Epic Swiss Unwind A Victory For Free Markets
On January 15, The Swiss National Bank surprised the financial world when they removed the cap on the Swiss Franc versus the Euro. The Swiss Franc responded by jumping almost 30% that day. Also following the move, Switzerland’s main stock average, the Swiss Market Index (SMI), dropped over 15% due to the strength in its home currency (the move also inspired our most popular chart we’ve ever Tweeted: the SMI going from 52-week high to 52-week low within the same week).
As we noted in a February 20 update, however, a funny thing has happened since. The Swiss Franc has dropped…and dropped…and dropped. Meanwhile the SMI has bounced and bounced and bounced. And lo and behold, as of today, the two markets have essentially unwound the entire knee-jerk move following the SNB’s January 15th policy move.
On January 14, the day before the SNB’s move, the Swiss Franc closed at 1.0185 (using the USD/CHF currency cross). After jumping all the way to 0.736 following the peg removal, it has unwound 98% of that move. Similarly (but in reverse), the SMI traded from a close of 9198 on January 14, the day before the de-peg, down to below 7900 in the days that followed. Today the Swiss stock index closed at 9237, officially unwinding the entire post-SNB move in the Swiss markets.
What does this tell us? For one, DO NOT trade based on news events, unless you A) can accurately predict events – and the market’s reaction to them – before they occur or B) have the world’s fastest algorithmic-based trading system. Of all the possible trading approaches in the world, the very worst would be one based on interpreting news events or market headlines. It is one thing if such an event causes prices to move enough to trigger one’s stop-loss. However, as it pertains to the potential for profiting from the analysis of such events, know that the superficial market impact is priced into the market instantaneously.
Secondly, we would consider this a victory for natural price discovery of the free markets. Despite the SNB’s intervention (or its removal), prices have moved according to market forces rather than following the knee-jerk presumptive path. And like a homing pigeon, they have returned to where they were before the policy intervention.
It seems these days that our markets – or at least the coverage of the markets by analysts and the media – are focused on an all-consuming obsession over the impact of the artificial, exogenous forces of global central banks. Therefore, it is just refreshing to see financial markets move of their own, organic accord as has happened over the past 2 months in Switzerland. As the financial world prepares for a fully-lathered debate over the inclusion or exclusion of a single word in a statement by a politically-appointed official in a few days, we just pine for a bit more of that free market stuff.
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“Swiss Flag” photo by Claudio Schwarz.
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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
