Switzerland’s cap on the Swiss franc against the euro has been scrapped, a move that sent the Alpine state’s currency surging by more than 30 per cent and will affect its big international banks.

Switzerland’s policy of capping the Swiss franc against the euro at a rate of 1.20 has been scrapped, a move that sent the Alpine state’s currency surging by as much as 41 per cent according to some reports, and which also prompted a rise in the gold price.

The Swiss National Bank has printed Swiss francs to curb its strength against the euro since September 2011. That policy has been controversial because of fears that such monetary policy will eventually push up inflation; the exchange rate cap had been originally introduced to ease the strains of a strong currency on Swiss exporters.

Late last year, a referendum proposal in Switzerland to force the SNB to hold at least 20 per cent of its reserves in gold – a move that if accepted would have boosted the franc and the gold price – was decisively rejected by voters.

The exchange rate issue is important for banks such as UBS, Credit Suisse, Julius Baer and Bank J Safra Sarasin, and many others, because such organisations typically book a large amount of their client business outside the country. Shares in UBS were down 1.15 per cent on the day; shares in Credit Suisse were down 1.34 per cent. Julius Baer was down 0.27 per cent.

At the SNB announcement, the Swiss franc/euro rate went from 1.20 to the euro to 0.8052 (source: BBC).

As well as axing the currency cap policy, the SNB said in a statement today that it was cutting interest rates on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to -0.75 per cent. It is moving the target range for the three-month Libor further into negative territory, to between -1.25 epr cent and -0.25 per cent, from the present range of between -0.75 per cent and 0.25 per cent.

The SNB’s action caught markets by surprise. The price of spot gold rose over $1,250 an ounce to the highest level in four months, up by 2.3 per cent from the previous market close.

"We see current strong upward pressure on the franc against the euro mounting, particularly in the likely event that the ECB announces quantitative easing next week. A further appreciation against the euro could have serious implications for the economy given that Switzerland has typically sent nearly half of its exports to the euro-zone and about 10 per cent to the US. And with the economy already experiencing negative inflation for some time, the SNB will need to tread particularly carefully. The Bank stated today that `if necessary, it will remain active in the foreign exchange market to influence monetary conditions'. We think that such action will almost certainly be necessary," Jennifer McKeown, senior European economist, Capital Economics, said in a note.

"The SNB decision was very unexpected, it was very surprising given the officials latest comments on their commitment to hold the floor. The credibility of the SNB certainly took a big hit at this point especially given the damage it caused on the real economy. You know Switzerland is a small international country, everybody has to do with foreign currencies. The payment schedules, hedges, plans have been done accordingly. So when you do similar damage, it should take time to recover," Ipek Ozkardeskaya, market analyst at Swissquote, said. 

Not so overvalued

The SNB said it acted because the sharp depreciation in the euro against the dollar meant the peg had caused the Swiss franc to lose ground against the dollar. “In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified,” it said.

The Swiss franc/euro cap had been introduced as an “exceptional and temporary measure” to protect the Swiss economy from serious harm. However, the overvaluation of the Swiss currency has declined as a whole since the policy was introduced in 2011, it added.