January 16, 2015

Frankly, we won’t defend it anymore

The big news overnight was the completely unexpected Swiss National Bank abandoning its EUR/CHF 1.20 floor it’s been defending since September 2011. As recently as last week, the 1.20 floor was described by SNB President Thomas Jordan as “absolutely central” in light of negative inflation.

The big news overnight was the completely unexpected Swiss National Bank abandoning its EUR/CHF 1.20 floor it’s been defending since September 2011. As recently as last week, the 1.20 floor was described by SNB President Thomas Jordan as “absolutely central” in light of negative inflation.

To quote from my London colleague Gavin Friend: “Today Jordan went back on his words of the last couple of years – words uttered only on Tuesday to a Swiss broadcaster that he and his central bank officials “were convinced that the cap on the franc must remain a pillar of our monetary policy,” by saying the policy was now deemed to “not make sense” and could only be carried out by “constantly intervening in the market.” Aside from the collapse in SNB credibility that must surely follow, these are strange remarks indeed.

The Swiss Franc soared. EUR/CHF immediately gapped by almost 30%, yes 30%, to 0.8500, USD/CHF likewise from 1.0230 to 0.7395, before both regained some territory, leaving EUR/CHF still around 15% lower at 1.026 and USD/CHF also 14% down at 0.883 in markets this morning. To soften the blow on the economy, the SNB cuts rates by 50bps. Gavin estimated that at the CHF’s strongest point last night, the net impact of the SNB’s decision was the equivalent to a 1000bp (i.e. 10%) rate hike.

No doubt the market will be expecting big stimulatory action from the ECB next week if the Swiss fear a much weaker Euro. In fact, the move unleashed a spate of currency volatility, including the Euro, major currency pairs whipsawing significantly. In the melee, EUR/USD fell the best part of two big figures to below 1.16 and is only barely above that level in local trade here. USD/JPY has fallen from almost 118 to 116.58 this morning.

The AUD and the NZD – after whipping to and fro – went “bid”, a move that suggests some see solace in parking funds in higher yield currencies. AUD/USD – already well supported after yesterday’s strong Australian labour market data rose to 0.8240 before settling back to around its post-employment data level at 0.8220 this morning. The NZD/USD has settled up a cent to 0.7820 this morning with AUD/NZD back down to just over 1.05 in early morning trade.

Elsewhere, commodity markets continued to whip-saw, base metals recovered with copper regaining half its losses. Oil though was back down. Equities were higher in Europe – except for the Swiss market that fell a whopping 8.7% – but have been soggy in the US as was the data mostly. Germany released their full year 2014 growth (1.5%) which was right on expectations. Swiss bonds soared and out-performed, yields gapping lower. The 2y down 17 bps to -0.524% and the 10 down 10 bps to 0.076%, barely positive. A big night in Europe indeed.

Coming up today/tonight

No major local data today. Japan has its weekly bond/equity inflows/outflows data as well as its Tertiary Industry Index for Nov. Tonight there is final Dec inflation reports for Germany and the Euro-zone with no revision expected.

The US also has its December industrial production report with a 0.1% dip expected after last month’s 1.3% jump, followed by the preliminary estimate from the University of Michigan’s consumer sentiment survey. Sentiment is expected to pick up further to 94.1 from 93.6 that would be the highest since December 2006. Several Fed speakers including Kocherlakota (dove, non-voter), Williams (neutral/ dovish, voter), and Bullard (hawk, non-voter).

Overnight

Currency volatility soars on SNB action: Eurostoxx 600 +2.6%, Dax +2.2%, CAC +2.4%, FTSE +1.7%. Dow -24 points to 17,403, -0.1%, S&P 500 -0.1%, Nasdaq -0.4%, VIX 22.19 +3.3%. Shanghai +3.5%, Mumbai +3.5%, Nikkei 225 -0.9% and ASX 200 +2.7%; ASX SPI futures this morning -0.1%. US bond yields: 2s at 0.44% (-6), 10s at 1.77% (-9). WTI oil at $46.50 (-4.1%), Brent at $47.67 (-2.1%), Malaysian Tapis (yesterday) $48.98 (+3.4%). Gold at $1257.80/oz (+1.9%). Base metals: LME copper +1.5%, nickel +1.2%, aluminium +1.0%. Iron ore $68.6/t +0.5% Chinese steel rebar futures +0.7%. Soft commodities spot futures: wheat -0.9%, sugar +2.8%, cotton +0.9%, coffee -1.8%. Euro Dec 14 CO2 emissions at €7.21/t (-0.6%).

The RBI unexpectedly cut rates by 25 bps, cutting the reverse repo rate to 6.75%

The SNB abandoned its 1.20 EUR/CHF floor; they also cut their 3m libor target to -0.75 from -0.25

German GDP growth (2014) was 1.5% (L: 0.1%; E: 1.5%)

US Empire State Manufacturing (Jan) 9.95 (L: -3.5; E: 5); Philly Fed index (Jan) 6.3 (L: 24.5; E: 20); Jobless claims (Nov) 316K (L: 294K; E: 290K); PPI (Dec) -0.3%/1.1% (L: 0.0%/1.4%; E: -0.4%/1.0%)

 

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