Swiss Franc breaks from euro peg

Swiss National Bank headquarters
Swiss National Bank headquarters

The Swiss National Bank (SNB) put European financial markets in a spin yesterday when it announced it would no longer be pegging its currency, the Swiss Franc, to the euro. SNB is discontinuing the minimum exchange rate of CHF 1.20 per euro.

The banking institution said that it was taking the step to counteract devaluation of its currency. 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.

“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,” the bank said in a statement.

FX expert Philippe Gelis, CEO and co-founder Kantox believes the Swiss National Bank’s decision to abandon its currency ceiling yesterday could prove as a precursor to countries leaving the euro altogether.

“Of course Switzerland is not a member of the euro, but the SNB’s decision yesterday to remove the enforced ceiling of CHF1.20 per euro essentially demonstrated the tax haven country’s complete loss of faith in the currency that it has been pegged to for the last three years,” said Mr. Gelis.

“The main reason for the SNB’s decision is that in order to maintain a low Swiss franc against the euro, the SNB had to sell its franc reserves and buy euros. This led to large increases on the euro reserves they held. In other words, as any private individual might have done, the SNB decided to take its loss on the EUR and quit the game.”

According to Mr. Gelis, the euro could be hitting troubled waters in 2015, especially if the EU considers adopting a programme of quantitative easing (QE). “QE would see investors flee from the euro to park their money somewhere safer. It is seen by many as the last throw of the dice to rescue the Eurozone, by a central bank bereft of ideas,” he said.

“Added to this, the euro faces Greek and Spanish elections this year, whose results may well see far-left, anti-austerity parties assume power. The Spanish political establishment and the European Union will nervously look to the Greek election later this month as an indicator of what may come for Spain at the end of the year.”