An ‘Unprecedented’ Franc Plunge & How To Make ’40-50 Billion’ On A Falling Swissie

Much has been made of the Swiss franc’s epic plunge. And indeed, it has been just that – an epic plunge. If you’ve missed our previous posts on this, you can read some of them here. Just to underscore the contention that our ongoing coverage of the story isn’t hyperbolic, have a look at this chart:

 

The move was, quite simply, unprecedented since the SNB abandoned the floor.

Now consider this from a BofAML note out Wednesday:

Summer months can be unpredictable for FX markets and 2017 has been no exception so far. While summer 2015 was dominated by the China devaluation story, 2016 by GBP and the impact of the Brexit Referendum vote, summer 2017 has so far been dominated by the sharp depreciation in the Swiss Franc.

We would classify this as a “surprise” because the scale of the move over the past month has been unprecedentedsince the SNB abandoned the EUR/CHF peg in January 2015 and because it appears to have lacked an immediate catalyst.

Right. “It appears to have lacked an immediate catalyst.”

Or maybe that’s not entirely accurate. Maybe the better way to think about it is that the catalysts have been largely exogenous. That is, this seems to be almost entirely attributable to expectations for ECB tapering and, more immediately, the assumption that more hints about that effort will be dropped by Mario Draghi at Jackson Hole.

Here’s an annotated chart to that effect from Goldman, who notes that a series of ostensibly euro-bullish events and rhetoric have likely fueled the EURCHF rally:

As you can see, there are really only two “uniquely Swiss” events in there.

Of course this is welcome news for the SNB – something we’ve been keen on noting as this whole story has unfolded and something Thomas Jordan said explicitly late last month in interview with newspaper Le Temps. Here’s a bit of color from Goldman:

We think SNB policy makers have viewed overall financial conditions in Switzerland as excessively tight of late: the lack of room for manoeuvre at the SNB (given already deeply negative policy rates) has made the Swiss Franc “significantly overvalued”.