Swiss Surprise

Small in size and few in population, Switzerland is home to some of the world’s largest financial services companies. To attract capital, it always held a practice of sound money and hard currency. So back in the days when European Central Bank was promiscuously extending credit to the spendthrift peripheral nations, in order to extricate them from the specter of liquidity crisis, a flood of euro gushed into Switzerland. When the subsequent appreciation of the Swiss Franc threatened to weaken the competitiveness of Swiss exporters, the Swiss National Bank drew a line at 1.2 Francs to each Euro by promising to buy unlimited quantity of Euros with freshly minted Francs at such an exchange rate.

On January 15, 2015, the SNB surprised the market by ending the Euro peg. In the ensuing confusion, Euro fell as much as 30% against the Franc and closed down around 14.5%. Here over the distant shore, S&P 500 traded off nearly 1%. The immediate reaction here in the US seemed one of disbelief. It was difficult for commentators to grasp why the SNB would do something to weaken its economy. Having accumulated Euros equivalent to 86% of Swiss GDP, one estimate placed the SNB’s one day loss at 60 billion Francs.

With the passage of time, it became clear that SNB’s decision to end its currency peg had a lot to do with the eminent start of ECB’s quantitative easing program. The main obstacle for this program was Germany’s legal challenge at the Advocate General of European Court of Justice (ECJ). On January 14, the ECJ blessed the ECB with broad discretionary right to conduct EU’s monetary policy. With ECB ready to print hundreds of billions more Euros, what percentage of those SNB must buy if it had kept the peg? The elephant in the room had spoken. So wisely, SNB took the cue.

A sudden move by a major financial institution of course produces shock waves throughout financial intermediaries. Currency brokers were in the direct line. FXCM Inc, a currency trading platform for retail investors suffered customer loss in excess of their balance to the tune of $225 million. Over the weekend, it had to accept an onerous rescue package from Leucadia National and saw its stock plummeting 87% in yesterday’s trading. Major banks such as Citi Group, Barclay and Deutsche Bank all suffered significant losses.

Since the 2008 financial crisis, the unprecedented practices of monetary policies have been elevated into ever unprecedented heights. In the US, the zero interest rate policy was augmented by numerous rounds of Treasury and Mortgage Bond purchasing with newly created dollars. In Japan, the quantity of yen produced by the BOJ is now sufficient to finance the entire deficit spending conducted by the Japanese government. In Europe, negative deposit rates have been coerced upon the savers of European citizens. Now for the first time ever, Swiss 10 year government bond fetches negative interest rate.

Here in the United States, we may still lament the low returns our fixed income securities produce or the lofty valuation stocks are trading at. But comparing to the negative rates of the Swiss bond and the 0.4% return of 10 year German Bond, the 1.8% yield of the 10 year Treasury looks positively appetizing. And the 2.5% to 3% dividend yield on blue chip stocks like IBM, INTEL and Johnson & Johnson can rightly be described as scrumptious.