The currency markets have been in chaos because of the sudden decision by Switzerland to remove its currency peg to the euro.
The Swiss National Bank (SNB) announced on Thursday that it would be removing its 1.20 franc peg to the euro. The peg had been set in place since the height of the Eurozone’s debt crisis three years ago.
By removing the peg the Swiss have stopped limiting the rise of its currency. The Swiss franc soared by 30 percent against the euro to 0.8517 before closing at around the 1.00 level.
Obviously investors holding Swiss francs profited very handsomely.
However, the shock decision by the SNB caused many investors and brokerage firms to post huge losses. In fact, two brokerage firms (one in London and another in New Zealand) experienced such huge losses that they have no other choice but to shut shop and go out of business.
The New York based-firm FXCM Inc., America’s largest retail foreign-exchange brokerage, announced on Thursday that the surge of the Swiss franc resulted in “negative equity balances” of $225 million – meaning that its clients owed the company $225 million. In order to stay in business FXCM had to receive an emergency $300-million investment from Leucadia National.
Currencies don’t typically move so much in one day which is why traders often use leverage to increase returns. In the currency market there are many investors using leverage of 10:1 and even as much as 100:1 or 200:1 in some instances.
Citigroup and Deutsche Bank were reported to have lost over $150 million after the SNB’s decision, according to The Wall Street Journal.
