The announcement by the Swiss National Bank (SNB) to reduce its interest rate came as a huge surprise, primarily because the previous reduction just took place within the last thirty days, this decision blind-sided the masses. The SNB dropped its three year long cap against the Euro, causing a staggering thirty percent increase in the Swiss Frank (CHF). This came as a shock to people, and rocked the Forex and equities market, we saw the CHF currency surge. In conjunction with ending the cap and lowered deposit rates they moved the rage of the International Exchange London Interbank Offered Rate (LIBOR) from 0.75 and 0.25 percent to minus 1.25 and minus .25 percent on the three year range offers, administrated by the ICE Benchmark administration (IBA) significantly moving the five base currency's USD, EUR, JPY, GBP and of course the CHF. For me most surprising was the lack of discussion and focus on the LIBOR change, any shift in the LIBOR is a indicating a lack of trust within banking systems, so it seems odd that they would not be interested in this quite more than the cap. It is a huge indicator of something major about to take place, signs of volatility in the market and banks yearning for USD. The LIBOR evaluates the Central Bank interest rates and sets expectations on the global banking system daily, unlike the Federal Reserve (FED) that issues the rates weekly to raise or lower money supply and growth with federal funds. The LIBOR is on a international scale and releases what rates are, not just what the banks want them to be, this affects the U.S. Treasuries, the TED spread, Fiat, and high yield bonds. In turn, it then trickles down to futures contracts, variable rate mortgages and USD interest swaps. The move in rage shows the Swiss don't plan to "widen" the balance sheet anymore after the estimated 495 billion-franc record loss for currency interventions they have covered.
The choice of the SNB was to protect the value of the CHF a defence against the growing fear, in regard to the Eurozones economy, uncertainty in Greece and the ongoing crisis in Russia. Fear was the primary reason for this unusual "surprise" foreseeing the upcoming decision next week by the European Central Bank (ECB) and discussion about purchasing government bonds and Quantitive Easing (QE) that would drastically affect the Swiss Economy. The Swiss ending the cap was not a easy decision to make, however, looking ahead to the potentially collapsing Euro with the CHF pegged to it, they deemed no other way. This could be a great move for the Swiss they then can come to the rescue of the EUR buying up assets with CHFs, or the opposite that they know the CHF would appreciate anyway and could not buy up the assets quick enough.
Price stability seems to be a thing of the past. The stoic Swiss Bank hit a record level of appreciation today with the decision to break away from the Euro. The Swiss have pumped billions since 2011 to defend the cap, it was a major surprise. The SNB could have kept purchasing Euros, only if they could trust France and Germany to pay back the principal and interest on their bonds, with the Euro doomed for QE, the trust came to an end with the estimated 500 billion EUR owed. The Fear that the Swiss would lose more than the 15 percent they lost today made them have to move fast.
The worry now is jobs and wages but most of all the exports sold in foreign markets, watches, metals, chemicals, machinery and agricultural products. So they lower wages and reduce cost of goods. The Swiss are one of the worlds wealthiest country's, since 2000 the CHF has more than doubled, in 2011 the average adult had an estimated 540,000 in USD, this development had direct correlation with the USD and CHF exchange rate. There are such a high number of wealthy in a small area that the statistics are swayed a little, so the typical individual averages 100,000 USD. Now only three percent of Americans make over 75,000 USD. This is why since 1992 the Swiss have fought for negotiations, "Bilateral" agreements that protect them as well as the security of the SNB and of course the taxation that makes the SNB appeal to so many. The fight was also over free movement of capital, persons, goods and services though the three of the four member states that make up the EU. When the European Economic Area (EEA) membership was denied they came up with a adjusted negotiation package and in 1999 it was approved. These agreements where Switzerland will take on aspects of the EU legislation, and gave them free trade within the EU. Overall, more than a hundred Bilateral agreements between Switzerland and the EU. The Swiss knew that following the framework of the EU would make them members of the European Free Trade Association (EFTA), that alone would gain economic strength of the two, since Switzerland's main trading partner is the EU. The U.S. is the primary an investment partner. The Swiss have always capitalized from their open trade, and communication with the EU. However the Swiss have fought hard to protect themselves and the CHF. So Why did they make this surprising decision today? Why cut themselves from the Euro altogether? They must have had a well calculated reason, perhaps the Euro will undergo some drastic fundamental change, they assumed that it is better to jump ship now. Something is coming and they saw it first, there numbers were great, why go negative?
I would love to know how the ECB and FED took this decision, years of price fixing gone in , twenty seconds, they will have to make a sequel to the Doomsday book titled "The Death of Money". The ECB may now want to reconsider QE and print out francs. Unless the ECB knew Germany would never approve QE and this was the only way to debase the Euro without printing. However, I do not think they took into consideration how much it would move the market.
The SNB had to reestablish safety for the elite to park their trillions, if they only had a mass amount of gold to back their currency. I see why they fought the gold referendum so hard. The announcement hit the markets and the appreciation grew quick, we saw investors rushing to the CHF, as a safe refuge from the erratic forex storm. Looking at the charts the CHF it looked like a bomb went off. If you were holding a long position, happy new year to you, for others in short, (literally) I hope you have appropriate stops allocated for the erratic unforeseeable situation this was. This announcement sent fear though many for what is to come next. The SNB has a strong reputation for being reliable and consistent with their actions. Today was inconsistent with their reputation.
according to the National Energy Agency (IRA) in the last quarter of 2014 demand for oil was up, in fact 600,000 more per day than it was same period last year. The media is flooded with statements portraying that low demand for oil globally is justification as to the price decline
