Date
18 December 2017
The Swiss franc's appeal as a safe-haven currency will diminish because it now lacks liquidity after being delinked from the euro, according to analysts. Photo: Bloomberg
The Swiss franc's appeal as a safe-haven currency will diminish because it now lacks liquidity after being delinked from the euro, according to analysts. Photo: Bloomberg

Swiss franc should not have been unpegged from euro in one go

Switzerland should have unpegged its currency from the euro in a more calibrated way to reduce market turmoil, BNY Mellon Investment Management said on Friday.

“If the Swiss National Bank is concerned that the euro is depreciating too much, it could have shifted to a currency basket, putting greater weight on the dollar, less weight on the euro,” said Simon Cox, investment strategist of BNY Mellon Investment Management.

The Swiss central bank was entirely capable of defending the cap if it wanted to, but it is less compelling to have overvaluation of the Swiss franc as a result of the depreciation of the euro, he said.

Also, he said the peg fell apart because the currency is on the weak side and the Swiss franc experience is a less common example of exiting the link on the strong side.

Switzerland’s central bank stunned markets Thursday when it abandoned the currency peg, which had been in place for more than three years, sending the franc soaring against the euro.

The Swiss National Bank (SNB) said it was removing the cap of 1.20 Swiss francs to one euro, allowing the currency to trade freely against the European unit.

The decision sent global foreign exchange markets into a frenzy.

JPMorgan Chase & Co.’s index of global currency volatility rose to 11.24 percent, the highest since June 2013, up from last year’s low of 5.28 percent.

Christopher Probyn, chief economist of State Street Global Advisors, said the move came because the SNB thought the peg policy was about to become unsustainable.

“With the euro dropping and under pressure to go lower, this was going to require the creation of tremendous reserves [to exchange for euros],” he said.

He said the role of the Swiss franc as a safe-haven currency will dwindle because the unit is not liquid enough.

“A safe-haven currency requires liquidity such as the US dollar, euro, Japanese yen and may be renminbi in the future when the country gets rid of capital controls… people should be able to buy it and sell it easily,” he said.

He said the strong US dollar is now the best safe-haven currency in the market.

The US Federal Reserve is expected to start raising interests rate in June, gradually guiding benchmark rates up 1 percent by the end of the year, he said.

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