The Swiss National Bank (SNB) has scrapped its three-year-old cap on the Swiss franc’s exchange rate against the euro, bringing sudden volatility to credit and currency markets across the globe.
The CHF1.20 per euro cap policy was introduced in 2011 at the height of the euro zone crisis to combat deflation and recession. SNB officials had only days ago reaffirmed it as a pillar of policy.
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Following the move, the franc surged about 30% higher versus the euro in chaotic early trading. It also led to drop of 8.7% in Swiss stocks owing to traders’ worries that the stronger franc would hurt Switzerland’s exports, especially to Europe.
SNB chairman Thomas Jordan said that the cap had been discontinued due to its unsustainability.
"If you decide to exit such a policy, you have to take the markets by surprise," Jordan added.
Apart from this, SNB also lowered its interest rate on some cash deposits held at the central bank by commercial banks as well as other financial institutions.
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By GlobalDataLast month, SNB took the interest rate into negative territory for the first time since the 1970s, and now it has reduced the interest rate by a further 0.5% points to -0.75% .
"The values we currently see (on currency markets) point to a massive overvaluation of the franc. They should come back down to more sustainable levels. Markets tend to overreact when confronted with such a surprise," Jordan said.
