The surprise decision of the Switzerland National Bank to remove the Swiss Franc’s euro cap caught many trading houses and investors by surprise. We’ve all heard of how retail forex market leader FXCM had to take out a $300 million lifeline just to ensure its continued survival. Investment banks like Goldman Sachs and others also took hits of varying levels of severity. Well, if you think the bad news is finally over, don’t get too comfortable yet. It appears the roster of financial institutions that got hit by the Swiss Franc debacle continues to grow and grow. The latest additions? Switzerland’s own Credit Suisse and Saxo Bank. In fact, both firms reported warnings that the Switzerland National Bank’s moves might lower their earnings.
The dangers of forex trading bandwagon mentality
The ever lengthening list of corporate casualties is a natural outgrowth of the common Swiss franc trading strategy used by many players in the global forex market. Since many of these players were betting that the ECB’s much anticipated quantitative easing will put pressure on the Swiss Franc, many investors, both big and small, bet big on a weak Swiss franc. Well, the Swiss franc skyrocketed to around 40% against the euro when the Switzerland National Bank (OTCMKTS:SWZNF) weighed the costs of its continued support for the Swiss franc and took the euro peg off. The SNB would have had to buy up an increasingly huge amount of watered down quantitatively eased euros to shore up the Swiss franc-a traditional ‘safe haven’ currency. Not surprisingly, investors betting on Swiss Franc weakness got smacked. Given that most traders use highly leveraged margin accounts, this leaves many trading platforms and finance houses providing leverage holding the bag. Expect the list of casualties to grow longer as earnings season drags on.