Wow! Yesterday was an incredible day on the markets and was witness to volatility not seen for decades. As most of you will probably know by now, the Swiss National Bank (SNB) removed it’s peg against the Euro which sent the markets into what has been described in various different quarters as a financial earthquake. The surprising aspect of this is that the SNB is often thought of as a bastion of moderation and caution, and this move was anything but that.
So, what exactly happened? In 2011, at the height of the financial crisis, the SNB pegged itself to the Euro so the rate would not go above 1.2000 against the Euro. Acting without warning the SNB implemented this peg as funds were flooding into Switzerland and they wanted to try to control the Swiss Franc as much as they could.
For over 3 years, this was maintained with minimum fuss. Yesterday, in an unexpected move which took everyone by surprise including a rather non-plussed IMF MD Christine Lagarde, the peg was removed. This caused CHF to move in ways the markets could not keep control of. Against the Euro, 24 hour volatility jumped to its highest level since 1971. Against the US Dollar, CHF moved 25%. Against GBP we saw it strengthen by 14%.
So why has the SNB done this and cut its interest rates to -0.75% at the same time? It believes the cap is no longer justified. Lowering interest rates will mitigate the effects of the removal of the cap and will eventually show its effects. The timing of all this is very important as it appears that the SNB has decided it no longer wishes to spend billions of Dollars protecting the limit when the ECB is about to flood the market due to QE.
The Euro is going to be the major loser in all this and Goldman Sachs have already predicted parity with the USD by 2016. The SNB has shown that it is happy to intervene and will continue to do so. The Euro has lost one of its major financial allies and the effects will be shown across the board.
We saw GBP/EUR climb to over 1.30 yesterday and EUR/USD to 1.1600. It looks unlikely that the moves will stop there.
Realistically the markets will be getting over yesterday’s shock today but there is also CPI from the Eurozone and US for them to get their teeth into.
Have a great weekend!