Switzerland ends euro peg, Swiss franc soars and euro crashes against dollar
The Swiss National Bank (SNB) has abandoned its minimum exchange rate of 1.20 franc per euro, surprising the market with the timing as it brought a three-year policy to an end and sending the franc soaring and the single currency crashing against the dollar.
After a move which surprised investors and analysts alike, the Swiss central bank attempted to soften the blow on the currency by cutting the interest rate from -0.25% to -0.75% on larger deposit account balances.
“While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate,” SNB said in a statement on Thursday. “The economy was able to take advantage of this phase to adjust to the new situation.”
Since September 2011, the central bank adopted a policy aimed at shielding the country’s economy from the flagging Eurozone economy, a move which many saw as delaying the inevitable.
In a press conference on Thursday afternoon, SNB boss Thomas Jordan said the cap was the right policy at the time of its introduction in 2011, but conditions have changed, he said, citing various “international developments” such as the Russia crisis and the changes in the euro-dollar rate, which had driven some money out of Moscow into Switzerland, while the euro has been weakening as investors anticipate a new QE stimulus package.
The central bank also changed the target range for the three-month Libor from the current value of between -0.75% and -0.25% to a range between -1.25% and -0.25%.
“The SNB must have a very strong inclination that the European Central Bank is about to begin a large scale quantitative easing program which would act to depreciate the euro and make a defence of the Swiss franc peg impossible,” said analyst Jasper Lawler of CMC Markets.
“This is the strongest signal yet that QE from the ECB is on the way so while equities are lower for now on the possible fallout, that may not last long on the prospect of a fresh bout of liquidity from the ECB which would boost risk-taking."
The decision comes as a surprise to Berenberg too, with senior economist Christian Schulz saying that given that the minimum exchange rate had been successful for such a long time, he had expected the SNB to avoid the risks associated with dropping it before the euro appreciates materially away from the limit.
"Indeed, the knee-jerk market reaction paints a dramatic picture of the near-term risks."
In the immediate aftermath the announcement, the euro lost almost 14% on the Swiss currency to just over 1.03 and analysts believe SNB’s move will cause a huge issue in terms of currency markets as well as equity markets.
“With many clients struggling to close positions and banks struggling to offer prices due to the high volatility and demand, many had been expecting the SNB to raise the currency floor but to remove it totally has taken everyone by surprise,” said Alpari UK analyst James Hughes.
“There has been a clear attempt to soften the blow on the currency by cutting the interest rate however this seems to have only led to spark yet more volatility and moves on the CHF based currency pairs.”
Schulz added that if the franc's rise was sustained, the impact of the decision on Switzerland’s economy could be significant for a few years, though the Swiss economy is used to occasional periods of overvaluation and should ultimately be able to cope. For the Eurozone, he thought the impact should be limited.