• Swiss National Bank abandons EUR-CHF peg
  • More FX volatility expected
  • Waiting on US CPI report
  • World Bank cuts 2015 global growth forecast

A “black swan” event is a metaphor that describes an event that comes as a complete surprise and has a deep and widespread effect on financial markets.  Yesterday’s announcement by the Swiss National Bank (SNB) to abandon a three-year old EUR-CHF peg at 1.2000 was a case of a black swan event – it shocked the foreign exchange market and skyrocketed the value of the franc relative to the euro.

As a consequence, the US dollar – being in the middle of cross movements – fell ten percent against the franc and gained about two percent against the euro.  The dollar also lost ground against the yen as nervous global investors bought yen denominated assets in search of safety amid the bedlam in Europe.

By removing the EUR-CHF peg yesterday, the SNB may have eased its angst over the possible European Central Bank (ECB) announcement of a bond buying program next week. The ECB is expected to provide details of its bond buying program at its next meeting on January 22nd and  if it launches a full-blown bond buying (or printing money) effort then the euro is expected depreciate further.

A weaker euro will encourage more capital to flow into the franc which has a long history of holding its relative value particularly during a global crisis.  In this case, that would have forced the SNB to buy more euros and sell francs if it had to maintain the EUR-CHF peg to help its exporters.  The capitulation by the SNB yesterday of its commitment to the EUR-CHF peg revealed that it did not have sufficient resources to keep the peg going any longer.

What does this all mean? The foreign exchange market is expected to be very volatile, particularly in the next few days, as the latest black swan effect settles.  Meanwhile, the market will be looking at today’s release of US Consumer Price Index report to assess if inflation or lack of it is something that could turn into another swan in the coming weeks and months.  Stay tuned.

EUR-USD fell briefly to new 11-year lows yesterday and forecast to test a 1.1600 support level.  The EUR has been unable to find any support ahead of the ECB meeting on January 22nd.

GBP-USD has established a firmer footing against the dollar in recent days, with Bank of England Governor Carney and other committee members downplaying the drop in the inflation rate in December as a transitory event.  The GBP-USD is poised to climb near 1.5200 today.

USD-CHF plunged yesterday by ten percent, and there is no immediate sign of recovery towards .9000.

USD-JPY fell below 116.00 and it is poised to lower ahead of the January ECB meeting.

USD-CAD peaked at 1.2017 as a big fall in copper prices drove other commodity prices lower, apparently triggered by the World Bank cutting its 2015 global growth forecast.

AUD-USD climbed above .8200 as oil price prices gained and the December employment rose by 37.5K.

Have a great Friday.