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Swiss Unpegging Stokes European Currency Concerns.

RiskEuropeCost and Cash ManagementMarket VolatilityBlog+-
swiss_franc_unpeg.jpg

The fall-out from the unexpected un-pegging of the Swiss currency is still uncertain, yet more firms are reporting a negative impact. But how should we prepare for more bad news?

 

On the 15th January, Swiss authorities dramatically ended the ceiling between the national currency and the euro. Before last Thursday, CHF stood at 1.2 to the euro. As of this morning, the Swiss franc surged to exceed the euro’s market value. Against the dollar, the franc moved from near parity to 0.87. Against the British pound, CHF moved from 1.5 to 1.3.

 

The consequences of this violent swing are still being felt. IG Group, a spread betting group, has issued a profit warning. Alpair, a Russian foreign exchange broker, has fallen into administration over the weekend.

 

There has been speculation that the Denmark, which also pegs its currency to the euro, will remove currency controls. To protect itself from speculation, the national bank has slashed its interest rates. Still, Saxo Bank, a local bank, has forecast that it will be facing losses from its depositors.

 

As always with financial crises, the debate for the wider economy is twofold:

 

Firstly, to what extent is this a containable financial problem?

 

And, secondly, if this is to be a contagion effect, how soon will it affect the market? And who will be affected?

 

On the first of these questions, it seems as though the consequences may be starting to impact upon firms in the ‘real’ economy. 9% of the value of the Swiss stock exchange was wiped off in a single day. Immediately, the impact on cross-border trade will be noticeable, as all goods sold from Switzerland see a price hike. Tennis star Roger Federer has reported that even he is feeling the pinch.

 

If we are to assume a contagion effect, the potential ranges from financial firms to all Swiss-trading businesses. The issue will be of ongoing-volatility. Already, the Swiss currency is out-performing the Russian rouble. On Bloombery’s price variations scale for the rouble moved by 245% on one day as Moscow free-floated the currency. By contrast, the franc scored 261%.

 

Although the Eurozone has smoothed much of the intra-EU trading for businesses, speculators actions seem to have move impact as they target a reduced number of continental currencies.

 

For buyers this causes an enormous headache. For those using contracts deploying spot prices, this kind of volatility with budgeting and indeed profitability. Yet it’s perhaps impractical to hedge ever contract in every currency.

 

The immediate action needed is a thorough of past decisions. Investments or deals that looked good last week may be completely recast as the value of the euro dropped 30% against the franc.

Worst still, the full effects of this revaluation will take some time to fully feed their way through the system. It seems likely that more companies will be feeling the effects, with more profit warnings and potential insolvency to strike the supply chain in the coming weeks and months. Buyers must be vigilant to this and explore, in depth, suppliers’ potential exposure to this threat.

For insight into predicted commodity trends for 2015, click here.

Jon Webb
Posted by Jon Webb