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Major Financial Event: The Swiss Franc Black Swan Event

TraderKnows
TraderKnows
05-10

An overview of the Swiss Franc Black Swan event and its resulting impact.

Background:

Since September 2011, the Swiss National Bank (SNB) implemented a policy of capping the exchange rate at 1.20 euros per Swiss Franc to protect the domestic economy from the adverse effects of a highly valued franc. The decline in oil prices and the depreciation of the Russian ruble in late June 2014, coupled with the further devaluation of the euro against the dollar, as well as the anticipation of the Greek election results, prompted investors to seek refuge in the stable Swiss franc. These factors collectively led the SNB to ultimately abandon its cap on the franc's exchange rate against the euro.

Black Thursday:

On January 15, 2015, the Swiss National Bank abruptly announced it would abandon the cap on the franc's exchange rate. This decision led to a sharp decline in the value of the euro within five minutes, causing major losses for currency traders across Europe.

Within two minutes of the announcement, the franc's exchange rate against the euro soared by 11%, and after seven minutes, it rose by 19%, eventually appreciating by 41% with the franc reaching a high of 0.85 francs per euro. The day before, the exchange rate was 1.2 euros per franc.

Brokers' Losses:

The event resulted in an estimated total loss of over $1 billion for brokers. The UK retail broker Alpari UK went bankrupt the day after the announcement. Deutsche Bank officially announced to the media that it had lost over $150 million due to the extreme volatility of the franc. Interactive Brokers also reported losses exceeding $120 million.

FXCM Inc, one of the largest online trading platforms and most popular currency trading brokers, announced that because of client losses exceeding $225 million, it had severely violated regulatory capital requirements. The value of FXCM Inc's shares dropped by 90% in pre-market trading on Black Thursday, indicating a significant threat to regular trading sessions on the New York Stock Exchange (NYSE).

Subsequent Impact:

Global Brokerage Inc, the parent company of FXCM, filed for bankruptcy a few months later due to shareholders losing over 98% of their investment during the crash, leading to the company being banned in the United States. The FXCM group was later acquired by Leucadia National Corporation, which remains the parent company of FXCM to this day.

Major European stock markets also took a significant hit. The overall Swiss stock index fell by over 10% for the month. For instance, Swatch Group AG dropped by 16%, Actellion LTD. by 14%, Nestlé by 6.2%, and even J.P. Morgan Chase & Co. saw a decline of 3.5%.

Impact on the Swiss Economy:

The overall Swiss economy also suffered damage. The risk of inflation led to significant speculative activity domestically. The swift appreciation of the franc severely impacted the export industry, with exports declining by 2.6% in 2015. The Swiss National Bank announced losses of approximately 50 billion francs in the first half of the year alone due to foreign exchange position losses. Moreover, the tourism industry was significantly affected due to the rise in the euro-franc exchange rate, resulting in a substantial decrease in visitors to Switzerland.

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Risk Warning and Disclaimer

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

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