Two important lessons from the SNB decision

“Words fail me” Nick Hayek, CEO of Swatch

The real story from last week was the surprise announcement from the Swiss National Bank (SNB) to abandon their currency peg with the Euro, first introduced in 2011 at a rate of 1.20 Swiss Francs per Euro to halt the appreciation of the Franc at a time when perceived safe-haven assets were in demand. The SNB also cut their main interest rates with the deposit interest rate cut to -0.75%. The market reaction was eye popping, the Swiss Franc spiked higher and the local SMI equity index fell 13.7% in the following two hours, before regaining some ground and ending the day down 8.7%.

I take two lessons from this event. The first is that central banks can say one thing and do another. In the days before the announcement key figures at the SNB talked up their commitment to the currency peg. I am reminded that just like in any relationship, the idea of “commitment” can have different meanings for each party. Second, it is a fresh example of the limitations of risk models; black swans are a common occurrence. Forex brokers and investors who relied too heavily on VaR models are now feeling the pain!