What happened on January 15. 2015.?
15. January 2015. was Swiss franc devaluation 2015. or in simple words, the swiss franc jumps 30 percent after the Swiss National Bank dumps the euro ceiling. A massive wave of disturbance hit the Forex exchange market on January 15th, 2015. This was one of the challenging days and will be regarded as a day of infamy. The USD CHF 15th January 2015 incident led to serious economic disturbance because the Swiss National Bank decided to deviate from the promise they made on September 6th, 2011.
The SNB had promised to defend the strengthening of Switzerland’s currency against the Euro. They did not allow the Swiss Franc (CHF) or CFH to drop below 1.20. While everyone was skeptical, the SNB declared on Jan 12th, 2015 that they will keep its promise. However, they did not respect their word. Three days later, the bank declared that they were dropping the currency at the rate of the 3.25-year peg.
They published a statement on their website to defend their move and left everyone gasping.
Reason Behind the Currency Swing
The announcement made by the Swiss National Bank generated mass confusion. By removing the peg and cutting the rates, they created economic uncertainties for various traders, investors, and brokers.
Many people were in deep waters when the SNB made the announcement. A part of their official statement detailed that they took stock of the situation in December 2014, a month before the big announcement, and decided to keep the minimum exchange rate as-is. They claim to have looked at all the parameters before making this call. This move was deemed appropriate in conciliation with their monetary policies. Just after three days, the bank decided to pull the exchange rate, leading to a drop n the EUR/CHF currency pair from 1.20 to approximately an intraday low of 0.85. The change might not seem huge in points but it roughly translates to a drop of 41 percent.
A famous FX broker, FXCM, uses the Speculative Sentiment Index. They explained how the ration of sellers of Swiss Franc and buyers of EUR/CHF dropped drastically from 67.3:1 after the announcement by the SNB. Many clients faced major losses and they were operating on leverages.
How Did it Begin?
The value of a currency is based on various things and market forces do influence their strength greatly. No central bank alone can deal with these forces. In that decade, there have been multiple failures of part of central bank programs, the Thai Baht peg to USD being one of them.
Central banks can push the markets in the short run but they cannot do the same in the long run. The same thing happened with SNB. They pushed their currency and the EURCHF 1.20 peg continued for three consecutive years. Ultimately is crashed and the cost could not be borne as the EUR fell continuously. It led to a potential QE.
The Great EUR/CHF Crash: A Lesson about Currency Market Crashes!
My trades got wiped and I remembered several minutes of hell during the Swiss franc currency explosion. Traders do not remember any an example in the modern history of an advanced currency moving as fast as the Swiss franc did on January 15.
Consequences of the Currency Swing
When something like this happens, the repercussions do not follow immediately. The immediate effects were focused on the small brokers who closed their shops within 24-hours of the announcement. The losses were too big to be borne by small hedge funds as well. They also closed their doors.
This happened because many believed that EURCHF will hold the 1.2000 floors. They used leverage while placing the trades. Major brokers and traders did not leave the turf but the 41 percent drop caused massive losses to many people.
This situation teaches a valuable lesson. The market might seem stable but there is no guarantee that it will not change its direction. You can have a great strategy but there are many forces that are beyond your control. Use tools like stop losses to your advantage. Last but not the least, trade-in small amounts and use leverage wisely.