The Markets
Central banks have been full of surprises lately, but not too many people saw this one coming. For aficionados of the board game Clue, here's the gist of it: Thomas Jordan did it in Switzerland with monetary policy.
Last week, Swiss National Bank (SNB) Chairman Thomas Jordan told the world the SNB would no longer cap the value of the Swiss franc at 1.2 per euro because the policy was no longer needed. The decision triggered an exceptional response. The Economist reported:
"Currencies don't normally move that far on a daily basis - 2-3 percent is a big shift. The exception is when a country on a fixed exchange rate suffers devaluation; then a 20-30 percent fall is a possibility. But a 20-30 percent plus upward move is almost unprecedented. That, however, is what happened to the Swiss franc on January 15th..."
The SNB's decision roiled global financial markets. The Swiss market lost about 10 percent of its value on the news and U.S. markets slumped, too. Anxiety was particularly acute in central Europe where many people hold loans and mortgages denominated in Swiss francs.
The SNB currency peg was introduced just three years ago, when things were grim in the euro region, and money was pouring into safe-haven Switzerland. The value of the Swiss franc increased significantly, making Swiss exporters - watchmakers, chocolatiers, luxury goods manufacturers - far less competitive. The SNB's solution was a currency peg.
So, how does a central bank maintain the value of its currency? Well, among other things, it prints money (in this case, Swiss francs) to buy more of the peg currency (euros). Today, with the European Central Bank expected to begin a round of quantitative easing that may reduce the value of the euro, the BBC speculated the Swiss could no longer afford to maintain the peg.
Motives aside, the move may have produced results the SNB didn't anticipate. An expert cited by the International Business Times said, "The Swiss bank thought that by removing the cap and activating a negative interest rate, the currency would weaken. In this case, the surprise is going to bite them back." Did it ever.
Data as of 1/16/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
-1.2%
|
-1.9%
|
9.4%
|
16.0%
|
11.9%
|
5.4%
|
|
10-year Treasury Note (Yield Only)
|
1.8
|
NA
|
2.8
|
1.9
|
3.7
|
4.2
|
|
Gold (per ounce)
|
4.9
|
6.5
|
2.9
|
-8.0
|
2.4
|
11.7
|
|
Bloomberg Commodity Index
|
-0.3
|
-1.0
|
-17.5
|
-10.0
|
-5.7
|
-3.4
|
|
DJ Equity All REIT Total Return Index
|
2.3
|
7.0
|
33.1
|
18.2
|
17.7
|
9.6
|
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
