The Swiss National Bank has acted to end its euro/Swiss franc currency floor, while moving the central bank interest rate into negative territory at -0.75%.
This morning’s move has taken the entire market by surprise, leading to widespread selling on both the EURCHF and USDCHF currency pairs. EURCHF has moved as low as 0.8500 from a high at the start of the day at 1.20, while USDCHF has fallen from an opening on the day of 1.0188 to trade as low as 0.7406.
The move will be one of shock to the markets as the SNB has maintained its 1.20 EURCHF currency floor since September 2011. With pressures mounting over the depreciation of the euro and the strength of the US dollar, the national bank has felt under pressure to at least amend the currency floor. However today’s move has not only seen this unpopular currency floor removed, but it has also seen an interest-rate cut of 50bp to -0.75%.
The reaction to this is likely to wide-reaching and cause a huge issue not just in currency markets but in equity markets as well, with many clients struggling to close positions and banks struggling to offer prices due to the high volatility and demand.
Many had been expecting the SNB to raise the currency floor, but to remove it totally has taken everyone by surprise. There has been a clear attempt to soften the blow on the currency by cutting the interest rate, however this seems to have only led to spark yet more volatility and moves on CHF-based currency pairs.
Today’s announcement has let investors decide just where the Swiss franc should be valued without central bank intervention, and it very much seems that around 1.05 for EURCHF and 0.90 for USDCHF are the levels that investors now feel are a better representation of the Swiss currency. However, we can’t rule out yet more surprise – and large – moves during today’s trading session.