Brokers' insolvency, SNB shock, and the ECB

SNB shock

Once in a while, usually long “whiles”, something happens that rocks your world, and things turn upside down. Well, same goes for the forex market. Last I remember was the Japanese earthquake and tsunami that took place in Japan back in March 2011 and sent USD/JPY to a record all time low around 75.50. In the next couple days the pair recovered @ 1000 pips, from where it slowly but steadily returned to the lows before Abe’s arrival. 

But that’s a whole different story. The SNB on Thursday lift the 1.20 peg between the EUR and the CHF, triggering another tsunami, a chaotic change reaction that will extend into next week. To begin with, the EUR/CHF pair sunk from 1.20 to 0.85 in a matter of minutes, a whopping 3,500 pips. The USD/CHF followed, down around 2,300 pips. The EUR/CHF finally stabilized around 1.0200 but on Friday the cross trades below parity. The USD/CHF finally surged up to 0.9130 late Thursday, but traded @ 700 pips lower in the European session. 

Why? Why the SNB took this decision, in this particular time?

There are many reasons behind this decision being one, the cost of this intervention: the SNB has already spent over 50% of its GDP, in this regulatory process that started back in 2001. The country lost 60B Francs of its reserves just during Thursday. The pressure over the peg due to European continued economic slowdown, had increased exponentially in this last year, with the pair trading in a couple pips range right above the 1.2000 level for most of the last two weeks, meaning it would become increasingly expensive to hold it. But more important, SNB Governor’s Jordan quoted diverging economic policies as one of the reasons to lift the peg. The SNB is scared about what the ECB will do next week. And is that much scared that decided the lost of the bank’s credibility and the billions down, mean little compared with what the ECB may bring to the table next week.  This means the SNB is actually expecting a full-blown QE from the ECB next week, and it will be probably larger than expected. In plain English, the SNB left the boat before it sunk. 

Alpari UK Insolvency

And just when the market was beginning to come out of the shock, a second wave of high risk events came out: brokers around the world are collapsing in the wake of the SNB’s decision. The most shocking news so far has been Alpari UK announcing the firm has entered insolvency. To put it simple, the unprecedented volatility in Swiss Franc crosses and the lack of liquidity resulted in retails accounts being blew beyond those account equities, passing their losses to the brokerage firms.  So far, news had also reported that a New Zealand based broker, Global Brokers NZ Ltd. had also shut down.

Furthermore, some of the well known firms are in different forms of trouble, with FXCM reporting that the company may be in a break of some regulatory capital requirements, following a $225 million client negative balance. FXCM is down 75% pre opening, last quote at 16.04 now at 3.11. 

The IG Group (LON:IGG) is reporting up to £30 million in losses; yet at the same time, rumors are making the rounds that  the firm is looking to acquire the client list of brokers which are unable to meet their regulatory capital requirements. 

Many other brokers had suspended CHF trading since the chaos started, and news keep coming: Oanda, Saxo Bank, Swissquote, and Spreadbetter all reported losses, but so far are looking to honor trade executions and remain in business. 

ECB QE

At this point, one may think the full-blown QE from ECB has been fully priced in. But a spooked SNB suggest the ECB may exceed by far the €500B-€750B in the form of sovereign bond purchases, the market has been expected before this move, and that is far from being fully priced in. Goldman Sachs said that SNB action hints at a “massive ECB QE.” 

Furthermore, ECB’s head Draghi is well known for saying more than doing. So the market, at least until Thursday, was not sure about a full-blown QE next week. But the picture changed now, and changed big. There are three possible scenarios for upcoming ECB meeting, as follows:

• ECB announces no QE
• ECB announces a tepid QE below €500B
• ECB announces a full-blown QE above €1T

In the first case scenario, I believe all hell will break lose: the EUR will likely lose big, the current king of the board, the Swissy, will appreciate further, adding to current market turmoil and the yen and the gold, will become the overall winners on their safe-haven condition.

In the second case, the EUR will likely remain under pressure, but losses will be limited. There will spread not much effect against other currencies that can interfere with ongoing trends. 

The last one is the most interesting: anything can happen. The market may see it as positive for Europe, and give the EUR some support, or the excess of offer can made of it an even cheaper currency, again triggering strong selloffs in EUR crosses and meaning deeper chaos, albeit local share markets will likely shine.  

Anyway, we are living interesting times. And we are just starting to.