The Swiss National Bank's Currency Peg

Between the Yen and the Euro, the foreign exchange markets have seen some excitement in recent months.  One currency cross that has been anything but exciting though has been that of the Euro against the Swiss Franc (EUR/CHF).  After a rapid depreciation of the Euro during the heart of the European Financial Crisis, the Swiss National Bank decided to explicitly peg the Swiss Franc at 1.20 EUR/CHF.  The SNB had maintained a "soft peg" up until that point by purchasing EUR in the open market, but the explicit peg was needed to stop the appreciation.

Below is a chart of the evolution of the SNB balance sheet as it has tried to stop the CHF from appreciating.  The balance sheet has expanded by nearly 5x and foreign currency now represents almost 90% of the bank's assets.  As a result, the CHF has effectively become backed by the Euro.

Nikkei Priced in Dollars

Yesterday's post about the S&P 500 priced in Euros got me thinking about other markets that might be interesting to view priced in foreign currencies.  Below is a chart of the Nikkei priced in dollars.  Because the Yen has generally appreciated against the dollar over the course of Japan's (somewhat mythical) lost decades, the Nikkei's fall is a little softer when viewed in dollar terms.

S&P 500 Priced in Euros

Today the S&P 500 was up 1.65%, but considering that the dollar was down 1.26% vs. the Euro, if you were a European investor in the US market, you hardly realized any gains--such is the power of currency.  Much like how perception of physical motion is defined by one's frame of reference, motion in financial markets only meaningful relative to the value of the currency of reference.  Gains and losses in markets, measured in currency, can be completely illusory based on the change in value of the currency itself.  To illustrate the point, the chart below is a chart of the S&P 500 as viewed by a European investor, measured in Euros.  It's a completely different picture than the one that we're used to seeing, primarily because 2007 never reached the peak of 2000.  Bull and Bear markets happen over different time frames.  Technical levels become completely different.  Simply rebasing the unit of measurement can alter the interpretation completely.  YTD the S&P 500 is up 15% in Euro terms compared to 8% in USD.