The Swiss franc rose 20% against the euro on Thursday, after the Swiss Central Bank announced its decision to remove the exchange rate cap against the euro. A massive rally boosting the franc occurred within seconds and liquidity dried up since, obviously, no one was going to buy euros after the announcement. This left investors and big trading firms naked as they couldn’t sell their positions until the franc was already way up. They couldn’t do anything but lose a ton of money.
This kind of regulatory change causes huge market disruptions and the move was as volatile as can be. Now, this 20% move might seem like a lot, especially after a 3-year period of slight movement, but could the franc go higher?
Investors see the Swiss franc as a safe-haven and in 2011 it appreciated greatly against the euro. Then, the franc experienced a quiet period as the cap was introduced in September 2011. But now, as the cap is being removed, the trend is back up again as the franc marks a new all-time high against the euro. Sure, it’s a big jump, but in this period of weakness in Europe and emerging economies, we could see safe-havening inflows pushing the Swiss franc even higher .
The franc also appreciated steeply against the US Dollar, marking a 3-year high (see above). Despite the strong performance of the dollar during the past few months, it seems like it will have a new competitor.
Now, how does this relate to industrial buyers?
What This Means for Metal Buyers
With machinery being one of the largest imported product categories coming from Switzerland into the US ($2.4 billion in 2013), industrial companies might want to reassess their risk exposure. Companies might not even know what their tier one and tier two (let alone tier three) suppliers’ risk exposure is to the franc and euro.
Fasteners, machining, castings, components…the parts coming from that region just became 20% more expensive as the franc appreciates. Some producers and distributors will face a huge supply risk with this game-changing regulation.