Last week's Swiss National Bank shock, which reversed a key monetary policy, was a perfect reminder of how a single decision can hammer the global indexes like a tsunami.
In one day the franc soared more than 30% against the euro and the U.S. dollar. That instantly made Swiss exports 30% more expensive. The Swiss stock market fell 9% on Thursday and another 5.2% on Friday.
But forex traders got the worst of it.
Trusting that the long-standing Swiss National bank policy would not change, currency traders bet against the Swiss franc. They assumed a declining euro would not cause the trade to fall below 1.2, thanks to the cap.
But because traders with a Forex brokerage account can take their leverage to incredible levels, a major shift in currency valuations can lead to dramatic gains – or extremely painful losses.
And that's exactly what led to the crash of broker FXCM Inc. (NYSE: FXCM) on Friday. Several other small foreign exchange trading firms also were slammed.
Yet all the turmoil could have been prevented if the world had learned the lessons of the 2008 financial crisis.
Let's dig into the details of last week to find out what the Swiss National Bank shock can tell us.
One Thing the Swiss National Bank Shock Made Clear
When the Swiss central bank ended its cap, it made big losers out of anyone shorting the Swiss franc.
The world's largest foreign-exchange broker, FXCM, saw its shares fall 85% in pre-market trading. Ultimately, the New York Stock Exchange halted the stock as the company attempted to sort through the rubble and explain what had happened.
The official report indicates that the brokerage's clients owed the exchange $225 million because of the losses, but there wasn't enough capital to obtain. As a result, the firm immediately had a massive negative equity balance. Now it doesn't have enough cash on hand to meet its regulatory capital requirements.
Reports are also emerging that Citigroup Inc. (NYSE: C) lost roughly $150 million and fired its head of European FX trading operations after the Swiss National Bank ended its cap on the Swiss franc.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.