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Posted February 5th, 2015 by Charles Purdy

What the changes to the Swiss franc policy really mean

Last month’s announcement that the cap on the Swiss franc would be removed raised warning bells in the markets, with news spreading fast and speculation about what this could mean for the European economy and the Eurozone. But what does this actually mean?

Foreign currencies are bought or sold; as such, they have a price, as you would expect with any goods or services. The exchange rate is essentially the price of one currency against another. Exchange rate caps mean that the price of that currency has a set limit – either up or down – in the case of the Swiss franc, a cap was set by the Swiss National Bank on the price of euros in francs, for the euro to not go lower than the value of 1.2 francs/1 euro.

The reason for this cap is that Switzerland is considered as having ‘safe haven’ status for investors. The value of the euro against Swiss francs also has very real implications for exporters who sell their products and services in euros but pay their staff’s wages in Swiss francs. We have seen the effects of this over the years, for example, in 2007, a euro cost more than 1.6 Swiss francs, and as the franc continued to strengthen, this rate went up in 2011 to a rate of one euro to one Swiss franc. This dramatic rise in value made conditions particularly difficult for exporters, reducing their revenue and profits.

The volatility of the exchange rate also made financial planning difficult for anyone making exchanges between the euro and Swiss franc, whether this was to pay for goods or services, ship goods overseas, or purchasing property.

Despite this, the situation in the Eurozone remains a greater concern. The cap on the exchange rate could well have been removed in light of the continuing uncertainty in the Eurozone and the difficulties this could cause the Swiss National Bank in maintaining the low levels, given continued pressure for ways to stimulate the EU economy.

David and Maureen Adcock’s story shows how they were nearly caught out by the volatility of the Swiss franc in early 2014.

A lucky escape with the Swiss franc

One British couple, David and Maureen Adcock from Northumberland, faced the possibility of losing thousands when sterling’s value plummeted against the Swiss franc in January 2014. They consulted a currency specialist, Smart Currency Exchange, and ended up saving £9,000 through careful currency planning. This significant saving meant they could pay off the mortgage on their property in Cyprus.

Knowing they would need to make the final mortgage payment for their Cypriot apartment by the end of January 2015, in December 2014 the Adcocks decided to organise the required funds in advance. Their mortgage in Cyprus was in Swiss francs.

“We needed 89,000 francs for our final payment,” said David Adcock. “In December our trader informed us that the exchange rate had moved in our favour, so we decided to forward buy the Swiss francs using a currency product called a forward contract, securing the favourable exchange rate at the time by paying a small deposit. When I called to action the transfer on January 15th, I got a bit of a surprise!”

Using a forward contract with meant the Adcocks’ CHF89,000 cost them around £58,500. The same transfer would have cost them around £67,500 if they had bought the francs on 15th January, the day that sterling’s value crashed against the Swiss franc. Forward buying, essentially locking in the good exchange rate in advance, saved the couple around £9,000, but just as importantly brought them peace of mind that they avoided the risks of the crashing exchange rate.

David and Maureen’s two-bedroom apartment is in the village of Pyla near the resort of Larnaca. They bought it off-plan for around £100,000 in 2007, paying a 30 per cent deposit. They use it as a second home and plan to spend much of the year there once they retire.

To find out how much you can save with Smart Currency Exchange, fill in their simple online quote form.

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