Swiss National Bank shock decision to abandon EUR/CHF floor and cut interest rates by 50 bps sends NZD 1.4% higher; excellent Australian job report

By Raiko Shareef

NZ Dollar

The NZD is 1.4% stronger this morning at 0.7830. In the aftermath of the Swiss National Bank’s shock decision, NZD/USD pushed as high as 0.7885.

We put NZD’s strength down to two factors. First, the SNB’s move evoked whippy price moves that drove traders to the sidelines. The market had been pushing NZD/USD lower, hoping for a break of 0.7700. When investors stepped back last night, the path of least resistance was higher.

Second, after NZD/AUD cracked lower on an excellent Australian jobs report, short-term investors jumped on the bandwagon, looking for a break below 0.9400. But again, the SNB’s decision likely caused those investors to abandon their positions, seeing NZD/AUD ping from 0.9400 to 0.9550 in one breath.

Today, there are no local data releases. We suspect markets will remain volatile heading into the weekend, and pick a rather wide 0.7750 – 0.7900 range today.

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Majors

The Swiss National Bank (SNB) shirt-fronted markets when it announced it was abandoning the 1.20 floor in EUR/CHF it has enforced since September 2011. The market’s collective jaw dropped, and so did the value of Swiss assets. At one point CHF, the world’s sixth most traded currency, was 28% lower for the day. It has recovered about half those losses as this note goes to pixel.

It is hard to overstate the magnitude of the SNB’s decision, especially for the consequences on the Swiss economy. SNB Governor Jordan cut interest rates by 50bps when he removed the floor, allegedly to provide some offset to the monetary tightening caused by a sharply stronger exchange rate. But our NAB colleague Gavin Friend estimates that, at CHF’s strongest point last night, the net impact of the SNB’s decision was equivalent to a 1000bp (i.e. 10%) rate hike. Little surprise that Swiss equities are 9.4% lower for the day, even off their lows.

Leaving the direct implications for the Swiss economy aside, the subtext of the SNB’s decision ahead of the ECB’s meeting next week is that Governor Jordan is convinced (and might even know for sure) that a significant bond-buying programme is imminent. That would incite further downward pressure on the EUR/CHF floor, requiring the SNB to step in and defend it. Investors picked up on the implication quickly and EUR/USD is 1.4% lower for the day at 1.1620, having recovered from 1.1570 earlier. Non-Swiss European equities reacted positively, too, with the Euro Stoxx 50 2.2% stronger.

For us, this simply makes the ECB’s job next Thursday all the more difficult. The market now expects a Bank of Japan-style shock and awe move, not the softly-softly approach the ECB has taken to date. Certainly the €500b figure bandied about last week would disappoint.

Separately, the AUD is one of the better performers overnight, after an excellent labour market report yesterday. The 37.5k rise in employment took the unemployment rate down to 6.1%, even with a rise in participation. Nearly every aspect of the report was better than expected. And while there are certainly question markets over the survey given its credibility issues in recent months, this tone is more consistent with other indicators. In all, the report makes an RBA rate cut in February less likely. AUD/USD is 0.8% stronger for the day at 0.8%.

Very little attention was paid to US data overnight, but for completeness, we note that the Empire manufacturing index beat at expectations at +9.95 vs +5.00. On the other hand, the Philly Fed survey disappointed at +6.3 vs +18.7. The upshot is that these surveys, having been out of kilter with other US data of late, have become more believable, and point to a slightly softer manufacturing picture than in recent months. This is consistent with idea that the US economy will slow slightly from 5.0% annualised growth rate the US achieved in Q3 2014.

Tonight, shell-shocked investors will find it hard to concentrate on data releases. We pick the US U of Michigan consumer confidence survey to be the highlight.

All its research is available here.