Yep. Today, Switzerlands central bank shocked investors by abruptly abandoning its national currency cap of 1.20 francs per euro, which it put in place during Europes rocky economic days of 2011. In the frantic moments afterward, the francs value rose by almost a third, though it has since retreated a bit. The banks move had economists throwing around words like seismic, while the Wall Street Journal described the aftermath as unprecedented turmoil in the currency market. Swiss stocks also plummeted, experiencing their biggest one-day fall in 26 years, according to Reuters. And of course, rich guys are now worrying about how much it will cost to attend Davos. Advertisement Why on earth did the ever-conflict-averse Swiss decide to unleash havoc on the markets? Well, you have to start with why they adopted the currency cap in the first place. Switzerlands economy is driven heavily by tourism and exports, 40 percent of which are shipped to the eurozone. Therefore, it needs to keep its exchange rate against the euro reasonably low. Otherwise, its valuable watches, machinery, pharmaceuticals, and jewelry would become too expensive abroad, and vacationers would stop showing up to gorge on chocolate. The problem is, when countries sell lots of exports and keep inflation low, like the Swiss, their currency starts to look like an attractive investment option. When the euro crises went into full swing during 2011, panicking money men saw the franc as a safe haven and started buying it en masse, pushing up its exchange rate with the euro, and pushing some exporters into bankruptcy. Sensing an emergency, the Swiss National Bank declared that it would start buying euros in unlimited quantities to keep the francs value down. Thus, we got the cap. So what changed? Buying unlimited quantities of euros is about to get expensive. The European Central Bank is about to begin a round of quantitative easing to revive the regions economy—which, for all intents and purposes, means it will be printing lots of euros, which Switzerland would have to purchase in bulk to maintain its exchange rate. Thats just not sustainable. So, instead, its bidding goodbye to the cap, and riding out the nasty economic consequences.
Posted on: Sat, 17 Jan 2015 06:07:46 +0000
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