WSJ
The franc insta-tanked in response (~10% for anyone with a B-berg or forex account). Gold (the last real currency?) went from 1497 to 1620 in francs.SEPTEMBER 6, 2011, 6:35 A.M. ET
UPDATE: Switzerland Caps The Franc Amid Threat Of More Action
(Recasts throughout, adds reaction.)
--Swiss central bank sets minimum exchange rate at CHF1.2 per euro
--Franc weakens sharply against the euro, more immediate losses seen
--Resolve of SNB likely to be tested going forward
--Swiss exporters, business lobby groups welcome SNB action, see need for more
By Goran Mijuk and Jessica Mead
Of DOW JONES NEWSWIRES
ZURICH (Dow Jones)--Switzerland took drastic action Tuesday to protect its exporters by unilaterally setting a cap on the franc's exchange rate against the euro, roiling currency markets and setting itself up as a new undewriter of euro-zone assets.
The announcement by the Swiss National Bank came after negative interest rates and a month-long campaign of pumping new cash into the market failed to deter nervous European investors from plowing into one of the region's preferred safe havens. Prior to the announcement the euro was trading at CHF1.12 having sunk almost to parity last month.
"The current massive over valuation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development," the central bank said in a statement. "The SNB is therefore aiming for a substantial and sustained weakening of the Swiss franc."
The central bank said that with immediate effect it will no longer tolerate the euro trading below CHF1.20
The SNB said it will enforce the policy with purchases of euros "in unlimited quantities." It said that even at this rate the franc's value was still high, but that it should continue to weaken over time.
"If the economic outlook and deflationary risks so require, the SNB will take further measures," the central bank said.
The Swiss franc weakened sharply after the SNB step, which was partly expected by economists, trading at a recent high of CHF1.22 versus the euro.
The step reprises a similar peg operated by the central bank in the late 1970s. But foreign exchange analysts say currency markets have changed dramatically in the past three decades, becoming global and highly volatile. World-wide trading volumes, now at $4 trillion a day, dwarf SNB's total assets of CHF270 billion, of which the bulk are foreign-exchange reserves.
The euro is the immediate beneficiary. The SNB will need to park the euros that it buys somewhere. In theory, that should be a boon for a euro-zone market where liquidity is drying up due to concern about the solvency of governments and many of its banks.
But in practice, analysts warn, the liquidity is either going to end up back at the European Central Bank, or in other "safe haven" assets whose prices are already inflated by the prevailing fear. This would very likely favor Germany's well-regarded government bond market more than those of financially weaker governments such as Spain or Italy.
Some currency strategists were broadly skeptical that it would be able to maintain this policy, especially while fears about the global economy persist.
"Our view is that it will be difficult to sustain something like this. There is quite a significant amount of risk out there on both sides of the Atlantic. The market will certainly test the SNB, not least because they have set a target," said Steven Saywell, head of currency strategy at BNP Paribas in London.
Currency markets were thrown into turmoil, with the franc tumbling against both the euro and the dollar. The move also pushed the euro higher against the dollar.
Ripple effects through the currency markets saw the Japanese yen weaken against the dollar as some traders feared that the Japanese authorities might step into the markets.
The effect was also felt in Europe's emerging economies such as Hungary and Poland, with the forint and the zloty strengthening against the euro. Hungary is particularly sensitive to movements in the Swiss franc, due to its massive external and public debt denominated in the Swiss currency.
Swiss stocks jumped on the news of relief for the country's exporters. The Swiss Market Index spiked sharply, gaining 4.2% in early Tuesday trade as shares of Swiss exporters such as electrical engineer ABB (ABB), pharmaceuticals giant Novartis (NVS) and watch maker Swatch Group AG (UHR.VX) rose more than 5%.
"The Swiss National Bank's action is the right step to reduce the stress on Swiss exporters, which otherwise would have struggled to survive and could have led to more than 20,000 job cuts here," said Rudolf Minsch, chief economist at Swiss think tank and lobby group EconomieSuisse.
"But we have to be aware that even at 1.20 francs, the Swiss currency is over valued against the euro and we expect that should the European debt crisis weaken, the franc could move toward 1.30 and 1.40, which would be the fair value against the euro," Minsch said. EconomieSuisse is the country's most influential business group and has for months advocated for more central bank action.
Economists said the action, even as it entails huge risks for the Swiss central bank, could turn out to be successful as the Swiss National Bank had with an earlier peg.
"If the experience of the 1978 peg [of the franc to the Deutsche mark] is anything to go by, the central bank should be successful in defending this level," said UBS economist Geoffrey Yu. "However, the risks for this strategy are great and the central bank will need to carefully calibrate its money market operations."
The Swiss National Bank's recent action comes after the central bank in August cut interest rates close to zero and flooded the money market with extra liquidity. While these measures initially had helped the franc to weaken, recent safe haven buying amid the growing European debt problems increased the stress on the franc, prompting the central bank to take more drastic steps.
"It will have to be seen how this evolves and if the central bank's resolve is strong enough," said Kasper Kirkegaard, analyst at Danske Bank. "Everything depends on how the crisis in Europe develops and how the Swiss economy is reacting."
-By Goran Mijuk, Dow Jones Newswires, +41 43 443 80 47; gorna.mijuk@dowjones.com
-- Asuka
