Swiss watches, Swiss holiday, Swiss banks

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.