The Perils of Leverage

Posted by Andrew McGuire - Agility Forex

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Yesterday’s move by the Swiss National Bank was totally unexpected and brutal in it’s consequences. Removing the peg from the EURCHF caused the Swissie to rally 40% immediately causing stops to be triggered. Major FX markets moving this much in a single day is unheard of and the gap action meant that losing positions couldn’t be closed out anywhere close to their stop loss triggers. The nature of investing/trading today means many companies leveraging up their investment (borrowing more money to buy more) to maximize their profits and outperform their benchmark. The idea being to turn a 0.25% gain into a 0.5-1% gain, or even more for highly leveraged funds. But if you’re starting point is a 30% loss…..well you get the picture. Over the next few days we’ll be hearing lots of news about funds/trading houses closing their doors for good due to their losses incurred yesterday on this one way bet that suddenly surged the wrong way.

Elsewhere, the Loonie has had little trouble breaching the $1.20 level. We had a nice pop in oil earlier this week which didn’t do much for the Loonie, although yesterday’s extraordinary events in Europe did see 1.1810 print very briefly, but with oil firmly back below $50 the Loonie is along for the ride. It does seem like the path of least resistance remains for higher USDCAD.

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