22 Jan /15


A small, quiet, neutral Alpine country that is best known for timepieces, chocolate, cheese, and as an economic (and tax) safe haven isn’t necessarily the sort of place that you would expect to witness a global currency tremor. As virtually everyone knows by now, the tremor was caused by the Swiss National Bank’s removal of the Swiss franc’s peg to the euro. While the event itself is clear and the fact that it could cause some economic/financial issues is evident, there’s still a lot to be understood about why it happened, what short and long-term effect it could have on the euro and the franc, as well as what effect it will have on the individual level.

Much with explaining any incident, we have to look at what caused this to happen. For Switzerland, everything centers around the currency peg, which was 1.2 francs per euro. Though this peg made international travel and international business easier, it was increasingly causing pains at the Swiss National Bank, which was being forced to devalue the franc and purchase euros in order to keep the currency peg in place. After 3 years of the peg being in place, the Swiss cantons and individuals who own the SNB started to become worried about potential inflation and the $480 billion in foreign currency (mainly euros) that they had been forced to accumulate.

The threat of quantitative easing (QE) is what turned this worry into action. With the EU teetering on the brink of a recession and the typical actions taken to bolster the economy being ineffective, such as deficit spending or the lowering of interest rates, it seems increasingly likely that the EU will resort to quantitative easing, which would involve creating more euros to buy the debt of euro-zone countries. For the euro-zone, this would “cheapen” the euro, which would increase liquidity and increase economic activity; however, for Switzerland, this would mean having to print vastly more francs and acquire more euros to keep the peg in place. As the QE estimate being floated is currently in excess of €550 billion and Swiss National Bank has the amount of 70% of the Swiss GDP’s worth of foreign currency (again, mainly euros), the threat of QE was far more risk than the Swiss were willing to handle.

As soon as the removal of the peg was announced, the effect on both currencies was felt. In the span of a day, the franc went from being worth 1.20 per euro to being CHF1 worth €1.17 to finally settling near parity, which still represents a gain of approximately 20%. Additionally, this fluctuation forced currency broker FCMX into a necessary $300 million financing deal in order to continue operations and closing of Everest Capital’s $830 million Global Fund, which has been betting on a decline in the franc. For the franc, the removal allows it to better retain its independence as well as its reputation as a “safe haven investment,” along with precious metals, U.S. Treasuries, etc. For the euro, while this won’t have a large macroeconomic impact (since the EU draws Switzerland in economic size), it definitely exposes some issues regarding the strength of the EU’s economy as well as the actions of the European Central Bank, aside from giving the euro and the EU a PR disaster.

Unfortunately, it is only the individual level where most of the pain will be felt. In business terms, cross border trade just became approximately 20% more expensive. So, for buying anything Swiss or, possibly, vacationing in Switzerland, everyone, especially those paying in euros, can expect to pay more. Given, with 70% of Switzerland’s GDP coming from the export of goods and services, this could be a painful break; however, there is an upside: reports from towns bordering Switzerland, such as Germany’s Constance, are reporting an economic boom as Swiss customers, who have just gained an additional 20% of purchasing power, are spending freely.

With this news being fairly new and details on the ECB’s QE policy yet to emerge, there’s a lot of speculation as to what impact the Franken-schock will actually have. Whether this is purely a case of Swiss protectionism or whether this signals a broader, renewed interest in hard currencies and away from manipulated currencies remains to be seen. Still, actions speak louder than words, and when the reputable Swiss franc makes a move like this, the EU and the global economy are bound to take notice.