• Swiss central bank shocks world markets by unleashing exchange rate
  • Swiss franc soars 15% against euro, and 14% versus pound and dollar
  • European stock markets take fright at unpredicted move but soon recover

The euro tanked 15 per cent against the Swiss franc today after Switzerland’s central bank removed an exchange rate cap that kept it weak against the single currency.

The euro initially plunged 30 per cent to just 0.805 francs after the Swiss National Bank surprised the foreign exchange markets by abandoning its three-year 1.20 francs per euro exchange rate control. But as traders scrambled to respond the single currency recovered to 1.020.

International investors spooked by the surprise sold equities and fled into gold as well as into the Swiss franc itself – so while the currency strengthened across the board the Swiss stock market fell 12 per cent. 

Currency shock: The Swiss central bank’s move has seen the Swiss franc soar against all major currencies

Britons heading for Switzerland for some skiing will get a nasty shock as the pound plunged by 14 per cent against the Swiss franc. But British travellers to the continent were cheered as the pound broke above the €1.30 level for the first time in nearly seven years with sterling rising by a cent to €1.304.

The pound has not been so strong against the single currency since March 2008, in the midst of he financial crisis. At that point sterling was in the middle of a swift decline from a January 2007 high of nearly €1.54: by January 2009 it was near to parity with the euro, with a pound worth just €1.02.

In place since September 2011, the cap has come under increasing pressure as the franc’s value elsewhere has soared with investors seeking a haven in Switzerland from the eurozone’s economic and political troubles.

The SNB has until now resisted pressure to let the franc float against the euro but the prospect of outright money-printing – which devalues a currency – by the European Central Bank as early as next week broke the bank’s resolve.

Cliffhanger: How the euro plunged against the Swiss franc – and then recovered half of its devaulation.

‘It has taken the market by complete surprise,’ said Jonathan Webb, head of FX strategy at Jefferies in London.

‘The SNB probably expects the ECB to launch QE next week and along with the Greek elections coming up, it would make it pretty tough on the Swiss to keep bidding the euro.’

Jasper Lawler at CMC Markets added: ‘The SNB must have a very strong inclination that the European Central Bank is about to begin a large scale quantitative easing program which would act to depreciate the euro and make a defence of the Swiss franc peg impossible.’

Recovery: The pound has gained steadily against the euro over the last eighteen months.

European share prices and bond yields tumbled as jittery markets reacted negatively to the unexpected move. The FTSE 100 index fell 100 points on the news, dropping from 60 points up on the day to 40 points down – but it soon regained its poise to notch up a 70-point gain at 6,456 in late afternoon trade.

Continental stock markets rebounded too after shock as they refocused on stronger expectations for stimulus moves by the European Central Bank next week. But US stocks put in a volatile early performance, dropping back from opening gains in the first half hour of trading.

The dollar meanwhile also lost 14 per cent of its value against the Swiss franc. 

‘This is extremely violent and totally unexpected, the central bank didn’t prepare the market for it,’ said Alexandre Baradez, chief market analyst at IG in France.

‘It’s sparking panic across all asset classes. It suddenly revives the risk of central bank policy mistakes, right when central bank action is what’s keeping equity markets going.’

In an effort to prop up the cap, the SNB last month announced it would charge depositors a ‘negative’ interest rate of -0.25 per cent to discourage spooked investors from using the franc to shelter their cash

THE IMPACT ON BRITISH INVESTORS

Hargreaves Lansdown estimates that UK fund investors have in excess of £4billion invested in Swiss stocks, mainly via European funds, but also perhaps more surprisingly, via UK Equity Income funds.

The fund platform said Swiss drugmakers Roche and Novartis are popular fund holdings with managers in the UK Equity Income sector, who can invest up to 20 per cent of their portfolio overseas. For instance, it noted that Woodford Equity income has 3 per cent invested in Roche.

Hargreaves estimates that the average European fund has 9 per cent invested in Swiss stocks, the typical European (ex-UK) tracker fund has around 20 per cent, and the average UK Equity Income fund has just under 1 per cent, though some UK Equity Income funds have closer to 5 per cent invested.

However, even though the Swiss stock market has tanked today, the financial services group believes that the effect of the sharp rise in the Swiss franc has more than offset that fall.

After factoring in the currency’s rise against the pound, Hargreaves thanks that UK investors would on average have made around 2 per cent on their Swiss stock market holdings this morning.

And UK Equity Income funds invested in Roche and Novartis would have made more, both these stocks rose about 5 per cent in sterling terms. Not bad for a morning’s work.

Laith Khalaf, senior analyst at Hargreaves Lansdown said: ‘The Swiss stock market has been decimated this morning by the central bank’s decision to remove their currency peg to the Euro. However UK investors can afford a wry smile because the appreciation of the franc has made their Swiss holdings more valuable, despite the stock market plunge.’

The bank said it would slash its interest rate on balances of over 10million Swiss francs, effectively imposing a charge on depositors wanting to hold francs in a bid to keep its currency weaker.

Today it lowered that rate to -0.75 per cent in an effort to stop the currency appreciating too much as the cap was removed.

The currency moves overshadowed a steadier session for commodity stocks after a sharp slide in the price of copper triggered big losses across Europe’s leading stock markets on Wednesday. 

Devaluation: The Swiss central bank has given up on attempts to keep the Swiss franc artificially weak against the single currency