REUTERS/Ruben Sprich
Thomas Jordan, head of the Swiss National Bank.
The SNB announced Wednesday morning morning that it has abolished its exchange-rate controls against the euro. Since 2011, when the euro crisis was at its peak, the central bank has been trying to hold the euro-franc exchange rate at now lower that 1.20.
When it gave that up early on Wednesday the euro slumped by nearly 30% against the franc.
The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.
From October 2007 to July 2011, the franc rose by about a third against the euro, to put that in context. He goes on:
Recently, divergences between the monetary policies of the major currency areas have increased significantly - a trend that is likely to become even more pronounced. The euro has depreciated substantially against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB has concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified...
Let me emphasise that the SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions.
In short, he means the Fed is getting ready to hike (which should strengthen the dollar further), while the European Central Bank is getting ready to do QE (which should weaken the euro). The SNB doesn't want Switzerland to be trapped between those two forces any more than it has to be.
The warning about intervening in foreign exchange markets isn't a bluff: Switzerland has accumulated huge foreign exchange reserves (including billions of euros) in recent years. As far as Jordan is concerned, the SNB is not afraid to keep adding to them, to weaken the franc again if it gets too strong.
Manufacturers and other exporters are getting hammered too today: Swiss stocks are down by more than 10%.
Here's the full statement from the SNB, outlining its reasoning.