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Swiss euro peg decision is ‘bold’ move

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Sandra Holdsworth, fixed income manager at Kames Capital, comments in the SNB’s decision to scrap its currency peg to the euro…

The Swiss National Bank (SNB) made a bold policy move today, breaking with the policy that was implemented in the turmoil of the Eurozone crisis.
 
The Bank had been maintaining a currency cap against the Euro at a rate of 1.20 and had been supporting this cap by accumulating reserves .Today this cap was removed leading to a swift appreciation of the Swiss Franc against all the major currencies. At the time of writing the Swiss Franc has appreciated against the Euro by over 14 % since the announcement. At the same time, to offset the monetary tightening that occurs when a currency appreciates, the SNB also cut its deposit rate by 0.5 % to a record -0.75 %, extending further the limits that interest rates can go to. 
 
In their accompanying statement the SNB cited the weakness of the Euro and Swiss Franc against the US Dollar as a reason to change policy, concluding that ‘enforcing and maintaining the minimum exchange rate for the Swiss Franc against the Euro is no longer justified.’ In the press conference later Thomas Jordan, President of the SNB, also said the weaker oil price was a positive economic development for the Swiss economy.   
 
The full implications of this move are yet to be realised but with deposit rates moving even further into negative territory, it is fair to say that the demand for investment products that can reliably produce positive returns will continue to be very strong.

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