As you will no doubt know by now, the currency markets went into turmoil yesterday as a result of the dramatic Swiss Franc revaluation following the Swiss central bank's decision to "un-peg" its currency from the Euro. The news was not lost on gold, the only currency with no central bank to meddle in its affairs. Gold spiked +3% yesterday, is now +13% in euro terms in the first two weeks of the year and +18% since we upped our allocation from 20% to 30% in our Active Asset Allocator Model. Our Active Asset Allocator is starting 2015 on a strong footing +4.4% YTD.
Now, let's take a look at what happened yesterday. Following the Swiss central bank's decision to remove the CHF 1.20 peg to the euro, the Swiss currency exploded higher by +40% in about 2 minutes, blowing up a number of hedge funds and currency exchange providers in the process. The fallout will take a few weeks before the true extent of the carnage becomes evident. The following chart is a US quoted ETF of the Swiss Franc so it doesn't capture the massive 40% spike yesterday morning, as it happened before US markets opened. It does however show the +20% move in the Swiss Franc which has taken place as of today's post. Those planning a ski trip to Zermatt this season may want to re-consider and head to St. Anton or Val d'Isere instead!
In addition to the currency spike, the Swiss stock market collapsed by -20%, wiping out almost 2 years' worth of gains in the process. Many of the companies on the Swiss stock market are big exporters. If your product becomes 20% more expensive overnight, it makes sense for your stock market value to decline by a similar extent, so long as you are not over-leveraged.
The Swiss move to un-peg is potentially signalling that the ECB is about to launch a very significant QE programme of its own. Swiss central bankers likely thought better than to fight a losing (money printing) battle with the ECB, which makes sense. The decline in the Euro in recent months is probably the market pricing in a large QE announcement ahead of time. It is in fact possible that the Euro could start to strengthen on an announcement of QE by Mario Draghi, as the USD is now approaching multi-decade resistance (see chart below). That would certainly confuse a few. QE in the US led to a rising US stock market and a rising USD. QE in Europe could also lead to a rising EU stock market and a rising EUR.
Commodities are approaching long-term support and also sitting on a multi-decade trend line. Commodities could bounce shortly in sympathy with a rising EUR and declining USD, which should benefit our overweight position in gold in the Active Asset Allocator.
The key takeaway from all this volatility is that no central bank is bigger than the market. Not the Swiss central bank; not the ECB; not even the Federal Reserve. When investors start connecting the dots and begin to lose trust in their central bank, volatility will escalate dramatically and precious metals will benefit handsomely. 2015 is shaping up to look nothing like 2014. We will be positioned to take advantage of this trend in our Active Asset Allocator. Will you?
For more information on our analysis, please get in touch. You can reach Brian Delaney at firstname.lastname@example.org or at 086 821 5911.