Swiss Move Roils Global Markets SNB’s Surprise Scrapping of Euro Cap Triggers Turmoil Among Bonds and Currencies By NEIL MACLUCAS and BRIAN BLACKSTONE Updated Jan. 15, 2015 11:11 p.m. ET ZURICH—Switzerland’s central bank triggered turmoil in the markets Thursday when it unexpectedly scrapped its cap on the Swiss franc’s exchange rate against the euro, a move that unleashed new volatility in credit and currency markets around the world and further underscored growing concerns about global economic prospects. Against the cloudy backdrop of collapsing oil prices, a sharply rising dollar, fresh doubts about the stability of the euro and mounting global concerns over deflationary pressures, the move by the Swiss authorities was the starkest sign yet of the pressure policy makers face in dealing with unusual financial conditions that threaten the world’s already fragile economic conditions. Some of the fallout was felt early Friday in Asia as FXCM Inc., the biggest retail foreign exchange broker in Asia and the U.S., said it suffered “significant losses” that wiped out its equity. The abandonment of the cap, which had essentially pinned the currency at 1.20 francs per euro for the past 3½ years, prompted a collapse of as much as 30% in the euro versus the franc—the biggest single-day move in a developed market traders could recall. Swiss stocks fell 8.7% as traders worried the stronger franc would hurt Switzerland’s exports, especially to Europe. The currency move was accompanied by further cuts in interest rates by Swiss authorities, pushing some European government bond yields deeper into negative territory. People line up to change currency in Geneva on Thursday. The euro plunged as much as 30% versus the franc. ENLARGE People line up to change currency in Geneva on Thursday. The euro plunged as much as 30% versus the franc. The Swiss National Bank became the first monetary authority to act ahead of the European Central Bank’s expected launch of a new bond-buying program to boost the currency area’s sagging economic prospects. The reaction shows the ECB’s bond-buying program is having a big impact on markets before it has even launched. ECB President Mario Draghi’s signals in recent months that it was coming have already pushed the euro down substantially. That would also likely be the main goal of bond purchases, since interest rates are already very low in most of Europe. Advertisement Jeremy Stein, a former governor of the U.S. Federal Reserve and now a professor at Harvard University, welcomed the likely ECB policy makers’ action next week, saying that while was unclear how it will benefit the eurozone, “they are doing absolutely the right thing.” But the SNB’s move also increases the market glare on the ECB’s action next Thursday, and potentially sets investors up for disappointment if the central bank doesn’t deliver a convincing package to fight off deflation. Tim Adams, president of the Institute of International Finance, said given the market expectations for the ECB, not acting could spark a market firestorm. “I think markets would be incredibly disappointed if it doesn’t happen,” Mr. Adams, a former U.S. Treasury undersecretary of international affairs, said in a recent interview. A big package or an open-ended commitment to buy more if needed could have the desired effects: an even weaker euro, a surge in risky asset prices like stocks, lower rates on European corporate bonds. But a small package or an approach that makes the public doubt the ECB’s commitment to follow through could leave investors underwhelmed and might even reverse some of the effects the trumpeting of QE has already created. While the lower euro does make life harder for the eurozone’s neighbors, most policy makers would prefer a stronger eurozone economy to a weak one. WSJs Michael Casey discusses the impact of Switzerland’s central bank decision to eliminate a cap on the franc-euro rate on the U.S. dollar. Photo: Getty The Swiss bank’s action also spotlights the broader stresses building across the global financial system at a moment of unbalanced economic growth and high social and market instability. Investors are flocking toward safe havens, among them Swiss and U.S. assets. These pressures appeared set to build as the ECB prepares its new stimulus program. Like Switzerland, other European countries outside the eurozone, such as Denmark and Sweden, are seeing their currencies rise as the euro falls, lowering their inflation rates and making their exports more expensive in global markets. The eurozone itself is at risk of a third recession in six years. China, the world’s second-largest economy, is slowing. Japan, the third largest, is also mired in low inflation, high debt and anemic growth. And output in many major emerging markets—economies that have provided most of the gas for global growth over the last decade—is slowing more dramatically than expected. India cut rates Thursday in part to counter the forces of disinflation there. “The really worrisome thing is that the Swiss are not alone in their worries,” said Scott B. MacDonald, senior managing director at MC Asset Management Holdings, LLC in Stamford, Conn., in a note to clients. On Thursday, the yield on the German and Swiss 10-year government bonds closed at record lows, and five-year bond yields were negative in both countries. The Fed has been preparing to raise short-term interest rates from near zero in the months ahead because of a strengthening domestic economy, but global pressures and capital flows could complicate matters. A stronger dollar threatens to curb U.S. exports and curtail prices of imported goods and inflation more broadly, and the prospect of U.S. interest-rate increases could draw even more foreign investment into dollar assets. These combined forces could convince Fed officials to hold off on rate increases at home, but they risk allowing the U.S. economy and markets overheat if they wait too long. The prospect of hundreds of billions in freshly created euros flooding the markets had led to a significant weakening of the euro’s exchange rate, particularly against the U.S. dollar, making the Swiss National Bank’s currency cap an increasingly risky and costly endeavor. Beat Siegenthaler, a strategist at UBS, estimated the central bank faces an implied paper loss of $40 billion on its foreign-currency holdings because of the day’s move. The SNB’s decision and the frantic reaction in financial markets highlight the challenge facing central banks that have kept supposedly temporary measures in place for many years, and the sensitivity of markets to changes in those policies. In the U.S. nearly two years ago, uncertainty over the unwinding of the Federal Reserve’s quantitative-easing program ignited volatile swings across financial markets, particularly in emerging markets. The Swiss case also shows the limitations of central banks in pushing against forces in the financial markets for an extended period, particularly when policy makers focus on currencies as a policy tool as Switzerland’s has. “Central banks have been the heroes [of the global economy] the last few years, but there are costs to being heroes,” said Charles Wyplosz, professor at the Graduate Institute in Geneva. “They’re all in a bind” with official interest rates stuck near zero in many developed economies. The SNB’s decision to scrap the currency cap was accompanied by the immediate introduction of negative interest rates on overnight bank deposits, designed to lessen the attractiveness of the franc. Abandoning the cap on the franc marks an abrupt about-face for the SNB, which has consistently defended the policy since it was introduced in September 2011. SNB President Thomas Jordan and some of the bank’s other top officials had reiterated that the cap was a cornerstone of its policy. In a news conference Thursday, Mr. Jordan said the cap had served its purpose, helping stabilize the Swiss economy and give exporters adequate time to adjust their businesses to the strong franc. But he also said maintaining the policy wasn’t an option. “We decided that due to international developments the time was right to discontinue the minimum exchange rate,” Mr. Jordan said. “The maintenance of the cap for the franc-euro isn’t sustainable or sensible in the long term.” Mr. Jordan said the timing of the decision was meant to be a surprise. Indications that the SNB was planning a policy change might have encouraged improper trading, he said. He declined to comment on whether the SNB had consulted with the ECB or other central banks before making the move. “The decision was taken without any outside influence,” he said. The efforts to rein in the franc have proved politically controversial even though the central bank is widely credited for its sober stewardship of Switzerland’s economy. In November, Swiss voters were asked to vote on forcing the central bank to hold a minimum amount of its assets in gold, a requirement some right-wing politicians felt was needed because the bank had purchased so many euros as it battled the relentless rise of the franc. ‘It’s a pretty extraordinary move, and there are going to be some massive repercussions in currency markets. The Swiss franc is a major currency, we’re not talking about a rarely traded third-tier currency here.’ —Paul Lambert, London-based head of currency at Insight Investment. See related article: Swiss Franc Rockets Voters rejected the measure, but only after Mr. Jordan and other members of the governing board took the unusual step of staging interviews and lectures, a break with the bank’s custom of not commenting on political issues. As well as abandoning the cap, the SNB said it would lower its target range for the three-month Libor rate—a key interest rate—to minus 1.25% to minus 0.25% from the existing range of minus 0.75% to 0.25%, effective immediately. Negative interest rates dissuade investors from buying a currency. The SNB will also charge banks 0.75% on deposits that exceed an exemption threshold by 0.5 percentage point. The bank had planned to initially introduce a 0.25% fee on Jan. 22—the same day the ECB is expected to announce fresh stimulus. The SNB justified the change in policy by saying the “overvaluation [of the franc] has decreased” since the introduction of the cap more than three years ago, although it remains high. “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,” it said in a statement. Following the decision, Mr. Jordan said the cap was an exceptional and temporary measure and was useful in protecting the Swiss economy. The SNB is also lowering rates “significantly” to ensure the scrapping of the cap for the franc doesn’t lead to tighter monetary conditions. Analysts said Thursday’s move was a surprise that could undermine the SNB’s future credibility. “This seems like a desperate move from the SNB,” said Esther Reichelt, a currency analyst at Commerzbank . “It seems their willingness to intervene is not big enough.” A strong franc, which has benefited from haven buying and the malaise in the eurozone economies, raises the risk of deflation, a damaging spiral of lower prices and slowing spending, and creates headwinds for the country’s exporters, many of whom depend on the European Union as an important market. A stronger currency makes exporters’ goods sold abroad less competitive. —Andrew Morse, Jon Hilsenrath and Ian Talley contributed to this article. Write to Neil MacLucas at neil.maclucas@wsj and Brian Blackstone at brian.blackstone@wsj
Posted on: Fri, 16 Jan 2015 06:43:08 +0000
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