The Swiss took everyone by surprise in abandoning the peg to the Euro. The focus has been on the Swiss franc and the Swiss economy and what will happen as a result. By why did the Swiss National Bank (SNB) make this move now? The Bank also deliberately did not tell anyone, which is highly unusual for any central bank. (2) The Swiss economy and its stock market are both expected to tank as a result of the move. It appears that the SNB has caused more harm to itself than anything else. If that is the case, why abandon the peg? The Swiss National Bank was trying to avoid a worse situation than the chaos that the decision caused. What can be worse than this? Looking deeper into what the bank was dealing with, you can see some clues. The SNB has a lot of gold reserves. There was a referendum held within Switzerland asking whether to increase its gold reserves that was voted down in November 2014. (5) The price of gold declining led to the SNB being short on cash in general. (4)(3) The Swiss National Bank is owned by Swiss cantons, which are provinces within Switzerland. It has to pay the cantons an annual dividend since they are in effect the shareholders. (4) At the same time, the Euro is going down versus most currencies, leading to investors trying to buy the Swiss Franc as a hedge against the Euro decline. This means that the SNB has to sell Francs to keep the value down and keep the peg in place. The Euro decline can partially be blamed on the deflation threat in the Eurozone and the subsequent massive QE that is being planned. Since the SNB has a peg against the Euro, they have to spend a lot of money to keeping the Swiss Franc from shooting up. This is the same money that would be used to pay the dividends to the cantons. Rather than blame the Swiss central bank, perhaps it is everything else going on that backed them into a corner. The worlds’ currencies are being devaluated. Since the Swiss Franc is still backed by gold to a large extent, it is deemed safer than almost any other currency. The Swiss Franc surged against almost all currencies when this announcement to end the peg was made public. The Swiss move is a symptom of the world’s problems brought into an unlikely arena. The bigger issues at stake are the global currency devaluations, the Euro deflation, the global deflation threat and the obligations of the central bank. Sources: 1) http://www.cnbc.com/id/102342751 2) http://in.reuters.com/article/2015/01/16/swiss-snb-strategy-idINKBN0KP2GO20150116 3) http://www.standard.co.uk/business/business-news/swiss-central-bank-lobs-bombshell-into-forex-markets-as-it-scraps-franc-cap-9979801.html 4) http://www.businessinsider.com/the-swiss-national-bank-move-may-have-been-done-to-protect-its-dividend-2015-1 5) http://www.forbes.com/sites/ralphbenko/2014/12/01/the-truth-behind-the-swiss-gold-referendum-escapes-most-of-the-mainstream-media/