From chaos to calm: one year on from Swiss 'Frankenschock'

ZURICH/LONDON (Reuters) - A year on from “Frankenschock”, when Switzerland’s central bank sent global foreign exchange markets into a frenzy by abruptly ending its cap on the Swiss franc, the currency is one of the most stable in the world.

Swiss 100 franc bank notes are withdrawn from an ATM in the northern Swiss town of Kreuzlingen in this picture illustration, January 16, 2015. REUTERS/Arnd Wiegmann

Sharply negative Swiss interest rates - three month rates are around minus 0.75 percent - and subtle market interventions by the Swiss National Bank have stabilized the franc at around 1.08 per euro.

Whether it lasts is an open question - there have been political and economic costs - but the situation is nonetheless a far cry from Jan. 15, 2015 when the cap’s removal prompted the biggest currency market swing since the 1970s.

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“Nobody who was involved in the franc on Jan. 15 will ever forget that one, what the move was like,” said Tim Mueller, a senior foreign exchange trader at Zuercher Kantonalbank. “I’ve been doing this for nearly 28 years and that was a unique move.”

Global markets had complete confidence the SNB would stick to its three-year-old pledge to keep the euro above 1.20 Swiss francs, a tool it had described as the cornerstone of monetary policy as recently as Jan. 12.

So when it published a brief statement in early European trading hours bluntly saying it had lifted the cap, investors were caught cold.

As the franc soared past parity against the euro, economists fretted Switzerland’s export-reliant economy would plunge into recession while some foreign exchange brokers were pushed out of business.

A year later, the picture has brightened.

The SNB still describes the franc as “significantly overvalued” but the currency is at a tolerable price for Swiss exporters to the euro zone, Switzerland’s biggest trading partner, and has not thrown the country into an anticipated recession.

“The SNB looks to have regained control over the franc and a lot of investors believe that,” said Joachim Corbach, head of currencies and commodities at asset manager GAM in Zurich.

Wariness about what the SNB could do next, along with the negative rates, has deterred speculators and kept franc in a narrow range since August.

Reflecting this, the share of the franc in daily spot deals in London, the biggest trading center for currencies, has slipped, according to the Bank of England.

Investors have instead plumped for more liquid currencies like the Japanese yen, another safe-haven currency, and the dollar in the latest bout of turmoil hitting global markets.


The latest trends in the derivative markets indicate investors are certain about the franc’s stability in the coming weeks given concerns about China and the pull of the franc as a safe haven.

“If things get nastier, then we could see them (investors) coming into the franc, but at the current moment they seem to prefer the U.S. dollar and the yen,” Corbach said.

Meanwhile, the political and economic fallout from the cap’s removal still grips Switzerland and the SNB.

Unemployment hit 3.7 percent last month, the highest in nearly six years, as Swiss companies that rely on selling goods abroad cut jobs to save costs. Consumer prices have fallen every month in year-on-year terms since November 2014.

The SNB posted a record 23 billion franc ($23 billion) loss last year largely due to enormous losses on its foreign currency positions.

It has also faced pressure from politicians and business leaders who argue the SNB should do more to protect industry from the strong franc and question the central bank’s set-up.

But a year on, “Frankenshock” has not turned into “Frankageddon”.

Editing by Jeremy Gaunt