The comments regarding the shock SNB move to remove the cap continue flowing. And yet again, this certainly has implications for the euro and the ECB decision next week.
The team at Danske explains why the SNB move could hint at the next moves down for EUR/USD:
Here is their view, courtesy of eFXnews:
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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