Swiss Franc Soars as Central Bank Scraps Euro Cap
The Swiss franc (CHF) rose by nearly 30% against the euro after the country’s central bank surprised global markets by abandoning its long-standing cap against the single European currency.
The Swiss National Bank’s (SNB) move to scrap the exchange rate control – which has imposed a maximum value on the Swiss franc of just over €0.83 since September 2011 – quickly saw the CHF move to near parity with the euro.
Over the past three years SNB foreign currency reserves have more than doubled, making it one of the five largest holders of foreign reserves in the world.
The SNB said that the cap was no longer justified and also reduced a key interest rate from -0.25% to -0.75%, increasing the amount investors have to pay to hold Swiss deposits.
Following the SNB move the CHF moved from 1.20 to the euro (EUR) to 0.8052, before later settling at 1.05, while the SIX Swiss Exchange fell by more than 10% on fears that goods and services provided by Switzerland’s key exporters would become prohibitively expensive.
Maintaining the CHF at 1.20 to the EUR had become increasingly expensive for the SNB as it sold its own currency and bought up other major world currencies; usually in the form of government bonds. Despite this, SNB president, Thomas Jordan, promised as recently as last month that the bank would continue to “defend [the ceiling] with utmost determination”.
“If the SNB thought that it could make this adjustment in an orderly manner, then it has failed miserably,” Kathleen Brooks, research director at currency trader Forex.com told a news agency. “The EUR/CHF market has basically shut down so far this morning, while it waits for the dust to settle,”
The move came as speculation grew that the European Central Bank (ECB) could announce a comprehensive quantitative easing (QE) scheme as early as January 22, which is expected to further reduce the euro’s strength.