Today, the Swiss National Bank did away with the EUR/CHF floor which had been in place since September 2011 and ensured that one euro could not buy less than 1.20 swiss francs. This has created volatile trade with the swissy appreciating by double digits across the board in the immediate aftermath.
This market moving event could give Forex brokers the volatility needed to surpass many of the well performing months of the past quarter, we shall find that out in time… The market reaction was swift and from the 1.20 peg the EUR/CHF briefly touched as low as 0.7275, close to a 5,000 pip drop and as low as 28%! The pair has since stabilized around the 1.02-1.06 mark at the time of writing, down around 15% on the day still, check out the before and after charts below, courtesy of cTrader.
You can read below the official statement from the Swiss National Bank for a detailed rationale for their move:
OFFICIAL STATEMENT: 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.
To view the official press release from the SNB, click here (PDF).
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