An exchange traded fund that tracks the price movements of the Swiss franc currency plummeted Tuesday after the Swiss National Bank capped the strength of its currency against the euro.
CurrencyShares Swiss Franc Trust (NYSEArca: FXF) was down more than 8%. It follows the franc’s movements against the U.S. dollar and had rallied through most of 2011 hitting its recent peak in August.
The SNB promised to buy euros at “unlimited quantities” as a way to maintain a 1.20 franc price ratio in an attempt to hold back the runaway appreciation in the currency, stating that it would “no longer tolerate” the euro depreciating beyond the minimum rate, reports Deborah Ball for The Wall Street Journal. Subsequently, the euro jumped 10% on the news.
The SNB’s recent move was a response to the current rise in the franc as investors became more anxious over the future prospects of the global economy, the slowdown in the U.S. and growing problems in the Eurozone. [Swiss Franc ETF in Focus After SNB Move]
“This could be a bloody battle for the SNB over the next few months,” remarked Jane Foley, currency strategist for Rabobank. “It’s a battle of the SNB against the search by investors for safe havens.”
“We think a fair value would be 1.30 to 1.40 francs, but taking into account the serious debt crisis in Europe and the problems in the U.S., we believe 1.20 francs is a level that can be easily defended,” stated Rudolf Minsch, chief economist for Swiss business lobby Economiesuisse. “There is a trade-off in order to convince the market that this level is defensible.”