Opinion

Felix Salmon

Charts of the day, Swiss franc edition

By Felix Salmon
September 6, 2011

As a general rule, it’s the risk-on trades which have a tendency to blow up in your face. If you borrow in a low-yielding safe currency and invest in a higher-yielding risky currency, you make money every day, but can lose it all — and then some — with one violent currency move, when the risky currency suddenly weakens.

Today, however, it’s the other way around. With one announcement, the Swiss National Bank sent the Swiss franc — a classic safe currency, which rallies in times of uncertainty — plunging. To give you an idea of just how insanely huge today’s currency move was, here it is in the context of the past 12 years or so:

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What this chart shows is that even during the recent crises, the Swiss franc basically never rises or falls more than 2% in one day. Today, it moved more than 8% — that’s a 20 standard deviation move. If market movements were normally distributed (which, of course, they’re not), 20 standard deviation moves would never happen. You can be quite sure though, that the SNB move today caused a lot of pain to a lot of people. Remember what the Swiss franc volatility surface looked like a couple of weeks ago?

EURCHF-vol-surface-082211.png

As I wrote back then, this chart shows a market very bullish on the Swiss franc and bearish on the euro — a market betting strongly against the SNB’s ability to weaken the Swiss currency. Well, that didn’t work out very well. But just check out what the same chart looks like today, post intervention:

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The first thing to note here is that the crazy implied volatilities seen two weeks ago seem positively low by today’s standard. Check out the y-axis: it’s now going all the way up to 31.35, compared to a maximum of 26.975 last time we looked at this chart. And in general the entire surface has risen a lot over the past couple of weeks. If you want to bet on the Swiss franc today, in any direction, you’re going to have to pay a lot of money to do so.

But there’s still a huge amount of skew here, in exactly the same direction. Over the near term, it’s not as pronounced as it was — there are lots of people betting that the SNB might be able to weaken the Swiss franc over the next few weeks. But over the long term, the market is speaking clearly: everybody thinks the Swiss franc is going to strengthen and many fewer people think it’s going to weaken. The SNB might have won this battle, but it’s not going to win the war.

And this is a hugely important war for Switzerland. Michael McDonough puts the Swiss franc’s strengthening into the context of Switzerland’s domestic economic health:

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The problem is that the international capital flocking to the safe haven of the Swiss alps really doesn’t care about Swiss exports. And if you look at Swiss exporters, even the top gainers, like Swatch, which rose 6% on the day, actually fell in euro terms. The broad Swiss stock market, up 3.9% today, didn’t even come close to making up for the currency losses imposed by the central bank on foreign investors.

The main winners today, I suspect, are just going to be black swan funds and anybody else making bets on extreme market moves. You don’t see 20-standard-deviation events very often, and when you do, there are always one or two people with out-of-the-money options who suddenly make a fortune. But over the long term, the markets are stronger than any central bank. The Swiss franc will test 1.20 again, and when it does, we’ll see in practice just how many euros the Swiss National Bank can stomach before it gets full.

Comments
5 comments so far | RSS Comments RSS

How many Euros would you buy if you could buy them with personal checks drawn against a closed account? Probably a lot. Maybe the SNB will adopt the same approach. The only limit to their issuance of CHF is the number of zeroes they desire to print on their banknotes. I’d buy more euros.

Posted by johnhhaskell | Report as abusive
 

Just another example of how MPT statistics do not accurately reflect actual loss potentials.

Many vendors of MPT based investment planning tout 95% confidence levels for their predictions. In reality, it is probably really in the range of 75% to 90% over a lifetime.

So in general, it should be pretty good. Just be aware of that 10% to 25% chance of it not working out as planned.

Posted by ErnieD | Report as abusive
 

I fear it’ll all end in tears. Alan Walters famously said in the 80s “You can’t buck the markets” yet Norman Lamont famously tried that with the Ppund and the ERM. It didn’t work, and George Soros famously made £1 billion from betting against the UK government which had to cave in in the end.

I suspect the same dangers lurk for the SNB with this risky fixed rate policy.

Posted by FifthDecade | Report as abusive
 

Franc will grow again after a while.
Printing money will make trouble for Central Bank.

Posted by Grgofil | Report as abusive
 

Dear Consumer Advocate:
I am writing this letter to you because the email option on the USPS website is woefully inadequate to express my concerns and was unable to even locate the branch post office I had the difficulties with. My old branch, Elk Grove in CA, has long lines but they do have ALL of their service lines open to alleviate this situation. The new branch, Rancho Cordova on Olsen Drive also in CA, closes service windows and lets the customer line grow and grow and grow. But THIS is not my main complaint.

It began back in July when I sold my home and moved into a rental home in Mather, CA (95655). Prior to moving we filed a change of address at the Elk Grove branch. As we were moving in I met the mail carrier for the rental in Mather, on July 31. We met at the ‘gang’ mailbox and asked which slot was for 4209 Aubergine Way. He opened the box and said we could either buy a new lock from the post office or exchange a lock that we purchased elsewhere. We did not have a lock at the time, so he locked and closed the slot. He said we may not see him again since many different carriers shared this route and delivered on a varied schedule. This is route #5 in Mather, CA.

No luck in catching a carrier even though I left a note. On August 6, I went to the Ranch Cordova branch on Olsen. Long line, longer wait. I spoke with three attendants and one supervisor and explained my predicament. All four offered me a slip to ‘fill-out’ and required a $50 fee to get me a lock and key. I refused and explained what the carrier had told me. I either wanted a key or for them to have the carrier open the box so I could install my replacement. I was told NO by the supervisor. The legal owner either had the keys or would have to appear, ‘in-person’, to get a ‘free’ replacement set. I left with no keys, no mail….

In speaking with the owner later that evening, my wife was told that he had NO keys (he purchased the home as a foreclosure) but would find the deed. The next day I encountered a different postman at our mailbox, but he would not allow me to exchange locks. But he did give me lots of mail either addressed to me our forwarded to me (incidentally, I was told the post office had no such mail; a lie???). His name was John and he told me to take the envelope with the USPS forwarding address to the post office and I should have no problem in getting the keys. Fat chance….

I spoke with the same supervisor as the previous day. I gave him the envelope with the forwarding address and asked for the keys. He said the carrier was again wrong and offered me that ‘yellow’ slip again. This time I said NO!!! Bring on the supervisor’s supervisor. He told me I didn’t own the property and was not going to get the keys. I went ballistic. No profanity, but I was loud. I left after he threatened to call the police on me….

I have never in my long life been treated like this. Poor customer service is a major reason the USPS is going bankrupt. Even yearly postage increases and, it seems, false advertising will not save this sinking ship. May the USPS RIP!!!

Sincerely,

Albert Hagemyer

Posted by podbytheusps | Report as abusive
 

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