Swiss currency shock: blame the bank in Frankfurt not Zurich

Swiss decision probably means Mario Draghi and the ECB have at last convinced Germany that QE is needed to save the eurozone

Another day, another bout of extreme market turbulence. The last cue for mayhem has been the decision by the Swiss National Bank to abandon its attempts to prevent the franc from appreciating against the euro. Given that just a month ago, the SNB said it would hold the line with the “utmost determination”, the announcement took traders by surprise. The franc soared, the euro collapsed, shares lost their gains. It was uproar.

The reason the Swiss have thrown in the towel is pretty obvious. Mario Draghi finally seems to have convinced the Germans that quantitative easing is needed to prevent the eurozone from sliding into a potential damaging period of deflation, and the European Central Bank is likely to publish plans for a sovereign bond buying programme when it meets next week.

The SNB has close links to the ECB, and knows QE is coming. It may have been tipped off that the programme will be bigger than the markets are currently expecting. As a result, the Swiss authorities saw little point in continuing to buy euros in order to keep the value of the franc at a minimum of 1.20 against the euro.

For the Swiss, that’s a far from rosy prospect. Almost half its exports go to the eurozone and they are about to become ferociously expensive. The tourist industry, for example, will find that skiers in the winter and walkers in the summer migrating to cheaper Alpine destinations in the eurozone. For the moment, the SNB has decided that it can’t buck the market. But if it continues with the policy announced on Thursday, it will kill the economy. It won’t be all that long before it is once again actively buying euros.

Full article: Swiss currency shock: blame the bank in Frankfurt not Zurich (The Guardian)

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