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Screenshot of a breaking news alert e-mail from Q2 2017
By Jameel Ahmad, Chief Market Analyst at FXTM
The financial markets were thrown in turmoil after the Swiss National Bank (SNB) decided that holding the minimum exchange rate pegged to the euro was no longer a viable strategy. Stating that the announcement came as a surprise would be an understatement to say the least. Installing and maintaining the 1.20 EURCHF peg was arguably a controversial precaution but nevertheless it served to stabilize the price and provided safety for the Swiss economy, at least in the short term.
Defaulting on the cap when only days ago, Thomas Jordan, the chairman of the SNB’s governing board assured the public of his intention to go to all necessary lengths to defend it, led to chaos, volatility and uncertainty across the financial markets. In the wake of the announcement, the franc broke out of the 4-year ceiling, set by the cap, with a violent uproar, surging its price by over an unprecedented 30% against the euro.
The Swiss franc has always been a safe haven currency to park foreign funds and with the divergence between economic progress throughout the global economy being clear to see, the SNB could have been preparing for the eventuality of investors returning to the CHF as a safe-haven.
In times of crisis and uncertainty it’s only reasonable that investors will seek stable markets into which to move their funds. The SNB’s move was also most likely a defensive measure against the European Central Bank’s (ECB) plan to boost money supply in the eurozone by implementing a quantitative easing policy which will more than likely further devalue the euro. By dropping interest rates even further below zero and surging the price upwards, the SNB have attempted to dissuade foreign investors from buying francs in the hope of convincing them that they have to look to other currencies to make their investments.
So what are the implications of this decision now that the dust has seemingly settled? The franc is now stronger than it has been since May 2014 which arguably is good for holders of the currency who will spend it abroad or those who make a living by importing goods from Germany, France and neighboring European countries.
However at the same time this is bad news for Swiss tourism, Swiss manufacturers and the export industry which is preparing to take the biggest hit. Due to its small size and industrial specialization, trade business is a key economic factor for Switzerland which is largely dependent on exporting its renowned chocolate, prestigious timepieces and high-end pharmaceuticals.
Now, Swiss goods will be more expensive for those buying them in different currencies, and hence a lot less competitive in the market which could lead to reduced production and unemployment. Further to the direct impact on the Swiss franc, the move by the SNB injected the foreign exchange market with an unprecedented dose of volatility. Retail traders keen on trading against the CHF on Thursday were shocked to find out that their accounts reversed.
As the dust starts to settle and the shock of the SNB’s decision begins to wane, one question that still seems to remain is why? Why the need for the surprise announcement and why commit to do one thing and then take a completely different action? Was the capitulation of the peg a plan towards staving future deflation?
Will it eventually prove effective in conjunction with the interest rate reduction on sight deposits? Or was it because the SNB have been committed to purchasing the Euro for so long but with the continual bearish forecasts for the Euro, have decided to withdraw their commitment before the already huge losses to the SNB balance sheet become liabilities that could never be recovered?
I am swaying towards the latter but it might require more time for the CHF price to stabilize to find out.
This is a Guest Editorial which was compiled and written by Jameel Ahmad, Chief Market Analyst at FXTM