Last Thursday EURCHF broke
the floor of 1.2000 for a few seconds. Low was in my platform 1.1996 although it’s
been said that in EBS platform did a 1.1990. I was closed to get stopped out
but I didn’t since I have modified the s/l to 1.1990. Of course I might
get stopped out very soon probably in the beginning of the week since it seems
that the floor is not going to last (at least not in the way the SNB described
it in the beginning)
As a result, I consider this a failed trade and even if I don’t get stopped out I would look to close 90% of my position in the break even. So what did it go wrong?
There were two main hypotheses behind this trade. First the ex president of SNB (Hildebrand) who seemed very capable to fight the market at least after using the super weapons of a central bank. Second the previous experience that SNB had imposing a floor back in the 80's and the consensus I had that it is much easier for a central bank to defend a floor by selling its own currency than having to buy it.
Unfortunately, Hildebrand was dismissed last January due to accusation of inside trading from his wife and since then SNB has been without an official president (although Jordan was covering temporarily the position)
Nonetheless, all members (Jordan included) have been stating that the floor is still valid and that SNB would not let market participant to break being ready to buy unlimited amounts of other currencies in order to defend it. Well guess what, it broke last Thursday and even though it was only for a few seconds the fact remains that the market won (at least the first round). Even after the break the pair is still trading in a tight range between 1.2005-1.2012. Of course the official justification for breaking the floor was that due to thin market counter parties were out of credit limits and could not see SNB bids.
Even if that is true makes me wonder why the SNB let the pair to fall below 1.2020 instead of starting defending it unofficially in this level so it can avoid issues like the one mentioned.
Some people say that SNB's floor still remains valid since it broke it only partially and then went back to 1.20. but I don’t I agree. If that was the intention, SNB should have avoided making statements on how determined it was to net let the market test its floor. Actually not even imposing the floor. All it has to do was to intervene in the first place raise the pair at 1.20 and then every time the pair was falling below just to buy as much as it was needed in order to bring it back again above the desired level (like what the Japanese did). But they didn’t do that.
So what does the break mean and what can except for the near future? After thinking a lot I have three scenarios.
1.) The break was indeed due to thin market. SNB intervenes on Monday morning (learning its lesson) and send the pair at 1.24!!!! After that many speculators will think twice to test it.
2.) SNB may have decided that due to political and economic factor can not sustain the solid floor. In that case will let the markets just breaking it and then intervene just enough to raise it just 1 .20. This of course will kill all short term traders as the spikes would be huge. In this case my view is that eventually the floor will break for good and SNB will be forced to abandon it
3.) The partially break of the floor may be an indication that a very serious event is pending that may have a very negative impact on the markets. As a result the smart money is happy to buy the chf even with the risk of depreciation by SNB.Again in this case the floor eventually will break.
If scenario 2 or 3 become true, SNB will lost all its credibility (although for me is already lost).
Let’s see what will happen on Monday
As a result, I consider this a failed trade and even if I don’t get stopped out I would look to close 90% of my position in the break even. So what did it go wrong?
There were two main hypotheses behind this trade. First the ex president of SNB (Hildebrand) who seemed very capable to fight the market at least after using the super weapons of a central bank. Second the previous experience that SNB had imposing a floor back in the 80's and the consensus I had that it is much easier for a central bank to defend a floor by selling its own currency than having to buy it.
Unfortunately, Hildebrand was dismissed last January due to accusation of inside trading from his wife and since then SNB has been without an official president (although Jordan was covering temporarily the position)
Nonetheless, all members (Jordan included) have been stating that the floor is still valid and that SNB would not let market participant to break being ready to buy unlimited amounts of other currencies in order to defend it. Well guess what, it broke last Thursday and even though it was only for a few seconds the fact remains that the market won (at least the first round). Even after the break the pair is still trading in a tight range between 1.2005-1.2012. Of course the official justification for breaking the floor was that due to thin market counter parties were out of credit limits and could not see SNB bids.
Even if that is true makes me wonder why the SNB let the pair to fall below 1.2020 instead of starting defending it unofficially in this level so it can avoid issues like the one mentioned.
Some people say that SNB's floor still remains valid since it broke it only partially and then went back to 1.20. but I don’t I agree. If that was the intention, SNB should have avoided making statements on how determined it was to net let the market test its floor. Actually not even imposing the floor. All it has to do was to intervene in the first place raise the pair at 1.20 and then every time the pair was falling below just to buy as much as it was needed in order to bring it back again above the desired level (like what the Japanese did). But they didn’t do that.
So what does the break mean and what can except for the near future? After thinking a lot I have three scenarios.
1.) The break was indeed due to thin market. SNB intervenes on Monday morning (learning its lesson) and send the pair at 1.24!!!! After that many speculators will think twice to test it.
2.) SNB may have decided that due to political and economic factor can not sustain the solid floor. In that case will let the markets just breaking it and then intervene just enough to raise it just 1 .20. This of course will kill all short term traders as the spikes would be huge. In this case my view is that eventually the floor will break for good and SNB will be forced to abandon it
3.) The partially break of the floor may be an indication that a very serious event is pending that may have a very negative impact on the markets. As a result the smart money is happy to buy the chf even with the risk of depreciation by SNB.Again in this case the floor eventually will break.
If scenario 2 or 3 become true, SNB will lost all its credibility (although for me is already lost).
Let’s see what will happen on Monday
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