Swiss franc surges after scrapping euro ceiling

The Swiss central bank has abandoned its exchange rate control and cut interest rates to -0.75pc, sending the franc soaring against the single currency

The Swiss franc has risen by almost 30pc against the euro Credit: Photo: Getty

The Swiss franc has risen by almost 30pc against the euro after the central bank shocked global markets by abandoning its long-standing cap against the euro.

The Swiss National Bank's (SNB) move to scrap the exchange rate control - which has imposed a maximum value on the Swiss franc of just over €0.83 since 2011 - has driven the franc to parity with the euro.

Swiss stock markets plunged by more than 10pc after the announcement, while the euro-franc currency market descended into disarray. The SNB's move was especially staggering since its president Thomas Jordan had vowed to "defend [the ceiling] with utmost determination" as recently as last month.

"If the SNB thought that it could make this adjustment in an orderly manner, then it has failed miserably. The EURCHF market has basically shut down so far this morning, while it waits for the dust to settle," said Kathleen Brooks, research director at currency trader Forex.com.

The shock move comes amid expectations that the European Central Bank (ECB) could launch a full-blown quantitative easing scheme as early as next Thursday, which is expected to reduce the euro's strength.

"A further appreciation against the euro could have serious implications for the economy given that Switzerland has typically sent nearly half of its exports to the eurozone and about 10pc to the US," said Jennifer McKeown, of Capital Economics.

Simon Smith, chief economist at currency trader FxPro, said the move showed the SNB knows it is fighting a "losing battle".

Jeremy Cook, chief economist at international payments company World First, said the SNB had effectively "thrown in the towel".

“This is a complete capitulation. The pressure and belief that the European Central Bank will launch a bond buying program in the coming week - further devaluing its currency - has been enough to make the Swiss National Bank step out of the way," he said.

“Nobody wins when you stand in the way of a freight train, except for the train.”

However Steen Jakobsen, chief economist at Saxo Bank, said the move will come to be seen as rational.

"This will be seen as not only rational but also as the protection of long-term Swiss growth and inflation expectations," he said. "The SNB is effectively acknowledging that the business cycle needs to run its course, the artificial weak CHF had the indirect consequence of inflating an already strong real estate market and placing Swiss monetary policy at the door of ECB."

Investors traditionally favour the franc because of its stability, considering it a safe haven in part because of the controls that have been in place since the height of the eurozone crisis.

The SNB said that its minimum exchange rate mechanism had been “introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets”.

It added: “This exceptional and temporary measure protected the Swiss economy from serious harm... the overvaluation has decreased as a whole since the introduction of the minimum exchange rate”.

Evelyn Herrmann, an economist at BNP Paribas, said: "The decision to abolish the minimum exchange rate altogether caught us by surprise."

"The appreciation of the franc now means lower import prices, increasing downward pressure on Swiss inflation, and will challenge Swiss exporters’ competitiveness, at least for those exports going to the eurozone (around 55pc of all exports)," she added.

The contrast between economic strength in the US and the re-emergence of worries about the eurozone has forced a divergence between the dollar and the euro.

The SNB noted that in turn, this “has caused the Swiss franc to weaken against the US dollar … [such that] the SNB concluded that enforcing and maintaining the minimum exchange rate … is no longer justified”.

The SNB also elected to push its key interest rate deeper into negative territory, lowering this from -0.25pc to -0.75pc, in order “to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions”.

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