Swiss National Bank (SNB) took the Carpet off the Floor on EURCHF
The Swiss National Bank (SNB) decided to startle the world’s Financial markets by taking the floor off EURCHF. The central bank’s shock decision to practically scrap a cap on the Swiss franc pushed the currency up to nearly 30% within a very short time. This have definitely affected Swiss businesses and some hotels there have reported cancellations as visitors rushed to rearrange their holiday plans for the hectic winter season.
The franc’s sudden surge impacted the Swiss stock market which went down as much as 9% on Thursday and this comes weeks before the European school half-term breaks which also marks the height of the ski season. In a week’s time, we will also see an annual meeting of rich and powerful individuals in the Swiss ski resort of Davos for the World Economic Forum. It was also noted that the in Geneva, long queues were formed outside foreign exchange bureaux as many foreign workers came to exchange their much appreciated francs to euros.
in the financial industry, currency speculators and macro global hedge funds who had large positions in the Swiss franc are now staring at massive losses after the SNB shocked the world markets by removing the three year old cap on the currency. It is said that the move sent the franc, also known as a safe haven currency, soaring against the euro and the US dollar. This came at a time when it is said more than $3.5 billion was staked in a position looking for more franc weakness. Ironically, it was just 4 days ago that the SNB mentioned that the 1.20 francs per euro cap is the cornerstone of its monetary policy. This makes you wonder whether they purposely said that just to make the big institutions put on a very unprofitable position. The damage done to the macro hedge fund managers is sharp as the last 4 years haven’t been too kind to them and performance over those years were mediocre.
Goldman Sachs closed its ‘Top trade’ recommendation of a short position on the Swiss franc against the Swedish crown with a said loss of 16.5%.
The euro dropped below the 1.20 cap as seen on the chart above to 0.8500 franc per euro at one point before rebounding to roughly 1.00, down 16%. The dollar too plunged to 0.736 franc and this marks the lowest it has been to since 2011 before it recovered and last seen trading at 0.868 franc, down about 15%.
Swiss shares were also affected as it experienced the biggest one day fall since 1989. On the other hand, European shares rose after the news of SNBs action was released.
It seems that some traders were able to escape the bloodbath. A forex options trader at a large brokerage who trades on the CME floor in Chicago said his firm stopped trading options in the Swiss franc a few weeks ago because overall volumes were increasing, leading the firm to think that something was imminent. CME volume in Swiss franc futures in December was 1.15 million contracts, up 38 percent from November and 64 percent greater than December 2013. (Reuters)
This move by the SNB and the effects in had in the financial markets will go down in history as one of the limits a Central bank has when having their hand in the currency market. The SNB just couldn’t stomach the amount of money they would have to fork out in order to defend the 1.20 cap. They just have to let it go as the Swiss economy is also facing its own set of challenges. The ‘shock and awe’ of the swiss franc appreciation is still making its waves in the markets right now. It will take some time for the currency to stabilize and we would also have to be mindful of the possible actions the SNB might have in store as they manage their currency’s appreciation that has already became a bane for the Swiss tourism industry as tourists continue to make changes to their plans to holiday in the Swiss Alps.
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