The Swiss National Bank (SNB) today unexpectedly abandoned its minimum exchange rate for the Swiss franc vs. the euro. The SNB said the cap, which was introduced in September 2011, was no longer justified. However, the announcement has shocked markets, with the Swiss franc soaring by as much as 30% against the euro and US dollar in chaotic trading. The SNB is lowering interest rates significantly to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions.
Today’s decision ends one of the most unorthodox policy stances of any developed country central bank. The Swiss currency peg was possibly the clearest indication of the voracious global demand for safe haven assets in the post-crisis era. That demand remains and investors will likely continue to seek Swiss franc assets for the foreseeable future.
By solely relying on negative interest rates to reduce inflows into the currency the SNB is still taking action to restrain the Swiss franc’s appreciation. Households in Hungary and Poland that took out mortgages denominated in Swiss francs in the pre-crisis will be hoping they are successful.
However, even though the SNB has abandoned the tool of a currency peg, the legacy of that policy remains. To defend the peg’s ceiling, the SNB had to buy significant quantities of foreign assets, which enlarged its balance sheet. Further appreciation of the franc may reduce the value of those holdings. With the country being buffeted by strong forces in the global economy, policy in Switzerland is likely to continue to occupy the headlines in coming quarters.
Equities: Swiss exports make up 56% of the country’s GDP and the appreciation of the currency is likely to damage the domestic economy and Swiss equity earnings. Swiss equities have fallen nearly 9% since this morning’s announcement.
Fixed income: Deepening deflation will boost real returns in coming quarters despite very low yields. Foreign owners of Swiss fixed income securities have today had returns boosted by the currency move. Expectations for further appreciation could well support demand for these assets going forward.