Switzerland discards franc’s cap against euro in surprise move
Print Edition
SWITZERLAND’S central bank said yesterday it was ending a three-year bid to hold down the value of its currency against the euro, in a surprise announcement that sent stocks plunging and the franc soaring almost 30 percent in minutes.
The Swss National Bank said it would no longer maintain the minimum rate of 1.20 francs against the euro as its currency was no longer massively overvalued and Switzerland’s export-intensive economy has had time to adjust.
But immediately after the announcement, the Swiss franc firmed 29 percent to 0.8517 against the euro, and also soared significantly against the dollar to 1.1362.
Fearful that a strong franc could dent earnings as exports became more expensive, investors dumped Swiss stocks, sending them plunging more than 12 percent.
Swiss watchmaking giant Swatch saw its share price slump 15 percent, while shares in the world’s second largest luxury group Richemont plunged over 14 percent.
“Markets are clearly in panic mode,” IG analyst Andreas Ruhlmann said, adding that he expected the central bank to rapidly shift strategies “to a new one which will better represent the real market conditions.”
The SNB had since September 2011 been defending the exchange rate floor to protect the country’s vital export industry, including by buying huge amounts of foreign currencies.
The rate was introduced as the eurozone crisis sent investors scurrying to the safe haven currency. More recently, the Russian ruble crisis has once again put pressure on the Swiss franc.
The bank, which less than a month ago vowed to enforce the exchange rate floor “with the utmost determination,” said it was no longer needed.
“The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets,” the SNB said.
“This exceptional and temporary measure protected the Swiss economy from serious harm,” it said.
“While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation,” the SNB added.
But analysts and investors were stunned by the central bank’s decision.
Berenberg analyst Christian Schulz called it a “Swiss bombshell” while Alpari analyst James Hughes said the reaction to the announcement is “likely to be wide reaching and cause a huge issue in terms of not just currency markets but equity markets as well.”
“We suspect that the bank will soon need to intervene against the currency to prevent a further rapid appreciation against the euro,” Capital Economics said.
To make the Swiss franc less attractive, the SNB yesterday slashed its interest rate by 0.5 percentage points on certain bank deposits to negative 0.75 percent.
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