Article / 18 January 2015 at 23:53 GMT

Macro Take: SNB ripples continue into ECB and Greek decisions

Global Macro Strategist / Saxo Bank Group - Singapore Hub
  • SNB shockwave effects are far from over. Watch the bodies pile up, as different entities get the hit 
  •  Next up: the ECB on Thursday – will Draghi disappoint again? Or will we see the mother of all QEs? 
  • After which: the Greeks go to the elections booths on Sunday. Will the “Exitonians” win?  

By KVP (Kay Van-Petersen)

Live from the Asia Pacific! We start off with a switch of gears, the combination of feedback (why is it sooo long KVP and too much info … moan … moan), finite resources (me, myself and I), a push towards being more client focus (more trade ideas and thoughts through direct conversations) as well as significantly shortened bandwidth over the weekends – while others train for marathons and triathlons such as my colleagues Goldfish, Marathon Morten, Holiday Sander and The Oak … I and Hampton Hamish train for the CFA – we’ve had to put the Macro Week Ahead on the shelf and instead we’ll be running with my Macro Take. 

This is a more concise snapshot of where I think traders should be looking and with heavier focus trades. Those still wanting to tap into my beautiful mind, can call me at any time. There are only three things on my mind this week, SNB, SNB and SNB. I will also touch on the ECB and Greek elections.

The Swiss franc as a global safe haven has been blown out of the water following the SNB's decision last week. Photo: Thinkstock

On the SNB

See my earlier detailed piece Never trust a Swiss central banker take on the pros and cons of the move, as well as thoughts on the corresponding tail and headwinds post this EPIC surprise. 

I will just like to add and reiterate the following points:

  • The causalities of the fallout are just starting, there will be a lot more bodies and blood. I still do not believe most people understand the significance and magnitude of the revaluation we saw in the Swiss – it’s the biggest one-day move ever of a major currency at -30% and -28% versus the EUR and USD at one point, before closing the day down -19% & -18 respectively. 
  • There is still a lot of dust that needs to settle, as well as a central bank that now has a free floating currency, yet with 500 billion of reserves (Over 80% of Swiss GDP), about half of which are in euros. 
  • The SNB through its actions have sent across a number of conflicting signals, such as before the event communicating that it thought deflation was a threat and the Swiss franc was overvalued (wonder what they think of it now) – but despite the negative rates (which did nothing when first implemented in December 2014), this move is actually a massive tightening on the Swiss economy. 
  • SNB credibility is completely shot to pieces and the Swiss franc as a global safe haven, I believe has been completely blown out of the water. 
  • While I may be early, I think when we look back in six, 12 or 24 months from now, we’ll be thinking at Friday’s close of 0.8587 on USDCHF and wondering why we did not go long. So while the safest and wisest course may be to stay away from all things Swiss (put that chocolate down, as you probably want to buy and stack on all the Swiss chocolate you want before prices take a leg up), to me this is one of maybe five high conviction trades that a macro trader can hope to find a year. So I’d encourage people to do the work on this, as I think these are great levels to start building a line on a high conviction long USDCHF trade. I cannot emphasise this enough; this is not a near term-tactical position but belongs in the strategic and heavy hitting part of one’s diversified portfolio.   

The oversold USDCHF is still -10% from the five-year average of 0.94, let alone fair value which most analysts equate to at least parity

Source: Bloomberg

ECB and Greek elections

See our bullish and bearish views on how to play both these events in ECB and Greek election: Are you a Bullish Benny or Bearish Billy? One of the key discussions or attempted interpretations in the market, is that somehow the SNB caught wind of the ECB’s QE for the coming Thursday. 

I think this is unlikely, I think the SNB decision was purely defensive in nature, over 80% of the country’s GDP was in its central bank's balance sheet, with limited control over its sovereignty and a peg on currency and economic zone in structural decline – as opposed to Switzerland, which has outgrown Europe since the 2011 peg and has kept growing surpluses since then. 

It was a risk management decision on its part and it got tired of being the buyer of last resort in the euro market. The key focus on the ECB outcome (Thursday January 22) is very simple in my view:

Draghi disappoints

Either through: 
1. Delaying yet again, expect a massive sell-off that one can jump onto for the risk-off move, either through short equities or long core European govies or 10yr treasuries) 
2. A diluted, muddling through that is the staple stone of European initiatives. So 500 billion of euros in commitment to purchasing sovereign debt, in a wishy-washy or unclear manner – in the latter markets will eventually sell off but there may be a lag as participants digest the news. We could see a spike back up in EURUSD and any such moves should be used to putting on shorts and potentially selling upside calls – as the structural move is still very much to the downside and eventually the ECB will get to full blown QE, even if it has to do so in incremental steps – the European way.  

Draghi shocks and awes

This will be hard, however anything is possible. If the ECB comes out with over one trillion euros in commitment, with no boundaries set about its use (i.e. has to be investment grade, etc), nor a cap on that number – then the market will be impressed! 

Anything between that, will be neither here nor there and is most likely where we will end up. No doubt Draghi wants +1 trillion and an open mandate, however it is doubtful that the Bundesbank and the Austrians will give it to him.

Some of the guys on the APAC trading floor, also believe with the Greece election being a key event risk – some members of the ECB may want to keep some of their powder dry. This is a relevant point.

On the Greek Sunday January 25 election

Man don’t get me started! ☺ Okay, in a nutshell – I think Greece is not leaving the Eurozone anytime soon (future is something else), it makes for great politics and if I was running for elections in southern Europe, getting out of the evil Eurozone would be my campaign theme as well – just like it is for Syriza. 

I believe the Greeks do not want to end up being a basket case (or even more of one) like Argentina is, blocked out from the international debt markets and spiralling into a maze of inefficiencies. The Economist has a great piece out this weekend on this.

With that all said – we just had the SNB with what seemed to be the improbable just happen –the Syriza party seems to be leading in all polls covering potential votes and this event does have a lot of risk attached to it. And if Syriza wins, regardless of whether its leader Alexis Tsipras wants to stay in or move out of the Eurozone, the markets would tank first and ask questions later! 

This is not an academic question of whether the Eurozone can function with or without Greece – it would just be the first exit of its kind and everyone would be risk-off to massively short Eurostoxx futures and the EUR. The key thing to monitor is 10yr Greek yields, which closed the week at +9.01%, in a wide 8.62% to 9.82% range, as well as the betting shops where Tsipras seems to be the most popular bet – remember Scotland? 

So if Syriza wins, look to sell volatility post the event as it should spike up to even greater elevated levels than where we are now, those with a more pessimistic/bearish view now (think ECB will/can disappoint and or Syriza wins), can look to go long volatility or get downward exposure to the EUR. Because this could easily see us break 1.10, from Friday’s 1.1567 close post these events.   

Random roving thoughts

  •  Remember the US is closed on Monday January 19 for Martin King day, which made the strong pronounced price action on the S&P even that much more impressive, up +1.8% on the highest volume of the year and one-third more volume than normal over the last month.   

  • Over the weekend China property prices are taking a dive against the majority of the cities, read across this could be positive for CH equities in the expectations of more easing. 

  • At the same time, Beijing is cracking down on margin requirements and policing by brokers, in an attempt to cool the slightly hot Chinese equity market (up +53% last year). 

  • INIL: What about shorting Emperor Watch & Jewellery (HK 887) – worth doing the work on, given that it may have a decent part of its inventory and costs from the Swiss luxury watches. How soon that feeds into its costs and what assumptions to make are key – but interesting to note the stock was up 3% on Friday (flat for the week), meanwhile Swatch (UHR) is down over -23% over the last two days.

Source: Bloomberg

  • For those who have not already given it a go, I finished a TM course in San Diego early this year and I only have great things to say about it. But don’t take it from me, listen to my main man, Ray Dalio the founder of Bridgewater – (world’s largest hedge fund) break it down

  • A lot of the media attention will also be focused on the World Economic Forum in Davos over January 21-24, where shareholders or/and taxpayers will have their bill increased by +20% to send to their respective CEOs / government officials.  

Key macro data that I am looking at this week*

Central Banks:  This week: BoE minutes as well as BoJ and BoC meeting on Wednesday 21, ECB on Thursday 22 . Next week: BoT & BNM on Wednesday January 28, FOMC and RBNZ on January 29.

Other: Greek elections Sunday January 25. Given it's the second-last week of the month, we have the start of preliminary PMI data.

* Source: Bloomberg and Saxo Capital Markets

Lastly, life is very similar to investing/trading, you end up with what you put up with – so set your standards high, focus on the process and a profitable trading/investing to you all – be successful and don’t forget to enjoy the journey.

-- Edited by Gayle Bryant

KVP (Kay Van-Petersen) is Asia Macro Strategist at Saxo Bank. In addition to, please follow him on twitter @KVP_Macro

He has a number of firm beliefs, including:

- Everything in life is a trade, hence he is always long oxygen, water, food & his girlfriend (& not always in that order). 
- If you take care of the downside, the upside will take care of itself. 
- A good trader has a trading plan. A great trader sticks to that trading plan. 
- Position sizing & risk management are what separate the exceptional from the great.
- To win in the game, you have to stay in the game - no matter what.
- There is a big difference between being right & being profitable, they are not always the same thing.
- Always assume that anyone talking about a trade has a position in that view – including myself. 

benlouro benlouro
great vídeos from Ray Dalio.
Kay Van-Petersen Kay Van-Petersen
Glad you enjoyed Benlouro
V for Vendetta V for Vendetta
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