Sunday, January 18, 2015

Swiss Franc shock

This week, Swiss franc and other currencies were terribly shaken by the decision of the Swiss National Bank (SNB).

Swiss was suffering from too strong Swiss franc because it had made their exports expensive. The situation was similar to Japan before Abenomics.

Then, the SNB began to intervene the currency to maintain the rate at around 1.20 to the euro on September 2011. As a means, the SNB determined to buy euro by unlimited amount. However, it meant that the SNB was forced to acquire a giant pile of foreign currencies leading to potential loss.

Finally, the SNB decided to discontinue this policy ceiling on the franc.

Quartz: Absolutely everything you need to understand what happened to the Swiss franc this week

Thomas Jordan, the president of the SNB, said that the policy fixing the exchange rate was no longer sustainable. He emphasized that this decision was done based on a deliberate consideration.

The Financial Times: SNB governor Jordan explains shock franc move

It was expected that the European Central Bank (ECB) would decide additional monetary easing next week. Therefore, the SNB had to state the abandonment before the announcement of the ECB.

Some economists guess that the SNB underestimated the influence of its decision, although Jordan denied it. Indeed, Swiss franc became strong by 40% temporally, and Euro rapidly fell. JPY was raised in accordance to the falling of euro. Stockpiles in Swiss were also damaged. It is afraid that the deflation would be worsening in Swiss.

International Business Times: Switzerland Underestimated Effect Of Currency Move On Swiss Franc

I was surprised that one policy change has caused such a great influence on the world economy. Some investors may be inflicted a critical damage this week. It seems extremely difficult, even for a central bank, to keep the financial market stable.

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