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Swiss abandon euro-peg as QE looms, franc and gold soar which will be the currency of the year?

 -- Published: Friday, 16 January 2015 | Print  | Disqus 

By Peter Cooper

Switzerland has abandoned its 1.20 peg to the euro causing some of the biggest one-day movements in foreign exchange markets in living memory. The Swiss franc soared 16 per cent against the euro. Gold and silver also gained in a flight to safe havens, with gold up 2.4 per cent to $1,260 an ounce immediately after the announcement.

The move was completely unexpected and there were no leaks in advance of the news. It’s the latest round in the global currency wars or the central banks rearranging the deck chairs on the Titanic, according to your view point.

Ducking QE

The Swiss National Bank is clearly going for a strong currency as the European Central Bank prepares to announce its own QE money printing program. The Swiss want none of this and have broken with their self-imposed euro-peg. The collapse of the euro in Swiss francs just shows what QE is likely to do to the value of the euro in other currencies.

These sort of seismic shifts in forex pairings typically catch somebody unaware and bankruptcies among traders caught on the wrong side are probably inevitable. Even a major financial institution could be brought down by such a sudden ‘black swan’ event. And what of eurozone borrowers of Swiss francs?

It’s not surprising then that precious metals shot up as well as the Swissie, though by not nearly so much. The Swiss want to be with the dollar and safe haven assets when the ECB starts printing money and the euro slumps. It is protecting the value of what has always been a hard currency.

However, this will come at a high cost to Swiss industry that exports 55 per cent of its products to the eurozone. It just became significantly less competitive and the Swiss stock market crashed by 10 per cent as a mark of what it means for business in the federation.

Gold referendum

It can’t be entirely coincidental that the SNB made this decision not long after the Swiss gold referendum was defeated. This is a policy response to those who wanted the Swiss currency to be a hard asset again and the SNB knows when to bow to democratic opinion.

As we predicted on ArabianMoney the gold referendum was a game changer for the yellow metal. It marked the bottom of its cycle and gold prices have been on the way up since then. The break above $1,250 is decisive and opens the way up for a swift upward march to $1,400 an ounce over the coming months, albeit a stock market correction would briefly reverse this advance.

After the $1,400 resistance level is broken there is nothing but blue sky to come for gold as the currency pick of the year.


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 -- Published: Friday, 16 January 2015 | E-Mail  | Print  | Source:

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