On January 15 the Swiss National Bank, in order to fight the increasing deflation, lowered its target rates deeper in negative territory (-1.25% - -0.25%). However, at the same time SNB canceled the minimum limit, previously set for the national currency exchange rate, triggering the largest event in the FX market in recent years. The Swiss franc soared to an unprecedented 18% against the dollar in minutes annihilating capitals of those who bet on further depreciation. Currency has not seen such a strong daily move in its whole history (look at the charts below the page). Actually, it was a so called Black Swan (but the elephant-sized one) - about 33-sigmas (standard deviations) of daily % changes since 1975.

    In recent years, Switzerland has significantly improved the current account balance and has accumulated a large amount of international reserves, while keeping the average rate of economic growth (see the charts). Will the negative SNB rates to overcome deflationary trends or rapidly strengthening franc will be more powerful factor?

Data sources: World Bank Global Economic Monitor, January 2015, IMF World Economic Outlook, October 2014, Swiss National Bank interest rates targets dataset (SNB data), USDCHF spot exchange rate daily series (1975-2015) (Bank of England data)

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