Tiny Switzerland has thrown a big wrench into global financial markets

Given the probability of the ECB announcing a QE program in next week’s meeting, should we blame the SNB’s Thomas Jordan for un-pegging the swiss franc from the Euro? If he had kept the cap, Switzerland would be “importing” ECB QE by selling newly minted Francs for Euro’s (in order to maintain the target 1.2 rate, he had to assume a large portion of the cash from ECB asset purchases would make their way into the Swiss financial system). That would have forced the Swiss to buy a falling knife: the euro dropped to a new low against the dollar and stands to fall further if the ECB follows through with QE.

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6 replies »

  1. I was just thinking… Maybe there was a reason the Swiss did this. Surely, years of harping the “Swiss franc is overvalued” rhetoric doesn’t change in a week (Jan 5th being when SNB Jordan committed to the peg).

    I think by breaking the peg, the SNB just threw the ball back to Draghi. Unless we see an explosive QE, the Euro is likely to rally. With yesterday’s move, I think in a way, the SNB has made Draghi to rethink his plans.

    No more bluffing from Draghi. I think its show time next week.

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    • agreed, its all on the ECB to deliver now. far from being a 100% signal for QE from the ECB, SNB was discounting a raised probability of QE (and thus having to absorb large amount of Euros for Franc). ECB has long preferred the jaw-bone method to actual stumilus, so next weeks meeting should see some fireworks, especially during the Q&A. Should be alot of overreaction from the mkts

      given the circumstances of the “anything it takes” line from draghi in 2012 it is unlikely that any decision has actually been made. they are waiting to see where markets head into the meeting next week.

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  2. The more I keep thinking about this the more I am convinced that the markets are positioned wrongly.

    Simple example, and one that is ironically cited in many newbie trading articles.

    Concepts of Accumulation/Distribution + Order Flows. How does someone as large as a Central bank unwind Euros? Especially when SNB wanted to see a weaker Franc??

    You drop a bombshell like they did. Shock and awe worked. Everyone is convinced QE is here (its no longer QE but the scope/size). So suddenly, everyone is long on the Franc while short on Euro. SNB is the only known buyer (and holding) those Euros right now.

    It’s perfectly positioned now. While I don’t know at what price they bought the Euro, i’m sure it was definitely around 1.2 – 1.18. So when SNB said they could intervene to support the fall (they were buying fresh Euros, absorbing all the supply of Euros gradually, probably to offset the losses they incurred during that day) although Jordan declined to comment if they were in fact intervening.

    So besides holding Euros at say 1.2, they now also hold euros at 1.15.

    If ECB disappoints, all they need to do is begin their unwinding.

    SNB = Largest Buyer/Holder of Euro
    Herd = Largest Sellers of Euro

    Just a knee-jerk reaction sell off is enough to trigger short squeezes, which will see the Euro rising, well enough to unwind some, if not most Euros safely.

    My above “fantasy” just scratches the surface. Throw in position sizing/money management etc and it starts to give me a headache.

    I’m staying on the sidelines this week (and buying some popcorn). If the above does come true, we will witness trading in a new light!!!

    P.S: I love the markets.

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  3. And final parting thoughts before I make this into a rant.

    Speculation is that Draghi had a closed door meeting with Merkel and Schaeuble (i think if Weidmann was included it would have been anyone’s guess) last week. So if Germany hasn’t said anything so far and Weidmann is quiet (he must have got the news from either of the two), QE must be a half baked job (and anyway Germany wants a higher Euro). More like a “hey you wanted QE, we gave you QE. Don’t blame us if your expectations did not match ours”

    If my fantasy turns out right, I might just sit with a nice glass of Whiskey on Thursday night 😀

    Liked by 1 person

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