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15/01/2015: The impact of the SNB ditching the €1.2000 floor


It has been an utterly staggering morning on the forex markets. At 09.30GMT the Swiss National Bank (SNB) dropped a bomb on the financial markets. There were two aspects of its announcement. On its own, cutting the deposit rate to -0.75% (ie. it costs 75bps to park your money at the SNB) was a big move. Theoretically this would help to dampen sentiment for the Swissy. However, at the same time the SNB announced that it was no longer favourable keeping a floor of €1.2000 on Euro/Swiss. This was the real game changer.

Swiss bomb

This means that for the policy of the past 6 years that has involved the SNB buying swathes of Euro denominate assets was coming to an end. The artificial ceiling that the SNB had self-inflicted at to at a rate of €1.2000 to prevent the appreciation of the Swiss franc was broken.

In effect the SNB has taken the decision that it sees ECB QE (which could be involve a balance sheet expansion of €1 trillion) as inevitable. It is purely speculation on my part, but it seems as though the SNB has looked at yesterday’s European Court of Justice ruling that the ECB’s Outright Monetary Transactions are not illegal and taken it that the way is now open for the implementation of full blown QE. It is perfectly possible that the SNB has also had some sort of indication from the ECB on the matter (again me speculating). It has subsequently taken the decision a week before the next ECB meeting that it cannot afford to bat against a potential €1 trillion worth of QE purchases by the ECB.

In my opinion, the actions of the SNB today suggests that we are almost guaranteed sovereign debt purchases by the ECB if not at next Thursday’s meeting (22nd January) then definitely on 5th March. The SNB would not have taken this measure unless it was absolutely sure.

The cutting of the deposit rate is an attempt to mitigate the damage done by removing the floor, but the impact on financial markets has nonetheless been nothing short of huge. The Euro/Swiss rate fell over 3300 pips in a matter of minutes from €1.2003 to a low of €0.8640. To get a true scale of the enormity of the move, I have to take my chart back to 2010 so that you can get a proper perspective on today’s move.

EURCHF   15012015

With almost the whole market likely to have been sitting long at €1.2000 in the knowledge that the SNB would maintain the floor, there must have been an enormous number of stop-losses taken out. The damage to hedge funds and forex houses may not be known for a while, but you can be sure that there are some key players that have been blown up by the SNB’s bombshell.

The Euro/Swiss rate has reacted off the low and has managed to retrace a large portion of those losses but the damage has been done. The rate may currently be looking a little more settled just under €1.0300. It is on the 1 minute chart where you get a gauge of the violent swings in today’s trading. However it might take a few days for the market to confidently settle on a re-rating of the Swissy and start to trade normally again.

EURCHF intraday  15012015

The move has also had huge consequences for volatility on other forex majors. The strength of the Swiss franc has dragged Dollar/Swiss over 13% lower. However, the euro has been a net loser, down 60 pips against the US dollar since the announcement. After an initial wobble it is notable that sterling has managed to claw slight gains against the dollar (about 10 pips).

The other major move has also come in gold which is now around $27 higher and has burst through not only the recent rally high at $1244, but also has broken the key October reaction high at $1255.20. On a near term target basis gold has achieved the $1258.50 upside target from the flag breakout. If it can now hold on to these gains, with a closing breakout, it would suggest that the gold bulls are back in control (at least for now).


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