Thursday, January 15, 2015

Switzerland Stuns Markets


Switzerland Stuns Markets by Giving up on Currency Peg
walkongstick

LONDON — Jan 15, 2015, 7:53 AM ET   By PAN PYLAS Associated Press
 

Bowing to the inevitable, Switzerland has ditched an increasingly expensive policy to keep a lid on the export-sapping rise of the Swiss franc — a move that saw the currency spike a whopping 30 percent against the euro.

Thursday's decision to call time on its efforts to keep the euro from trading below 1.20 francs came amid mounting speculation that the European Central Bank will next week back a big government bond-buying program that will put more euros in circulation, diluting their value.

That expectation has seen the euro face intense selling pressure in currency markets, particularly against the dollar. The euro has fallen to nine-year lows against the dollar and below its launch rate in 1999.

As a result, the cost for the Swiss central bank of constantly defending the peg by buying euros or selling francs has been rising.

The scale of their task was evident in the franc's movements in the markets following the abandonment of the peg. At one stage, the euro had plunged a stunning 30 percent against the franc before recovering somewhat to trade 13 percent lower at 1.04 francs.

"Switzerland suddenly got a whole lot more expensive," said Michael Hewson, senior market analyst at CMC Markets.

Many analysts thought the decision was inevitable in light of next week's expected announcement by the ECB to break new ground in its efforts to inject life into the ailing 19-country Eurozone economy. A week ahead of the stimulus, which some in the markets think could be worth 1 trillion euros ($1.17 billion), the Swiss National Bank, or SNB, is preparing for the market impact.

"The first thing it says is that the SNB clearly expected to see a huge surge of inflows in the week ahead and saw little reason to provide these buyers of francs with an artificially cheap rate," said Simon Derrick, chief currency strategist at BNY Mellon.

The Swiss central bank said nothing of the sort, though, arguing that the "exceptional and temporary" measure to protect the Swiss economy was "no longer justified."

The peg, which was introduced in Sept. 2011, was an attempt to halt the rise of the franc — a traditional safe-haven currency for investors — against the euro at a time when the Eurozone debt crisis was at its height. The strong franc was then particularly problematic for Swiss exporters, who were forced to drastically cut prices to remain competitive.

Unsurprisingly, Thursday's move prompted a painful 11 percent drop in Switzerland's stock market as investors took fright at the worsening outlook for Swiss companies selling chocolate or ski holidays and the possibility that the country will suffer a sustained period of falling prices, or deflation. A stronger currency makes imports cheaper, further dampening already-subdued price pressures — in the year to December, prices fell 0.5 percent.

In an effort to contain the franc's appreciation and limit any damage to the Swiss economy, the central bank on Thursday also lowered a key interest rate — what it charges commercial banks to deposit at the bank — to minus 0.75 percent from minus 0.25 percent. The hope is that it dissuades banks from parking their cash at the national bank and instead possibly invest it.
http://abcnews.go.com/International/wireStory/swiss-national-bank-scraps-minimum-exchange-rate-euro-28239702
 
 

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