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Lessons from SNB's Monetary Policy Gaff for Leveraged Global Stimulus

Lessons from SNB's Monetary Policy Gaff for Leveraged Global Stimulus

2016-09-15 02:31:00
John Kicklighter, Chief Strategist

Talking Points:

  • Back in January 2015, the Swiss National Bank (SNB) dropped its 'pillar' of monetary policy - a EUR/CHF floor
  • The Swiss effort was an example of fighting greater market forces which ultimately fell flat
  • Collectively, global monetary policy is fighting a larger storm with far greater costs and influence

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

The Swiss National Bank's decision to suddenly drop the floor it attempted to hold on EUR/CHF stands as one of the most dramatic and destructive events in modern financial markets' history. However, this effort is not exactly unique. In fact, there are remarkable similarities between the Swiss central bank's attempt and what the global central bank community is collectively employing currently. Will the simultaneous effort across boarders prove more successful than the SNB's alone? Is the benefit-risk balance different between the programs? Would a failure in the global effort have a proportionately catastrophic impact on the world's financial system? There are a number of lessons to learn from the SNB's evaluation and reversal on policy, and the subsequent market impact that can be used to further assess our current conditions.

From 2011 to the opening weeks of January 2015, the SNB's primary monetary policy objective was to keep a floor of 1.2000 under the EUR/CHF exchange rate. An unorthodox policy that would be considered unfair exchange rate manipulation from a larger economy and policy group, the effort managed to hold back the tide of a falling Euro to support the trade-dependent country. However, through its employment, the costs to maintain the curb grew extraordinary over time. Eventually, the cost to hold back the tied exceeded the success and benefit of the effort; and the group moved out of the way. The subsequent, near-20 percent tumble from the exchange rate was unprecedented in the extraordinary liquidity of modern FX markets.

In the aggregate (not exactly coordinated) accommodative monetary policy that is currently being maintained, there are similar evaluations being down on cost/benefit. Collective stimulus across the largest central banks has surpassed $18 trillion - an incredible 'cost'. In the meantime, doubts over its success and influence have grown louder; and we can see why. The rebound in global/developed world GDP and inflation figures immediately after the first phase of support faded materially in subsequent efforts beyond 2012. More recently, even the speculative enthusiasm that the programs inspired has tapered leaving an investing community that looks highly anxious and skeptical in its wake. Global policy officials are unlikely to reverse course overnight as the SNB has, but speculation will judge any shifts harshly. And, far more unsettling is the scale of the global effort with the extreme reach for yield. We assess the SNB's policy flip to draw lessons for our current market standings in today's Strategy Video.

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