Switzerland takes the nuclear option in the currency wars

Sometimes events really do overtake us and an example of that has just taken place. So let me give you an update on two of the major themes of this blog which are the currency wars which are taking place and the move towards negative interest-rates. There has been something of a game-changer this morning from the Swiss National Bank.

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%.

Regular readers will have been aware of what has been taking place here but for newer readers and as something of a refresher for all let me take you back to September 2011.

Step Back In Time

If we take the advice of Kylie Minogue and go back to the 6th of September 2011 we see quite a different statement from the Swiss National Bank.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF
exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

If we examine the language we see that it was to say the least rather extreme with “no longer tolerate” and “utmost determination” used in an early example of what we now call open mouth operations.  Also we got a rationale for the behaviour and language.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

The Chairman of the SNB Phillipe Hildebrand backed it up with some more rhetoric in his press conference that day.

The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc.

Did he get it?

The short answer is no as the furthest the currency moved was just shy of 1.25 versus the Euro in May of 2013. At that point there was some further bombast and hype about the cap being moved to 1.25 or even 1.30. That all seems rather hollow now doesn’t it?

What about further measures?

The main mover on this front we saw on the 18th of December last year.

The Swiss National Bank (SNB) is imposing an interest rate of –0.25% on sight deposit account balances at the SNB, with the aim of taking the three-month Libor into negative

Negative interest will be charged as of 22 January 2015 until further notice.

Negative interest is charged only on the portion of the sight deposit account balance which exceeds a certain threshold.
The exemption threshold applies to each individual account holder and shall be at least CHF 10 million.

As you can see this move was on two fronts. Firstly it meant that Switzerland joined the increasing number of countries with negative interest rates. And secondly there was a clear hint to the European Central Bank (ECB) that it needed to act as well as it was not by chance that the date of its next policy meeting was chosen (January 22nd).

Back on the 18th of December I explained what I believed were the causes of this.

The statement was a little vague as to the cause but the press conference then told us what I am sure that many of you were expecting to read and the emphasis is mine.

Over the past few days, a number of factors have prompted increased demand for safe investments. Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments. The worsening of the crisis in Russia was a major contributory factor in this development.

The number of factor seemed to have shrunk to just one! I had already been using Twitter to disseminate this message.

I think that we can safely assume from the actions of the that Rubles were pouring into Swiss Francs don’t you? .

The Swiss National Bank had found itself having to intervene more and more to cap its currency against the Euro. Now it found itself between the rock of its macho rhetoric and the hard place of having to back it up in large amounts. I have pointed out before that by fixing the price this became a quantity game and that this is dangerous because some big players like that as they sniff large profits. This happened to the UK in its exit from the ERM in 1992 as George Soros sniffed blood in the water in the same way as a shark does.

What happened in the last 24 hours?

Last night I tweeted this.

I hope the Swiss National Bank is awake tonight as 1.2009 for the is only a smidgeon away from intervention time

What was troubling me was the fact that the SNB had advertised that it would start to cap the Swiss Franc at 1.2008 so we found ourselves only 0.0001 away from it when it was an apparent “free lunch” for punters. It just did not look right as I mulled how much buying of Euros and selling of Swiss Francs the SNB might be doing. Now we know that even “utmost determination” was not enough and that “unlimited quantities” was the lie I always expected it to be.

Boom and Bedlam!

As you can imagine the market response has been chaotic and immediate. As I type this The Swiss Franc has blasted some 13% higher against the Euro to the 1.04 level. It did go through the parity level at one point with arguments to come as to exactly how far!The Swiss SMI equity index is down 8.7% as Swiss businesses mull the consequences of a higher exchange rate going forwards. I wonder if Switzerland will be the first country to have a negative ten -year bond yield?


There is much to assess here but let me give you my initial thoughts. On a worldwide scale this is a collapse of one of the pegs of the system and is a kick in the teeth for those who treat central bankers as omniscient and all-powerful. I put in thus on the 18th of December.

As King Theoden says in the Lord of the Rings

And so it begins….

Other moves by central banks are now threatened by this as the world monetary system receives quite a shake. What broke this dam? It seems fairly clear that the Russian crisis and the consequent flood of Roubles out of Russia into what are perceived as safe havens was the straw which broke the camels back.

For the Euro area and the European Central Bank we have plenty of consequences to consider as that project has clearly had considerable adverse effects for Switzerland. I have summed it up on twitter thus.

Dear European Central Bank what have you got now? Signed the Swiss National Bank

For those with foreign currency mortgages denominated in Swiss Francs in Eastern Europe then this is something of a shocker. Whilst they may see interest-rate cuts many of these adjust for the capital debt which has just shot higher. So monthly payments may shoot up again. Hungary has made moves to meliorate this but that may just simply shift the pain to (Austrian and Italian) banks and the state.

For Switzerland there is the likelihood of a much higher exchange rate and therefore another disinflationary push. This comes in a country where prices were already falling. Exporting looks likely to be more difficult especially for products which are price competitive. However those with Swiss Francs are suddenly a fair bit wealthier in terms of the ability to purchase foreign goods and services. As to the Swiss National Bank then it looks like it has just lost the Swiss taxpayer a fortune. Still they were asked in a referendum right? Oh hang on………

If you are going skiing in Switzerland this year then I hope that you have already changed up your money into Swiss Francs.

Update 1pm UK Time

We have now had a press conference given by the current Chairman of the SNB Thomas Jordan. He has not added much to what we already knew except for his denial that negative interest-rates will spread to ordinary banking customers. On his track record that means that they are very likely too! Also there is this.

Never believe anything until it is officially denied! RT chief denies panicking over euro cap,


As to events themselves then let me pass you over to Kate Bush.

Wow! Wow! Wow! Wow! Wow! Wow! Unbelievable!
Wow! Wow! Wow! Wow! Wow! Wow! Unbelievable!

When the actor reaches his death,
You know it’s not for real. He just holds his breath.
But he always dives too soon, too fast to save himself.


29 thoughts on “Switzerland takes the nuclear option in the currency wars

  1. Fantastic and fast work Shaun!

    Dou you see the SNB capitulation as in any way indicative that the ECB won’t be announcing full blown QE? In other words, what do they know that we don’t and are they getting their digs in first?

    • Hi Andy and thanks

      Maybe you are right about the ECB but I think that the Swiss have found themselves to be the “small open economy” of economicS text books. The big event has been the Russian crisis which I believe has seen not only Russian money going into Swiss Francs but others in Eastern Europe thinking it is time to do so. In the end that was more than the boasts of “unlimited intervention”.

      Right now I would imagine that the midnight oil is being burnt in the Frankfurt Towers of the ECB.

  2. hi thanks for the run down but, I don’t think I understand why the Swiss Franc is higher despite the fact that they now have negative rates. Wouldn’t people be selling the Franc given that they now have to pay to hold Franc savings? Forgive my ignorance but I think I may be missing a key element in this whole thing and would really appreciate if you could help me understand the matter better.


    • Imagine you were long the CHF on the belief that 1.20 would be defended to the last. What would your reaction have been then – buy more at 1.19, 1.18, etc etc to the EUR. I suspect like all the other traders and hedge funds who got this wrong, you panicked and sold, you got a margin call, and/or your stop was hit.

      In the short term the market sure is a voting machine, longer term who knows what the real weight of the CHF should be. Frankly the interest rate in this trade was a minor issue and still is until the CHF is allowed to find its market level. Therefore the dropping of rates is of no consequence in the short term, unless of course the SNB decides to surprise us some more and drop rates to -10% for all call deposits larger than say CHF10m!

  3. Shaun, Of all the FT articles this one shouted at me Shaun’s blog. You were on it already of course, we all need insight. I think it is possible a whole number of other “artificial” controlled markets could start un-winding. Who wants to forecast what is next, and to think the Russians gave us all this:
    Dairy product slump
    Oil price rout
    Energy pricing

    So what can we perceive, anyone want to add to my list of pet indulgences of Govts….
    1) over capacity in european automobile manufacture
    2) ……

    • Hi Paul C and thanks

      As to pet indulgences well maybe this is not quite what you were thinking of but how about we get told in six months time that Royal Bank of Scotland was short the Swiss Franc? It could not have been forseen etc……

      • Betting the wrong way, I think you are quite likely right. Who the heck would want to admit they got that wrong on the day it goes bang, there could be weeks of covering losses, hoping oil will go up or that CHF will be re-pegged. That is the trouble with artificial support, it goads the naiive and dumb into trades that appear like easy risk free bets but when they unwind…..

  4. Hi Shaun
    I feel like my move to a non-CHF dominated area of France was well timed……wish I had left more funds in CHF though!
    The SNB must have been tipped off about next Thursday’s statement by the ECB, some sort of QE in EZ must be coming.
    GBP/EUR about to hit record high?

    • Hi JW

      It depends over what period as I remember getting around 1.50 some years back as I changed my £’s into Euros for a trip to the Imperial City of Rome. Great place to visit. As to the ECB view that maybe true but usually the dam breaks when the intervention is just too much so it would appear that 500 billion Swiss Francs is the meaning of unlimited, unless the scale got really ramped up.

      All funds in CHF right now are welcome I would imagine 🙂

  5. Hi Shaun,

    I saw your tweet on this last night and figured you would cover it today. Those poor souls (Hungary, Poland et al) with their mortgages denominated in Swiss Francs are seemingly damned either way, caught in a double-bind of interest rates and capital sum. Still, maybe they’re just ordinary people and not worth worrying about, eh?

    I’ll take you back a little further than Kate Bush, to the days when Prog-Rock dinosaurs still roamed the earth. ELP ~ Karn Evil 9

    Welcome back my friends to the show that never ends
    We’re so glad you could attend
    Come inside! Come inside!

    • Ah Emerson Lake and Palmer the prog rock kings of the mid 70s! On that subject there was of course something out of fashion these days which was Fanfare for the Common Man.

      On the subject of 70s excess there was a BBC4 documentary on Elton John last night. He had a private jet with his bedroom at the back. One time he was in there and heard someone playing the organ ( no not a euphemism..) and rushed out of his bedroom shouting expletives to discover the player was Stevie Wonder.

  6. The 1.20 relation to Euro was always set as something temporary. It was temporary for 3 and a half year now. Back in 2011 it was the talk about that the Euro would not survive, which caused the call for action. When not now, when else should be the end of this boundary between Euro and CHF? In 6 month? In a year? And how should it end, if not surprisingly?

    Today the Euro is established again. With a lower price in comparison to the US-Dollar, which i would expect also mid term that the US-Dollar will have more value then the Euro. So therefore, it could be that the US-Dollar and the Swiss Franc will be stable in relation. Of course the surprise was big today, but in my eyes is this the only way how a communication should be done: nobody knew in advance and there was no insider trading possible. So for me, the SNB have my full trust to do what is necessary for Switzerland.

    • Hi Roland and welcome to my corner of the blogosphere.

      If you regard this as a can-kicking policy or a way of buying time then for it to be a success then things needs to have substantially changed in the meantime. So what has changed? If the Euro is so stable why are France and Italy in such trouble? After all with apologies to Greece, Ireland and Portugal they are bigger economies and thus represent bigger issues.

      As to the insider trading issue then after what happened with Phillipe Hildebrand’s wife the insider trading issue surely starts within the SNB?

  7. I am concerned about instability in financial markets and the massive rises and drops we get these days from new data or announcements. I remember many years ago buying forward currencies for exports / imports to provide stability in the businesses I was responsible for and I never expected or experienced such massive swings (with the exception of of the UK and ERM) as we do today. Rather insignificant figures or announcements appear to produce very significant changes due to the herd instinct; made easier today by instant communications and buying and selling opportunities. Bonds, equities, currencies all suffer from this and I wonder if; rather like the spinning plate wobbling on top of a stick; there is the potential for it to get out of hand? The chaos theory applies nicely to the markets and one wonders if the Russian economy equates to the butterflies wings?

    • Hi Pavlaki

      I agree that the swings are getting wilder and I note that even CNBC is admitting this. The problem is that central banks have forced so many markets to the wrong levels creating even more problems under the law of unintended consequences.

    • Hi Pavlaki,

      I agree with you I think you’ve shown concern about Russia being a trigger before, I see butterfly wings and Shaun alludes to the leverage provided by state “calming” intervention in his response below. It is always interesting to track the smoking gun when the fluctuations get wild. It appears Chinese farmers are slaughtering milk herds as a chain of events following Russians banning European dairy imports, which was itself a consequence of sanctions Russia by the west.

      This globalisation is creating some interesting interactions.


  8. Shaun Yesterday you answered my question about gold by mentioning the strength of the swiss
    franc, I think we missed an opportunity!
    This reminds me of the glorious 70’s tv series Soap it started like this
    How far dare the SNB go into negative territory-probably not far enough
    Will the financial and currency markets become more volatile-yupp
    Will the us$ become the ultimate dodgy safe haven so they put up their base rate-oh they cant can they.

    If it wasnt so serious it would be the best satirical comedy ever


    • Hi JRH

      I remember the “Confused? You soon will be” line of Soap! Pretty appropriate for these times is it not? Perhaps it will get repeated.

      Yes if only we realised that we should have been buying the Swiss Franc and gold at the same time, in fact we could have bought the Swissy and switched to gold if we wanted later. Oh well…

  9. The Franc is a small currency side show, if and when the conflict between the Euro QE proponents vs the German central bank & constitutional courts heats up – the currency markets will get volatile

  10. Shaun – I just don’t get it.
    SNB 11 Dec: “Deflation risks have increased once again and the Swiss franc is still high. Consequently, the SNB will continue to enforce the minimum exchange rate with the utmost determination.” http://www.snb.ch/en/mmr/reference/pre_20141211/source/pre_20141211.en.pdf

    But on 15 Jan the result of discontinuing the minimum exchange rate is to see an immediate appreciation of the CHF against other currencies. The result will be eroded competiveness of the Swiss export sector, which makes a high contribution to GDP.
    So isn’t this a counter-intuitive, self-defeating move on the part of the SNB?

    [Fortunately I pre-paid a trip to Lauterbrunnen, but unfortunately it looks like already expensive Jungfrau and cableway costs in CHF have just gone up by 15% against my A$.]

  11. Pingback: Market turmoil as Swiss central bank drops currency cap – business live | Classifieds - Marketplace - Classifieds Rss - Economy News - Travel -

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