what just happened to the Swiss franc (CHF)


Pre-financial crisis one euro bought close to 1.7 chf.

As progressive waves of bad news about the EU financial system broke–that, for example, its banks were stuffed to the gills with worthless US mortgage derivatives, or that Greece had faked its national financial statements for years and was unable to pay its (euro-denominated) national debt–EU investors began to sell their currency and buy the chf, whose value began to rise.

In mid-2011 a sudden spike upward in demand brought the Swiss currency to the point that a euro bought less than a single chf.

the cap

That forced the Swiss National Bank to step in to stabilize its currency, fearing that continuing gains in the chf would have terrible negative effects on tourism and on exporters.  The SNB set a cap on the value of the chf at 1.2 per euro.  The chf could trade cheaper than 1.2 per euro, but the central bank would always be there to buy euros at the 1.2 rate if needed to prevent the chf from appreciating further.


This action fixed the immediate problem of appreciation of the dhf against a key trading partner.  But it did two bad things at the same time:

–it effectively tied the currency to a now-nosediving euro, and

–it expanded the Swiss money supply in a potentially unhealthy way.


This morning the SCB made the surprise announcement that it was going to let the chf float against the euro again, effective immediately.  The currency spiked to 1.0 euro before settling in at around 1.1 euro.

Why the surprise?  

I can think of several reasons:  the Swiss government didn’t want to buy any more euros.  I imagine it anticipated it would be swamped with buy orders for the chf during any phase-out period.  Currency traders may have anticipated this move and been buying boatloads of euros from the Swiss government in recent days, effectively forcing the SCB action.

Why do this at all? 

That’s the interesting part.

Switzerland apparently anticipates that when the ECB embarks on quantitative easing, the result will be some pretty ugly currency action for the euro.


5 responses

  1. hi

    i didnt understand why you have wrote that the investors were buy boatloads of euros and by that pressured the swiss to abndon the euro cap.

    will appreciate your advise.


    • Thanks for your question. I reread my post and realized I wasn’t clear at all about what was making the Swiss franc rise. EU investors were scared that their currency would plunge in value as horrible financial news started to come out in 2009. They began to exchange their euros for the chf, which they regarded as a safe haven and a close substitute for their currency. They did this so consistently and in such large amounts that the chf nearly doubled in value over the next two years. In mid-2011 the Swiss government intervened in the currency market and said it would provide all the chf any euro holder would want, at the rate of 1 euro = 1.2 chf. It did so because it feared the rising chf was destroying the competitiveness of Swiss products in Europe.

      Yesterday, the Swiss abandoned the cap without much explanation. I think it did so because it was afraid it would be overwhelmed with buy orders from euro holders once the ECB begins quantitative easing and would be unable to defend the cap. The Swiss National Bank may also have felt that the cap was already coming under heavy attack by currency speculators.

      • thank you very much for the explenation. i must add that i read your post on a daily basis.

        can you please refer to what kind of a position the speculators could have done that would have caused the central bank to abonded his position?

        also if i understand correctly the sitiustion the central bank would buy euros and sell chf becuase of the euro holders demand for safe haven. from what was the central bank afraid as he could have maintain for ever this position and print chf and he would have foreighn currancy (euros) to back him self?

        thanks again

  2. The biggest players in the currency markets aren’t national governments. The major multinational banks dwarf countries in their ability to act quickly and in large size. Sometimes the banks are also joined by large hedge funds.
    The most important assumption in the attack on any currency is that it is now selling at a value set by government policy rather than the markets, and that its true value would be sharply different from the current one if government intervention were gone. We can see this with the chf. The cap maintained by the government kept the value at 1 euro = 1.2chf. Once the cap was removed, the relationship immediately became 1 euro = 1 chf, a sharp rise in the chf.

    Remember that my direct experience is with equities. I’ve observed many currency attacks, but only from the upper deck and not the courtside seats or the team bench. Also, it makes sense to me that Switzerland sensed the beginning of an assault on the cap, but no one has admitted this publicly so far.
    What I think typically happens is that the government notices unusually large transaction volume in its currency, all in one direction (meaning in this case almost all buying chf) and over a number of days. Its traders should be able to quickly pinpoint the source of the buying and guess his intentions. The government would conclude that the attacker has very large resources, is not going to go away and has the power to inflict very big losses on it. (The only instance I can think of where a government won one of these battles was in Hong Kong during the Asian currency crisis of the late 1990s. But there the peg between HKD and USD was the most fundamental economic and political principle of the SAR, Hong Kong had substantial help from China, and HK ended up buying in a quarter of its stock market (I think) before hedge funds went away. )
    In the Switzerland case, yes, it would have euros in its treasury when the dust cleared, but they’re already worth 20% less now than they were a day ago. Switzerland may have figured that defending the cap would be throwing good money after bad and that this was its least bad outcome.

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