The market is still trying make sense of yesterday’s bombshell by the Swiss National Bank to abandon its franc cap, which affirmed as an integral part of central bank’s monetary policy a few short days ago. Not only were market participants taken by surprise, but apparently so was the IMF and the ECB.  Â
Since the franc cap was imposed in 2011, there have been times when for one reason or another some, including ourselves thought it could be abandon. However, the SNB did not relent.  Last month, when adjusted for swings in prices, it appeared the SNB intervened by buying around 20 bln euros to defend the cap. It appears that the SNB accepted that it reached a fork in the road. Given the prospects of continued euro depreciation and outflows from Russia, where the ruble is off almost 7% this year, the SNB  would have to double down on its efforts to defend the cap or abandon it. It chose to abandon it as the lesser of two poor choices.  Â
We find much of what is passing for analysis of the Swiss decision is speculators talking their books. Judging the from the recent Commitment of Traders in the futures market and the losses suffered by several retail platforms, the speculative market was heavily biased toward short franc positions. At one point, yesterday, the Swiss franc appreciated a little more than an unprecedented 40% against the euro.  It is a painful reminder that those who make money in the market do not do so by being right more often but by disciplined risk management. There is no short cut.
Some observers argue that the Swiss experience proves that fighting “free-market” forces or pegged regimes are unsustainable. Yet several pegs remain, like the Hong Kong dollar and many Middle East currencies. On the Swiss news, the market immediately took the Hong Kong dollar to the strong side of its band, but the peg (really a cap) has not been broken. The market did not break the SNB cap as it did, say, the peg in Mexico in 1994-1995 and Asia in 1997-1998.  The SNB abandoned its strategy. Â
