The Swiss National Bank shocked global financial markets today as it abandoned is minimum exchange rate against the Euro which it introduced in September of 2011. This limit put a floor under the EURCHF at 1.2000 and the SNB has defended this level ever since then. This move was completely unexpected and no economists had forecasted the SNB to take this drastic measure. Swiss equity markets plunged as the Swiss Franc sky-rocketed.
On January 5th 2015 SNB President Thomas Jordan ensured financial markets that the ceiling will remain in place and referred to it as ‘absolutely central’. This was followed by comments from Vice President Jean-Pierre Danthine on January 13th 2015 that the tool to defend the 1.2000 exchange rate against the Euro would remain a ‘pillar’ of the monetary policy enforced by the SNB. Forex traders had no reason to believe that the two most senior members of the SNB would mislead financial markets.
The issues out of Ukraine as well as talks about a bond buying program out of the European Central Bank have caused more and more capital to flow to Switzerland, a small land-locked and export oriented economy nestled between France, Germany and Italy. The SNB in a statement released today said that ‘The SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.’
In addition to ending the tool it further cuts its interest rate down to -0.75% and announced the three-month LIBOR will float between -1.25% and -0.25%. Since the tool was announced the SNB spend $199 billion defending the 1.2000 level and amassed CHF495.1 billion in foreign currency reserves. Prior to announcing the tool the SNB faced book-losses worth CHF19 billion in 2010 due to spot market currency interventions.
The Swiss Franc sky-rocketed after the shock announcement and the EURCHF reached an all-time high of 0.8517. This translated into an increase of over 41%. Forex traders likely faced heavy losses as liquidity dried up and stop loss orders were unable to be filled. After recording the all-time high the EURCHF recovered some losses and hovered just above the 1.0200 level. The USDCHF dropped over 14% to 0.8776. This is a rare event which caused turmoil and is likely to add to further issues on a global scale.
