International Forecaster Weekly

Swiss National Bank Unleashes a Franc Tsunami

    What we know for sure at this point is that the fallout of this move is going to be massive, long-lasting, and global. Some traders are already predicting the collapse of financial institutions and smaller hedge funds.

James Corbett | January 17, 2015

It had to happen sooner or later, but almost no one was expecting it to come this week. In a move that has alternately been described as a “bombshell,” a “shocker,” a “tsunami,” a “once-in-a-blue moon event,” “all hell breaking loose” and “the biggest FX move in 30 years,” the Swiss National Bank stunned world markets this week by giving up on its four year long attempt to keep the franc/euro exchange rate above 1.20. At the same time it made an unscheduled rate cut, slashing interest rates down to 0.75%.

 

            The impact of the move was immediate, with the decision exploding like a bombshell across currency markets. The euro lost 41% against the franc on Thursday, the largest one day move on record. Overall the franc rose 15% against all 150 currencies tracked by Bloomberg. FXCM Inc., the largest retail foreign exchange broker in the U.S. with over $1.4 trillion in trades last quarter, has said its clients are down a combined $225 million on their accounts after the move, meaning the company “can no longer meet regulatory minimum capitalization requirements.” Other large FX traders are reporting losses in the tens of millions and two New Zealand-based currency brokers, Global Brokers NZ and Excel Markets, as well as UK-based Calpari have already gone belly-up, with reports of massive losses flooding in from other firms around the world.

            But if that was just the initial explosion of this bombshell, analysts are still tallying up the damage this move will likely do to the Swiss economy and its knock-on effects in the global markets.

            What we know for sure at this point is that the fallout of this move is going to be massive, long-lasting, and global. Some traders are already predicting the collapse of financial institutions and smaller hedge funds. Deutsche Bank strategist Jim Reid has openly mused about whether some institutions who are holding the wrong end of this trade (including almost the entirety of the macro hedge fund industry) might be forced into stress liquidation. Dow and S&P futures are already taking a beating, suggesting liquidation in other markets is already starting to cover losses suffered on the move. Asian stocks are down as well this week.

            As one trader for TradeNext noted, January 15th, 2015 “will be remembered for many years to come as a day that ended many a trader's career.”

            So what is this all about? For those not keeping track at home, today's move goes back to 2011 when the SNB made another move that “stunned currency traders” at the time. Amid the madness of the post-Lehman QE era, the Swiss central bank pledged to buy “unlimited quantities” of foreign currencies to force the value of the Swiss franc below €0.83. The move was widely seen as a dangerous sign of a new currency war and caused analysts to warn of a “race to the bottom” as countries around the globe looked to stay competitive in world markets by devaluing their currency. The franc, traditionally seen as a safe haven for foreign investors, quickly plunged, with the currency losing 9% of its values within 15 minutes of the announcement. At the time, World First chief economist described the move as “the single largest foreign exchange move I have ever seen.”

            This week's move is a mirror image of that 2011 decision. At that time, the SNB warned that "The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.” Fast forward to this week and the removal of the franc floor has caused a massive increase in the valuation of the franc and carries with it a deflationary risk.

            So what changed? In a nutshell, the cap was becoming more and more expensive for Switzerland to maintain as the euro's value continues to erode on global markets. For every move the euro made lower, the SNB was forced to buy foreign currencies or sell francs, thus effectively devaluing the currency, in order to keep the floor in place. The final straw may be next week's expected decision of a new round of quantitative easing from the European Central Bank that will further erode the euro's value. That, combined with upward pressures on the franc from Russian and Greek volatility causing money to flood in to the “safe haven” country, may have made it simply too expensive for the Swiss to maintain the peg.

            Now, perhaps unsurprisingly, the big bombshell Swiss central bankers were hoping to drop on the markets has exploded in their own face along with everyone else. The SNB's own considerable foreign currency reserves have been effectively devalued by the move with some sources indicating the bank took as much as a $100 billion hit on Thursday alone, but it is Swiss exporters and multinationals who are going to be on the front lines bearing the brunt of the blast. Swiss banking giant UBS called the move a disaster, predicting it will cost the country 5 billion francs in lost exports and shave 0.7% off of GDP growth. Swiss stocks are in free-fall, led by world-renowned Swiss watchmaker Swatch which lost 16.4% on the day Thursday in expectations of reduced export sales.

            What all of this means for investors is still in the process of being discovered. Those who were betting on the franc or have large franc holdings that they are looking to spend elsewhere are the first and obvious winners from the move, and those who were shorting the currency are the obvious victims. But the real question is how other central banks are going to respond to this move and what their response will mean for the various players at the table. Will the ECB hold off on Draghi's quantitative easing “bazooka”? Will this effect the Fed's calculus on raising interest rates? Given that this move has caused government bond yields around the world to fall as investors seek a “safe haven” what will central bank governors like Japan's Haruhiko Kuroda do to get money back into the stock market where they've been trying to encourage growth for years?

            Whatever the answer to these questions (and we will start getting more answers next week when markets try to sort this mess out), perceptive readers will note that this event has drawn a line under, added an exclamation point to, circled, highlighted and otherwise confirmed our thesis here at the Forecaster that world markets in the post-Lehman world are being completely driven by central bank pronouncement and no longer reflect fundamentals in any way. Within this web of easing and caps and inflation targets and stimulus programs and bailouts, one market has finally been freed to discover an actual market price...and that market is now causing global chaos. The problem, of course, is that economic reality has now become so skewed that any attempt at actual price discovery is going to expose the festering, bloated, rotten, fetid corpse of the world economy, long ago embalmed with phony government fiat funny money and paraded around by gladhanding politicians as a symbol of health like some horror-genre version of Weekend at Bernie's.

            For now, the old verities of “safe haven” investing will work to keep savings safe while the markets decide what to do. For most of the world, trained to believe in the stability of the status quo, that will mean buying treasuries. For those with a keener sense of perspective, this will mean gold, which as of press time has jumped $35 from Wednesday's close as spooked investors scramble for safety.

            But these are not long-term solutions to the fundamental instability of a system that has already been exposed as a sham. As long as central banks are dictating economic “reality,” that reality is no more stable than the next “surprise” banker-created market bombshell. The way things stand now, the lives and livelihoods of far too many people are being held hostage at gunpoint by a handful of central bankers. Even if you believed that these bankers were angels with the public's best interest at heart, no one could possibly think this is the best way to run the world economy.

            Of course, this is precisely why I continue to exhort readers who are interested in longer-term solutions to the problems of these bought-and-paid-for bankster-owned-and-operated markets to begin participating in alternative financial infrastructures. There are a range of options available for those looking to use, store or exchange their wealth in systems that are more or less removed from the manipulations of the central bankers and their cronies, from local credit unions and community currencies to barter exchanges, cryptocurrencies, LETS programs, co-operatives and farmer's markets, and, of course, land and precious metals. Given the carnage we saw last week and the volatility we're going to see in the coming week, there's never been a better time to consider exploring some of these options for yourself.

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