The EUR/CHF Floor: How a Currency Peg Breaks

The EUR/CHF floor episode of January 2015 is a textbook case of how managed currency pegs can break suddenly. For nearly three years, the Swiss National Bank (SNB) had held the euro at a minimum of 1.20 francs, a policy designed to prevent excessive franc appreciation that was hurting Swiss exports. On January 15, 2015, with euro weakness looking structural rather than temporary, the SNB abruptly removed the floor and announced negative interest rates. The franc surged 30% in minutes, wiping out traders holding long-euro positions, destabilizing leveraged funds, and demonstrating the singular risk of relying on a central bank to enforce a peg indefinitely.

Why the SNB imposed the floor in 2011

In the aftermath of the 2008 financial crisis and during the euro-zone sovereign debt crisis of 2010–2011, the Swiss franc was the safe-haven asset of choice. Risk-averse investors fleeing euro exposure, Greek debt fears, and general uncertainty bid up the franc relentlessly.

For Switzerland—a small, export-dependent economy—this was a disaster. A strong franc made Swiss watches, chocolate, pharmaceuticals, and machinery more expensive abroad. Tourism fell. Manufacturers faced margin compression. Deflation risk emerged as import prices collapsed relative to domestic production costs.

In September 2011, the SNB announced a floor: it would not allow the euro to fall below 1.20 francs. To enforce it, the SNB promised to sell unlimited francs and buy euros at that level. This was a radical commitment—essentially saying the SNB would accept whatever quantity of euro liabilities it needed to prevent the peg from breaking below 1.20.

How the SNB defended the floor

For the peg to work, the SNB had to be willing to back it with actual firepower: its foreign-exchange reserves and its balance sheet. Every time market pressures pushed the euro toward 1.20, the SNB would step in and buy euros, supplying francs to the market. This created a one-way bet: traders knew the SNB would defend 1.20 and would not let it break lower.

By late 2014, the SNB had accumulated roughly 188 billion Swiss francs in foreign-exchange reserves—primarily euros and other foreign assets—all acquired in service of the peg. The SNB’s balance sheet had swollen from 20% of GDP to nearly 40%.

For most of the period, the floor held. EUR/CHF traded in a range of 1.20 to 1.24. Traders betting on franc strength found the peg immovable. The SNB’s credibility was unquestioned.

But credibility is only as strong as the resolve behind it.

The unraveling: structural euro weakness

Starting in 2014, the picture shifted. The euro faced structural headwinds:

• The euro zone was in a shallow recession; growth was anaemic.
• The European Central Bank (ECB) was falling further behind the Federal Reserve in raising interest rates, widening the interest rate differential between dollars and euros.
• ECB President Mario Draghi signaled openness to quantitative easing—a signal of monetary ease—in late 2014.
• The dollar was strengthening across the board as U.S. growth accelerated and Fed rate increases approached.

The SNB faced a dilemma. If it wanted to defend the 1.20 floor, it would need to:

1. Keep buying euros indefinitely, accepting massive, growing foreign-asset holdings.
2. Accept the inflation risk of a bloated balance sheet and negative real interest rates.
3. Tolerate the resource cost of sterilizing foreign-exchange purchases (preventing them from inflating the money supply).

Or it could acknowledge that the euro weakness was structural, not a temporary panic, and that defending the floor was no longer in Switzerland’s interest.

The announcement: January 15, 2015

On the morning of January 15, 2015, the SNB released a terse press statement: it was abandoning the floor. The SNB would no longer intervene to prevent the euro from falling below 1.20. Furthermore, it cut its policy interest rate to −0.75% (a more aggressive negative rate), signaling a turn toward monetary ease.

The statement was issued in the morning, after the European trading session had closed but before the U.S. market opened. Crucially, there was no gradual signal, no press conference, no forewarning. The market had been expecting the SNB to hold firm.

The flash crash: January 15 aftermath

What happened next was a chaos cascade:

• EUR/CHF fell 30% in seconds. The pair, which had been trading around 1.025, dropped to 0.85 within the first minute of trading in the U.S. market.
• Bid-ask spreads exploded. In the absence of SNB buying bids, the market had no buyer. Sell orders piled up.
• Leverage unwound violently. Forex hedge funds and retail traders who had built long-euro (or short-franc) positions with leverage faced margin calls. Many were wiped out.
• Some forex brokers collapsed. OANDA’s forex operations were hit hard. Other brokers that had offered high leverage to retail clients faced insolvency as clients’ losses exceeded their account balances.
• Cryptocurrencies spiked. In the chaos, Bitcoin and other coins saw wild moves, as fear spread across risk assets.

By day’s end, EUR/CHF had recovered slightly to 0.98, but the damage was severe. The move was the largest single-day currency move in modern history.

Why the peg broke

The SNB’s decision to remove the peg rested on a simple economic fact: the cost of defending it had become unsustainable.

The SNB’s foreign-asset holdings were ballooning, risking inflation down the line. The negative real interest rates implied by defending the peg were distorting the Swiss economy, inflating asset prices and encouraging excessive borrowing. And the euro weakness driving the peg toward breaking appeared to be structural—driven by ECB monetary ease and weak European growth—rather than a temporary panic that would reverse.

In other words, the SNB had reached the limit of its willingness to absorb additional euro liabilities. Once that credibility was questioned, the floor was doomed.

Lessons for currency pegs

The SNB episode illustrates why managed currency pegs are inherently fragile:

1. Finite reserves. A central bank’s commitment to a peg is only as credible as its ability and willingness to defend it with real resources. Once traders sense the central bank is unwilling to spend more, the peg becomes vulnerable.

2. Interest rate costs. If maintaining a peg requires the central bank to hold interest rates far below what the domestic economy needs, resentment builds within the central bank and in the public. Eventually, the central bank prioritizes domestic objectives over the peg.

3. Balance-sheet bloat. Foreign-exchange reserves acquired to defend a peg inflate the central bank’s balance sheet. Over time, this creates inflation risk and limits future policy flexibility. The SNB had accumulated such large holdings that continuing to defend the peg would have meant eventual currency depreciation from the sheer volume of new francs created.

4. No surprise can be kept forever. The SNB tried to surprise the market with the removal, but insiders and vigilant traders had seen the structural euro weakness and questioned whether the SNB would hold the line. Once doubt emerges, the peg is fragile.

Contrast with other pegs

Not all pegs end in disaster. The euro itself is a peg—or rather, an irrevocable fixed exchange rate between 20 member countries. It holds because member states have committed to surrender monetary policy sovereignty entirely and face strong political pressure to maintain the union. But the euro has required rescue financing and ECB backing in crises.

The Chinese renminbi peg to the dollar has held (with minor adjustments) for decades because China has massive reserves, a current-account surplus, and capital controls that prevent traders from betting against it freely. The Hong Kong peg to the dollar holds because Hong Kong’s currency board rules mechanically enforce it and Hong Kong has foregone monetary policy autonomy.

The SNB peg broke because it was temporary, announced as temporary, and increasingly expensive to maintain. Once the SNB signaled an exit, the peg was finished.

Market impact and aftermath

After January 15, 2015:

• The franc, freed from the peg, appreciated further against the euro but stabilized somewhat as the shock wore off.
• The SNB cut rates further and remained accommodative for years.
• Several leveraged forex funds shut down or faced forced wind-downs due to losses.
• Forex brokers tightened leverage limits and margin requirements.
• The episode triggered a broader debate about how to regulate leveraged retail forex trading.

For traders, the lesson was stark: do not assume a central bank will defend a peg forever, no matter how strong its stated commitment. When economic fundamentals shift and the cost of defense rises, even credible pegs can break suddenly.

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