Stop loss, take profit – ringgit’s dramatic U-turn

TWO notable events roiled global currency markets in 2015. The first was the Swiss National Bank’s scrapping of the peg on the Swiss francs to euro in January. The abandonment of the peg, which had essentially pinned the currency at 1.20 francs per euro for the past 3½ years, prompted a collapse of as much as 30% in the euro versus the franc, the biggest single-day move in a developed market that traders could recall.

The other, in the emerging market space, the Peoples’ Bank of China devalued the Chinese yuan by almost 2% in August, prompting the yuan suffered its biggest one day decline in more than two decades. Both events were driven by Central Bank action in an unexpected manner and markets being caught off guard. While these events can be explained, certain exchange rate movements are totally unexplainable, unless one looks into the microstructure of currency markets.