Swiss Franc Rises Most On Record As SNB Kills Currency Peg

Updates: Retail FX Brokers In Deep Trouble, Some Cease Operations, Others In Bailout Talks

As we have warned, not only traders and investors, but also brokers and dealers that will see large losses on their capital as a result of this black swan.

So far, up to 41 retail FX brokers have either made public announcements or issued statements to their clients with varying impacts of their operations - from "minimal financial impact" to "insolvency/shut down".

For now, these brokerage firms are hardest hit:

  1. Alpari (shutdown);
  2. Global Brokers (shutdown);
  3. FXCM ('bailed out');
  4. IG (up to £30mn losses);
  5. Interactive Brokers (around $120mn in losses);
  6. Swissquote (CHF25mn provision activated)

We will write another post in due time to keep track of the slew of broker announcements. One referred the SNB's move on Thursday to be "Black Thursday". We agree.

Many retail FX brokers in trouble after adverse CHF move puts majority of clients exposed to short-CHF positions underwater. Main issue lies with under-capitalization as there were many cases in which clients' equity went negative, extra losses (above clients' segregated capital) were borne by broker.

Brokers we wish to highlight are: FXCM (US), Oanda (Canada), Global Brokers (NZ), Alpari (UK)

 The daily and weekly charts of FXCM. It was trading at around $17 days prior to the SNB shock, after which it  plunged some 26% on Wednesday and Thursday  alone; it did not trade on Friday as it was halted before the opening bell

The daily and weekly charts of FXCM. It was trading at around $17 days prior to the SNB shock, after which it plunged some 26% on Wednesday and Thursday alone; it did not trade on Friday as it was halted before the opening bell

 In pre-market trading on Friday morning,  FXCM was down to a low of under $1.40 when talks about a rescue package surfaced,  capping a stunning  93% decline  since $17. Unprecedented in the company's 15-year history

In pre-market trading on Friday morning, FXCM was down to a low of under $1.40 when talks about a rescue package surfaced, capping a stunning 93% decline since $17. Unprecedented in the company's 15-year history

  • FXCM LLC (NYSE: FXCM) - To be 'bailed out' by investment bank Jerreries, will receive $300mn in capital injection
    • US-based; largest retail FX broker in the world; founded in 1999
    • Initially reported clients owed them around $225mn due to negative equity
    • Said it may be in breech of minimum regulatory capital requirements
    • Said it was in discussions to replenish capital to prior levels
    • By Friday morning, FXCM was trading pre-market at around $1.40, from $17 just days before (-92%), stock was halted from trading on Friday; no news of when it will resume trading
    • Reuters reported that by afternoon, FXCM was in private talks with Jerreries New York for a rescue package via a capital injection
    • Capital injection in the form of senior secured-term loan of $300mn with tenure of 2 years and 10% initial coupon
    • Jerreries Group LLC is owned by Leucadia National Corp.
    • Leucadia's stocks were halted at 1224, just as Jerreries released statement on the $300mn loan
    • With the loan, FXCM can resume normal operations and meet regulatory capital requirement.

We asked on social media, when the deal was going through, "is this another Knight Capital redux?" seems like it is; the same distressed-corporation strategy, the same "savior" - Jerreries was involved in Knight's bailout then.

As an anecdote, the funding package isn't an equity deal but a debt deal. In the previous Knight Capital (the known as Knight Trading) saga, the firm booked a loss of $440mn due to a trading glitch that almost bankrupted it if not for the eleventh hour rescue deal led by none other than Jefferies.

The WSJ has more on the FXCM-Jefferies deal:

FXCM Inc. will receive a $300 million rescue package from Leucadia National Corp., the holding company for investment bank Jefferies Group LLC, that will allow it to meet its regulatory capital requirements and continue operations.

FXCM and other currency brokers were hit hard after the Swiss National Bank on Thursday decided to remove the cap on its currency.

FXCM had warned late Thursday that the volatility in currencies markets triggered losses that left its customers owing it about $225 million and that as a result, it might be in violation of capital requirements. It added that it was trying to shore up capital.

The Wall Street Journal reported earlier that the foreign-exchange broker also considered a private-equity capital injection, but a deal with Leucadia was seen as likely to happen faster, according to a person familiar with the matter.

Leucadia is investing $300 million in cash into FXCM in the form of a million senior secured-term loan with a two-year maturity and an initial coupon of 10%.

Richard Handler, chief executive of both Leucadia and Jefferies, called the move an attractive investment for Leucadia in a prepared statement.

FXCM was initially approached by Leucadia officials, including Mr. Handler about financing, people familiar with the discussions said. FXCM also held conversations with private-equity firms, these people said. As the conversations took place, Leucadia officials were calling other foreign-exchange brokers urging them not to take advantage of FXCM’s woes by poaching big clients, one of the people said.

It became clear on Friday that it was unlikely that talks with private-equity firms would result in a deal by the weekend, and FXCM needed the infusion on Friday to satisfy regulators, one of the people said. FXCM convened a board meeting on Friday morning to discuss the Leucadia loan, this person said.

FXCM was being advised by UBS AG, while Leucadia was working with Jefferies, according to a statement.

FXCM’s shares were off 62% to $4.80 in Friday’s after-hours trading following the news of the financing package, bouncing back slightly from the more than 85% premarket drop. The stock didn’t trade in the regular session, pending the financing announcement.

The deal is similar to one Jefferies reached two years ago to help bail out Knight Capital Group Inc. Jefferies led a group of investors that provided $400 million to keep the trading firm afloat after a number of accidental stock orders caused by a software glitch put Knight Capital on the verge of collapse.

That arrangement gave Jefferies and the other investors the right to buy about 73% of Knight Capital’s common stock at $1.50 a share. Four months later, Knight Capital reached a deal to sell itself to Getco LLC, a high-speed trading firm that participated in the rescue deal, for $3.75 a share. At the time of the Getco deal, Jefferies was Knight’s biggest shareholder.

Jefferies also regularly lends to cash-strapped and distressed companies, sometimes in bankruptcy proceedings or to fund out-of-court restructurings.

Based in New York, FXCM was founded in 1999 as one of the first currency-brokerage firms to serve retail customers.

FXCM ran into financial trouble in 2005 when Refco Inc., which had purchased a 35% stake in FXCM two years earlier, filed for bankruptcy protection. Refco accounted for nearly 40% of the revenues of FXCM, then known as Forex Capital Markets, at the time, and the company reported a net loss in 2006.

Refco’s stake in the firm was eventually sold to a consortium of buyers that included Lehman Brothers Holdings Inc., an investment bank that collapsed during the 2008 financial crisis. In 2007, an adviser to the deal called it a low-risk way for Lehman to quickly gain entry to the retail forex market.

In October 2010, FXCM was ready to tap the public markets. In its initial regulatory filings, FXCM said Lehman Brothers still owned a 9.9% stake but that the ultimate outcome of Lehman Brothers’ still ongoing bankruptcy proceedings wouldn’t have a material effect on the company.

FXCM went public in December 2010. Its chief executive, Drew Niv, who founded the firm in 1999 four years after graduating from the University of Massachusetts at Amherst, compared the brokerage firm’s likely trajectory to that of online stockbrokers like Charles Schwab Corp. and TD Ameritrade Holding Corp. “In the future, [online currency trading] will become even more mainstream,” Mr. Niv said on the day of the initial public offering.

But FXCM’s shares struggled, as investors quickly became disappointed in the potential growth of the retail foreign-exchange market. The industry also came under scrutiny from U.S. regulators, which forced forex brokerage firms to hold more capital.
— The Wall Street Journal
  • Alpari Ltd - Enters into insolvency after "majority of clients" sustained losses; ceases business
    • Officially entered into insolvency on 16 January 2015, Friday
    • Existing monies of clients will remain segregated and will be returned duely
    • Majority of clients that had leveraged short-CHF positions were not able to liquidate those positions in time due to the ferocity of the move
    • Clients incurred huge negative balances on their accounts as a result; losses were passed on to Alpari, firm then takes a hit on its capital
    • Although Alpari has not revealed the full details about its own trade books, we assume that it too had suffered large losses from the volatility in the CHF on its own trades
The recent move on the Swiss franc caused by the Swiss National Bank’s unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity. This has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm today, 16/01/15, that it has entered into insolvency. Retail client funds continue to be segregated in accordance with FCA rules.
— Alpari's Official Statement
I’m sure this isn’t the last we’ll hear on the subject and the SNB are going to be heavily scrutinised in the coming weeks for what appears to be a horribly irresponsible move on their part. For years central banks have tried to avoid days like today by being transparent and making moves like this over time while drip feeding their intentions to the markets. The SNB have shown themselves to be amateurs today and there is many people that will suffer considerably as a result.
— Alpari CEO, James Hughs
  • Global Brokers NZ Ltd - Shuts downs after operating capital wiped out
    • Full loss of operating capital; unable to meet minimum regulatory capitalization of N$1mn
    • Excel Markets served as Global Broker's retail FX brokerage arm
    • Unable to resume business; shuts down
    • All open clients' trade closed by 1700 Thursday; remaining equity was segregated and withdraw-able immediately
    • Losses mounted due to extreme illiquidity on broker's dealing side and was passed on to clients; entire CHF market was frozen for substantial period due to lack of offers
    • Negative balances on clients' accounts were not reimbursable; clients to bear their negative balances (i.e. they have lost more than their initial capital and must pay the deficit)
The dramatic move on the Swiss franc fueled by the Swiss National Bank’s unexpected policy reversal of capping the Swiss franc against the euro has resulted in rare volatility and illiquidity. Both our primary and backup liquidity providers became unresponsive or illiquid for hours after the event. The majority of clients in a franc position were on the losing side and sustained losses amounting to far greater than their account equity. When a client cannot cover their losses it is passed onto us.

ALL OPEN POSITIONS MUST BE CLOSED BY 5PM NEW YORK TIME OR THEY WILL BE AUTOMATICALLY CLOSED AT THAT TIME. NEW POSITIONS CANNOT BE OPENED AS OF THIS TIME.ALL CLIENT FUNDS ARE IN SEGREGATED ACCOUNTS AND NEVER USED FOR LP MARGINS. 100% OF POSITIVE CLIENT EQUITY OR BALANCE IS SAFE AND WITHDRAWABLE IMMEDIATELY.

Global Brokers NZ Ltd. STP’s 100% of order flow and has sustained a total loss of operating capital.GBL can no longer meet regulatory minimum capitalization requirements of N$1,000,000 and will not be able to resume business. Losses incurred on trades that could not be exited due to illiquidity were losses incurred directly with the liquidity provider and we do not have the ability to reimburse those. Please note the interbank market for francs was illiquid for hours after the event and no traders with an open franc position were able to close it for a significant period of time, at any broker.

News of the impact of this event on companies and traders is just beginning to come to light. As Directors and Shareholders we would like to offer our sincerest apologies for this devastating turn of events, and to thank you for being such a supportive group.

We ask that you place withdrawal requests for your account balance at your earliest convenience and allow for minor delays as our team begins to experience higher than usual service volumes.
— Global Brokers' Official Statement
  • Oanda (International) - Honored all trades and executions, restored clients' negative balances
    • Business as usual for the Canadian-based broker, after it released statement to all of its clients post SNB
    • Did nor re-quote or alter clients' CHF trades although spreads widened a lot; that was inevitable across the board
    • Offered to restore clients' negative balances to zero, for those that went negative due to the CHF's move
    • No adverse financial impact although it reported that losses of undisclosed amounts were sustained; this is supported by the initiate to restore clients' negative balances - proving it was extremely well capitalized
    • Firm was approached by several competitors (that had sustained serious losses) for acquisitions but declined to purchase
In the wake of unprecedented market events this morning, OANDA demonstrated its ongoing commitment to doing right by its clients.

Despite suffering losses and vanishing liquidity in the institutional hedging market, OANDA remained true to its 14-year legacy of transparency, integrity and fairness to our clients. OANDA did not re-quote or amend any CHF cross client trades. We even took the further step of forgiving all negative client balances that were caused when clients could not close out their positions fast enough.

Client inquiries are being handled normally and those making withdrawals and deposits are able to do so as normal.

OANDA is proud of its strong reputation for fairness and integrity. We thank our customers for their continued loyalty and welcome new traders who want to experience outstanding service and execution.
— Oanda's Official Statement

We have to commend Oanda for their immensely courageous and emphatic spirit, because to our knowledge, they are the only retail FX broker that has gone out of its way to save clients that would have otherwise been underwater (loosing more capital than they initially committed). Oanda was not obligated to prevent negative balances, as such is the inherent risks related to margin-trading and spread betting. Oanda stood up to the occasion, and offered to help clients with negative equities because they felt a moral responsibility and not because they were require to by law. In doing so, oanda would have taken a further hit to its own capital and profits; such an act would have eaten into its margins. But it did so anyways. For that, we take our hats off to Oanda and wish it the best of luck in its business. For the record, we are ourselves clients of Oanda and are proud to be serviced by such a company.


A Move So Fierce, It Has Never Been Witnessed Before

Note: We wrote about Jim Reid's concept of "volatile volatility", on how more and more asset classes are slipping into 'chaos'

We are shocked, shell shocked in utter dismay; while we were still updating our memorial piece on the Charlie Hebdo attacks news so big and unprecedented broke, that we had no choice but to shelve all immediate plans and cover this extremely nerve wrecking story. In our more than 6 years in the financial markets, we have NEVER seen anything as ginormous as the move in the Swiss Franc has been. Something as innocuous as decoupling one's currency after 3 years of the status quo has turned out to be what will go down the history books.

  The EURCHF currency pair in 5-minute resolution. EURCHF was trading almost exactly at 1.2, the SNB mandated "floor". After the initial news from the SNB that this floor was no more, prices literally gaped (for non-traders, gaps are the pinnacle of ultra momentum). This wasn't a 50 pip gap, it was somewhere in the leagues of  3000 pips (roughly 25%) in milliseconds , Within minutes, prices had printed a low south of 0.75 from the 1.2 tape, a move exceeding  4500 pips (roughly 38%) , Nothing in the financial markets ever moves more than 10% in minutes. This should give you the sheer immensity of this event moments thereafter the EURCHF pair crashed to less then 0.75,  marginalizing out virtually every single long   EURCHF position  ,  before finally rebounding to a level just above 1.00, which is where it was trading just before the SNB instituted the currency floor over three years ago. Suave move, as they say

 The EURCHF currency pair in 5-minute resolution. EURCHF was trading almost exactly at 1.2, the SNB mandated "floor". After the initial news from the SNB that this floor was no more, prices literally gaped (for non-traders, gaps are the pinnacle of ultra momentum). This wasn't a 50 pip gap, it was somewhere in the leagues of 3000 pips (roughly 25%) in milliseconds, Within minutes, prices had printed a low south of 0.75 from the 1.2 tape, a move exceeding 4500 pips (roughly 38%), Nothing in the financial markets ever moves more than 10% in minutes. This should give you the sheer immensity of this event moments thereafter the EURCHF pair crashed to less then 0.75, marginalizing out virtually every single long EURCHF position, before finally rebounding to a level just above 1.00, which is where it was trading just before the SNB instituted the currency floor over three years ago. Suave move, as they say

To be certain, we are reading about countless anecdotes of professional traders (read hedge funds, management money, trading desks, what have you) suffering huge margin calls on their positions; be it tactically positioned or macro-based (a la those sexy hedge funds).

The bottom line is crystal clear, almost nobody had guessed the SNB's hand in today's shocking move; and we suspect the SNB better gear up with some physical protection as we smell Molotov cocktails and napalm bombs when trading closes later and the full scene of the vicious carnage is laid fully bare for all to see.

We don't have time to go into the minutiae and the finer shenanigans for now. We believe these aspects to be very important for analyzing and we will certainly touch on this field after the dust settles and some 'calm' permeates through this fog or war. As a succinct primer, aspects such as positioning in the futures market; sentiment indicators; central bank foreign reserves; cross boarder flows and balances; treasury capital; contagion effects via the organic currency markets; the ECB-SNB monetary mechanics now that the currency floor has been removed; so and and so forth.


Aftermath: Nothing Short Of Armageddon

 Swiss yields are  now negative going out 7 years , meaning that interbank deposits will yield negative nominal rates for tenures up to 7 years. At last checked,  this cloud of negativity has extended to 9 years  with all series from the overnight deposit rates to the market for 9 year SGBs  are under 0% . Insane!

Swiss yields are now negative going out 7 years, meaning that interbank deposits will yield negative nominal rates for tenures up to 7 years. At last checked, this cloud of negativity has extended to 9 years with all series from the overnight deposit rates to the market for 9 year SGBs are under 0%. Insane!

We'll just let the charts do the talking here. In short, the CHF has been superbly strong against all currencies (strongest against the Euro, and Sterling). Strength has been sticky throughout the European session and position liquidation and stop tripping has fueled the rally as New York lights up. There is A LOT of pain in the trading and investing community. Even without looking at CFTC positioning, we know from experience that a majority of managed money has been short the CHF especially after the Swiss Gold referendum did not see a passage.

In other asset classes, Treasury yields, understandably plunged across the entire world, and the entire Swiss bond curve lest of the 10 Year is now negative, with the "On The Run" itself threatening to go negative soon as can be seen on the rate table.

 Daily charts of the EURCHF, GBPCHF, USDCHF, and CHFJPY illustrate just how massive the rally in the CHF has been. We're talking in  thousands of pips and tens of percent . This is just  abnormal . As we've said, in our 6 years of experience, we have  never witnessed anything as mind boggling as this . The pair that exhibited the c raziest knee jerk was of course the EURCHF , which fell all the way south of 0.75 ( more than 4500 pips under the 1.2 floor ). For more color on this move, look at the top most chart at the onset

Daily charts of the EURCHF, GBPCHF, USDCHF, and CHFJPY illustrate just how massive the rally in the CHF has been. We're talking in thousands of pips and tens of percent. This is just abnormal. As we've said, in our 6 years of experience, we have never witnessed anything as mind boggling as this. The pair that exhibited the craziest knee jerk was of course the EURCHF, which fell all the way south of 0.75 (more than 4500 pips under the 1.2 floor). For more color on this move, look at the top most chart at the onset

Other than the currency markets, Swiss stocks are down massively, one of (or maybe even THE LARGEST) down day in their recorded history. As a stronger CHF means less monetary largess despite the SNB diving deeper into the monetary twilight zone of NIRP (see below for commentary on this).

 Swiss equities have taken their heaviest beating in a long while as corporations generally lambast the SNB's actions to remove the floor. The luxury sector is a major export component of the Swiss economy, and a stronger CHF will surely eat into profitability in this sense

Swiss equities have taken their heaviest beating in a long while as corporations generally lambast the SNB's actions to remove the floor. The luxury sector is a major export component of the Swiss economy, and a stronger CHF will surely eat into profitability in this sense

As American markets are just waking up to the bright red margin calls, the carnage in Switzerland remains. The Swiss Market Index is down almost 15% although it is bouncing back moderately. Swiss stocks are now at 3-month lows. More intriguingly, the yield curve of the SGB (Swiss Government bond) complex has been crushed 10-20bps lower with yields negative all the way out to 9 year maturity!

The absence of an inversion (short end with higher negative rates than the belly and tail) seems to signify that negative rates are mostly due to the SNB lowering its benchmark interest rate and not because of risk aversion. Of course whether or not global markets take this as a CUE to dump risk assets is another wild card. With global equity markets staging ephemeral bidirectional swings, nothing is truly certain other than the bllodshed seen today.

 A complex of CHF pairs consisting of AUDCHF, EURCHF, USDCHF, CHFJPY, GBPCHF, NZDCHF, CHFSEK, and CADCHF provides in greater clarity the extend of the moves. We have calculated the exact pip ranges as seen in the red boxes on the top right corner of each pane.  GBP remains weakest of the major currencies against the Franc , if we ignore the EUR's nasty knee jerk to 0.75 in the minutes tailing the news

A complex of CHF pairs consisting of AUDCHF, EURCHF, USDCHF, CHFJPY, GBPCHF, NZDCHF, CHFSEK, and CADCHF provides in greater clarity the extend of the moves. We have calculated the exact pip ranges as seen in the red boxes on the top right corner of each pane. GBP remains weakest of the major currencies against the Franc, if we ignore the EUR's nasty knee jerk to 0.75 in the minutes tailing the news

 Crude oil has benefited from the "ECB QE" possibility/speculation

Crude oil has benefited from the "ECB QE" possibility/speculation

The smart people of Goldman have quickly come out with their analysis of the development, saying that the Euro should be expected to weaken further against the dollar as the ECB lines up for its announcement next week. They think the SNB's sudden withdrawal from its outright currency management framework is due to the anticipation that the ECB will launch sovereign QE, thereby dragging the Franc to uncomfortably low levels if it transpires. All this remains wild speculation until the moment of truth as we turn into next week.

But for now, here is Goldman:

Removing the SNB peg takes out one of the biggest EUR buyers in the market. And of course, VERY notable this is happening 1-week ahead of the ECB, they possibly realised they could not continue to buy unlimited quantities when the ECB might print unlimited quantities.

This is a massive message from SNB to the market : ECB is going to do QE, and it’s going to be big..No way I am keeping buying EUROs here. First Market will have to digest the pain of a 28% move at some point, also the USDCHF is down 15% which will HURT in the current long USD environment.
— Goldman Sachs

To bridge the time gap between our postmortem analysis and the currency of this development, readers should be able to take away a thing or two from this brief analysis by the Swiss investment bank, UBS. Although the analysis reiterates what we already know, it also provides more breadth on the impact of the SNB's decision to push its plunger. The main takeaway for us lies in the last section on the bank's credibility going forward. Will the SNB loose its mojo in its commandeering role? Too early to tell, but the possibility is indeed present.

Here is UBS's Beat Siegenthaler:

No more floor

The SNB today dropped the 1.20 EURCHF floor while at the same time lowering the negative interest rate on sight deposits to -0.75% from -0.25% previously, as well as moving the 3m Libor target to between -0.25% and -0.75%. The SNB argues that the floor was an exceptional and temporary measure that ‘protected the Swiss economy from serious harm’ but that the economy had had time to adjust to the new situation. It continues to argue that the franc had recently depreciated ‘considerably’ against the dollar. ‘In these circumstances, the SNB concluded that enforcing the minimum exchange rate for the Swiss franc against the euro is no longer justified’.

Dramatic market impact

The announcement has had a dramatic impact on markets with EURCHF initially dropping 40% to almost 0.85. It quickly reversed seemingly with the help of SNB interventions at levels just above parity to the euro. The statement noted that ‘if necessary’ the central bank will ‘remain active in the foreign exchange market to influence monetary conditions’. The SMI equity index dropped by more than 8% on the news and has recovered little since. On the rates side cross currency basis moved around another 20bp lower.

Economic repercussions

It would seem likely that today’s decision will have significant ramifications in Switzerland as very few observers expected the floor to be dropped with some arguing that it looked set to remain in place for years. Unless EURCHF was to recover back to levels much closer to the old 1.20 floor, the economy could be significantly impacted, as seems well reflected in the reaction of equity prices. At levels close to parity many businesses and investment decisions might not be seen as viable anymore and over time a significant volume of economic production could move outside the country. If so, there could be a significant deflationary shock possibly not too dissimilar to the one Switzerland might have suffered had the floor not been introduced in 2011.

Hope of a limited drop

Where will EURCHF settle after today? The big question is whether investors will want to buy Swiss francs despite substantially negative interest rates and at clearly expensive levels. Nevertheless, safe haven flows have so far demonstrated a remarkable stickiness which can be expected to continue as long as global risk aversion reigns. The SNB might be hoping to be able to stabilise EURCHF at around 1.10 which may be deemed a level that the economy can cope with. However, defending such a level might still be quite costly assuming that global risk aversion continues to linger.

Credibility cost

The other question is about the cost of today’s decision for the SNB, both in monetary and credibility terms. The SNB is holding roughly half of their CHF500bn in euros, which implies a loss of possibly not dissimilar to the CHF38bn that the SNB made in profit last year. The monetary impact might thus be manageable. The credibility impact might be harder to gauge though. Domestically, many economic actors relied on what was seen as a ‘promise’ to hold the 1.20 floor. Internationally, following the negative rates confusion back in December today’s decision might be further undermined the standing of the SNB among investors.
— UBS

Here are some comments from the professionals moments after the epic happened:

  • "As if millions of macro hedge funds suddenly cried out in terror and were suddenly silenced", as macro strategy hedge funds will be big loosers if their delta risks weren't hedged
     

  • Swatch Group's CEO Nick Hayek called the SNB's decision a "tsunami" for the Alpine country and its economy
     

  • "Words fail me! Jordan is not only the name of the SNB president, but also of a river… and today's SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country"  - Nick Hayek
     

  • "Absolutely shocking... For companies with international operations – translated earnings are going to be lower and if companies make products in Switzerland it is going to hurt margin. It is a terrible day for corporate Switzerland" - Jon Cox (Analyst at Kepler Cheuvreux)
     
  • Alexandre Baradex (Chief Market Analyst, IG France) - "This is extremely violent and totally unexpected, the central bank didn't prepare the market for it. It's sparking panic across all asset classes. It suddenly revives the risk of central bank policy mistakes, right when central bank action is what's keeping equity markets going"
     

  • Lex Van Dam (Hedge Fund Manager, Hampstead Capital) - "Major losses in euro-franc trades are causing panic selling and deleveraging across the board"
     

  • Chris BeauChamp (Market Analyst, IG) - "My initial reaction was that it is a sign the ECB is about to do something, which makes it odd that the reaction has been so negative across European stocks. However, it's not every day that a central bank pulls the rug out from underneath something in such a massive way, and clearly people are worried that there's something bigger afoot. This kind of event is the kind of thing that will trigger volatility. This is not a one day thing now."
     
  • Darren Courtney Cook (Head of Trading, Central Markets Investment Management) - "They’ve stopped defending the 1.20 floor. It’s carnage"
     
  • Partick Jacq (Rate Strategist, BNP Paribas) - "The decision of the SNB means it no longer needs to buy euro-denominated paper in order to defend the 1.20 position. This should normally weigh on European debt but the SNB also said they will continue to monitor in order to prevent the exchange rate from rising substantially. This means that at the end of the day even if they don't defend the 1.20 level, if they want to prevent a collapse of the euro versus the Swiss franc they will probably have to keep on buying, maybe at a lesser extent, euro denominated paper" 
     
  • Jonathan Webb (Head of FX Strategy, Jefferies London) - "It has taken the market by complete surprise. The SNB probably expects the ECB to launch QE next week and along with the Greek elections coming up, it would make it pretty tough on the Swiss to keep bidding the euro. So they have abandoned the cap and cut rates deeper into negative territory. We expect euro/Swiss to trade around 0.90-1.00 francs after all the stop loss orders have been cleared"
     
  • Geoffrey Yu (Currency Strategist, UBS London) - "They think too much money is going to come in, especially with QE coming, and so they think they need a 'Plan B'. Let it run, let it settle, and we'll see what happens next."

Removes EURCHF Floor & Lowers Already Negative Rates

 This Swiss ATM that refuses to dispense Euros probably says it all

This Swiss ATM that refuses to dispense Euros probably says it all

In brief, the biggest story was had obviously been the Swiss National Bank (SNB) abandoning its currency peg or floor (the SNB defines this as the "minimum exhange rate of CHF 1.20 per euro"). The SNB started managing the level of which its currency, the Swiss Franc (CHF) trades against another specific currency, the Euro (EUR) in 2011 where by it was concerned about the CHF's overvaluation, a lot due to demand for safe haven currencies as risk assets saw heightened volatility back then. It then issued an ultimatum of a 1.2 EURCHF floor in which it would defend at all costs. EURCHF has never penetrated significantly under this floor since. Until now that is, and it has done with with no abandon.

Besides that shocker, it also lowered its already NEGATIVE interest rate to -0.75% from -0.25% (which is the lowest of of any central bank, easily trouncing the ECB's -0.25%). From the horse's mouth:

Swiss National Bank discontinues minimum exchange rate and lowers interest rate to –0.75%

Target range moved further into negative territory

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to -0.75%. It is moving the target range for the three-month Libor further into negative territory, to between –1.25% and -0.25%, from the current range of between -0.75% and 0.25%.

The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.

Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.

The SNB is lowering interest rates significantly to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions. The SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions.
— SNB Press Release

It is difficult to envisage reality with a base deposit rate of -0.75%, and it seems like the SNB together with the ECB are found of playing inside the monetary twilight zone of NIRP (negative interest rate policy). Imagine having to pay to deposit your cash in a bank. This how absurd NIRP is, but central banks always love the absurd. The more the merrier.

The previous twilight zone was ZIRP (zero interest rate policy); the ante has been upped, and will continue to be upped as deflation reigns in hard on the financial markets (see here and here); and central bankers who so live comfortably in their ivory towers face the reckoning they have detested since Bernanke coined his "helicopter money" theory.

Again, without going too deep in down the rabbit hole, it is highly unlikely we see persistence in the strength of the CHF in light of the -0.75% deposit rate the SNB pays. Unless of course markets see a seismic shift in risk appetite; it would be an entirely different ball game then. But as for now, sit back, and enjoy the carnage, assuming you aren't already a carcass.