SNB: will it or will it later? An order flow analysis
For the past two days there has been much chatter about Eurchf 2000 peg and its getting louder as we spend more time between 2030 and 2050 with specs patience getting tested like someone waiting for a flight at the airport with a name card in his hand (and the visitor promised him a gift).
My orders are in place and one getting triggered every day so i wan't much concerned regarding outcome much as i have gotta a nice average on entries, stoploss is set and i am doing quit well with the other pairs . But when the huge size of stop loss number came out in the market i started thinking and that's what i have been doing all day today between my trades.
Latest number i heard of stop reported below 2000 were exceeding EUR 20 bio (one number on April 2 was EUR 28 bio) and of stop below being sized EUR 8 bio and i am sure its growing every day as more and buyers are getting in so i will use the figure of 35 bio.
There are two arguments in the market 1) SNB will defend at all costs...2) SNB will defend but they might let the stops get triggered below 2000 first.
While the 2nd idea looks intelligent and outofthebox there's also another angle that i am looking at but first my thoughts on the 2nd idea,
Will SNB betray the trust of speculators who have been buying in front of 2000 and helped SNB defend their peg?
Ofcourse its not like its a wrong thing to do (specs have been hurting SNB for a long time now anyway so dont expect SNB to have a soft corner for them) but the point is if they do that than the next time Eurchf will come back near 2000 after the intervention (and it will) there will not be an orderflow of worth more than EUR35 bio to help them defend it again.
What will SNB achieve by letting the stops trigger below the peg?
Well the arguments are
1) When they will intervene after the stop are wiped out SNB wont have to fill the TP's of specs(buyers above 2000) at like 2400 or where ever the specs had them placed. Which will result in a lower cost of intervention
2) By letting the stops trigger SNB will ofcourse start their intervention below 2000 resulting in a better average position for SNB for what would be obviously higher if start the intervention before the stops get triggered.
Ok these are two valid points But,
Addressing the first point, SNB will have to fill the TP's of specs in any case cause they are gonna start placing buy orders above 2000 (that's what i'd do) the moment eurchf breaks 2000 and get simply picked up when its on the way up (cant get any easier than that).
Second I dont think SNB will able to get too much below 2000... why? cause there wont be enough stops below 2000 to service both sellers TP's and SNB's bids........WHAT ABOUT THE 35 BIO OF STOPS????
Ok lets do some simple logic and math.
The number for stops is EUR35 bio which implies that around same number OF EUR's were bought above 2000 which further implies that in order to break 2000 sellers will have to sell more EUR's than the EUR's are being bought right?
So lets assume that 35 bio EUR's were bought and 36 bio EUR's were sold resulting in 2000 getting breached. Next the sellers will offload their 36 bio EUR's into 35 bio worth of liquidity. So we have 1 bio EUR still left to ofload which will result in quick whipshaw price action and Eurchf will be back above 2000 in minutes.
But that's not all..... actually there were more than 36 bio Eur were sold in order to break 2000. Sellers also had to go through the bids of SNB which are not added into the EUR35 bio (bought) number cause SNB dont have stops below 2000. So there will be more than 1 bio get left to offload.
So i think liquidity will be scarce below 2000 for sellers and if SNB jumps in below 2000 too they are gonna speed up this process and end up with almost same average price.
What will SNB achieve by simply defending the peg?
They will strengthen their credibility, Gain trust of more speculates thus a bigger order flow that will help protect their peg next time.
Everyone is talking about the huge stops below 2000 but what nobody is talking about is the stops above 2050.
as i calculated above that if the stops below 2000 and 2020 are worth more than 35 bio than sellers also have to sell more than that amount to break 2000 to hit those stops. Now ofcourse those sellers also have stops too and the way 2050 is being protected i am certain sellers dont want us to go there cause thats the area from which above there stops come into the game.
Now as it turns out this might not be a very expensive intervention for SNB this time.
All they have to do is to throw in a big order that should pop 2050 and starting triggering those stops, when people will see this on charts more buy interest will start to come into market and the game will be over for sellers and i think SNB can offload their long into stops above 2050 and buy interest and book a nice profit.
Considering this scenario it also comes to my mind that maybe they themselves let this rumor free in the market to create such an opportunity?
So why is SNB delaying the intervention than?
1) They could be wating for stops above 2050 to grow bigger and bigger to inflict maximum damage.
2) I heard they sold Volatility (via options ofcourse) so they get paid when market is not volatile to fund the future interventions.
Thats all for now. What i have written above are my personal views, numbers are ofcrouse hypothetical (based on my limited knowledge and schoolboy math) so trade at you own risk.
Open for discussion and criticism.
Nasir, a few weeks back I was stationed for long on a dip on ECHF but bailed shortly afterwards for a couple of pips when I realise I was sat in a giant herd.
Yes there is x bn of stops below 1.2 but much of that is stationed in puts, so you can't break them. Funds have learnt from the JPY interventions to cover their slippage. It could be sat around 2040 for weeks, even months on end largely depending on what happens with the euro. A couple of big figs down on EU should trigger action but as to it being at their stated bids (2020) or a run down first initially I'd toss a coin instead. Throwing in the towel is the least likely option IMO.
Great analysis Nasir.
Can I ask from where do you get the information about the volume of stop orders? Just curious.
So, back again on sentiment & specs behavior, COT data shows that specs turn to fully neutral stance after march 15. Remember March 14 & 15, right? SNB give a signal to raise the peg but actually the next day market see nothing, no move of SNB, that makes price that already spiked to 2145 back again to around 2050. That means specs is on sideline thesedays, they are not attracted with swissy unless SNB give another clear signal & the specs also not attracted to fight the peg with so many excitement news on other country.
The eyes are on China & US, the flow heavily flowing there & nation's attached to it -japan, china & absolutely australia- I think there is nothing worth to watch on CHF, SNB also knows that, they of course still watching 2000 levels but with less caution whenever USD is starting to back as world's save haven.
Above condition makes "the only" player is retailers and we can't expect much from them. That don't mean CHF in a calm water now, whenever liquidity away like thesedays, any "small" market order can push the price wildly as long as the specs have strong reason to play.
Nice gun on the barrier this morning. These stops are so huge they are skewing price feeds. Be careful guys this is dangerous.
This attack just sent a very clear message imo. Intervene now or face more gunning. Buy interest was just cleared out all the way to the barrier. NO ONE should be holding for the weekend if the snb just lets price sit here.
Market talk: We’re presently at 1.2015, talk having had upwards of 9 yards (billion) of euros on the bid on EBS at 1.2000.
9b and 15pts to trigger 25+ yards in stops has some risk/reward in it. Something to think about.
Update at bottom says bank is NOT up to the challenge to hold the 1.2 floor...
Link though says different : https://mobile.twitter.com/ChrisAdam...40971172618240
Retailers got fucking owned on that push earlier. Ebs confirmed the break but said it was mostly a technical issue. Interesting stuff today. This definitely calls snb credibility into question.
I see a lot of limit buys and not many sell stops taken out. Those that bought on the drop have placed even more stops under ~1.1990.
I've been keeping my eyes on this pair for quite some time, and used to trade it actively before the peg was instituted. Since then, I've been keeping an eye on its reticent movements in the hope that we'll get some official action to liven things up once more.
Regarding the liquidity analysis, I believe Tactical said it best. Speculators would have to chomp through ~10Bio of bids ahead of the barrier before they can savour the succulence of the ripe, massive stops lieing below. Assuming these stops are about ~30Bio, then for a fund, or group of funds with the right amount of co-ordination, this can easily make a profitable year, especially with the employment of some leverage.
The majority of retail and their mothers, is currently stationed long ahead of 1.2000, in the hopes that the SNB will actively intervene, and perhaps trip stops higher up in the range, which will conclude their play. One risk is that the SNB intervenes only enough to get the pairing above the peg back into the range, and opts to stick a fatter bid at the handle. This would be the dumbest policy move, as they would essentially be asking for further excursions beneath the handle, and add brilliantly to their list of previously failed interventions.
The strictly dominating strategy to play here, as is usually the case in these markets, is to play against the herd. If the peg is breached in some quiet, thin liquidity conditions (coincidentally many financial centres are closed for Easter), and spot can get to 1.1980-50 to trigger, what should be a large portion of the stops, we may possibly get a huge splash past the level, due to a lack of bids below there, into the many options structures such as DNTs et. al, which reside below the level. This would definitely cause the SNB to quickly enter the market to get spot above the peg. The end result is that the herd gets their accounts transferred to more able speculators.
What I wouldn't advise, is to get long at 1.2000. The SNB will only actively execute market orders if they feel that the peg is threatened, and any threatening of the peg will be an orchestrated feat whose sole goal is to liquidate into the stops below there. Save for a visit beneath the peg, spot will only climb up convincingly from the level if the SNB decides to hike the peg to 1.25/1.30. However, I see this scenario as far more unlikely, at least in the short run.
In summary, there are ample opportunities to profit from this event. Spot is not going to remain glued to 1.2000 forever. Be careful, and as always, may the best speculator win.
Another interesting day in the market. . . I thought today's events deserved a little review.
The verdict is that the SNB floor was officially breached for the first time today. The reason I find today particularly interesting is because of the way the level was breached.
Once price traded below the number the SNB immediately intervened at the market. The situation prompted a test of the liquidity at 1.2 exposing 9 billion in protection.
Upon reviewing the situation I do have some doubts that any more immediate gunning will take place. The SNB more than likely already patched this hole. They have 9B on the bid and I'm sure they are on high alert. Even if there is an attempted attack on their bid they can reload. I'm not placing any bets on this though. No one saw this coming and I'm not going to pretend for a second that I genuinely know what's going to happen with this floor.
Something else to consider is the SNBs unwillingness to pay off specs who are taking longs. If risk aversion picks up like it did last year the and the perception is that they are going to just sit there on the bid. the SNB is going to have some real trouble on their hands if specs lose interest and risk averse participants begin to unload billions into the floor.
sell in hell
Intersting thread you got here Nasir. I've also been banging my head with what the intentions of SNB are. Its interesting to see some insight from other trades.
But looking the reaction today I would say they are already neutralized. Of course some retailers attracted but not much on the "idle" market like that, the most unluckiest one is the one got their eur/cf ask filled below 1200 last thursday.
Today may be those breaching scars can creating a new perception to market player. Can it shake the faith of loyal bullish specs? That's the question for this week.
Hey everyone, really sorry for starting the thread and never responding to anyone's post....had some other cam up and dint had the energy to reply to you.
So the question i have is why SNB's is not doing what is was expected to do and why its doing what its doing.
and the conclusion i am reaching is that,
What happens if SNB never intervenes and just defends the peg?
After some weeks or say a month or so speculators on the bulls side will slowly move out of this pair to free up their margin and reducing the risk of what happened last week.
from the bulls side,
negative in this case of course is that's gonna generate more sell orderflow for SNB to hold back but positive's are that Stops below will start to get lightened and WHEN/IF SNB ever intervene they wont have to fill bulls TP's.
from the bears side,
Well with bulls moving out it will seem easier than before to break 2000 but also there wont be that much liquidity (stops) below the level too. Now people who are selling Echf are not like retail traders they have got balls, bills and brains on their side so they wont give up that much easily. I dont know whats gonna happen here cause i cant say how long SNB will have to hold 2000 before bears give up on it.
Well from what it seems to me the plane could be to just defend 2000 and never intervene to draw out the buyers in anticipation for an intervention and they want same for the bears to who give up on trying to break the peg. So for a bank like SNB what could better than a currency which Specs dont wanna touch.
What SNB also can do from time to time is to spike it up like 30-70 pips every now than to further damage the bears confidence.
In between SNB could sell the Volatile option to help them generate money to fund the interventions though money is not big problem for SNB as they going through some deflationary cycles (so can print).
This is the beauty of order flow art, we can analyze from any angle and still came to the similar conclusion
Tac, Re the options, puts are already in place so its delta hedging that'll gather momentum rather than stop feeding. Not much difference in PA other than a lack of distinct stop levels to sweep. Even discounting this, there's still clearly a ton of bog standard stops below. No idea about proportions and no mysterious calculations, just regularly mentioned on IFR.
SNBs tactic looks like they're going to bore traders into submission and on that front they're winning.
Zurich, 10 April 2012
Discussion on the topic of the euro/Swiss franc minimum exchange rate
by Thomas J. Jordan, Vice Chairman of the Governing Board of the Swiss National Bank
Ladies and Gentlemen
I would like to welcome you to this discussion on the topic of the euro/Swiss franc minimum exchange rate and thank you for attending at such short notice. As you are aware, on Thursday of last week a few of the transactions in the foreign exchange market for the euro were concluded at a rate below the minimum exchange rate set by the Swiss National Bank (SNB). I consider it important that you are aware of the sequence of events, and also that I reaffirm the SNB’s current policy. Since this is a specifically market-related topic, we have chosen this rather special approach involving a discussion with news agencies.
The fact that a few individual transactions at less than CHF 1.20 per euro were observed last Thursday has led to some isolated doubts being raised about the SNB’s resolve to enforce its minimum exchange rate. Right from the start I want to make it quite clear that such doubts are misplaced. The Swiss National Bank is enforcing the minimum exchange rate with all the means at its disposal. We are prepared to buy foreign currency in unlimited quantities for this purpose. In this respect, our policies are totally unchanged.
What precisely occurred last Thursday? Within just a few seconds, the euro/Swiss franc exchange rate fell from 1.2020 to 1.2000. Despite SNB offers placed in the trading systems, a few isolated transactions occurred below CHF 1.20 per euro. However, at no time did the best available euro exchange rate in the market fall below the minimum exchange rate of CHF 1.20. Thus, for a short time, what is known as a segmented market could be observed, in which transactions below the best price were concluded. This situation was remedied within very few seconds, however, by means of arbitrage.
How could transactions take place on the foreign exchange market for below CHF 1.20 per euro despite the fact that the SNB was at all times present in the market? The foreign exchange market is a decentralised market. Rather than foreign exchange being traded on a bourse, forex transactions are made directly between market participants. Each bank has its own individual group of counterparties, and, in particular, banks with lower ratings only have a small number of counterparties. The exchange rates below CHF 1.20 per euro were concluded by banks that do not have an agreement relating to limits with the SNB, in other words, by banks that cannot or do not wish to trade with the SNB. The SNB was at all times prepared to buy unlimited quantities of euros at CHF 1.20 per euro. All market participants were at all times aware of this SNB purchase offer, including the banks without an agreement relating to limits. Consequently, banks which sold euros for less than CHF 1.20 did not receive the best market price and had – relatively speaking – to accept losses. Since there is no compulsion to make business transactions at the best prices, such anomalies cannot always be excluded. However, they can only be maintained for a very short period.
How is the SNB organised in operational terms for implementing the minimum exchange rate? Since the introduction of the minimum exchange rate, the SNB has monitored the foreign exchange market from market opening in Asia on Sunday evening to market closing in New York on Friday evening without any interruption. The same applies to holidays. The interbank market, which is the market of relevance for the SNB, includes its counterparties. The SNB accepts well over 100 banks with more than 700 trading desks as counterparties. Thanks to this network of contacts, the global foreign exchange market is almost completely covered. On the part of the SNB, the trading limits amount to some hundreds of billions of euros a day. These limits can be flexibly adjusted by the SNB, should this be necessary. Via electronic trading systems, the banks have access at all times to the offers. The SNB’s strategy for implementing the minimum exchange rate has proved effective – including in the last few days. On the relevant interbank market, CHF 1.20 per euro qualifies as the lowest exchange rate. Consequently, the minimum exchange rate applied at all times.
Does the minimum exchange rate continue to apply? Yes. Without any qualification. The SNB has successfully enforced the minimum exchange rate and will continue to do so, without any restrictions. The Swiss franc is still overvalued and represents a substantial challenge for the Swiss economy. The SNB continues to expect that the Swiss franc will weaken. Should the economic outlook and the risk of deflation so require, the SNB stands ready to take further measures at any time.
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