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The Swiss National Bank shocked financial markets by scrapping a three-year-old cap on the franc, sending the safe-haven currency soaring against the euro and stocks plunging amid fears for the export-reliant Swiss economy.
Only days ago, SNB officials had described the 1.20 francs per euro cap, introduced in 2011 at the height of the euro zone crisis to prevent the strong currency leading to deflation and a recession, as the cornerstone of the bank's monetary policy.
With more than 40 per cent of Swiss exports going to the euro zone, firms across Switzerland warned of a plunge in profits, with the luxury and tourism industries most exposed.Credit: Bloomberg
The U-turn sent the euro nearly 30 per cent lower against the franc in chaotic early trading. It came a week before the European Central Bank is expected to unveil a massive bond-buying programme that might have forced the SNB to intervene repeatedly to defend the cap.
"Today's SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country," said Nick Hayek, chief executive of Swiss watch firm Swatch.
SNB chairman Thomas Jordan denied at a news conference that the move amounted to a "panic reaction", saying the cap had been scrapped because it was unsustainable.
"If you decide to exit such a policy, you have to take the markets by surprise," Jordan said.
As it removed the upper limit on the currency, the SNB sought to discourage new flows into Swiss francs by pushing down its interest rate on some cash deposits held at the central bank by commercial banks and other financial institutions.
After taking the rate into negative territory last month for the first time since the 1970s, it cut another 0.5 percentage points on Thursday to -0.75 per cent, a move Jordan said would help ease upward pressure on the franc over time.
"The values we currently see (on currency markets) point to a massive overvaluation of the franc. They should come back down to more sustainable levels," Jordan said. "Markets tend to overreact when confronted with such a surprise."
Earlier this month, Jordan described the cap as "absolutely central", while SNB vice-chairman Jean-Pierre Danthine said on Monday it would remain the cornerstone of SNB policy.
"In my opinion, this damages confidence in the Swiss National Bank that has always been saying it can keep up the minimum exchange rate," said Alessandro Bee, economist at Swiss bank Sarasin. "I see big risks in this."
In what now looks like a signal the move might be coming, Ernst Baltensperger, an influential academic and former SNB adviser who is close to Jordan, said last weekend the SNB should move away from the "temporary" cap.
Leading newspaper Neue Zuercher Zeitung described the move as "unavoidable".
On social media, however, it was dubbed "Francogeddon".
With more than 40 per cent of Swiss exports going to the euro zone, a strong franc is a nightmare for leading exporters.
Swiss shares tumbled more than 10 per cent, putting them on track for their biggest one-day fall in at least 25 years and wiping about 100 billion Swiss francs off the main index.
Banks UBS and Credit Suisse were both down over 10 per cent at 1315 GMT, while Richemont, which owns luxury watchmaker Cartier, and Swatch were the biggest losers, down roughly 15 per cent.
Christian Levrat, president of the left-wing Social Democrat party, called the move "a serious threat for tens of thousands of Swiss jobs".
As markets tumbled, people rushed to banks to change money.
"I've never seen such a drop in one go, it's huge. People will probably be buying euros, but also dollars and other currencies," said one UBS teller, after selling euros to a Russian client.
Investors have been sweeping up the Swiss currency as the ECB considers printing money to buy bonds, or quantitative easing. Europe's showdown with Russia over Ukraine has also put pressure on the euro and made the franc more attractive.
In addition to lowering the sight deposit rate, the SNB said it would expand its three-month Libor target range to between -1.25 per cent and -0.25 per cent, from a previous range of -0.75 per cent to 0.25 per cent.
Swissquote analysts Ipek Ozkardeskaya said recent heavy interventions to defend the cap may have forced the SNB's hand.
"Given the pressures on the EUR/CHF, an accidental break of the floor would have been more serious for SNB credibility," she said, adding that panic around the franc was likely to continue until the SNB unveils a "new game plan".
In the first minutes of trading, the franc broke past parity to trade at 0.8052 francs per euro before trimming gains to 1.0255.
Fitch's managing director of sovereign ratings Ed Parker said the move would not affect Switzerland's top-grade rating.
"Clearly a change in monetary policy is an important event in terms of looking at what is going to happen to the Swiss economy but it is not a sovereign rating issue at the moment."
Reuters