U.S. Markets are closed Monday for the Martin Luther King holiday but throughout Europe banks and brokers continue to react to last Thursday’s decision by the Swiss National Bank to abandon its three-year-old currency cap which essentially removed a pillar of support for the euro.
The SNB had been buying billions of euros in order to keep the franc from strengthening above the 1.20 per euro cap it had implemented back in September 2011.
Despite the scheduled meeting by the European Central Bank which will take place on January 22nd and is expected to launch a large-scale sovereign bond-buying program, the surprising SNB move sent the euro to 11-year lows hitting $1.14595 on Friday and settling back only slightly to $1.1557 in yesterday’s trading.
Upcoming ECB Meeting
The ECB is expected to implement bold policies to help combat deflation and revive the euro zone economy but speculation exists as to how the plan will be constructed and whether it will be reliable and timely.
"There will no doubt be a lot of wire traffic after Thursday's meeting about these details and such structural shortcomings, but the total QE to be announced will get prime attention," said David de Garis, senior economist at National Australia Bank, adding the market was now looking for quantitative easing of 1 trillion euros.
Analysts continue to question why the SNB chose to announce its abrupt turnaround a week before the ECB meeting. Especially after media reports suggested ECB President Mario Draghi had met with German Chancellor Angela Merkel last week to smooth the path for quantitative easing, a policy normally opposed by the Bundesbank.
As a result of the SNB’s surprise move, the Swiss franc immediately rocketed across all currencies, eventually stabilizing around 0.9997 francs per euro on Friday.
Market Volatility
Worries of market volatility were intensified by the upcoming elections in Greece where despite its insistence that it is interested in staying part of the euro zone, the radical leftist Syriza party, which has held a consistent lead in the polls, is intent on ending austerity and seeking debt renegotiation with its European partners.
According to Daisaku Ueno, chief foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, “Damages from the Swiss franc's sharp moves could take a few months to heal… market players do not know the exact scale of losses.”
"Markets are still digesting the SNB shock and trying to assess what damage it has done. We are yet to see the full impact," said Kosuke Hanao, head of FX at HSBC in Tokyo.