MEMORY LANE - An opportunity has presented to establish a short position in a market that I haven't been in for a very long time, and a market that is a reminder of some very bad things for many people. That memory is actually a good one for us. As I always say, despite taking a loss on the trade, the decision to place the stop where I did, was what made the difference between a complete disaster and just another day at the office. The best part about that day, was the fact that I was able to anticipate something that many believed could not be anticipated or protected against. Yet, I was able to protect myself against it without getting hurt. The point is that this is reassuring as we don't want to be taking risk when there is a risk we could lose everything in a moment.
WHAT HAPPENED? - So what was it? It was EURCHF. After a very long period in which the Swiss central bank said they would never allow the EURCHF rate to drop below 1.2000, the decision was made to change that policy, which had the market crashing through what had been a floor that could not be penetrated. The setbacks were to the tune of +40% in a matter of moments!!!!! But heading into that day, I had a long position in which I was long EURCHF between 1.2010 and 1.2020 and had placed my stop for the first time ever, above a figure, rather than below. The idea was that if the 1.2000 barrier was ever broken, it would be a nightmare and any stops below 1.2000, would never get filled, leaving the account at a risk of complete liquidation.
EXHAUSTING WORK - Fast forward a little more than 3 years, and here we stand with the EURCHF rate recovering all the way back to that previous floor at 1.2000. This has not been an easy job for the SNB, and the central bank has taken an active role in pushing the exchange rate back up. Negative interest rate policy and what could easily be argued as way too much balance sheet exposure to US equities, were some of the measures taken to make the Franc softer and the EURCHF rate higher. And of course, the SNB has been buying the rate as well, in a more direct form of intervention. But now we are all the way back to 1.2000 and the world we're living in is very different than the world we lived in when that floor collapsed in spectacular fashion back in 2015.
THE TRADE - We live in a world where central banks are unwinding their aggressive easing policies and the implication is that this will weigh significantly on risk assets. If this is the case, it will be very hard for the SNB to fight against intense demand for the Franc that it hasn't needed to worry about post 2008 financial markets crisis. And even with all of the positives at its back in recent years, the battle to get back to 1.2000 has been intense. So this time round, the break of 1.2000 doesn't have that same meaning and if anything, an anticipated decline in global equities could very well weigh heavily on the EURCHF rate on the back of flight to safety demand for the Franc. And the icing on the cake here? The technicals are screaming to be selling EURCHF on the overbought readings across all time frames (hourly, daily, weekly, monthly). The downside risk has been managed to allow for a nice cushion in here and we will see if the market can give us the follow through we're looking for in the sessions ahead.