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Swiss Franc Move: What Does It All Mean?
Rivers of ink and the vastness of the
blogosphere have been devoted to
explaining the Swiss National
Bank’s shock move in mid-January to defend its currency.
Since much of that commentary is not always comprehensible
to the foreign-exchange uninitiated,
herewith, as a public service for advisors, is a brief, plain-English account:
What exactly did the swiss national
Bank (snB) do?
Switzerland’s national bank did two
things: ended a three-year-old peg that
had set a minimum exchange rate of
1. 20 Swiss francs (CHF) to the euro and
lowered its interest rates.
Why did the snB end the peg, and
what effect did that have?
In a press conference on Jan. 16, SNB
Chairman Thomas Jordan said the bank
introduced the peg at a time of “
exceptional overvaluation” of the franc.
As a nation dependent on exports,
and whose primary market is the
European Union, Switzerland introduced
the peg in 2011 to defend the viability of
its goods and services by keeping them
from being priced too high in euros.
Ending the peg sent the Swiss franc
soaring 30%, resulting in a near state of
mourning on the part of Swiss industry.
The move also undid foreign exchange
broker FXCM, since the volatile currency
move caused $225 million in losses
from clients positioned in the crowded
euro trade. The SNB’s lifting of the peg
removed a significant source of demand
Why did the snB discontinue its
To maintain the 1. 20 CHF-euro
exchange rate, the SNB had to buy
increasing quantities of euros as
that currency weakened against
The key turning point, most commentators have pointed out, was the European
Central Bank’s announcement that it
would launch a massive quantitative easing program starting Jan. 22. That would
place significant downward pressure on
the value of the euro, multiplying the cost
to the relatively small SNB of maintaining
the CHF-euro peg. Exiting the exchange-rate peg after the ECB’s move would be
even costlier and more painful.
Was the snB’s move foreseeable?
The SNB had defended the parity as a
cornerstone of its policy only days earlier.
According to Bloomberg, analyst
Jason Shenker of Austin, Texas-based
Prestige Economics was alone in fore-
casting the move, saying:
“Our forecasts have been predicated
not necessarily on an exclusive lifting of
the ceiling, but rather on the fact that
the market direction for the euro and the
Swiss franc would be basically unsus-
tainable and indefensible.”
Why did the snB lower interest rates?
SNB Chairman Jordan said at a news conference that the rate shift, lowering rates
on certain deposits to -0.75% and lowering
its three-month Libor target by 50 basis
points to a range of - 1. 25 to -0.25% was
meant to make “Swiss franc investments
considerably less attractive” and mitigate
the effect of discontinuing its euro peg.
What does all this mean?
While the fallout of the dramatic currency
move will likely continue to expand in the
coming weeks, currency expert Axel Merk
told Bloomberg TV that the resulting jolt,
while claiming a few victims like currency
trader FXCM, will not be systemic. He
added that the SNB effectively removed
incentives for businesses to hedge their
currency via the Swiss franc and warned
of persistent deflationary fears.
Most ominously, Merk said the move
demonstrated that central banks can
turn on a dime, and he warned that
stock and bond markets could see similar sudden and large-scale reversals.
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