It was the currency shot heard around the world. On Jan. 15, 2015, Switzerland announced that it was going to scrap its currency peg of 1.20 to the euro. The Swiss franc immediately skyrocketed 20%. This left many people holding the bag. This didn't just include investors with a position in the euro, but hundreds of thousands of people in Switzerland, Poland, and Croatia who have their mortgages in Swiss francs. The irony is that many of these people moved their mortgages to the Swiss franc thanks to its safety and stability after the financial crisis of 2008.and because of lower interest rates, which can be found as low as 1.5%. Now imagine waking up one day and the Swiss franc has appreciated 20%, destroying the equity you have in your home.
Surprise, Surprise
The reason this move was such a surprise is that Switzerland had publicly announced time and time again that it was fully committed to the euro.
The Swiss National Bank pegged its Swiss franc to the euro on Sept. 6, 2011, which currency years, is a very short period of time. Just prior to the Swiss franc/euro currency peg, Switzerland was an expensive place to do business. In fact, it was the most expensive place to do business in Europe; exporters and service providers had a very difficult time making profits. The solution: the Swiss franc/euro peg. This helped because the Eurozone was just exiting a crisis and the euro was lower. Therefore, by pegging the franc to the euro, Swiss exporters and service providers would greatly increase their odds of profitability. (For more, see: The Swiss Currency Shock Explained.)
Now, due to the increased value of the Swiss franc because of the scrapped currency peg to the euro, Swiss exporters and service providers will once again have a difficult time delivering profits. Swiss officials have stated that Swiss businesses are in better shape now than prior to the currency peg, but that’s only a relative point. Swiss officials have also stated that the removal of the currency peg will not lead to a destabilized local economy, and that over the long haul, the Swiss franc will settle at 1.10 vs. the euro. (For more, see: The Pros and Cons of a Pegged Exchange Rate.)
Perhaps Swiss authorities are correct, but what happens to the euro if neighboring and nearby countries decide to peg their currencies to the Swiss franc for safety and security? That would lead to massive volatility, both economically and politically. As far as both points are concerned, this goes beyond currencies. The currency moves, and potential currency moves, are an aftereffect of a struggling Europe from an economic standpoint. With Europe unable to deliver consistent and sustainable growth, independent nations are likely to attempt to figure out solutions to protect their own. This can lead to destabilization. Hopefully, it will get better after it gets worse. (For more, see: The Swiss Franc: What Every Forex Trader Needs to Know.)
The Big Question
The big question: Why did Switzerland Scrap the euro? Nobody outside the Swiss National Bank knows the answer to that question with absolute certainty, but there are three theories floating around:
1. Switzerland doesn’t see the Eurozone as sustainable and didn’t want to go down with the ship;
2. Switzerland is aiming for franc parity with the euro;
3. Wealthy Americans with money tied up in Swiss bank accounts were seeing their investments sour due to a weak euro vs. the U.S. dollar.
The Bottom Line
It might be fun to guess at why the Swiss made this move, but "why" isn’t important. What’s done is done. Now you can attempt to figure out how to profit from it. The most logical scenario is that the euro will continue to weaken and the U.S. dollar will continue to strengthen — in the near future. Please do your own research prior to making any investment decisions. (For more, see: Use This ETF to Trade the Swiss Franc.)
Dan Moskowitz owns shares in Market Vectors Double Short Euro ETN (DRR).
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