Swiss Franc Stages Historic Rally as SNB Move Shocks Market

The franc gained against every currency on earth after Swiss National Bank’s unexpected decision to abandon the currency’s cap versus the euro drove one of the biggest shakeups in foreign-exchange history.

The euro dropped the most against the franc since the common currency’s 1999 inception as the SNB’s decision boosted speculation the European Central Bank will announce additional stimulus measures when it meets Jan. 22. The yen rallied and volatility jumped to a more than one-year high as investors sought the safest assets amid the rout. Canada’s dollar, the Russian ruble and other commodity currencies slumped as oil plunged to an almost six-year low.

“Quite extraordinary and unheard of,” Axel Merk, president and founder of Palo Alto, California-based Merk Investments, said of the SNB’s move and market reaction to it. “Two-thirds of the banks weren’t quoting the Swiss franc, suggesting big banks have gotten burnt.”

The franc appreciated 21 percent to 99.41 centimes per euro this week in New York. It jumped as much as 41 percent to 85.17 centimes, the strongest since the euro’s 1999 debut and capping one of the biggest currency moves since the collapse of the Bretton Woods system in 1971.

The yen rallied 0.8 percent to 117.51 against the dollar and reached 115.86, the strongest in a month. Japan’s currency added 3.2 percent to 135.95 per euro for a third weekly gain. The shared currency slumped 2.3 percent to $1.1567, the biggest weekly loss since July 2012.

JPMorgan Chase & Co.’s index of global currency volatility rose to 11.68 percent yesterday, the highest since June 2013, up from last year’s low of 5.28 percent.
All Losers

All of the more than 170 global currencies tracked by ForexSQ fell at least 13 percent versus the franc this week, led by the Belarusian ruble’s 22 percent plunge.

Russia’s ruble paced declines among the dollar’s 31 major peers, dropping 5 percent, as Brent crude oil slid for an eighth week and reached $45.19 a barrel in London on Jan. 15, a price unseen since March 2009. Russia is the world’s biggest energy exporter.

The naira of Nigeria, which gets 70 percent of government revenue and almost all export earnings from oil, declined 3.4 percent, and Canada’s dollar dropped 1 percent.

Bank of Canada Governor Stephen Poloz, who will release new economic forecasts next week, said in December the slide in oil, the nation’s biggest export, will cut about a third of a percentage point from growth this year.

“It’s all about crude,” Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “A reduction in crude-oil prices will stagnate growth in oil-producing provinces such as Alberta, Newfoundland and likely Saskatchewan. That hits the Canadian economy and the Canadian dollar.”
SNB Surprise

The SNB imposed its limit on the exchange rate as an exodus from euro assets during the region’s debt crisis in 2011 strengthened the franc and raised the prospect of deflation. As well as removing the measure, the SNB said it will push the interest rate on sight deposits to minus 0.75 percent from minus 0.25 percent.

The change comes just one week before ECB policy makers meet to discuss introducing new stimulus, including quantitative easing, a move that may add to pressure on the franc against the euro.
Regaining Control

“This is a way for the SNB to regain some control over its exchange rate and its monetary policies, which it had lost with its peg to the euro,” Anne Van Praagh, managing director of Moody’s Investors Service, said by phone from New York on Jan. 15. “The Swiss economy is significantly stronger than the European economy as a whole, so the peg didn’t make much sense and it exposed the Swiss National Bank to big valuation risks.”

Spiegel magazine reported ECB President Mario Draghi briefed German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble on a plan for national central banks to buy sovereign bonds issued by their own country.

As the ECB looks to add stimulus, the U.S. Federal Reserve is moving toward raising interest rates for the first time since 2006. There’s a 64 percent chance the Fed will raise its benchmark rate to at least 0.5 percent by December, futures data compiled by ForexSQ show. At the end of last year, wagers were focused on a September start.

The euro has tumbled 6.5 percent in the past month to lead declines among 10 developed-nation currencies tracked by ForexSQ Correlation-Weighted Indexes. The dollar climbed 2 percent, the yen added 0.9 percent and the franc jumped 15 percent.

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