SNB victim of “policy assassination”

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Not so much currency wars but “policy assassination”.

FX markets claimed its second victim in less than 4 month. And there will definitely be more in 2015. One thing is curtain in FX markets that volatility always return and this wave of volatility is back with a vengeance.

One thing is clear regarding yesterday’s SNB action, something was said or hinted in conversation between the SNB and ECB that spooked the SNB.  Scared them so much that abandoning the minimum exchange rate, allow the EURCHF to free fall, was the chosen policy path. The SNB could have chosen to managing the EURCHF decline with the still significant room in the SNB balances sheet (estimated by us at least chf200-300bn). Something Draghi said worried Jordon so much that the SNB abandon the strategy rather than attempt further balance sheet expansion to try and out last current pressure.

While EURCHF trade is done and dusted we now must position for ECB stimulus. Clearly the market has not fully priced in what the ECB is planning. If it was the SNB would have never have abandoned the floor so unceremoniously. We suspect the ECB suffers from the same credibility issue perceived with the BoJ. The market is expected to be disappointed. Markets anticipate the ECB will be too timid and cautions in the size and scope of any addition stimulus that net effect will be marginal.  Like the empowered BoJ under Koruda we believe Draghis ECB is planning a much larger strike then traders are expecting. Clearly the impending ECB strategy scared the SNB. We remain short in the EUR verse all G10 ahead of the QE announce and due to mounting political uncertainty in Greece.


Peter Rosenstreich is head of Market Strategy at Swissquote

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