Switzerland has just become a much more expensive place to visit. The Swiss National Bank (SNB) has abandoned its peg to the Euro which saw the Swiss Franc closely anchored to €1.2. This decision will have been taken on account of the relative weakness of the Euro which has fallen by nearly 12% against the US Dollar over the course of last year and slipped from $1.20 to $1.17 so far this month. This means that the Swiss Franc devalued by about the same amount against other major currencies, of course.
The SNB decision saw the Euro slump from €1 buying 1.20 CHF to just 1.028 currently a fall of 14% or so – literally overnight. The American Dollar appreciated by 15% against the Yen over the course of last year, by way of comparison. In Forex terms, this is akin to an earthquake – indeed when the tsunami hit Japan in March 2011, the Yen gained by just a couple of Yen as money flooded out of the markets and into cash. In comparison, the shift in the Swiss Franc is akin to a massive asteroid strike on earth!
The tether to the Euro was put in place about 3 years ago when the Euro was under great pressure from the European sovereign debt crisis and the Swiss Franc was appreciating because of the perception of the currency as a safe haven. Switzerland acted to protect its imports to the EU (and elsewhere) from becoming prohibitively expensive. The EU and Eurozone constitute Switzerland’s major trading partners.
According to Bloomberg, the SNB has also acted to increase the interest fees levied on banks leaving money on deposit with SNB (over a threshold figure of 10 000 000 CHF) from -0.25% up to -0.75%. This move was intended to improve liquidity when brought in and only introduced on 18/12/14.
In a comment on the move, an SNB statement noted: “While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.”
Swiss stock markets saw about 12% wiped off their value as investors scrambled to take in the change. Swiss exports have just had a 14% surcharge added to their value (although imported goods will be cheaper) as the Franc rose against all of the major currencies. Swiss industry needed this like a hole in the head. Tourism within Switzerland (a traditionally pricey destination) will also be hit hard as everything has just gone up by 14% or so.
Lastly, Switzerland partially coupled to the Euro to dissuade investors from buying the Franc as a safe haven currency. Given that there is speculation that the ECB will adopt its own QE measures soon, the Euro is likely to fall still further which makes Switzerland look like a good place to park your money whilst waiting for the Eurozone economy to pick up. Rumour had it that the recent rise in the Yen was due to its perceived role as a safe haven (with Switzerland effectively out of the picture for the last three years) – that may know be about to change unless anybody can see a reason for the Swiss Franc to depreciate significantly anytime soon. If it does attract forex investment, the Swiss Franc is likely to rise even further against other major currencies.