On Thursday 14th January 2015 at 09:30 an earthquake hit London and every other financial capital in the world. No buildings were destroyed and nobody died and anyone walking around London would have felt nothing but in the financial markets there was mayhem and devastation.
On this day and at that time the financial markets went into meltdown when the Swiss National Bank, without warning decided to renege on a 3 year promise that they made and had repeated just months earlier that they would defend the Swiss Franc and cap it against the Euro at an exchange rate of no worse than 1.2000.
No-one had anticipated this move. Not the banks, not the brokers, not the institutional traders, not the professional trader, not the amateur trader – no-one had thought this would happen or had even considered what would happen if the SNB decided to abolish the currency peg.
So what happened?
Imagine you were trading the EUR/CHF and at 09:00 on Thursday the 14th January 2015 you had a look at the charts and saw that the price was 1.2011. You know the S.N.B. wont let the price drop below 1.2000, so on your £20,000 trading account you go LONG (buy) the EUR v CHF at £15 per pip. This means if the price moves 10 pips in your favour you make £150. You know that if the price drops to 1.2000 you’ll be down £155 but this doesn’t worry you as you know the S.N.B. will intervene and drive the price up.
At 9:30 the S.N.B. abandon this policy.
The first thing you’ll see is nothing.
The price of EUR/CHF at 09:31 is the same as it was at 09:30. At 09:32 the price still hasn’t moved. As a day trader trading at home you check other prices. None are moving. Your platform has frozen. You’re not too concerned. You’ve seen platforms freeze before. After 5 minutes the price on some pairs are now moving but all CHF pairs are still frozen. You glance at your account balance and your blood runs cold. You stare at a zero balance where there was once £20,000. Its a mistake. It has to be. You’re on the phone to your broker. You can’t get through. You turn on Bloomberg. You stare wide eyed at the screen in shock when the breaking news flashing across the screen is that the 1.2000 floor has not been defended.
At 09:00 the price of EUR v CHF was 1.2011. When your platform resumes trading on EUR V CHF the price is now .8754. That’s a drop of 1,457 pips. This means you have lost £21,855 on that trade and you’ve been wiped out!! Its a similar story on all CHF pairs.
But its not only the armchair FX trader that’s lost.
UK online broker Alpari and New Zealand outfit Global Brokers collapsed, while shares in Forex Capital Markets (FXCM) plunged more than 90 per cent, after it announced it was facing losses of $225 million.
Citigroup and Deutsche Bank are estimated to have lost in the region of $150 million apiece, while one veteran hedge fund, Everest Capital, is to close its $830 million Global fund after it was wiped out by the move.
But all this is history and we can learn from history.
Since the January 2015 crash, the price price of EUR/CHF has hit a high of 1.1197 but has steadily declined since then and fell to a low of 1.0621. Since hitting that low, price has meandered in a tight trading range but is relentlessly heading down to back to this critical level and it is known that the SNB has been busy defending its currency.
The problem the S.N.B. have is that the Swiss France is a safe haven currency. When there is uncertainty in the market there is a flight to those currencies considered “safe”. Switzerland is a neutral country with huge reserves and solid a solid banking structure. Its economy is stable. With stock markets ready to fall and uncertainty surrounding the European Union with Brexit and the possibility of a Le Pen victory in France, investors are less interested in yield and more interested in safety.
Even with intervention and negative interests rates (effectively charging you to park your money) , the Swiss Franc is attractive and if this is the case even when equities are pushing higher what is going to happen if we see what looks an almost inevitable decline in stocks sometime this year?
Its more than likely that we’ll see a demand for the Swissy that the S.N.B. cannot defend and we could well see a large appreciation in the CHF and a subsequent large decline in cross CHF pairs with the EURO looking particularly vulnerable.
So how do we use this information?
The likelihood of a sustained EUR rally against the CHF looks out of the question. There just isn’t a scenario out there currently that could drive it.
Short of the ECB announcing a surprise interest rate hike which isn’t feasible this year the EUR is headed in one direction only against the CHF.
Should Marine Le Pen even perform well in the up and coming French Election, let alone win it, the markets will be rocked and the EUR will come under enormous pressure.
Selling the EUR against the CHF at current levels (1.0680) with a stop at 1.0735 (55 pip risk) could be an interesting trade.