The CHF tsunami

Total shocker!

Is there absolutely anyone on this forum who thinks their current IR (-.75%) is going to be enough to prevent the massive tsunami their decision to unpeg has caused for swiss corporates? I’ve been hearing crazy figures like 4-5% negative from some…Call me crazy but I think we’re witnessing history here - I’m really not sure when was the last time something like this happened!

PS: I know it’s a touchy topic right now but anyone who was short CHF overnight or short upside on options?

I live in CH and am very much looking forward to petrol being 20% cheaper tommorow, there are going to be massive queues for sure on the border at the weekend for cheap EUR shopping.

I’m sure CHF will drift down again, otherwise there is going to be a lot of RPI deflation going on. The negative interest rate probably has little effect IMO, there has been a negative rate here for many months (and no free banking).

The Swiss were fighting a losing war with ECB - they can’t simply keep buying the Euros in massive quantities and throwing good francs after bad euros, just to make their exporters competitive. No doubt their economy will slow down, even though they are trying to stem the tide using NIRP and limited Euro purchases.

On the other hand, great news for ordinary Swiss on fixed income or relatively fixed salary. They are suddenly 13% richer if they spend money in Europe or US. Good for them!

I doubt CHF will drift down as fast as some may be expecting. 2 main reasons jump out - one, russian ruble (pretty much going down with oil) and two, euro(which is expected to devalue further if ecb does something drastic on 22jan). Safe haven status is a bitch - might wanna check with the kiwis :stuck_out_tongue:

But on the bright side, oil - haha!

i have a question, why did the CHFUSD pair fall by so much? there wasn’t a peg on the USD was there? how does the EURCHF relationship basically create a defacto peg on the CHFUSD pair?

i understand that clearly when a cap on a major pair is lifted, it will clearly result in speculative shift toward the CHF versus all currencies, but for the CHFUSD to fall the same degree as the CHFEUR when the USD is also a safe haven currency doesn’t make any sense to me. the CHF has been depreciating against the USD for some time like all currencies so clearly the cap couldn’t have had that much impact on the CHFUSD, but apparently it did? what?

is it simply safe haven currency buyers switching from USD to CHF? if so, why? so you switch from USD to CHF but your investment options are relatively limited in CHF relative to USD and the outlook for CHF assets just worsened meaningfully versus USD assets.

i can only imagine we’ll see a huge rally in the USDCHF pair versus the EURCHF pair.

no idea why central banks still maintain a fixed exchange rate. its very silly really. naren summarizes it pretty well. look at the asian financial crisis and russian financial crisis in the late 90s to see how stupid fixed exhcnage rate are. BTw i know the CHF is fixed/floating, but that too is stupid. fiat money is juss paper, let that shit float.

Matt Likes Analysis - I think you meant why CHFUSD went up so much. You’re right in questioning why the move vs the dollar was equally strong, as the Euro was the currency against which the pegging level was announced. First lets not consider the immediate move after the announcement - that was just algos and everyone’s stops being triggered one after the other. Focussing on once things settled down a bit…

I can only think of one reason why that would happen - say you’re a fund who wants to short CHF(basically betting the peg would stay in place for some time), what do you go long on? EUR? Maybe. I’d personally go with USD. This is primarily because central bank actions in Europe will help devalue EUR whereas in US would help appreciate USD. As such, instead of chosing EUR on the long leg, you’d be better with USD because now the both legs of the trade are supported by their respective central bank’s current policy and forward guidance. On paper this seems like a solid trade for a macro-fund, unless of course one of the central bank does something surprising.

Further, funds had record shorts on CHF, second highest compared to Q4 of 2013. This exasperated the move vs dollar.

Anyway, given what’s just happened, I wouldn’t call CHF a safe haven currency anymore. There are many reasons for this - and I am aware it might sound nonsensical given the fact that it just appreciated so much. Main reason being lack of forward guidance reliability from SNB but there are many more. 2 scenarios I’d like us to consider-

Scenario 1 - ECB acts this month or this year and Euro continues to slide against CHF, then SNB might introduce a new peg, at a slighly lower level (say 1). Meaning the way CHF shot up in one day, it might come back down once the peg is reintroduced.

Scenario 2 - ECB does not act, which is highly unlikely but EU remains in a period of stagflation. This would also lead to a flight of capital to CHF, pushing it further up, albeit not so fast - which would ultimately still push SNB to act through alternative measures, if not a peg of some sort.

Finally, I don’t expect CHF to come down anytime soon, i mean even if it does - it won’t be as fast as people might be expecting because there are still large banks holding onto their CHF shorts in swaps, and what not. So if anything, once ECB is done with their stuff, it might make things even worse for the swiss. The only scenario where I see a strong devaluation of CHF in the absence of SNB actions is when foreign FI’s start liquidating their stakes in swiss companies, at the same time - because net net, ALL equity funds made money. SMI down 8-9% and CHF up 16-17% that day. Net net they take home decent sums in USD.

@let that s**t float - I wish Xi Jinping could read this

[quote=“Neryblop”]

fiat money is juss paper, let that s**t float.

good point. thanks!

From the perspective of the Swiss, what is CHFUSD. You could say CHFUSD can be arbed by CHFEUR * EURUSD. Thus, if CHFEUR is fixed, then the entire volatility is driven by EURUSD. Plot those two on the same graph and it’s pretty clear that they are related. Think of it as an arb and it’s less confusing.

If you were the SNB, you would be trying to get a more accommodative monetary policy: grow the money supply. This means more Swiss Francs. The whole purpose is to depreciate the franc. To make it less good.

Fixed exchange rates, as a concept, have a long history. The only reason we don’t have fixed exchange rates in the U.S. is because we prefer independent monetary policy and free capital movement. For countries without independent monetary policy, it can make sense to have fixed exchange rates.

If you are a small country closely linked to a large neighboring economy through trade, and both economies are relatively robust and/or stable, there can be value in maintaining a fixed exchange rate, or a relatively tight range, because it facilitates trade by removing currency risk. If trade is a big part of your economy (as most successful small economies are), it’s not an unthinkable option, though most countries prefer the range to the fixed peg.

However, you lose control over monetary policy by doing this, since your monetary decisions are constrained by maintaining the peg. And that can be a problem if your local economy performs substantially differently from the the economy you’re pegged to, either via recession you can’t stimulate your way out of or inflation you can’t reign in, or if you have fiscal issues that require monetary coordination to solve.

^ Would Canada and the US (and maybe Mexico) benefit from a pegged or common currency?

Thanks to a buddy of mine who’s been following currencies much closer than I have and gave me a really timely siggestion, I was short some FXCM on Thursday and woke up today to the biggest IRR I’d ever seen in my life. (not trying to victory lap as this isn’t my sector coverage, and yes it was a small position) However, shares were halted today and then Leucadia came in with a capital infusion, so it isn’t a total zero. Anyone else involved in this trade and if so, when do you cover? Thank you.

numi - Not the same situation as yours, but I have to say it was an excellent day for option traders with small overnight posns. I trade SMI along with other indices and I think this day will go down in my diaries as one of the best ever.Not in money terms but in swings I saw in volatility.

Unconfirmed broker chatter - quite a few intraday firms went bankrupt in London on their margin calls

Personally, I don’t think tsunami quite covers this. Blood bath is more to the point. But that’s yesterdays news.

Now I am wondering what Jordan has up his sleeves, 'cause he sure did take into account market participants reactions and perceptions of the decision. Or does anyone really think he woke up on Thursday morning “Oh what a nice day, lets kill the peg today?” I can imagine the unpredictability that he earned himself working in his favour.

What would stop him to push up the rate once the excitement as petered out - possibly even beyond the original peg - and even for brief periods to fight off excessive speculation?

o yea. thats a pretty good argument. 1. same currency = increase trade. 2. but yea everyone is different so same currency wont work in the long run.

hahahaa. i did an essay on this in college. about nafta. there was a lot of talk in the 90s basically ppl complained that forming 1 currency would be protectionist relative to other countries. and we shouldnt include mexico cuz they different.

Canada and the US have currencies that float in a range, and that range is pretty close to 1:1. I think if 1 USD = 5 CAD or 1 USD = .62 CAD, then a peg might end up promoting trade, which is likely to benefit Canadian exporters by making their products easier to price and sell in the US.

In normal times, a peg isn’t necessarily a terrible thing, it’s just that it constrains you in extraordiary times or when one economy underperforms the other over a long period of time. So most pegged systems eventually break, but that doesn’t mean that they weren’t valuable beforehand.

Personally, I tend to advocate floating systems, but pegging is not necessarily insane.

^ At the top, 1 USD = 1.5 CAD or 5 CAD? (Bottom 0.62 CAD)

Pegging should absolutely be the last measure. Generally speaking, if you officially peg your currency, you’re basically confirming what market sees as a weakness and in this business, it’s a sin punishable by bankruptcy or public embarrassment.