Swiss National Bank surprise removal of Franc cap stuns currency markets

Enrique Díaz-Álvarez19/Jan/2015Currency Updates

What had otherwise been an unexceptional week of currency trading was turned on its head Thursday morning. The Swiss National Bank (SNB) surprise announcement, that it was removing its longstanding cap on Swiss Franc (CHF) appreciation against the Euro, brought within minutes a spike in volatility which, in the case of the CHF, amounted to complete market dislocation. The CHF appreciated by over 30% against all other currencies in a matter of minutes, a move that has no historical precedent among major currencies. The currency stabilised later at a lower level, though still up a massive 15% from pre-announcement levels.

Understandably, the weekly moves of other major currencies were mostly driven by the implications of this event. The removal of a major buyer of Euros (the SNB has purchased to the tune of several hundred billion Euros since 2011 to maintain the cap) added further pressure to the common currency, which ended the week down nearly 3% against the US Dollar and has now reached 11 year-lows. Sterling, by contrast, held its own rather well, finishing the week nearly unchanged against the greenback and up very strongly against the Euro.


The main news for the week out of the UK was the release of December inflation numbers. These were quite mixed. While the headline number slid sharply to just 0.5% YoY, pushed down by the dramatic fall in energy prices, the more stable core index ticked up again to 1.3%, as the downward pressure on import price from high Sterling levels starts to fade. These tentative signs of stabilisation and even upward pressure on core inflation, together with dropping unemployment and improving wage hikes, are the key reasons we are maintaining our call for a first Bank of England interest rate hike in the third quarter of this year. Sterling moves last week were consistent with this view, as it held nearly unchanged against the US Dollar in spite of the massive sell off in the Euro.


Last week little news of note came out of the Eurozone but this coming week should provide some fireworks in common currency trading. Thursday we will get the first European Central Bank (ECB) meeting of the year. Pressure on the Council is enormous, as markets will be severely disappointed by anything less than an announcement of direct purchases of sovereign bonds in the hundreds of billions of Euros. The devil will be in the details; specifically, we will have to see what concessions the Bundesbank has managed to extract from President Draghi in return for dropping its opposition to the program. Then, on Sunday, we will receive the results from the general election in Greece, where every poll still predicts the leftist anti-austerity coalition Syriza party will win a plurality of the vote. The Greek electoral system awards an additional one-sixth of parliamentary seats to the most-voted list. Unless the polls are completely off, this means that Syriza will form the next government and re-open bailout negotiations. The first hints of panic were seen this weekend as two Greek banks applied for emergency ECB liquidity as a precautionary measure. At any rate, this points to an exceedingly volatile week that will perhaps be reminiscent of the 2012 Euro crisis.


A streak of stronger-than-expected economic developments out of the US came to an end last week. The volatile monthly retail sales release confounded expectations for a moderate increase by falling a sharp 0.9% MoM. The December number is always beset by statistical difficulties relating to the seasonal adjustments due to holiday shopping. Therefore, we look past this number and regard it as a temporary aberration. However, without a rebound in next month’s data, we will put under review our current call for a first Federal Reserve interest rate hike in April of 2015. For now, the trend towards a stronger Dollar, buoyed by divergence in monetary policy across the Atlantic, continues unabated.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.