The Swiss National Bank dropped the foreign exchange shock of the year earlier today as they abandoned the three-year-old floor at 1.20 in EUR/CHF. Analysts at JP Morgan, Deutsche Bank, and SEB Group react to the news.
DB: The SNB decided to remove the minimum exchange rate floor. This is a huge surprise, and leaves two initial questions: (i) where will EUR/CHF settle and (ii) what is the impact on EUR/USD. On the latter, despite the big drop would say it is *initially* marginally positive in that aggressive SNB accumulation is now off the table, implying that we will no longer be getting the EUR-selling reserve diversification flows. Also, EUR/CHF weakness is marginally inflationary for the euro-area. On (i) however this is a HUGE hit to their credibility having committed to the floor for so long…The ultimate impact on EUR/USD is therefore a bit more ambivalent, as it is for global rates: ultimate aim of SNB policy is to encourage outflows but there is also the risk they are forced to come back in to stabilize markets.
SEB: We assume that that the SNB has realized that relative monetary policy is crucial for exchange rates and policy easing by the ECB has weakened the EUR and the CHF substantially against the USD since last summer while inflows to Switzerland has increased and the central bank expects this trend to continue. Markets reacted with a initial huge appreciation of the Swiss franc against all major currencies. EUR/CHF was down to 0.8517 before stabilising at 1.05. Where the EUR/CHF exchange rate will stabilize is impossible to say. The CHF is long-term overvalued from a fundamental stance at any level below the floor. However the attractiveness of the CHF in the context of the Eurozone crisis and the risk of further easing by the ECB as broad based government bond purchases will main the downside pressure in EUR/CHF. The SNB decision today should probably be viewed against the risks the ECB will launch new measures at the upcoming meeting on January 22, which will weaken the euro even further.
JPM (who gloats and offers no guidance): The SNB’s decision to abandon the floor for EUR/CHF is remarkable but not unwarranted. As we have long argued and indeed positioned for, the SNB was losing the ability to prevent an increasingly justified depreciation in the euro against the franc. The pressure was bought to a head by the prospects for ECB QE and the SNB’s inability to substantially expand its balance sheet from an already bloated 85% of GDP. Most surprising in today’s decision is that the SNB has not chosen to retreats in a managed fashion – it has completely removed the floor such that EUR/CHF is now free floating…We are currently short EUR/CHF through a 1.2088 put, expiry 16 March. This is currently valued around 40%. We will hold for now but look to unwind if spot dips much below 0.90.
Danske: The surprise move has sent ripples through the FX market and EUR/CHF and USD/CHF initially dropped as low as 0.85 and 0.75, respectively; these sharp moves lower were, however, swiftly reversed and the crosses now trade around 1.01 and 0.86 at the time of writing.
In the press release, the SNB notes that the floor was always meant as a temporary measure to guard against deflationary pressure in Switzerland led by CHF strength brought about by safe-haven flows at the peak of the euro debt crisis.
The SNB cites the likelihood of increased divergence in monetary policy (probably with the ECB versus the Fed in mind) as a reason for the timing of the floor discontinuation (ECB meeting on 22 January should see a QE announcement). Indeed, the EUR/USD de-route ahead of likely ECB easing and Fed hikes later in the year appears to have been the tipping point; thus, the SNB implicitly hints that EUR/USD should continue to drop from here.
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