Swiss National Bank Removes Currency Exchange Rate Policy; Cuts Interest Rate

graphEuropean stocks are volatile on Thursday in trading after Switzerland’s National Bank decided to eliminate its minimum exchange rate policy and cut their interest rate further into negative territory by 0.5 percentage points to – 0.75 percent.

According to the press release from the Swiss National Bank, the decision was done in response to the “divergences between the monetary policies of the major currency areas” which is expected to become more pronounced as early as next week when the ECB will likely announce during their next meeting the launching of a new round of monetary stimulus, a policy decision that will likely weaken the euro.

“The euro has depreciated considerably against the U.S. dollar and this, in turn, has caused the Swiss franc to weaken against the U.S. dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.”

“The SNB is lowering interest rates significantly to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions.”

Yesterday  in Europe a court opinion declared that the ECB’s planned bond buying program is legal despite facing challenges from Germany’s Federal Court, which makes it easier for the ECB to announce plans to launch a new round of monetary stimulus, likely during its upcoming meeting next week to help combat the risk of deflation across the 19 member euro area.

The court opinion ruled that the ECB’s Outright Money Transactions (OMT) program is legal but will depend on certain conditions being met.

The objective of OMT is to combat high borrowing costs for governments in the 19 member euro area.

Under the program, the ECB purchases outright transactions in secondary, sovereign bond markets with certain conditions being met of euro area bonds from member countries.

“We have always been convinced that OMTs are legally sound and in line with our mandate” said Yves Mersch, member of the executive board.

Lingering questions persist over the size and scope of the ECB’s quantitative easing plans that is aimed at providing liquidity in the economies of the euro area to help generate stronger economic growth.

U.S.

U.S. investors are seeking to recover from 3 days of heavy selling that witnessed the Dow’s longest stretch of losses in 3 months.

Yesterday the U.S. Commerce Dept.  reported worse than expected retail sales results from December that saw a decline of -0.9 percent from November, the largest drop in 11 months, even with American consumers having some more purchasing power due to the steady decline of oil in recent weeks.

Despite the gloomy report, retail sales in December is still up 3.2 percent year over year compared to December 2013.

-Johnathan Schweitzer

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