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15 Jan 2015
EUR/CHF floor removal: impact on EUR/USD marginally negative - DB
FXStreet (Bali) - After the shocking move by the SNB to remove the 1.20 EUR/CHF floor, George Saravelos, FX Strategist at Deutsche Bank, believes that the impact on EUR/USD will be marginally negative.
Key Quotes
"At face value, the SNB policy move signals a declining willingness to accumulate FX reserves, which naturally led to SNB euro selling via reserve diversification. However, this signal has to be tempered against two factors. First, given the hugely disruptive move of EUR/CHF on the domestic economy and likely rising disinflationary pressure, it is unclear that SNB intervention will cease - even if this is not to defend the 1.20 floor but to stabilize the market at lower levels."
"Second, the removal of the EUR/CHF floor has reduced the attractiveness of USD/CHF long positions as proxies for EUR/USD shorts, as well as the usefulness of CHF as a funding currency given the spike in realized Swiss franc volatility. Both factors suggest that the impact on the euro is not unambiguous, with our assessment being that the latter two (bearish) factors are likely to (marginally) ultimately dominate."
Key Quotes
"At face value, the SNB policy move signals a declining willingness to accumulate FX reserves, which naturally led to SNB euro selling via reserve diversification. However, this signal has to be tempered against two factors. First, given the hugely disruptive move of EUR/CHF on the domestic economy and likely rising disinflationary pressure, it is unclear that SNB intervention will cease - even if this is not to defend the 1.20 floor but to stabilize the market at lower levels."
"Second, the removal of the EUR/CHF floor has reduced the attractiveness of USD/CHF long positions as proxies for EUR/USD shorts, as well as the usefulness of CHF as a funding currency given the spike in realized Swiss franc volatility. Both factors suggest that the impact on the euro is not unambiguous, with our assessment being that the latter two (bearish) factors are likely to (marginally) ultimately dominate."