The Swiss franc soared nearly 30 per cent against the euro and 28 per cent against the dollar on Thursday after Switzerland’s central bank dumped a three-year-old cap on the franc’s value against the euro, sending shockwaves through currency markets and pummelling traders who had bet against the franc.
Broader concerns about the euro sent it to its weakest in 11 years against the dollar.
“This was really a meteorite crashing into the foreign exchange market,” said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.
“A move like this is going to have reverberating effects across the board.”
The swings in the franc were the biggest since most major currencies moved to free-floating regimes in the 1970s. Dealers said they had seen a number of major investors lose as much as 20 percent before managing to complete trades to close their bets on a stronger dollar against the franc.
Frantic trading after the SNB scrapped its cap on the franc drove Swiss stocks down 10.2 per cent on Thursday, putting them on track for their biggest one-day fall in at least 25 years. Some traders described the central bank’s move as “carnage”, while Swatch chief executive Nick Hayek called the franc’s surge in value against the euro an economic “tsunami” for Switzerland, which sends more than 40 per cent of its exports to the euro zone.
Stocks including Swatch, luxury-goods firm Richemont and cement-maker Holcim were down between 12 and 17 per cent as the franc surged against the euro.
Top Swiss stocks lost some 100 billion Swiss francs of their combined market value, a figure which represents roughly $90 billion. The currency moves could however have technically led to gains for unhedged dollar investors.
Swiss-listed shares in offshore drilling contractor Transocean slumped to an all-time low, while lenders Julius Baer and UBS were down more than 11 per cent. Weaker equities wiped off about 117 billion Swiss francs ($100 billion) from the SMI share index. “It’s carnage,” said Central Markets Investment Management’s head of trading, Darren Courtney-Cook.
The Swiss National Bank had been resisting pressure for months to abandon the cap it imposed on the franc when investors picked it as their haven of choice in 2010 and 2011 from the euro zone's economic and political troubles.
Switzerland is a heavily export-oriented economy, the SNB was fearful that a too-strong franc would undermine economic growth. The prospect of outright money-printing by the European Central Bank being introduced as early as next week has ratcheted up the pressure, with the SNB seen by market players as buying euros consistently around 1.2009 francs per euro in recent days. Traders viewed the SNB’s move as a sign that the ECB would move ahead with quantitative easing when it meets on January 22nd. That has fuelled a rally in the dollar against the euro, said Mr Borthwick.
Switzerland is threatened by a debilitating cycle of falling prices and poor economic growth, which a strong franc worsens. The bank also cut interest rates deeper into negative territory on Thursday and its chairman, Thomas Jordan, told a news conference it would remain active in markets.
Dealers were already speculating that the bank had intervened on Thursday to stabilise the euro-franc rate.
“The peg strategy has been thrown out the door,” said Richard Franulovich, senior currency strategist at Westpac in New York in reference to the scrapped 1.20 per euro limit. He said the SNB may cut rates further. The SMI index of Swiss shares fell by 6.1 per cent, its biggest one-day fall since October 2008.