Trader’s Perspective: Never Trust a Central Bank

By | January 15, 2015

Despite evidence last week from Swiss National Bank member Danthine saying the EUR/CHF floor at 1.20 will be maintained, the Swiss National Bank (SNB) released a market-wide cataclysm by abolishing the minimum exchange rate and EUR/CHF floor.

Today’s shocking announcement of Swiss National to discontinue its minimum exchange rate of 1.20 Swiss francs to the Euro effectively convulsed currency markets worldwide. Subsequently, the CHF appreciated some 30% against the EUR, falling well below parity, but for at least one hour you couldn’t see that on most retail platforms as the quotes and charts have simply frozen.

Beyond proving once again in a big way that a ‘line in the sand’ in financial markets can’t last forever – the last event of such magnitude that I can recall is the Bank of England (BoE) and its unsuccessful defense of GBP exchange rate in 1992 – the SNB move reinforces a couple of trading lessons.

1. Don’t trust easily

Never base your trading decisions on what Central Banks or any talking head on TV for that matter are saying. Assuming that they know what they are talking about, they can change their positions in a few hours or days – as shown at the beginning of this article- and by the time you find out about it, the damage has already been done.

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