snb miscalculates by dropping currency ceiling 87282015
<p>The Swiss National Bank’s decision to abandon its 4-year old EURCHF peg at 1.2000 is a stark reminder that in today’s deflation-bound, zero-interest rate world, […]</p>
Share this:
The Swiss National Bank’s decision to abandon its 4-year old EURCHF peg at 1.2000 is a stark reminder that in today’s deflation-bound, zero-interest rate world, capital appreciation exceeds yield.
Unlike in September 2011 when the Swiss franc’s safe haven was boosted by the Eurozone debt crisis playing out in Italy, today there are several nations whose benchmark interest rates or short term bond yields are below zero (Germany, France, Denmark, Switzerland and Japan). At the same time, the risks fuelling safe haven flows into the franc have increased (outright deflation in Eurozone, capital fleeing from Russia and EU uncertainty from the UK & GBP). These factors are likely to overcome negative Swiss rates.
In explaining its decision, The SNB mentioned the franc “overvaluation has decreased as a whole since the introduction of the minimum exchange rate”. Is that true?
Problem with divergences
Aware of the diverging monetary policies between the Fed and ECB, the appeared to have decided to minimize the deepening franc decline against the USD as a result of maintaining the EURCHF peg in the midst of ECB/Fed divergence.
By removing the peg, the SNB decided to offset franc depreciation vs. USD with franc appreciation against the euro. But since 2/3 of Swiss exports are sold to the Eurozone, the problem of persistent franc appreciation against the euro could well outweigh any depreciation advantages against the USD. Indeed, the US is Switzerland’s third biggest export destination (behind Germany and China).
Dangerous assumptions
The SNB’s assumption that further CHF weakness against the USD would ensue later this year and serve to offset CHF appreciation vs. EUR is based on the dangerously popular assumption that higher US interest rates are as inevitable as prolonged USD strength.
Since we expect the Fed will be forced to refrain from raising rates, owing to the emerging deflationary tide from China and Europe as well as the growth implications of these dynamics, the Swiss franc will be the last of the negative-yielders to depreciate against the USD –owing to its safe haven role from the Eurozone doldrums and Russian outflows.
Related tags:
Latest market news
Open an account in minutes
Experience award-winning platforms with fast and secure execution, and enjoy tight spreads from 0.5 pts on FX and 0.3 pts on indices.
Economic calendar
Web Trader platform
Our sophisticated web-based platform is packed with features.
Related articles
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.forex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.