Swiss currency ‘tsunami’ wreaks havoc in world markets

Enrique Díaz-Álvarez16/Jan/2015Currency Updates

World currency markets on Thursday were dominated by the news that the Swiss National Bank (SNB) unexpectedly abandoning its 1.20 EUR/CHF currency ceiling, just days after labelling the cap as “absolutely central”. In a statement released during early trading, the central bank detailed that the cap, introduced in 2011 after the Eurozone crisis, was “no longer justified”, citing a significant divergence between monetary policies of the major currency areas of the US and Eurozone. The move led to unprecedented levels of volatility in the world markets throughout the day.

GBP

A lack of data in the UK yesterday did nothing to prevent Sterling volatility, as the currency fell by 0.45% versus the Dollar.

Before markets opened for trading in London, the Royal Institution of Chartered Surveyors revealed house prices rose at their slowest annual pace since May 2013 after tighter lending rules weighed on buyer demand. The RICS survey fell to just 11%, down from the 13% registered last month. The UK housing market has been slowing significantly since the summer when regulators required banks to make closer checks on whether borrowers would be able to afford mortgage repayments if interest rates were to rise sharply.

No data out in the UK today, as traders focus turns to the Bank of England minutes, set to be released next Wednesday.

EUR

One of the worst trading days for the Euro in months saw the currency plummet by 1.5% against greenback and by 1.2% against the Pound.

An extremely volatile day for the Euro was driven predominately by the SNB’s decision to abandon its Euro cap, with the currency falling by an astonishing 30% against CHF in a frantic few minutes. The Eurozone, which accounts for more than 40% of Swiss exports, fell by 1.5% against the Dollar in early trading, reaching levels not seen since November 2011. A quick recovery back to where it began the day was short lived, as the single currency plunged to yet another eleven year low during afternoon trading. The main data release of the day showed a slight increase in exports and a decrease in imports, helped the Eurozone widen its trade surplus in November. A weaker Euro and lower oil prices offset the impact of a dramatic drop in sales to Russia, allowing the trade surplus to climb to €20 billion, up from €16.5 billion twelve months previous.

Revised inflation data will be out in the Eurozone at 10am GMT today.

USD

Volatility in the markets today was clearly evident in the US Dollar index which hit a nine day low moments after reaching an eleven year high. The greenback rebounded again the finish the day 0.35% up on its major peers.

There was a series of mixed data out in the US on Thursday. While better than expected, prices charged by US companies fell in December for the second consecutive month by 0.3%, dropping the seasonally adjusted figure to 1.1%, its greatest decline in three years. Driven down by the recent fall in oil, prices for energy goods in the US declined by 6.6% last month; the sharpest fall on record. Elsewhere, the number of Americans claiming new unemployment benefits rose unexpectedly last week to the highest level since early September. Initial jobless claims rose by 19,000 to 316,000, causing the four-week moving average to climb 6,750 to 298,000. The US did, however, create a total of nearly 3 million new jobs in 2014, the strongest annual increase since 1999.

A number of key releases in the US today will be centred on December’s inflation data, set to be released by the US Bureau of Labor Statistics at 1.30pm London time.

Rest of the world

Overshadowed by events in Europe, the Reserve Bank of India cut interest rates in a surprise move. The benchmark interest rate was slashed 25 basis points from 8% to 7.75%, with the central bank citing a sharper than expected decline in the price of fruits and vegetables since September.

Print

Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.