Binary bet of the week: Black Swans and the Swiss National Bank
by Dave Evans of binary.com
Markets stabilised on Friday after the Swiss National Bank dropped a large boulder in the calm waters of the EUR/CHF, with ripple effects across the FX world. The move was completely unexpected and with other fears dominating trader’s radars, the SNB action is an archetypal “Black Swan” as made famous by Nassim Taleb.
Weekly chart of the EUR/ CHF
The EUR/CHF chart above shows how the pair has effectively been dead in the water, with the only available strategy being to pick up pennies. Sadly many of those traders and brokers were too busy with the pennies to notice the steamroller coming towards them.
Traders and quant modellers were busy analysing the known risks, only for something completely unexpected to take market unaware. A number of retail forex brokers were hit by large losses, as leveraged client losses broke financial stability covenants (Binary.com offers no leverage to clients so is unaffected in this way).
The move saw a surge in interest for the Swiss Franc, which had a knock on effect of selling the euro and hitting the dollar. One leading theory surrounding the activity is that the SNB did not want to get in the way of forthcoming QE from the ECB and if that’s the case then the euro value is likely to be diluted further.
Quite whether the SNB expected the move to be as large as it has been is unclear and for many this has shattered the perceived omnipotence of central bankers that has developed since the start of the financial crisis. As the central bankers have effectively controlled market flows as much by their words as their deeds, it has left many with concern for the state of the global economy and the banker’s ability to control things as they have.
Arguably, the SNB’s peg not only kept the Swiss Franc lower than it should be, it has also helped to prop up the euro. Back in January 1999, the euro launched as an accounting currency with a ratio of US$1.1743. It dropped as low as 0.82250 in 2000 and rose as high as 1.6038 in 2008. Given the perilous state of the eurozone at certain points since 2010, it is remarkable that it has taken so long for the euro’s value to fall back to its launch levels.
EUR/ USD monthly chart
Given the prospect for European Quantitative Easing, or at the very least what such plans say about the state of the Eurozone economy, there is likely to be more trouble ahead for the EUR/ USD.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.
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