Jan 15, 2015
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Swatch Group CEO says SNB action is a tsunami for Switzerland

Jan 15, 2015

LONDON, United Kingdom - The Swiss franc soared by 15 percent on Thursday after Switzerland's central bank scrapped its three-year-old cap against the euro, sending a shockwave through currency markets.

The euro plunged as much as 30 percent below the 1.20 cap to 0.8500 francs per euro at one point before rebounding to roughly 1.02 francs. Broader concerns about the euro sent it to its weakest in 11 years against the dollar.


One of London's slew of retail trading platforms, Forex.com, briefly stopped quoting the franc, and the main venue for interbank trading of the Swiss currency, EBS, registered one mistaken trade at just 0.0015 francs per euro.

Swatch Group Chief Executive Nick Hayek called the Swiss National Bank's decision to discontinue the minimum exchange rate on the Swiss franc a "tsunami" for the Alpine country and its economy.

"Words fail me! Jordan is not only the name of the SNB president, but also of a river… and today's SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country," Hayek said in an emailed statement on Thursday.

Swiss watchmakers, which are also grappling with weak demand in Asia, are very exposed to moves in the Swiss franc exchange rate because their production costs are largely in Swiss francs, but most of their sales are done abroad.

Shares in Swatch Group fell 15 percent at 1056 GMT, while Richemont was down 14 percent, underperforming a 9 percent drop in the Swiss market index following the SNB's announcement.

"Absolutely shocking ... For companies with international operations – translated earnings are going to be lower and if companies make products in Switzerland it is going to hurt margin. It is a terrible day for corporate Switzerland," Kepler Cheuvreux analyst Jon Cox said.

Across Europe

The swings in the franc were the biggest since most major currencies moved to free-floating regimes in the 1970s. Dealers said they had seen a number of major investors lose as much as 20 percent before managing to complete trades to close bets on a stronger dollar against the franc.

"The real damage I think has been on the dollar-Swiss trade," said one senior trader with a large international bank in London. "I wouldn't be surprised to see some funds close in the next few days, the losses were so bad."
Belgian and French bonds, seen as the main targets for SNB investments in the euro zone, underperformed their regional peers, with 10-year yields both rising 3 basis points.

Jaeger LeCoultre, one of Swiss group Richemont's watch brands | Photo: Source: Jaeger Lecoultre

The SNB has been resisting pressure for months on the cap it imposed on the franc when investors picked it as their haven of choice in 2010 and 2011 from the euro zone's economic and political troubles.

The prospect of outright money-printing by the European Central Bank being introduced as early as next week has ratcheted up the pressure, with the SNB seen by market players as buying euros consistently around 1.2009 francs per euro in recent days.

The move still leaves the SNB with the same cocktail of policy difficulties to deal with. Like many economies in Europe, Switzerland is threatened by a debilitating cycle of falling prices and poor economic growth, which a strong franc worsens.

The bank concurrently cut interest rates deeper into negative territory on Thursday and its chairman, Thomas Jordan, told a news conference it would remain active in markets. Dealers were already speculating that the bank had intervened on Thursday to stabilise the euro-franc rate but Reuters was unable to confirm.

"You will have the SNB coming back into play, but maybe their intervention will be concentrated not only in euro terms but in dollar terms as well," said Hans Redeker, global head of FX strategy at Morgan Stanley in London.

Redeker said that might effectively add up to a dirty float, where the SNB would use intervention regularly to steer the exchange rate without revealing any formal targets.

"They will intervene but not linked to a cap," he said.

The franc also appreciated by almost a third against the dollar before settling 14 percent higher at 0.8779 francs per dollar.

"The SNB probably expects the ECB to launch QE next week and along with the Greek elections coming up, it would make it pretty tough on the Swiss to keep bidding the euro," said Jonathan Webb, head of FX strategy at Jefferies in London.

"So they have abandoned the cap and cut rates deeper into negative territory. We expect euro/Swiss to trade around 0.90-1.00 francs after all the stop loss orders have been cleared."

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