How Swiss Decision to Scrap EUR/CHF Peg Affects You

How Swiss Decision to Scrap EUR/CHF Peg Affects You


Switzerland’s surprise decision to abandon their 1.20 EUR/CHF peg triggered vicious volatility in the foreign exchange market. Their announcement drove EUR/CHF down nearly 30% at the on set, drove EUR/USD to 12 year lows, EUR/GBP to 6.5 year lows and EUR/NZD to record lows.

Is the Euro Headed for Parity?
The euro dropped to 12 year lows against the U.S. dollar on the back of the SNB’s decision. Their announcement obviously had significant implications for the euro because the SNB defended their peg by buying a massive amount of euros but the question now is whether their decision impacts the ECB. The lower the euro falls, the less pressure on the ECB to intervene because the weakness of the euro helps to boost inflation and support growth.

USD/JPY Getting Cheap
For the past few days we have been looking for the currency pair to break below 117 and having done so 2 days in a row USD/JPY is starting to look like a bargain. Despite yesterday’s big drop in retail sales, the tone of the Beige Book tells us that the Federal Reserve is optimistic and on track to raise interest rates this year. Of course, deleveraging poses downside risk to USD/JPY, but the currency pair is entering a value zone and so far 116.30 has held. Negative interest rates in Switzerland and the prospect of Quantitative Easing by the European Central Bank leaves the market looking for alternative safe havens. The Yen is attractive but not nearly as alluring as the dollar because the U.S. economy is actually improving while Japan is struggling. The Fed is one of a select few central banks looking to raise interest rates this year.

Money Pours into AUD and NZD
When the Swiss National Bank brought interest rates deeper into negative territory, investors were forced to look for alternative safe havens. This resulted in money pouring into Australia and New Zealand, two countries still offering an attractive yield. The rebound in gold and copper prices also increases the attractiveness of commodity currencies while healthier economic data from Australia gave hope for a stronger recovery.

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