Swiss Franc Roils Markets as SNB Abandons Cap

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Swiss Franc Roils Markets as SNB Ends Cap
An employee places a bundle of twenty Swiss franc banknotes into a cashier's tray in a Travelex store, in London. The Swiss National Bank’s surprise decision to abandon the franc’s cap against the euro roiled currency markets. Photographer: Simon Dawson/Bloomberg

The Swiss National Bank roiled markets worldwide with its unexpected decision to abandon the franc’s cap against the euro, knocking down what an official just two days ago reaffirmed as a pillar of policy.

Europe’s shared currency slumped 1.9 percent against the dollar before recouping much of the decline as traders reflected on the decision, which also saw the SNB deepen negative deposit rates. SNB President Thomas Jordan defended the move, saying surprise was necessary. The franc surged as much as 38 percent versus the greenback and gained against all 174 foreign-exchange values tracked by Bloomberg. Volatility jumped to a more than one-year high.

“This passive intervention in euro-Swiss was costly and not effective because for every euro the SNB was taking away, the European Central Bank stood ready to print another three,” Hans Redeker, London-based head of global currency strategy at Morgan Stanley, said in a conference call. “What today’s Swiss franc move did provide us, we think, is an opportunity of very cheap U.S. dollars, to buy the dollar cheap.”

The franc appreciated 23 percent to 97.55 centimes per euro at 5 p.m. New York time after earlier jumping 41 percent to 85.17 centimes, the strongest since the euro’s 1999 debut. The Swiss currency gained 21 percent to 83.92 centimes per dollar, after touching 74.06 centimes, the strongest since August 2011.

JPMorgan Chase & Co.’s index of global currency volatility rose to 11.24 percent, the highest since June 2013, up from last year’s low of 5.28 percent.

Global Markets

Today’s SNB decision roiled markets around the world. U.S. 10-year Treasuries erased declines, pushing yields down as much as 16 basis points, or 0.16 percentage point, to 1.7 percent. The yield on German two-year notes dropped to a record minus 0.154 percent. The price of Euribor futures for some months this year rose above 100 for the first time, turning implied yields negative.

The Swiss Market Index of equities slid as much as 14 percent, the biggest decline since 1988, and Swatch Group AG, Switzerland’s biggest watchmaker, tumbled. A gauge of volatility on the SMI soared as much as 138 percent today.

Other European markets gained, with the Euro Stoxx 50 advancing 2.2 percent. Italy’s FTSE MIB Index surged 2.4 percent for and Germany’s DAX Index jumped 2.2 percent.

Closing Positions

Some of the biggest losers in the currency market this year rebounded, as the SNB’s surprise forces investors to liquidate positions.

“A lot of investors got burned so now they’re closing some positions that they were having some profits -- we’re seeing that in Canada, in Aussie, in kiwi,” said Charles St-Arnaud, London-based senior economist at Nomura Securities International Inc. “Most investors are taking a step back to reassess their willingness to take risks now. That’s why you see very little liquidity in the market.”

The Canadian dollar rose as much as 1.2 percent before erasing gains, trading little changed at C$1.1961 per dollar. It’s down 2.8 percent this year. New Zealand’s dollar rallied 1.4 percent to 78.25 U.S. cents, while the Australian dollar gained 0.8 percent to 82.17 U.S. cents.

These carry trades will continue to unwind in the coming days, giving support to funding currencies such as the yen and the euro, according to BNP Paribas SA. The Japanese currency rallied 1 percent today to 116.17 against the dollar, a fifth day of gains.

Yen, Euro

“Thursday’s massive appreciation of the franc will have hurt these trades badly,” the bank said in a report. “We may see depreciation pressure on higher yielding currencies and appreciation pressure on the other funders, including the EUR and JPY, as these carry structures are unwound in the days ahead.”

Elsewhere in Europe, emerging-market currencies fell at least 18 percent against the franc amid concern individuals may struggle to repay loans denominated in francs.

Poles and individuals in countries such as Hungary and Romania borrowed francs in the run-up to the 2008 financial crisis because the interest rates were cheaper, only to get stuck with higher financing costs as price swings accelerated.

The zloty weakened 20 percent to 4.4128 against the Swiss currency, paring an earlier loss of as much as 28 percent. Hungary’s forint and the Romanian leu tumbled to records.

‘Position Reduction’

“We are seeing position reduction so that has hit long USD positions, but this is only temporary,” said Jonathan Webb, head of foreign-exchange strategy at a unit of Jefferies International Ltd. in London. “It also takes away the one large buyer of euros in the market. So we think the euro is under pressure.”

The change comes just one week before ECB policy makers meet to discuss introducing new stimulus on Jan. 22, including quantitative easing, a move that may add to pressure on the franc against the euro.

“The decision has been a surprise for markets -- you can’t do it in any other way,” SNB President Jordan told reporters in Zurich today. “We came to conclusion that it’s not a sustainable policy.”

The SNB imposed its limit on the exchange rate as an exodus from euro assets during the region’s debt crisis in 2011 strengthened the franc and raised the prospect of deflation.

While defending the cap pushed up Switzerland’s foreign-exchange reserves, the limit was pierced only once, in April 2012. As well as removing the measure today, the SNB also said it will push the interest rate on sight deposits to minus 0.75 percent from minus 0.25 percent.

In an interview with Swiss broadcaster RTS on Jan. 13, SNB Vice President Jean-Pierre Danthine said central bank officials were “convinced that the cap on the franc must remain the pillar of our monetary policy.”

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