It's been quite an eventful 24 hours, particularly in the forex markets, after the SNB yesterday decided to announce a massive change in monetary policy without prior warnings or hints, sending the Swiss Franc sky rocketing higher and creating turmoil in the markets.
While central banks are under no obligation to drip feed such massive changes in policy to the markets, there have been big attempts made to do so in recent years so as to avoid the kind of volatility we saw in the currency markets yesterday. It appears the SNB did not get that memo and when the announcement that the 1.20 floor was being removed in EURCHF was made, some fx markets went into meltdown.
The move by the SNB generated a lot of questions regarding what motivated such an irresponsible and abrupt move given that only a few days before the central bank had referred to the 1.20 floor as the "cornerstone" of its monetary policy. SNB Chairman tried to convince us all that the decision was well thought out but I'm sure many would agree that unless under exceptional circumstances, a well thought out decision of this magnitude should take longer than 48 hours.
Which begs the question, what caused the sudden u-turn by the SNB that prevented them from carrying out the move in a more gradual and responsible manner. The only explanation I can come up with is that the move relates to the upcoming ECB press conference in which Mario Draghi is expected to announce a new bond buying program, one that the markets now believe will be much larger than initially thought based on the actions of the SNB.
If the SNB had prior warning of this, and this is just purely speculation, it may have decided that the floor would be extremely difficult to defend given its level of reserves and therefore opted to declare defeat. If this is the case then that again begs the question of why the SNB and ECB didn't think this through and do it in such a way that this could have been avoided. These people are meant to be the experts and yet they have acted in such a way that caused significant harm to the markets, something most people could have predicted would happen.
While the markets have stabilised a little, the damage caused could have a longer term impact on the markets. It will be interesting to see in the coming weeks what this does to liquidity and volumes in the forex markets, with many predicting that this may do significant damage for the foreseeable future.
Moving on from the idiotic actions of the SNB, we do have other things to focus on today, with key inflation figures being released for the eurozone and the US, two countries who's monetary policies could not be headed more in different directions. While the ECB is hoping to launch its first quantitative easing program, a little over six years after the Fed did the same thing, the Fed is looking to raise interest rates in the middle of this year as the economic recovery gathers pace and the country closes in on what the central bank deems full employment.
The final eurozone CPI reading for December is expected to confirm that the region fell into deflation for the first time since October 2009, making it incredibly likely, especially after yesterday's events, that the ECB will announce its QE program next week. In the US, we're also seeing oil prices have a disinflationary impact, although not even close to the same extent with the CPI seen falling to 0.7% from 1.3%, while the core reading is seen remaining at 1.7%. With rising wages seen bringing inflationary pressures, there is very little concern about the inflation outlook in the US and in fact, the Fed expects inflation to return to its 2% target, opening the door to that first rate hike.
The FTSE is expected to open 33 points lower, the CAC 23 points lower and the DAX 47 points lower.