The Swiss national bank (SNB) said it would “no longer tolerate” a euro rate below 1.20 francs. “The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities. The massive overvaluation of the franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” it said.
The franc plummeted against all major currencies, falling 9pc against the euro as markets opened on Tuesday. The Swiss action will be studied closely in Norway, Singapore and above all Japan, where the yen has also rocketed to levels that threaten to blight exporters and tip the country into deep deflation.
“The market must fear this will lead to a sharp escalation in currency wars,” said David Bloom from HSBC. “Gold is the only safe haven asset that will not do QE, put in capital controls or complain.”
Mr Bloom said the Swiss move will exacerbate Europe’s debt crisis by widening the spreads betweeen core EMU and the periphery. “This is a risky policy for the Swiss,” he said.
Simon Derrick from BNY Mellon said the Swiss are restricting EMU debt purchases to German and French bonds, unlike earlier rounds of intervention. “The SNB is just as keen to have a safe-haven for its money as any other investors. It is recycling money leaving southern Europe into northern Europe. This is the darker message,” he said.
Japan has warned that it may intervene at any moment, especially if the US weakens the dollar by printing more money (QE). Michael Saunders from Citigroup said Britain may beat them to it. “We suspect the UK will be the next central bank to reach into the unconventional tool box, with a decision to restart QE on Thursday,” he said.
The Swiss economy is at risk of crippling damage appreciating from CHF 1.7 against the euro in 2008 to near parity in August. Currency hedges have protected Swiss firms until now but these contracts are expiring, leaving exporters nakedly exposed.
The SNB was forced to act once global recovery stalled and Europe’s debt crisis metastasized. The minimim floor is a copy of the bank’s desperate strategy - after all else failed - in October 1978. It did stabilize the franc at that time but at a very high cost.
The flood of liquidity from “unsterilized” interventions stored up all kinds of problems. “Inflation skyrocketed, reaching over 7pc in 1981,” said Paul Mackel from HSBC.
The SNB said in July that it had already lost 9.9bn francs from intervention this year. This is a political hot potato. There are already calls from the Swiss parliament for heads to roll.
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