Traders were caught blindsided yesterday as Switzerland’s central bank unexpectedly abandoned its currency peg against the euro and sent shock waves through the markets. The SNB ended its three-year old cap of 1.20 franc per euro, prompting a surge in the currency and a plunge in Swiss stocks. The shift may have been an attempt by the SNB to pre-empt possible pressure on the franc in the event of government bond purchases by the European Central Bank. In a nation that has attracted investors for its stability, the change underscores the challenges Swiss policy makers have faced managing a currency popular with investors at times of crisis.

The Swiss bourse suffered its biggest daily drop since 1989 with nearly US$100 billion of market value wiped out in a day. UBS AG, Holcim Ltd. and Swatch Group AG were among shares tumbling at least 10 percent, while the VSMI, the measure that tracks volatility expectations for the SMI using options contracts, surged a record 39 percent. The sharp drop in the SMI could provide an attractive entry point for investors, as although a stronger CHF is going to negatively affect corporate earnings, at this point most of it is already priced in. Next week, the European Central Bank (ECB) is expected to announce a major monetary stimulus programme for the euro zone which may weaken the euro even further and Switzerland would have been forced into massive sales of the franc to defend the cap.

The initial shock was felt across all markets, causing an intraday swing of over 4 percent in the Euro Stoxx 50, an index of the 50 largest European companies. The index closed up 2.19%, recouping its losses in the beginning of January and taking its increase since the beginning of the year to 0.34%.

The SNB also lowered a benchmark interest rate by 0.5 percentage point to minus 0.75 per cent, which was experiencing unwanted and unnecessary inflation as a result of the currency peg. The franc also surged against the dollar. One Swiss franc could buy S$1.51 yesterday evening, about 15 per cent more than the $1.31 on Wednesday. The EURCHF closed yesterday at CHF 0.976 for each euro as opposed to the CHF 1.20 posed by the currency peg, 18.6% lower.

The euro also plunged 3.5 percent against a basket of 10 developed-nation peers, the most since its 1999 debut. The SNB’s decision removes a key pillar of support for the euro, boosting the odds that its recent slide will accelerate. Companies from Goldman Sachs Group Inc. to Pacific Investment Management Co., the world’s biggest manager of active bond funds, have in recent days talked about the increasing chance the euro falls to parity with the dollar, which would represent a 14 percent decline from its current level.

 

This article was issued by Mr. Simon Psaila, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.