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Does the Swiss Franc Collapse Signal “RISK ON”?
I often get up at 3:00 am and check my positions, attempting to determine if I deserve another two hours of sleep or not. When I checked the Swiss franc futures trading overnight, it showed a straight line down 12 handles, from $1.28 to $1.16. I thought “This can’t be right”, and that the software had gone haywire once again.
Then I checked my inbox. There were pages and pages of messages from European readers saying “congratulations” on my Swiss franc short. Then I found the email that I was looking for, an alert from Reuters trumpeting that the Swiss National Bank had pegged their currency to the Euro at a conversion rate of €1.20. The Swiss franc reacted by immediately crashing 10% against the US dollar. One of the largest long positions in the financial markets had just been vaporized.
Other flight to safety assets were trashed as well. The long Treasury bond quickly gave back two points in the futures market. Gold plunged $80, then made back half. Could the Swiss move herald the beginning of a global “RISK OFF” TRADE? As British Prime Minister, Winston Churchill, said in 1942, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
I had been expecting something imminent from the Swiss Authorities in my August 29 piece “Time to Dump the Swiss Franc ” at http://www.madhedgefundtrader.com/august-29-2011-2.html , and my August 31 article, “The Greek Assist on My Swiss Franc Short” at http://www.madhedgefundtrader.com/august-31-2011.html . What really shocked me was that the normally conservative, staid, and cautious Central bankers in Bern had elected for the nuclear option.
In my 44 years in the foreign exchange market, this is the first time that I have seen a country switch its currency from free floating to quasi fixed. In one fell swoop, the Swiss have converted their currency from a bastion of safety as solid as the granite of the Matterhorn, to a patient in intensive care on the verge of going into a coma. They are hitching their wagon to the Euro just as it is about to run over a cliff. Now Europe’s banking crisis and sovereign debt disaster is Switzerland’s. They have just taken ownership and shall suffer the pains and travails that come with it. A much weaker currency is the assured result.
It was one of the sharpest one day moves in the history of the foreign exchange markets. One harks back to 1992, when George Soros famously broke the Bank of England, sending the pound plummeting. Even that affair was spread over several weeks. You really have to go back to the Nixon shock in 1971, when a president beleaguered by a losing war in Vietnam moved to take the US off the gold standard, to find moves of similar magnitude.
Traders had pushed the Swiss National Bank into such a tight corner that they had no alternative but to take bold action. The strong currency was decimating the country’s export industry and dragging down the domestic economy. In the early stages of the currency’s run, companies reacted by cutting costs to the bone and enforcing extreme efficiencies.
But when the Swiss franc made its eye popping run to 70 cents, or $130 in the (FXF) there was no fat left to chop. Much of what Switzerland makes, like heavy machinery and pharmaceuticals, are also manufactured in Germany. But German exports were prices in Euros, which has been in free-fall against the Swiss franc. If the SNB hadn’t acted when it did, the Germans would have eaten what little the Swiss have for lunch in its entirety.
The SNB employed a tactic time tested at other central banks. If you can’t bend the trading community to your view, then take their money away, literally. The 10% move was so instantaneous that there was no chance to stop out. Hedge funds and commodity trading advisors who had long call option positions were left stinging, but will live to fight another day.
Those with much more leveraged futures positions have been completely wiped out, sticking prime brokers and custodians with the left over bill. A capital deficient community is much less likely to make bets against you if they lack the funds with which to do so. And you can bet that margin requirements, both exchange and house margin, are ratcheting up as I write this.
Now that the trend is broken and the driver has been switched to the Euro, you can expect the Swiss franc to continue its decent, possibly reaching parity against the dollar by next year. But you are better off playing the Euro from the short side than the Swissy from here on.
The estimated cost of the peg goes up to $500 billion. That’s a lot of Swiss cheese for a nation of only 7 million bankers, hoteliers, dairy farmers, and private ski instructors. If traders burry the SNB with an avalanche of Euro selling, they may smash the peg. That could deliver another 10% sudden move for the Swiss franc, this time to the upside.
This is a move that is reminiscent of the Federal Reserve’s Jackson Hole meeting last year. If the aftermath of that love fest, rumors began quickly leaking out about a program that would start three months, later known as “QE2”, sending risk assets everywhere rocketing. This year, chatter about a Swiss/Euro peg was flying out of the fishing boats as fast as you could clean a rainbow trout with a filleting knife. It is the reason why I acted as aggressively as I did in shorting the Swiss franc in that particular week.
The Swiss move delivered the most profitable trade in the history of my Macro Millionaire trade mentoring program, taking in a one day gain of 400% on our position in the (FXF) October puts, for a net profit of 972 basis points. Macro Millionaires went into one of the sharpest moves down in market history with a large leveraged short. The total holding time was just five trading days. Along with our short positions in US small cap stocks and oil, this takes our year to date performance to a new, all time high of 38%. Well done Macro Millionaires!
For those who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put “Macro Millionaire” in the subject line, as we are getting buried in emails.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Way to go Sir! May you continue to paper your way to the future. I will continue on my turtle course of Agricultural land; stored food; toilet paper; tools; certain types of ammo, with matching hardware; physical silver coins; pretty much in that order.
Peace Bro. Have fun with all that fiat TP. I have my 100T Zim Note. Got it on e-bay for $3.75 US.
ZH enjoys both revenue and lively discourse the letter writers provide.
The exploding credit markets would be a non confirm on your risk on theme.. quite the opposite .
why do I feel like I just read a really verbose ad for another stock promoter?
now I need a shower.
I certainly hope MHT paid ZH proper advertising rates for this "article".
What other options do the Swiss have?
There are endless trecks of Swiss people crossing erveryday the border to Germany entering the shops and come back with cartloads of all kind of goods. I guess in the other border areas of the Swiss (Italy, Austria or France) the picture was the same. As a matter of fact a Swiss is able to buy all kind of goods for roughly 50% the cost compared to home (because there is a refund of the VAT of 19% at the border). And even with a rate of 1.20 to the Euro this situation will not go away.
The reality is, that Switzerland is an island sorrounded by Euroland and cash Euro is since long an accepted currency if one needs to fill his tank or eat something along the autobahns there. The economy of Switzerland is very much comparable with the economies of the sorrounding areas except for the fact that Switzerland is home to such banking giants like UBS and Credit Suisse. And these banking giants are Switzerlands problem nowadays. Its not anymore a benefit to have such corporations in your country, on the oppossite its a huge burden already.
The "real economy" of Switzerland which includes giants like Nestle, Roche, ABB and a row of other not much smaller global players is lean and mean. To say highly productive and effective. But against an extreme currency disadvantage not even the best companies in the world can hold out for a longer time. So something had to be done otherwise Switzerland would be in deep trouble soon.
My bet is that the Swiss government has already accepted the fact that their banking giants are going to crumble on a not so far away day. And do not hope that the Swiss would bail out these banks.
First these banks are way to big for this small country.
Second the Swiss introduced already two years ago a legislation, that in the case of the default of these banking giants the retail part is going to be excluded and taken over by the state in order not to block the "real economy".
So UBS and Credit Suisse are in my opinion excellent shorts. And the good thing is, that the US can never let these two banks go down because they are TBTF. So there is another big job waiting for Uncle Sam. To bail out the Swiss banks!. Because one thing is sure, the Euroland is not going to lift a finger in such a case. I'm wondering what the hard working average American is going to say when this is happening. This will be then one bail-out to much and all the media power will not help to make this situation tasty to the US public.
+100 excellent, could not have written it that well
shorting TBTF? does this not go against the definition? ;-)
Did you actually eat Swiss cheese with a Swiss banker?
This guy is amazing.
How can he write so well and about so many things correctly and then mix it with such BS?
"The estimated cost of the peg goes up to $500 billion.": Cost? Eh? It's a Central Bank... CB's don't have to bother with that...
"That’s a lot of Swiss cheese for a nation of only 7 million bankers, hoteliers, dairy farmers, and private ski instructors.": Oh, I thought you just wrote (correctly) about the substantial industry (Much of what Switzerland makes, like heavy machinery and pharmaceuticals, are also manufactured in Germany.), already forgotten?
"If traders burry the SNB with an avalanche of Euro selling, they may smash the peg. That could deliver another 10% sudden move for the Swiss franc, this time to the upside.": Smash the peg? Traders? How? It's a floor, for criminy! The SNB can buy and buy and buy... Note that it's a floor for the EUR price in CHF, not the USD. And yes, if the SNB stops, the CHF goes up again!
Question: Where does all the CHF liquidity end up? CH has already a real estate bubble. With this measure it could get worse!
They buy gold
Yes, safe fiat currencies went out with disco. It's all kick the can and slowly buy gold. In such a world, why would anyone want a solid fiat currency? This is a perfect example of how the Fed and the ECB got all the central banks to play the kick the can game. Do it our way, or your currency gets swamped by survivors seeking safety. Well, the SNB just stove in their skulls as they swam into the Swiss life raft.
Who said central banking isn't fun!
Hate to spread the bad news regarding your comment:
The matterhorn consists of crystalline metamorphic rocks (schist and gneiss). No granite. So much for that.
OK, I'll say it, crystalline metamorphic bitchez!
have to wonder how an artificial rate of exchange by a goverment signals anything more than manipulation.
That statement implies that there is a theoretical pure price action as opposed to just manipulations of price overlying supply and demand. I think you will never have the former, and always find the latter.
Trading IS ALL about manipulation. The real world only counts in the extreme long run. All markets, on all time frames, are being manipulated, all of the time. It's just too hard to make a buck in an efficient market, so people form conspiracies to manipulate price. That's why you will never see an efficient market, or untainted price discovery.
The old poker adage goes that every game has a sucker. If you sit down at a poker table and can't spot the sucker, it's you. This applies equally well to markets. On a macro scale, the suckers of a bull market are the long term buy and hold investors. They seem to be making money, until you realize they are always harvested in the end. On a micro scale, the suckers in a penny stock scam are the momo chasers. Everything in between is also manipulated.
If you can't spot the manipulations, you just can't trade effectively and will carp about how your technical pattern failed or how the market doesn't make sense from a fundamental standpoint. The truth is, people who lose do so because they took the trade before understanding the game.
So, from my perspective, there is no more pure price action than a central bank stepping in to utterly destroy currency speculators. It was the ultimate macro example of how markets really function.
Hats off to MHFT for a great trade.
Moral of the story: Never take Alpine mineral compositions for granite, or those who are flinty and not so gneiss will summarily accuse you of talking schist.
I see what you did there.
Upvote for you, Sir.
MHFT, does this trade square up your gigantic losses on the SPX ,airline stocks and short Silver postions?
Risk on risk off: It's both.
Anything paper is way beyond risky whereas anything real is beyond risk. Paper just lost more credibility to cover rock and will be shredded by gold.
Currency volatility isn't exactly 'risk on', its taking risk from somewhere and putting it somewhere else. Right now risk is a hot potato, who will wind up with it?
Norway? Singapore? Will it matter at the end of the day?
Better to look to the EU and its last-ditch effort to craft a fiscal union out of duct tape and old porno mags. If they do so, the reason for the euro/swiss peg will vanish.
"Men of money and no value" will end up destroying the world for....pieces of paper?
BRILLIANT!