As I covered in yesterday’s update, “The one with the jaw dropping drop,” the Swiss National Bank surprised markets yesterday with the announcement of the end of Swiss Franc’s peg to the Euro at 1.20 EUR/CHF. Many traders lost or gained a bunch of pips money on the shock… and some firms even went bankrupt.
As for me, I sure did make money on my EUR/USD bearish trade, but I also had an automated position on EUR/CHF to go bullish once the pair hits 1.20… and I sure lost a bunch on the drop. Good thing I had my stop order in place!
Here are 4 things you must know on the aftermath of the news.
1-EU Quantitative Easing is Now almost Certain
While the announcement have come as a shock to the market, it may be a logical move by the SNB in anticipation of the now almost certain Quantitative Easing program, expected to be revealed by the European Central Bank in their next meeting on January 22. The launch of large scale government bond purchases from the ECB will put immense pressure on the SNB, should the bank have chosen to defend against the 1.20 Euro Swiss Franc minimum exchange rate. Following the EU Court Judgment advice on ECB’s OMT mechanisms yesterday, essentially an approval of the legality of the widely anticipated QE program, the SNB now sees that the measure [exchange rate floor] is “no longer justified”.
2- The 1.20 Floor is Broken
The EUR/CHF pair were pegged to dance above 1.20 for the longest time. That’s why many traders including myself had automated bullish positions above the 1.20 level because we were convinced that the Swiss will remain true to their peg and won’t do anything… well shocking. But guess what, when it comes to protecting their assets, the Swiss sure know how to rock the forex dance floor.
You see, back in September 2011 the aftermath of the euro zone debt crisis led to stronger demand for the Swiss franc, which appeared to be the safer European currency back then. In the past few years, SNB head Jordan has been reiterating that they would do whatever it takes to keep the franc from rallying too much, even as critics already pointed out that it was already becoming too expensive for the central bank to do so. After all, they’d need to keep selling francs and buying massive amounts of foreign currency in exchange, which hasn’t been doing their balance sheet any favors. So we can’t blame the shock entirely on the Swiss because the situation now seems to have been inevitable.
3- Many forex brokers are in trouble
It is clear that the Swiss Franc shock is going to reshape the retail forex industry.
LeapRate has reported the most disastrous aftermaths which includes the bankruptcy of Alpari UK, and that FXCM is dealing with negative client equity balances of approximately $225 million, and as a result may be in breach of some regulatory capital requirements.
Other brokers however such as IronFX Global Limited announced that was not affected by these events due to strong risk management systems and IG Group is looking to buy forex brokers that are struggling in the wake of yesterday’s heavy losses.
So if you have an open position or planning to trade today, make sure your broker is in good shape, and otherwise, takeout your money immediately.
4- More Swiss National Bank intervention may be on its way
After all this, SNB officials still decided to play with investor’s hearts by hinting that further intervention moves are still possible. According to the official statement, the SNB indicated that it would continue to monitor exchange rate moves and that it would remain active in the forex market to influence monetary conditions.
Some analysts took this to mean that the Swiss central bank would explore unconventional measures in keeping the franc undervalued. Although the SNB mentioned that the Swiss economy has already benefitted from the franc peg, many believe that the central bank might implement smaller-scale interventions in order to manage exchange rate levels.