… which caused not only turmoil in EURCHF (making quotes for our FX dealers nearly impossible because of high spreads) but in the whole market like EURUSD and stocks. The SMI plunged nearly 10%…
^ they’re probably afriad of the potential fallout surrounding the Greek election. you don’t want a peg on the Euro if the Euro is effectively dissolving.
They justified that step with the divergence between ECB and Fed´s monetary policy. Maybe they were no longer able to buy Euros to keep the rate stable. They also announced to lower the band for short-term rates in order to soften the increase in Francs.
An export economy would love a dissolving currency. Look at Germany. They are laughing the cheap EUR all the way to the bank. A VW selling in the US is worth 20% more than a year ago, assuming its selling for the same number of dollars. This is one reason why I think Euro weakness is overstated. Same goes with Omegas and chocolates regarding currency… But now they’re screwed by a currency move that just ate their profit margin.
Valid points, but I don’t think that you can compare swiss watches with swiss chocolate.
Swiss watches’ input prices are quite disconnected from currencies (a few grams of metals and leather, more or less ?) ; it’s like a 99% value-added, incourced industry within the Swiss borders.
Swiss chocolates’ input prices do vary with cacao prices and the production is outsourced to some extent.
So for watches, I think the CHF’ appreciation’s only effect is to make them less attractive for non CHF buyers.
Swiss chocolate, on the other hand, also benefits from cheaper inputs.
Just my 0.02 but I don’t think that I am too far off.
^ Somewhat right, somewhat wrong. Yes cacao inputs will be cheaper. But that’s, say, 20% of retail. But ALL the margin (where there is no offsetting cost) just collapsed. Example: $100 revenue becomes $80 revenue (20%) $50 input cost becomes $40 cost (20%) $50 margin becomes $40 margin (20%) It’s still a 20% reduction in domestic profit per unit. But your domestic inputs (including SG&A) don’t devalue so the equation is much worse than that from overall profitability. Some companies may lose all margin.
I guess that people at Everest Capital are contemplating jumping out of windows.
They just lost in excess of 800 M$ overnight, wiping out an entire fund. Crazy.
http://www.reuters.com/article/2015/01/17/us-swiss-snb-everest-idUSKBN0KQ0N920150117
I find it worrying that someone would put all their investors money on a short currency exposure without any kind of contingency in place for headwinds of magnitude.
The notion of Black Swan is relative IMO. For most of us the Swiss event is a Black Swan.
For that specific fund manager, the Swiss event shouldn’t be regarded as a Black Swan, but rather an outcome to which likely was attributed a probability that was way too low.
That sounds nice on the surface, but was the probability of a move that large happening? I would be curious their risk manaagement they had around the position, but sometimes things are so extreme it wouldn’t seem prudent to stress it that much until after you’ve witnessed it. Leveraged or concentrated firms will always have a stress event that kills the enterprise. I bet the swiss move wasn’t even in what they thought the bell curve looked like
^^
Essentially we are saying the same thing, except that I find this kind of failure inexcusable.
Loosing all your equity due to one risk factor that went the wrong way means that you were gambling.
i’m not going to say that i called the cap being removed, but wasn’t it assumed that if economic pressure on the Eurozone continued, that the cap would be removed eventually? i had considered making a bet against the Euro w/ CHF previously (2012 or something like that) as you could lever up 100:1 with little worry of being stopped out in short order b/c once the pair started grinding around the 1.20 level, the odds of it going to 1.212 within a year or so is virtually nil, and if the Swiss CB was forced to remove or lower the cap, you’d make an absolute killing.
i wouldn’t call this much of a black swan just good, and likely lucky, timing on behalf of speculative currency traders. though i can’t say it was all luck as it wasn’t hard to see the Euro was under immense pressure as per the USDEUR pair and with the ECB QE and Greek elections coming, it was surely to get worse before it got better, resulting in boatloads of downside protection over the coming months if you set up a posiiton in the November-January period.
i can’t even imagine what anyone on the other side of the trade was thinking. i mean, they basically trusted the words of a single central banker, over the realities and pressures of the global market and a mismanaged currency union. idiots.
You were paid to short CHF, that’s what they were thinking. Fund for free (or get paid to borrow) in CHF, go long something else. Easy win. Or so it seemed.
Aren’t all currency levels largely determined by central bank (CB) actions? I don’t know how one can invest in the currency market as opposed to speculate.
For example, can we predict the band that EURUSD will trade a year from now (within a 95% confidence interval)? I can guess based on past history (technical analysis) and my prediction of what CBs will do (behavioral finance), but there are no fundamental factors unlike analyzing stocks.
Whilst what you say makes sense, I wouldn’t go as far as calling them “idiots”. Agreed that in the end economics and the market always wins, but this was no minor CB - very credible, safe haven status, massive Gold deposits and well behaved in it’s policy changes (thus far).
Do we have any examples of pegging/unpegging to look at in economic history? Keen to see how differently SNB could’ve acted, if they had to do it last week.
Sometimes its not investing per say, but a matter of corporate finance. Often you’ll see firms issue debt in other currencies to obtain lower rates, due to lower foreign currency interest rates and/or investor demand. Sometimes firms do it as they have significant foreign currency inflows and the foreign currency interest acts as a hedge. The problem is that often the hedging relationships are not perfect, or the firm may decide not to hedge the exposure (which is speculative… But often the cost of hedging long term obligations can be substantial). Maybe the interest flows are similar to CHF inflows, but the principal value is not. Whatever. The result is the same, a loss. Like the Poles “speculating” on CHF through their mortgages. They borrowed in CHF as rates were lower (as do many firms, often through tax structures in Switzerland) and they’ll get hammered as a result. And are you claiming you can predict stock prices at a 95% confidence interval? Holy shit man, where do I sign up for your fund?
DKKEUR may be an interesting and actionable similar example. Many pegs have failed historically. Argentina tried this, for example, in the early 90s. Their issue was kind of the opposite problem as CHF though.
okay fine. they’re idiots only if they didn’t buy far OTM puts on the CHF v EUR pair along with their carry trade activities. CBs stances are made to be broken. i admit that CBs carry a lot of weight when it comes to domestic issues (interest rates, inflation expectations, etc) but CBs are always broken by market forces when it comes to currency games. maybe Soros talking down the Euro made them think he might target the CHF similar to the Pound in the 90s. the setup was very much the same then with the Pound.
Sorry, that was supposed to be top-secret 
So yeah, the 95% confidence level does not apply. Lack of fundamentals does. For example, RMB could float up or down - probably up - if China removed the peg/band for RMBUSD. But how can you use this knowledge? The stock market is a weighing machine in the long term, but the currency rate market can have arbitrary levels for decades.
^ Many would argue equities and bonds are at arbitary levels due to central bank influence right now too (also why you should be long Europe…).
Interesting, I’ll read into DKKEUR and ARG. Would you call CHF peg a successful one?