Rivers of ink and the vastness of the blogosphere have been devoted to explaining Thursday’s shock move by the Swiss National Bank to defend its currency.
Since much of that commentary is not always comprehensible to the foreign-exchange uninitiated, herewith, as a public service for financial advisors, is a brief plain-English account:
What exactly did the Swiss National Bank (SNB) do?
Switzerland’s national bank did two things: ended a three-year-old peg that had set a minimum exchange rate of 1.20 Swiss francs (CHF) to the euro and lowered its interest rates.
Why did the SNB end the peg, and what effect did that have?
In a hastily arranged press conference Thursday, SNB chairman Thomas Jordan said the bank introduced the peg at a time of “exceptional overvaluation” of his nation’s currency.
As a nation dependent on exports, and whose primary market is the European Union, Switzerland introduced the peg in 2011 to defend the viability of its goods and services, by keeping them from being priced too high in euros.
Ending the peg sent the Swiss franc soaring 30%, resulting in a near state of mourning on the part of Swiss industry.
“Words fail me,” Swatch CEO Nick Hayek is quoted as telling the U.K.’s Telegraph. “Today’s SNB action is a tsunami; for the export industry and for tourism, and for the entire country.”
The move also undid foreign exchange broker FXCM, since the volatile currency move caused $225 million in losses from clients positioned in the crowded euro trade. The SNB’s lifting of the peg removed a significant source of demand for euros. Many similarly positioned financial institutions were hurt, albeit to a lesser degree.
Why did the SNB discontinue its euro peg?
To maintain the 1.20 CHF-euro exchange rate, the SNB had to buy increasing quantities of euros as that currency weakened against the franc, causing a ballooning balance sheet.