RiskFX Risk/CLSSwiss Franc Soars as Central Bank Scraps Euro Cap

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.

Related Articles

Digitization and the role of the digital treasurer – part 2

Automation Digitization and the role of the digital treasurer – part 2

4w Victor Penna
An overview of FX risk management tools and strategies

Foreign exchange An overview of FX risk management tools and strategies

2m Michael McCaw
Treasury 101: What are the major foreign exchange risks?

Foreign exchange Treasury 101: What are the major foreign exchange risks?

2m Michael McCaw
Algorithmic FX trading an "inevitable endpoint" for treasurers

Automation Algorithmic FX trading an "inevitable endpoint" for treasurers

3m Curtis Pfeiffer
FX for corporates: 5 best practices for treasurers

Economy FX for corporates: 5 best practices for treasurers

3m Mateo Graziosi
2017's most read: The future of cash management: the single multi-currency virtual account

Accounts Payable 2017's most read: The future of cash management: the single multi-currency virtual account

4m Matthew Fuellhart
8 predictions for treasury in 2018

Financial Crime 8 predictions for treasury in 2018

4m Bob Stark
How Costa Coffee hedges the price of beans

Events How Costa Coffee hedges the price of beans

4m Victoria Beckett