Hopes for an unprecedented monetary support package for the ailing eurozone economy have risen following a shock policy move by the Swiss National Bank (SNB).
The SNB last week removed the ceiling it had placed on its currency, the Swiss franc, which had kept its exchange rate pegged at ¤1.2 per franc since 2011.
The measure had been implemented to counteract the huge amount of money flowing into the country, which had been perceived as a ‘safe haven’ during the eurozone crisis.
The move shocked markets, sending the franc briefly 30 per cent higher versus the euro before settling back to trade at just more than 15 per cent against the single currency.
Swiss equities crashed, with most falling by more than 10 per cent, as investors realised any overseas profits would now be worth considerably less when converted back into francs. On the flipside, European markets rallied considerably.
Experts suggested the rally was due to the view that the SNB’s move was made in anticipation of the European Central Bank (ECB) announcing a considerable support package at its meeting later this month.
Anthony Doyle, senior fixed income manager at M&G Investments, said: “Some are speculating that the SNB action suggests it expects an imminent and significant easing in monetary policy from the ECB which it is unwilling to match.”
If the ECB announces significant monetary easing, it will push down the value of the euro, which would have forced the SNB to take drastic action to defend its currency ceiling.
To maintain this ceiling the SNB has had to buy significant amounts of euros. But the central bank may have decided that, with the euro likely to take a hit from an imminent ECB support package, it could no longer afford to keep buying more of the single currency.
Kathleen Brooks, a research director at Forex.com, said the SNB had close ties to the ECB and could have been “spooked” into removing its currency ceiling because of what lies ahead for the euro.
“This move could be a sign the SNB thinks (or knows) the ECB will embark on quantitative easing at next week’s meeting, and the size of its programme could be bigger than the market expects – perhaps $1trn, not the $500bn that was ‘leaked’ last week.”
Joe Corbach, head of currencies and commodities at Swiss & Global Asset Management, said: “It looks very much like the SNB suspects the measures the ECB will communicate this week will be more severe than commonly anticipated.
“The question arises whether the SNB would have been able to withstand the rising pressure on the (unbearable) peg.”
Sterling investors could make a killing
European fund managers with high weightings in Swiss stocks would have been glued to their screens last week, as the stockmarket collapsed in the face of the franc’s appreciation.
Most Swiss stocks are multinationals with a high proportion of earnings overseas.
Mark Page, co-manager of the Artemis European Opportunities fund, which has 24.2 per cent in Swiss stocks, said: “Every unhedged, non-Swiss franc cent of earnings is right now worth 16 per cent less.”
At the time of writing, the Swiss stockmarket was down 13 per cent, but Mr Page pointed out this meant UK investors could actually gain from the shock move.
Sterling investors could make money from the depreciation of the UK currency versus the Swiss franc, which, at the time of going to press, stood at a little more than 14 per cent.
But Mr Page said investors need to wait and “see where the dust settles” rather than acting in the face of wild market swings.
