Swiss National Bank shocks the currency markets (what now?)

The Swiss National Bank (SNB) sent shockwaves around the financial markets when it unexpectedly discontinued its commitment towards maintaining the 1.20 EURCHF floor on Thursday, only days after reiterating that it remained a key cornerstone of its monetary policy. This sent the already high market volatility into complete overdrive, sending shockwaves across the financial markets.

So, what future movements could this bring to the markets? One thing to take into account is that the SNB has remained on front-line defence of the 1.20 EURCHF for a long period of time. Surrendering its commitment towards the cause has provided yet another indication to the markets that the Euro is going to continue the decline that has already seen the currency crash from 1.39 to 1.15 (as of yesterday) against the USD over the previous nine months.

Does the decision from the SNB also confirm that the European Central Bank (ECB) is set to introduce QE next Thursday? Not necessarily. However, the ruling from the European Court of Justice (ECJ) that ECB QE would be legal just the previous day, further weighted anticipation in this direction and most probably alerted the SNB that QE is more likely to be introduced from the ECB than it has ever been before. Such action would further pressure the Euro and consequently lead to the SNB remaining on front-line defence of the 1.20 EURCHF floor for a continuous period, and to the point that what have already become losses to the SNB balance sheet would just become liabilities that they quite possibly would never have been able to recoup.

Since the most recent US GDP was confirmed at an annualised 5% only days before the Christmas break, the EURUSD has been on a complete one-way journey down the charts. In fact, since the US GDP was confirmed at an annualised 5% on the 23rd December 2014, the EURUSD has declined from 1.22 to 1.15 (as of yesterday). Optimism that the Federal Reserve will raise US interest rates at some point this year has been consistently reaffirmed by improved economic performances such as the US GDP and the US economy adding another 250,000 jobs to its economy last month, alongside repeated comments of commitment towards raising US rates from the Federal Reserve. This has continually supported the USD while on the other hand, the EU economic sentiment has increasingly worsened and the pressure on the ECB to introduce QE has intensified.

The continual bearish forecasts for the Euro have led many to expect that the currency will decline to parity against the USD by the end of 2015. While it is looking increasingly likely that we are heading in this direction, it will remain more possible for this to be achieved if further monetary easing from the ECB is combined with the US Federal Reserve raising US interest rates. The ECB introducing QE would also provide validity to those forecasts, however it will have to be enough QE to prevent the Euro bulls from attempting a rally back. The Euro also slid to over a seven-year low against the GBP at 0.7627 yesterday, while the EURJPY has declined by nearly 500 pips over just the previous three trading days. Overall, it’s the continual and ever-increasing pressure on the Euro that proved to be a major catalyst behind the SNB’s decision to withdraw its commitment to the minimum exchange rate.

Does the decision from the SNB also mean that demand for the CHF is set to continue the gains seen yesterday? No and the primary reason why the CHF has already begun withdrawing its incredible gains from the unexpected monetary decision is due to a realization from the markets that discontinuing its commitment to the EURCHF 1.20 floor is not positive for the Swiss economy.

Swiss stocks have already encountered steep losses because investors have now realized that exports from Switzerland have just become far more expensive. The whole reason why the 1.20 EURCHF commitment was enforced in the first place was because Swiss exports were becoming too expensive. Now that the floor has been released and all current expectations are for the Euro to continue its decline, we are looking at elevated chances for this cycle to repeat itself. By the cycle repeating itself we are looking at a situation where Europe can just no longer afford to purchase Swiss products.

During the completely unexpected movement on the financial markets where in less than one hour the CHF gained around 30% against the USD and the Euro hit multi-year lows against the USD and GBP, Gold restored its credibility among investors as a safe-haven asset. Gold bulls were reignited during the uncertainty with the metal climbing as high as $1266, its highest level since September. The increased demand for Gold over recent days is going to lead to suspicions that the metal is attempting a bull run, although the metal really needs to extend above $1270 for any hopes that there could be a rally towards $1280. Around the area just above $1270 there is still some short-term resistance and Gold’s failure to extend to this level yesterday is largely why the metal has already declined to $1256 on Friday morning.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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