SNB this morning scrapped the long-standing 1.20 floor on EUR/CHF and simultaneously lowered its Libor target range by 50bp -0.75% to 0.25% (prev.-0.25% to 0.75%) - the rate on sight deposit account balances exceeding a threshold was similarly cut to -0.75%. Recall that the SNB last lowered rates by 25bp in December and thus went into negative territory for the first time.
The surprise move sent ripples through the FX market and EUR/CHF and USD/CHF initially dropped as low as 0.85 and 0.75, respectively - these sharp moves lower were however swiftly reversed and the crosses now trade around 1.01 and 0.86, at the time of writing.
In the press release the SNB notes that the floor was always meant as a temporary measure to guard against deflationary pressure in Switzerland led by CHF strength brought about by safe-haven flows at the peak of the euro debt crisis.
The SNB cites the likelihood of increased divergence in monetary policy (probably with the ECB vs. the Fed in mind) as a reason for the timing of the floor discontinuation (ECB meeting on 22 January should see a QE announcement). Indeed, the EUR/USD de-route ahead of likely ECB easing and Fed hikes later in the year appears to have been the tipping point - thus the SNB implicitly hints that EUR/USD should continue to drop from here.
On the whole, this suggests that the SNB has revised its toolbox fundamentally, concluding that a combination of interest-rate moves and FX intervention is now a more favorable combination to fight Swiss deflation. Thus the SNB should now more actively use the rate on sight deposits and the Libor target range to steer CHF markets. We stress however that the SNB will remain focused on the Swiss franc exchange rate but that the use of intervention will now be discretionary.
With ECB easing coming up and worries over both Russia and Greece looming we cannot rule out that the SNB will have to do more than today's rate cuts to curb the strength of a floating Swissie.
The move from SNB will likely have a negative effect on major Eastern European currencies, most notably HUF, but also PLN and RON. Hungarian, Romanian and Polish households and corporates have significant loans in CHF, which are affected by this.
EUR/DKK dropped to 7.4360 on the news from SNB. There could be some inflow to Denmark from Switzerland on the back of SNB's decision as Denmark offers a higher interest rate (key policy rate in Denmark is currently at minus 0.05% vs. minus 0.75% in Switzerland) and low FX risk. This will give rise to increased downwards pressure on EUR/DKK, which we have already seen, following the SNB announcement and thus put pressure on Danmarks Nationalbank (DN) to make FX intervention purchases and potentially cut interest rates. EUR/DKK is currently around the level which triggered intervention in Q4 last year. Inthe period Sep-Nov DN made FX intervention purchases for DKK6.9bn - it will probably take another DKK10-15bn to trigger a rate cut. Note that we expect DN will maintain the de facto lower bound on EUR/DKK, which is probably around the level of 7.4300, which EUR/DKK reached in 2012, and not significantly lower than the historic low (since the current regime started in 1999) of 7.4234. Formally, DN is committed to keep EUR/DKK within +/- 2.25% around the central rate of 7.46038.
SNB President Jordan is set hold a press conference at 1.15 pm CET which should provide more details on SNB thinking regarding the use of interest rates vs. FX intervention.
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