

SNB Unexpectedly Gives Up Cap on Franc, Lowers Deposit Rate - sz4kerto
http://www.bloomberg.com/news/2015-01-15/snb-unexpectedly-gives-up-cap-on-franc-lowers-deposit-rate.html

======
pjc50
Everyone commenting on the exchange rate, but nobody commenting on the
_negative interest rate_? If you want to keep your money in CHF the Swiss
banks are going to charge you 0.75% for the privilege.

This is the "safe asset premium". Given the uncertain world, people and
organisations with vast wealth are looking for ways to maintain it. In a
globally shrinking economy this is not as easy as it sounds. And it's a _lot_
\- for example, UBS have $2trn assets under management.

Edit from my other comment: this is the interbank target rate only, normal
deposit rates are just above zero:
[http://www.ubs.com/ch/en/swissbank/private/interests.html](http://www.ubs.com/ch/en/swissbank/private/interests.html)

The corollary of this is that any investment proposal with a plausibly
positive expected return looks good. Swiss banks have issued a lot of CHF
mortgages on property in and out of the country. Property in the core stable
parts of the western world has shot up in value (e.g. London), while the
periphery remains depressed.

~~~
comrade1
They started making them negative a month ago. It mostly just affects the rate
that the banks pay to the central bank. It doesn't really affect individuals,
not until you get into 10M CHF, and honestly, who would keep that much money
in cash?

[http://www.thelocal.ch/20141218/swiss-central-bank-
imposes-n...](http://www.thelocal.ch/20141218/swiss-central-bank-imposes-
negative-interest-rates)

~~~
lmg643
As I understand it, the "classic" Swiss bank account is a negative interest
rate account where money is held for safe-keeping - neutral country. I believe
this is the same philosophy on a national/global scale. People don't put money
in Switzerland for a return, they put it there for safety.

------
mentose
Switzerland exports 27 billion USD more than it imports [1]. That means this
is bad news for the swiss economy, since swiss products just became much more
expensive for foreign buyers.

[1]
[http://www.bfs.admin.ch/bfs/portal/en/index/themen/06/05/bla...](http://www.bfs.admin.ch/bfs/portal/en/index/themen/06/05/blank/key/handelsbilanz.html)

~~~
nuriaion
We (small startup/company in Switzerland) are mostly exporting our product.
Today we changed from making a profit to making a loss with each system we
sell...

~~~
raverbashing
Is your price pegged to USD/EUR?

~~~
bdcs
It implicitly is if their customers use USD / EUR. Maybe they buy something en
masse at, e.g., $99 but not $119

------
zimbatm
It always seemed such a bad idea to me in the first place. If an actor is so
predictable in the market, how can you prevent other people from benefiting
from it ? Pump&dump.

> It introduced the cap in September 2011 and, in 2012, spent $199 billion
> defending the minimum rate.

Wow, spending almost 1/3 of the GDP of 2012 to maintain the EUR/CHF ratio (
[http://www.wolframalpha.com/share/clip?f=d41d8cd98f00b204e98...](http://www.wolframalpha.com/share/clip?f=d41d8cd98f00b204e9800998ecf8427e71hk3ft38s)
). I hope it was worth it.

~~~
ddeck
To be clear, the SNB is not "spending" money. They were intervening to prevent
the CHF from appreciating, not the reverse. In this situation, they (as the
central bank) are creating new money (CHF), which they sell to anyone who
wants to purchase them for EUR1.20 each.

The result of this is to accumulate enormous amounts of EUR, which is
typically used to purchase EUR area government securities.

The SNB actually made a profit of CHF 38 billion in 2014 from price
changes/interest on the securities they hold as well as FX gains. [1]

They of course will now be taking significant losses on those foreign currency
assets as the CHF appreciates.

[1]
[http://bigstory.ap.org/article/eaafe09a860f4b09abc789fe6f5d2...](http://bigstory.ap.org/article/eaafe09a860f4b09abc789fe6f5d26f5/swiss-
central-bank-reports-profit-38-billion-swiss-francs)

~~~
Keyframe
On the other hand, SNB now has a decent-sized mountain of Euros to sell.

~~~
ddeck
The actual size of the SNBs EUR holdings hasn't grown that much (EUR174 bn in
Q3 2014 from EUR90 bn in 2010) and EUR allocation has actually reduced (to 45%
from 55% over the same period) [1].

I believe the most recent comments by the ECB also indicate that they have no
immediate plans to reduce reserves.

With a JPMorgan analyst suggesting a few days ago that a size for the expected
ECB QE program of EUR500 million is missing a zero, it's likely not going to
be too difficult to find a buyer if they did decide to do so.

[1]
[http://www.snb.ch/ext/stats/balsnb/pdf/deen/A3_2_Devisenanla...](http://www.snb.ch/ext/stats/balsnb/pdf/deen/A3_2_Devisenanlagen_der_SNB.pdf)

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needusername
Little known fact: SNB is actually a publicly traded company but exempted from
various laws which usually apply stock corporations. A share gets you entry
and a vote at the general assembly which is known for its generous Apéro.
While they do not have a dress code (you can appear with a Hoodie) Jean Studer
is French speaking so a lot of the assembly will be in French.

------
lawl
Realtime exchange rate
[http://www.finanzen.ch/devisen/realtimekurs/eurokurs](http://www.finanzen.ch/devisen/realtimekurs/eurokurs)

Eur fell as low as 0.79 from 1.2.

------
qnr
CHF appreciated 40% in 15 minutes and then retraced about half of it. That's
Bitcoin-comparable levels of volatility.

~~~
antr
you missed the part where the "SNB Unexpectedly Gives Up Cap on Franc, Lowers
Deposit Rate".

When a central bank artificially sets an exchange ceiling/floor, and lets it
float again freely expect the currency to adjust. That's not "market
volatility", that's just the market adjusting to a true free-float.

~~~
bdcs
Look back to Sept 2011 to see the Franc do similar price swings without a cap
in place... In fact, that's WHY the cap was put into place (also to prevent
deflation, recession, and a huge slump in exports).

------
alltakendamned
Could someone please explain why they do this, and with this means in layman
terms ?

~~~
tribaal
They do this because to peg the currency to the Euro meant they had to buy an
unlimited amount of foreign currency to make up for it, which gets very
expensive in the long run.

What this means in layman's terms (I'll do my best):

\- If you are paid in Swiss Francs, your purchasing power in the Euro zone is
stronger (since the prices you see will in effect be smaller to you).

\- If you are paid in Swiss Francs and shop in Switzerland, the foreign
products you buy will slowly become cheaper (although companies will try to
keep the label price of goods "the same" in Switzerland, and pocket the
difference). It will not have a direct impact on 100% Swiss products, however.

\- If you are paid in Euros, visiting Switzerland and buying Swiss products
just became more expensive.

\- The Swiss firms exporting products might get hit, since their products are
now more expensive to foreigners (that was the original point of pegging the
CHF to the EUR in the first place - so they could export more).

\- As others pointed out: the Swiss firms importing goods will have cheaper
raw materials, too, so the price of some Swiss products should decrease as
well (modulo some companies trying to pocket the difference by keeping the
same face cost, again).

I'm sure I miss a few obvious points, but these changes of value affect such a
wide range of things it's hard to think of everything :)

EDIT: Formatting and one omission :)

EDIT2: Added import of raw materials on the list. Thanks guys!

~~~
ddeck
_> They do this because to peg the currency to the Euro meant they had to buy
an unlimited amount of foreign currency to make up for it, which gets very
expensive in the long run._

It's the reverse situation that is typically unsustainable from an expense
perspective (as the Central Bank of Russia has been dealing with).

To prevent the CHF appreciating, the SNB creates the CHF it uses to buy EUR to
defend the peg. There is no theoretical limit on the amount of CHF they can
create in this process as they are creating new money. The key issues are
that:

1) The CHF has depreciated significantly on a trade weighted basis since the
peg is only against the EUR (which has depreciated substantially against the
USD).

2) The monetary base has reached 60% of GDP as a result of the high demand of
CHF at the artificially low price (and getting lower given continuing EUR
depreciation) and continues to grow.

There is much speculation, but most market professionals agree that the timing
is due to the expected imminent QE by the ECB and the likely implications for
the above two factors.

~~~
tribaal
Very interesting, thank you for the insight!

------
comrade1
Switzerland has something like 1/2 trillion in foreign currency reserves built
up while trying to keep the franc at parity, putting them in a risky position.
I think they were preparing for today - they recently lowered interest rates
to negative, and now today dropped them even more negative.

Funny anecdote - the last time this happened around 3 or 4 years ago I was on
a project in Germany and was surprised at how cheap everything was now with
the exchange rate. Dining out felt like I was in India it was so cheap. We
bought an Audi (in CHF) around then and they had to reduce the price 30%
before the deal went through - then shortly after they pegged the franc to the
euro.

Now hopefully the foreigners will start moving their money back into francs
and let the property market cool off.

~~~
michaelcampbell
> they recently lowered interest rates to negative, and now today dropped them
> even more negative.

How does this not cause a run on the banks? (Serious question)

~~~
pjc50
The average depositor is not paying negative rates:
[http://www.ubs.com/ch/en/swissbank/private/interests.html](http://www.ubs.com/ch/en/swissbank/private/interests.html)

There is obviously a limit as to how negative the SNB can push the interbank
rate, but if you see it as the "convenience fee" for keeping and moving large
amounts of money in the central bank versus trying to hold it and transport it
as cash it makes more sense.

------
nico_h
As an example of the current exchange imbalance, the top of the line 13"
MacBook pro is:

\- 1799€ -> 1845CHF (->$2110) on the French Apple store.

\- 1949CHF -> 1900€ (->$2228) on the Swiss Apple store.

The kicker here is that the VAT is 8% in Switzerland and 19+% in France, and
yet the laptop is 100€ cheaper in France.

~~~
sschueller
There is also the 10% Apple adds to their stuff sold in Switzerland just
because they can and people are stupid enough to pay it.

~~~
jlouis
Indeed. This varies too much to be viable. In Denmark, the top-of-the-line 13"
Macbook Pro sells for 13999 DKK (Roughly 1882 EUR - There are 25% VAT in .dk).
Now, that price point is chosen for its locality to 14000, more than any other
reason.

------
config_yml
"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 considerably against the US dollar
and this, in turn, has caused the Swiss franc to weaken against the US 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."

[http://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_2...](http://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_20150115.en.pdf)

The SNB just had a 38 billion surplus in 2014 which they could use to write of
their losses in euro investments, but they just stated they are not going to.
They EUR is weakening against the USD and the SNB does not want the CHF to go
down with it. Does that mean they lost trust in the EUR completely? People are
speculating on Greece's exit from the EUR, which could further weaken it.

I guess exports and tourism will now suffer, but investments in the eurozone
just got pretty cheap for the swiss.

~~~
tormeh
A grexit would strengthen the euro, not weaken it. Greece has more imports
than exports. A grexit will weaken the euro temporarily because of uncertainty
but the effect will wear off quickly.

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sschueller
Better take the hit now than later when it could be a lot more painful.

------
easytiger
Huge. It was like NFP at 9.30 am today. Was wondering why my dev code was
using more memory than normal. Looked at live graphs to see all hell was
breaking loose. US open could be interesting.

------
sz4kerto
Not too good news for developers working for foreign companies in Switzerland.
(Google, etc.). They just got 15% more expensive without a salary raise.

~~~
furyg3
This is incorrect. Nothing changed as they are paid in CHF and spend money in
CHF. If they buy products from abroad, their spending power just increased by
15%.

It's not good news for Google, etc. as their Swiss employees just got 15% more
expensive.

~~~
tonfa
Also the biggest change is versus EUR (who was crashing vs USD). CHFUSD wasn't
affected as much if you compare with previous years rates.

Additionally every large company does currency hedging to protect itself from
those events.

~~~
seanmcdirmid
Google must also earn some CHF to offset R&D costs (and maybe a subsidy also
from the Swiss gov?).

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throwaway90446
Could someone explain the market reaction here?

When rates are lowered, it puts both competitve pressure and supply pressure
on the currency. This can be seen in all historical interest rate cuts. You
cut rates to weaken, and raise rates to strengthen.

And yet, this CUT in rates is leading to a BID for CHF.

As they say in Geneva, WTF?

~~~
fidotron
My guess is it's to do with the relative state of the Euro. This move by the
Swiss bank is effectively a vote of no confidence in the ECB being able to
resolve the weakness there, so even though going into CHF is bad, it's judged
to be less bad than sticking in EUR.

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emeidi
Was about time ...

~~~
tobltobs
That is the common opinion in the comments on "20min.ch". Don't know if this
speaks favorable for you.

~~~
floyde
+1. The vast majority of people commenting on these platforms are very very
limited thinkers that just see the positive short term effect for them but not
even try to think about the effect this has on the swiss exporting economy.
Pretty sad.

~~~
emeidi
"Lieber ein Ende mit Schrecken als Schrecken ohne Ende."

There is no way the SNB could have sustained this currency peg in the long
term: It's vital for a "kleine offene Volkswirtschaft" like Switzerland to
maintain its independent currency. We've been held hostage by the adverse
developments of the EUR currency for too long (a terrible construct from the
beginning, by the way).

Three years ago, the SNB gave a lifeline to Swiss companies who rely on
exports to the EU area. Those companies had enough time to prepare for the Day
of Reckoning which came unto us today. I am aware that there might be a
bloodbath ahead, but I don't think it's up to the SNB to make sure Swiss jobs
in export industries are artificially kept alive. If at all, it's up to the
politicians to protect those industries. They could either decide to subsidize
those companies or to turn the employees into civil servants. In case the
electorate doesn't like such measures thank god there will be elections this
fall.

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ExpiredLink
You cannot trust the Swiss any more. That's what people learned during the
last years.

~~~
ExpiredLink
Credibility at stake:
[http://www.handelszeitung.ch/konjunktur/schweiz/glaubwuerdig...](http://www.handelszeitung.ch/konjunktur/schweiz/glaubwuerdigkeit-
der-snb-steht-auf-dem-spiel-724859)

