Swiss Bankers Are Accelerating the Euro's Slide

Euro’s Decline

The euro is shaping to be the biggest casualty of Switzerland’s decision to scrap its currency cap.

Soon after the Swiss National Bank unexpectedly ended its three-year policy of keeping the franc weaker than 1.20 per euro, bearish bets on Europe’s common currency soared. While setting a record low versus the franc yesterday, the euro also plunged 3.5 percent against a basket of 10 developed-nation peers, the most since its 1999 debut, and reached an 11-year low against the dollar today.

The SNB’s decision removes a key pillar of support for the euro, boosting the odds that its recent slide will accelerate. Companies from Goldman Sachs Group Inc. to Pacific Investment Management Co., the world’s biggest manager of active bond funds, have in recent days talked about the euro falling to parity with the dollar, a 14 percent decline from its current level.

“It adds fuel to the fire,” Atul Lele, the chief investment officer of Deltec International Group, who manages $1.9 billion, said by phone from Nassau, Bahamas. “This move out of Switzerland certainly exacerbates the trade-weighted euro weakness that we expect to see.”

Options Jump

The difference in the cost of options to sell the euro against the dollar, over those allowing for purchases, jumped by the most in almost two years yesterday, and extended its advance today to the highest since August 2012.

The euro dropped 1.3 percent yesterday and tumbled further today, reaching $1.1522, the weakest level since November 2003. It was at $1.1527 as of 10:16 a.m. in New York.

The euro also sank below parity with the franc yesterday to an all-time low of 85.17 centimes, recovering to 98.88 today.

In defending its cap on the franc, the SNB almost doubled its holdings of the 19-nation currency to 174.3 billion euros ($202 billion) since September 2011. Speculation the European Central Bank is only days away from announcing a government-bond purchase program, or quantitative easing, at its Jan. 22 meeting had already weakened the euro against its major peers.

“The euro can’t find a friend for love nor money,” said London-based Kit Juckes, a strategist at Societe Generale SA, which predicts a decline to $1.14 by year-end. When one of the biggest buyers of euros “leaves the building,” losses are inevitable, he said.

Risk Reversals

Options traders appear to agree. The premium on three-month contracts to sell the euro versus the dollar, over those to buy, rose 0.4 percentage point in the wake of the SNB announcement and another 0.5 percentage point today.

That took the cost premium to 2.17 percentage points, 25-delta risk-reversal data compiled by Bloomberg show. Yesterday’s jump was the biggest one-day increase since February 2013.

The euro’s decline against the basket of its peers, tracked by Bloomberg Correlation-Weighted Indexes, underlines the unprecedented nature of Thursday’s volatility across financial markets.

The shared currency’s next-biggest daily decline was a drop of 1.6 percent on Jan. 5, 2009, when the dollar surged as details emerged of a U.S. fiscal stimulus plan to tackle the global financial crisis. The franc jumped 21 percent against the basket yesterday as policy makers removed the euro cap.

‘Big Pressure’

“When I saw the news, the first thought was how far can the franc go, and then what does this mean for other assets?” Chris Morrison, the London-based head of strategy at the Omni Macro Fund, which oversees $550 million, said by phone. “We see big pressure on the euro crosses.”

Goldman Sachs brought its forecast for the euro to fall to parity with the greenback forward a year to 2016 last week, citing expectations the ECB will announce government-bond purchases as part of its efforts to stave off deflation. Official data today confirmed that euro-area consumer prices fell 0.2 percent in December from a year earlier.

Pimco joined the chorus this week, while ING Groep NV, the most-accurate currency forecaster in 2014 in Bloomberg’s rankings, predicts a slide to $1 within two years.

The SNB capped the franc’s value in 2011 as the European debt crisis prompted an exodus from euro-denominated assets. The cap weathered the conflict in Ukraine and years of extraordinary stimulus from the ECB that boosted investor demand for the franc as a haven.

Backstop Gone

The overvaluation of the franc decreased since the limit was introduced, meaning the cap is no longer necessary, Switzerland’s central bank said in a statement. Some strategists said the nation simply decided it no longer wanted to spend billions of dollars defending the limit, particularly with the ECB about to flood markets with euros.

The SNB’s euro holdings climbed 95 percent from when the cap was implemented to the third quarter of last year, according to the most recent data. It accounted for 45 percent of its total reserves.

Since September, the central bank’s total foreign-currency reserves jumped 7 percent to 495.1 billion francs ($566 billion), suggesting it may actually own more euros now after stepping up intervention to defend the cap in recent weeks.

“The central tendency will be for a weaker euro -- what’s to stop it?” Greg Peters, managing director and senior investment officer at Prudential Financial Inc.’s fixed-income division, which oversees $534 billion in bonds, said by phone from Newark, New Jersey. “The SNB is out of the game as one of those backstops. It’s gone.”

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