CMC Markets, a worldwide forex dealer, says proportionately there were fewer traders in New Zealand trading Swiss francs than there are in Europe. Traders tend to deal in the currencies they know and the Swiss franc isn't top of Kiwis' minds. Nevertheless, some were trading francs.
Oanda allows its customers up to 100 to 1 leverage (that means they can trade 100 times the amount of money they've actually invested). Other operators offer up to 1000 to 1. That leverage amplifies both gains and losses by up to 1000 times.
Individuals with just $2000 invested on the wrong side of the coin through such dealers could in theory have lost up to $2 million, says Cooper. That's a lot of negative equity.
Some dealers have let their clients off the hook. Oanda, for example, refunded affected Kiwi clients' accounts to zero, rather than expecting them to pay up. Those clients still lost everything they'd invested in their accounts, but at least weren't left with a massive debt. The unforeseen unpegging of the franc had global implications and has taken the scalps of several forex dealing companies around the world including at least one in New Zealand.
Even private forex traders who had no positions on the Swiss franc may have lost money if the company they trade through has gone to the wall.
The first New Zealand scalp was Global Brokers, which traded as Excel Markets. Fortunately for investors it was regulated by the Financial Markets Authority and client money should be separated from the company's. Not every New Zealand forex dealer does that yet.
When MF Global collapsed in 2011, New Zealand investors didn't get their money back because the company had transferred $700 million from customer accounts to mask liquidity shortfalls, says Michael McCarthy, chief market strategist for forex dealer CMC Markets.
Thanks to the Financial Markets Conduct Act and regulations most forex dealers are now required to separate client money, and have to jump through hoops to get licensed, which is a good thing.
Some have been given an extension until February to comply. Fingers crossed that none of them goes under in the meantime.
As well as limiting leverage, some forex dealers place other restrictions on traders. Companies such as CMC Markets have tiered margins, which means the greater the risk, the more of your own money you need to invest. This is a safeguard to both the company and to individual investors, says McCarthy. Some traders see it as an impediment and go elsewhere. Others, after the Swiss move, will be glad their investments were tiered.
In good times tiering turns some potential clients away, says McCarthy. But when the black swan hits, it's a life-saver.
Currency market turmoil does have an effect on other investments such as KiwiSaver and managed funds, although not a large one.
Some KiwiSaver funds will have money invested in large Swiss companies such as Nestle, Roche and UBS, although these companies are also listed on other exchanges.
Kathryn Young of Morningstar says direct exposure by KiwiSaver and other local funds to Switzerland and the Swiss franc is fairly low.
The most exposed of all funds covered by Morningstar is ANZ's OneAnswer Single Asset Fund International Share fund, at 7.11 per cent. The median exposure is only about 0.5-1.0 per cent.
"The short-term market reaction has been severe but the managers of the funds with the exposure will decide for themselves about whether the long-term value of these companies is diminished as a result of the policy change," Young says.
KiwiSaver funds may also use currency hedging or be invested in one of the international hedge funds that has ceased trading over the past 10 days. According to Morningstar, leading KiwiSaver funds are hedged between 50 per cent and 100 per cent on their international equities.
KiwiSaver managers hedge to reduce the effect currency movements have on underlying investments.
But as many private forex traders discovered on their equivalent of Black Monday, it's possible to get it wrong. Hedging can magnify both gains and losses, but in the scheme of things it's unlikely to be more than a blip on KiwiSaver values.
Currency movements also affect people who want to travel and those who need to transfer large sums of money from one country to another. The move by the Swiss Central Bank has had a big effect on the value of the euro and has also given the British pound a bit of a bruising. That's good for some Kiwis and bad for others.
If you're planning a trip to Britain or to countries that use the euro, want to buy property in those countries or move money there for other reasons, now could be good time to buy the currency, says Michael Johnston, Australasia head of corporate and commercial foreign exchange sales at HiFX, a company that does international money transfers.
The kiwi has risen against both the pound and the euro, says Johnston, and it's possible to fix the interest rate for up to six months for amounts over $50,000. Exchange rates change daily and there is no guarantee that by the time this article is published these currencies will not have reverted to their pre-January 15 level.
Some of Johnston's clients were about to move UK pension pots to New Zealand, but might want to wait, he adds. Thanks to changes in rules by the Inland Revenue Department, expats and returning Kiwis have been moving their overseas pensions to New Zealand in relatively large numbers recently.
More worrying than the effect on KiwiSaver, says Jeffrey Stangl, a senior lecturer in Massey University's school of economics and finance, is the reason for the Swiss Central Bank move. It unpegged the franc from the euro because Europe's Central Bank wants to print money.
New Zealanders who invest in Europe should be more worried about that than what's happened to the Swiss franc, says Stangl.
For anyone considering getting into forex trading, this event offers a salutary lesson. Some people will succeed at it but it's nigh impossible to beat the experts and the market.
Private traders invariably lose, says Johnston. More and more traders are needed to replace those who have lost their money.
"It's like a seductive mistress," he says. "She looks wonderful, but comes back to bite you."
The moral of the tale is that forex dealing has big risks and that a black-swan event such as the unpegging of the Swiss franc can have a financial effect on all of us.
