The Swiss currency gained almost 30 percent in relation to the euro in frantic trade on Thursday after the Swiss central bank scrapped a three-year-old cap on the franc’s value against the euro.
The very instant the cap was removed the franc started soaring from 1.2 francs/euro, only losing momentum when it reached 0.81/euro. It has since recovered to 0.98/euro.
Why the Swiss franc took off
“Before yesterday the Swiss central bank has been buying foreign reserves to try and avoid the appreciation of their currency so as to keep their exports competitively priced,” says Michael Keenan, Currency Strategist at Barclays Africa.
The market expected the Swiss central bank to cut interest rates, and they did, from -0.25 percent to - 0.75 percent, thereby upping the amount depositors pay to hold money in a bank account.
“The scrapping of the cap, however, was completely unexpected,” says Keenan.
Undoing everything in one fell swoop
The Swiss central bank has been trying to keep the franc’s value down for three years. In one swell swoop they accomplished exactly the opposite.
“They couldn’t afford continuously propping up their currency,” says Keenan. “They’ll be hoping their negative interest rates will spur depositors to disinvest and look for yield in other countries, thereby weakening their currency.”
Why this is good news for South Africa
The gold price is on course for its best week in 10 months as investors fled for safety from volatility after the unexpected move by the Swiss central bank.
Gold was trading at US$1260 by 5.41am after shooting up to US$1266 on Thursday, a level last seen in September.
“The Swiss franc is going to stay strong for a while,” says Keenan. “And other countries in the region are going to cut interest rates to try and keep their currencies from strengthening. We’ll soon see quantitative easing, colloquially referred to as ‘printing money’.”
Keenan reckons all bond markets, including ours, as well as the rand, will benefit from capital inflows as a result.
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This article first appeared on 702 : Why the Swiss franc gained 30% in a day (and how this will benefit South Africa)