The Investor SA

28 February, 2015

Martin Barwise

 

-Swiss tendency to keep money out results in an epic foreign exchange market spike-

 

Switzerland wants to keep  money out of its country! That just shows

how  bad  the  rest  of  the  world's economies are... The most iconic

banking nation in the world is issuing penalties in an attempt to keep

outside  money  from  coming in. The  Swiss  National  Bank's (SNB)

President, Thomas  Jordan, confirmed  the  decrease  of  the  Swiss

interest rate to -0.75%. No  other  central bank in the world has ever

set an interestrate that low.

 

The abandonment of the Swiss  Franc-Euro  cap  resulted  in  a 30%

jump  against  the  Euro. Movements   of   around   2%   are   usually

considered big in the foreign exchange  market. The move wiped 9%

off  the  value  of  the  Swiss  stock  market, its biggest one day fall in

over 25 years. Moves in the Swiss Franc  saw  shares  in the Swatch

Group dropping by 15%, while Richemont, whom owns luxury brands

such  as  Cartier,  Montblanc   and   Chloé, dropped  14%. The  euro

declined to 0.80 Francs per euro, before  recovering  slightly  to 1.03

Francs per euro. The Franc also  gained 25% against  the US Dollar,

trading  at  0.89  Francs  for  one  US Dollar. The  spike  in the Swiss

Franc's foreign exchange forced an investment firm to admit that the

sudden shift in the Swiss Franc had cost them as much as £30m

 

So what exactly happened ?

 

The Euro-Zone is a group of  countries  that  share  the  Euro as a currency. The Swiss Franc does not form a part of the Euro-Zone, and with its low interest rates it became  known as a safe haven to stash all your assets. The Euro-Zone has given people plenty to be concerned about. The wake of the Greek debt crisis  at the beginning of the decade, lead investors to jump into the Swiss Franc. The problem with that, is that is makes

the goods produced by Swiss  companies  more  expensive  to export. That was enough reason for the Swiss National Bank to cap the value of a Franc at 1.20 Francs per Euro. The Swiss National Bank also  decided  to charge negative interest rates, leaving investors with a fee to park their money, in an attempt to keep investors from banking with the Swiss National Bank. This would also be another way of fighting currency overvaluation.

 

Why did this happen?

 

The  surprise move came as Mario Draghi, president of the European Central Bank(ECB) considered new measures to stimulate the Euro-Zone's economies. Many  investors  believed  that  the  ECB would  start buying long-term debt from the USFederal Reserve in an attempt to push down long-term  interest  rates. This  strategy  is  known  as  Quantitave Easing (QE). QE  in  Europe  is  expected  to  bring down the value of the Euro compared to the US Dollar. The Swiss didn't want its Franc's value to be dependant of the policy  makers at the ECB. The Euro has  lost  its value considerably against the US Dollar, which has caused the  Swiss Franc  to  weaken against  the US  Dollar. Under these circumstances the Swiss National Bank concluded that enforcing and maintaining the Franc-Euro caps are no longer justified.

 

Any Comments ?

Well like Bill Hubard commented on Fox-Business : "Sell the Euro, Sell the Euro, Sell the Euro!!!