Swiss Franc Moves Set Markets Aquiver

This is interesting.

At the Wall Street Journal, "Swiss Move Roils Global Markets: SNB’s Surprise Scrapping of Euro Cap Triggers Turmoil Among Bonds and Currencies":

ZURICH—Switzerland’s central bank triggered turmoil in the markets Thursday when it unexpectedly scrapped its cap on the Swiss franc’s exchange rate against the euro, a move that unleashed new volatility in credit and currency markets around the world and further underscored growing concerns about global economic prospects.

Against the cloudy backdrop of collapsing oil prices, a sharply rising dollar, fresh doubts about the stability of the euro and mounting global concerns over deflationary pressures, the move by the Swiss authorities was the starkest sign yet of the pressure policy makers face in dealing with unusual financial conditions that threaten the world’s already fragile economic conditions.

Some of the fallout was felt early Friday in Asia as FXCM Inc., the biggest retail foreign exchange broker in Asia and the U.S., said it suffered “significant losses” that wiped out its equity.

The abandonment of the cap, which had essentially pinned the currency at 1.20 francs per euro for the past 3½ years, prompted a collapse of as much as 30% in the euro versus the franc—the biggest single-day move in a developed market traders could recall. Swiss stocks fell 8.7% as traders worried the stronger franc would hurt Switzerland’s exports, especially to Europe.

The currency move was accompanied by further cuts in interest rates by Swiss authorities, pushing some European government bond yields deeper into negative territory.

The Swiss National Bank became the first monetary authority to act ahead of the European Central Bank’s expected launch of a new bond-buying program to boost the currency area’s sagging economic prospects. The reaction shows the ECB’s bond-buying program is having a big impact on markets before it has even launched. ECB President Mario Draghi’s signals in recent months that it was coming have already pushed the euro down substantially. That would also likely be the main goal of bond purchases, since interest rates are already very low in most of Europe.

Jeremy Stein, a former governor of the U.S. Federal Reserve and now a professor at Harvard University, welcomed the likely ECB policy makers’ action next week, saying that while was unclear how it will benefit the eurozone, “they are doing absolutely the right thing.” But the SNB’s move also increases the market glare on the ECB’s action next Thursday, and potentially sets investors up for disappointment if the central bank doesn’t deliver a convincing package to fight off deflation.

Tim Adams, president of the Institute of International Finance, said given the market expectations for the ECB, not acting could spark a market firestorm. “I think markets would be incredibly disappointed if it doesn’t happen,” Mr. Adams, a former U.S. Treasury undersecretary of international affairs, said in a recent interview.

A big package or an open-ended commitment to buy more if needed could have the desired effects: an even weaker euro, a surge in risky asset prices like stocks, lower rates on European corporate bonds. But a small package or an approach that makes the public doubt the ECB’s commitment to follow through could leave investors underwhelmed and might even reverse some of the effects the trumpeting of QE has already created.

While the lower euro does make life harder for the eurozone’s neighbors, most policy makers would prefer a stronger eurozone economy to a weak one...

Basically, the Swiss had established a fixed exchange rate with the Euro in 2009, where it took 1.2 francs to buy a euro. By removing the fixed rate, markets caused the franc to appreciate against the euro by 30 percent, 0.9 francs to the euro. It thus takes more euros to buy francs, and it's more expensive for consumers to buy Swiss goods and for travelers to visit Switzerland (a terrible blow to the Swiss economy). All of this roiled financial markets, as exchange brokerage houses saw their equity balances wiped out.

More at the link.

And see the New YorkTimes, "Franc Soars After Swiss Drop a Cap on Its Value."