On January 15th, in early European trading, the Swiss National Bank (SNB) shocked global capital markets by immediately discontinuing its Euro exchange rate floor and also instituting a -0.75% interest rate on reserves. The immediate reaction caused a spike in the appreciation of the Swiss Franc (CHF) against all major currencies; both the Euro (EUR) and the US Dollar (USD) fell greater than 25% vs. the CHF before recovering to approximately -15% by the day’s end. Additionally, the Swiss Market Index fell -8.7%. These actions were taken as the SNB could no longer sustain the extremely expensive exchange rate floor and to allow the CHF to float more freely against other major currencies. The full SNB press release can be found here.
While this move by the SNB caused chaos in the Foreign Exchange and subsequently the international bond markets, our client portfolios were not negatively affected given their diversified nature. In some cases, our slight overweight to the CHF relative to USD even provided an incremental gain to the portfolios.
The non-standard monetary policy carried out by Central Banks has suppressed volatility in global equity and fixed income markets. Consequently the Foreign Exchange markets are the only “relief valve” for volatility. There is little evidence that this non-standard monetary policy will change anytime soon. Thus it becomes increasingly important for global citizens to be mindful of their currency exposures, as they will be the main driver of returns moving forward. We invite you to watch our CIO, Brent Jaciow’s interview with CNBC regarding the SNB decision here.
The events of the 15th were yet another reminder that in financial markets, shocks are the norm - not the exception. For this reason, our investment philosophy dictates that we keep client portfolios diversified so no one event can cause permanent capital impairment. By managing capital in this manner our clients are able to weather storms and are positioned to capitalize on extreme market movements.
Our team remains ready to review your current investment strategy to see where unintended and potentially risky exposures lie. Should you wish to have a discussion please email email@example.com.