Calm Friday markets mask Swiss National Bank currency damage

At least two forex brokers may be out of business as a result of shock Swiss currency move. Oil continuing feeble and likely short-lived recovery.

Wile E. Coyote falls.
Like the hapless Wile E. Coyote, Thursday's markets went off the cliff thanks to the Swiss. (Screen capture image, characters and images copyrighted by Warner Brothers)

WASHINGTON, January 16, 2015 – U.S. markets are attempting to pick up the pieces in pre-holiday Friday trading, with all major averages up modestly at the noon hour EST. But in the aftermath of the Swiss National Bank’s (SNB’s) shock-and-awe dropping of its three-year-old currency peg of 1.20 Swiss francs per one Euro, collateral damage is continuing to unfold.

According to a chart we found floating around in a couple of places, here’s how yesterday’s currency action looked:

Euro vs. Swiss franc (CHF) in recent years.
Euro vs. Swiss franc (CHF) in recent years. Note Thursday’s wild move, highlighted in pink.

The blue part of this chart, which goes back to roughly 2006, shows the Euro vs. the Swiss franc (aka, the “Swissy,” aka CHF). Note that by mid-2011, more and more currency investors had been piling out of the Euro and into the Swissy which was and is regarded as a safe-haven currency.

But in mid-2011, in order to protect itself from being overwhelmed by holding too much in the way of unstable currencies, the Swiss National Bank pegged the Swissy at 1.20 Euros. Instant stability, as illustrated in the green area of our chart. Or so everyone thought.

For reasons we’ll get to in a moment, the SNB chose to release that defensive peg Thursday. Wham! Check out the pink-shaded area above to see how that worked. Anyone not expecting this move (apparently most traders including many hedge funds) got slammed, and margin-call city made things even worse, with forced liquidations right and left.

This is what happens when governments try to ignore market forces. They eventually come back to get you, as the Nixon/Ford administrations learned from Nixon’s price control regime back in the day.

Back to the present. As Thursday’s market super-slam unfolded, at least three foreign exchange (forex) currency brokers—Alpari in the UK, Excel Markets in New Zealand and FXCM in the U.S.—found themselves essentially insolvent after recent currency trading action caught them and (apparently) the bulk of their customers flatfooted and subject to huge margin calls for being on the wrong side of the currency trade.

CNBC for a change, has some good play-by-play information on this disconcerting action. According to the network and other sources, “U.S. retail forex broker FXCM fell 88 percent in premarket trading after it said its clients’ losses threatened the firm’s capital. The stock was ultimately halted just before markets opened, and at least two brokerages slashed their rating on the stock.”

Apparently, the currency games had kicked off earlier in the day in the UK, where Alpari seemed to be leading the pack in reaction to the Swiss currency shot heard ‘round the world.

“The recent move on the Swiss franc caused by the Swiss National Bank’s unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity,” Alpari UK reported in a prepared statement. “This has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us,” a situation that resulted in insolvency.

In turn, Alpari’s problems became acute after “New Zealand brokerage Excel Markets also announced that it was unable to resume business following the SNB’s move,” according to the CNBC report.

“Both our primary and backup liquidity providers became unresponsive or illiquid for hours after the event,” Excel explained in another prepared statement, further observing “The majority of clients in a franc position were on the losing side and sustained losses amounting to far greater than their account equity. When a client cannot cover their losses it is passed onto us.”

Here’s a CNBC video that explores this issue with some concision. (You’ll have to endure an ad before you get to the clip.):

BTW, for those not familiar with international trading: the sun never really sets on world trading action which goes on 24/7 literally as the world returns.

As U.S. markets wind down in the afternoon, international trading action follows daylight and the international dateline, with Asia and the South Pacific grabbing the baton next. Action eventually moves through the Middle East to European markets and eventually back to Wall Street. Hence the logical unwinding of positions in the Swiss franc in that order.

There is some speculation that some market players were tipped off of the impending SNB action, according to Adam Myers, European head of FX research at Crédit Agricole who ventured his opinion in a CNBC interview.

But frankly, it doesn’t take a rocket scientist to divine that the tip-off came earlier than that—something that could largely explain the massive stock market cratering that happened this past Tuesday and Wednesday, the two trading days prior to the SNB bombshell. We strongly suspected yesterday, and still suspect, that the usual suspects, including the elusive Gnomes of Zürich, were tipped off ahead of time.

Normally, we simply prefer to deal with stocks and the stock market in this column. But on “black swan” days like yesterday, traders are forced to look more deeply into the machinations of governments, central banks and crooked but well-connected oligarchs that make plenty of money by manipulating markets for their benefits, frequently fleecing average investors and many mutual funds that are, in the end, just trying to make a decent living or save up for retirement.

Until this nonsense is brought to an end, and until markets are made transparent again, traders are likely to be forced to endure this ongoing and damaging nonsense. If you wonder why a recovery from the 2007-2010 debacle has remained elusive, you have to look no further than this kind of market manipulation from behind the curtain.

Ultimately, for reasons too complicated to get into very deeply here, the Swiss—who’ve been defending their strong currency for years against the Euro and the dollar—apparently concluded that the European Central Bank (ECB) was about to surprise the world shortly with a long-promised but never delivered quantitative easing (QE) program of their own, meant to kickstart the Eurozone’s dying economies by flooding the zone with money and putting an end to what’s become a now very obvious international deflationary situation.

We still remain skeptical, however, that this will happen. ECB head Mario Draghi has, it seems for years, played Lucy to the Eurozone’s Charlie Brown, promising, promising, promising that he’ll do something to turn the negative tide, but then pulling the football away again and again, largely due to the fact that the powerful German banking interests don’t want to play.

Maybe it will be different this time around. The Swiss surely think so. But we’ll just wait and see. Fool me once…you get the picture.

Today’s trading tips

Very little to recommend, a situation we’ve dealt with most of this month. We have established a few defensive positions here, after getting rid of our clobbered oil-patch holdings. But with few things working well, we began to hedge yesterday, beginning to establish a position in the short S&P 500 ETF whose trading symbol is SH.

Since the market, perversely, is up thus far today, that position is down at the moment. But if nastiness begins either this afternoon or during traditionally bearish Monday trading—which next week will happen on Tuesday due to the MLK trading holiday—we’ll just add to the SH position rather than liquidate stocks and ETFs we otherwise like, or ones that pay swell dividends.

If things should worsen, alternative short ETFs are HDGE and the S&P 500 double-short (leveraged) issue, SDS. We’ll wait and see.

Action in gold has improved considerably over the last two trading days, likely to gold’s general habit—short-circuited by market manipulators in recent years—of reacting positively to nasty international surprises. We established tiny positions yesterday in gold ETF SGOL (Swiss bullion) and in silver ETF SIVR (again Swiss bullion.) We wish we’d picked up more and picked it up on Wednesday, as gold in particular made a massive upward move yesterday, breaking through its long-held upside resistance level, a potentially positive sign.

The reason we choose these two ETFs to play with is that they’re commission-free with our brokerage house. They are relatively thinly traded, however. The more common gold ETFs in most accounts are the very liquid GLD (the most popular) and the also quite liquid IAU, which has the advantage of a lower unit price, allowing you to purchase a greater number of shares, goosing that expected move up. (Or that unexpected move down, alas.)

These are risky times, however. We’re telling you what we’re up to here, not making recommendations for your portfolio. Do your own research, preferably relying on several sources, before you make any moves, particularly in this market.

Stock trading is risky enough these days as it is. But with markets relying now on often bogus headlines rather than on fundamental analysis or charts, trading is now even riskier than ever.

While keeping fundamentals and chart patterns in mind, also make sure you stay up on international financial news as well as major headlines that could influence this trade or that. This is what those nefarious high-frequency traders (HFTs) rely on. And if you don’t stay informed, you invest at your peril.

This should not be so. But since Western governments no longer look out for the average citizen, those of us not part of the 1% need to remain eternally vigilant to win at least a few rounds.

Enjoy the long weekend, and we’ll be back Tuesday reporting the latest exciting Wall Street adventures.

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  • Ocean Sprayz

    Not even $17 trillion in debt could stop the Obama regime from wasting $300,000 on caviar consumption propaganda in 2012.