Switzerland scraps currency cap

Photo: Twicepix

Switzerland’s cap was introduced in September 2011, keeping the Swiss france at 1.20 to the euro. The move was intended to prevent overvaluation of the country’s currency. With the single currency weakening in recent months, though, both against the pound and the dollar, the fall was also echoed by Switzerland’s franc, prompting the Swiss National Bank to scrap it altogether yesterday.

The bank’s decision was hailed as “a bit of a surprise” by IMF head Christine Lagarde, while one trader described trading after the announcement to the BBC as “carnage”.

The euro weakened immediately following the move, while the franc soared. Shares in Switzerland fell yesterday, though, as speculation rises surrounding the ability of the country to maintain its exports given the franc’s relatively high cost.

The announcement arrives following a statement from the ECB suggesting that quantitative easing could be a possibility in the future, while the SNB cited divergence between the world’s major economies as their motivation.

The surprise has caused ripples to extend throughout the financial community, with one broker, Alpari, closing its UK arm today, according to the BBC . Kiwi foreign exchange brokers Global Brokers NZ also shut it doors.

“I would be astonished if we did not see more casualties,” Nick Parsons, the London-based head of research for the U.K. and Europe at National Australia Bank Ltd., told Bloomberg .

“This was a 180-degree about turn by the SNB. People feel hurt and betrayed.”