Swiss bank lets franc off the hook
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
The Swiss National Bank dropped a bombshell on the financial world before the U.S. markets opened for trading on Thursday, when it unexpectedly cut its one-sided currency peg to the euro. The Swiss franc initially surged 39 percent higher in 10 minutes against the euro in response, before giving back roughly half of its gains. This is the equivalent of a “black swan” event in the currency market, which begs the question whether the SNB really understood the degree to which the Swiss franc had been repressed by being pegged the Euro over the past three years.
The Swiss stock market reacted by declining roughly 10 percent before recovering some of its losses, as investors realized that higher currency prices would make the cost of Swiss exports more expensive abroad and potentially lower sales.
The decision to peg the Swiss franc to the euro was made by the SNB back in 2011, when the eurozone debt crisis (think Greek debt crisis) motivated investors to seek refuge in the Swiss currency, driving the value of the franc higher and inspiring Swiss central bank leaders to protect their exporters.
Today, the European Central Bank (ECB) is on the cusp of a bond-buying program that is expected to be announced in the coming week, and is designed to combat the eurozone’s deflation problem while stimulating their sagging economy. Like the Federal Reserve’s latest quantitative easing program, the ECB’s stimulus plan will focus on holding interest rates low, which is expected to suppress the value of the euro. Due to the pending monetary policy change, the SNB felt it needed to act quickly and decisively.
This decision by central bankers of a smaller, developed country like Switzerland, illustrates how difficult it can be to navigate around the decisions of much larger central banks like the Federal Reserve, which is moving towards a tightening policy, or of the European Central Bank, who is prepared to loosen it. The SNB may be just the first in a series of central banks to act in light the ECB’s new bond-buying program.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.