Chart of the day: Swiss franc move stuns the market

published 15 January 2015

The forex markets are in chaos this morning, and it's all down to the Swiss central bank.

Here's what happened the value of the euro has plunged against the Swiss franc. The chart below shows the number of Swiss francs a single euro will buy you. It's gone from around 1.20 to roughly one. That's a massive, epochal move in terms of foreign exchange markets and it's happened in a single morning.

Source: Bloomberg

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The back story: why the Swiss fixed their exchange rate against the euro

Terrified investors and savers in the eurozone were piling into what they saw as the safety of Swiss francs. That was driving up the value of the Swiss franc. At one point in 2011, it got to the point where the Swiss franc had dropped from 1.30 francs to the euro to near parity with the euro in other words, one euro got you just one Swiss franc. (You can see that in the chart above the spike crash in mid-2011).

That was bad for the country's exporters and was inflicting deflation on the Swiss economy.

So the Swiss introduced a currency ceiling'. The Bank wouldn't allow the euro to weaken below 1.20 francs to the euro.

Now, you can't just set' an exchange rate like that. If you don't want your currency to strengthen, you have to back it up with action. So in order to keep the Swiss franc (CHF for currency traders) at 1.20 to the euro or weaker, the SNB had to sell a pile of Swiss francs.

The big news today: the Swiss scrap the cap

Just as George Soros and co. broke' the Bank of England in 1992, a similar thing has happened here only in the other direction. It's just become too painful for the SNB to keep pumping out francs.

Immediately, the Swiss franc rocketed to a record high against the euro at one point this morning in fact just after the announcement, one euro would have briefly bought you a mere €0.85. And even at the time of writing, CHF is pretty much at parity with the euro. It's also got a lot stronger against the dollar.

The SNB also started charging banks more to hold money with it (the Swiss interest rate has turned negative to -0.75%). But that didn't hold back the franc in any obvious way.

What are the consequences?

And the fall-out is likely to have an impact in many other areas. As Paul Lambert of Insight Investment points out to the Wall Street Journal: "The Swiss franc is a major currency, we're not talking about a rarely-traded third-tier currency here." For example, gold has soared this morning as investors rush to protect themselves against potential blow-ups in the financial system elsewhere.

The surprise move also suggests that the European Central Bank may be about to surprise markets with a big package of quantitative easing (QE) on Thursday coming. A big QE package would hammer the euro and have sent even more money fleeing into the Swiss franc. The SNB may have decided to give up the fight in advance of such a move.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.