Week Ahead & in Review: No boring SNB; ECB meets

Week in review: The SNB completely threw the global financial markets off this week, by scrapping the limit on the EUR/CHF rate that had been in place since 2011. After appreciating close to 40% after the decision, the Swiss franc stabilised at about parity versus the euro, which corresponds roughly to a 20% appreciation relative to the ceiling. The reasons for this decision are uncertain but SNB may have been wary of further stronger inflows requiring intervention in the  FX markets, if the ECB starts purchasing bonds on 22 January, which is likely to add downward pressure on the euro. Nevertheless, the consequences for the Swiss economy are likely to be heavy, as exports are likely to be hit and the country is likely to import further disinflation, inflation is currently hovering at around 0%. Global financial markets traditionally view Switzerland as a safe haven. This week’s actions may change that. Global equity indices were hit by these news and many small/medium sized brokers went bankrupt int he aftermath, which may affect liquidity globally in the near term. More generally, the decision by the SNB is a good example of how smaller countries may be affected by extreme monetary policy of larger  neighbours, while it also underlines that there are limits to what central banks can do when the economic structure is inefficient.

Datawise, Portuguese CPI was -0.4%yoy in December. The 2014 average inflation was -0.3%. Weak demand and more recently low oil prices are the main drivers for the decline in prices. Industrial production in the euro area was up 0.2%mom in November. In the quarter ending in November it was up 0.2%qoq compared with -0.4%qoq in the quarter ending in September. The data suggests some recovery in activity, even if moderate, in Q4.

Week ahead: The major even next week will be the ECB meeting on Thursday. President Draghi dropped hints that the ECB would decide on buying sovereign debt at the beginning of 2015, which means that there is a fair chance that it will do just that next week. The recent European Court preliminary report stating that buying debt falls with the ECB’s mandate is a boost for the doves. However, uncertainly about the elections in Greece and, more recently, the market turmoil caused by the SNB decision may lead the ECB to opt for taking the decision on 5 March, while vigorously hinting at debt buying. The same day, the European preliminary January PMIs will be released. Markets expect a small rise, but the indicators are likely to remain relatively close to the zero-growth threshold