It was shaping up to be a sleepy morning until the Swiss National Bank – in a surprise move- decided to lift its minimum exchange rate, put in place in 2011, of 1.20 euro for every Swiss franc.
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This “Swiss-central bank Shocker” quickly unsettled a fragile layer in the economic mountainside causing plates of snow to tumble from the Matterhorn – traders and citizens alike have filled the morning selling Swiss stocks – causing one of the largest one-day drops in 30 years. In addition, the SNB, weary of its precarious position of being everyone’s chaperone, cut its deposit rates (now -0.75%) along with its target range for three-month Libor (now between -1.25% and -0.25%).
Swiss residing in cantons stretching from Aargau to Zurich are currently in shock as they are first-hand witnesses to the implications of mixing policy divergences, currencies moving too far and too fast, and living in a land that perhaps is overly dependable as a safe haven. Central bank “snap decisions” ought to be reserved for econometric case studies or faraway countries with delicate balance sheets. Many a trader rebooted a computer, phoned a colleague when the Swiss Franc jumped 30% in the wee hours of this morning.
We Have Now Seen the Elephant
We are not yet far enough removed from the rear-view mirror to see clearly however this SNB surprise action can today, be likened to a steam locomotive’s piston valve or blood pressure medication. Simply, the SNB felt as though it was losing its power to counteract a progressively justified depreciation in the Eurocurrency against the Swiss Franc.
Like a surprise divorce of a friend – the signs were apparent in hindsight – unevenness of the EU economic recovery attempts, European Central Bank (ECB) large-scale asset purchases (ECB QE), and the enormous depreciation of the Eurocurrency.
The free-floating of a currency (i.e. allowing the market to value a currency based on another) is standard financial fare – it’s the timing and nature of this move that today has the panties of corporations and countries in a bunch. Its ultimate entrails are indiscernible. Yet, common convention would lead me to guess that this will leave a huge scrape on credit investors – especially with the many Eastern Europeans who are enticed to borrow in lower interest rate foreign currencies.
I would imagine there would be immediate fall-out from the corporate sector – companies that have financed themselves with Swiss Francs without the ability or knowledge to hedge. It will most likely stave off a lot of merger and acquisition activity as well. As an outlier, I can envision disgusted Europeans transferring their Eurocurrency to buy U.S. denominated Treasuries. Sounds benign but, what should happen if after years, the Euro finally claws its way back. Ouch!
Volatility is rarely good for anyone but risk-takers and today is no different.