Swiss currency cap is removed, pointing toward continued volatility

The Swiss National Bank (SNB) stunned markets last Thursday with a currency adjustment and an interest rate move. Since the onset of the European sovereign debt crises, the bank had put a limit on the Swiss franc’s appreciation against the euro. Last week, the SNB removed the cap, and made an unscheduled rate reduction that left rates at -0.75%, down from -0.25%.

The decision came one day after the advocate general to the European Court of Justice issued a positive opinion on the European Central Bank’s bond-buying program, which was originally conceived in 2012 but has yet to be implemented. This was interpreted by some investors as a green light for the bank to begin rolling out the program.

As international fixed income analysts, we believe the SNB’s move could have market implications that include:

  • Prompting other central banks to adjust their positions, triggering more currency volatility. Broadly, we believe the Swiss franc and the euro may drift weaker against the U.S. dollar.
  • Keeping European rates low (or perhaps moving them lower), which could drag global interest rates along.

As a final note, it’s important to remember that the legal opinion was issued by the court’s advocate general, which means a final ruling is still due from the court’s judges.

The views expressed represent the Manager's assessment of the market environment as of January 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Investing involves risk, including the possible loss of principal.

International investments entail risks not ordinarily associated with US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Notes from the desk

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