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Series: Thoughts on the Swiss Franc Crisis-- Causes

23 Years ago | January 20, 2015 11/27/22, 12:00 AM

I have been active continuously in many facets of Foreign Exchange since the early 1970’s and feel the need to correct some of the nonsense I have been hearing from the talking heads on TV and to provide a little risk management advice to retail forex traders.

First of all this tsunami was not created by retail or interbank dealers, it was caused by a major imbalance in the CHF to EUR value created by a disastrous decision by the SNB. The SNB had become worried several years ago by the deflationary impact on the Swiss economy of an overvalued (and rising) currency against its major trading partner, the Eurozone. So the SNB decided to support the value of the EUR against the CHF at a price of  EURCHF1.20 . To enforce this cap, the SNB bought EUR and sold CHF in massive amounts. This strategy can work for a short while, but the policy will bottle up pressures that have to be relieved. It has always been so.

I don’t like the terminology, but in essence the Swiss got involved in a high stakes currency war with the Eurozone. Here we had the SNB buying EUR while the ECB was selling them to drive the EUR weaker to stimulate the Eurozone economy.

Also recently we have seen safe-haven demand for CHF as plummeting oil prices has seen Russian oligarchs moving funds out of the Ruble into the safety of the Swiss franc while the Russian currency weakened. Additionally the markets have begun to anticipate a new round of Quantitative Ease by the ECB that would create even more EUR and force the currency even weaker vs. the CHF and USD.

These are big money transactions and dwarf the magnitude of leveraged retail forex trading.  I have heard several script readers on Business TV blame the Swiss collapse on retail forex trading. This is utter nonsense.

Next: trading crisis 

John M Bland. co-founder

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