• SNB shocked financial markets
• The Swiss National Bank (SNB)
unexpectedly discontinued the floor from EUR/CHF, and lowered the interest rate on sight
deposit to -0.75% from -0.25%. (2nd cut in less than a month).
• Why change a policy started in 2011 now?
The main reasons were the EUR/USD depreciation (due to strong dollar) and
diverging monetary policy between major currency areas, that are likely
to become even more pronounced. The latter, raises the strong
possibility that next week’s ECB meeting could bring a larger-than-expected QE
program.
• The further weakening of EUR, would have
put downward pressure on EUR/CHF, hence increasing the need for the SNB to
intervene. However, the SNB may have been reluctant or even unable to intervene
further
• The removal of the floor does not mean that the SNB thinks CHF is
fairly valued or that it is abandoning the market. It could set a CHF cup against another
currency (perhaps the dollar) or a broader basket of currencies than just the
euro.
• With a big EUR-buyer out of the market and potentially becoming a
big buyer of USD, the implications are for a lower EUR/USD.
• As for USD/CHF, given the divergence between the Fed and SNB
monetary policies, and the deflationary condition of the Switzerland’s economy,
I would expect the USD/CHF to recover further in the near future.
• Today:
• Eurozone: Eurozone final CPIs for December is
expected to confirm that the bloc fell into deflation, for the first time since
2009
• US: CPI for December are expected
to fall below 1%. Industrial production for December. The Preliminary U o
M consumer sentiment for January The surveys 1-year and 5-to-10 inflation expectation outlook are also
coming out
• Speakers: ECB Governing Council member Carlos Costa,
Minneapolis Fed President Narayana Kocherlakota, San Francisco Fed President
John Williams and St. Louis Fed President Jim Bullard speak.
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