Yesterday (15/1), Swiss National Bank (SNB) sent thrilling shock toward the market by unexpectedly scrapped a key policy that has defended Swiss Franc at a maksimum of 1.2 Euro. It sent massive shocks in the market.

Yesterday (15/1), Swiss National Bank (SNB) sent thrilling shock toward the market by unexpectedly scrapped a key policy that has defended Swiss Franc at a minimum of 1.2 per Euro. The policy has contributed in supporting demand for the Euro because there are assurances that SNB will intervene by buying the Euro when Swissy strengthened. With the end of the policy, the market lose one of its basic fundamental assumption. Consequently, it sent massive shocks in the market.

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Switzerland, although it exists amid Euro countries, it is not a a part of the European Union and is not a member of the Euro. It makes the country's financial system unique, as well as known as a one of the world financial center due to its notoriously steady banking system. At times when the Euro sickness spread, of course Swiss Franc is going to be seen as if it is an oase in the desert.

Normally, rising demand on a currency as experienced by the Swiss Franc will double its value. In fact, in mid-2011 when Eurozone crisis was near its peak, CHF skyrocketed to almost equal the Euro although it previously stands at 0.7 CHF to Euro. Such sudden strength is surely bad for a country, particularly for an export-based country like Switzerland. Switzerland, famous for its high quality products, saw their product prices soared because of their own currency strength. Worried about imminent lost of competitiveness, in 2011 SNB announced that from then on they will put a cap on the EUR/CHF; Euro will not be allowed to step below 1.2 CHF. The central bank defended the minimum rate by printing CHF to buy Euro regularly.

So, why do SNB scrap the Euro peg now? It needs to be remembered that ideal figures for economic indicator is never flat, but dynamic, and they always change along with the circumstances they are on.

According to SNB announcement as quoted by Bloomberg Businessweek, Recently, divergences between the monetary policies of the major currency areas have increased significantly –a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.

Société Générale currency strategist Kit Juckes tells Bloomberg Businessweek, it could be SNB concluded that it is unable to continue defending the peg any longer and the Euros in its balance has turned into liability. What's more, European Central Bank is expected to launch Quantitative Easing program that is going to further pressures the Euro and increase SNB burden if they are still trying to defend the Euro peg. In short, SNB takes on the risk on Swiss economy in order to accomodate changes. The market subsequently went haywire as it lost an extremely basic fundamental and tried to seek a new equilibrium. What will happen then? Here is some predictions.

 

1. Focus Shifts to USD/CHF

According to Kit Juckes, it is not that SNB gave up, but instead they change their strategy. After market mayhem reduced, they will probably intervene again, not in the EUR/CHF pair but instead in USD/CHF pair with added emphasis on the CHF trade weighted index. Afterward, SNB will monitor the effect of their recent moves, including a second under-zero interest rates that was announced at the same time with the removal of Euro peg. Rates reduction from -0.25% to -0.75% is hoped to make investors think twice before putting their money in the region. Further, Juckes think that SNB is probably hoping EUR/CHF will be back near 1.2 after the current shock sent it lower, apart from expecting USD/CHF to come back up to more than 1.0 level later this year

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2. Massive Hit For the Euro

Euro crosses suffered as well. This is because SNB Euro buyout in order to defend 1.2 level has long been a support for the Euro. Each time Euro weaken and CHF strengthen, market automatically assume that SNB will bail out the Euro. When this assumption is erased, all analysis crumpled. Beside of that, SNB moves could be considered as a signal that at policy meeting next week, ECB will announce QE at a much bigger amount than previously predicted.

Kathy Lien from BK Asset Management mentioned that Swiss took on a big risk by scrapping their Euro peg. This decision indicate that SNB expect ECB to announce QE next week, and they don't think they will be able to defend the peg longer if that's happen. She even added that We would be surprised if Jordan had not conferred with Draghi before making his decision.

Panics mean that sell the Euro has became the main theme in the market now. QE prospect will continue to depress Euro further, but Lien wrote that she is still looking for EUR/USD bounce in 48 hours before ECB announcement next week. If ECB disappoints, EUR/USD will rally but if they over deliver it could make a good dent towards parity. One to one against the dollar is possible but don't expect a straight line downwards because 1.10 is a very important level and right now 1.15 is holding.

3. Alternative Safe Haven

In a mayhem, investors are naturally looking for a safe haven. But with Swiss become the source of mayhem and Japan economy remain uncertain, they are seeking other alternatives as additional safety pins. First choice is of course, Gold. But apart from that, it seems commodity dollars has became the next choice with Aussie and Kiwi saw interest increased. Canada Dollars did not see substantial gain as oil prices go further down, but Australian Dollar and New Zealand Dollar recordeed quite an improvement due to their rates that was considerably high among leading currencies.

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The havoc inflicted by SNB decision has caused a number of trading platforms to crash. A report from ForexMagnates mentioned that several banks failed to quote and liquidity is not only small but virtually nonexistent. The situation has pushed forex brokers to stop trading on related pairs, such as Forex.com, Saxobank, FXCM, Alpari, Exness, XM, etc, and quotes was frozen for some time.

Beside of that, big players are suffering major losses that the world has not seen for years, including banks and forex brokers. IG announced that they might lost around 30 million Pounds. FMA New Zealand-regulated Excel Market closes shop during SNB mayhem, although clients funds are said to be safe because they are stored in segregated account, and clients will still be able to apply for withdrawals.

SNB mayhem is expected to remain for some time, at least until ECB meeting and Greek election next week. Forex traders that wanted to deal with related pairs is advised to revise their trading plan and analysis.