Swiss National Bank’s Decision Points to the Power of Foreign Exchange and its Ability to Shock!

swiss_national_bankJust when you thought foreign exchange is the same and there could be no changes, experts maintain that it has the power to surprise. This was evident in January when the Swiss National Bank unexpectedly ended its currency’s euro cap.

This decision led to Franc rising a whopping 30% against the single currency, and that too in one day! This also led to Swiss stocks falling and two foreign exchange brokers collapsing.

While this is not something that is usually expected, analysts are of the opinion that this decision by the Swiss definitely heralds a year where currency movements can surge higher up the investors’ agendas.

“This decision by the Swiss National Bank has brought in instability in the currency markets. In fact, this volatility is likely to stay on”, says Dean Turner who is an economist at UBS Wealth.

He further went on to say, “Since the low points reached in Q4 of last year, a sharp rise in implied volatility has been seen across major pairs of currency.”

The European Central Bank was in the process of unveiling a quantitative easing programme. The programme is a €60 billion bond-buying scheme per month. This scheme is expected to apply downward pressure on the single currency But before the latest monetary authority launched this scheme, the Swiss National Bank shocked the foreign exchange market with its currency euro cap.

James Maltin, who is an investment director at the prestigious Rathbone Investment Management said, “The Bank of England, the US Federal Reserve and the Bank of Japan have co-ordinated by initiating, adopting and taking it to dizzying heights respectively to devalue currency and hence, managed to stimulate inflation in the major economies of the world.”

Since the Fed is looking to return to ‘normal’ monetary policy right after its quantitative easing programme, several analysts have predicted a continuous bull market in the dollar.

So, what does this effectively mean for investors?

Pictet Wealth Management’s chief investment officer, Yves Bonzon said, “Everyone needs to be much more cautious when dealing with hedge foreign exchange and FX.”

In fact, one of the key questions still remains, ‘to hedge or not to hedge?’ Especially when dealing with Yen and Euro.

Many wealth managers have been encouraging their clients to use something called as a hedging mechanism. To this, Turner said, “Since the European equity market is quite constructive, one function of this optimism is a weaker Euro, which in fact, is great for corporate earnings. Honestly, we’d like to hedge that exposure”

However, there are others who are not quite sure and don’t really know what to make of this.

While Maltin doesn’t really prefer hedging, JPMorgan Private Bank’s global head of investment strategy usually hedges fixed income exposure. Maltin said, “The costs of hedging and the erratic nature of the currencies around the world render hedging unwise.”

Many are of the opinion that instability will be extremely high in the next few years. Thus, it will present numerous opportunities to agile investors. It remains to be seen how the next few years will roll out.