Swiss Franc move rattles Eurozone
January 16, 2015, 4:01 am

The Franc jumped 30 per cent immediately after the Swiss Central Bank removed its currency exchange cap against the euro. It later fell to register an overall gain of about 15 per cent [Xinhua]

The end of pegging means that the Swiss Central Bank (SCB) will no longer hold fixed exchange rates, curbing how high the franc can go against the euro.

The surprise move – and the ensuing shockwave – resulted in a 9 per cent drop in Swiss stocks and a 14 per cent gain in the Franc’s strength.

In the past few years, as the Eurozone has been rocked by recession, deflation, and double digit unemployment, the Swiss Franc has been seen as a source of currency stability.

In plain words, it is a lucrative buy.

Today’s initial surge in the Franc’s value – an almost immediate jump of 30 per cent after the SCB announcement – is proof of that.

But the SCB is aware that the Euro – which has fallen by at least 15 per cent in the past 11 months – will further tumble if ECB chief Mario Draghi is able to rally and introduce quantitative easing (QE) as a stimulus program to help economic recovery later this month.

With the Euro down and the Franc up, Swiss exports will decline, leading to a drop in manufacturing, investment, and eventually GDP.

This SCB move Thursday is meant to prevent such damage to the Swiss economy.

Draghi on the move

But an unintended outcome of the SCB move is that it appears to indicate an acknowledgement among Europe’s most influential financiers that the ECB will move ahead with its plans to introduce quantitative easing at the end of January.

If not then, the next likely date for such an announcement would be in March during an ECB summit.

However, markets will react angrily if the announcement is delayed by several months.

The anticipation is that Draghi will indeed make the announcement at the January 22 Monetary Policy Meeting; after all, he himself has gone on record in the past few weeks that Eurozone deflation must be dealt with in any way possible.

Draghi recently said: “It is essential to bring back inflation to target and without delay”.

But how large will the quantitative easing stimulus fund be?

In a bid to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy – Central Banks can resort to quantitative easing by flooding financial institutions with capital.

In 2009, the US Federal Reserve launched an $85-billion bond-buyback program to generate stimulus in the economy following the sub-prime mortgage crisis which led the world into recession.

But with the US economy appearing to have regained its pre-2008 strength, the Fed ended the bond-buyback scheme half-way through 2014.

The ECB move is likely to involve 500 billion euros; some analysts predict that the surprise SCB move indicates that the fund could be as high as 1 trillion euros.

The BRICS POST with inputs from Agencies