The (unhedged) forex broker’s nightmare… The EURUSD fell by more than one percent in one giant step on Thursday, following news of (another) surprise rate cut by the ECB. The European Central Bank cut its key interest rate to 0.05 percent, as of September 10. The rate on the ECB’s deposit facility will be cut still further into negative territory, to -0.20 percent.
The Euro dropped below the $1.30 level for the first time since mid-2013.
In a live televised address, ECB President Mario Draghi cited continued weakness in pan-EU countries, and also announced that the ECB had decided to start an asset backed securities bond-buying program.
The rate cut and resulting drop in the Euro by definition injects more volatility into the currency markets, with other currency pairs also racing to adjust – in theory, that’s good for retail forex brokers. But such a ‘one step’ change in rates can be dangerous to both traders and brokers alike which are ‘flying without a safety net’, especially if using large amounts of leverage.
For example, a trader using 100x leverage (and many brokers offer more than that) who was long the EURUSD would have been closed out of his/her position today.
Similarly, non-STP brokers which do not actively match their books (and many don’t bother to do so) might have a rough day if many of their traders were anticipating that the Euro was going to continue weakening, like it has been the past few weeks.
We’ll get some industry reaction and bring it to our readers soon. Stay tuned to LeapRate…