Central bank’s abandonment of Swiss franc-euro cap described as a ‘tsunami of pain’ for exporters and tourism industry

Watch makers, ski resorts and currency traders were facing big losses on Thursday when the Swiss central bank stunned the financial markets by abandoning its currency peg against the euro.

Swiss manufacturers faced what one business leader described as a “tsunami” of financial pain as the franc responded to the shock announcement, jumping by an initial 30% against the euro. Movements of around 2% are usually considered big in the foreign exchange markets.

The move wiped 9% off the value of the Swiss stock market – its biggest one-day fall in more than 25 years. One trader described the market reaction as “complete carnage”.

The Swiss action is the latest event to unsettle markets since the turn of the year and came amid growing concern about the health of the global economy and warnings from the International Monetary Fund that the recovery since the recession of 2008-09 remained weak.

Speaking iIn the US, IMF director general Christine Lagarde said global growth was “still too low, too brittle and too lopsided”. There was a risk, she added, of the eurozone and Japan getting stuck in a world of low growth and low inflation for a prolonged period.

Strong signs that the European Central Bank (ECB) will announce a large-scale programme of quantitative easing (QE) – electronic money printing – to lift the eurozone out of deflation was seen by currency traders as the main reason for the Swiss National Bank (SNB) ditching its three-year campaign to stop the franc damaging Swiss exports by becoming too strong against the euro.

But with rich Russians looking for a safe haven during the recent rouble crisis, hot money has also been flowing into Switzerland in recent weeks, adding to the SNB’s difficulties in holding down the franc.

Swiss central bank chairman Thomas Jordan said that after more than three years in force the policy was no longer needed. The swiss franc/euro exchange rate did come back to a gain of 15% on the day. But Swiss businesses flatly rejected Jordan’s explanation. Banks, manufacturers and the tourist industry lined up to condemn the bank for its decision, which will make Swiss holidays and goods far more expensive.

Manufacturers in Switzerland’s northern belt are likely to feel the impact first as their exports to Germany and other eurozone countries become far pricier.

Nick Hayek, the chief executive of the Swatch watch group – which owns brands such as Omega, Longines, Tissot and Calvin Klein watches and jewellery – said: “Words fail me …today’s SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country.”

Swiss watchmakers are already grappling with weak demand in Asia, and are very exposed to moves in the Swiss franc exchange rate because they export almost all they produce. Shares in Swatch Group tumbled by 15%, while Richemont, which owns luxury names including Cartier, Montblanc and the fashion label Chloé, was down 14%.

The London spread-betting business IG Group said bets on the Swiss franc could cost it as much as £30m.

Julien Manceaux, analyst at ING Financial Markets, said the central bank’s cut in its interest rate to minus 0.75% “ensures the appetite for the franc as a safe haven will remain limited, avoiding a negative shock for the Swiss economy”. “This should work at least in the near term. Whether, this will still be the case after the ECB’s meeting on 22nd January and a likely QE announcement remains to be seen.”

The tourism industry will be hard hit as the cost of holidays soars, with a sharp decline expected in bookings to Alpine ski resorts at a peak time for the industry.

The euro declined to 0.80 francs before recovering slightly to stand at 1.03 francs. The franc also gained 25% against the dollar to trade at 0.89 francs per dollar.

One investment firm was forced to admit that the sudden shift in the Swiss franc had cost it as much as £30m.

The spike rise in the value of the Swiss franc came in early trading after the Swiss National Bank’s chairman Thomas Jordan said in a statement that the cap, introduced in September 2011, “protected the Swiss economy from serious harm” but was no longer justified.

The bank said the measure, which in effectively pegged the Swiss franc to the euro, meant the franc has tracked the euro during a period when it has dropped sharply against the US dollar.

Switzerland is seen by investors as a safe haven by wealthy investors and corporations fearful of destabilising developments in Russia and the Middle East. Investors have also flocked to Switzerland to escape ultra-low interest rates in the eurozone.

Pressure has intensified on the franc since the ECB hinted that it would begin flooding the eurozone with cheap credit under a programme of quantitative easing (QE), a move expected to reduce long-term interest rates further and devalue the euro against other currencies.

An advocate general’s ruling this week, likely to be accepted by the European Court of Justice, said the ECB was free to press ahead with bond buying without legal challenge. This intensified speculation that QE was imminent, forcing the SNB’s hand.

The growing US economy, and the likelihood of an increase in interest rates this year, has also pushed the dollar higher, exacerbating the widening gap between the dollar and euro.

At 11.00 the euro was down a cent against the dollar at $1.68 while the pound was up a cent at $1.52. The Swiss stock market collapsed 10%, or almost 1,000 points, to hit 8,205.

With the likelihood of money flooding out of the eurozone in search of higher interest rates, the SNB’s cut in its deposit rate by 0.5 percentage points to -0.75 is intended to be a deterrent to investors thinking of Zurich as an alternative home for their investment savings.