EUR/CHF plummets after SNB scraps euro ceiling

on Jan 15, 2015
Updated: Oct 11, 2019

The EUR/CHF has taken a dive during today’s trading session after the Swiss National Bank (SNB) scrapped a policy that limited how much the euro could fall against the Swiss franc. The central bank also further raised the costs for deposits.

The currency pair had plummeted 14.6 percent to 1.0255 as of 12:38 GMT after the SNB announced it was ending its three-year-old cap of 1.20 franc per euro. The Swiss central bank has been resisting heavy pressure over the past few months over the cap imposed back in September 2011. The cap was an attempt to restrain the dramatic increase in the franc’s value due to investors seeking a haven from the euro zone’s troubled economic and political climate. At the time, the strong franc was particularly problematic for Swiss exporters, who were forced to drastically cut their prices in order to remain competitive on the international markets.

According to a statement from the central bank released today: “This exceptional and temporary measure protected the Swiss economy from serious harm”. However, the central bank said it has now “concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified”.
At the same time it announced that it would also lower its average interest rate from minus 0.25 percent to minus 0.75 percent, increasing the amount investors have to pay to hold Swiss franc deposits. The latest cut in interest rates comes less than a month after the SNB announced the introduction of a negative deposit rate to support its franc ceiling, citing the need to stem a tide of money flowing from Russia’s financial crisis. That measure was to take effect on 22 January, the day of the ECB’s next policy meeting.

The move caught many investors off guard. According to FX Pro analyst Simon Smith: “The timing of the move is a surprise, coming just a month after the last change in interest rates. But it could well be that the SNB has chosen to front-run the likely move to QE from the ECB.” In his view the SNB “chose to take the initiative, rather than fight what would have been (in their eyes) a losing battle to defend the franc“.
Bloomberg quoted Alessandro Bee, strategist at Bank J Safra Sarasin AG in Zurich as saying: “The SNB doesn’t see any future any more for their floor with the strong US dollar and the QE ahead at the ECB”.

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