The move of the Swiss central bank has proved, once again, that in this world one can never be sure of anything.
Considered one of the safest instruments in the world, alongside the U.S. dollar, it was the result of much chaos in the global currency market.
In 2011, The Swiss National Bank, or SNB, wanted to keep its franc from appreciating too much against the euro. Being an export-driven economy, a strong franc hurts because it makes the country’s exports more expensive for foreign buyers and less competitive in other countries.
The SNB vowed to defend the euro/Swiss franc currency peg with the “utmost determination” by not permitting the Swiss franc to fall below 1.20 to the euro. The central bank set a programme in motion which would entail printing money to buy unlimited quantities of foreign currency. So the SNB was creating money to buy euros.
But everyone flocked to this currency because of the stability of the government and the country’s wealth. The currency continued to appreciate while the euro continued to weaken. The European Central Bank, or ECB, is likely to start stimulus programme resulting in further depreciation of the euro.
With the SNB creating new francs to buy euros, the central bank has amassed almost $480 billion-worth of foreign currency.
Finally the SNB decided that it had enough and announced that it would no longer hold the Swiss franc at a fixed exchange rate with the euro. On January 15, the SNB dropped the cap and the franc soared due to a massive re-pricing of the currency.
The franc is heavily traded and, generally, currencies don't usually move much in a single day (20% in this case). And not a reserve currency like the Swiss franc! Naturally, repercussions were felt all across the globe. Anyone who bet against the franc was hit – and how!
The Wall Street Journal noted that some global banks posted millions of dollars in losses and named Deutsche Bank and Citigroup as examples. The Economist noted that hedge funds across the world made losses.
Europe is once again in panic. Now that one of the buyers of euros is out of the picture, one can expect the euro to depreciate even further.
