The franc gained 30 percent against the euro in early trading and has threatened the entire country with deflation.
The Swiss National Bank (SNB) dropped its interest rate to -0.75 percent to offset the effects of automatic money tightening, but that might not be enough to stop the deflationary spiral.
“If the SNB thought that it could make this adjustment in an orderly manner, then it has failed miserably,”‘ said Kathleen Brooks of Forex.com to the Telegraph.
Thomas Jordan, president of the SNB denied that the change in policy was a “panic reaction” and tried explaining the move. “You can only end a policy like this by surprise. The whole international situation has changed,” he said.
According to market experts, the move not only caused the franc to appreciate about 30 percent against the euro immediately, it has also introduced more uncertainty into the market because the SNB has shown they are not above manipulating the currency market. This proved good news for investors in foreign exchange, using online platforms to trade currency.
The flow of money from Russia, Greece and Italy has made it hard for the SNB to prop up the franc. Threatened quantitative easing by the European Central Bank, which could have occurred as early as next week, could have been the trigger for SNB to remove the cap.
Jeremy Cook, from World First, said that the force in play may be too big for even the Central Bank to stand against and that the Swiss adjustment was a “total capitulation” to those forces.
“Nobody wins when you stand in the way of a freight train, except for the train,” he said.
Although the SNB could have increased printing money to offset the easing, the side effects of that policy have already caused the Swiss monetary base to surge from 80 billion francs to almost 400 billion francs since mid-2011. This has been accompanied by a huge property boom and increase in bank laoans to 170 percent of GDP.
As David Owen from Jefferies said, “They have had to throw in the towel. This is going to cause extreme pain for parts of the Swiss economy but the SNB are trapped.”
