Currency Funds Hammered By SNB’s Move To Uncap The Franc

The Swiss National Bank’s decision on Thursday to remove the cap against the euro has sent the Swiss franc on a record 40% one-day surge. The huge move in Swiss franc has hammered currency funds across the globe, with the $1.9 billion John Hancock Absolute Return Currency Fund the biggest loser among U.S. funds.

Currency Funds hit by Swiss Franc

The John Hancock Absolute Return Currency Fund was off around 8.7% yesterday, the most among the over 2,000 U.S.-domiciled funds tracked by Bloomberg with at least $1 billion under management. The fund had its second-biggest short position in the franc as of the end of November, based on the latest data from John Hancock’s website.

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The Swiss franc skyrocketed 41% against the euro yesterday, roiling markets worldwide following the SNB’s surprise decision to remove the franc’s cap against the euro. Of note, FXCM Inc., the largest U.S. retail foreign- exchange brokerage, highlighted yesterday that client losses threatened its compliance with capital ratios and a New Zealand-based currency dealer closed his doors.

Statement from analyst

“When they pulled the rug under the market, the Swiss franc rallied against everything,” explained Chris Weston, chief market strategist at IG Markets Ltd. in Melbourne. Quite a few funds “would have been in a lot of pain last night,” Weston noted.

Shocking move by SNB

The SNB brought its three-year policy of capping the franc at 1.20 per euro a week to a close just ahead of the European Central Bank meeting to consider government bond purchases to boost the euro-area economy. Such a policy is likely to put upward pressure on the franc to against the euro. Analysts are scrathing their heads regarding the SNB’s move as the central bank has spent billions defending the cap since September 2011.

Based on data from the U.S. Commodity Futures Trading Commission, hedge funds and other speculators had wagered the most that the franc was going to rise in more than 1 1/2 years on Jan. 6. Investments that profit  from dollar gains versus the Swiss currency outnumbered those that profit from a drop in the franc by 24,171 contracts as of January 6, the largest net long position since the summer of 2013.