3 banks have posted initial reactions to the surprise removal of the 1.20 floor from under EUR/CHF, a move that shocked markets and sent the franc shooting higher.
These first reactions see mention the ECB decision next week, which is expected to consist of an announcement of quantitative easing:
Here is their view, courtesy of eFXnews:
In a surprise move that shocked the market, the Swiss National Bank (SNB) discontinued the minimum exchange rate of CHF 1.20 per euro. The following are the first reactions to this move as provided by the economists and FX strategists at JP Morgan, Deutsche Bank, and SEB Group.
JPM: The SNB’s decision to abandon the floor for EUR/CHF is remarkable but not unwarranted. As we have long argued and indeed positioned for, the SNB was losing the ability to prevent an increasingly justified depreciation in the euro against the franc. The pressure was bought to a head by the prospects for ECB QE and the SNB’s inability to substantially expand its balance sheet from an already bloated 85% of GDP. Most surprising in today’s decision is that the SNB has not chosen to retreats in a managed fashion – it has completely removed the floor such that EUR/CHF is now free floating…We are currently short EUR/CHF through a 1.2088 put, expiry 16 March. This is currently valued around 40%. We will hold for now but look to unwind if spot dips much below 0.90.
DB: The SNB decided to remove the minimum exchange rate floor. This is a huge surprise, and leaves two initial questions: (i) where will EUR/CHF settle and (ii) what is the impact on EUR/USD. On the latter, despite the big drop would say it is *initially* marginally positive in that agressive SNB accumulation is now off the table, implying that we will no longer be getting the EUR-selling reserve diversification flows. Also, EUR/CHF weakness is marginally inflationary for the euro-area. On (i) however this is a HUGE hit to their credibility having committed to the floor for so long…The ultimate impact on EUR/USD is therefore a bit more ambivalent, as it is for global rates: ultimate aim of SNB policy is to encourage outflows but there is also the risk they are forced to come back in to stabilize markets.
SEB: We assume that that the SNB has realized that relative monetary policy is crucial for exchange rates and policy easing by the ECB has weakened the EUR and the CHF substantially against the USD since last summer while inflows to Switzerland has increased and the central bank expects this trend to continue. Markets reacted with a initial huge appreciation of the Swiss franc against all major currencies. EUR/CHF was down to 0.8517 before stabilising at 1.05. Where the EUR/CHF exchange rate will stabilize is impossible to say. The CHF is long-term overvalued from a fundamental stance at any level below the floor. However the attractiveness of the CHF in the context of the Euro zone crisis and the risk of further easing by the ECB as broad based government bond purchases will main the downside pressure in EUR/CHF. The SNB decision today should probably be viewed against the risks the ECB will launch new measures at the upcoming meeting on January 22, which will weaken the euro even further.
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