SNB Unexpectedly Gives Up Cap on Franc, Lowers Deposit Rate

http://www.bloomberg.com/news/2015-01-15/snb-unexpectedly-gives-up-cap-on-franc-lowers-deposit-rate.html

by sz4kerto • 12 years ago

125 97 12 years ago

bloomberg.com

lawl• 12 years ago

Realtime exchange rate http://www.finanzen.ch/devisen/realtimekurs/eurokurs

Eur fell as low as 0.79 from 1.2.

sz4kerto2• 12 years ago

Not too good news for developers working for foreign companies in Switzerland. (Google, etc.). They just got 15% more expensive without a salary raise.

xianshou• 12 years ago

But all their CHF accounts just got 15% more valuable. I'd consider that excellent news!

s3nnyy2• 12 years ago

I get my salary in CHF and I am quite happy as I transfer it regularly to EUR.

Nothing changed for my Swiss colleagues who don't shop in Euros.

Here the official reasoning of the SNB: http://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_2...

More of my experiences within Switzerland you'll find in here: "Eight reasons why I moved to Switzerland to work in IT" http://goo.gl/EIX4UX (Full disclosure: If you're from the EU and looking for a tech-job over here, I'd be happy to help out).

FredericJ• 12 years ago

Aren't Google Zurich employees payed in CHF?

dola2• 12 years ago

They are.

furyg3• 12 years ago

This is incorrect. Nothing changed as they are paid in CHF and spend money in CHF. If they buy products from abroad, their spending power just increased by 15%.

It's not good news for Google, etc. as their Swiss employees just got 15% more expensive.

tonfa• 12 years ago

Also the biggest change is versus EUR (who was crashing vs USD). CHFUSD wasn't affected as much if you compare with previous years rates.

Additionally every large company does currency hedging to protect itself from those events.

jevgeni• 12 years ago

The point sz4kerto is making, as I understand it, is that the staff cost just jumped for these companies, meaning that some companies might seek to freeze any new hires or even lay off some workers.

oldspiceman• 12 years ago

German groceries just got way cheaper.

qnr• 12 years ago

CHF appreciated 40% in 15 minutes and then retraced about half of it. That's Bitcoin-comparable levels of volatility.

maxerickson• 12 years ago

One difference is that the primary currency manipulators involved with bitcoin are unknown (I guess it is not even really known how much the price is manipulated, I'm sure some insiders have an idea though).

Whereas the Swiss National Bank is known to be the manipulator here, and they publish a lot of information about their activities:

http://www.snb.ch/en/iabout/stat/statpub/statmon/stats/statm...

beagle32• 12 years ago

Still, assuming that Bitcoin is inherently less stable / more volatile than a "hard" currency like the Swiss Franc is, as we've just seen, not supported by evidence.

(We have just witnessed a "fast-forward" view - but I have always assumed this happens on a daily basis, albeit at a slower pace)

antr• 12 years ago

you missed the part where the "SNB Unexpectedly Gives Up Cap on Franc, Lowers Deposit Rate".

When a central bank artificially sets an exchange ceiling/floor, and lets it float again freely expect the currency to adjust. That's not "market volatility", that's just the market adjusting to a true free-float.

bdcs2• 12 years ago

Look back to Sept 2011 to see the Franc do similar price swings without a cap in place... In fact, that's WHY the cap was put into place (also to prevent deflation, recession, and a huge slump in exports).

mike_hearn2• 12 years ago

All the cap did is try to hide the volatility that was already there.

venaoy• 12 years ago

Doesn't matter what the cause is. A 20%+ variance in mere minutes _is_ volatility, by definition.

easytiger• 12 years ago

Huge. It was like NFP at 9.30 am today. Was wondering why my dev code was using more memory than normal. Looked at live graphs to see all hell was breaking loose. US open could be interesting.

emeidi3• 12 years ago

Was about time ...

tobltobs• 12 years ago

That is the common opinion in the comments on "20min.ch". Don't know if this speaks favorable for you.

floyde• 12 years ago

+1. The vast majority of people commenting on these platforms are very very limited thinkers that just see the positive short term effect for them but not even try to think about the effect this has on the swiss exporting economy. Pretty sad.

emeidi3• 12 years ago

It does.

jcfrei• 12 years ago

It's not an unlikely scenario that the ECB will keep the euro weak for a long time thereby crippling the Swiss export economy. It's entirely possible that the Swiss have to join the euro in order to save their economy, because preventing the rise of the CHF would otherwise cause massive inflation in the country. Or the euro recovers and we go back to business as usual. The future will tell.

comrade13• 12 years ago

Switzerland has something like 1/2 trillion in foreign currency reserves built up while trying to keep the franc at parity, putting them in a risky position. I think they were preparing for today - they recently lowered interest rates to negative, and now today dropped them even more negative.

Funny anecdote - the last time this happened around 3 or 4 years ago I was on a project in Germany and was surprised at how cheap everything was now with the exchange rate. Dining out felt like I was in India it was so cheap. We bought an Audi (in CHF) around then and they had to reduce the price 30% before the deal went through - then shortly after they pegged the franc to the euro.

Now hopefully the foreigners will start moving their money back into francs and let the property market cool off.

michaelcampbell• 12 years ago

they recently lowered interest rates to negative, and now today dropped them even more negative.

How does this not cause a run on the banks? (Serious question)

comrade13• 12 years ago

It's the rate on bank-to-bank borrowing (basically, the rate banks pay to borrow money from the central bank). But also the franc is like gold - people move their money to the franc for stability and so there's always external demand.

FracMat• 12 years ago

Only the interest rates on money borrowed from the swiss national bank (which only other banks can use) are affected. This will keep the interest rate you get for your private account close or equal to zero, but they will not get below that margin for exactly the reason that people will withdraw their money.

pjc503• 12 years ago

The average depositor is not paying negative rates: http://www.ubs.com/ch/en/swissbank/private/interests.html

There is obviously a limit as to how negative the SNB can push the interbank rate, but if you see it as the "convenience fee" for keeping and moving large amounts of money in the central bank versus trying to hold it and transport it as cash it makes more sense.

dola2• 12 years ago

It's the rate banks have to pay to deposit Swiss Francs with the Swiss National Bank. Many Swiss Banks however do invest their assets differently (higher risk) and therefore the people in Switzerland with private accounts are not affected directly. This is mostly to avoid foreign banks to invest in Swiss Francs.

sschueller3• 12 years ago

The only run on ATMs* and banks is to get cheap euros as long as still possible.

*ATMs here will give you Swiss Francs or Euros.

pjc503• 12 years ago

Everyone commenting on the exchange rate, but nobody commenting on the negative interest rate? If you want to keep your money in CHF the Swiss banks are going to charge you 0.75% for the privilege.

This is the "safe asset premium". Given the uncertain world, people and organisations with vast wealth are looking for ways to maintain it. In a globally shrinking economy this is not as easy as it sounds. And it's a lot - for example, UBS have $2trn assets under management.

Edit from my other comment: this is the interbank target rate only, normal deposit rates are just above zero: http://www.ubs.com/ch/en/swissbank/private/interests.html

The corollary of this is that any investment proposal with a plausibly positive expected return looks good. Swiss banks have issued a lot of CHF mortgages on property in and out of the country. Property in the core stable parts of the western world has shot up in value (e.g. London), while the periphery remains depressed.

comrade13• 12 years ago

They started making them negative a month ago. It mostly just affects the rate that the banks pay to the central bank. It doesn't really affect individuals, not until you get into 10M CHF, and honestly, who would keep that much money in cash?

http://www.thelocal.ch/20141218/swiss-central-bank-imposes-n...

lmg643• 12 years ago

As I understand it, the "classic" Swiss bank account is a negative interest rate account where money is held for safe-keeping - neutral country. I believe this is the same philosophy on a national/global scale. People don't put money in Switzerland for a return, they put it there for safety.

tribaal4• 12 years ago

That is correct, as far as I understand.

It that also means Swiss companies have an incentive to borrow money and invest it, though.

EDIT: Ah, it seems it only applies to inter-bank interest rates, not sure how it trickles down to end clients.

miralabs• 12 years ago

It that also means Swiss companies have an incentive to borrow money and invest it, though.

this is what the effect SNB is going for -- that the CHF will naturally devaluate instead of them piling up risk by holding bazillion of EUR.

jpmattia• 12 years ago

Everyone commenting on the exchange rate, but nobody commenting on the negative interest rate?

BTW: Real interest rates have been negative for a while in the US. Even the 10yr Treasuries are there now. http://delong.typepad.com/sdj/2012/05/measures-of-real-inter...

cynicalkane2• 12 years ago

Monetary rates being negative are a big deal in a way negative real rates aren't. When you pay the bank to hold money, you begin to see cases where it is most rational to hold cash instead.

branchless2• 12 years ago

The real interest rate vs USD or EUR may well be positive. Certainly if you already had CHF that 20% will take a while to be eaten away by the nominal negative rate, plus the CHF may well appreciate more with EUR QE expected.

AnimalMuppet• 12 years ago

True - if you owned CHF yesterday. That doesn't help you if you're thinking about buying it tomorrow, though.

More to the point, if you owned it yesterday, you just got a very sweet gain. But now, do you continue to hold it? That's essentially the same question as "would I buy it now"?

jeffreyrogers• 12 years ago

The European Central Bank cut one of their rates to below zero in June 2014, iirc. Part of the reason you see this in Europe and not in the US (at least at the moment) is because of restrictions on where the ECB can put its money. For example, the ECB can't (or maybe won't? I'm not completely sure) buy bonds in its member countries.

runeks2• 12 years ago

The corollary of this is that any investment proposal with a plausibly positive expected return looks good.

Very true. This causes massive investment to take place, increasing productivity, and pushing down the price of goods, because they are now cheaper to produce.

In response to this price deflation, the central bank will lower interest rates further, increasing investment further, driving down prices further. And so on, and so forth, in a vicious circle. Japan has been in that circle for the past 20 years or so, being pulled deeper and deeper into deflation.

We, in the West, are earlier in this process, but our destination is the same as that of Japan.

Or at least, that's one explanation of what is happening. :) A theory put forth in this article: http://www.gold-eagle.com/article/economic-consequences-mr-g...

alltakendamned• 12 years ago

Could someone please explain why they do this, and with this means in layman terms ?

Hermel• 12 years ago

According to Thomas Jordan (SNB president), the previous policy was "not sustainable". Furthermore, the peg was presented as a temporary measure from the beginning. Their preferred scenario would have been a rising euro, which would have allowed a painless abondining of the peg.

tribaal4• 12 years ago

They do this because to peg the currency to the Euro meant they had to buy an unlimited amount of foreign currency to make up for it, which gets very expensive in the long run.

What this means in layman's terms (I'll do my best):

- If you are paid in Swiss Francs, your purchasing power in the Euro zone is stronger (since the prices you see will in effect be smaller to you).

- If you are paid in Swiss Francs and shop in Switzerland, the foreign products you buy will slowly become cheaper (although companies will try to keep the label price of goods "the same" in Switzerland, and pocket the difference). It will not have a direct impact on 100% Swiss products, however.

- If you are paid in Euros, visiting Switzerland and buying Swiss products just became more expensive.

- The Swiss firms exporting products might get hit, since their products are now more expensive to foreigners (that was the original point of pegging the CHF to the EUR in the first place - so they could export more).

- As others pointed out: the Swiss firms importing goods will have cheaper raw materials, too, so the price of some Swiss products should decrease as well (modulo some companies trying to pocket the difference by keeping the same face cost, again).

I'm sure I miss a few obvious points, but these changes of value affect such a wide range of things it's hard to think of everything :)

EDIT: Formatting and one omission :)

EDIT2: Added import of raw materials on the list. Thanks guys!

skylan_q• 12 years ago

- The Swiss firms importing products will get a benefit of being able to import for cheaper. This goes for consumer goods as well as raw materials.

runeks2• 12 years ago

You're missing at least one additional point :)

- The Swiss firms importing products will save money on imports, enabling them to either lower the prices of their products, increasing company profits (which increases investor profits), or both

That's the inverse or your "The Swiss firms exporting ..." point.

With every price move, including prices moves in the foreign exchange market, there is a winner and a loser. The seller of the good with the increased price (in this case CHF) realizes a gain, and the seller of the good that decreased in price (EUR) takes the loss.

Swiss companies sell CHF, which just means they buy goods (concrete, steel, wheat, land, labor, etc.) with CHF. Euro-area companies sell EUR, which means they buy goods with EUR.

ddeck3• 12 years ago

They do this because to peg the currency to the Euro meant they had to buy an unlimited amount of foreign currency to make up for it, which gets very expensive in the long run.

It's the reverse situation that is typically unsustainable from an expense perspective (as the Central Bank of Russia has been dealing with).

To prevent the CHF appreciating, the SNB creates the CHF it uses to buy EUR to defend the peg. There is no theoretical limit on the amount of CHF they can create in this process as they are creating new money. The key issues are that:

1) The CHF has depreciated significantly on a trade weighted basis since the peg is only against the EUR (which has depreciated substantially against the USD).

2) The monetary base has reached 60% of GDP as a result of the high demand of CHF at the artificially low price (and getting lower given continuing EUR depreciation) and continues to grow.

There is much speculation, but most market professionals agree that the timing is due to the expected imminent QE by the ECB and the likely implications for the above two factors.

fla• 12 years ago

And if you are paid in Swiss Francs and live in France (like some of my colleague) You pop the champagne !

nico_h• 12 years ago

As an example of the current exchange imbalance, the top of the line 13" MacBook pro is:

- 1799€ -> 1845CHF (->$2110) on the French Apple store.

- 1949CHF -> 1900€ (->$2228) on the Swiss Apple store.

The kicker here is that the VAT is 8% in Switzerland and 19+% in France, and yet the laptop is 100€ cheaper in France.

sschueller3• 12 years ago

There is also the 10% Apple adds to their stuff sold in Switzerland just because they can and people are stupid enough to pay it.

jlouis• 12 years ago

Indeed. This varies too much to be viable. In Denmark, the top-of-the-line 13" Macbook Pro sells for 13999 DKK (Roughly 1882 EUR - There are 25% VAT in .dk). Now, that price point is chosen for its locality to 14000, more than any other reason.

sschueller3• 12 years ago

Better take the hit now than later when it could be a lot more painful.

config_yml• 12 years ago

"Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. 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."

http://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_2...

The SNB just had a 38 billion surplus in 2014 which they could use to write of their losses in euro investments, but they just stated they are not going to. They EUR is weakening against the USD and the SNB does not want the CHF to go down with it. Does that mean they lost trust in the EUR completely? People are speculating on Greece's exit from the EUR, which could further weaken it.

I guess exports and tourism will now suffer, but investments in the eurozone just got pretty cheap for the swiss.

ExpiredLink3• 12 years ago

investments in the eurozone just got pretty cheap for the swiss.

Yep, they should all emigrate to the EU!

tormeh• 12 years ago

A grexit would strengthen the euro, not weaken it. Greece has more imports than exports. A grexit will weaken the euro temporarily because of uncertainty but the effect will wear off quickly.

mentose• 12 years ago

Switzerland exports 27 billion USD more than it imports [1]. That means this is bad news for the swiss economy, since swiss products just became much more expensive for foreign buyers.

[1] http://www.bfs.admin.ch/bfs/portal/en/index/themen/06/05/bla...

nuriaion• 12 years ago

We (small startup/company in Switzerland) are mostly exporting our product. Today we changed from making a profit to making a loss with each system we sell...

raverbashing2• 12 years ago

Is your price pegged to USD/EUR?

s3nnyy2• 12 years ago

Could you point to your company?

toomuchtodo• 12 years ago

Would this cause you to move the business to another country?

cynicalkane2• 12 years ago

I'm curious why you didn't hedge with currency futures, since this is close to an ideal use case. I ask because I used to work in the futures industry but never really interacted with trading or hedging customers.

zimbatm• 12 years ago

It always seemed such a bad idea to me in the first place. If an actor is so predictable in the market, how can you prevent other people from benefiting from it ? Pump&dump.

It introduced the cap in September 2011 and, in 2012, spent $199 billion defending the minimum rate.

Wow, spending almost 1/3 of the GDP of 2012 to maintain the EUR/CHF ratio ( http://www.wolframalpha.com/share/clip?f=d41d8cd98f00b204e98... ). I hope it was worth it.

iSnow• 12 years ago

Well, the $199bn are not spent in the sense they are gone. The SNB of course now holds Dollars and Euros it bought with Franken. Of course, if the Franken now appreciates, they are taking a loss on those Dollars and Euros.

ddeck3• 12 years ago

To be clear, the SNB is not "spending" money. They were intervening to prevent the CHF from appreciating, not the reverse. In this situation, they (as the central bank) are creating new money (CHF), which they sell to anyone who wants to purchase them for EUR1.20 each.

The result of this is to accumulate enormous amounts of EUR, which is typically used to purchase EUR area government securities.

The SNB actually made a profit of CHF 38 billion in 2014 from price changes/interest on the securities they hold as well as FX gains. [1]

They of course will now be taking significant losses on those foreign currency assets as the CHF appreciates.

[1] http://bigstory.ap.org/article/eaafe09a860f4b09abc789fe6f5d2...

branchless2• 12 years ago

you de man

Keyframe• 12 years ago

On the other hand, SNB now has a decent-sized mountain of Euros to sell.

pjc503• 12 years ago

That buys them a lot of Euros, and stabilised the very large part of the Swiss economy that's dependent on financial services. This includes CHF-denominated Hungarian mortgages, which may now start defaulting again http://ftalphaville.ft.com/2011/08/03/642281/oh-schweizer/ (2011)

ExpiredLink3• 12 years ago

You cannot trust the Swiss any more. That's what people learned during the last years.

ExpiredLink3• 12 years ago

Credibility at stake: http://www.handelszeitung.ch/konjunktur/schweiz/glaubwuerdig...

throwaway90446• 12 years ago

Could someone explain the market reaction here?

When rates are lowered, it puts both competitve pressure and supply pressure on the currency. This can be seen in all historical interest rate cuts. You cut rates to weaken, and raise rates to strengthen.

And yet, this CUT in rates is leading to a BID for CHF.

As they say in Geneva, WTF?

fidotron• 12 years ago

My guess is it's to do with the relative state of the Euro. This move by the Swiss bank is effectively a vote of no confidence in the ECB being able to resolve the weakness there, so even though going into CHF is bad, it's judged to be less bad than sticking in EUR.

jsnell• 12 years ago

The interest rate has not been the main method of controlling the exchange rate in this case. There was an artificial CHFEUR peg maintained by selling Francs and buying Euro-denominated assets.

a_c_s• 12 years ago

There are two things happening with opposite effects: releasing the peg and cutting rates. Since the CHF is strengthening, we know that releasing the peg is having a stronger effect than cutting rates.

needusername• 12 years ago

Little known fact: SNB is actually a publicly traded company but exempted from various laws which usually apply stock corporations. A share gets you entry and a vote at the general assembly which is known for its generous Apéro. While they do not have a dress code (you can appear with a Hoodie) Jean Studer is French speaking so a lot of the assembly will be in French.

SNB Unexpectedly Gives Up Cap on Franc, Lowers Deposit Rate

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