week. And depending on what day it is, we’re either in the high-risk period or we’re in the lower-risk period.
Monday to Friday gives you the lower-risk window of time. That’s when ALL the market players are on the pitch. You’ve got your longer-term position guys, but you’ve also got your short-term speculators. These are the guys like us who are trading to make money but have no permanent stake in the long-term outlook.
The short-term speculators make up the majority of the market and if you’ve been trading my own OMT strategy you’ll know how we always square-off all our trades by Friday evening. That way we’re removing our exposure to any market-moving events that might happen over the weekend when the markets are closed.
So by a process of elimination, Friday night to Sunday gives you your high-risk period: that’s when your access to the market is almost certainly shut off.
Sunday night has typically been the time when surprise announcements are dropped on the market. Not good if you’re holding positions for the long-term but at least the effect on the market at large is lessened: not so many traders will have taken their positions home for the weekend.
Did the Swiss time their torpedo to inflict maximum damage?
So without a transparent reason for doing so, it could be considered ‘bad-form’ on the part of the SNB to drop their bombshell on a Thursday morning, especially when a large part of the market – New York – would have been in position, but still asleep.
Why did the SNB not hang on until the weekend, when so many more traders would have been out of the market and emerged largely unscathed?
The positions held on Sunday would have been much smaller than on Thursday. The knee-jerk price movements in the various Forex pairs would have been lessened, and the effect on retail accounts would be to a much smaller degree than what we’re looking at now: brokers going bust, $300 million bailouts, and all.
Who’s feeling the pain now?
We had a quick round-up of the most prominent casualties on Friday… Alpari announced they were entering into insolvency, then backtracked and said they weren’t, and now they are again. KPMG were appointed as administrator yesterday.
FXCM got bailed out to the tune of $300m. And New Zealand outfit Global Brokers NZ Ltd went completely bust.
And over the weekend, according to Bloomberg.com, losses at the big currency dealing banks began to be tallied…
- Citigroup – ‘more than $150m’ Deutsche Bank – $150m
- Barclays – ‘less than $100m’
Even hedge-fund maestro Marko Dimitrijevic saw his 24-year-old fund Everest Capital Global and the $830 million it was sitting on wiped out in a day. Ouch!
So where do we go from here?
Like we talked about on Friday, the first priority is obviously to make sure your own trading funds are secure.
By now, most of the bigger brokers have emailed to reassure their clients they remain in good standing. But please do take the time to make sure your broker is FCA regulated (you should see their registration number on their website). That way, you know your money is always kept safe in a segregated client account.
What about the Forex industry?
For the Forex industry there is bound to be a wider knock-on effect, and there will be more developments still to come, but the markets are going nowhere. They’ll still be ticking away, ready to be traded like always.
Sure, we’ll see a few familiar old names disappear, and we’ll see some new ones step in to fill the void, but it’s only a process of natural selection we’re going through.
Any functioning system – whether in nature or in business – suffers unexpected blows from time to time. It’s what lets the strong rise to the top and culls the weak.
The Forex industry will emerge all the better for it, I’m sure. And I’ll keep you abreast of new information as it becomes available.
IMPORTANT: I’ll post timely new information to the Trader’s Nest Facebook page. Please pay a quick visit and click ‘like’ now before you forget. That way you’ll always be kept right up to date.
As for the global economy, there are sure to be more changes as the shockwaves filter through too…
Now the SNB have made their renegade move, what next? ECB to finally introduce quantitative easing? That’s what the focus of the market is on and traders are pricing their opinions into the market now.
So it’s a fascinating period we’re moving into and we’re fortunate to be able to observe and participate in the markets in real time.
The months ahead could easily provide the backdrop for stories of incredible fortunes made.
There’s a lot of talk at the moment about brokers taking losses, but remember, someone, somewhere was on the other side of those trades…
If FXCM took a $225 million hit on Thursday it means a lot of people got very rich in the blink of an eye too!
Just keep your wits about you as you go after your piece of the pie in the weeks to come.
Be Prepared: Market Moving Data Coming This Week (London Time).
Friday 23/01/15:
We’ve got quite a few big reports on the horizon this coming week but pay particular attention to the ECB activity on Thursday (interest rate decision and press conference that follows).
So let’s see what the market has in store for us next!
Until next time…
Happy trading!
