SNB Causes CHF Flash Crash Game-Changer

At least investors cannot complain as volatility remains healthy so far in 2015 despite many unknowns including if the European Central Bank’s (ECB) quantitative easing (QE) program will be tabled in a matter of days, and if Greece will remain in the eurozone. Meanwhile, this morning is like trying to survive in the Wild West in the Swiss currency market, and it used to be so cordial.

In the grand scheme of things, watching the EUR/CHF graphs flat-line for so long was never going to work. At one point it felt like the Swiss National Bank (SNB) were the only buyers of EURs in the market. Swiss policymakers’ aim was to keep the psychological EUR/CHF floor in check at €1.2000, and defend this level at all costs no matter the price. However, all of that suddenly changed this morning when the SNB abandoned its EUR/CHF unofficial floor at €1.20, and cut its three-month Libor (London Interbank Offered Rate) target in a surprise move. The franc surged more than +20%, ending nearly 36 months of relative calm in this idyllic neutral country. Volatility in all asset classes also surged, and capital markets will reflect this unexpected knock-on effect for some time.

Swiss Parity Broken

After the SNB abandoned its long-standing FX rate cap against the euro, the CHF rocketed beyond parity with the EUR, fueled by the strength of the franc. Plotting EUR/CHF graphs was the equivalent of looking at a non-functioning heart rate monitor that flat-lined. The SNB has been intervening in the currency markets more aggressively since September 2011 to prevent the franc from appreciating too high, and at times, it was the only buyer or EURs to prevent the franc from dropping below €1.20.

Now that has all changed. After three-and-a-half years of artificially capping the currency’s rise, Swiss officials have scrapped that plan, prompting a sharp franc rise across the board. Officials has also cut the deposit rate to -0.75%, another significant surprise as the negative interest rate announced in December was due to come into effect next week, alongside the ECB’s monetary policy meeting.

Swiss Traders Plotting New Ranges

From a technical point of view, new trading range floors for EUR/CHF and USD/CHF have to be forged. Disregarding blatant spikes that may or may not be validated during upcoming sessions, EUR/CHF seems to have found some stability at or near €1.000 (the official EUR low continues to be disputed), while USD/CHF has since bounced from its three-year low to trade atop of $0.8840. The lack of a floor means that the SNB does not have to engage in aggressive intervention, but the volatility suggests that policymakers should be providing some level of liquidity support.

Now that the gloves are off, and despite the CHF freefall and negative deposit rates, the pressure on the CHF to appreciate will continue. As already demonstrated across the various asset classes, investors are not averse to paying away to hold safe-haven assets. €1.2000 EUR/CHF now becomes a strong resistance barrier, although any rally below or close to EUR/CHF parity will struggle. The more orderly USD/CHF charts are a tad easier to read, with varying resistance levels first appearing around $0.8974, 0.9545, and 0.9650. Traders are required to think in “big” handles.

SNB’s Credibility Questioned

Clearly, the SNB’s about-face was an unexpected development by any central bank standard. Its actions have deviated from the rhetoric script that the bank’s policy officials have gone to great pains to continually deliver to investors, especially over the past few quarters. SNB Chairman Thomas Jordan was expected to “enforce the floor with utmost determination.” This sudden U-turn will definitely have a negative impact on the SNB’s credibility going forward. It’s obvious that the SNB is hoping to dissuade investors from viewing CHF as a safe haven with its move to cut the deposit rate. But in unsure times, investors will pay away to preserve capital.

The appreciation of the franc now means lower import prices, increasing downward pressure on Swiss inflation, and it will eventually challenge Swiss exporters’ competitiveness. Nevertheless, negative deposit rates will not rid the demand for safe-haven assets that quickly!

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