What happened?
The Swiss National Bank (SNB) sent shockwaves across the financial markets when it unexpectedly discontinued its commitment towards maintaining the 1.20 EURCHF floor on Thursday, only days after reiterating that it remained a key cornerstone of its monetary policy. This sent the already high market volatility into complete overdrive, sending shockwaves across the financial markets.
Why the sudden decision by the SNB?
The continual bearish forecasts for the Euro have led many to expect that the currency will decline to parity against the USD by the end of 2015. While it is looking increasingly likely that we are heading in this direction, it will remain more possible for this to be achieved if further monetary easing from the ECB is combined with the US Federal Reserve raising US interest rates. The ECB introducing QE would also provide validity to those forecasts, however it will have to be enough QE to prevent the Euro bulls from attempting a rally back. The Euro also slid to over a seven-year low against the GBP at 0.7627 yesterday, while the EURJPY has declined by nearly 500 pips just over the past three trading days. Overall, it’s the continual and ever-increasing pressure on the Euro that proved to be a major catalyst behind the SNB’s decision to withdraw its commitment to the minimum exchange rate.
What next?
Does the decision from the SNB also mean that demand for the CHF is set to continue the gains seen yesterday? No and the primary reason why the CHF has already begun withdrawing its incredible gains from the unexpected monetary decision is due to a realization from the markets that discontinuing its commitment to the EURCHF 1.20 floor is not positive for the Swiss economy.
Swiss stocks have already encountered steep losses because investors have now realized that exports from Switzerland have just become far more expensive. The whole reason why the 1.20 EURCHF commitment was enforced in the first place was for the precise reason that Swiss exports were becoming too expensive. Now that the floor has been released and all current expectations are for the Euro to continue its decline, we are looking at elevated chances for this cycle to repeat itself. By the cycle repeating itself we are looking at a situation where Europe can no longer afford to purchase Swiss products.
During the completely unexpected movement on the financial markets where in less than one hour the CHF gained around 30% against the USD and the Euro hit multi-year lows against the USD and GBP, Gold restored its credibility among investors as a safe-haven asset. Gold bulls were reignited during the uncertainty with the metal climbing as high as $1266; its highest level since September. The increased demand for Gold over recent days is going to lead to suspicions that the metal is attempting a bull run, although the metal really needs to extend above $1270 for any hopes that there could be a rally towards $1280. Around the area just above $1270 there is still some short-term resistance and Gold’s failure to extend to this level yesterday is largely why the metal has already declined to $1256 this Friday morning.
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