Swiss National Bank decision causes major volatility in world markets

Enrique Díaz-Álvarez15/Jan/2015Currency Updates

The Swiss National Bank (SNB) shocked markets on Thursday morning by unexpectedly abandoning its 1.20 EUR/CHF currency ceiling that has been in place for more than three years. In an initial statement released during early trading, the central bank stated that the cap, introduced in 2011 after the Eurozone crisis, was “no longer justified”, citing a significant divergence between monetary policies of the major currency areas.

A recent Euro depreciation, which has seen the single currency fall by 15% since the summer, has caused a significant weakening of the Franc against the US Dollar, inevitably increasing the cost of SNB intervention. With the European Central Bank (ECB) now almost certain to introduce quantative easing measures at its monetary policy meeting next week, pressure on the Swiss currency has intensified. The Swiss National Bank does, however, reserve the right to continue intervention in the market despite the removal of the cap. As such, we’ll continue to see SNB managing the rate if it gets too high, rather than stepping away altogether.

In a move that would ordinarily grab the headlines, the central bank has also decided to cut its official interest rate further into negative territory. Rates were slashed by 50 basis points from -0.25% to -0.75%, in order to ensure the removal of the cap does not lead to an “inappropriate tightening of monetary conditions”. This did little to limit the currency’s surge. It will, however, serve as an experiment in the effectiveness of negative rates to stem deflation, something that the ECB will be monitoring closely.

A matter of minutes after the cap was removed the safe-haven currency crashed through the 1.20 EUR/CHF limit, soaring by 30% before settling at almost parity with the single currency (Figure 1). The Swiss Franc also climbed by close to 25% against the US Dollar. Away from the currency markets, the Swiss stock market plummeted by 9% within a few hours, while Switzerland’s benchmark SMI equity index slumped by 11.3%.

The move also has major implications beyond Switzerland. The Euro fell sharply as the news broke; briefly touching an eleven year low versus the US Dollar. As is traditional during times of intense uncertainty, investors have piled into safe havens, with gains for the Yen and gold. The SNB’s decision will inevitably have significant ramifications for the global markets in the weeks and months to come.

Figure 1: Intra-day evolution of EUR/CHF



Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.