ON Tuesday, the Swiss National Bank (SNB) made an announcement that it would put in place a floor on the Euro-Swiss franc exchange rate, with the SNB indicating that it was prepared to buy foreign currencies in “unlimited quantities”.
So how does this move affect institutional investors and currency hedging policy?
There were reports following the SNB move that JP Morgan had been stopped out of its long Swiss franc positions and that the bank’s long positions in Swiss franc against euro, sterling and dollar were now obsolete.
However, while banks were understandably cagey about whether they or their clients had been caught short – or long as the case may be – by the SNB move and resulting Swiss franc sell off, the SNB announcement didn’t have institutions scrambling to move their positions as much as one might have expected.
According to Geoff Yu, G10 FX Strategist for UBS, the SNB move doesn’t seem to have been a big issue, and most have kept their Swiss franc positions in place. “Banks will have had stops in place for the event of a change in SNB policy.” On the question of where haven flows may now head, Yu says that there have been flows into the Norwegian krone, but it doesn’t have the liquidity and so there is a risk of the position unwinding.
And as James Wood-Collins, chief executive of Record Currency Management, explains, the sell off of Swiss franc will help Swiss franc institutions trying to hedge the non-Swiss franc positions within their portfolio. “Before the move, the banks were struggling to offset the short position they would take to balance the hedger’s long position. Rather than the market being one-sided, it makes it easier to hedge your non-Swiss franc holdings.”
YOUR MOVE, BANK OF JAPAN
After the SNB’s announcement, many will be looking to the Bank of Japan (BoJ) for a tit-for-tat move. They have already been active this year in defending the yen, and institutions may be looking for the Japanese central bank to make a move. A move as aggressive as that made by the SNB wouldn’t fit the form book for the Japanese authorities, but the new finance minister, Jun Azumi, is seen by many as a bit of a lightweight, and he may make a bold move to curb capital flows in order to stamp his authority on his new office. “Institutional investors will be restructuring and placing adequate protection just in case the BoJ follows suit and acts aggressively to weaken the yen,” says Jamie Jemmeson, a trader at Global Reach Partners. “Repositioning and finding the safe haven is the key, gold is the obvious choice but other instruments could be 10-year German bonds and 10-year UK gilts.”