Toward Removal of the Swiss Franc Cap: Market Expectations and Verbal Interventions

Nikola Mirkov, Igor Pozdeev and Paul Söderlind

Issue
2016-10

Pages
33

JEL classification
E58, E44, G12

Keywords
Swiss franc, implied volatilities, market expectations

Year
2016

We ask whether the markets expected the Swiss National Bank (SNB) to discontinue the 1.20 cap on the Swiss franc against the euro in January 2015. In the runup to the SNB announcement, neither options on the euro/Swiss franc nor FX liquidity indicated a significant shift in market expectations. Furthermore, we find that the SNB's verbal interventions during the period of cap enforcement increased the credibility of the cap by reducing the uncertainty of future euro/Swiss franc rate. We conclude that the markets did not anticipate the discontinuation of the policy.