SNB removes floor on EURCHF, brings chaos to the markets

Fundamental View

Yesterday saw a lot of volatility in the currency space following the European Court of Justice. This morning, after a closer look at the transcripts and the habits of the ECJ we feel that it is important to note that the Legal Advisor often indicates the decision of the ECJ so the confirmation that an OMT would be legal is valid reason for the initial sell-off in the EURUSD yesterday. We also note that the conditions which the advisor to the ECJ outlined “did not provide critical limits to the design of a public QE programme.” The structure of the QE programme is, therefore, likely to be of a regular nature rather than ABS-based with a limited number of products available to purchase as many market participants were concerned with. US Retail Sales yesterday printed a reading of -0.9% against the expected -0.1%, causing a mass reversal of the initial leg lower in the EURUSD. We have also seen a swathe of announcements noting oil projects are being cut across the globe. Statoil, the Norwegian oil firm, have returned three Greenland exploration licences as firms scramble to cut costs due to the large decline in the commodity. The effect of lower oil prices is beginning to force emerging and developing economies into action. The Indian Central Bank has been the first of the Central Banks to cut rates. This initially seemed unusual seeing as they raised rates in the middle of last year however the strategy behind this is concrete; taking advantage of the low inflationary environment created by the crash in oil prices India seem to be moving to improve economic growth using more reasonable levels of inflation to do so.

Today’s View

This morning we saw the Swiss National Bank remove the floor on the EURCHF set at €1.2000. The ensuing chaos allowed the Franc to appreciate against the Euro, achieving parity and beyond on the spot market. We saw the EURCHF futures market close limit down temporarily before gapping lower aggressively, reopening at 1.0158. The correlated reaction also saw a 140 pip move in the EURUSD, breaking through the 1.16 handle. European and US bourses also made new lows on the session with the S&P 500 pushing through the psychological support at 2000. This was translated from the Swiss stock market which currently trades down 15% on the day. Swiss exporters were among the first to take the damage before filtering through into the majority of sectors. Ahead we have US data in the form of Empire Manufacturing, PPI Final Demand for December and Initial Jobless Claims at 1330, followed by the Philadelphia Fed Business Outlook at 1500. We are expecting the jobless claims number to print below the 300k handle and expect continuing claims to remain around expectations. The only risk posed to the number is the letting go of temporary employees which, after the Christmas retail period, could translate into more initial jobless this week and higher continuing claims next week.

Alternative View

Any further comments from the SNB should be monitored closely however further moves are unlikely