Swiss National Bank (SNB) all of a sudden removed the Euro peg on January 15th this year. Immediate effect was a massive rally in franc against all currencies across world. Franc appreciated close to 40% within minutes against Euro, however traced back most of its gain afterwards. Franc is currently trading around 1.047 against Euro.

Where the pain to be felt –

  • Two of the largest exporting partner of Swiss and Euro zone, both suffering with weaker economic activities. This year Franc has appreciated more than 3% against Yuan.
  • Moreover a comeback of growth in Eurozone over weaker Euro means higher imports in Switzerland from Euro zone. That will translate lower revenues for Swiss companies and relatively weaker performance by Swiss stock index.
  • Switzerland is facing “difficult times” and a short period of deflation following January’s abrupt unwinding of a currency peg, one of the Swiss National Bank’s most senior policy makers said on Thursday night.
  • Probably this was the right move for SNB to earn profit on its large sum of Euro bonds, it lost its credibility over removing the peg, when confirming it a few days before. Future forward guidance will be taken with pinch of salt by traders and investors.

Mr. Zurbrugg, one of three policy makers within SNB, expressed concern that tougher times ahead for Swiss economy.

  • CPI might hover in the negative zone for prolonged period. CPI in February fell by -0.8%. Swiss economy is risking prolonged deflationary environment that might get deeply entrenched. Moreover cheaper imports will keep the price pressure subdued.
  • Depreciating the Franc will be a daunting task especially against Euro, as SNB is sitting on large sum close $ 500 billion worth of Euro bonds that it need to unload.

Should the exchange rate appreciate Japanese Style, SNB is not left with lot many tools other than full blown QE to depreciate Franc.

Unless that appears negative rates would have muted reaction. Franc might appreciate against dollar close to 0.90, should the dollar weaken broad based. Higher the franc value, higher will be the pain.

Probabilities are higher that Swiss stock index will lag European counterpart such as DAX, so a spread bet looks pretty lucrative.

The material has been provided by InstaForex Company –