Swiss watches, Swiss holiday, Swiss banks
New Year surprise from the Swiss Central Bank
caused an earthquake in the financial market.
It did the reverse of the Russian Ruble and Swiss Francs was up 20% then
40% against the Euro. Currency brokers
were right in the middle of it and some could not withstand the shock. Alpari went under and FXCM needed a white
knight. Most banks were hurt with a
scratch but the Swiss banks have a bigger problem which I will explain later. The Swiss stock market dropped thru a crack
and was down 14% at one point on 15 January.
It was not funny at all.
Most people think a currency from a developed
country like Swiss Franc moved by 20% is a very very big Black Swan with tabby
pattern. It really is beyond imagination
and certainly falls into the same category of rare events like England Soccer
team winning World Cup. Agree. Looking at historical data, CHF last big move
was in 2011. It was EUR 1 to CHF 1.23 in
July 2011, then CHF strengthened to EUR 1 to CHF 1.03. Then the Swiss Central Bank declared brotherhood
with the Euro and told the world they would sell CHF for EUR at 1.20. People stopped going long CHF and short
EUR. That was a small Black Swan
move. So, looking back, we should have
known it. It is simple physics. You can have a very strong container, like
the will power of the Swiss Central Bank to be on the same boat as Euro. But if you keep pumping gas into the
container, eventually, this very strong container will explore in a very
powerful way. The weak Euro against USD
had been a trend in second half of 2014 but this may not be the trigger of the
event. If I were a Swiss Central Banker,
I probably could live with a weakening CHF which is just dragged down by EUR. EUR, in any case, is still a very big
currency backed by the European Union.
My biggest fear would be what if my assumptions were wrong which is not
unheard for Central Bankers. For
example, the concept of EUR being the currency for European Union or the
concept of European Union. The recent
political movement in Greece that revived the thought of Greece leaving EU or
the EUR currency might have caused Butterfly Effect to Swiss Central Bank decision. (Just to kill the speculation, I was not, am
not and mostly likely will not be a Swiss Central Banker).
Bang!
Everyone woke up with CHF rocketed against other currency. Selfishly, first thing came to my mind was to
change my ski trip from Davos to St Anton in Austria. Then I thought maybe I should buy a Rolex
before they increase the price in GBP due to labor cost in CHF. Then I heard about Currency Brokers suffering
from potential bad debt from client’s trading losses. Logically, those Swiss companies who report
earnings in CHF but make money in EUR or USD are in tears as their revenue is
now taking a 20% discount when it converts to CHF. Swiss banks, exporters like drug makers,
engineering companies, luxury sectors are all making money offshore and
reporting earnings in CHF. Unlucky. Swiss companies who borrow in EUR or USD are
laughing. I wish I had taken a EUR or
GBP loan to buy Rolex. As Swiss Franc
deposit was not paying any interest, it is almost illogical to be investing in
Swiss deposit or Swiss government bonds except for the big money manager who
manages billions and need to diversify their currency exposure. Or the hedge funds or traders who have
patiently waiting for the container to explore.
A bit like Soros winning in the GBP in the 80’s. History does repeat.
CHF will eventually clam down but there are
casualties already. Swiss Central Bank
has said they would step into the currency market again if they think CHF is
too strong. Of course they would, they
just did it. But they have already set
negative interest rate for CHF and perhaps they could make it even more
negative. This would be very interesting
if one day Swiss Banks pay borrowers interest to borrow Swiss Francs. One could earn credit from swiping their
Swiss credit card. Hard to imagine
right? That very big Black Swan in tabby
pattern may have a friend around the corner.
