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Daily Agenda: Forex and the Aftermath of the Swiss Avalanche

Outflows weaken Greek banks in the lead-up to the country’s election; euro zone inflation remains weak; Goldman posts drop in profits.

Today global markets continue to grapple with the aftershocks of the Swiss National Bank’s sudden move to abandon an exchange rate cap. The announcement, made yesterday, caught many currency market players off guard as the Swiss franc rose by as much as 41 percent against the euro within hours. Broker FXCM, the largest retail currency trading firm in the U.S., announced today that it may drop below required capital levels after yesterday’s sharp move in the franc caused client losses to balloon rapidly. A primary question for investors with Swiss exposure now is just what will be the Alpine central bankers’ next move. As Robert Savage, CEO and chief market strategist for New York–based hedge fund firm CCTrack Solutions, mused in a note to clients yesterday, “Their plan failed as money flows were driving the SNB reserves of euro ever higher and deflation continued. So what is their Plan B? If negative rates and a currency floor don’t work to fight against deflation, then more negative rates and a stronger Swiss franc will do?” One possibility is that the bank will refocus its effort to stabilize the franc by buying U.S. dollars instead. In any event, the near-term impact on the euro has been profound and, with consensus expectations for quantitative easing by the European Central Bank, there appears no relief in sight for the 19-nation common currency.

Greek banks seek help. Greek banks Eurobank Ergasias and Alpha Bank have sought a capital infusion via the Bank of Greece Emergency Liquidity assistance facility. The outflow of deposits in the nation has been picking up momentum as the parliamentary election looms with the leftist Syriza party leading in the polls, raising the possibility of a break away from the euro.

U.S. financial institutions announce earnings. Fourth-quarter announcements continue among primary financials this morning. Goldman Sachs posted a 7 percent drop in profits for the final quarter of 2014, driven by a decline in trading revenues in fixed income and commodities. Despite the setback, the results exceeded consensus expectations, with earnings of $4.38 per share. Pittsburgh–based PNC Financial fourth-quarter earnings topped analysts’ estimates at $1.84 per share but this still represented a decline in both revenues and profits, as persistent low rates ate into core interest income.

Inflation remains low in Europe. Consumer inflation data released in Europe today confirmed that price growth in the euro zone remains depressed, adding fuel to the fire for ECB action in the upcoming meeting. The euro zone aggregate consumer price index (CPI) registered softer-than-consensus forecasts at 0.7 percent, versus the same month in the prior year while German-specific levels were flat versus November.

Key economic data releases on deck in the U.S. In a busy day for economic releases, December CPI will be announced in the U.S. today. Lowered fuel costs are expected to continue to weigh on the headline index. Société Générale analysts wrote in a note to clients this morning, “Widespread declines in retail energy prices, combined with an anticipated deceleration in core commodities and services costs, probably left the CPI 0.4 percent month-over-month lower — the largest decline since December 2008.” Separately, industrial production for December is forecast to pull back slightly after a surge in November. Also on the schedule are initial January University of Michigan consumer sentiment data and November TIC flows from the Treasury Department.

Portfolio Perspective: Shock and AweAdrian Miller, GMP Securities

Just in case investors were growing increasingly tired of having the energy market dominate everything about asset prices, the Swiss National Bank undeniably made its presence known with a shock-and-awe policy announcement. After the SNB pulled the plug on its Swiss franc 1.200 cap against the euro, the resulting financial market shock waves were immediate and severe. Since the cap was directly tied to the euro, we saw the exchange rate between the two currencies crater to a session low of 0.8517 before rebounding and trading at an average rate of 1.0300 for the remainder of the session yesterday. And after strengthening again into the U.S. close, the Swiss franc closed up 20 percent versus the euro to parity, an all-time low, below the previous historic low of 1.0300 on August 10, 2011.

It’s important to note that the initial fallout in European shares that ultimately saw momentum turn positive was not realized in U.S. equities, where exchanges in negative territory for much of the session.

Ironically, the SNB will ultimately need to intervene in the forex market seeking to limit the surge in the franc as the Swiss economy will surely suffer from the SNB’s decision. With approximately 50 percent of Swiss exports directed to the euro zone, one can imagine the impact on near-term growth — to say nothing of a deflation reading because of the collapsing oil market. Given that the SNB’s move comes a week ahead of the ECB’s policy meeting, the market interpreted the timing of the move as a clear signal that SNB president Thomas Jordan has insight into what the ECB has in store for the market.

Adrian Miller is the director of fixed-income strategies for GMP Securities in New York.

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