Ad Hoc Commentary – EURCHF madness
Just exactly about six months ago, yours truly attended a course and there was someone from the Swiss National Bank (SNB) there. Over lunch, yours truly asked what they are going to do with all their losses in buying EUR and Gold. Yours truly got a curt remark that it is highly confidential. Yours truly could not ascertain if the person did not know much about the central bank that he or she was working for, or if there was so much pain that he or she felt that it was better not to talk about it over lunch.
Whatever the reason, the pain apparently became unbearable for the SNB overnight as they ended the EURCHF 1.2 currency peg. The EURCHF spiked from 1.2 to 0.85 and is now trading at 0.99. When yours truly was at the bank sales desk, there was very few EURCHF options traded regionally in Asia, and if Eurozone banks are like Asia, it is likely that trading losses related to EURCHF is going to be limited and well contained. The only one suffering will be the SNB itself with its huge EUR reserves due to the peg, and the people that took mortgages in CHF.
Since the spike was to 0.85, it is probable that the EURCHF will eventually end up at around that level, say 0.8. In that case, those who seen their mortgages increase 15% overnight will probably see it increase by 30% when EURCHF finally finds a new equilibrium. In the future, they will probably make it criminal to take a mortgage in a currency different from where the house is domiciled. But that is a problem for another day. For now, the EUR has lost a significant buyer in the SNB. Without the SNB in the way, the EURUSD will probably continue to inch towards parity or to 0.8, where it all began in the early 2000s.
Good luck in the markets.