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Friday, January 16, 2015

Swiss Franc Stunner Claims Victims, Currency Broker FXCM Bludgeoned

The Swiss National Bank shook markets Thursday when it loosened its grip on the Swiss franc, and the fallout from the surprising move continued Friday.
Trading in currency brokerage firm FXCM FXCM -15.06%, which caters to retail traders, was delayed at the open after shares plummeted 88% in pre-market trading to $1.49 apiece. After dropping 15% to $12.63 Thursday, the broker said the “unprecedented volatility” in euro/franc pairs resulted in massive losses for clients, who subsequently owed FXCM about $225 million, leading to a negative equity balance that could put the company in breach of regulatory capital requirements.

“We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with regulators,” FXCM said in its brief statement Thursday. Citi analyst William Katz warned clients “the severity of the impact is likely to question the sustainability of the retail platform.”
Given existing concerns around customer churn and pricing, the damage to FXCM now brings solvency concerns to the fore, Katz added, raising the likelihood that FXCM will have to raise capital, perhaps issuign up to $100 million in equity.
The Swiss National Bank decision to scrap the Swiss franc’s peg – 1.20 per euro since 2011 – caught markets by surprise, given recent commentary in defense of the peg. The move, seen by some as a preemptive counter to further euro weakness driven by the European Central Bank or a decision to abandon the peg before the market broke it for them, boosting the value of the currency by nearly 14% against the dollar and 15% against the euro Thursday. (See “Why The Swiss Franc Shot Up 30% In A Morning.”)
The impacts on brokerage firms were hardly universal. While FXCM was halted after its off-hours plunge, Interactive Brokers fell a relatively modest 4% in morning trading after estimating negative client equity stemming from Thursday’s wild swing amounted to $120 million, or 2.5% of the company’s net worth.
Smaller firm Gain Capital gained 2.4%. Gain Capital actually generated a profit Thursday, the company said in a statement touting its move to raise margin requirements to 5% in late September after assessing the potential risk related to the euro/Swiss franc currency pair. CEO Glenn Stevens said navigating the fallout from the unexpected SNB move shows the firm is positioned “to effectively manage risk during both calm and tumultuous markets.”
Goldman Sachs Group GS -0.71% CFO Harvey Schwartz called the currency move “pretty extraordinary” on the firm’s fourth-quarter earnings call Friday morning, but said the action was “immaterial” to Goldman’s financial standing.
Troy Gayeski, senior portfolio manager at SkyBridge Capital, says most macro traders he follows have paired long dollar trades with short positions on the euro or yen, and expects the losses from the Swiss bank’s move to be limited relative to the potential impact of more drastic quantitative easing from the ECB
“Clearly somebody lost money,” Gayeski says, given the news reported by FXCM, and traders may have been caught offside because there are so many other trends to watch at the global macro level, like the ongoing collapse of oil prices and the continued flattening of global interest rates.

There will also be fallout for the Swiss, as the euro-denominated assets the central bank has scooped up while expanding its balance sheet to maintain the currency peg depreciate in value. Equity market investors took the news badly, sending the SIX Swiss stock exchange to its worst loss in a quarter century and punishing Zurich-listed shares of banks like UBS and Credit Suisse, each down more than 10% Thursday and still falling Friday.
Nomura analysts project the Swiss franc change will dilute bank earnings, but boost capital ratios due to the banks’ mismatch between foreign revenue and assets and domestic costs and capital. Pre-tax profits at Credit Suisse and UBS could be cut by 8% with a 10% sustained rise in the Swiss franc against the dollar and euro, Nomura’s Jon Peace figures, but the currency’s reaction to next week’s ECB bears watching.
Santander analyst Aurelia Faure remains cautious on the Swiss banks due to valuation and capital concerns, but think both “overreacted to the [Swiss franc] appreciation on Thursday,” and might be accounting for ”a further strengthening of the currency.”
“It was a drastic move,” says Russell Investments’ Wouter Sturkenboom, noting that the severity of the spike likely jarred traders who have long-treated the Swiss franc as a safe-haven currency. In the longer term, the move in the Swiss franc should do little to derail a trend toward a stronger dollar and weaker euro, rendering any market stress from the removal of the euro peg transitory and short-lived.
“The direct impact on European stocks is small,” says Sturkenboom,” and in pretty non-existent in the U.S.” Of more importance was oil’s continued struggle to build and sustain any type of rally. A Wednesday jump was followed by a nearly 10% peak-to-trough slide Thursday that pushed West Texas crude back under $47 a barrel, before crossing back over that mark with a 2% climb Friday morning.
“Until oil at least stabilizes, it’s hard to believe stocks can gain a steadier foothold,” Sturkenboom adds. U.S. averages started Friday’s session with narrow gains, with the S&p 500 up 0.3% just a hair below the 2,000 level an hour into the trading day.

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