This morning, ATMs throughout Switzerland were emptied of euros and long lines were seen at currency exchanges as people rushed to cash in their Swiss Francs for euros or dollars.
Overnight, the Swiss Franc rose more than 14% against the dollar and euro, which means that anyone holding Swiss Francs can now exchange their currency for 14% more dollars or euros than they could the day before.
It began after the Swiss National Bank announced that they would un-peg the Swiss Franc from the euro in advance of a forthcoming European Central Bank stimulus package that will likely involve Quantitative Easing.
With Greece and Spain on the verge of pulling out of the eurozone, the ECB is desperate to restore confidence in the faltering currency. Quantitative Easing is predicted to further depreciate the euro against the dollar and would have put increased downward pressure on the Swiss Franc.
The appreciation of the Swiss Franc is expected to be a tremendous burden on the Swiss economy and the news immediately sparked a trading frenzy that caused the Swiss Market Index to fall by 10% today. The rise in the value of the Swiss Franc will force Swiss exporters to increase their already high prices, which is likely to hurt business.
Other unfortunate victims of the SNB’s decision are FOREX traders and hedge fund managers who purchased the traditionally stable currency as a safe-haven asset amid volatility with the euro. Investors who held long positions with the dollar/Swiss Franc and euro/Swiss Franc are suffering major losses.
But the full consequences of the SNB decision are not yet known. Some Eastern European countries, notably Hungary and Poland, have billions of dollars worth of large financing deals denominated in Swiss Francs. That will hurt homeowners who took out mortgages with Swiss financiers and could lead to defaults which in turn, will hurt creditors and damage trust in Swiss banks.
All of which plays into something market analyst Marc Faber said earlier this week: “My belief is that the big surprise this year is that investor confidence in central banks collapses. And when that happens — I can’t short central banks, although I’d really like to, and the only way to short them is to go long gold, silver and platinum.”
The Save Our Swiss Gold movement was defeated in an election at the end of November, despite polls showing that many Swiss citizens were in favor of the referendum. Though the SNB was publicly against the grassroots efforts, this latest decision is makes it clear that the bank wants to move away from the euro and the ECB. It’s possible that SNB officials decided that “enough was enough” and wanted to finally put a stop to the euro dragging down the value of the Franc against the dollar.
Or, more disturbingly, the shift signals that the SNB foresees serious danger ahead for the eurozone.