Last week, the Swiss Central Bank voted in a surprise move to stop pegging its currency to the Euro. The result was swift and dramatic as traders of all sizes piled into the Swiss Franc and exited their positions in the Euro. Why? There are a lot of theories floating around, but the prevailing one is that the ECB will announce a significant quantitative easing (QE) program this week that would put further downward pressure on the Swiss Franc. This is something that the Swiss Central Bank can no longer tolerate. Instead of creating stability, the Euro-Swiss peg has created more uncertainty as serious doubts about the future of the EU resurface yet again.
While the Swiss Central Bank’s move is good for Swiss shoppers in Paris, it has tough consequences for Swiss companies that rely heavily on exports. It is estimated that the Swiss large cap stocks lost $100 billion on this currency move. Ouch! Such companies include global giants like Roche Holding, Nestle, Novartis, UBS, and the Zurich Financial Group. The Swiss Central Bank’s justification for inflicting this corporate pain is directly related to their concerns about the future of the EU itself. The truth is that the Swiss are not alone in their concerns and the anti-EU UKIP party in the UK is gaining more and more supporters. The UKIP is calling for political freedom and the right for each EU nation to regulate its own immigration. We have heard these objections before, but the actions of the Swiss Central Bank have added a significant amount of wood to the fire. So, will anything change?
“Breaking Up Is Hard To Do” was a number 1 hit for Neil Sedaka back in 1962. Perhaps this should be the EU’s theme song as efforts to break up the union have failed miserably in the past. I can remember how the Irish voted to reject a EU treaty back in 2008 and were forced to vote again one year later. Well, the vote passed the second time as Irish voters realized that they had little choice. It is ironic that while the EU is slow and bureaucratic, it is also quick to prevent any member states from leaving. The big fear is that if one member leaves, then the EU will fall like a house of cards. For EU members, breaking up is hard to do, but the day that the EU goes back to being just Europe might be closer than many would like to believe.
For more information on the Swiss Central Bank’s move, please refer to the following articles:
Swiss move shows euro is like a bad, bad marriage, Jake Novak, January 15th, 2015 (http://www.cnbc.com/id/102341727)
A Swiss bombshell: Why the franc soared 30%, Sara Eisen, January 15th, 2015 (http://www.cnbc.com/id/102341104)
Swiss large-caps lose $100B on currency move, Giovanny Moreano, January 15th, 2015 (http://www.cnbc.com/id/23051332)
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