Swiss Currency Cap Abandoned on Fears of a Euro Collapse

The Central Bank of Switzerland has abandoned a cap on the Swiss franc, causing it to soar in value against the euro.

The Swiss franc rose 17.5% against the euro and 15.7% against the US dollar on Thursday after the bank announced it would decouple the currency from the euro, seeing weakness in the European economy and the likelihood in a fall in the euro’s value in the near term.

The Central Bank of Switzerland has abandoned a cap on the Swiss franc, causing it to soar in value against the euro.

The Swiss franc rose 17.5% against the euro and 15.7% against the US dollar on Thursday after the bank announced it would decouple the currency from the euro, seeing weakness in the European economy and the likelihood in a fall in the euro’s value in the near term.

“Depreciated Considerably”

Part of the bank’s strategy is to guard against a further decline in the currency, which it sees as a growing risk due to a fall in the euro and the likelihood of dovish monetary policy causing a further decline in the euro.

“The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified,” the bank said in a statement.

The new strategy means the Swiss Central Bank will stop buying euros and increasing its euro-based foreign reserves, which has been a key strategy in 2014. This will result in less franc availability in foreign markets.

European QE a Risk for Francs

At the same time, the European Central Bank broadly expects to initiate a quantitative easing program much like the programs that the U.S. Federal Reserve enacted after 2008.

Many analysts said they expect Mario Draghi to announce a quantitative easing program next week, which has caused European stocks to spike. Equity indices throughout Europe were up on Thursday, as investors expect an increase in the monetary base to drive equities even as U.S. stocks continue to fall.

If the ECB does begin a QE policy, many economists expect it to have effects on the European markets comparable to the effects seen in the United States. For national bonds, this means rising prices and falling yields. Stocks will likely be part of a QE policy, driving equity prices higher. For the euro, it would mean lower purchasing power. In theory, each of these asset-purchasing programs would encourage more spending and investment.

While a more dovish bond-buying program from the ECB would improve equity valuations in the euro, its impacts on the Swiss market are more uncertain. Weakening purchasing power for Eurozone nations could negatively impact Swiss exports and the Swiss tourism market.

Commenting on the move, Swatch CEO Nick Hayek likened the SNB’s movement to a “tsunami”, predicting disaster for “the export industry and for tourism, and finally for the entire country.”

Swatch stock fell 17% on the news, while Holicm Limited and Nestle SA also saw double digit declines.