The euro suffered its largest one-day fall against the Swiss franc in history as the SNB suddenly abandoned its long-held pledge to keep the franc above 1.20 per euro. The move sent the currency markets into a tailspin, catching investors totally unawares.
Yesterday the euro moved well below parity against the franc, dropping almost 30% to trade as low as 0.854 before rallying to 1.033, a fall of 14%, while major Swiss stocks also suffered sharp falls.
In Asia, Japan’s Nikkei fell 2.8%, later regaining some ground to close down 1.4%, and Hong Kong’s Hang Seng index lost 0.5%.
Safe haven currency the yen gained 1.2% to 115.96 against the US dollar, while the Australian dollar rose 1%.
Spot gold rose as much as 3% to its highest level since September, at $1,266 per ounce.
Yields on Japanese government bonds and German bunds fell to fresh record lows, while the yield on the 10-year US treasury dropped back to 1.74% and 10-year UK gilt yields fell to 1.47%.
This morning, the FTSE 100 opened 0.7% lower as market jitters continued.
TradeNext trader Rocky Muddar said he had never witnessed markets in such disarray as brokers tried to catch falling knives in the currency markets.
“15/1/15 will be remembered for many years to come as a day that ended many a trader’s career and saw the collapse of numerous financial institutions and smaller hedge funds,” he said.
“As someone that has traded some of the most volatile rates and bonds futures over the last financial crisis, I can honestly say I have never seen such a swift and aggressive move in a major financial product like this in my life.”
As investors digest yesterday’s dramatic price moves, commentators are taking the SNB’s decision as proof that the European Central Bank (ECB) will unleash full-scale quantitative easing next week.
Joe Corbach, head of currencies and commodities at Swiss & Global Asset Management, said: “Although we can see the reasoning behind the SNB’s decision to remove the ceiling, in our opinion the timing seems premature.
“A link with the expected additional ECB monetary policy measures is rather clear. The date on which the SNB’s negative interest rates should come into effect, 22 January, coincides perfectly with the ECB meeting where an announcement of a possible QE programme is widely expected.
“It looks very much like the SNB suspects that the measures the ECB will communicate next week will be more severe than commonly anticipated. The question arises whether the SNB would have been able to withstand the rising pressure on the (unbearable) peg.”
Simon Ward, chief economist at Henderson Global Investors added: “The timing of [yesterday’s] decision may be linked to the opinion by the European Court of Justice advocate-general on the legality of the OMT programme, which has reinforced the likelihood of ECB QE.”
In September 2011, the Swiss central bank surprised markets with a bold move to cap the exchange rate of its currency to the euro at CHF1.20.
The move was intended to halt the continued rise of the Swiss franc, which had seen huge inflows during the eurozone financial crisis, as investors used it as a safe haven currency.