You might have seen #Francogeddon trending recently, referring to the economic cataclysm erupting out of Switzerland. When we think of Switzerland, we imagine a country that has been historically removed from outside troubles. Always protected from conflict by high mountains and steadfast neutrality. So what’s happened in Switzerland that’s been making waves across financial markets and the internet alike.
#Francogeddon, what does it mean?
Until very recently Switzerland’s currency, the Swiss franc, has been seen as a stable investment. With the Eurozone crisis many looked to commodities that would remain stable, even during times of turmoil. These included precious metals such as gold, silver, and most importantly – Swiss francs. Because of this increased investment, the Swiss National Bank (SNB) set a minimum exchange rate of 1.20 francs to the euro, capping the value of the Swiss franc by pegging it close to the euro.
On January 15, 2015 however, with no warning, the SNB removed the cap, sending markets into disarray… Kicking off the #Francogeddon.
Why did the SNB uncap the franc?
Did they just want to watch the world burn? Well during the period of capping, the SNB had been buying euros with newly printed francs (in order to keep the value steady). This resulted in Swiss ownership of $480 billion (USD) worth of foreign currency (about 70% of GDP).
Many people in Switzerland worry about owning too much foreign currency, due to the value of these assets being out of their control. Recently, more troubles in the Eurozone have been pushing the franc down as well. This appears to be what prompted the SNB to remove the cap, saying that there is no reason to weaken the franc artificially if it is no longer overvalued.
Don’t buy watches or chocolates
Regardless of the Swiss government’s intentions, removing the currency cap does not seem to have helped the Swiss economy, at least not in the short term. One effect of this is a huge increase in the prices of Swiss exports and vacations because of the rising franc. A large portion of Switzerland’s economy is dependent on these exports, which are reduced with the recent price increases.
You may want to hold off on that Swiss Alps getaway, but there are other options instead. At the time of writing, the euro’s value is at its lowest point in years relative to the franc and Canadian dollar. So we suggest you take a look at Italy, Austria, or any number of other countries in the region. Instead of buying Swiss chocolate online, you might want to save some money and order from Belgium for the time being.
You win some, you lose some
Anyone who owns Swiss francs but uses euros (other European nationals living in Switzerland for example) faced a mad rush to exchange their currency. In some cases, currency exchange centers had long lines stretching around the block, with everyone looking to pick up cheap euros. In addition, precious metal values rose in accordance with the SNB’s big move.
Not everyone made off great however. The foreign exchange (FX) broker Alpari LTD – who also happens to buy a key sponsor for West Ham, a Premier League team in London – declared insolvency after finding themselves unable to make up huge losses. Alpari leveraged at 500:1, making them extremely susceptible to a seismic shift such as this. Other risky brokers suffered similar losses across the board.
What does this tell us about investing in the FX market?
The FX market can be a great investment, but as with any investment there will be ups and downs. Drastic events like the #Francogeddon might not occur every day, but they definitely do happen. Always be careful when choosing whom you invest with. We recommend speaking to a certified (and trusted) broker prior to investing in anything – including the FX market.
Keep tuned into the Current for more info as it develops. Whether it’s the Swiss franc or any other currency on the market, we’ve got you covered.
Stay informed. Stay Current.
