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Swiss Nat Bank Ends Peg To Euro!


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I wonder if the opaqueness and unexpectedness was a conscious decision. Traditionally central bank openeness was a tactic to keep the markets calm and foster support for the currency. Although the decision has increased the value of the franc, that was in fact inevitable. In the long term, such erratic behaviour should make the franc less attractive, i.e., there is now a larger risk premium to be paid for holding it.

There were suggestions earlier last year to a change in CB's approach, from the years of outright invitations to get loaded/rich with free money (later explicit from Bernanke in 2010).

Up to market participants what they believe. Maybe the Swiss hints were there, but market participants didn't read them; throwing strops and scapegoating now.

Do you as a market participant expect cuddles and sucking on the CB easy teat - or - cynically suspect them of luring in the ultra complacent and more CBers being willing to let them pay the blood price in corrections ? We make our own decisions.

By Ben S. Bernanke

Thursday, November 4, 2010

The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372.html

Central Banks Ending Era Of Clear Promises, Return To 'artful' Policy

Started by interestrateripoff, Jul 07 2014

http://uk.reuters.com/article/2014/07/07/uk-cenbank-communication-insight-idUKKBN0FC0AJ20140707

The world's major central banks are returning to a more opaque and artful approach to policymaking, ending a crisis-era experiment with explicit promises that they found risked their credibility and did not substitute for action.

From Washington to London to Tokyo, the global shift from transparency to flexibility underscores the challenges central bankers face as they test the limits of what monetary policy can achieve.

The return to a more traditional policymaking approach and nuanced statements will challenge the communication skills of central bankers who have been chastened in the last year after some too-specific messages confused and disrupted financial markets.

Complicating things on the world stage, the U.S. Federal Reserve and the Bank of England are looking to telegraph plans and conditions for raising interest rates, while the European Central Bank and the Bank of Japan are heading the other way.

"Central banking used to be an art," said a senior official of a G7 central bank. "It became less so once, globally, but with what's happened at the Fed and the BoE, it may be back to being an art."

Both the Fed and BoE had promised to hold interest rates near zero until their jobless rates had fallen to a particular level. However, unemployment in the United States and Britain fell much more quickly than economists expected and both central banks scrambled to replace their suddenly outdated "forward guidance".

"Too much transparency may sometimes be counter-productive. The balance is always tricky," the official said, requesting anonymity.

http://www.housepricecrash.co.uk/forum/index.php?/topic/199588-central-banks-ending-era-of-clear-promises-return-to-artful-policy/

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Interesting question.

I guess a part of it is it's a bit like a short squeeze.

If QE is greater than issuance, then yields can continue to fall as the supply dries up.

So if this is a factor then ashortage of issuance is equally as important as QE itself.

I note the public sector deficit has 'improved' in the USA for one as the economy has grown.

I think QE and the real world is quite different from QE and the trading world. All it takes since 2012, apparently. An oldie but...

"...If you are a banker named José, and your bank is insolvent but you have a large trading operation, you can simply have your amigos on the fixed income desk short the govies of your own country, say, España, against the govies of another solvent country, e.g. Deutschland. Then when the rates are high enough, your government demands a bailout of its banking system, and you then use the resulting monies to buy the govies that you had been shorting, while advising El Jefe to begin an austerity program that results in lower rates via deflation. A year later you pocket the profits and announce that you have successfully replenished your Tier 1 assets and recapitalized. Your fixed income boys get a big bonus. Meanwhile, in another country, a banker named Giorgio is shorting the govies of.....

Repeat, serially, around the world."

http://www.housepricecrash.co.uk/forum/index.php?/topic/156362-eu-shocked-by-irish-debt-downgrade/#entry2826770

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I'm not an expert, but QE has surely not ended. AFAIK, they haven't sold any of the assets back yet, which is what the central banks claim they will do.

That is of course the case. But when everyone says QE has ended they mean no new QE at the mo.

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That is of course the case. But when everyone says QE has ended they mean no new QE at the mo.

Yes but, for me, that is a willful category error, like the one politicians and media types routinely make on debt and deficit.

All that 'ending' the program means is that we're the furthest from actually finishing it that we are going to get.

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http://www.bloombergview.com/articles/2015-01-16/swiss-turmoil-hints-at-future-lehman-moments

For three years, the Swiss National Bank successfully sat on its currency, selling the franc whenever it threatened to appreciate too much for the comfort of Swiss exporters. Yesterday, it tore up that policy, inciting the equivalent of a riot in the currency market and trashing retail brokerages from New York to New Zealand. While victims of the turmoil ponder whether Swiss policy makers are irresponsible or just incompetent, the scale of the damage is a timely reminder that contagion is always unpredictable, that markets always overshoot, and that traders, when they smell profit, can outgun central banks.

Currency analysts all seem to assume that the Swiss central bank, after abandoning its 1.20 euro cap, expected its currency to settle at about 1.10 or even 1.15 per euro. Instead, the franc is trading at parity with the euro -- a stunning blow for exporters. If the central bank thought that simultaneously cutting its deposit rate to -0.75 percent would deter franc purchasers -- SNB President Thomas Jordan called negative rates "a very strong instrument" -- it was badly mistaken.

Jordan also said markets "tend to strongly overreact" to surprises, and that the situation would "correct itself over time." Maybe. But as of today, abandoning the cap rather than, say, adjusting the level seems to have been a wild miscalculation. And it contains a lesson for both U.S. and European policy makers.

Got to love the idea that this is the SNB's fault and those holding the positions share none of the blame for their own folly. The bet they lost. Tough 5h1t, that's the free market.

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http://www.bloombergview.com/articles/2015-01-16/swiss-turmoil-hints-at-future-lehman-moments

Got to love the idea that this is the SNB's fault and those holding the positions share none of the blame for their own folly. The bet they lost. Tough 5h1t, that's the free market.

If only it were generall the case or even just some more.

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I wonder if anyone will end up bust over the weekend.

One suspects that the retail FX brokerage bankruptcies may just be the start

Needless to say many retail FX investors are going to get wiped out but then any private individual who dabbles in this area needs their head examined anyway as this sort of event was always lying in wait to destroy them.

Some of the large bank trading desks have also take a hit but at the moment the sums being quoted in the media as losses are chump change to them.

It will be interesting to know if any of the larger hedge funds are at risk and what the counterparty risk are in the event of a major failure.

Edited by stormymonday_2011
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http://www.zerohedge.com/news/2015-01-16/what-soaring-swiss-franc-means-hungarian-and-polish-mortgages

Spoiler alert: nothing good, because what until yesterday was, indicatively, a 1 million mortgage (in HUF or PLN terms) is suddenly a 1.2 million mortgage. But what about the details?

Here they are, courtesy of Goldman Sachs.

Poland. Total balance of SFr denominated mortgage loans in Poland stood at PLN131 bn at the end of November which corresponds to 22% and 15% of retail and total lending respectively, and some 8% of Polish GDP. The individual exposures of banks under our coverage differ significantly with MBK, PKO having >20% of Swiss franc loans while the balances of PEO and BHW amount to <5%. SFr lending remains a legacy product, the balance of which has been declining over the recent years (-22% since 2009) and is expected to fall further. Implications from strong depreciation of PLN vs. SFr predominantly relate to the risks of asset quality and to a lesser extent capital and liquidity. Strong performance of SFr denominated exposures over the last 5 years (2009-14) that came against 28% depreciation of PLN vs. SFr is largely attributable to the fact that mortgage installments remained stable because of declining LIBOR rates. In a press release published today (January 15), the KNF disclosed that according to their stress test, the depreciation of PLN by 30% to circa 4.5 level should not have meaningful and systemic implications for the sector (CET1 - 20bp to 13.3%), while a 50% move (towards 5.1 level) could see banks’ CET1 ratios come under moderate pressure (CET1 -100bp to 12.5%). We cut our earnings estimates for Polish banks by 3% in 2015 and -3% in 2016 to better reflect weaker asset quality and topline trends; we modestly lower our CET1 forecasts.

Hungary. Total balance of SFr denominated loans in Hungary stood at HUF3.9 tr at the end of November, which corresponds to 26% of total lending and, similar to Poland, is largely FX retail lending. Importantly, the high nominal exposure is only temporary given that Hungarian authorities have already started a process of conversion of retail FX lending into HUF. The conversion rates were set in early November (CHF256; €309) and selected banks (OTP, ERST, RBI) have indicated that they have subsequently obtained necessary € and SFr liquidity. The conversion of FX mortgage loans is expected to come into effect as of February 1, 2015. Based on current information we do not expect a meaningful direct impact from the recent FX move.

CHF%20mortgages_0.jpg

CHF%20mortgages%202_0.jpg

I wonder how many of these mortgage will suddenly start to struggle?

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Nice one. Don't know if already posted but Saxo bank are going to go back over the trades they filled....

http://uk.reuters.com/article/2015/01/15/markets-forex-saxo-idUKL6N0UU52W20150115

'Another player in the retail space, London-based interdealer broker IG Group, said many clients were able to close out their Swiss franc positions with IG more swiftly than the broker itself managed to close out its hedged positions on the currency in the forex markets. It forecast it would take a hit of around 30 million pounds.'

One suspects that the retail FX brokerage bankruptcies may just be the start

Needless to say many retail FX investors are going to get wiped out but then any private individual who dabbles in this area needs their head examined anyway as this sort of event was always lying in wait to destroy them.

Some of the large bank trading desks have also take a hit but at the moment the sums being quoted in the media as losses are chump change to them.

It will be interesting to know if any of the larger hedge funds are at risk and what the counterparty risk are in the event of a major failure.

http://www.telegraph.co.uk/finance/currency/11350730/Broker-FXCM-faces-80pc-plunge-after-Swissie-turmoil.html

'

Shares in foreign exchange company FXCM fell by more than 80pc in pre-market, and did not resume trading when markets opened in New York at 2.30pm.

FXCM clients racked up $225m (£148m) in losses, after what the broker referred to as “unprecedented volatility” in trade of the Swiss franc.

Jefferies is said to be in talks with FXCM for a $200m rescue, according to Bloomberg, who cited people familiar with the matter.'

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This discontinuity could have been avoided.

What is financial market stability? A central bank that manipulates whatever they deem fair game can make mistakes. Suddenly abandoning a manipulation scheme leads to jumps, as we have just seen. However, free market forces unfolding - that could get wild at times too.

A central bank should possibly be allowed to smooth market moves short-term if they are too wild. Long-term schemes, however, have to be sustainable in balance sheet terms, unless it is agreed that the currency is printed into oblivion (that is always sustainable).

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. . . any private individual who dabbles in this area needs their head examined anyway as this sort of event was always lying in wait to destroy them.

From the FT

Raj, 33, a London-based photographer and amateur commodities trader who has used Alpari since 2009, said he currently has about £24,000 trapped in his account at the firm.

“It was completely out of the blue, a total shock,” he said. “I’ve never had any issues with them. I’ve been calling and I just keep getting their answerphone.”

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two FX brokers (US-based FXCM and New Zealand-based Excel Markets) announced tonight that they “can no longer meet regulatory minimum capitalization requirements," due to "significant losses" suffered by clients. For FXCM these losses mean a $225 million negative equity balance and they are actively discussing alternatives with regulators. For Excel Markets, it is over... "we will not be able to resume business...Client positions will be closed within the next hour."

FXCM is in trouble...

FXCM’s Chief Executive Officer Drew Niv. “Clients experienced significant losses” after the franc’s surge, FXCM said in a statement dated Jan. 15. That “generated negative equity balances owed to FXCM of approximately $225 million.”

FXCM receive investment by way of big secured loan, some $300m on 10% coupon and other conditions from LUK.

http://www.cnbc.com/id/102343957

(Let's hope distressed opportunities fall to those of us with less money, but enough to take on complacent over-extenders / or others with their locked in perm high values: Wherever prosperity exists, it is natural for people to expect prosperity to continue. For this reason, much of the history of human society is a record of astonishment. .. The deflation process ends after the supply of credit falls to a level at which it is collateralised acceptably to the surviving creditors. Financial assets, and all other asset-classes of value, will be selectively repudiated by default, not obliterated by inflation.)

Leucadia National Corporation (NYSE: LUK) is an American holding company that, through its subsidiaries, engages in mining & drilling services, telecommunications, healthcare services, manufacturing, banking and lending, real estate, and winery businesses with a market cap of about $8.0 billion as of June 15, 2011. Largest current investments include Jefferies and Fortescue Metals Group. The company is sometimes called a "baby Berkshire Hathaway" for the wide range of its holdings.

Excel Markets (NZ)

Looks small compared to FXCM. One moment you're counting your HPI open positions (I always use Guaranteed Stop Losses, and pay the extra trading premium, and don't trade markets which don't have that feature, and not large sums at risk either), next moment, 'Critical Notice'. At least they seem to have position of funds to pay out all their creditors as they wind down/ceased trading. 'As Directors and Shareholders we would like to offer our sincerest apologies for this devastating turn of events, and to thank you for being such a supportive group.'

http://www.excelmarkets.com/

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This discontinuity could have been avoided.

What is financial market stability? A central bank that manipulates whatever they deem fair game can make mistakes. Suddenly abandoning a manipulation scheme leads to jumps, as we have just seen. However, free market forces unfolding - that could get wild at times too.

A central bank should possibly be allowed to smooth market moves short-term if they are too wild. Long-term schemes, however, have to be sustainable in balance sheet terms, unless it is agreed that the currency is printed into oblivion (that is always sustainable).

Yes but how long is short term? The central banks have and do target assett prices in terms of supporting prices via low interest rates, QE and assett purchases etc?

It also implys that they know or take a view as to the fair value as opposed to market value of a particular assert or class of assetts.

This seems counterintutive with respect to there reluctance to identify bubbles!

I have limited knowledge but to me the CBs seem to act more like market participant's and than market makers.

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One suspects that the retail FX brokerage bankruptcies may just be the start

Needless to say many retail FX investors are going to get wiped out but then any private individual who dabbles in this area needs their head examined anyway as this sort of event was always lying in wait to destroy them.

Some of the large bank trading desks have also take a hit but at the moment the sums being quoted in the media as losses are chump change to them.

It will be interesting to know if any of the larger hedge funds are at risk and what the counterparty risk are in the event of a major failure.

You are not forced to trade during high impact news events. Normally the spread and stop requirement increases massively anyway.

Late last week the major FX houses still had massive spreads on the Swissy pairs and my poor old brain can only cope with a few majors at a time, and I tend to ignore the more exotic and racy currency pairs.

Bear in mind the market is mainly algo driven these days and some of which are quite predictable (if you have some awareness of where the big orders exist and can use a Fibonacci tool. Traders in banks these days will largely be managing algo's rather than clicking buy/sell on a chart/

Time after time after time I've watched the market make a pullback and then go to a 127.2 or 141.4 extension. (these are not Fib levels but square roots) and I got that tip from a so called prop trader. Try it yourself on a chart.

Some of the algo's are not that sophisticated. So its not like betting the house by putting all the rent money on red, or the 3.30 runners at Newmarket races.

Last year was marked by a lack of volatility, now rather too much. But we all knew the risks

Edited by aSecureTenant
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The issue that has caused Alpari, other retail brokers and retail traders such problems is that the move in CHF was so big and so fast that most stops that were in place were simply violated.

I suffered this on my fxcm account - I had a long EURCHF / short USDCHF combination open. Both stops were massively violated (by about 1500 pips each). In my own case, the loss beyond the stop loss on EURCHF was bigger than the gain beyond the profit target on USDCHF. I trade very, very small amounts of my account on any one position, but even so, I lost nearly 6% of my account in seconds on Thursday.

However, the move was so big and so quick that many retail traders will have losses larger than their account balance. In such cases, the loss can pass to the broker (in the case of fxcm for instance that is $225m)

Whether the client can settle or not is a question (some will not be able to). Whether they settle quickly enough to meet the obligation of the broker to settle the debt is another question (some will pay up eventually, but the broker needs to settle PDQ if it wants to continue in business. A lot of traders will be arguing that the stop loss should have been honoured by their broker and, therefore, that they don't owe the extra (but they do).

So, as well as it being the fault of the trader for overtrading versus the potential risk, it can be argued that the broker is also to blame for allowing traders to have such large leverage and small deposits for the trading they do. Just as Northern Rock could be to blame for lending people 125% at silly salary multiples.

It is a risky business and far too many people enter into far too lightly imo - that has been proved (once again) by the events of Thursday.

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The issue that has caused Alpari, other retail brokers and retail traders such problems is that the move in CHF was so big and so fast that most stops that were in place were simply violated.

I suffered this on my fxcm account - I had a long EURCHF / short USDCHF combination open. Both stops were massively violated (by about 1500 pips each). In my own case, the loss beyond the stop loss on EURCHF was bigger than the gain beyond the profit target on USDCHF. I trade very, very small amounts of my account on any one position, but even so, I lost nearly 6% of my account in seconds on Thursday.

However, the move was so big and so quick that many retail traders will have losses larger than their account balance. In such cases, the loss can pass to the broker (in the case of fxcm for instance that is $225m)

Whether the client can settle or not is a question (some will not be able to). Whether they settle quickly enough to meet the obligation of the broker to settle the debt is another question (some will pay up eventually, but the broker needs to settle PDQ if it wants to continue in business. A lot of traders will be arguing that the stop loss should have been honoured by their broker and, therefore, that they don't owe the extra (but they do).

So, as well as it being the fault of the trader for overtrading versus the potential risk, it can be argued that the broker is also to blame for allowing traders to have such large leverage and small deposits for the trading they do. Just as Northern Rock could be to blame for lending people 125% at silly salary multiples.

It is a risky business and far too many people enter into far too lightly imo - that has been proved (once again) by the events of Thursday.

Not sure if you can say stops should be honoured when IG etc have 'guaranteed stops' (at the cost of a wider spread of course)

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