• Switzerland's news in English

Markets panic as Swiss scrap euro rate cap

AFP · 15 Jan 2015, 16:57

Published: 15 Jan 2015 16:57 GMT+01:00

Facebook Twitter Google+ reddit

Minutes after the bank said it was abandoning the minimum rate of 1.20 francs against the euro, the safe haven Swiss currency strengthened almost 30 percent to 0.8517 against the common European currency.

Fearful that a strong franc could dent earnings as it makes local products more expensive, investors dumped Swiss stocks, wiping out some 12 percent in market capitalization.

The impact was felt as far as in Poland, where 700,000 mortgages are denominated in the franc. The zloty lost a fifth of its value against the Swiss currency, making it even more expensive for Polish homeowners to repay their loans.

"Markets are clearly in panic mode," IG analyst Andreas Ruhlmann said, adding that he expected the central bank to rapidly shift strategies "to a new one which will better represent the real market conditions."

Swiss business leaders called the central bank's decision a disaster, with banking giant UBS saying it would lead to a drop of five billion francs worth of exports and knock 0.7 percentage points off overall output growth.

"I am at a loss for words," Swatch group's boss Nick Hayek told news agency ATS. "What the SNB has sparked here is a tsunami."

The Swiss watchmaking giant was among top losers on the stock market, with its shares sinking 15 percent while those of the world's second largest luxury group Richemont plummeted more than 14 percent.

Swiss bombshell

The SNB had since September 2011 been defending the exchange rate floor in a bid to protect the country's vital export and tourism industries, even buying massive quantities of foreign currencies to do so.

The rate was introduced as the eurozone crisis sent investors scurrying to the safe haven currency. More recently, the Russian ruble crisis put renewed pressure on the franc.

But the bank, which less than a month ago vowed to enforce the exchange rate floor "with the utmost determination", said on Thursday it was no longer needed.

"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," the bank said.

"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," the bank added.

But analysts and investors were stunned by the bank's decision.

Berenberg analyst Christian Schulz called it a "Swiss bombshell" while Alpari analyst James Hughes said it would wreck havoc not only on currency markets but also equity markets.

"We suspect that the bank will soon need to intervene against the currency to prevent a further rapid appreciation against the euro," said Jennifer McKeown, senior European economist at Capital Economics.

To make the franc less attractive, the central bank also announced on Thursday it was pushing its interest rate further into negative territory -- slashing it by 0.5 percentage points on certain bank deposits to negative 0.75 percent.

Story continues below…

The target range for Libor -- the franc's three-month London interbank offered rate -- is now between -1.25 and -0.25 percent, down from between -0.75 and 0.25 percent.

But analysts were not convinced.

"Negative interest rates are unlikely to be as effective as the massive currency interventions that the bank has undertaken in the past" to defend the floor, said McKeown.

Market players also said Bern's move may have come at this time because it is expecting the European Central Bank to launch a massive quantitative easing programme -- which would make defending the franc too costly.

The ECB is meeting on January 22nd, and is widely expected to launch a controversial programme of large-scale government bond purchase in a bid to keep the bloc from sinking into deflation.

For more news from Switzerland, join us on Facebook and Twitter.

Facebook Twitter Google+ reddit

Today's headlines
Swiss woman wins headscarf court battle
Photo: Jack Guez / AFP file picture

A Swiss court has ruled against a company that fired a longtime employee after she began wearing the Muslim headscarf, marking one of the first such rulings in Switzerland, media reported Sunday.

Montreux throws hat in Olympic rings
Could Montreux host the 2026 Games? Photo: Ivo Scholz/Swiss Tourism

Montreux is to put itself forward as the host city for the 2026 winter Olympics as part of a potential bid by the cantons of Valais and Vaud.

Geneva car share scheme could help reduce city traffic
Catch a Car is aimed at short hops within a city. Photo: Catch a Car

Catch a Car, already in Basel, launches in Geneva next month.

Swiss women will ‘work for free’ for the rest of year
Female employees in Switzerland earn 19.3 percent less than their male colleagues. File photo: Randy Kashka

Switzerland's gender pay gap means from today, Friday October 21st, women in the country will effectively be working for free for the rest of 2016.

Swiss luxury watches stolen in Paris raid
Police outside the Girard-Perregaux watch store on Thursday. Photo: Bertrand Guay/AFP

The 10 Girard-Perregaux watches are worth half a million euros in total.

Brother-in-law arrested over murder of Swiss teacher
The victim worked in a school in Stabio, near the town of Mendrisio. Photo: Oliver Graf

The primary school teacher was found dead in Ticino earlier this week.

Inside Switzerland’s largest nuclear bunker – 40 years on
Designed to house 20,000 people, the bunker was built in and over two motorway tunnels. Photo: Unterirdisch Ueberleben

The Local takes a tour of the Sonnenberg bunker in Lucerne, opened 40 years ago at the height of the Cold War.

Ten Swiss ski resorts named most expensive in Europe
File photo: Renato Bagattini/Swiss Tourism

Skiers in Switzerland pay the highest prices for their ski passes of anywhere in Europe, according to research.

Eco group fights Bern over wind farm plans
There are currently more than 30 wind farms in Switzerland. Photo: Alpiq

Wind turbines are “gigantic and destructive” machines, says Paysage Libre Suisse.

Vegan wins battle to be accepted by Swiss army
Antoni Da Campo will now carry out his military service. Photo: Antoni Da Campo

A Swiss man who was told he would not be accepted for military service because of his strict veganism has finally succeeded in making the army change its mind.

Sponsored Article
How to vote absentee from abroad in the US elections
Photo: Richard Juilliard/AFP
Man makes Geneva airport bomb threat ‘for a joke’
Sponsored Article
Last chance to vote absentee in the US elections
Photo: AFP
Solar Impulse team reveals plans for unmanned plane
File photo: Martin Abegglen
Swiss to vote on passport rules for 3rd gen foreigners
Sponsored Article
How to vote absentee from abroad in the US elections
Photo: AFP
Swiss wingsuit hotspot Lauterbrunnen won’t impose ban
Photo: Swiss Tourism
Six reasons Switzerland isn’t as boring as you might think
Photo: Swiss Tourism
Report: Switzerland one of world’s best places for girls
Photo: The Local
Thief returns Swiss cow bells worth thousands
File photo: Wikimedia Commons
One in three rapists isn’t locked up: statistics
Photo: activistin.ch
Tampon-tax protest turns Zurich fountains red
Photo: AFP
Geneva police to lift ban on bearded officers
Photo: Marcel Gillieron/AFP
Suicide chef’s restaurant keeps Michelin stars
Photo: Lara de Salis
11 things the Swiss get tired of hearing abroad
Photo:  Ivo Scholz/Swiss-image.ch
Survey: expats in Switzerland have money but few friends
Photo: AFP
Swiss press criticize Bern’s 'capitulation' on immigration
Photo: Jura Trois Lacs tourism
German ex-policeman is Swiss city’s new hermit
Photo: Dmitry A. Mottl
Ticino votes to favour local workers over foreigners
Photo: file
Some deodorants could cause breast cancer: Swiss study
Photo: Royal Savoy
In pictures: Inside the latest Swiss luxury hotel
Photo: AFP
Geneva airport bomb hoaxer faces 90,000-franc bill
Photo: Schaffhausen police
Mother leaves toddler son alone in car to go clubbing
Photo: Fabrice Coffrini/AFP
Swiss populist attacked by knife-wielding pensioner
Photo: File
Bern argues over passports for 3rd generation foreigners
Photo: Broad Bean Media
Muslim pupils must shake hands – ‘no ifs and buts’
jobs available