Markets roiled on Swiss move: franc soars as central bank lifts currency cap

SWITZERLAND’S central bank triggered turmoil in global markets yesterday when it abandoned its cap on the Swiss franc’s exchange rate.

SWITZERLAND’S central bank triggered turmoil in global markets yesterday when it unexpectedly abandoned its cap on the Swiss franc’s exchange rate, a move that unleashed new volatility in credit and currency markets around the world.

The move also reinforced expectations of further downward pressure on global interest rates, with the European Central Bank poised to announce a major quantitative easing program next week.

It also adds an additional layer of uncertainty in markets that have remained on edge from a ­collapse in oil prices and other commodities.

After enforcing a floor of 1.20 euros per Swiss franc by buying the euro for the past three years, the Swiss National Bank abruptly scrapped the policy, saying it was unsustainable and no longer needed. The central bank also cut its benchmark interest rate to minus 0.75 per cent, after cutting it to minus 0.25 per cent in December to stymie Swiss franc demand during the Russian currency crisis.

Some of the fallout was felt early yesterday in Asia as FXCM, the biggest retail foreign exchange broker in Asia, said it suffered “significant losses” that wiped out its equity, which could leave some Australian investors facing losses.

Switzerland had moved to protect its currency three years ago, fearing a surge in investor funds from Europe, the US and Japan could cripple its economy.

The Swiss bank’s action also spotlights the broader stresses building across the global financial system at a moment of unbalanced economic growth and high social and market instability. Investors are flocking towards safe havens, among them Swiss and US assets.

Like Switzerland, other Euro- pean countries outside the eurozone, such as Denmark and Sweden, are seeing their currencies rise as the euro falls, lowering their inflation rates and making their exports more expensive in global markets.

Switzerland’s sharemarket tumbled 8.7 per cent as the franc surged more than 20 per cent against the euro and the US dollar. The European single currency dived to a record low of 0.7813 Swiss francs before stabilising around parity.

The Australian dollar jumped to a four-week high of US82.96c as foreign investors flocked to higher-yielding investments, and ­­10-year bond yields fell to a record low of 2.49 per cent. Just this week the Swiss central bank had insisted the cap “must ­remain a pillar of our monetary policy”. But in a one-page statement yesterday, it said the policy was no longer justified.

“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,” the SNB said.

“This exceptional and temporary measure protected the Swiss economy from serious harm. 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 policy moves followed a legal ruling this week that gave the ECB a green light to deploy sovereign bond purchases as part of the monetary stimulus expected to be announced at its board meeting next Thursday.

“The Swiss National Bank has been forced to sever the franc’s anchor to the euro because of the latter’s sustained weakness, driven partly by expectations that the ECB will launch sovereign QE next week,” said Simon Ward, chief economist at Henderson Global Investors.

Analysts also said anti-austerity sentiment in Greece could see the debt-strapped nation forced out of the eurozone after elections later this month, putting further downward pressure on the euro that could be difficult to stop.

“It’s difficult to see an immediate end to the euro rout, and with Swiss deposit rates deeper in the negative and European yields ­collapsing, it’s also easy to see US bond yields falling further,” said Riki Polygenis, ANZ’s co-head of Australian Economics.

IG chief market strategist Chris Weston said: “Greece would definitely have been something they spoke about, but quantitative easing in Europe would have been the main catalyst. The euro will continue weakening and in my opinion the ECB will keep increasing the size of their asset purchases throughout 2015. Therefore the SNB would be swimming against a tide that is becoming more and more powerful.”

Under the exchange rate cap imposed in recent years, its balance-sheet expanded to 85 per cent of GDP. “To put this in perspective, if the US had a balance sheet 85 per cent of GDP it would equate to around $15 trillion, which is around the current total of the assets of all central banks collectively,” Mr Weston said.

Additional reporting: agencies