Remember, Remember .......

Friday 15th January 2016

Remember, Remember .......

ref :- "Short View" , Katie martin in The Financial Times

By coincidence, we happened to mention the Swiss National Bank's decision to abandon the Swiss Franc's 1.20 cap against the Euro in a piece just the other day. We refer to it again not just because today is that first anniversary of that extraordinary day, but also because we would all do well to remind ourselves just what a seismic event it was. And as a lesson in why one always has to expect the unexpected, it's hard to beat.

For three years, in a policy designed to protect Switzerland's exports-led economy the SNB had battled to keep a lid on its currency largely by a strategy of direct intervention in foreign exchange markets. It was a hugely expensive and, as it turned out, ultimately unsustainable process. Out of the blue, on this day one year ago the SNB scrapped the policy. To call it a surprise would in no way convey just what a shock the move was  --  only days before, the central bank had publicly confirmed their on-going commitment to do whatever it takes to hold the Franc at 1.20 or above despite the added pressure of a Eurozone stumbling both economically and politically.

The immediate (and we mean immediate) effect of this change of policy was to see the Sw. Franc soar by about 30% or more  --  it's impossible to be exact as it was almost impossible to trade. What we do know is that it was the biggest move in currencies since the collapse of the Bretton Woods exchange rate agreement in the early 1970's. Banks were left nursing colossal losses and broking houses were put out of business.

So what does the affair teach us ? Obviously that no scenario is ever certain, and traders had better have some kind of exit strategy in mind even if the likelihood of that scenario coming to pass seems very remote. And more specifically, that currency pegs should not be viewed as written in stone just because of their longevity and apparent determination expressed by the relevant central banks. Right now, both the Hong Kong Dollar and the Saudi Riyal pegs to the US$ are the subject of some conjecture. One seems far more vulnerable than the other, if that's the right word, but as the Swissy demonstrated, rule nothing out.