Implications for EUR/USD, EUR/GBP after SNB Floor Collapses

Talking Points:

- EURCHF falls as much as 28% after SNB removes floor.

- Consequences for EURUSD thanks to ECB? Many, indeed.

- See the DailyFX Economic Calendar for Thursday, January 15, 2015.

The Swiss National Bank's decision to remove the EURCHF Sf1.2000 floor is a monumental development for FX markets. Sparing no few words, nothing more needs to be said than the fact that this is a complete surprise for most (if not all) market participants.

With the SNB's balance sheet having exploded to 100% of the country's annual GDP, the cost of maintaining the floor was too costly for the SNB. The first signs that the SNB was struggling with the floor came on December 18, when the SNB first introduced negative interest rates as a way to deter speculators from betting on further Franc appreciation.

At the time we said that the move was in all likelihood preemptive action to front run a massive balance sheet expansion by the ECB; this may be the surest sign yet that the ECB is on the verge of unveiling some massive QE program at its meeting next week.

As it were, we had no exposure to CHF at the time of the floor removal; and while we're excited by the opportunity now to trade the CHF freely from the EUR (the rolling 20- and 100-day correlations in EURUSD and USDCHF were -0.98 and -0.99, respectively, before today), the Swiss Franc is not a clean floating exchange rate right now - it's best to steer clear for a few days as volatility remains high.

See the above video for technical considerations in EURUSD and EURGBP.

Read more: Momentum Gathering Pace in EUR-crosses - Watch EUR/USD 5-EMA

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail [email protected]

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