Currency markets experienced a once-in-a-lifetime event this week when the Swiss National Bank (SNB) announced it was dropping its three-year cap against the euro. The announcement triggered widespread volatility in most major crosses. Prior to the announcement currency markets were being driven by a drop in oil prices which came after the World Bank revised lower its global growth forecast. Swings in equity and commodity markets dictated where currency markets moved until the SNB said that the franc should weaken from current levels as negative interest rates make franc-denominated assets less attractive. Further, diverging monetary policies between areas was a trend that the bank expects to become more pronounced. The comments would suggest that the bank is preparing for a tighter monetary policy in the US and a looser policy at the European Central Bank, which meets next week to discuss policy.

Euro

The euro initially experienced a 30 per cent decline against the Swiss franc when the cap was abandoned by the SNB for the first time since 2011. The decision had a ripple effect. Economic data this week became irrelevant as markets began to price in the possibility of a quantitative easing program being launched at next week’s ECB meeting. A non-binding, interim ruling by the European Court of Justice on the ECB’s Outright Monetary Transactions seemed to pave the way for the central bank to embark upon a quantitative easing programme at next week’s meeting. Against the US dollar, the euro dropped below the single currency’s rate at its birth.

Sterling

Consumer prices in the UK dropped to a 14-year low, but the comments from Bank of England’s governor Carney and the Chancellor halted sterling’s initial slide. Sterling jumped to seven-year highs against the euro. Governor Carney showed little concern for deflation within the UK economy, but rather took a transitional approach to the current decline in prices. He went on to suggest that the ECB has room to become more accommodative in its measures.

US dollar

The US dollar dropped sharply against the Swiss franc when the national bank dropped its peg against the euro. The dollar dropped to levels not seen since 2011. Economic data this week focused on inflation figures. The data was important coming on the heels of weak wage growth that was seen with the release of non-farm payrolls. Inflation figures continued to be soft, but the FOMC continues to see these developments as transitory and related to the drop in oil prices. Retail sales declined by a sudden 0.9 per cent, which was more than expected and initially startled investors. The decline in goods bought was broad based and eventually was shrugged off.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.