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Repercussions of Switzerland’s Shock Currency Move

currency moveBecause of the Swiss National Bank’s (SNB) shock currency move, many industries are being highly impacted, to include skiing. Policymakers in Switzerland came to a decision that would create a very difficult day for traders, which consisted of the ceiling held over the value of the Swiss franc being torn down by the SNB.

That ceiling had been put in place in 2001 during the peak of the Eurozone panic. At that time, incredible pressure was placed on the currency by the central bank, holding it down against the Euro by printing an amount of francs that would help it remain cheap.

Since that time, the SNB had been holding the franc down but on January 15, controls maintained by the central bank were removed, causing the value of the franc to skyrocket. Within a short time following the announcement, the franc had peaked at 30pc.

For many markets, the decision was a shock. Thomas Jordon, chairman with SNB had stated earlier that the cap was critical and to many, it appeared it was a permanent feature. The immediate moves in the franc were nothing less than extreme but compared to what will happen with the Swiss economy next, repercussions have been somewhat tame.

One of the challenges is that only one in five Swiss companies had prepared for this type of move by hedging products. To deal with the mass liquidity in the form of a European Central Bank quantitative easing program, the SNB was forced to create huge amounts of money to ensure the franc stayed weak against a declining Euro.

According to Paul Mortimer-Lee of BNP Paribas, SNB’s own balance sheet could have easily reached an enormous size, which put it in an increasing high-risk situation that ultimately forced it to stop before things spiraled completely out of hand.

One week later, significant monetary firepower in the form of a 1.1 trillion in Euro quantitative easing package was launched by the European Central Bank that was to help revive a weak Eurozone economy. With that, the SNB knew it had to protect itself.

The shock strategy was defended as being the only option the central bank had. If an exit policy has been decided, markets have to be taken by surprise. However, chances are good that the SNB was not completely prepared for the horrific turbulence to follow and by making the decision, the country may be condemned to lower growth on a permanent basis.

The central bank’s once stellar reputation took a huge blow days prior to the annual meeting for the World Economic Forum. As stated by Lars Christensen, Danske Bank analyst, SNB’s decision was horrible. Rather than come up with a better replacement, it appears the SNB has simply thrown in the towel and not pursuing any monetary policy rule.

The perceived weakness of the SNB and defending its shock move is causing many investors to keep a close eye on who else might follow suit. For instance, the central bank of Denmark had no choice but to decrease its interest rate four times over a three-week period as a means of defending the peg.

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