SNB surprises, CHF blasts away, freezes then gaps

SNB discontinues Minimum Exchange Rate; high impact

Swiss National Bank discontinues the minimum exchange rate which is effectively a currency peg to the Euro in a surprise announcement. CHF pairs rocket away but are now eerily stuck across multiple FX platforms.

 

 

What is the Minimum Exchange Rate?

As a recap, this is what the SNB minimum exchange rate was all about. In my opinion, a currency peg with a fanciful name, like Hong Kong’s Linked Exchange Rate System LERS.

Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

 

What is Swiss National Bank’s reason for discontinuing?

Press release.

Swiss National Bank discontinues minimum exchange rate and lowers interest rate to –0.75%

Target range moved further into negative territory

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%. It is moving the target range for the three-month Libor further into negative territory, to between –1.25% and −0.25%, from the current range of between −0.75% and 0.25%.

The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.

Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.

The SNB is lowering interest rates significantly to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions. The SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions.

 

Visual of impact

At the moment it appears that the Swiss Franc is strengthening furiously. But for discomforting minutes, price feeds across multiple forex platforms froze.

EURUSD reacts to SNB discontinue min. exchange rate, lower interest rates

EURUSD reacts to SNB discontinue min. exchange rate, lower interest rates

GBPSGD rocked by SNB high impact news

GBPSGD rocked by SNB high impact news; who would have thought this unrelated pair to react so

EURCHF freezes then gaps after SNB minimum exchange rate announcement

EURCHF freezes then gaps after SNB minimum exchange rate announcement

USDCHF freezes, gaps too

USDCHF freezes, gaps too

We called our favourite broker and this is what they said

There was a massive drop in CHF due to their central bank removing a floor in the market so no pricing was received for a time

Will there be a repeat of this and this? We are very concerned and will be watching closely.

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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.   Soh's Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX.   Disclaimer notice: "I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."
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