SNB Rocks The Whole World

The markets have been ROCKED this morning as the Swiss National Bank (SNB) just announced that they have abandoned the Swiss peg. After 2 years of active intervention in the currency market to hold the $EURCHF at 1.2000, with today’s announcement the SNB has effectively exited the forex markets. This is their 1st monetary policy announcement of 2015 and, while the rate announcement was scheduled, their decision was a major surprise.

The reaction from traders as the decision came down:

And the effect on the CHF pairs has been EPIC.

USDCHF 1 hour chart today

EURCHF 1 hour chart today

GBPCHF 1 hour chart today

The SNB also cut interest rates today to -0.75%. With the abandonment of the currency peg, this interest rate cut was absolutely necessary. The CHF has long been a safe haven currency. Switzerland is considered a financial haven and tax shelter for the ultra-wealthy and has a relatively robust economy. During times of uncertainty, market participants buy Swiss francs. So when the financial crisis hit in 2008, the CHF and USD both strengthened considerably. But a strong currency is a stranglehold on the local economy as it dampens exports demand in the face of muted local consumer demand in 2008. The Federal Reserve enacted quantitative easing in response. The SNB combated the markets with a currency peg. With the peg now gone, the SNB understandably hopes that negative interest rates will dissuade the market from buying francs. However, uncertainty abounds, given the epic moves we are experiencing in the commodities markets, and I doubt even negative interest rates will stem the tide of CHF buyers now coming back into the market.

With the European Central Bank (ECB) due to announce their decision on monetary policy next week, “interesting” doesn’t even begin to describe the forex markets at this point. Everyone has a plan until you get punched in the face. Stay nimble traders.

Read also:

You’ll Never Beat Them. Join Them! (FaithMightFX)

UPDATE: The article was updated to reflect the interest rate cut decision.

What Do You Do With 18 Billion Euros?

You sell them for other appreciating currencies.

It’s no secret that the SNB has been in the markets buying euros to maintain its 1.20 EUR/CHF currency peg. The euro, however, is a loosing currency to hold as it looses value in the face of its sovereign debt and political crises. To hedge against this loss of  euro value and diversify its foreign reserves as it accumulates euros, a pattern, first noted by Credit Writedowns and included in yesterday’s digest, has emerged that the SNB sells its intervention euros for other, more valued currencies. And it looks like one currency of choice may be sterling.

Euro has drifted higher in the face of intervention
However, euro sells off versus the sterling post-intervention

Sterling strength has been mysterious to many traders because UK fundamentals are so poor (poor economy and tons of QE). Perhaps the SNB has been big buyer of sterling as it looks to quietly get rid of a devaluing euro that it is forced to buy. Now as $EURCHF is hovering around the 1.20 peg, I have to wonder if we’ll see a drop in $EURGBP when the SNB enters the forex market again. Some argue the SNB is already in the market.

OK, I step off my conspiracy theorist soapbox.