Those fond of eating Swiss chocolate and wearing Swiss-made watches will have to pay a substantially higher price for enjoying these luxuries. But their sacrifice seems negligible as compared to other collateral damages. Foreigners indebted in this safe haven currency will bear the brunt. Many banks and hedge funds will face substantial losses. Swiss shares have also plummeted in the worst day for many years, its index dropping by 10%.
The currency intervention seemed untenable ever since the Euro started to weaken. The coming ECB bond-buying programme added extra pressure to a highly strained Swiss franc. Yet, observers favoured a downwards adjustment of the ceiling plus additional measures to address hot money inflows, such as temporary negative interests. They never imagined being confronted to the sheer markets forces, with no safety net protecting them.
The SNB undoubtedly feared the prospect of piling up huge foreign reserves. It has undertaken bond purchases in the past, trying desperately to keep the currency within its limits. As the Euro steeply slides, such tactics would bring little comfort. Yet, the wild reaction in foreign exchange markets may have come as a nasty shock for the Swiss monetary authority. This episode undoubtedly shows that raising artificial barriers ultimately fuels increasing distortions and proves useless for curbing a widely traded item such as money.
The Euro is likely to come close to 1.1 ratio vis-à-vis the dollar in the coming week as the ECB takes further action for defusing deflationary risks. Nonetheless, this move seems already largely discounted. Should the ECB’s delivery fail to impress the markets, a wild upsurge might ensue. The unwinding of short positions may also propel a similar upwards reaction. With the prospect of future hikes in US interest rates, the Forex is likely to witness huge turmoil this year. Very bad news when global economy is lacking stamina.