PRAESENT ABIIT FERAE!
“CURRENCIES GONE WILD!”
As you may have noticed there’s been significant percentage moves in many currencies lately in the FOREX markets. The strength in the U.S. dollar lately versus the cross rates against the Euro and the Ruble are particularly remarkable. Also Thursday night the Swiss Central Bank decided to lift its peg against the Euro after having it for just a few years (in an effort to increase their exports to all of Europe). They decided to do this when the Franc was at the top end ceiling range of trading set by the Swiss Central bank, which explains why so many traders and investors were caught on the wrong side of the trade. When the Swiss Central Bank issued the news, they effectively pulled the rug, perhaps the magic carpet, out from under the Euro. Consequently, instantaneously the Swiss Franc appreciated against the Euro in the magnitude of approximately 30%, and against the cross rate to the U.S. Dollar, the Swiss Frank rose roughly 16 to 17 percent in just seconds (closing up these figures for the day). Obviously, this caught a lot of traders by surprise!
As you may or may not know, the SEC does not enforce its rules and regulations on commodities (including currencies) traders, so there’s no “Reg T” to deal with. Consequently, the traders and investors, regulated by the Commodity Futures Trading Commission (the CFTC), are actually allowed to use 50:1, or 100:1. In foreign countries abroad investors can legally employ the use of leverage (meaning to borrow funds to seek excess returns) in currency trading at 400:1. Consequently when a 30% move occurs, investors with 400:1 leverage (and borrowing) can have unrealized gains or losses of 12,000% (derived by 30×400). Such excessive and intense borrowing is allowed because many currencies are widely believed to trade with minimal volatility and in tiny daily percentage moves. Currency and Commodity trading firms believe they can issue margin calls, and traders and investors believe they can self protect themselves from “big” moves by using stop-losses. Obviously, this time, these precautions didn’t really help to mitigate losses. I wouldn’t necessarily even agree that currencies don’t appreciate or depreciate much over e.g. the course of a day, and as you can see below in the charts, currencies have been on the move! The Swiss Franc moved instantaneously (from roughly 0.98 to 1.165) so strongly that those caught on the wrong side of the trade will, or may, pass on their losses to the brokerage firm, who has to make the other side’s trader whole, at once. Consequently, these currency and commodity brokerage trading firms may “go bust!” and file for bankruptcy (due to the excessive leverage, hence borrowing that’s so common for commodities traders). This is what makes borrowing money for investing so dangerous, in securities trading it’s referred to as “margin,” in commodities trading it’s referred to as acceptable leverage. If I had to guess the CFTC’s leverage and margin requirements will be examined by some regulatory agency.
Despite what the media has been reporting, there have been some HUGE winners in the currency markets, in addition to HUGE losers as of late, regarding the currency cross rate of the Swiss Franc to the Euro. By definition there must be someone on the opposite side of the futures transaction.
Also lately on the move has been the Russian Ruble, which due to oil’s great depreciation since late June of 2014, has depreciated substantially versus the U.S. Dollar.
The Euro has also been experiencing a major slump, and has depreciated substantially against the U.S. Dollar, and other major currencies. The U.S. Dollar has reached an 11 year high versus the Euro, now at (a cost of U.S. dollars at) 1.1561. I believe the Euro will continue to have further future losses against all major currency cross rates, and I think the Ruble is also headed for further turmoil, despite oil having reached a potential bottom or trough on Wednesday, January 14, 2015. I’d say Europe is in dire straights because of nearly no growth, no consumer spending, no savings & investment, nearly zero interest rates, and because of poor education, ridiculous job security, corruption, zero inflation (they forgot how to print money at the ECB, which could be spent, immediately assisting jobs and GDP growth, etc.), deflation scares (which halts spending further by the people, who wait for lower and lower prices, causing zero growth, if not a contraction of the economy, and layoffs), and their taxes are too high. Another looming problem worldwide (especially in Japan) is the coming generational storm of demographics, due to birth control pills. Additionally, perhaps socialism really isn’t conducive to economic growth, economic development, or to progress.
The Ruble, the Russian stock market, and oil seem to correlate as of late. Many are wondering and are worried about a possible default of the Russian Ruble this year, and of Russian’s sovereign bonds, notes, and bills (additionally, after a couple weeks passed, Moody’s and/or S&P have finally gotten around to downgrading their Russian outlook, and their currency, and their sovereign fixed income… I think Russia’s 17% interest rates readily let investors know of the risks involved in the Russian debt markets, as does their rapidly depreciating currency. BEWARE: The Russians are having a currency crisis, and interest rate surge).
Next week traders may be looking for signs the ECB will provide some kind of stimulus program. Europe has experienced and endured elevated unemployment, weakening GDP growth, recent disflation and deflation. Their nearly zero interest rate policy also is not conducive to savings & investment. The ECB also seems to be broadcasting that they have no intention to raise interest rates anytime soon.
What currency traders analyze, or really what I would analyze before trading any particular currency cross rate would include a broad base and range of economic data of one nation versus another. Most traders would choose their home country versus a foreign country, but anyone could trade any particular cross rate they’d like. Before trading a currency I would suggest these investors and traders examine interest rates (and if they’re rising or falling), inflation rates (and if they’re increasing aka reflation, or decreasing aka disflation), and GDP (is it falling or rising, and at what rate, and is this rate gaining strength or slowing down), the labor markets (employment, unemployment, and labor force participation rates), deficits or surpluses (and is it getting more or less obscene), and total government debt outstanding (how fast is this figure increasing per year?), as well as the deficits as a percentage of GDP, and the total debt as a percentage of GDP. They then have to develop a hypothesis or forecast or estimate of which way these figures are going to go, either improving or deteriorating. Only at this point would I, or these hypothetical currency traders be either bullish or bearish on their home country’s currency vs. some foreign currency. Again, this is what I’d do, and what others do, is their choice. Some may just examine which way has the currency cross rate moved in the last 1 minute, 5 minutes, 30 minutes, or 60 minutes, and decide to then either buck that trend or go with the flow… they could also examine the exchange rate for 1 day, 5 days, 30 days, 90 days, 180 days, or 365 days, and decide to either buck that trend, or go with the flow. There are many ways (and no right way) to eat a reese’s pieces.
I believe the Swiss Central Bank simply didn’t want to support the Euro any longer, by purchasing it in the open market to support it’s price, versus their Swiss Franc. They felt as though they had accumulated enough Euros, and they decided to dump them on the open market. They had wanted to artificially lower their cost of a Franc to Euro holders, to artificially increase their exports to Europe. After that experiment, they decided to stop it. The Swiss Central Bank also had tried to weaken its own currency by introducing negative interest rates of -0.25% for its Government Securities, but that couldn’t even support the Euro, and weaken the Swiss Franc. Negative interest rates are nuts to me! Who in the hell would pay a Government for the privilege of holding and owning their fixed income!? It sure doesn’t stimulate savings & investment.
Ponder this, if margin interest rates were zero (and they never are… but this is funny!) if margin interest rates were zero, what would happen if you shorted a Swiss Franc Denominated Government bill at -0.25%!? Would they then owe you money, aka interest?!
Below, behold… CURRENCIES GONE WILD!!!
Press here for all major currency cross rates… http://www.cnbc.com/id/15839178 or here… http://finance.yahoo.com/currency-investing.
Press here for the cost of the Euro in U.S. Dollars, and a one year chart. As you can see the price of a Euro in Dollars has been trending lower and lower.
Press here for the amount of Rubles you’d get per U.S. Dollar, and a one year chart. As you can see the amount of Rubles you’d get for a U.S. Dollar has been nearly going parabolic lately. The Russians are having, in my mind, a major currency crisis, as the Ruble has lost roughly now half it’s value, over the past year. It’s from the Sanctions imposed due to their War against the former U.S.S.R. states. This will cost the Russians an “arm and a leg” to import things compared to just a few months ago. Also, to foreigners, Russian goods will be looking awfully cheap.
Press here for the cost of the Swiss Franc in U.S. Dollars, and a 5 day chart. As you can see the price of a Swiss Franc surged versus the Euro, when the Swiss Central Bank no longer bolstered the value of the Euro, in an effort to artificially increase Swiss exports. An immediate nearly 30% surge, wound up closing up around 17% for the day.
Here is a 6 month chart of the exchange rate between the Swiss Franc and the U.S. dollar, it is plotting the cost of 1 Swiss Franc. As you can see, currencies don’t really make tiny moves, sometimes they gap up or down rather quickly.
Here is the price of a Swiss franc quoted in the Euro currency. Here you can see the cost of a Swiss Franc quoted in the Euro currency.
Hence, for all these reasons, it is now officially… “CURRENCIES GONE WILD!”
By Andrew G. Bernhardt
Bernhardt Capital Management LLC 