Switzerland’s notorious Swiss franc crisis, which rocked markets one year ago and sent the currency spiking, could return to haunt traders, some analysts warn.
The nation’s central bank stunned foreign exchange and other financial markets on Jan. 15 last year, when it unexpectedly scrapped efforts to stop the franc rising against the European single currency.
The Swiss National Bank (SNB) decided to abandon the minimum rate of 1.20 Swiss francs against the euro that it had been defending for more than three years.
Following the announcement, the Swiss national currency immediately spiked in value, sparking turmoil on global financial markets.
However, fast forward one year, and the Swiss franc has erased a large part of those hefty gains.
The SNB’s decision last year to abandon the franc’s exchange rate floor was felt globally as the franc immediately strengthened by 30 percent against the euro.
Share prices of Swiss companies heavily dependent on exports took a nosedive.
The crisis also wiped out at least two international foreign exchange brokers — London-based Alpari UK and Global Brokers NZ in New Zealand — which both declared insolvency after clients’ losses were passed on.
“2015 started with a bang,” said Simon Smith, chief economist at currency broker FxPro, describing the Swiss franc crisis as a “black swan” moment, or extremely rare and unexpected event that alters the markets landscape.
“The SNB black swan completely changes the retail foreign exchange industry,” he said.
The day the SF1.20 peg was removed, the Swissie, as the currency is nicknamed by traders, shot off to its highest ever level against the euro, at SF0.8517 for one euro. On Jan. 15, it was trading at about SF1.0940 per euro.
Joe Corbach, head of currencies and commodities at GAM, warned that the Swiss franc could potentially face more sharp volatility as traders build up so-called short positions, or bets against the value of the currency rising.
“Markets have a short memory,” Corbach said.
“Since September, the franc has stabilized in a range of 1.08 to 1.10 against the euro, and investors have been building up their shorts,” he said, adding: “Could the market be underestimating the risks again?”
However, FXTM chief market analysts Jameel Ahmad sounded a more cautious note.
“Bearing in mind that there is no longer a minimum exchange rate against the euro, I would say that there is not a present direct risk that the SNB could shock the markets again,” he said.
“There are heavy rumors in the markets that the SNB is still intervening in the markets and purchasing the euro,” he said. “However, it has never been confirmed what level might be targeted for the euro/franc to achieve.”
Trading firms remain on edge over the potential for another currency market crisis, but the industry has since implemented measures designed to contain such a risk.
“Last January was a wake-up call for those market operators that were lucky enough to survive,” analyst Fawad Razaqzada at trading firm Forex.com said.
“They are better prepared for an event like that this time around, with lots of brokerages increasing their margin requirements and introducing other risk control measures,” he said.
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