Swiss franc: a look back at the end of the EUR/CHF floor in 2015
The abandonment of the EUR/CHF exchange rate floor, which came as a sudden surprise on 15 January 2015 following an announcement by the Swiss National Bank (SNB) that took the economic world by surprise, is a particularly significant event in Switzerland’s monetary history in recent years. We take a closer look at this bombshell announcement, the consequences of which are still being felt in Switzerland today.
Find out what the euro-Swiss franc exchange rate floor entailed, why the SNB abandoned it in 2015, and the consequences of this major event for both the markets and Swiss businesses and their employees.
What is the EUR/CHF floor?
Introduced on 6 September 2011 by the Swiss National Bank (SNB), the EUR/CHF floor was a minimum exchange rate between the Swiss franc (CHF) and the euro (EUR), meaning that, in theory, 1 euro could no longer be worth less than 1.20 Swiss francs.
Following a prolonged period of appreciation of the Swiss currency (during which the Swiss franc was used as a safe-haven asset at the height of the eurozone sovereign debt crisis), the SNB had in fact decided to introduce this exchange rate floor in order to prevent the national currency from appreciating too sharply.
And with good reason: an excessively strong currency has numerous negative consequences for a country’s economy, as it particularly hampers exports; the SNB had therefore decided to buy foreign currencies on a massive scale in order to curb the appreciation of the Swiss franc…
The end of the EUR/CHF exchange rate floor in 2015
The facts
After maintaining the minimum exchange rate of 1 euro to 1.20 Swiss francs for almost three and a half years, the SNB suddenly abandoned it on Thursday 15 January 2015, at around 10.30 am, causing not only panic on the financial markets but also bewilderment and anger among Swiss business circles.
And with good reason: just three days earlier, on Monday 12 January, the Swiss institution had reaffirmed its determination to defend this famous floor rate through its vice-chairman, Jean-Pierre Danthine.
Why was the EUR/CHF floor removed?
To explain this surprise decision, SNB President Thomas Jordan described it as a logical choice resulting from a thorough review of the Swiss central bank’s balance sheet. According to the SNB’s governing bodies, whilst the Swiss franc remains at a relatively high level, its overvaluation has been largely contained by the introduction of the exchange rate floor in previous years.
Jordan also refers to the recent sharp depreciation of the euro against the US dollar, which inevitably leads to a depreciation of the Swiss franc against the greenback. Coupled with the difficulties faced by the SNB due to the widening gaps between the monetary policies of the major European central banks (gaps that are set to widen further under the European Central Bank’s debt purchase programme), this depreciation would therefore have precipitated the Swiss institution’s decision.
Furthermore, and in order to limit any unwelcome tightening of monetary conditions, the SNB immediately decided to cut the interest rate on current account balances exceeding a certain exempt amount by half a percentage point to -0.75% (from -0.25% initially).
The consequences of the end of the EUR/CHF floor
Immediate consequences
The SNB’s announcement on 15 January 2015 sent shockwaves through the financial markets. Although many observers had expected such a decision sooner or later (as the EUR/CHF floor could not be maintained indefinitely), none had imagined it would be taken so suddenly and without any prior warning!
The market reaction was immediate and sharp: the euro, which had been trading at 1.20 Swiss francs shortly before the SNB’s announcement, fell rapidly to a record low of 0.9652 francs, before stabilising at the end of the day at around 1.04 francs.
Meanwhile, the Swiss stock market has taken a heavy hit: the SMI index, which tracks the country’s 20 largest companies by market capitalisation, closed the session down 8.67% at 8,400 points.
Finally, in the hours following the announcement that the EUR/CHF floor had been lifted, many Swiss citizens and cross-border workers who had bought euros in large quantities rushed to currency exchange bureaux to reverse their transactions (to the extent that some bureaux were forced to temporarily suspend all euro withdrawals to prevent their IT systems from crashing).
Longer-term implications for the Swiss economy
Beyond the immediate adverse consequences of the removal of the floor rate between the euro and the Swiss franc, the SNB’s decision has created numerous long-term difficulties for both Swiss businesses and employees.
Firstly, it has led to a significant loss of competitiveness for Swiss exporting companies. Numerous in a country heavily reliant on foreign trade (watchmaking, luxury goods, industry, banking and finance, etc.), these companies saw the value of their products and services rise by nearly 30% in the space of a single day, and consequently suffered a significant loss of competitiveness…
At the same time, Switzerland’s appeal to foreign investors has been significantly affected: it is now much more expensive to set up a subsidiary in Switzerland, due to the strong Swiss franc, than it was when the EUR/CHF floor was in place.
Furthermore, whilst the situation may initially have appeared to benefit cross-border workers (whose purchasing power increased significantly), they too are facing consequences that are, to say the least, unpleasant; Swiss companies, weighed down by an overvalued franc, are consequently being forced to scale back their recruitment or even make staff redundancies.
Similarly, some mortgage borrowers, who are highly exposed to currency risk, have found themselves with a debt in Swiss francs that exceeds the value of their property in euros!
Significant and very real adverse economic consequences directly caused by the unfavourable movement in the EUR/CHF exchange rate, which only a few market participants have managed to mitigate through their currency risk management strategies.
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