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16 Jan 2015
SNB wary about full-blown ECB QE - Westpac
FXStreet (Bali) - By removing the EUR/CHF floor, the entirely plausible suggestion is that the SNB is wary about a substantially larger ECB QE program, notes Richard Franulovich, FX Strategist at Westpac.
Key Quotes
"The SNB is acting ahead of a very likely sovereign QE announcement at next week’s ECB meeting (22 Jan). Next week’s ECB meeting is of course shaping up as a highly consequential event. Expectations had been settling on a program of EUR500bn in sovereign asset purchases, with shares based on each member’s paid-in capital key."
"The entirely plausible suggestion is that the SNB is wary about a substantially larger ECB QE program, one that would place EUR/CHF under further intense pressure (say a EUR1trn program? or an open ended program of monthly purchases that may last several years). The SNB may have reasoned that amid potentially substantial fresh pressure on the peg the likely growth in its balance sheet in coming months and years is unsustainable. This amounts to a realisation that major shifts in relative monetary policy produce large but ultimately necessary exchange rate adjustments. The SNB at least gets back an independent monetary policy!"
"Beyond the short term there are several countervailing forces at work. The SNB’s actions have of course supported EUR (especially) and to a lesser extent the likes of AUD, GBP and CAD via reserve diversification flow. The SNB will no longer be creating reserves. Any potential diversification flow into the likes of AUD will thus no longer emerge. These flows have of course made their way into sovereign bonds too. All else equal one less buyer at the margin may pressure bunds, Treasuries and gilts, though we wouldn’t overstate it given the substantial overall bullish forces at work in global fixed income markets (i.e. disinflation pressure from falling commodities)."
"Against that carry strategies now have the attractive prospect of funding in CHF at -75bp. But, that will cut both ways of course. In the last several years CHF has behaved as a high powered euro, offering little diversification value, with the peg forcing CHF and EUR’s correlation to permanently higher levels (as if it wasn’t already high). The removal of the peg effectively adds a “new currency” to the mix, one that is likely to be "used" more heavily at times of risk aversion than would have been the case had the peg not been removed."
Key Quotes
"The SNB is acting ahead of a very likely sovereign QE announcement at next week’s ECB meeting (22 Jan). Next week’s ECB meeting is of course shaping up as a highly consequential event. Expectations had been settling on a program of EUR500bn in sovereign asset purchases, with shares based on each member’s paid-in capital key."
"The entirely plausible suggestion is that the SNB is wary about a substantially larger ECB QE program, one that would place EUR/CHF under further intense pressure (say a EUR1trn program? or an open ended program of monthly purchases that may last several years). The SNB may have reasoned that amid potentially substantial fresh pressure on the peg the likely growth in its balance sheet in coming months and years is unsustainable. This amounts to a realisation that major shifts in relative monetary policy produce large but ultimately necessary exchange rate adjustments. The SNB at least gets back an independent monetary policy!"
"Beyond the short term there are several countervailing forces at work. The SNB’s actions have of course supported EUR (especially) and to a lesser extent the likes of AUD, GBP and CAD via reserve diversification flow. The SNB will no longer be creating reserves. Any potential diversification flow into the likes of AUD will thus no longer emerge. These flows have of course made their way into sovereign bonds too. All else equal one less buyer at the margin may pressure bunds, Treasuries and gilts, though we wouldn’t overstate it given the substantial overall bullish forces at work in global fixed income markets (i.e. disinflation pressure from falling commodities)."
"Against that carry strategies now have the attractive prospect of funding in CHF at -75bp. But, that will cut both ways of course. In the last several years CHF has behaved as a high powered euro, offering little diversification value, with the peg forcing CHF and EUR’s correlation to permanently higher levels (as if it wasn’t already high). The removal of the peg effectively adds a “new currency” to the mix, one that is likely to be "used" more heavily at times of risk aversion than would have been the case had the peg not been removed."