PM Daily Market Commentary - 1/15/2015

davefairtex
By davefairtex on Fri, Jan 16, 2015 - 12:48am

Gold screamed higher today, up +33.50 [+2.73%] to 1262.60 on very heavy volume, while silver rose +0.11 to 16.95 on moderately heavy volume.  The move in gold was entirely driven by the stunning decision of the SNB to drop its peg to the Euro, announced at 0430 EST.  EUR/CHF dropped an unbelieveable 20 cents - from 1.20 to 1.00 - over the course of about an hour immediately following the announcement.  Gold started edging higher right after the decision, and as traders sorted out how they should react, the move gained momentum, finally blasting through the 200 MA after the NY market opened, and by end of day, closing relatively near the highs.

You can see by silver's relatively muted reaction that today was a gold-is-currency safe haven move; silver's underperformance caused the gold/silver ratio to shoot higher, +1.48 to 74.47.

So why did the SNB pull the plug on their peg?  Right now, we cannot say exactly why, and the SNB isn't telling, so all we can do is speculate.  Perhaps in the run-up to the ECB's money-printing decision (scheduled for the 22nd of January) as well as the Greek Elections (scheduled for 25th of January), the currency flows into the Swiss Franc were starting to become unbearably heavy.  To maintain a peg, a central bank must stand ready to print and sell unlimited amounts of national currency in exchange for another currency - in this case, the Euro.  We won't know if this was the case until the data releases from the IMF catch up to real time, which will take about two months.  Last data I have for Switzerland is from Nov 30, 2014, and things looked calm.  But that was 45 days ago, and a lot can happen in 45 days.  Perhaps too, Mario Draghi had indicated privately to the SNB that he really was going to start printing money with wild abandon, and the Swiss didn't want to sign up for that ride.

Regardless of the particulars, the decision did not look to be carefully planned but seemed to be driven by a forced reaction to some circumstance outside the SNB's control.  They certainly didn't want to do this, it appears to have been forced upon them, since Swiss manufacturing will be badly hurt by a rising currency.  Ultimately, the Swiss are voting with their wallets, and I believe the market interpreted the SNB's dropping of the peg as a very strong vote of no confidence in the Euro.

The impact of such a dramatic move may well cause the failure of individuals and financial institutions who were expecting the peg to stay in place, and were selling financial insurance on margin against just such a move imagining they were simply collecting free money.  One FX trading company revealed:

NEW YORK, Jan. 15, 2015 (GLOBE NEWSWIRE) -- FXCM (FXCM) an online provider of forex trading and related services worldwide, announced today due to unprecedented volatility in EUR/CHF pair after the Swiss National Bank announcement this morning, clients experienced significant losses, generated negative equity balances owed to FXCM of approximately $225 million.

As a result of these debit balances, the company may be in breach of some regulatory capital requirements.

Translated: "we don't have enough capital to cover our client's margin calls."

How can that happen?  A hypothetical client might have a $10k account balance, and that provided them with enough "margin" to fund the sale of a EUR/CHF put, with the client expecting to net (perhaps) $500/month in "free money" premiums since the SNB was maintaining the EUR/CHF peg at $1.20 - but when the big move happened today, now the client is on the hook for a $200k payoff to the buyer of the put because the move was so massive and it happened so quickly.  Multiply this situation by 1000 clients, and now FXCM has a problem, since if the client with the $10k balance can't (or won't) cough up the $200k, FXCM is on the hook to pay the counterparty.  This could easily take out the company.  Since these are on-exchange derivatives, FXCM is required to come clean about their issue.  You can be sure that there are banks engaging in proprietary trading with exactly the same risk/reward who are in this same position.  We won't know who they are until they decide to come clean.  Losses could be massive, depending on just how many traders were trying to pick up seemingly free nickels in front of the steamroller.

One fun aspect of the move is that most trading systems simply locked up and clients couldn't execute trades in the hour following the event.  There was no way for them to "bail out" of the trade until long after the dust had settled.  Even the trading firms like FXCM who really wanted to unload their client's positions could not do so.  Lots of people all trying to get through the same small door = trading systems fail.

So why did this huge currency move affect gold?  That's harder to say.  My guess: both the CHF and gold act as safe haven currencies - so when the CHF suddenly became more valuable, gold looked more valuable too.

The USD had some high volatility today in the wake of the SNB decision - first it spiked higher to 93.30, then lower to 91.50, stopping out both longs and shorts in turn in the 90 minutes following the decision.  By end of day it closed up +0.29 to 92.57.  EUR/USD dropped -1.63 to 116.25, breaking sharply below the previous low set in...2006!   Martin Armstrong's computer suggests that a weekly closing below that 2006 low of 116.40 will be devastating for the Euro.  No matter what the talking heads or the central bankers say, the market is speaking if you are willing to listen: the Eurozone is in big trouble.  Make that, Big Trouble.

Mining shares rallied, with GDX up +5.76% on heavy volume eliminating two days of losses, while GDXJ was up +4.88% on moderately heavy volume.  The miners weren't as excited about the move higher in gold as I think they "should have been" - miners are looking relatively weak against the metal right now.  I'm thinking that this particular miner rally cycle may be a bit long in the tooth, and if/when gold takes a break, miners will sell off strongly until buy-side support builds again.  I also get the sense that "safe haven" moves in gold are given less credit by traders of the mining shares, since they seem to be less durable than moves that are based more on overall price level increases.

SPX sold off again, dropping -18.60 to 1992.67.  SPX looks destined to test the December low of 1982; a failure of that low will be bearish for equities.  VIX moved up +0.91 to 22.39.

Long bond ETF TLT had a very strong day, up +1.57% scoring a new cycle high; 20 year rates down to 2.12%.  JNK dropped -0.57% - it did not like the drop in oil prices today, I suspect.

The overall commodity index ($CRB) dropped -1.28%, losing much of yesterday's gains.  It was able to move above the EMA-9 but could not hold those gains into the close.  WTIC behaved quite similarly - it started moving higher following the SNB announcement and eventually spiked up to hit 51.73 right before the NY open.  However, it then sold off for the rest of the day, eventually closing down -2.41 to 46.21.  While this big failed rally hasn't yet resulted in new lows, it did entirely wipe out yesterday's strong move higher in oil.  From the market's reaction today, it appears that the recent bounce in oil may just be short covering rather than something longer lasting.

There was a rally in copper, but it was relatively mild, and silver's difficulty in moving above resistance also doesn't lend confidence to a move higher in commodities.

The market will take some time to digest the implications of the SNB decision today; it certainly appears to be gold-positive overall, but now we will see if traders will want to immediately continue pushing prices higher now that gold has broken conclusively above the important 1240 resistance.

Understand too this appears to be a safe haven/gold-as-currency move rather than a more general "price level" (i.e. inflation-driven) gold trend, which means the elevated prices in gold will remain only as long as the perception of immediate trouble persists.  I think that will remain true through the upcoming Greek elections, and possibly beyond if Syriza gets tapped to form the next Greek government; if Syriza loses the election, then gold may well see a sell-off.

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3 Comments

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1428
When the Swiss Franc was not

When the Swiss Franc was not pegged to gold it tracked gold quite nicely.  So with the unpegging the monkey goes back to trained behavior.  Why did SNB make this move?  Local inflation?

sand_puppy's picture
sand_puppy
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 1758
Tell Martin Armstrong it just happened

DaveF, 

I appreciate your thoughts on what happened and theories about why the SNP might have made this move.

DaveF wrote:

EUR/USD dropped -1.63 to 116.25 ....   Martin Armstrong's computer suggests that a weekly closing below that 2006 low of 116.40 will be devastating for the Euro.  No matter what the talking heads or the central bankers say, the market is speaking if you are willing to listen: the Eurozone is in big trouble.  Make that, Big Trouble.

Well it didn't take long.

sand_puppy's picture
sand_puppy
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 1758
One more colorful eur/chf commentary

More colorful commentary on the 3 phases of the eur/chf exchange history:

[T]hree distinct section: The cyan area is Markets As God Intended. The green section is the rigidly-controlled, ruled-by-doctrine, price-by-decree market, which went on for nearly three years. And the magenta area, which is just a single price bar, neatly represents what happens when the markets are allowed, pushing and shoving, back into reality.

 

 

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