The SNB (Swiss National Bank) today dropped the 1.20 EURCHF floor while at the same time lowering the negative interest rate on sight deposits to -0.75% from -0.25% previously, as well as moving the 3m Libor target to between -0.25% and -0.75%. The SNB argues that the floor was an exceptional and temporary measure that 'protected the Swiss economy from serious harm' but that the economy had had time to adjust to the new situation. It continues to argue that the franc had recently depreciated 'considerably' against the dollar. 'In these circumstances, the SNB concluded that enforcing the minimum exchange rate for the Swiss franc against the euro is no longer justified'.
This is the change in stance over just two days and why this move is such a shocker worldwide...
From January 12th,
Today,
"Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified."
EURCHF initially dropped 40% to almost 0.85. It quickly reversed seemingly with the help of SNB interventions at levels just above parity to the euro. The statement noted that 'if necessary' the central bank will 'remain active in the foreign exchange market to influence monetary conditions' which it seems they likely were this morning.
The SMI (Swiss Market Index) was down almost -15% at one point and has recovered some to approximately -10% currently while the rest of Europe is green.
It would seem likely that today's decision will have significant ramifications in Switzerland. At levels close to parity many businesses and investment decisions might not be seen as viable anymore and over time a significant volume of economic production could move outside the country. If so, there could be a significant deflationary shock possibly not too dissimilar to the one Switzerland might have suffered had the floor not been introduced in 2011.
Snap analysis from some banks suggests that the SNB may well have taken pre-emptive action ahead of anticipated ECB action by scrapping the floor as the cost would have been amplified by the drop in the EUR allied to cutting rates in order to deter market participants from parking their cash at the Swiss central bank.
Beneficiaries include the Japanese Yen and gold, while the Euro saw outflows across virtually all currency pairs and the USD is sliding...
Crude
And Index Futures...
ES / SPX futures
Hedge funds CRUSHED:
"Just before lunch local time, the Swiss National Bank took on virtually every single macro hedge fund, the vast majority of which were short the Swiss Franc and crushed them, when it announced, first, that it would go further into NIRP, pushing its interest rate on deposit balances even more negative from -0.25% to -0.75%, a move which in itself would have been unprecedented and, second, announcing that the 1.20 EURCHF floor it had instituted in September 2011, the day gold hit its all time nominal high, was no more."
Some soundbites:
"This is extremely violent and totally unexpected, the central bank didn't prepare the market for it. It's sparking panic across all asset classes. It suddenly revives the risk of central bank policy mistakes, right when central bank action is what's keeping equity markets going."
"Major losses in euro-franc trades are causing panic selling and deleveraging across the board."
What happened next was truly shock and awe as algo after algo saw their EURCHF 1.1999 stops hit, and moments thereafter the EURCHF pair crashed to less then 0.75, margining out virtually every single long EURCHF position, before finally rebounding to a level just above 1.00, which is where it was trading just before the SNB instituted the currency floor over three years ago.
This should mean less support for the Euro as the SNB were the largest daily buyers of Euros.
The move is being taken as ECB QE being a virtual certainty and likely at the Janauary 22nd meeting next Thursday.
From Goldman,
"This is a massive message from SNB to the market : ECB is going to do QE, and it’s going to be big... Removing the SNB peg takes out one of the biggest EUR buyers in the market. And of course, VERY notable this is happening 1-week ahead of the ECB, they possibly realised they could not continue to buy unlimited quantities when the ECB might print unlimited quantities."
In the US...
Bloomberg:
- Yellen has signaled she wants to look past short-term market fluctuations and place economic outlook at center of policy making; to succeed, she must wean investors from the notion that the Fed will bail them out if their bets go bad
Financials continue getting battered, you can see why I'm so fond of the FAZ position, which was long before earnings...
After JPM and Wells Fargo's disapointing earnings yesterday, today it was Bank of America, reporting a 50% collapse in its sales and trading from Q3, down $600 million from a year ago to just $1.7 billion in Q4. Revenue of $18.96 billion, which missed expectations of $21.03 billion by over $2 billion and down $2.7 billion from a year ago. I've long maintained that US QE was a "STEALTH BANK BAILOUT" because most of us recall how politically unpopular the early crisis bank bailouts were, yet very few traders and virtually no "Average Joe-Voters" would understand QE and how it benefitted banks. Now that QE is over, without the Fed's visible hand manipulating markets every day, banks are a ticking time bomb just waiting to blow.
It also appears BAC has fired over 4000 employees.
Macro US Data...
Tumbling retail sales yesterday crushing the cheap gas, more disposable income narrative and now surging jobless claims... Initial Jobless claims surged to 316k (smashing expectations of 290k) and has not been higher since June 2014. The BLS reports no unusual activity - so economists can't blame this on weather. Details on state-by-state job losses are lagged a week so we will not know if this is Shale Oil region-related but yesterday's Beige Book and day after day of announced job cuts by the energy sector suggest it is.
I was just saying in an email yesterday,
" I also feel there's an instability there (rising market volatility), and although everytime I worry about this (surprise move), the market tends to give the signals I should wait for, so I'll wait, even though I do have a feeling of randomness and surprises."
Well this morning was a VERY unpleasant surprise for many FX traders and hedge funds.
Now, lets move on....
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