Guest Editorial: Switzerland on the defensive?

Yesterday, January 15, 2014, will likely go down in history as one of the most astonishing moves by any central bank in recent history as the Swiss National Bank set its floor drop in place. In this LeapRate Guest Editorial, Blackwell Global’s Research Analyst Alex Gurr shares his view

The Swiss central bank stunned the markets overnight and the result was a once in a decade event in the forex markets, as all CHF pairs lost liquidity and volatility was at the extreme end of the scale.

Many are now calling this a black swan event, but either way you look at it, the market has been shaken to the core by the results. The Swiss central bank generally has a good history when it comes to monetary policy, and just recently they introduced negative interest rates, changing the Libor from 0% to 0.25%; as well as reaffirming their pledge to keep the EURCHF floor in place (a pledge they made last week in a speech). Last night, they also readjusted the Libor rate to -0.75% as well, however, this was overshadowed by the floor drop.

So why the sudden release of the floor on the market? The Swiss central bank has been struggling with the USDCHF exchange rate for some time, and with the recent decisions by the European courts over the ECB’s mandate, they felt it cleared the way for quantitative easing (QE) in the Eurozone, something that markets have been calling for now for some time in order to fight deflation. So with the advent of QE looking closer than ever, it’s likely we are going to see some serious volatility in the market.

While many are looking at the CHF, there are other movements that people should be paying close attention to and that is the EURUSD. With QE getting closer and closer, and the Swiss central bank believing it to be soon, many will now be looking to short the EUR further against the USD, with the USD likely acting as a safe haven currency for further volatility in this scenario.

Additionally, the Japanese Yen has also become one of the currencies to watch. Markets will be looking for safety and the Bank of Japan (BoJ) will be looking to make sure that markets don’t consider the Yen as a safe haven currency during European uncertainty. The USDJPY will be interesting to watch as the BOJ tries to push traders back into the USD.

Many brokers will be also be struggling after last night’s Swiss Franc shocker. There are reports of losses occurring in most major brokerages as well as a number of small ones closing down after last night’s trading. As Warren Buffet once said, “only when the tide goes out do you discover who’s been swimming naked”. After last night, we have quickly figured out who is indeed swimming naked in the markets.

This is a Guest Editorial by Alex Gurr, Research Analyst at Blackwell Global.

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