Financial reports can resort to excitable language, describing humdrum fluctuations in terms like plunge, soar or plummet. But yesterday’s action in the Swiss franc defies the reach of hyperbole. Within minutes of the Swiss National Bank announcing the end of its exchange rate cap, the currency had shot up 39 per cent. At time of writing, it had settled 15 per cent above the previous day’s close. Few working FX traders will have seen anything like it.
At first glance it is more remarkable that this should happen to a currency prized for its stability. But being a safe haven for global capital flows is part of the problem. In volatile economic times, money floods into Switzerland. This causes the currency to rise, damaging exports and leading to enervating deflation. In 2011, the SNB introduced an exchange rate cap of SF1.20 to the euro, to stem the currency’s rise during the sovereign debt crisis.
Countering an appreciating currency ought to be easier than defending it against collapse, as — in theory — it is impossible to run out of ammunition. A central bank trying to prop up the exchange rate can run out of reserves before the market is sated. Those aiming for depreciation have the ultimate weapon in the shape of a money printing press. With an infinite arsenal to discharge, a central bank can credibly promise to buy as much foreign currency as it takes.
