The Future of the Forex Industry after the Swiss Franc’s Cap Sudden Drop

In the financial sector, having a fluctuating currency which is not only predictable but also unstable is one of the greatest aims. When there is a sudden drop in the value of a currency, a number of negative effects on the market follow.

This is exactly what happened on January 15, 2015 when the Swiss National Bank (SNB), removed the cap that had been placed on the franc against the euro. But what are the consequences of this action? What is the future of the forex industry? Let’s discover the answers to these questions in this article:

• One of the industries that will be hit the hardest by this move is the Swiss export industry. The exporters have suddenly found themselves in an undesirable position as their products command less competitive rates in the overseas markets compared to what they commanded before the cap dropping. This has led to the drastic decrease in the price of shares and hence resulting in losses by the stockholders.
• This move has also laid fertile ground for the central bank’s opponents who are most likely going to oppose any such drastic moves in the future. This has already been experienced in the past when in December of last year, a referendum was held in order to convert a majority of the bank’s foreign exchange into gold which is more stable. Even though the initiative failed, the latest move by the bank has given the opponents enough power for any future campaigns.
• The SNB’s monetary policy will have a ripple effect on major financial institutions in other countries. It will make markets quite skeptical on whether such policies in other institutions will stand the test of time. It would therefore discourage investors from pumping their money into the forex industry. With reduced investor confidence, less money will flow into the forex industry thus decelerating growth in the sector and effectively slowing down economic growth in other sectors as well.
• Another prominent predictable effect of this move is the fall of the Swiss stock market. Most investors were shocked and caught off guard by this action and have continued to sell their equities and shield themselves by running from the franc itself or gold. Even those who are still holding onto their equities are mostly doing so in anticipation of the stabilization measures they expect from the SNB as well as the European Central Bank to undertake.
• This move may also work against the strides made so far in the recovery of the global economy from the 2008-09 recession. According to the International Monetary Fund, this action may result in the Eurozone and Japan being held in a world of slow growth and low inflation for prolonged periods of time.

This would be a blow to the health of the global economy whose growth is still too brittle, too low and too lopsided to withstand such situations. So, the forex industry needs to pay a lot of attention in making itself successful.