SNB on the Clock

As Tyler Durden pointed out the EURCHF fell off of a cliff two hours ago. I think there is a story here worth noting. First let me say that we are in no man’s land. Any part of the Swiss cross is a high-risk trade. Be guided accordingly. I doubt that tight stop losses will be executed if the SNB shows it’s hand.

Consider the timing of the collapse of the cross. It kicked off at 10:25. Why? Because “someone” knew that past 4:30 Zurich time the SNB was a no-show for the day. With that risk removed the “someones” sell hard and fast. Without the threat of the SNB the cross quickly corrects. It did it Sunday night in Asia. It did it NY yesterday. And today the cycle is being repeated.

This is a disaster in the making. The SNB has given the “someones” AKA the “market” a free ticket to coin money. The window is now open to trade around the SNB. If the door remains open, the players will continue to operate, the cross will go lower and there will be a crisis.

In September of 1992 George Soros (but really it was Stan Drukenmiller) broke the Bank of England. They made a bundle in the process. After that, the CB’s quietly agreed that they could not hand up winners to the market. By itself, it created a systemic risk. By making it profitable, it insured that there would a continuing “run on the bank” and the chaos that always goes with it.

The SNB has been doing exactly the opposite for nearly eight months. Their losses are FX player’s gains. It is a zero sum game in the short term.

I can’t imagine that this pattern can continue for long. There is no CB that is not watching this closely. They understand that this is a gathering storm. It is even more troubling that it is happening in a very similar fashion with the Yen crosses. The BOJ is just hot air. Like the SNB they are powerless.

If the CB’s want/need to stabilize speculative markets they have only one option. They have to re-establish two way risk. There has to be risks 24/7 that the CB’s will act. The CB’s have to step up and show they mean business and be active in all markets in large amounts.

This can only be accomplished if the intervention is done with a number of Central Banks and the activities are coordinated. It CAN NOT be accomplished unless the Fed is involved for it’s own account.

Should that be the result it would be the most significant leap in government involvement in the market since February-March of 2008. If initiated it would get the capital moving. There can be no certainty of what the outcome will be. These are the conditions where Black Swans appear.

I would not advise anyone to dabble in this water unless you are a pro. It is better to watch this play out from the sidelines. But do watch the Swiss crosses. There may be significant macro consequences from what will likely play out in the next few weeks. Either the attacks on sovereigns will dramatically accelerate, or the financial system will get “socialized” up another notch. A fair bit on the line.