Jan.
16
2015

The swiss central bank lays waste to the euro… and everything else.

One of the worst central bank decisions of all time

Rare is the occurrence when a man with no skin in the game stares at a stock market monitor in absolute disbelief. Yesterday was one such occurrence, when the Swiss Central Bank eliminated its 1.20 CHF/EUR peg in one fell swoop. This was the kind of step that could best be compared to picnickers in a valley realizing that the protective dam behind which they had been relaxing had suddenly been destroyed…

“Don’t fight the central bank!” has been the most successful investor slogan of the past few years, but nothing signifies the inherent uncertainty of markets better than seeing investors who had trusted perhaps the most prestigious central bank in the world lose a ton of money.

Of course it is understandable that the Swiss had been bothered by the increasingly slavish euro. We Hungarians had also played our part in helping to bring this about, for our banking system poured fuel on the fire at the very last moment thanks to the exchange rate freeze. (Even though we often criticize the Hungarian government and the Hungarian National Bank, this time they have earned our highest praise. Their timing was unbeatable!) The 1.20 CHF/EUR peg had proved to be a tremendous opportunity for global investors to use the floundering and weakening EUR to buy on the cheap the economically stable CHF from the alpine central bank. In a small way it reminded me of the time when East German (read: sub-par) marks could be traded for superior West German ones. In the current situation, an investor could trade his crummy euros for quality Swiss francs at a fixed rate. That is, up until now.

So the Swiss’ problem had been clear, but the chosen solution was absolutely brutal. The franc skyrocketed nearly 30% in a matter of minutes, destroying any and all expiring options and positions against it. As per the rules governing currency futures trading, the initial strengthening knocked out the first stops, which then generated more buying, which then knocked out the next line of defense and so on and so forth…until everything that could be destroyed was destroyed, and all trading systems had to be halted. That the exchange rate moderated somewhat a few hours after the announcement’s details could be analyzed did no good. By then all the picnickers had already been swept away…