SNB move adds further conviction to ECB QE

Fundamental View

The SNB’s decision is perhaps the greatest example we have seen thus far of reacting to expectations of future ECB monetary policy changes. If Draghi and the Governing Council have the ECJ’s ruling and fulfil the criteria required by the court, the SNB would realise that they couldn’t afford the floor. Exacerbating the problem by continuing to buy the floor would have increased the impact of the policy change later on, wasting valuable resources in doing so. The shock of this move by the SNB is that they committed themselves to preventing the 1.20 floor from being breached and stated they would enforce this policy “with the utmost determination.” The issue, which Jim Reid made mention of this morning, was that if the SNB can make such quick decisions we could see this propensity for major overnight policy changes increase among the other central banks. The other risk we have this coming week is Greek political risk filtering through into the ECB press conference and rate decision. It is relatively unlikely now that the ECB will act next week as we see it as unwise for the ECB to take up decisions on Greek debt if there is a chance of a party winning election that is openly against European austerity measures

Today’s View

Traders need to appreciate that yesterday’s market volatility is not the norm and trading opportunities today are likely to be much more thin on the ground. This point is especially valid given Monday in the US is a holiday in respect of Martin Luther King. Having said that European equities still remain strongly bid this morning as the Dax trades above 10000 for two reasons. Firstly, the EUR currency looks set to continue its path lower helping European exporters, secondly the move by the SNB adds further conviction to ECB QE in the coming months. However, although the prospect of QE is positive for EU equities, more than any other event in recent financial history this prospect is already both widely expected and priced in. Often when this happens you have a case of buy the rumour and sell the fact, and ultimately it is hard to know what Draghi can do to exceed market expectations; he is much more likely to disappoint. On the data front today we have more US inflationary data out of the US this afternoon which will be interesting given where currencies trade now. However we expect a continuation of the patter that there is no inflation in the developed world, even in the US, and this will be a key issue for the global economy throughout 2015.