Nomura Provides Initial Thoughts on SNB Move; May Signal ECB QE is Imminent and Big

Nomura strategist Kevin Gaynor offered some initial thoughts on the surprise move by the Swiss National Bank (SNB) to abandon its minimum exchange rate of CHF 1.20 per euro. The strategist believes that moves by the SNB is a warning that the ECB may in fact be considering a substantial surprise to the upside versus market QE expectations and a move is imminent.

He also said it obviously adds to volatility and may be a positive for gold.

Initial thoughts:

1) Obviously the moves introduce further volatility into the system which is likely to mask any fundamental impact.

1.1) Where the CHF settles is unclear after barriers and structures net out.

1.2) CHF earnings uncertainty rises.

1.3) Increased uncertainty on payment streams for those with CHF funding and non-CHF incomes.

1.4) Further SNB intervention at what level is now uncertain.

1.5) Whether the SNB unwinds its long positions in EUR and USD assets (bonds, credit and equity) and how quickly or holds them.

1.6) What happens to net demand for assets that have had SNB flow support, e.g. the long end of euro bond markets?

1.7) Gold may like the move as CHF is traditionally seen as a close proxy, and a) relative yield has now worsened and b) the rally in CHF may have left gold in CHF terms looking attractive to this sort of investor type.

2) The fundamental impacts will likely be hidden by that volatility for a while but:

2.1) The SNB presumably believes that ECB QE is imminent and for what that belief is worth it will increase the market's already high delta on that event. We see this as risk positive at the margin for euro risk assets, negative for the euro on a TWI basis and further supports front end and belly euro rates. How the ECB constructs QE will be more important now for those assets that had received SNB buying support.

2.2) To the extent CHF remains at these levels, Swiss inflation should fall further raising questions about what the appropriate level for rates should be further out on the CHF curve and, indeed, how negative rates may need to go in order to stabilise CHF.

RELATED ETFs: Ishares Msci Switzerland Capped Etf (NYSE: EWL), Currencyshares Swiss Franc Trust (NYSE: FXF), SPDR Gold Trust (NYSE: GLD)

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