On Thursday, Jan. 15, the Swiss National Bank abruptly dropped its efforts to cap the exchange rate of 1.2 Swiss francs per euro. The franc immediately appreciated by 17 percent, causing chaos in the currency markets.
Several currency brokers, as of the time of this writing, are facing gigantic losses and some even liquidation. A lower franc provides support to Swiss exporters. The SNB also cut rates to a negative 0.75 percent, discouraging further inflows and an even stronger Swiss currency.
The Swiss bank reportedly built up a balance sheet of 80 percent of their gross national product in their attempt to hold the franc’s value down but, expecting the euro to continue its decline, they abandoned their cap. This suggests trouble for Swiss watchmakers and the other exporters in the country, as their goods have suddenly become far more expensive to buyers outside of Switzerland.
One lesson equity investors can learn is that sell stop orders are no guarantee of limited losses. Currency and stock traders often place sell stop orders underneath their positions, but when there is limited liquidity — as in when everyone is running for the exits at once and no one wants to buy—stops offer little protection.
Even if a stop loss was triggered, no one wished to buy at the stop price. Even if currency brokers had the right to liquidate client positions, they couldn’t do so at a price close to their stop losses.
The moral for stock investors is not to place complete faith in stop losses; stocks can suffer the same fate when a company opens down sharply on bad news.
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