The Swiss National Bank’s sudden decision to discontinue supporting the exchange rate of 1.20 Swiss francs per euro is a stark reminder to corporate treasurers that they are not immune to volatility swings that can wreak havoc on financial markets.

“After years of relative calm in the market, 2014 started to become quite volatile, and 2015 has started out even more so,” Amol Dhargalkar, managing director and leader of the corporates team at Chatham Financial, told Markets Media. “This is just the latest example of a financial market that moved dramatically.”

The SNB’s decision means that overnight a company’s euro-based revenues will now be able to purchase 15% less CHF.

If a company has exposure to the Swissie, either from a revenue or cost perspective, that’s going to be a challenge for them, particularly if it’s from a cost standpoint, said Dhargalkar. “If you are a company that has budgeted 120 Swiss francs on the euro, there’s a bit of a rude awakening in store,” he said.

The likelihood of European customers being willing to accept price increases just for the exchange rate movement are small, particularly if the company has a cost base in Switzerland, he added. “This is a reminder that volatility really should be a significant area of focus for companies.”

The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty in the financial markets in order to protect the Swiss economy from serious harm.

The euro has depreciated substantially against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.

“There’s been significant weakening of the Euro overall, which has actually made the dollar Swiss franc exchange rate move in a direction that they perhaps are not that comfortable with,” said Dhargalkar. “The SNB was printing significant amounts of Swiss franc over the time that they’d been defending this floor. Over time, their balance sheet was increasing quite significantly, to the point that there were concerns that maybe that would not be acceptable from a political standpoint.”

Central banks have moved away from pegged to free floating exchange rates because pegged rates are difficult to defend, “particularly if you are defending against a weakness in your currency versus too much strength in your currency,” said Dhargalkar. “If you have too strong of a currency you can just keep printing money. At some point you might invite inflation, but I don’t think the SNB was anywhere near that line yet.”

Featured image via  NiJ0/Flickr under creative commons