SNB Decision and Economic Ramifications

The Swiss National Bank (SNB) shocked the entire world with its decision to remove their peg holding the Swiss franc at 1.20 euro’s. This move caused turmoil in all FX markets as well as across the world. The biggest ramifications of this shakeup will be felt in Switzerland (obviously). This was deemed necessary because the Swiss franc had surged in value. This move to remove the currency peg will affect retailers of Switzerland products because their goods now look more expensive. Since there products are now considered more expensive, Swiss retailers will find it harder to sell their products, and even harder to export them. As chief executive of Swatch Group, a luxury Swiss made watch corporation, said in the Economist article, Shaken, not Stirred, “The bank’s action was “a tsunami” for exporters, tourism, and “the entire country.”” This same article later says, “Luckily I was sitting down” when the SNB called to warn of its impending announcement, said Johann Schneider-Ammann, the federal economics minister charged with trying to keep the Swiss industry competitive. Exporters, he acknowledged, face a huge challenge.” As you can see from the chart pictured below, the euro has collapsed in Swiss franc terms. Meaning that one euro used to buy 1.2 Swiss francs, but now that same euro only will get you ~1 Swiss francs. This makes everything in Switzerland ~20% more expensive for foreigners. This has impacts that will be felt throughout the entire Swiss economy, including retailers, restaurants, hotels, tourism, and consumer goods.

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This impact was immediately felt as Swiss companies lost upwards of 10% of their share price as soon as the news hit. This was felt extra hard by Swatch, who has lost 18% since the SNB announcement. In response to this, as John Revill writes in his article, Watchmaker Swatch Announces Price Rises, “Swatch, based in Biel, said it would increase the prices charged outside of Switzerland for some of its brands by 5% to 10%. The move comes as the franc has gained more than 15% in value versus the euro following the Swiss central bank’s decision last week to scrap a long-standing currency cap.” This move is to try and offset the loss of future sales that they are no doubt going to see. This move will certainly hurt Swatch’s (and every other Swiss based company’s) bottom line (which caused the respective stocks to drop), but at least there are no more surprises coming… We hope!

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