Carnage in markets as Swiss National Bank revokes minimum exchange rate promise. What happened and what does it mean for me?
If you were at your trading screen you just knew something big had happened. Even the biggest, most liquid, Forex market (EURUSD) dropped 180 pips inside five minutes.
And if you were following the Euro against the Swiss Franc market live at 09:30 on Thursday 15th January, oh my goodness…
It simply fell off a cliff.
One minute it was trading around 1.2010 and literally moments later it was down at 0.8500.
It was all because the Swiss National Bank (SNB) cancelled their promise to ‘peg’ the Swiss Franc to the Euro. Since 2011 they said they’d maintain a minimum exchange rate of 1.2 francs to the Euro to prevent the franc becoming too strong, but that all changed in the blink of an eye.
Here’s what the SNB vice chairman said in a TV interview on Monday 12thJanuary –“We took stock of the situation less than a month ago, we looked again at all the parameters and we are convinced that the minimum exchange rate must remain the cornerstone of our monetary policy”
But everything changed just days later…
By Thursday 15th they had reversed their position:
…the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.
It meant the SNB had stopped buying euros to protect the Swiss franc and the market reacted strongly to their shock announcement.
How the SNB decision affected the markets
Repercussions were felt across the board…
The Swiss franc gained almost 27% against the US dollar and the Euro dropped to 11 year lows against the dollar. But obviously, the big story was in the Euro/Swiss franc market itself.
The thing was, because the market saw that 1.20 level as cast in stone it was treated as an infallible level of support. Hedge funds, investment banks, and many individual traders with a longer term outlook were all holding large short positions in the Swiss franc thinking they were onto a guaranteed winner. The SNB had promised to protect the franc by buying euros so it was commonly seen there was no way the franc could strengthen and cause the euro to weaken any lower than 1.20.
And it was a good strategy to trade with. Until yesterday…
A LOT of traders got caught with their pants down.
What does it mean for me?
Well, if you’re off Skiing to Switzerland this winter and you haven’t changed your currency yet your holiday spends just got a whole lot more expensive, that’s for sure!
And trading wise, it’s interesting to think how this changes the landscape in the markets…
The SNB will have loads more cash swilling around now they don’t have to keep stockpiling the euros. One idea is they’ll allocate it to gold instead so we could see that market benefit as a result. In fact, one theory is they made the snap decision to drop the currency peg precisely because they wanted to hoover up a load of gold. Makes you wonder what event they might be anticipating if it’s true!
And it all obviously puts a lot more pressure on the euro so we could look for weakness to continue there, especially now quantitative easing (printing more money like they’ve been doing in the US) by the European Central Bank is almost a given.
But the most immediate concern is the effect this is all having on certain Forex brokers and spread bet companies.
How the brokers were hit hard
Where clients have taken big losses and are unable to cover them the broker foots the bill. IG index released a statement saying the losses from market and credit exposure will not exceed £30 million!
FXCM are currently owed $225 million by clients whose trading accounts sunk into the red, and Alpari have already entered into insolvency. Here’s the statement from their website:
The recent move on the Swiss franc caused by the Swiss National Bank’s unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity. This has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm today, 16/01/15, that it has entered into insolvency. Retail client funds continue to be segregated in accordance with FCA rules.
I think there will be more industry fallout to come too!
Not all brokers will be affected, it all depends how they operate their business. But it’s a good idea to make sure any funds you have on deposit are with a firm regulated by the FCA. This means that client funds are kept in segregated accounts away from the firm’s operating capital and your money is safe.
IMPORTANT: Why don’t you go and check now that your broker is FCA regulated? Look for an FCA registration number on their website.
Almost all the big names with a presence here in the UK will be regulated. But if you’re with a smaller firm who are not FCA registered, it might be a good idea to consider temporarily moving your funds elsewhere. At least until the dust has settled.
And do keep following the markets – these are unprecedented times after all! Keep your wits about you and let’s see how this fascinating situation plays out in the weeks to come.