What scrapping the Swiss franc cap means for you
Earlier this month, the Swiss National Bank (SNB) made the shock move to abandon its cap on the Swiss franc. The cap had pegged the franc at a price of €1.2 since September 2011, making it a relatively safe bet for traders. Its removal changed all that, with the its worth soaring by 30% against the euro overnight. This was followed by panic on the Swiss stock exchange, gloomy predictions for its export market and confusion for individuals whose investments relied on the currency. But why did it happen, and what will the move really mean for you?
Many traders suspected the decision was triggered by the European Central Bank's quantitative easing programme, which will decrease the value of the euro. There was also growing Swiss opposition to the SNB's tactic of minting new francs to buy euros, keeping the franc’s value down. Switzerland's foreign currency reserve was worth an enormous $480 billion at the last count, and the policy had led to inflation of an already strong housing market.
Now the cap has gone, buying or investing in Switzerland will be much more expensive – especially if you're spending in the euros. For that reason, it's little surprise that Swatch group chief executive, Nick Hayek, called the move "a tsunami; for the export industry and for tourism”.
For example, today, an Omega Seamaster men's watch would cost you around €5955. On 14 January 2015, it would've cost you €1000 less. In US dollars, that difference would've been around $600. The shift would still hit your bank balance, but not quite so hard. Like Swiss watches, Swiss holidays will also be a bigger investment, potentially putting off visitors. If you booked now, the price of a four-day stay in a five-star Bellevue hotel, flights included, would be £713 per person. A couple of weeks ago, that would've been £460.
In the short-term, this is a difficult time for foreign investors in Switzerland. But the hard part should be over; recent activity in the currency markets suggests the SNB has acted since to keep the franc down. Rabobank analyst Jane Foley also believes the rate will remain settled for the next six to 12 months. The best way to transfer money to or from Switzerland will really depend on how much faith you have in that prediction, and the reasoning behind it.