Fundamental Analysis Of Swiss National Bank Shocking Move That Ripped The Markets

Swiss National Bank move to unpegg the Swiss franc from the euro shocked the market. Why? Because exactly one month back, Swiss National Bank had issued a statement reassuring the markets that it would do whatever it takes to defend the 1.20 Swiss franc to 1 euro. Then the sudden about face came that shocked the market.

Swiss National Bank

Take a look at the above picture. Some three years back Swiss National Bank had made the decision to peg 1.20 Swiss Franc with 1 euro. Since 2008, Swiss franc value had been soaring as people affected by the financial crisis wanted a safe haven.  This soaring Swiss franc was making things expensive for the Swiss exporters. Switzerland is an export oriented economy. With soaring Swiss franc, exporters were finding there products getting expensive in the international market. They wanted the Swiss National Bank to help.

So some 3 years back the 1.20 Swiss franc to 1 euro peg was introduced. But this peg was putting enormous pressure on the Swiss National Bank to hoard large quantities of foreign exchange reserves just in case it needed to defend that peg. In order to buy these large quantities of foreign exchange reserves, Swiss National Bank had to print large quantities of Swiss francs.

This was not winning fans in Switzerland among the prudent crowd that correctly considered this money printing irresponsible. But here’s the kicker. It is widely believed that next week Thursday, after a meeting on the European Central Bank monetary policy committee, the ECB will announce an expanded money printing program. With the SNB propping up activity in place, this would most assuredly have resulted in even more euros flowing into the Swiss franc. In other words, if the SNB continued to prop up the euro after such an ECB announcement. it would have to absorb even more foreign exchange by printing even more francs.

During these last 3 years, Swiss franc became the best carry trade base currency. Many hedge funds and big banks had shorted Swiss franc for the carry trade. So when the decision to unpeg it from euro was taken and it appreciated sudden almost 40%, most of these carry traders found their positions in negative of billions of dollars. Whatever the ramifications of these policy decision will felt in the global financial markets in the next few months. Once again exports have become very expensive for Swiss manufacturers. In the next few months, Swiss National Bank will have to do something to bring Swiss franc down somewhere around 1.1 Swiss franc to 1 euro.

The Swiss central bank move is just the beginning. The entire financial sector is very unstable at present. The current financial structure is lulling many traders and investors into very bad positions. The trend followers are going to get wiped out in 2015. It is time to understand the fundamentals behind current market activity.

0 Comments