Swiss National Bank Scraps Euro Cap, Gold Skyrockets

Rafi Farber
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Swiss National Bank Scraps Euro Cap, Gold Skyrockets

In a stunning move this morning, the Swiss National Bank has decided to scrap its cap of 1.20 Swiss Francs (CHF) per Euro and let the Franc free float against the Eurozone currency. While this move was unexpected to say the least, it is especially surprising given the rejection of the Swiss Gold Initiative at the end of November last year, and the insistence of SNB staff that it be rejected precisely because it could cause the Swiss Franc to skyrocket, as it just did today.

At its peak this morning, the Swiss Franc was up as much as 30% against the Euro.

The Swiss Gold Initiative, which would have forced the SNB to hold a 20% gold reserve, would have essentially stopped the bank from unlimited printing of CHF in order to buy Euros and thereby peg the exchange rate at 1.20. Now that this is exactly what the SNB has just done, investors are scratching their heads. It has basically announced a “cease and desist” order from printing, at least for the purpose of supporting the Euro.

The fact that this move is nearly equivalent to what the Swiss Gold Initiative was trying to accomplish is evident in the fact that on the announcement, gold shot up 2.5%.

Short of a candid interview with SNB decision makers, one can only guess why, and why now. It is possible that the SNB, seeing the recent tumbling of the Euro against the USD to 9 year lows and to an exchange rate below its founding, did not want to tether itself to a sinking ship any longer. The prospects of a SYRIZA win, the Greek anti-bailout party, in Greek elections in 10 days magnify the possibility that Greece will soon be leaving the Eurozone, which is not dangerous for the currency block on its own, but could cause bond runs in other weak Eurozone countries, especially Italy. Italy leaving would be existentially dangerous for the Eurozone and the Euro itself.

It is likely that the SNB is simply fearing a currency crash in the Euro in the event that a chain reaction ensues if and when SYRIZA takes power, and does not want to be tethered to such an event on the off chance that it occurs.