Double hit for Cypriot speculators

EUR/CHF plunges sharply lower

 

Cypriot speculators are in for a rough ride this year – in addition to the more than 30% hit from the drop in local equity prices, they are now witnessing a sharp appreciation in the value of the Swiss franc (CHF) against the euro. Hence, all those who borrowed in CHF and converted the proceeds into Cyprus pounds which were automatically converted into euros are now seeing the value of their loans rises while the value of their assets, in most cases their homes, declines.

Since hitting an all-time high of 1.6800 in October 2007, the euro has been declining against the CHF and touched a three-year low Tuesday of 1.5770, which was last recorded in August 2006.

Since the start of the year, when the EUR/CHF rate was 1.6500, the Swiss franc has gained 4.5%, while compared to its all-time high reached in October 2007, the Swiss franc gains are about 7%.

About a third of all foreign currency borrowing by Cypriots, estimated at the equivalent of EUR 1.8 bln, are believed to be in Swiss francs before the change-over from the Cyprus pound into euros. About 55% were in euros and the rest were in dollars and yen.

Borrowing in Swiss franc used to be fashionable, as Cypriots loved to borrow in cheaper priced Swiss franc with a borrowing rate of 2.5% as opposed to borrowing in Cyprus pounds, which used to be 4% more expensive.

Since hitting a bottom at 1.45 in September 2002, the Swiss franc has been steadily losing in value against the euro, which meant all those who borrowed in Swiss francs not only took advantage of 3-4% interest rate differential in their favour, but also got the additional benefit of the loan currency losing its value. Between the 1.45 bottom in September 2002 and the 1.6800 peak in October 2007, the movement in value was 16%.

Having broken below the 200-day moving average, the Swiss franc is now appreciating in value, with the next chart objective being 1.54-1.55, a previous low area since January 2006.

Market rumours that banks and insurance companies are likely to report up to USD 600 bln in sub-prime related losses, of which only USD 160 bln have been revealed, have forced equity prices lower, which in turn is forcing speculators to buy back the Swiss franc and the Japanese yen, two currencies that had been used extensively to finance speculative positions.