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Swiss 'tsunami'
Switzerland’s central bank truly shocked and awed the markets today, with two shots heard ‘round the world.
The franc soared and Swiss stocks plunged, and the move rippled globally across financial markets.
The double-barrel action – the central bank abandoned its peg against the euro, and took interest rates further into negative territory - also threatens to hurt the Swiss economy.
But more importantly, it brings the credibility of the world’s central banks even further into question, which in turn could well translate to further angst and uncertainty among investors.
“The ripple-out effect of this likely to be hard to quantify, and we could well get a lot more volatility as investors and markets in general try and work out what this sudden change in policy means for future central promises going forward, but it seems like that the U.S. dollar could well benefit, as well as gold, as investors look again at the more traditional havens,” said chief analyst Michael Hewson of CMC Markets in London.
“This morning’s moves also highlight how fragile financial markets still are … six years after the financial crisis despite trillions of dollars of central bank largesse, and the risk is that markets start to lose faith in these new masters of the universe as investors look at central bank promises with large dollops of skepticism.”
The limit on the franc – a ceiling or a floor depending on which way it was viewed – had been 1.20 against the euro.
What the Swiss National Bank said, and what observers believe, are also two different things.
The central bank abandoned its limit for the franc against the euro, which it brought in a few years ago when the European crisis was raging because Switzerland is a haven.
Money was flooding in, driving up the franc, and hurting the economy.
The central bank said today it was retreating from that because the “overvaluation has decreased,” though the franc remains high.
“Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced,” the central bank said.
“The euro has depreciated considerably against the U.S. dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.”
It also moved a key further into negative territory, at -0.75 per cent, to try to limit the funds that would flow in because of the dramatic change in currency policy.
But it was only recently that the central bank vowed to defend the limit, and the move comes just one week before the European Central Bank is expected to launch an all-out program of quantitative easing, an asset-buying stimulus program known as QE.
If that prompts further depreciation of the euro, the Swiss would have had to be much more forceful in defending that limit.
“The SNB appears to be acknowledging that it can’t defend its currency from any new ECB attempts to try and weaken the euro, as the ECB attempts to stimulate Europe’s sclerotic economy, and is trying to mitigate this by launched new measures to try and deter further inflows into its currency,” said Mr. Hewson.
There won’t be much shock if the ECB launches QE next week, as everyone expects the move.
The awe is questionable, too, given that there are questions over how successful it would be.
“The SNB had become more active in enforcing its floor … however, a complete and sudden abandonment is a shock,” said chief currency strategist Camilla Sutton of Bank of Nova Scotia.
“The timing of the decision could spur further expectation over what action the ECB is likely to take at its January 22nd meeting and suggests that the SNB felt that they would have had difficulty maintaining the floor with ongoing EUR depreciation,” she added, referring to the euro by its symbol.
There’s also speculation that the Swiss will now intervene in currency markets.
“The SNB clearly does not believe that the upward pressure on the Swiss franc from inflows due to ECB policy, Greek uncertainty, the Ukraine crisis and Russian sanctions will pass soon,” said Kit Juckes and Alvin Tan of Société Générale.
“So the SNB has decided to jump to ‘Plan B’ rather than persist with the previous one in the (futile?) hope that pressure would ease any time soon,” they added, referring to the move as a market bombshell.
“The SNB is not ‘giving up’ but rather, changing tack.”
The decision also shocked Swiss industry, which is clearly worried by the move.
“Today’s SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country,” Swatch Group AG Chief Executive Officer Nick Hayek told Bloomberg News. “Words fail me.”
- David Berman: World's optimism drained as U.S. economy shows signs of weakness
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