SNB move motivated by ECB QE outlook says Meriten’s Fahrinkrug

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Holger Fahrinkrug , chief economist at BNY Mellon Boutique Meriten comments on the decision of the Swiss National Bank to abandon the fixed exchange rate between the euro and franc.

Today, the Swiss National Bank (SNB) unexpectedly scrapped its 1,2 minimum exchange rate for the Swiss Franc (CHF) against the Euro (EUR) and cut interest rates more deeply into negative territor: The new target range for three-month Libor was lowered by 50bp to -1,25% to -0,25%, and the interest rate for sight deposits was reduced by the same amount to 0,75%. Echoing arguments of ECB President Draghi, he also mentioned that the SNB might have to use its balance sheet to in order to enforce monetary policy.

EURCHF initialy dropped by almost 40%, but then retreated to 1,025 against EUR as we go to press, still a 15% appreciation.

According to SNB President Thomas Jordan, the move was reflecting the fact that CHF had depreciated against the US dollar since the introduction of the exchange rate floor in 2011 so that upholding it was unjustified. We believe, however, that the move was largely motivated by the outlook for ECB quantitative easing, possibly to be announced as early as next week, that could exert further upward pressure on CHF and make it even harder for the SNB to stick to the fixed exchange rate floor.

In our view, the decision to abandon the CHF peg does not imply that the SNB will abstain from intervention. Thomas Jordan suggested that it will remain active in the market. Hence, although today’s action might raise some question marks over the credibility of such announcements, we expect EURCHF to remain just above parity in the near-term, but to exhibit greater volatility.

The SNB move should have no effect on the ECB’s discussions and potential decisions regarding QE next week. After the supportive statement of the European Court of Justice’s advocate-general yesterday, we expect the ECB to announce an acceleration of bond purchases next week, at least covering corporate bonds, and further details regarding potential purchases of sovereign bonds. Whether it will already commit to a fixed starting date or other details for a sovereign bond programme is less certain, in our view, but possible.

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