Market News & Insights
16 January 2015

Did the ECJ Pave the Way for SNB To Drop the Floor?

EUR/USD 1.1625
GBP/USD 1.5220
GBP/EUR 1.3092 (0.7638)
EUR/CHF 1.0115
GBP/CHF 1.3245
GBP/AUD 1.8520

Unless your head was buried in a spreadsheet yesterday, it was difficult not to hear about the turmoil across global markets following the surprise/shock decision by the Swiss Central bank to remove the EURCHF floor at 1.2000, which they have been defending since September 2011. The decision by the SNB totally caught the market off guard, and is perhaps one of the biggest shocks to FX markets in decades, to say this was unexpected would be an understatement and I would imagine taking a look at the macro hedge fund and speculative trading victims would be a testament to that. Needless to say the end of the floor removed one of the few consistent buyers of Euro from the market resulting in EURCHF falling over 30% at one stage, while almost all EUR pairs accelerated recent losses, EURUSD dropping as low as 1.1567, just shy of 11 year lows.

The total surprise of this move has been hotly debated, it appears that there was no warning whatsoever from the SNB, but markets are now looking towards the ECB QE announcement next week as a certainty. Wednesday’s clarification from the ECJ regarding the OMT Program confirmed the legality of the ECB purchasing bonds of struggling member states, and while the two program differ, in principal the act is the same essentially opening up the scope for the ECB’s QE program. It is apparent the SNB had neither the clout nor desire to stand in front of the potential freight train that will be ECB QE. The rapid appreciation in the value of CHF will cause its own issues for Switzerland and there have been a vast number of warnings to the Swiss economy as a result. The drop of CHF interest rates into negative (-.75% onsight deposits) territory has done little to negate the surge in the value and while the SNB may be unwilling to stand in front of ECB QE, they will have to do something to address the surging value of CHF so we are unlikely to have heard the end of SNB intervention. Currency wars anyone?

The result of the SNB’s actions was a massive bout of risk off trading. Equity markets declined across much of the globe with the US and Asian markets over night both in the red. Not surprisingly Swiss stocks tumbled with the Swiss Market index down 8.7%, having been as low as 14% lower on the day. European markets however were surprise benefactors of the Swiss stock sell off with the Euro Stoxx 50 up 2%, with the DAX also up 2%. Needless to say currency markets bore the brunt of volatility yesterday with the EUR facing heavy selling, safe havens USD and JPY were key benefactors with the later outperforming. EURGBP dropped to fresh lows just shy of the March 2007 lows down below .7700

Almost all other major data releases fell through the cracks yesterday but looking at the US there was some weak jobless claims data, weekly claims unexpectedly rose while the Philly Fed survey was also worse than expected. The US session carries the potential to provide most volatility in today’s session with the release of CPI inflation data, year on year inflation is expected to have slowed to .7% from 1.3%, in my view it is curious that the US see no issue with inflation below 1%, with markets looking to price rate hikes in the second half of the year, while in the UK inflation is at .5% and rate hike expectations have been pushed back to 2016. GBPUSD held its own in choppy trading yesterday and should US inflation be confirmed as weak we may well see GBPUSD push back above this week’s resistance ahead of 1.5270.

CPI data is due from the Eurozone as well today but with everything that has happened we see the impact on EUR trends as minimal. All focus is now on next week’s Jan 22nd ECB meeting, the single currency is likely to be in for an extremely volatile period over the next 7 days, and while EUR weakness has been well priced we will warn that should the ECB fail to meet market expectations there is the possibility of a bounce in EUR pairs, that is not to be taken for granted.