The Swiss National Bank (SNB) came under a barrage of angry criticism last night (Thursday) after it plunged foreign exchange markets into chaos by unexpectedly scrapping its cap on the value of the Swiss franc.
The bank’s decision to lift the €1.20 cap immediately put a rocket under the currency, which shot up by 40 percent against the euro. The franc also rose 30 percent against the dollar and 15 percent against sterling, NewsNow reported Friday.
It also cut a key interest rate from -0.25% to -0.75%, raising the amount investors pay to hold Swiss deposits.
The International Monetary Fund's head, Christine Lagarde, called the move "a bit of a surprise".
Keith Pilbeam, professor of international economics at City University London, said the enormous moves in the currency market will have meant vast losses for many traders and hedge funds that had expected the cap to remain in place. “We have not seen a day like this in the foreign exchange market for over 20 years, and many people have been caught completely by surprise,” he said.
Only last month the Swiss National Bank pledged to enforce the euro cap with “the utmost determination”.
Thomas Jordan, the SNB’s chairman, said, “It is better to do it [lift the cap] now than in six or 12 months when it would hurt more,” he explained.
"This might be the sort of action deemed acceptable in some of the world’s more exotic currencies, but not the Swiss franc,” said Alastair McCaig of IG, the spread-betting firm, which claimed it could face a £30m ($45.6m) hit from Thursday’s currency market swings.
Options Jump
The euro is shaping up as the biggest casualty of Switzerland’s decision to scrap its currency cap. The difference in the cost of options to sell Europe’s common currency against the dollar, over those allowing for purchases, jumped by the most in almost two years Thursday, Bloomberg said.
The euro dropped 1.3 percent to $1.1633 Thursday after falling as low as $1.1568, the weakest level since November 2003. It traded at $1.1631 at 9:23 a.m. in London. The euro also sank below parity with the franc to an all-time low of 85.17 centimes, recovering to 1.011 per euro.
In defending its cap on the franc, the SNB almost doubled its holdings of the 19-nation currency to 174.3 billion euros ($203 billion) since September 2011. Speculation the European Central Bank is only days away from announcing a government-bond purchase program, or quantitative easing, at its Jan. 22 meeting had already weakened the euro against its major peers.
“The euro can’t find a friend for love nor money,” said London-based Kit Juckes, a strategist at Societe Generale SA, which predicts a decline to $1.14 by year-end.
Expectations
Analysts said the Swiss central bank was probably acting in expectation of the European Central Bank announcing its own quantitative easing program next week, which could result in a fresh deluge of funds seeking sanctuary in Swiss assets.
The foreign exchange reserves of the Swiss central bank hit SwFr500b ($563b) in December, up from SwFr337b when the cap was imposed in September 2011 and representing 80 percent of the country’s GDP. The bank has bought up eurozone assets to hold down the value of the franc.
Some analysts suggested there was a growing risk that the cap could be accidentally broken in trading – which would be even more damaging to the central bank’s credibility than scrapping the cap. The bank ran up record losses of SwFr26.5b in 2010 in an earlier attempt to limit the rise of the currency.
The Swiss franc ended the day up 18 percent against the euro at €0.98. Against the dollar it finished up 16 percent at $1.14. And against the pound the Swiss currency was 17 percent higher at 75p.
Meanwhile, ratings agency Standard & Poors said on Friday the Swiss National Bank's shock decision to scrap its three-year-old cap on the franc had no immediate impact on Switzerland's credit rating, Reuters said.
Standard & Poors said the strong appreciation of the Swiss franc against the euro could dampen Swiss exports over the next two to three years, but expected the country's economy to whether any setbacks.
