January 19, 2015    3 minute read

The Foreign Exchange Game: Swiss Franc vs Euro

   January 19, 2015    3 minute read

The Foreign Exchange Game: Swiss Franc vs Euro

The Swiss Franc soared as much as 30% on the 16th of January 2015 after the Swiss National Bank (SNB) announced it would remove the cap it had in place to keep the Swiss Franc stable against the Euro and prevent it from increasing too much. Moreover, it also cut a key interest rate from -0.25% to -0.75% with the effect of increasing the amount investors pay to hold Swiss deposits.

How it all started?

During 2011, when the financial crisis in the Eurozone was at its peak, Switzerland was turned into a cash haven for international investors to park their cash. Money poured in from other countries with the effect of transforming the nation into an ‘island of harmony’ for cash. With everyone wanting to keep their money in Switzerland, the Swiss Franc surged in value. At the beginning of 2010, the Swiss Franc was less valued at less than 0.70 Euro; in the middle of 2010 it was almost at parity – a huge move in a small period of time. As the Swiss Franc appreciated against the Euro, Swiss exports became less competitive; therefore a surging in the currency was not accommodating to the economy.

What did the SNB do? 

In this regard, during the summer of 2011, the Swiss National Bank placed a cap on the exchange rate between the Franc and the Euro – it did not allow the Euro to weaken below 1.20 against the Franc. The bank maintained the levels of the Franc by printing more on a regular basis in order to buy Euros in the market, ensuring that the currencies would not breach that line. The Swiss National Bank explained the move;

“The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss Franc and an extremely high level of uncertainty on the financial markets.”

This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss Franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation. 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 Euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss Franc to weaken against the US 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. Other strategists explain that the cap was no longer needed, as it seemed to the bank that holding Euro was a soaring liability on its balance sheet.

What is happening now? 

Mortgages denominated in Francs now have now become more expensive. As this was a colossal move in the market, people were expected to lose a lot of money. As the collapse of commodities has created a lot of problems, this was an additional unexpected shock stressing the system.

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