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Swiss-bomb

The SNB has capitulated and removed the 1.20 floor on EURCHF that has been in place since September 2011. Furthermore, the SNB has also pushed rates further into negative territory, the mid-point of the target range for 3M money moved from -0.25% to -0.75%. The timing of the move is a surprise, coming just a month after the last change in interest rates. But it could well be that the SNB has chosen to front-run the likely move to QE from the ECB, whether than happens next week or the subsequent meeting in March. Perhaps knowing that the likely impact on the euro would mean even greater upward pressure on the Swissie, they chose to take the initiative, rather than fight what would have been (in their eyes) a losing battle to defend the franc.

Back when the EURCHF floor was introduced, the SNB said that it would enforce the cap “with utmost determination” and stated that it was prepared to buy foreign currency in “unlimited quantities” in doing so. They lived through previous times of pressure back in 2012, which saw the SNB sold euros to defend the floor. The impact of this was seen on expanding money supply, which saw M3 into double figures with spillover into asset prices, such as property.

Clearly, the SNB felt that they were giving with one hand and taking away with the other by moving rates further into negative territory. But at this point in time, the SNB has broken a dam wall and the waters have flooded out. It will take time to see what lies beneath.

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