The Proof Will be in the Fine Print of the ECB QE

Europe will continue to take center stage following last week’s remarkable breach of the Swiss National Bank’s mandate against franc appreciation, which collapsed in a heap after the SNB let the EUR/CHF 1.2000 floor door go ahead of this week’s ECB meeting. Following the EU court decision clearing up the legal impediments to the ECB undertaking quantitative easing, that left the CHF some 21% firmer near 0.9900 after an over 41% rally to 0.8580 as a full range of investors were caught short CHF and the speed of the breach overwhelmed stop-loss protections to create a classic liquidity trap.

The Swiss Market Index is down 12% year-to-date as a hit to Swiss exporter sales and FX translation costs are priced in. The FX move left in multi-million losses in the laps of a whole range of banks, brokers, highly geared hedge funds and retail investors, and windfalls for some CTAs holding cheap and suddenly very valuable options. Meanwhile stop-loss levels will continue to be feverishly negotiated from Thursday’s event after the long weekend for settlement on Tuesday, which still could hold some surprises.

Looking ahead, in addition to the clean-up of the Swiss mess, focus will shift to the next round of risk events, including the heralded ECB meeting, along with Greek elections and even an FOMC meeting due before month-end. The ECB to follow-through with a full QE package, including the purchase target of some 500-600 billion in euro sovereign bonds, even over the dead body of Bundesbank President Weidmann. The devil will be in the details, however, as just what form those purchases will take, ranging from high rated paper to inclusion of Greek debt could dictate the markets’ reaction and have profound implications for peripheral spreads and markets.

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