Swiss National Bank Ditches Currency Cap

Swiss National Bank Ditches Currency Cap

US stocks turned higher at Thursday’s open behind a surprise move from the Swiss National Bank (SNB) and signs of strength in oil prices.

Swiss National Bank Ditches Currency Cap
Swiss National Bank Ditches Currency Cap

The S&P 500 and Dow both gained 0.3% at the open, while the Nasdaq added 0.1%.

On Thursday, the Swiss National Bank surprised analysts by scrapping its longstanding currency cap against the euro. As the euro weakens, the SNB has found it increasingly difficult to defend the minimum exchange rate of 1.20 Swiss francs to the euro. As a result, the bank opted to remove the restriction altogether. Additionally, the SNB elected to reduce interest rates.

“The market is likely to remain extremely volatile in the near term, as positions are squared, stop losses are met, and a new equilibrium is found,” Mark Haefele, global chief investment officer at UBS, told MarketWatch. “From a fundamental perspective we believe that the Swiss franc remains overvalued with purchasing power parity for EURCHF at 1.28. However, it is hard to tell the level at which the currency will stabilize in the days ahead.”

Oil prices show signs of life
The unexpected move from the SNB was a boost for oil prices as the US dollar weakened, according to The Wall Street Journal. In addition, OPEC reported it saw an uptick in global demand for crude oil this year and a reduction in the rate of supply growth.

Brent crude for February rose 2.4% to $49.87 per barrel on the London ICE Futures exchange, while WTI futures added 4.4% to $50.60 per barrel on the New York Mercantile Exchange. Having said that, it remains unlikely that the oil price decline has ended.

“We are again lowering our oil price forecast to reflect what will likely be an oversupplied market through at least the first half of 2015,” Jason Gammel, analyst at Jefferies, told The Wall Street Journal. “Until the oversupply is corrected, prices will be biased to the downside.”

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