- Title: SWISS-SNB/CAP SNB stuns markets by scrapping cap against euro
- Date: 15th January 2015
- Summary: LONDON, ENGLAND, U.K. (JANUARY 15, 2015) (REUTERS) (SOUNDBITE) (English) JAMES BEVAN, CHIEF INVESTMENT OFFICER, CCLA, SAYING: "I was completely wrong-footed by the Swiss National Bank's decisions. They said very firmly just a month ago that they were committed to defending current levels and that the negative interest rates strategy was part of a longer-term, deeply considered move. Therefore, what they have done today makes no sense and I am absolutely confident they will have to take steps now to stop the head-long appreciation of the Swissie against the euro."
- Embargoed: 30th January 2015 12:00
- Topics: General
- Reuters ID: LVA6F6TWT7KM1J2PIUFU42A0LGXE
- Story Text: The Swiss National Bank shocked financial markets on Thursday (January 15) by scrapping a three-year-old cap on the franc, sending the safe-haven currency soaring against the euro and stocks plunging amid fears for the export-reliant Swiss economy.
Only days ago, SNB officials had described the 1.20 francs per euro cap, introduced in 2011 at the height of the euro zone crisis to prevent the strong currency leading to deflation and a recession, as the cornerstone of the bank's monetary policy.
The U-turn sent the franc nearly 30 percent higher against the euro in chaotic early trading. It came a week before the European Central Bank is expected to unveil a massive bond-buying programme that might have forced the SNB to intervene repeatedly to defend the cap.
"The euro distinctly lost value against the U.S. dollar which is why the Swiss franc also lost value against the U.S. dollar. In light of this, the Swiss National Bank decided that it doesn't make sense to carry on with a policy that is not sustainable and that can only be carried out by constantly intervening in the market," SNB Chairman Thomas Jordan said at a news conference.
"The Swiss National Bank decided to scrap immediately its 1.20 per euro limit and to no longer purchase foreign exchange. The limit was introduced at a time of extreme overrating of the Swiss franc and massive uncertainty on financial markets. This extraordinary and temporary measure saved the Swiss economy from serious damage," Jordan added.
One chief executive of a Swiss company called today's SNB action a "tsunami" for the export industry and for tourism.
Jordan denied at a news conference that the move amounted to a "panic reaction", saying the cap had been scrapped because it was unsustainable.
"The Swiss franc remains highly rated but the overrating reduced itself overall since the introduction of the limit. The economy was able to make use of this phase to prepare for the new situation," he said.
As it removed the upper limit on the currency, the SNB sought to discourage new flows into Swiss francs by pushing down its interest rate on some cash deposits held at the central bank by commercial banks and other financial institutions.
After taking the rate into negative territory last month for the first time since the 1970s, it cut another 0.5 percentage points on Thursday to -0.75 percent, a move Jordan said would help ease upward pressure on the franc over time.
Earlier this month, Jordan described the cap as "absolutely central", while SNB vice-chairman Jean-Pierre Danthine said on Monday it would remain the cornerstone of SNB policy.
"I was completely wrong-footed by the Swiss National Bank's decisions. They said very firmly just a month ago that they were committed to defending current levels and that the negative interest rates strategy was part of a longer-term, deeply considered move," said Chief Investment Officer at CCLA, James Bevan. "[W]hat they have done today makes no sense and I am absolutely confident they will have to take steps now to stop the head-long appreciation of the Swissie against the euro."
In what now looks like a signal the move might be coming, Ernst Baltensperger, an influential academic and former SNB adviser who is close to Jordan, said last weekend the SNB should move away from the "temporary" cap.
Leading newspaper Neue Zuercher Zeitung described the move as "unavoidable".
On social media, however, it was dubbed "Francogeddon".
With more than 40 percent of Swiss exports going to the euro zone, a strong franc is a nightmare for leading exporters.
Swiss shares tumbled over 10 percent, putting them on track for their biggest one-day fall in at least 25 years and wiping about 100 billion Swiss francs off the main index.
Banks UBS and Credit Suisse were both down over 10 percent at 1315 GMT, while Richemont, which owns luxury watchmaker Cartier, and Swatch were the biggest losers, down roughly 15 percent.
Christian Levrat, president of the left-wing Social Democrat party, called the move "a serious threat for tens of thousands of Swiss jobs".
As markets tumbled, people rushed to banks to change money.
Investors have been sweeping up the Swiss currency as the ECB considers printing money to buy bonds, or quantitative easing. Europe's showdown with Russia over Ukraine has also put pressure on the euro and made the franc more attractive.
In addition to lowering the sight deposit rate, the SNB said it would expand its three-month Libor target range to between -1.25 percent and -0.25 percent, from a previous range of -0.75 percent to 0.25 percent.
In the first minutes of trading, the franc broke past parity to trade at 0.8052 francs per euro before trimming gains to 1.0255.
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