USDCHF drop biggest since 1971! Hedge Funds Crushed! SNB Abandons EURCHF Floor

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EUR/CHF Crash and USDCHF Biggest Drop Since 1971

The Swiss central bank just abandoned the minimum floor rate to the euro, and decreased the interest rate to negative -0.75%. This led to a collapse in the levels of the euro and the dollar against the franc, as well as to a huge volatility in other currencies. The EURCHF exchange rate decline to 0.78 before recovering to 0.88. It was a more than 24% decline for the EURCHF rate. After the recovery, the Swiss franc gains stand at 14%.

EURCHF drop! Hedge Funds Crushed! SNB Abandons EURCHF Floor

Why SNB Abandoned the Floor

Apparently the SNB wasn’t able to keep the currency at a low level because it had to accumulate too much Euro reserves, which could risk the price and financial stability of the country in the future. Also exporters had 3 years since the peg to protect and change the way they work and are better prepared for that than they used to be.

The Swiss National Bank commented in a statement. “The economy is stable enough to cope in the new environment,” complemented by the financial institution.

What The Move Could Bring to Markets?

Today, the hedge funds and traders that used the Swiss franc as a funding currency will suffer badly. On the opposite, some traders such as Jim Rogers, who predicted that the peg of 1.2 EURCHF, won’t hold, are most probably happy if they still hold Swiss francs.

Expect increased volatility. There will be a Euro buyer less from today on. The USD will probably continue its uptrend. This move will leave shock-waves through the markets and will probably affect other markets too. Gold is up 1.2% today. Our Gold forecast is proving right. USDJPY is crashing, so we will probably go deeper into a risk-off environment.

Swiss National Bank discontinues minimum exchange rate and lowers interest rate to –0.75%

Target range moved further into negative territory

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to ?0.75%. It is moving the target range for the three-month Libor further into negative territory, to between –1.25% and -0.25%, from the current range of between -0.75% and 0.25%.

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. The economy was able to take advantage of this phase to adjust to the new situation.

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 SNB is lowering interest rates significantly to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions. The SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions.

The SNB move target range to between -1.25 and -0.25, so we will probably see even higher negative interest rates to smooth the Swiss franc strength. According to the the currency value is still high but the overvaluation has decreased since the minimum exchange rate was introduced

SNB have said governor Jordan will be giving a statement at 1215GMT/0615CST.

Updated: SNB Chairman Jordan says declines to comment on communication with other central banks or whether SNB is active in the market. SNB Chairman Jordan says will intervene in FX markets as appropriate for monetary policy

This move comes ahead of the ECB rate decision (22nd Jan) where by the central bank is broadly expected to announce a QE program of some shape or form. This then would have put addition pressure on the SNB to protect their previous floor of 1.2000. A move that would have cost more and more money if the EUR continued its decline.

Swatch Group UHR.VX Chief Executive Nick Hayek called the Swiss National Bank’s decision to discontinue the minimum exchange rate on the Swiss franc a “tsunami” for the Alpine country and its economy.

“Words fail me! Jordan is not only the name of the SNB president, but also of a river… and today’s SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country,” Hayek said in an emailed statement on Thursday.

Swiss watchmakers, which are also grappling with weak demand in Asia, are very exposed to moves in the Swiss franc exchange rate because their production costs are largely in Swiss francs, but most of their sales are done abroad.

Shares in Swatch Group fell 15 percent at 1056 GMT, while Richemont CFR.VX was down 14 percent, underperforming a 9 percent drop in the Swiss market index .SSMI following the SNB’s announcement. 

Absolutely shocking … For companies with international operations – translated earnings are going to be lower and if companies make products in Switzerland it is going to hurt margin. It is a terrible day for corporate Switzerland,” Kepler Cheuvreux analyst Jon Cox said

 

Update.

From UBS’ Beat Siegenthaler: “The SNB’s Standing Is Undermined… There Could Be A Significant Deflationary Shock”

No more floor

The SNB today dropped the 1.20 EURCHF floor while at the same time lowering the negative interest rate on sight deposits to -0.75% from -0.25% previously, as well as moving the 3m Libor target to between -0.25% and -0.75%. The SNB argues that the floor was an exceptional and temporary measure that ‘protected the Swiss economy from serious harm’ but that the economy had had time to adjust to the new situation. It continues to argue that the franc had recently depreciated ‘considerably’ against the dollar. ‘In these circumstances, the SNB concluded that enforcing the minimum exchange rate for the Swiss franc against the euro is no longer justified’.

Dramatic market impact

The announcement has had a dramatic impact on markets with EURCHF initially dropping 40% to almost 0.85. It quickly reversed seemingly with the help of SNB interventions at levels just above parity to the euro. The statement noted that ‘if necessary’ the central bank will ‘remain active in the foreign exchange market to influence monetary conditions’. The SMI equity index dropped by more than 8% on the news and has recovered little since. On the rates side cross currency basis moved around another 20bp lower.

Economic repercussions

It would seem likely that today’s decision will have significant ramifications in Switzerland as very few observers expected the floor to be dropped with some arguing that it looked set to remain in place for years. Unless EURCHF was to recover back to levels much closer to the old 1.20 floor, the economy could be significantly impacted, as seems well reflected in the reaction of equity prices. At levels close to parity many businesses and investment decisions might not be seen as viable anymore and over time a significant volume of economic production could move outside the country. If so, there could be a significant deflationary shock possibly not too dissimilar to the one Switzerland might have suffered had the floor not been introduced in 2011.

Hope of a limited drop

Where will EURCHF settle after today? The big question is whether investors will want to buy Swiss francs despite substantially negative interest rates and at clearly expensive levels. Nevertheless, safe haven flows have so far demonstrated a remarkable stickiness which can be expected to continue as long as global risk aversion reigns. The SNB might be hoping to be able to stabilise EURCHF at around 1.10 which may be deemed a level that the economy can cope with.However, defending such a level might still be quite costly assuming that global risk aversion continues to linger.

Credibility cost

The other question is about the cost of today’s decision for the SNB, both in monetary and credibility terms. The SNB is holding roughly half of their CHF500bn in euros, which implies a loss of possibly not dissimilar to the CHF38bn that the SNB made in profit last year. The monetary impact might thus be manageable. The credibility impact might be harder to gauge though. Domestically, many economic actors relied on what was seen as a ‘promise’ to hold the 1.20 floor. Internationally, following the negative rates confusion back in December today’s decision might be further undermined the standing of the SNB among investors.

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