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OPINION

Punting on policy

Punting on policy
January 23, 2015
Punting on policy

The SNB's move is widely seen a very good reason to think that something major is on the way – ECB government bond buying has long been speculated, but such a panic stricken reaction from the Swiss suggests they'd caught wind of some more concrete information. So if Mr Draghi fails to deliver – and concerns surrounding the outcome of the Greek election suggests disappointing news remains a slim possibility – the situation could turn even uglier than it did in the immediate wake of the SNB’s move last week. Of course, the Swiss central bank did not set out to cause such carnage in the foreign exchange markets - "amateurs" was how the boss of FX brokerage Alpari UK described them before client losses following the move sent it crashing into insolvency. Others have run into trouble, too, while well known multinational banks have lost millions as a result of the Swissie's sudden appreciation against the euro.

There are at least two important lessons to learn here. One, is that central bankers’ grip on markets is stronger than ever, and that the course of the markets will be directed by monetary policy for some time to come. Don’t bet against them. The second lesson is that currency speculation is a difficult and dangerous game, even for the professionals. Despite this the retail currency trading industry has grown very rapidly in recent years, and much business is done on margin. In other words, traders are able to leverage their position many hundreds of times in the hope of magnifying their gains - but as is often the case it is their losses that are amplified instead.

In a multi-trillion-dollar market open 24 hours a day and with little real fundamental basis upon which to invest, the scope for such losses is enormous. One estimate puts retail trading losses from the Swiss france debacle at $400m. As former Fed chief Alan Greenspan once put it, “no model projecting directional movements in exchange rates is significantly superior to tossing a coin”. Only those making the markets are able to win, he suggested - and even they’re not winning at the moment. There are of course winners in the trading game, but as Greenspan pointed out, there are winners in coin-tossing contests, too. It’s why we tend to stick to long-term, fundamentals-based stock selection at the IC – it’s not a risk free, but it’s less risky than day trading. And, if you’re looking for any meaningful returns, is as a safe a port as you’ll find in the current sea of uncertainty.