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Have Lessons Been Learned?


The SNB decision to drop the EURCHF allowed the franc to see free markets once again.

Christopher-LemieuxSMBullion.Directory precious metals analysis 16 January, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

Irresponsible they say. From traders who got obliterated to brokers who got… obliterated. Have the lessons been learned? Complacency breeds indolence. The Swiss National Bank (SNB) allowed the franc to enjoy the wide-open spaces of free markets.

See, the problem is not that the SNB’s action was abruptly releasing the Swiss franc from its euro peg. The irresponsibility came when the SNB decided the peg should be set forth in the first place. The SNB’s balance sheet ballooned because of the peg – nearly 85 percent of Swiss GDP! The SNB set right its wrong, and it has now allowed the markets to find price discovery – a concept not seen in three years.

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Since the financial crisis, we have lived in a world of fantasy. Traders and investors believed that volatility was something of the past, and all that needed to be done was enjoy the parabolic nature of equities and other risk assets. The strings of the financial markets were pulled upon by world central banks, who told everyone it’ll all be OK.

The lack of volatility brought complacency that every little road bump was pre-planed by the central banks. All that was need was a useless thing called forward guidance. However, this made traders lazy. Trades were now a sure thing, and everyone was making money. Unfortunately, the SNB snapped market participants back into reality. Nothing is a sure thing. Not your profits, and certainly not the EURCHF peg.

US forex broker FXCM, due to clients massive losses in the tune of $225 million, has breeched US regulations for capital requirements. Their stock was $17 per share on Wednesday, and it’s now just above $2 per share. While, a New Zealand broker is completely out of business. In a business were leverage is the name of the game (up to several hundred-to-one), why weren’t there more safe guards?

To keep this in perspective, the EURCHF floor was suppose to be held at 1.20, while the collapse brought it down to just above .9500. That’s 3,500 pips in minutes. For those who do not trade forex, if you have a standard lot position at $10 per pip, that’s a loss of  $35,000. However, if you had a .1 lot, the losses would be staggering at $3,500 but somewhat manageable for small retail traders.

I was talking to a friend about two weeks ago. He has been trading for over 30 years, and I highly respect his opinion. However, in this talk about gold, he mentioned a Warren Buffet quote after mentioning he was long an ultra-short gold ETF (GLL). “Our approach is very much profiting from lack of change rather than from change,” he uttered. And, it summed up the markets attitude perfectly. I was on the outside looking in as I became more bullish on the yellow metal.

How could even a veteran be swayed to believe there would be no change? Not even a little. So much so, traders would want assets that protect a portfolio to go down. Needless to say, on January 1, GLL opened at $99.67 and currently trades at $85.95 per share – in just two weeks.

To think the world is void of change, especially when money is evolved, is foolhardy. Although, not everyone was absentminded. Jim Grant, of Grant’s Interest Rate Observer, said in his September issue that the SNB would abandon the floor sooner than later due to several factors. He mentioned that low-cost CHF/EUR exchange rate options would likely appreciate greatly for those who held them. Grant has also been a vocal objector to central bank policies.

The market is a stern teacher, and I hope lessons were learned.

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  1. Great article chris, though I sincerely doubt those geniuses gambling with Other Peoples Money will learn a thing. Not last time, not this and not the next.

    • Thank you, FC.

      This is true. But, I also must extend the question to retail traders. You can rummage through the forums and see the pure panic. Brokers like Saxo are delivering “formal” demands for payment on negative balances. Keep in mind, forex is vastly leveraged.

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