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Swiss Franc Becomes Stronger After Euro Cap Was Removed

The Swiss National Bank (SNB) has removed the cap placed on the Swiss franc against the Euro. 

Swiss Franc Becomes Stronger After Euro Cap Was Removed

The result has been a strengthening of the franc by as much as 30 percent against the Euro.

The National Bank in Switzerland introduced the cap in 2011, at the peak of the euro zone debt crisis. During this crisis, the value of the franc soared significantly as demand for the franc rose too.

In addition to eliminating the cap, the SNB has also slashed interest rates up from -0.75 percent to -0.25 percent, making it costlier for investors to hold Swiss francs.

Market experts and investors were taken by surprise by this move. It is reported that the SNB governor had not formally communicated with the International Monetary Fund about removing the cap.

As a result of the removal of the cap, the value of the Euro went from 1.20 against the franc to just 0.8 against the franc. This value later recovered to 1.04.

At the same time, Swiss shares at the stock market fell significantly to 9% causing investors to purchase safer assets such as German bonds and stable commodities including gold.

Investors expressed negative sentiments as they anticipate Swiss exports to be too expensive against a strong franc. It is estimated that the move would cost Swiss exporters an estimated 5bn Swiss francs or £3.3bn.

Nick Hayek, CEO of Swatch sees the decision by the SNB as disastrous for the Swiss economy.


How is the Euro Responding?

Market observers predict that the value of the Euro will fall further in the event that the European Central Bank (ECB) implements quantitative easing. This process entails purchasing bonds to increase the amount of currency circulating within the Euro zone. It is expected that quantitative easing will boost recovery in the zone.

It is very unlikely that a central bank would conduct such a surprise move knowing very well the kind of impact it would have on its own economy and other economies. Analysts are concerned that this could be a prediction of bigger things to come.

The SNB was finding it particularly difficult to maintain the value of the franc at 1.20 against the Euro. The central bank in Switzerland has been selling its own franc in exchange for US dollars, Canadian dollars, Yen, Sterling and Euro as government bonds.

As a result, since implementing the cap in 2011, the SNB doubled its foreign currency reserve, making Switzerland one of the top reservoirs of foreign currency in the world.


Market Impact

The SNB cited the steady weakening of the euro, which is almost at its lowest since the currency was introduced as the reason why the bank chose to eliminate the cap.

The result?

Investors should expect the value of the Euro to fall further against the US dollar. Given that the Franc is fixed to the euro, the value of the franc will continue to weaken against the US dollar as well.

The markets have reacted by pushing up the value of franc.


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