BNY Mellon’s Derrick: SNB anticipated pressure on CHF

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Simon Derrick, chief currency strategist, BNY Mellon comments on the Swiss central bank scrapping the CHF/EUR peg

In stoking the money supply and credit growth, SNB policy has contributed to the biggest real-estate boom in two decades. Despite this, the pressures facing Switzerland had intensified in recent months as expectations of further monetary policy easing in the Eurozone (and, hence, the risk of further capital flight into Switzerland) have begun to grow. Compounding this was Switzerland’s role as a safe haven as the Russian crisis intensified.

It was, therefore, not entirely surprising when the SNB decided a few weeks ago to impose an interest rate of -0.25% on sight deposit account balances at the bank and expand the target range for three-month LIBOR to -0.75%/+0.25%.

What was most interesting about the decision in December was the market’s muted response with the CHF remaining within shouting distance of the ceiling. It was therefore clear that something else would need to be done. What was not clear was quite what they would do and the timing of the move.

So what can the unexpected decision this morning to abandon the minimum exchange rate this morning without a fight tell us? The first thing it says is that the SNB clearly expected to see a huge surge of inflows in the week ahead and saw little reason to provide these buyers of CHF with an artificially cheap rate. This also intimates that the SNB either believes that the Russian crisis could intensify or (more likely) that they believe a programme of quantitative easing from the ECB is imminent (it is worth noting that the SNB this morning also lowered the interest paid on sight deposits to -0.75bp and moved its target range for three month LIBOR to between -125 bp and -25 bp).

The other fascinating bit about today’s move is how it echoes how events played out in the late 1970s and early 1980s given that the peg then lasted roughly the same length of time as the just abandoned currency regime. We believe that the currency markets have returned to environment that is surprisingly similar to that in force during the early part of the 1980s and today’s move provides yet another eerie reminder of that time.

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