On Thursday January 15th, the Swiss National Bank abandoned it’s cap on the Swiss Franc, leading to a flash crash which saw the Franc gain over 40% on the Euro , but what was this cap all about and why did the SNB drop it?
Around September 2011, during the Eurozone crisis, the SNB introduced a cap of (no higher than) 1.20 Euro per Franc in order to protect local economy, especially the Swiss export sector, from an over valued Swiss Franc (CHF).
This was the world’s largest quantitive easing programme which, at times, saw the SNB as the only buyer whilst maintaining this artificial cap. The SNB, in short, simply said that the cap was no longer required, but the markets clearly reacted in shock. The official statement by the SNB was as follows:
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 implications of this policy change has been very significant and whilst many have suffered large losses, this brings new volatility and opportunity to CHF currency pairs after 3 years of calm.
For us social traders, the main lesson to learn from this event is to always guard against the unforeseen. Even in an event like this where the market moves too quickly and stop losses are missed, most brokers will have a fair policy to correct accounts soon after.
So, implement those stop losses regardless of the trader you’re copying!