hen the Swiss National Bank brought in the 1.2000 peg against the euro four years ago in an attempt to prevent safe haven flows at the height of the euro crisis, there was an awful lot of scepticism that the bank would be able to defend it within any success.
The fact that the peg lasted as long as it has is probably more to do with the fact that the European Central Bank has found it extremely difficult to ease policy as quickly as it would like
in the face of German opposition to a full scale bond buying program.
In any case history tells us that currency pegs usually have a limited shelf life as the UK found out to its cost on numerous occasions in the 1980’s and the 1990’s
, when it pegged its currency to the Deutschemark, so there was always the prospect that the removal of the peg would end in tears.
Today’s surprise announcement that the Swiss National Bank has finally bowed to the inevitable and has thrown in the towel and removed the peg
caught everyone by surprise, prompting a sharp aggressive pyroclastic flow of euro selling
and Swiss currency strength as the franc surged on the foreign exchange markets.
The Swiss central bank also slashed rates even further into negative territory in an attempt to cap or deter further safe haven gains against the euro.
At one point the euro/chf cross rate dropped around 30% from 1.20 to 0.85 before rebounding pack above parity
What this means for central bank credibility is hard to gauge
given the SNB’s insistence it would defend the peg with utmost determination, but it also suggests that we are about to get a whole lot of new euro weakness as a result of the recent positive ruling from the European Court of Justice
about the legality of a possible QE program.
The SNB appears to be acknowledging that it can’t defend its currency from any new ECB attempts to try and weaken the euro,
as the ECB attempts to stimulate Europe’s sclerotic economy, and is trying to mitigate this by launching new measures to try and deter further inflows into its currency
The short term effects of this are, as we have seen, not been pretty but what it does tell us is that not even central bankers have all the answers, and going forward the damage to central bank credibility, which is already wafer thin, could well become even more stretched.
The Swiss stock market has also slid back sharply as the companies that are based there will find that their exports suddenly become much more expensive, with the resultant hit to margins that will entail, while broader European stocks should feel the benefit as the euro weakens.
Switzerland suddenly got a whole lot more expensive
and for chocolate lovers Nestle and/or Lindt chocolate just got a whole lot more expensive as well.
This will ultimately damage the Swiss economy further
and it is largely due to the inability of European politicians to fix their own fiscal problems,
and their insistence that the ECB do the job for them, in the face of an inability to implement structural reforms.
Ultimately central bankers can create the bridge to help in the reform process but ultimately politicians have to want to cross it and in Europe there is no evidence that this is likely to happen, and this could have significant consequences for those economies that orbit around it.
The Polish Zloty and Hungarian forint have also been hit hard in this morning’s fall out.
The ripple out effect of this is likely to be hard to quantify
, and we could well get a lot more volatility as investors and markets in general try and work out what this sudden change in policy means for future central bank promises going forward, but it seems likely that the US dollar could well benefit, as well as gold, as investors look again at the more traditional havens.
This morning’s moves also highlight how fragile financial markets still are nearly six years after the financial crisis
despite trillions of dollars of central bank largesse and the risk is that markets start to lose faith in these new masters of the universe as investors look at central bank promises with large dollops of scepticism.
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