Bank losses from Swiss Franc Fiasco Continue To Mount and Might Threaten Broader Market

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Talk about the dangers of bandwagon investing. As more and more investors heard of the upcoming ECB talks about Eurozone quantitative easing, lots of forex investors started betting against the Swiss Franc (CHF). The conventional thinking was that QE by the ECB will result in a battered CHF. Wrong. Dead wrong. The Switzerland National Bank stepped in and uncoupled the CHF from the euro. By letting the CHF float, the SNB relieved itself of the potentially costly burden of buying up QE-watered euros in the open market to shore up the CHF. As reported here, this unleashed a lot of losses in the global forex market.

Many analysts were simply surprised and caught flat-footed by the extensiveness of the carnage. The reality behind the widespread financial damage caused by so many investors betting on the losing end of the euro-CHF pair is that investors tend to invest with a herd mentality. They go where everyone else is going. While this strategy can and have paid off in the past, you need to be very careful when going where the crowd is. Everyone bet on conventional wisdom and lost big.
The extent of CHF meltdown continues to surprise 
Just how bad was the carnage? A lot of analysts originally thought the CHF debacle was going to be limited since the CFH-euro pair is just one of many possible pairs in the daily multitrillion dollar forex market. Well, it appears that, thanks to herd mentality, many of the biggest investment banks as well as retail forex platforms and mutual funds were caught flat-footed by the CHF meltdown. Which banks? Citigroup, Barclays, Deutsche Bank AG, and even Goldman Sachs. As for retail forex platforms, the biggest platform to get hit was FXCM. FXCM needed a $300 million infusion just to stay alive. Considering the ‘sleeper’ effect of the CHF fallout, we shouldn’t be surprised if more banks announce multi-million losses in the coming days or weeks.

 

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