EUR/CHF momentarily plunged by 30% to around 0.85 following a surprise move by the Swiss National Bank to abandon its FX floor, while the rate has subsequently rebounded to trade just above parity. Swiss equity markets plunged by 8-9%, while the 10-year government bond yield touched 3 bp. Bonds rallied elsewhere as well, and the US 10-year Treasury yield plummeted by another 14 bp,while EUR/USD was trading below 1.16 before rebounding slightly. European equities had a positive day in most countries (Stoxx 600 up by 2.58%, touching the highest levels since early 2008), but US equities continued to take losses (S&P 500 down by a further 0.92%). Oil prices fell again after Wednesday’s rebound.
SNB shocked markets by scrapping its long-held EUR/CHF floor @ 1.20. The central bank also lowered the interest rate on sight deposit account balances by 50 bp to -0.75%. Now the Swiss economy has to adjust to increased policy uncertainty and exchange rate volatility. Inflation is negative already (-0.3% y/y in December) and exchange uncertainty could weigh on investment spending even if the CHF weakens going forward. We wouldn’t exclude the possibility that the SNB will introduce a new floor at some point in the future. The SNB’s decision will have no impact on the ECB decision next Thursday. The casualties of the move include some large brokers, which have suffered big losses.
We remain very optimistic on the outlook for US consumer spending in 2015 despite the weak retail sales numbers.
German full-year growth was 1.5% in 2014. That probably means that growth in Q4 was around 0.2% q/q and hence clearly out of recession levels.
US initial jobless claims jumped to 316k. However, seasonal adjustment problems related to the seasonal holidays and year-end provide an extra source of volatility in jobless claims this time of the year. We do not give much weight to yesterday’s release and the next few weeks.
Chinese FX reserves fell yesterday morning, but we see that mainly as a consequence of the stronger dollar.
Day ahead
There are mainly US numbers on the calendar for today.
US core PPI yesterday was stronger than expected, which supports our view that the core CPI rate will remain steady at 1.7% y/y in today’s release. Headline CPI will obviously be dragged clearly down by lower energy prices.
Rates
The SNB grabbed the headlines yesterday as mentioned above. Some “lowlights” from the Swiss rate market include the 5-year swap at -0.285% and the 10-year government bond yield at 3 bp. These are levels previously unheard of, anywhere in the world.
The effects of yesterday’s action were not constrained to just Switzerland, far from it. Short EUR rates dropped massively, and some Euribor futures traded above or right at par, implying negative Euribor 3-month fixings.
At the same time, 5-year 0% floors on 3-month Euribor traded as high as 55 bp, or put differently, at an implied breakeven fixing of ‑11 bp. This is a level that all but implies that the ECB would cut the depo rate from the current -20 bp, which is not in any case our baseline scenario, but seems less unlikely to the market than it did before yesterday’s SNB action. In any case, by moving to ‑0.75%, the SNB managed the impossible – making the ECB’s depo rate look high.
German 10-year yield fell again, and while the new 10-year benchmark started the day above 50 bp, it quickly fell below that level. For much more detail on our view on levels, curve and liquidity, please see our latest European FI Strategy here.
Semi-core spreads saw some widening pressure, and we see more room for widening, as we find the current levels already too narrow.
US Treasuries saw another massive rally yesterday, with the 10-year yield plunging by 14 bp to close to 1.70%. These moves appear completely overblown considering the US outlook, but the bond market momentum still looks very strong.
FX
EUR/USD made a large intraday move from 1.1793 to 1.1568, and settled back in the middle. The 2005 low has been cleared, yet a weekly close is needed to secure the loss. The action was purely SNB driven, as the abandoned EUR/CHF floor raised hopes that the ECB will do more QE than the SNB can sustain. Pressure likely until next week’s ECB actual announcement of QE. The Fed’s Bullard and Kocherlakota speak today – maybe they could give some clues into what the Fed thinks about the importance of recent USD strength.
The CHF has been let go free, with EUR/CHF falling to 0.8517 intraday on the news from the SNB. The fair value estimates suggest the CHF still being overvalued, so did the SNB say – the CHF is still “high” and interventions will resume if needed. We see EUR/CHF recovering, and fair value is closer to 1.30 rather than 1.00.
The SEK was briefly hit on the news from the SNB, but recovered later. It still seems EUR/SEK is heading down, ECB QE or not.
The NOK gained again on the back of oil prices as Brent oil recovered to above USD 50/bbl, back to 9 January levels. Early days, but there are hopes oil is finally carving a bottom, good for the NOK.
Nordea