Swiss Remove Currency Cap and Cross with Euro Colapses

Posted On 15 Jan 2015
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EUR/CHF collapsed after the Swiss National Bank gave up the 1.2000 franc cap. This sent the currency pair to 1.0236, from 1.20, which is enormous volatility. With the ECB set to pursue quantitative easing, it was always going to be a tall order for the SNB to defend 1.2000 cap, while the central bank stated that while the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate, and that the economy was able to take advantage of this phase to adjust to the new situation.

The decision by the European court stating this week that quantitative easing is legal paved the way for the SNB’s action. The EUR/CHF nosedive caused chaos in forex markets. EUR/USD hit a new nine-year low at 1.1572 following a two-big figure dive, subsequently rebounding sharply to near net unchanged levels around 1.1750, and then settling to a jumpy oscillation around the 1.1700 level.

The Swiss National Bank cut the interest rate on sight deposits the exemption threshold to -0.75% from -0.25% previously. At the same time, the target range for the three month Libor was cut to -1.25%-0.25% from -0.75% – 0.25%.

In economic news, German 2014 GDP growth accelerated to 1.5% from just 0.1% in 2013, with equipment investment rising a strong 3.7% after falling 2.4% in the previous year. This meant capital formation contributed 0.6% points to the annual growth rate. Net exports added a further 0.4% points and government consumption 0.2% points.

The Eurozone posted a trade surplus of EUR 20 billion in November, up from EUR 19.6 billion in the previous month and with the 3 months trend rate continuing to rise. Exports rose 0.2% month over month, after falling 0.1% month over month in October and imports were steady over the month in November, with data pointing to a positive contribution from net exports to overall growth in Q4, although it is worth keeping in mind that these are nominal numbers that will have been impacted by the sharp drop in oil prices.

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