Switzerland Goes Emmental
Daily Look

Switzerland Goes Emmental

If you consider Switzerland a country of boring bankers, think again. Around the world, foreign exchange trading floors remain in shock after the Swiss National Bank abandoned its efforts to cap the franc’s value, triggering a spectacular rally. In a matter of minutes, the currency soared almost 30% against the euro, with badly shaken traders panicking as liquidity dried up.

To put that into perspective, the exchange rate move was far more extreme than those seen in major currencies during the Soviet Union’s collapse, Black Wednesday, Long Term Capital Management’s fall, the September 11th terrorist attacks, or the Lehman Brothers bankruptcy. Needless to say, the losses are enormous. Speculators who had borrowed in low-yielding francs were particularly badly hit, with many retail traders and hedge funds devastated by the move.

The financial system is struggling to mitigate the damage this morning, with equity markets down across the board. The US dollar and yen are both up slightly, acting as safe havens, while the pound is proving remarkably resilient, trading in a stable range against the majors.

With the Swiss National Bank’s move widely seen as an anticipatory response to a quantitative easing programme from the European Central Bank, the common currency continues to head downward, pushing toward an 11-year low against the big dollar. Investors are now broadly convinced that Mario Draghi will announce an asset purchase decision at the institution’s meeting on the 22nd, and are racing to position ahead of it. Without the Swiss to support the euro, further downside is likely before the tide turns.

Canadian dollar bears came out of their caves this morning, driving the currency downward through several resistance levels as sentiment on the country’s economic future worsens. Traders are growing increasingly cautious ahead of the Bank of Canada’s monetary policy meeting next week – if policymakers turn overtly dovish, interest rate expectations could get crushed and the loonie could fall further.

Have a great weekend, and buckle your seatbelts for the week to come”¦

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Karl Schamotta

Karl Schamotta

Director, FX Strategy and Structured Products at Cambridge Mercantile Group.