Last week’s shock decision by the Swiss National Bank, to allow its currency to climb freely, saw the value of the franc soar, to almost one-to-one against the euro.
The franc has gained almost 20 per cent against the euro in the space of just one week, with the euro plummeting by 30 per cent against the Swiss currency in a single day.
Those with vested interest in the forex market are now waiting with baited breath to see what the continued effects of the fallout will be.
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The Biggest Single-Day Move in a Developed Market
Thursday’s drop in value for the euro against the franc is now being described as the biggest-single day movement in a developed market that traders can remember. The announcement by the Swiss National Bank (SNB) to remove their currency cap saw the euro’s value drop by a stunning 30 per cent.
Commentators like Beat Siegenthaler, a currency strategist at UBS, are far from optimistic in the wake of the market’s initial reaction. Mr Siegenthaler has stated that the Swiss currency “appears more overvalued versus the euro than at any other time in the last thirty years”, warning that this could place “significant strain” on the country’s economy. With short-term relief in his opinion unlikely, the experienced strategist has prophesied that the exchange rate will likely “fluctuate around parity” over the coming months.
Eveline Widner-Schlumpf, Switzerland’s finance department head, has proved more optimistic, promising that the country “can cope” adequately with the decision made by the SNB. Ms Widner-Schlumpf has commented that provided the euro does not fall below 1.10 francs (as opposed to its previous limit of 1.20 francs) the impact would be bearable.
Looking to the Future
The finance department head is alone in her optimism, with banks around the world echoing the UBS in their forecasts, suggesting that the euro will remain significantly below the 1.10 francs threshold going forwards.
Sebastian Galy, currency strategist at Société Générale went as far as stating that Ms Widner-Schlumpf’s hopes for 1.10 francs looks “forlorn for a while”. In his view, and that of Credit Suisse economists, it seems more likely that the euro will retain its parity with the franc for at least 12 months to come, with a drop to as little as 0.95 francs looking likely ahead of this week’s meeting with the European Central Bank.