In 2011, due to the Eurozone Debt Crisis, Switzerland established a cap–pegging its currency in a 1-to-1.2 relationship with the Euro. On Thursday, the Swiss Central Bank removed that cap, which allowed the Franc to appreciate by 23% versus the Euro, and 18% against the US Dollar. On Friday, the Euro and the Dollar rebounded somewhat; but, the Franc is still much stronger than before the Swiss moved.
The foreign currency market is quite a conglomeration of traders and speculators–large institutions, ForEx specialists and smaller operators. Besides causing large losses at giant banks, such as Citi and Deutschebank, a few smaller traders were forced to close. As always, those using leverage in their trading felt the pain even more.
The Dodd-Frank legislation that was established to reduce the risk among the largest banks, for the first time gave regulators some authority over the ForEx market. As the new Republican-controlled US Congress tries to reduce the safeguards of that Act, however, it is still uncertain as to what future risks–especially for Taxpayers–a roll-back might cause.
When the Swiss disrupted the normal trading patterns, global stocks dropped and the proceeds fled to sovereign debt of strong economies. As Swiss government bond prices soared, the yields–which move inversely to prices–actually turned negative. Yes, investors paid to have the safety of the Swiss Franc. It has happened before!
Given the considerable volatility in the marketplace already–with oil having dropped by almost 60% since June, stocks declining in sympathy with oil, weakening developing markets, and terrorist attacks in the West–do we really need one more source of concern–and uncertainty?
I believe that the Swiss and European Central Banks, working in conjunction, might have made somewhat the same adjustment on an incremental basis, and without it all being done at one time. Granted, some ForEx speculators might have recognized what was being done; however, in every trading action, there is generally a counter-trader–taking the risk on the other side. Either way, the inter-related global markets may be gun-shy now, for some time to come.