Swiss Surprise

Seemingly out of the blue, the Swiss National Bank abandoned its cap in the Swiss franc (euro floor) and moved deeper into negative interest rates.  This has seen the Swiss franc rocket higher against the euro and dollar.  It sent the euro briefly below $1.1600.

The SNB lowered its 3-month LIBOR target to between -0.25% and -1.25%. The charge for sight deposits over the exemption threshold to -0.75%. Previously the LIBOR target range was -0.25% and -0.75%.  

The euro collapsed from just above CHF1.20 to a little below CHF0.8520 before what looked like intervention brought it back above CHF1.05 in choppy conditions. The marked appreciation of the franc has spurred sharp losses in the Swiss stock market (near 7% at the time of this note) and European bourses are off around 1.8%. Hungary has not completed its restructuring of CHF-denominated loans, and the SNB move has punished the forint.  

It appears the SNB had grown increasingly concerned about cost of maintaining the cap on the franc. The European Court of Justice preliminary ruling yesterday removed potential barrier to a ECB’s sovereign bond buying program. The SNB likely anticipated, as do many market participants, for the euro to come under more pressure going forward. 

Investors and policy makers have become more accustomed to negative interest rates. The German curve is negative out through six years.  Six eurozone countries have negative interest rates out to two-years. The SNB’s cap was introduced in September 2011 as an alternative to its previous attempt to resist inflation through buying foreign bonds as a form of quantitative easing.   

While the SNB’s move is a shock and has wide impact, the Reserve Bank of India surprised investors by announcing a 25 bp rate cut between meetings. The central bank cut the repo and reserves repos to 8.0% and 6.75% respectively. The central bank has been fighting inflation for several years. Food and energy prices have fallen quickly, while domestic demand is weak. Many had expected the RBI to cut rates later as a partial offset to what is anticipated to be tighter fiscal policy. Indian bonds and stocks responded favorably to the surprise, and the rupee rallied.