Switzerland stuns markets by giving up on currency peg

[herding cats]

Source: Seattle Times/AP

Bowing to the inevitable, Switzerland has ditched an increasingly expensive policy to limit the export-sapping rise of the Swiss franc -- a decision that propelled the currency a whopping 30 percent higher against the euro within minutes.

Thursday's decision by the Swiss National Bank, or SNB, to end its efforts to keep the euro from trading below 1.20 francs came amid mounting speculation that the European Central Bank will next week back a big stimulus program that will put more euros in circulation, which would further dilute their value.

That expectation has seen the euro face intense selling pressure in currency markets, particularly against the dollar. The euro has fallen to nine-year lows against the dollar and below its launch rate in 1999.

As the outlook for the euro has darkened, the cost for the Swiss central bank of defending the peg by buying euros or selling francs has risen. Though the timing of the Swiss decision proved a surprise, most foreign exchange experts thought the peg would have to be abandoned, just as previous such efforts had.

Read more: http://seattletimes.com/html/businesstechnology/2025464767_apxswitzerlandnationalbank.html

[Lucky Luciano]

1. This is a spectacular thing.

Macro oriented hedge funds have gotten the most exciting headline in several years.

[bemildred]

2. U.S. stocks struggle for direction after Swiss shocker

NEW YORK (MarketWatch) — U.S. stocks dipped in and out of negative territory as investors grappled with disappointing earnings from large banks, mixed economic data and a surprise action from the Swiss National Bank that rocked currency markets.

The unexpected move to ditch its currency ceiling and implement a rate cut by SNB rocked currency, commodity and equity markets around the world, as investors reassessed their strategies which were based on different assumptions. The Swiss decision amid mixed U.S. earnings and economic releases helped foster a choppy trading environment Thursday.

The S&P 500 SPX, -0.44% switched between small gains and losses. Materials and industrials moved higher, while energy and financials led losses.

The Dow Jones Industrial Average DJIA, -0.32% dipped in and out of negative territory and was last trading higher, with two-thirds of its components trading lower. J.P. Morgan Chase & Co and Goldman Sachs Group Inc .were the top decliners on the index.

http://www.marketwatch.com/story/us-stocks-rebound-on-tap-as-futures-surge-with-big-bank-earnings-ahead-2015-01-15?siteid=bigcharts&dist=bigcharts

[bemildred]

3. Swiss franc rockets after SNB ditches euro cap

ZURICH--The Swiss franc rocketed beyond parity with the euro on Thursday after Switzerland's central bank stunned markets by scrapping its long-standing cap on the strength of the currency.

The franc surged more than 20%, ending more than three years of calm in Swiss foreign exchange markets. The Swiss National Bank has intervened in markets since September 2011 to prevent the franc climbing too high, acquiring billions of euros in an effort to stop the common currency dropping below 1.20 to the franc.

In the aftermath of the SNB's shock move, the euro plunged as low as CHF0.93.

"This is a very unexpected development," said Vasileios Gkionakis, currency strategist at UniCredit. "This is a clear and significant divergence from the rhetoric so far of 'enforcing the floor with utmost determination.' Medium term I am worrying about the implications on SNB's credibility...the change in language was very abrupt."

http://www.marketwatch.com/story/swiss-franc-rockets-after-snb-ditches-euro-cap-2015-01-15?mod=MW_story_top_stories

[bemildred]

4. Swiss mess could make oil plunge seem like minor hiccup

One day, it’s gold. The next, it’s equities. Most days, it’s crude. On Wednesday, it was copper. On Thursday it was the Swiss franc and Swiss stocks. And the move in those two makes those others look like minor-league hiccups.

While you were sleeping, all hell broke loose in Switzerland, as the central bank ditched its currency cap against the euro after four years and slashed interest rates to negative 0.75%. The Swiss franc is rallying wildly, while the Swiss stock market is cratering and U.S. stock futures are mostly on the losing side as investors figure out this latest shock to the markets

Meanwhile, collapsing oil is claiming its next batch of victims. Apache just became the first, and certainly not the last, big-name oil producer to cut a notable number of jobs. And Calgary is suffering through it’s worst decline in home prices in almost two years.

http://www.marketwatch.com/story/another-day-another-plunging-asset-2015-01-15?mod=MW_story_top_stories

[hunter]

5. Bet some insiders made some money on that...

...timing is everything, right?

Ordinary traders are not privy to that information, and don't have high speed links to the trading machinery anyways.

[Lucky Luciano]

6. Smart money had that trade on for a while now waiting....

...and waiting and waiting for something to happen.

It had low risk, but did tie up capital for a bit - then Blammo! Ka-ching!

[roamer65]

7. The Swiss gave up on fighting the currency war.

They probably had inside information on just how massive the ECB's QE and decided destroying the franc was not worth it.

The Euro is going right into the shitter and it was a smart move by the SNB.

[pampango]

8. Krugman: (Swiss) Francs, Fear and Folly (and the risk of deflation)

Ah, Switzerland, famed for cuckoo clocks and sound money. Other nations may experiment with radical economic policies, but with the Swiss you don’t get surprises. Until you do. On Thursday the Swiss National Bank, the equivalent of the Federal Reserve, shocked the financial world with a double whammy, simultaneously abandoning its policy of pegging the Swiss franc to the euro and cutting the interest rate it pays on bank reserves to minus, that’s right, minus 0.75 percent. Market turmoil ensued.

And you should feel a shiver of fear, even if you don’t have any direct financial stake in the value of the franc. For Switzerland’s monetary travails illustrate in miniature just how hard it is to fight the deflationary vortex now dragging down much of the world economy.

If you ask me, the Swiss just made a big mistake. But frankly — francly? — the fate of Switzerland isn’t the important issue. What’s important, instead, is the demonstration of just how hard it is to fight the deflationary forces that are now afflicting much of the world — not just Europe and Japan, but quite possibly China too. And while America has had a pretty good run the past few quarters, it would be foolish to assume that we’re immune.

What this says is that you really, really shouldn’t let yourself get too close to deflation — you might fall in, and then it’s extremely hard to get out. This is one reason that slashing government spending in a depressed economy is such a bad idea: It’s not just the immediate cost in lost jobs, but the increased risk of getting caught in a deflationary trap.

http://www.nytimes.com/2015/01/16/opinion/paul-krugman-francs-fear-and-folly.html

[roamer65]

9. The CHF/EUR depegging turmoil is giving us a "window" into a GREXIT.

All the Swiss did was dissolve a currency peg and major FX firms and hedge funds are near bankruptcy.
The ECB and Germany had better face up to the fact that a Greek exit of the Eurozone is not a manageable event and plan accordingly. Otherwise we will have a worldwide currency crisis on our hands.