The Swiss National Bank (SNB) stunned markets Thursday by scrapping its long-standing cap of 1.20 Swiss francs per euro, sending the franc soaring and stoking fears about the export-reliant Swiss economy.
The announcement sent Swiss shares tumbling over 10% and forced holders of bank accounts to rush to exchange money.
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SNB scraps three-year-old cap on the franc
The Swiss central bank introduced a peg of 1.20 Swiss francs per euro back in 2011 in response to investors buying massive amounts of the Swiss franc as a safer foreign exchange alternative to the euro or the dollar.
The SNB said in a statement Thursday the franc was now out of the period of “exceptional overvaluation” during which the minimum exchange rate had been introduced. The statement added: “The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the U.S. dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified”.
After making this move which is likely to strengthen the franc, the central bank sought to dissuade new flows into the currency by lowering a key interest rate, which was already negative, by 0.5 percentage points to -0.75%. The SNB vowed to “remain active in the foreign exchange market to influence monetary conditions”.
Nick Hayek, the chief executive of Swiss watch firm Swatch described today’s SNB move as a “tsunami for the export industry and for tourism, and finally the entire economy”.
However, Ed Parker, managing director, sovereigns at Fitch ratings agency, said the latest move would not affect Switzerland’s AAA credit rating.
U-turn by SNB
Interestingly, earlier this month, SNB chairman Thomas Jordan had described the cap as “absolutely central”. On Monday, Vice-chairman Jean-Pierre Danthine said that the cap would remain the cornerstone of the bank’s policy.
The U-turn by the Swiss central bank sent the franc soaring nearly 30% against the euro in the chaotic first minutes of trading. Thursday’s announcement came just a week before the European Central Bank is expected to unveil a massive bond-buying program that risked forcing the SNB into massive sales of francs for euros to defend the cap.
Reacting to the stunning announcement, Swiss stocks dropped sharply. The blue-chip Swiss Market Index dropped 11% to trade at 8196. Banks were among the biggest losers with UBS AG dropping 12%, and Credit Suisse AG falling almost 14%. Other big losers include Swatch Group down by 16%, while Richemont Compagnie Financiere dropped 15%.
As reported by ValueWalk last month, SNB announced that it was introducing negative interest rates on commercial bank deposits. Analysts believed the central bank has taken this extraordinary step to try and stabilize the rapidly appreciating Swiss franc in the wake of the Russian ruble collapse.