background
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.
problems
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.
today
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.