Headlines today were dominated by the surprise announcement by the Swiss National Bank to abandon its peg against the euro, prompting a flurry of activity which saw the Swiss franc surge against the single currency, breaching the ceiling that had been in place for the past three years. Strengthening to 0.85 francs to the euro immediately after the decision, an almost 29% intraday move, the SNB stated “divergences between monetary policies of the major currency areas have increased significantly” and that “the euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar.” After the initial surge in CHF buying activity, trading towards the afternoon saw the exchange rate moderate towards 1.0480 as buzz in the market calmed. The Swiss central bank also slashed interest rates from -0.25% to -0.75% as it struggled to find continued justification for a minimum exchange rate between the EUR and CHF.
The move saw spot gold prices surge to a four month high as prices reached $1,265/oz on fresh risk aversion, rallying as much as 2.6% from yesterday’s close as investors took the surprise move by the SNB as a further hint of continued volatility in the eurozone. Given the plunging price of crude oil already signalling at a soft demand outlook and the ongoing crisis in Russia as well as unrest in the eurozone ahead of the Greek election, the move by the SNB to scrap the currency ceiling could indicate worsening times to come for investors as the cost of intervention by central bank spiralled out of control. Investors desperate to liquidate short Swissie positions have contributed to the significant strength seen today but we expect the EUR/CHF exchange rate to trade with some volatility in the coming sessions as the market attempts to find a stable valuation.