Swiss Franc bounces with a vengeance

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Swiss Franc

Surprise Surprise!!!

  • Swiss National Bank gives up on the EURCHF floor of 1.2
  • Cuts sight deposit rates or 3-month LIBOR to -0.75%
  • Swiss Franc rallies across the board
  • European equities trade in the Red
  • Dollar Index declining on the news
  • Gold futures relatively stable

In what seems like a major decision that caught the markets off guard, the Swiss National Bank today announced that it will no longer be defending the EURCHF peg at 1.20. The SNB also cut its sight deposit raters further to -0.75%.

On the news, the Swiss Franc gained across the board notching gains as much as 2% across its peers and expected to rally more. At the time of writing, the USDCHF dropped close to 12%. The Swiss SMI index was also deeply in the red down 5%.

The move by the SNB, especially in regards to the EURCHF floor of 1.2 surprised many a market participants but questions began to arise recently as the ECB prepared ground for its quantitative easing and how much the SNB could defend the peg. By committing itself to the floor, the SNB in part had actually given up its monetary policy sovereignty. The pre-emptive move by the SNB late last year to cut its sight deposit rates to negative territory was driven due to inflows of capital from Russia which led the SNB to act first, offering little to no support to defend the peg once the ECB starts its printing presses.

Global equity markets also felt the heat as the Nikkei225, S&P500 and NASDAQ futures gave up the gains from the previous day. German DAX declined as much as 2% on the news, while the Eurostoxx 50 was also down 2% for the day.

EURUSD, in a knee-jerk reaction briefly dipped to a new low of 1.1585. The SNB, in its bid to maintain the peg was so far the only buyer of the Euro at a Central bank level. With the SNB now giving up its peg, the Euro could see a sharp selloff in the week to comes, supported by the announcement of QE at next week’s ECB meeting.

The decision by the SNB today comes just a day later when the European Court of Justice gave a green light to the ECB’s OMT program, a mini bond buying program that never really kicked off. The decision had cleared up the air and put to rest any questions on the legality of the ECB’s proposed bond purchase program later this year. Given the circumstances, with the SNB’s sight deposits already into negative territory, it was but obvious that the SNb would give up its peg sooner than later.

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