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20 January 2015

Soaring Swiss Franc 

Investors, traders and financial institutions around the world were caught unprepared for Switzerland’s decision to abandon efforts to keep the national currency’s value from rising.

On January 15th, the Swiss central bank lifted the lid on the Swiss franc by ending four years of intervention on foreign exchange markets – triggering an initial hike of 41% in value in panicked trading before settling at around parity with the euro. That compared with a previous ceiling of 1.20 francs.

The losers include insolvent foreign exchange brokers whose clients were trading with borrowed money; investment banks and hedge funds; and Eastern European borrowers who had taken out loans denominated in Swiss francs. Swiss companies that depend heavily on exports to the rest of the continent now find that their goods and services are 20% more expensive in European markets, and the country’s stock market slumped in response.

The global shock to currency markets is already prompting concern about the light-touch regulation applicable to foreign exchange trading, which in recent years has become popular among retail clients.

The potential risks were already clear before the Swiss National Bank’s move last week. France’s financial regulator, the Autorité des Marchés Financiers, last year reported that 85% of retail customers active in foreign exchange trading lost money.

Denmark’s Saxo Bank says it may face significant but manageable losses from customers unable to repay debts incurred from trading currencies – although it did reduce credit levels a few months ago. Today, investors and institutions alike are likely to look at foreign exchange markets with a great deal more caution than they did a week ago.