Archive for January, 2015:

Retirement Minute Episode 8: Medicare Basics Part 1

Written on January 18th, 2015 by Jamesno shouts

Swiss Currency fallout – How can it affect you?

Written on January 16th, 2015 by Jamesno shouts

So the Swiss National Bank (equivalent of our Federal Reserve) made a surprise announcement yesterday that they would end their cap of the Swiss Franc (symbol CHF) that had it closely aligned to the Euro.  While you may say, “so what”? This move caught everyone off guard and the currency effects are having reverberations that we will hear about for quite awhile.

So let’s take a step back and talk about currencies.  Currencies are traded in the Forex market 24 hours a day.  The exchange rates of dollars per Euro (usd/eur) or dollars per Swiss Franc (usd/chf) move all the time based on traders views of countries interest rates and inflation projections.  With currency trading, anyone can do it.  Right now you can deposit $50,000 into a trading account and get leveraged up to to trade $1M worth of currency.  The reason for all the leverage is usually currencies don’t have big swings and the risk isn’t all that much, usually.  However when Central Banks make surprise announcements in this highly leveraged globally connected financial world, it can have huge implications.

Below is a chart of what happened when the announcement was made:

 

And we are now starting to hear about how that kind of move in a currency, that quickly ,can hurt:

 

And then we hear about how all those leveraged currency trading firms are in trouble.  This is the thing to watch.  Currency trading firms that had clients levered up 20 to 1, not only did the clients get wiped out but they are hundreds of millions in the hole.  That trader that levered up $50k to buy $1M and was on the wrong side of this trade not only lost his $50k but now owes the brokerage firm a lot more.  And this is small scale.  Many firms work with institutional level clients so the losses could be in the billions.  Many firms will actually go under because of this.  We are probably just started to hear about it and I would not be surprised to hear of US based investment houses taking some huge losses, if they have prop trading desks.  One reason you want to make sure you custody your assets with firms that don’t have exposure to this.  (plug for TD Ameritrade Institutional).  We will have to see how this affects the markets in the short term.  Fundamentally things should not be any different, however there may be some fear and unknown out there that causes some volatility for the next few weeks until we learn more.  Buckle up!

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