Trading the Swiss Franc

A lot of people lost money trading the Swiss franc when the Swiss national bank announced that they were no longer selling francs for Euros to maintain a currency cap of 0.8 francs to the Euro. Anyone who was trading options and had calls on the franc with Euros did exceptionally well when the franc soared forty percent in minutes. Now the Swiss are rethinking their monetary intervention strategy according to Reuters.

Switzerland’s franc again dominated trade on major currency markets on Thursday, falling as much as two percent against the euro and dollar amid renewed speculation of intervention by the Swiss National Bank.

The franc sank to 1.0430 francs per euro in morning trade in Europe, by far its weakest since the SNB triggered the most violent move in a major currency in four decades by dumping its cap on the franc two weeks ago.

But as interesting for most players was the speculation that the SNB was also intervening in favor of the dollar, a shift which may allow it to battle the franc’s broad strength at less overall cost.

It turns out that a lot of folks in Switzerland were very unhappy when their central bank took the cap off the Euro with consulting anyone else. The prices of Swiss exports immediately became very pricey in world markets and Swiss labor unions complained about the risk of layoffs if companies are forced to cut back on production. Interestingly the franc has settled into a trading range close to one to one with the Euro. And Switzerland appears to be selling francs again but using a broader approach. How does this affect anyone trading the Swiss franc?

Who Made a Profit?

Not everyone got hurt trading the Swiss franc when the cap went off. JPMorgan made money trading the Swiss franc to the tune of $300 million!

JPMorgan Chase & Co.’s foreign-exchange traders reaped a gain of as much as $300 million after the Swiss central bank roiled markets by abolishing its cap on the franc, according to two people with knowledge of the matter.

The bank netted $250 million to $300 million on the day of the Swiss National Bank’s surprise decision to scrap the franc ceiling of 1.20 against the euro, said the people, who asked not to be identified because they weren’t authorized to speak publicly. A JPMorgan spokesman declined to comment.

Not everyone believed that the Swiss would always buy Euros and some were at their terminals when the news hit and were able to place profitable trades. This simply reaffirms the old Woody Allen saying that 90% of success in life is just showing up!

What Comes Next?

Giving up supporting the Euro was simply admitted that the policy was going to be too costly as the EU starts its quantitative easing program and drives down the value of the Euro. Nevertheless, Switzerland is still a small economy with an attractive currency. Thus there will always be upward pressure on the franc. Anyone trading the Swiss franc can expect continued the Swiss to continue to intervene in the FX market but against a broader basket of currencies. The International Business Times reports on this situation.

The Swiss National Bank has revealed that it is prepared to intervene in the foreign exchange market after it stopped capping the Swiss franc’s value against the euro on 15 January.

Speaking to domestic press, the SNB’s vice chairman also defended the central bank’s move to abolish the three-year-old euro cap, as it would have cost 100m Swiss francs (£73m, €97m, $110m) to maintain.

“Giving up the cap means a tightening of monetary policy,” said Jean-Pierre Danthine in an interview with Swiss national daily TagesAnzeiger.

“We accept this, but only up to a point. We are fundamentally prepared to intervene in the foreign exchange market.”

Thus anyone trading the Swiss franc against the Euro will not expect to see direct CHF to EUR intervention. Rather trading this pair will have to do with actions of the EU that decreased the Euro’s value across the board and actions of the Swiss that drop the value of the franc against all major currencies.