An idiot’s guide to what just happened to the Swiss Franc

No one likes to spoil a party like a central banker …

Yesterday, the Swiss National Bank scrapped the euro cap on the Franc.

It was the biggest move I’ve ever seen on a currency.

If you’re still seeing stars and wondering what happened, you can get the basic facts right here.

The back story

Back in 2011, when the euro was in crisis, the Swiss National Bank (SNB) took the decision to peg the Swiss franc to the euro. This was designed to stop the franc becoming too strong against the euro.

At the time, the franc was gaining a ‘safe haven’ status, which mean that it’s value was soaring, making Swiss products too expensive to export.

So, the SNB set a minimum value of 1.20 francs to 1 euro, and gave assurances that it wouldn’t let the rate go lower than that. This meant spending the last three years buying up euros.

So, what happened yesterday?

Out of the blue, yesterday morning, they scrapped this rule, and the franc shot up 30% in value against the euro. As seen in the ‘dead worm’ chart formation shown on twitter …

Dead worm formation in EUR/CHF pic.twitter.com/fMqiB3zNj2

— Katie Martin (@katie_martin_FX) January 15, 20 qw2315

SNB chief Thomas Jordan has said that it wouldn’t be possible to carry on buying euros to artificially keep down the value of the franc indefinitely. And he’s said that the cap has served its purpose.

However, it would have been possible to make this change in a series of steps, which would have given the market a jolt – but not the high-voltage shocker they got yesterday.

The SNB have also developed a new tactic against foreign banks stockpiling francs as a safe haven – last month they introduced charges for banks holding francs on deposit in Switzerland.

Okay, but is this a good or a bad thing?

I guess that depends on who you are.

If you’re paid in Swiss francs and want to spend them overseas … you just got a lot richer.

But if you’ve euros in your pocket and a penchant for Swiss chocolate … Easter just got a lot more expensive.

The losers yesterday will be any traders who’ve had their stops hit by this nasty surprise.

Longer term, the losers will be Swiss exporters, who are going to struggle to keep their prices in reach of foreign buyers.

Swiss stocks have plunged by nearly 10% in value amid the uncertainty.

Overall, however, a currency that isn’t being artificially manipulated by its central bank is a good thing for traders … although we should never be complacent that central bankers don’t have another trick up their sleeves to ruin our Easters …

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