From chaos to calm: one year on from Swiss 'Frankenschock'

Wed Jan 13, 2016 5:55am EST
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By Joshua Franklin and Anirban Nag

ZURICH/LONDON (Reuters) - A year on from "Frankenschock", when Switzerland's central bank sent global foreign exchange markets into a frenzy by abruptly ending its cap on the Swiss franc, the currency is one of the most stable in the world.

Sharply negative Swiss interest rates - three month rates are around minus 0.75 percent - and subtle market interventions by the Swiss National Bank have stabilized the franc at around 1.08 per euro.

Whether it lasts is an open question - there have been political and economic costs - but the situation is nonetheless a far cry from Jan. 15, 2015 when the cap's removal prompted the biggest currency market swing since the 1970s.

Click here to see the reaction:

"Nobody who was involved in the franc on Jan. 15 will ever forget that one, what the move was like," said Tim Mueller, a senior foreign exchange trader at Zuercher Kantonalbank. "I've been doing this for nearly 28 years and that was a unique move."

Global markets had complete confidence the SNB would stick to its three-year-old pledge to keep the euro above 1.20 Swiss francs, a tool it had described as the cornerstone of monetary policy as recently as Jan. 12.

So when it published a brief statement in early European trading hours bluntly saying it had lifted the cap, investors were caught cold.

As the franc soared past parity against the euro, economists fretted Switzerland's export-reliant economy would plunge into recession while some foreign exchange brokers were pushed out of business.   Continued...

Swiss 100 franc bank notes are withdrawn from an ATM in the northern Swiss town of Kreuzlingen in this picture illustration, January 16, 2015. REUTERS/Arnd Wiegmann