The Swiss franc soared against the euro Thursday after the nation's central bank stunned markets by abandoning a ceiling it put in place more than three years ago, in one of the most dramatic currency interventions in decades.
Almost immediately the Swiss currency surged as much as 39 per cent against both the euro and the dollar, one of the sharpest appreciations in recent history. It later settled back to trade more than 15 per cent higher at SFr1.0195 against the euro last night.
The move comes exactly a week before the European Central Bank is expected to embark on a full-blown sovereign bond buying programme, which would precipitate massive demand for the Swiss franc, widely seen as one of global markets' safest havens. That would make it increasingly difficult for the Swiss National Bank to defend its currency ceiling.
The SNB’s decision marks a dramatic reversal for the bank, which insisted as recently as December that it remained committed to preventing the franc from strengthening beyond SFr1.20 to the euro, adding it would enforce the policy with “the utmost determination”.
Decision defended
Thomas Jordan, chairman of the SNB's governing board, defended the decision though, saying that once it was clear the policy was no longer sustainable it was important to act quickly. "It is better to do it now than in six or 12 months when it would hurt more," he said.
Simon Derrick, chief market strategist at BNY Mellon, said the SNB had clearly anticipated a huge surge of inflows into Swiss franc assets in the coming days and "saw little reason to provide buyers with an artificially cheap rate".
“The SNB either believes that the Russian crisis could intensify or, more likely, that a programme of quantitative easing from the ECB is imminent.”
The bank’s move was greeted with dismay by Switzerland’s exporters, as a stronger franc will make their products more expensive abroad. The country’s main equities index, the SMI, fell 10 per cent on the bank’s announcement.
"Today's SNB action is a tsunami: for the export industry and for tourism, and finally for the entire country," Nick Hayek, chief executive of Swatch Group, the watchmaker, said in a statement. Shares in the company tumbled 16 per cent to SFr382.60.
Bank shares also declined on the move. UBS shares fell 11 per cent to SFr14.89, Credit Suisse was 11 per cent weaker at SFr20.76. Julius Baer also fell 12 per cent to SFr40.23.
The SNB also took official interest rates further into negative territory to minus 0.75 per cent, but that did little to limit the franc’s surge.
Safe haven The central bank’s brief statement said
the ceiling, which had been introduced during the middle of the financial crisis, protected the franc when a period of huge market volatility had turned it into a safe haven.
But over the past few months monetary policies in the developed economies had diverged significantly, leading to a fall in the euro against the dollar, which had caused the Swiss franc to weaken. That meant the ceiling was no longer justifiable, the central bank said.
Switzerland's foreign exchange reserves have swelled dramatically since the SFr1.20 target was introduced. At the end of December they had reached SFr495 billion – or almost 80 per cent of Swiss economic output – up from SFr257 billion at the end of 2011. – Copyright The Financial Times Limited 2015
