Swiss franc scraps euro peg

worldtraveller

The Swiss franc has risen by almost 30% against the euro after the central bank shocked global markets by abandoning its long-standing peg to the euro.

The Swiss National Bank's (SNB) move to scrap the exchange rate control - which has imposed a maximum value on the Swiss franc of just over €0.83 since 2011 - has driven the franc to parity with the euro.

Telegraph.co.uk

Some people presumably will have got their fingers seriously burned, some rubbing their hands in glee!

purch

They are calling it a Tsunami of CHF buying, and Francogeddon on Reuters

http://www.reuters.com/article/2015/01/15/us-swiss-snb-cap-idUSKBN0KO0XK20150115

The SNB says that the surprise was necessary

http://www.bloomberg.com/news/2015-01-15/snb-unexpectedly-gives-up-cap-on-franc-lowers-deposit-rate.html


Looks like they are preparing themselves for the ECB starting QE in a big way :eek:


P.S. You can't fight the market. If you have a good jab you can keep it at bay for a few rounds but in the end a giant haymaker will catch you. Better to go with the flow, and the SNB are doing just that.

Jonbvn

I am shocked by this move & extremely pleased. A 30% move in a day on the FX market must surely be a record.

I am paid in CHF with most of our expenses in GBP.:beer:
However, I won't celebrate too hard since I remember getting paid in USD when it was 2.2 vs GBP.:cool:

PS. Thank God I am not a currency trader.;)

purch

Jonbvn wrote: »

A 30% move in a day on the FX market must surely be a record.

That's the benefit of surprise.

GBP fell about 5 % against USD on White Wednesday (16th Sep 1992) when Lamont waved the white flag, even though over the entire week it fell about 15%

worldtraveller

Jonbvn wrote: »

I am shocked by this move & extremely pleased. A 30% move in a day on the FX market must surely be a record.

I am paid in CHF with most of our expenses in GBP.:beer:
However, I won't celebrate too hard since I remember getting paid in USD when it was 2.2 vs GBP.:cool:

PS. Thank God I am not a currency trader.;)

It can be an interesting life when paid in alternative currencies. I've been paid in USD for the past 25 years, so, a real roller coaster, where you're always grateful for the good times, but, as you imply, never get complacent, as it has a habit to bite you on the a**e!

Generali

Not fantastic news if you're one of the half of Polish mortgage holders who have their mortgage denominated in CHF:

http://www.bloomberg.com/news/2015-01-15/polish-banks-zloty-slump-as-swiss-franc-mortgages-get-expensive.html

Hungarian borrowers got lucky as the Government forced most of them to swap to locally denominated mortgages last year.

My guess is that the EUR has fallen so far and looks to fall further and that, it is feared, will cause its own problems in Switzerland. I suspect that the SNB will continue to intervene in currency markets but in a more discrete way and probably targeting the USD rate (as well perhaps as that against GBP & JPY) rather than the EUR one.

BobQ

I caught the end of news item just now suggesting it could seriously undermine one or two banks, even a UK bank?

Generali

BobQ wrote: »

I caught the end of news item just now suggesting it could seriously undermine one or two banks, even a UK bank?

Maybe. The impact on Polish individuals with CHF mortgages is likely to be large but the impact of that particular problem on the banks is likely to be small as the CHF mortgage book is about 0.2% of Polish GDP.

There could well be big losses amongst the largest FX brokers (HSBC, Citibank, Deutsche Bank, JP Morgan, Barclays & UBS). The reason? Not that they have made losses on speculative sales of CHF but that their clients have.

The way it works is this. Let's say you run BobQ's Macro Hedge Fund (BMHF) and you thought that the CHF would fall against the EUR. You would go to your friendly FX broker, let's say HSBC, and perhaps buy a forward contract agreeing to sell CHF and buy EUR in 6 months time. You and HSBC would agree an exchange rate between the CHF and EUR, set according to a pretty simple mathematical formula which we needn't worry about for now.

HSBC now has 2 lots of risk. The first is that you are right and the CHF/EUR exchange rate will fall. If that happens they will have to pay you a bunch of money. The second is that when the contract matures you will be unable to pay them. So what to do?

The first is easy, HSBC hedges against the chances of you being right. There are a number of ways to do this but all of them effectively rely on HSBC taking the same bet as you but using their size to do it more cheaply. But the second?

Well that's a problem. You have both agreed that the contract is for 6 months time, not today but you could go bust in the meantime and not be able to pay your debts to them. To get around that HSBC makes you put up margin, sort of a deposit that HSBC holds against your potential losses on the contract.

Let's say that HSBC is feeling conservative. BMHF is a well known, successful and respected hedge fund but HSBC well remembers the GFC and doesn't want to tak unnecessary risks and so requires a margin of 2%. You have a contract to sell CHF1,000,000,000 vs EUR1,200,000,000 so put up a margin of EUR24,000,000. Everyone is happy now. You have your [STRIKE]bet[/STRIKE] investment in place, HSBC has plenty of money to cover any likely movement in the exchange rate.

Then the SNB makes its announcement and the forward value of the EUR falls substantially so that your sale of CHF1,000,000,000 is only going to realise EUR1,000,000,000. You have put up EUR24,000,000 but are short EUR176,000,000! The bank will call you with a margin call for EUR196,000,000 being the EUR176,000,000 you have lost above the margin already put up plus another EUR20,000,000 to bring your margin back up to 2%. Under most contracts, you have until the end of the day to come up with cash or to sell assets to show that you can bring the margin back to its proper position. If you can't, HSBC will close out the contract and crystalise BMHF's losses and then take as much of the assets that BMHF has in order to make good on the losses. IF BMHF doesn't have the assets to make good then BMHF goes bust.

In this scenario, you put up EUR24,000,000 in margin but lost EUR200,000,000, a loss of more than eight times your original [STRIKE]bet[/STRIKE] investment! These figures are roughly equivalent to what happened in the EURCHF market today BTW.

The problem for HSBC is that they have losses on their hedge (which let's not forget was taking the same bet as BMHF) but BMHF couldn't make the margin call and so went bust. HSBC ends up recovering a fraction of losses.

You go on to set up an organic tea and cake place in Hunstanton which wins the 'Best Organic Lemon Drizzle Cake (South West Division) Award' from The Observer food monthly. This confuses everyone as Hunstanton is on the Norfolk Coast.

This is a very real problem for the banks, not least of which is, according to rumour, there is an overall large-ish net short position in CHFEUR across the market.

Jonbvn

Generali wrote: »

You go on to set up an organic tea and cake place in Hunstanton which wins the 'Best Organic Lemon Drizzle Cake (South West Division) Award' from The Observer food monthly. This confuses everyone as Hunstanton is on the Norfolk Coast.

You lost me here;)

Generali

Jonbvn wrote: »

You lost me here;)

And that's the most important bit!

The point really is that people sitting on short CHF positions will most likely have lost many times their investment. Because the SNB had put (apparently) a ceiling on the price of the CHF they thought it was a one way bet; the CHF might go down but couldn't go up. Even better, as CHF interest rates are negative the short CHF position didn't cost anything. Oopsy!

Nikkster

Generali wrote: »

And that's the most important bit!

The point really is that people sitting on short CHF positions will most likely have lost many times their investment. Because the SNB had put (apparently) a ceiling on the price of the CHF they thought it was a one way bet; the CHF might go down but couldn't go up. Even better, as CHF interest rates are negative the short CHF position didn't cost anything. Oopsy!

West Ham football club sponsor and currency broker Alpari has shut its UK arm following the Swiss National Bank's decision to end its capping of the Swiss Franc against the Euro