Via eFX comes this …. SNB Bombshell: The Aftermath – Thoughts From 15 Major Banks

As you’d expect, it’s a lengthy piece.

The following are the thoughts and reactions on today’s SNB surprise move to discontinue the 1.20 EUR/CHF floor as provided by the economists and FX strategists at 15 major banks.

Deutsche Bank: At face value, the SNB policy move signals a declining willingness to accumulate FX reserves, which naturally led to SNB euro selling via reserve diversification. However, this signal has to be tempered against two factors. First, given the hugely disruptive move of EUR/CHF on the domestic economy and likely rising disinflationary pressure, it is unclear that SNB intervention will cease – even if this is not to defend the 1.20 floor but to stabilize the market at lower levels. Second, the removal of the EUR/CHF floor has reduced the attractiveness of USD/CHF long positions as proxies for EUR/USD shorts, as well as the usefulness of CHF as a funding currency given the spike in realized Swiss franc volatility. Both factors suggest that the impact on the euro is not unambiguous, with our assessment being that the latter two (bearish) factors are likely to (marginally) ultimately dominate.

Goldman: The SNB’s surprise decision to abandon the minimum exchange rate on EUR/CHF earlier today was linked in the press release to diminished overvaluation of the Swiss Franc…While the overvaluation of the Swiss Franc may have been diminishing, this effect looks to have been relatively small on our estimates, not least given the sharp appreciation of the CHF today in the wake of the announcement. Indeed, on our trade-weighted index of the Swiss Franc versus the G10 currencies, today’s strengthening in the Swiss Franc takes it above its peak value back in 2010, even factoring in the decline in EUR/$ in recent months. The SNB was historically a large buyer of Euros – without this demand, depreciation pressure on the EUR is likely to increase.

UBS: Where will EURCHF settle after today? The big question is whether investors will want to buy Swiss francs despite substantially negative interest rates and at clearly expensive levels. Nevertheless, safe haven flows have so far demonstrated a remarkable stickiness which can be expected to continue as long as global risk aversion reigns. The SNB might be hoping to be able to stabilise EURCHF at around 1.10 which may be deemed a level that the economy can cope with. However, defending such a level might still be quite costly assuming that global risk aversion continues to linger. Credibility cost. The other question is about the cost of today’s decision for the SNB, both in monetary and credibility terms. The SNB is holding roughly half of their CHF500bn in euros, which implies a loss of possibly not dissimilar to the CHF38bn that the SNB made in profit last year. The monetary impact might thus be manageable. The credibility impact might be harder to gauge though. Domestically, many economic actors relied on what was seen as a ‘promise’ to hold the 1.20 floor. Internationally, following the negative rates confusion back in December today’s decision might be further undermined the standing of the SNB among investors.

SocGen: So, why now and where next? The SNB clearly does not believe that the upward pressure on the Swiss franc from inflows due to ECB policy, Greek uncertainty, the Ukraine crisis and Russian sanctions, will pass soon. That’s not a great vote of confidence in the prospects for either calmer markets in the months ahead, or for the Euro’s future value. So the SNB has decided to jump to ‘Plan B’ rather than persist with the previous one in the (futile?) hope that pressure would ease any time soon. The SNB is not ‘giving up’ but rather, changing tack. After allowing the markets to clear, further intervention is likely – but possibly, in USD/CHF rather than EUR/CHF, with added emphasis on the CHF trade weighted index. After all, the marginal buyer of Swiss luxury goods nowadays is more likely to be in Beijing or Shanghai than Frankfurt or Paris. After that, the SNB will see what the effect of the new interest rate stance is, after all, such deeply negative rates will have an impact on the appetite of anyone to keep money on deposit in Swiss francs. The SNB must hope that the EUR/CHF, after settling at a much lower level initially, then drifts back upwards towards 1.20. A more realistic hope might be that the USD/CHF rate gets back above parity later this year.

ANZ: The SNB shocked the market with the decision to end the floor in EUR/CHF at 1.20 causing huge market dislocation resulting in the CHF surging across the board. The market needs to settle as there are various theories doing the rounds. These include that the SNB may sell its euro holdings to the ECB as part of an ECB QE programme and that QE may be much bigger than expected. The reality is none of us know. What we do know is that a constant bid for EUR/CHF at 1.20 no longer exists. That may negatively influence expectations for demand for euros in the future and, against the backdrop of QE, could add to further downward pressure on the single currency, irrespective of what’s priced in. In the immediate future, the event risk of next week’s ECB meeting and Greek elections should continue to exert downward pressure on the euro. We continue to advise staying short EUR/for now. Monitoring trends in the oil price and the German yield curve is crucial as these have been key barometers of EUR weakness in recent months. The signalling from the SNB with the removal of the floor is also not positive. For now, the trend in the euro remains down.

Credit Suisse: Negative translational impact on earnings – The impact is particularly significant for companies with a large revenue base earned in a foreign currency (USD or EUR) and a larger proportion of the cost base denominated in CHF. This is generally the case for global investment banking and wealth management businesses. Banks generally disclose sensitivity to FX moves and based on these disclosures we estimate that the 14% FX move in EUR/CHF and USD/CHD we are seeing today will impact 2015E PBT of UBS (N) by c.7% and by c.16% for Julius Baer (OP). Marginally positive for capital positions – The impact on capital is a function of the proportion of assets denominated in foreign currencies and is twofold: (i) there will be a negative impact on equity from both the earnings impact discussed above and the revaluation of assets; (ii) the impact on the balance sheet size and therefore the capital requirement for non-CHF assets would be positive. Which of these two effects has more bearing depends on the capital allocation across geographies.

BNPP: Why change policy now? With the ECB on the cusp of delivering QE it appears the SNB views the floor as no longer appropriate. Indeed, the broader context in which the policy was established in September 2011 has changed dramatically with USD strength highlighted in the statement. The floor was initiated during a period of heightened fiscal concerns in the Eurozone By contrast, the recent downward pressure on EURCHF is due to the decline of EUR rates in response to looser ECB policy. SNB FX intervention likely. The SNB have made clear it will continue to be active with its foreign exchange intervention. Its policy statement notes that it “will continue to take account of the exchange rate situation in formulating its monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions.” We think it likely that it will lean against some of the appreciation in due course.

CBA: Looking ahead, the decision by the SNB will see the CHF revert to trading in line with its fundamentals. On that front, we expect the CHF to remain firm. When Switzerland ’s large current account surplus is overlayed with the Eurozone ’s economic underperformance, and the ECB ’s increasingly expansionary monetary policy settings, EUR/CHF looks to to stay near parity or below over coming months. Driven by the diverging monetary policy trends between the US Fed and the ECB and BoJ, higher relative front -end US swap rates and the US economies relative strength, we continue to expect the USD to appreciate over 2015. The pick -up in the USD and a further widening in the US -Swiss two -year yield spread should see USD/CHF grind back up over the course of 2015. A rebound in USD/CHF above the 200 -day moving average (0.9286) is probable, in our view.

TD: The SNB’s surprise decision to drop the floor opens up markets to new dynamics going forward. Trying to maintain the CHF floor in the context of significant and lengthy ECB sovereign bond buying would likely have been like trying to fit a square peg in a round hole, and with negative policy rates now more normal, that proves to be a more acceptable tool. This also opens up scope for a further round of a war of rate setting across Europe from the ECB, Norges Bank, Riksbank, and the SNB as well, with the latter adding likely further FX intervention into the mix Ultimately, this decision could be seen as an SNB vote of confidence for both the sustainability of the strong USD trend and ultimate start of a Fed hiking cycle as well as the vote of confidence for the cross-border flow we will see in EUR postQE.

Westpac: The SNB is acting ahead of a very likely sovereign QE announcement at next week’s ECB meeting (22 Jan). Next week’s ECB meeting is of course shaping up as a highly consequential event. Expectations had been settling on a program of EUR500bn in sovereign asset purchases, with shares based on each member’s paid-in capital key. To assuage German concerns about joint and several risk purchases are likely be conducted by both the ECB and the national central banks, the latter effectively keeping some sovereign risk within each country. The entirely plausible suggestion is that the SNB is wary about a substantially larger ECB QE program, one that would place EUR/CHF under further intense pressure (say a EUR1trn program? or an open ended program of monthly purchases that may last several years). In coming weeks CHF will find a new equilibrium though not without exploring some potentially very wide ranges in the interim. Absent any fresh actions by the SNB the combination of ECB sovereign QE and ongoing volatility in RUB / Eastern European markets may well see USD/CHF trade back below 0.80.

Credit Agricole: Under intense pressure, the SNB has reluctantly given up on the EUR/CHF 1.20 floor it has held since September 2011, shifting to a pure negative rate strategy. Provoked by ongoing ECB sovereign QE speculation, SNB policymakers clearly rejected the increasingly untenable position of defending almost unprecedented capital inflows. Their decision to increase the ‘tax’ upon speculative inflows instead (now 0.75%) may prove a sound decision given the size of the Swiss economy relative to the significant reserves built up under the floor. Near term we look for EUR/CHF to stabilise in the lead-up to next week’s ECB announcement. Indeed, given the potential for Mario Draghi to underwhelm, a small CHF pull-back may ensue. Further ahead, we expect investors to look further afield for EMU safe-haven alternatives given a higher SNB charge. Even so, with options limited, CHF buying could easily return if more contagion returns.

BTMU: Whatever happens going forward, the near-term consequences of this decision are worrying. EUR/CHF was down around 30% on the day at one stage and this scale of swing in FX is likely to have serious consequences for certain market participants. The markets are already dealing with the 50% collapse in crude oil prices, a 15% surge in the dollar, sharp falls in copper prices have intensified this week and now this extreme volatility in the franc. Large investor losses make for considerable risk of this spreading and risks are high of a more pronounced period of risk-off in the financial markets. We would highlight in foreign exchange where positioning is most pronounced (laid out in more detail in the second topic). The euro and yen are where short positions are most extreme and where we might see some reversal. Finally, SNB re-cycling of euro to dollars from intervention is a flow that will now stop and hence should be viewed as a EUR/USD positive.

JPM: The SNB’s decision to abandon the floor for EUR/CHF is remarkable but not unwarranted. As we have long argued and indeed positioned for, the SNB was losing the ability to prevent an increasingly justified depreciation in the euro against the franc. The pressure was bought to a head by the prospects for ECB QE and the SNB’s inability to substantially expand its balance sheet from an already bloated 85% of GDP. Most surprising in today’s decision is that the SNB has not chosen to retreats in a managed fashion – it has completely removed the floor such that EUR/CHF is now free floating…We are currently short EUR/CHF through a 1.2088 put, expiry 16 March. This is currently valued around 40%. We will hold for now but look to unwind if spot dips much below 0.90.

SEB: We assume that that the SNB has realized that relative monetary policy is crucial for exchange rates and policy easing by the ECB has weakened the EUR and the CHF substantially against the USD since last summer while inflows to Switzerland has increased and the central bank expects this trend to continue. Markets reacted with a initial huge appreciation of the Swiss franc against all major currencies. EUR/CHF was down to 0.8517 before stabilising at 1.05. Where the EUR/CHF exchange rate will stabilize is impossible to say. The CHF is long-term overvalued from a fundamental stance at any level below the floor. However the attractiveness of the CHF in the context of the Euro zone crisis and the risk of further easing by the ECB as broad based government bond purchases will main the downside pressure in EUR/CHF. The SNB decision today should probably be viewed against the risks the ECB will launch new measures at the upcoming meeting on January 22, which will weaken the euro even further.

Danske: The 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% (previously – 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 has 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 versus 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.

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