Candlesticks, Candelaabra, and the Swiss Franc/Euro “Peg”

Trading chart

The Swiss National Bank’s abandonment of the Swiss Franc/Euro “Peg” was not a surprise to those who understood the Candlestick and Candelaabra warning signals, which appeared 8 trading days before the abandonment.

By way of background…

It is to the advantage of an exporting nation that its currency be “cheap” relative to the currencies of nations whose citizens are buyers of the exporting nation’s products. The converse is also true – when the currency of an exporting nation becomes “expensive” relative to the currency of the purchasers of its products, its exporters may find themselves priced out of a market.

The countries of Europe constitute the principal market for the products of many Swiss exporters.

Most of the European nations use the Euro as their common currency. Switzerland, however, elected not to join the “eurozone,” and continues to use its own currency, the Swiss Franc.

Beginning in 2008, the value of the Euro relative to the value of the Swiss Franc began a persistent slide, and plunged to a low of 1.007 Euros to the Swiss Franc in August 2011. The Swiss Franc (in which Swiss products are priced) had become expensive for people who had only Euros in their pockets. Swiss providers of goods and services were losing business to non-Swiss providers as a consequence.

Candle chart A

Switzerland needed a “support floor” underneath the relative value of the Euro – inversely, also a “cap” on the relative value of the Swiss Franc. Accordingly, the Swiss National Bank (the central bank of Switzerland, equivalent to the Federal Reserve in the USA) installed a “peg,” whereby it would sell Swiss Francs in exchange for Euros sufficient to maintain a minimum relative value of the Euro at 1.20 Euros to the Swiss Franc.

The result, of course, was that the relative value of the Euro became artificial. But traders in the foreign currency market were content to close their eyes to the artificiality largely because of the repeated assurances of the Swiss National Bank that it would maintain the “peg.”

Over the ensuing months and years, the “peg” worked well, even though it required the Bank to be ready and willing to spend Swiss Francs in exchange for Euros. But signs of trouble began to appear in early 2014 when the pegged value of the Euro in relation to the Swiss Franc declined to 1.2102, which was uncomfortably close to the 1.20 “peg.” It appears that the Swiss National Bank stepped in at that point with substantial purchases of the Euro, but the trend of the Euro’s artificial value continued down, to a low of 1.2007 in November 2014.

Candle chart B

The plan began to unravel in May 2014 when the Euro started to decline against the US Dollar, in the “EUR-USD” currency cross. The “EUR/USD” is a “free market,” in that there is no artificial “peg” which applies to it. In that sense, the perceived “real” value of the Euro, as contrasted with its “artificial” value, became increasingly apparent to traders. From May 2014 onward, the Swiss National Bank was having to spend increasing amounts of Swiss Francs to buy Euros in support of the “peg.”

The decline of the Euro in relation to the US Dollar began to speed up in mid-December 2014 (whereby the Euro was increasingly losing “real” value in the view of traders in foreign exchange), and accelerated even more into January 2015. The Swiss National Bank was expending increasing amounts of Swiss Francs in order to support the 1.20 artificial value of the Euro relative to the Swiss Franc.

Candle chart C

By mid-January 2015, the situation had become untenable. The decline of the Euro relative to the US Dollar showed no sign of slowing down, and the Swiss National Bank was spending Swiss Francs at a furious rate in order to buy Euros at an artificially high price in order to maintain the “peg.” The expensive fiction finally came to an end when the Swiss National Bank abandoned the “peg.” The Euro instantly fell to its “real” value in relation to the Swiss Franc.

The US Dollar had been rising versus the Swiss Franc because it had been rising versus the Euro in a “real comparative value” free-floating relationship, while the Bank had artificially levitated the Euro and cheapened the Swiss Franc in the Euro/Swiss Franc relationship. Accordingly, in the relationship between the US Dollar and the Swiss Franc, the Dollar was artificially “expensive” while the Franc was artificially “cheap;” and the disparity between the “expensive” currency and the “cheap” currency was escalating.

There were warnings in the US Dollar/Swiss Franc charts of an impending substantial change. The uptrend in the value of the US Dollar relative to the Swiss Franc from December 2014 and well into January 2015 was readily apparent and ominous. Furthermore, and specifically, a bearish “Shooting Star” Candlestick trend-reversal-warning pattern appeared on January 5th.

Candle chart D

On the same day (January 5th) the Candelaabra “Blimp” trend-reversal-warning pattern – accompanied by an extreme “Bollinger Percent B” indicator reading – appeared. These bearish warnings appeared 8 trading days prior to the announcement of the “peg” abandonment.

 Candle chart E

The first and second charts, above, depict the instantaneous decline of the Euro relative to the Swiss Franc. Removal of the “peg” allowed the Euro to decline to its “real” value versus the Swiss Franc. The Swiss National Bank determined that it would not, or could not, support the artificial value of the Euro. No doubt it did so with full understanding of the adverse effects that abandonment of the “peg” would inflict upon its providers of goods and services. Apparently, it felt that it simply had no choice.

Examination of the relevant charts, especially of the charts of the Euro/US Dollar, should have alerted traders to growth of trouble between the Euro and the Dollar. That ought to have been instantly translatable into an understanding of a growing problem in valuation between the Euro and the Swiss Franc, and thence to a problem with the “peg” itself. Most traders probably understood the connection and the problem very well, but chose to overlook them on the strength of the continuing assurances by the Swiss National Bank.

My point is this…

Regardless of any other clues that could have been interpreted as an oncoming “train wreck” as between the Euro and the Swiss Franc, the Candlestick “Shooting Star” and the Candelaabra “Blimp” trend-reversal-warning patterns gave ample and sharp notice of a probable end of the “peg,” 8 trading days before the event.

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